NovaStar survival at risk as First American cuts jobs

NEW YORK (Reuters) - New fallout from the U.S. housing slump hit mortgage and real estate companies on Tuesday as subprime lender NovaStar Financial Inc (NYSE: - ) and title insurer First American Corp (NYSE: - ) announced job cuts and NovaStar's auditor expressed doubt the company will survive.

NovaStar scrapped plans to raise $101.2 million in a rights offering, saying auditor Deloitte & Touche LLP wouldn't be associated with the plan unless NovaStar amended its financial disclosures to include a statement "about the uncertainty of NovaStar's ability to continue as a going concern."

Kansas City, Missouri-based NovaStar also said it will cut 275 of 400 retail lending jobs and 12 retail offices, and explore "strategic alternatives" for its servicing business, including a partnership with another company. It had stopped making home loans through brokers on August 17. NovaStar expects to employ 600 people overall after the cuts, down from 2,048 at year end. NovaStar shares fell 15.7 percent.

"The probability of insolvency has increased significantly," wrote Scott Valentin, an analyst at Friedman, Billings Ramsey & Co. "An eventual liquidation of the company is highly probable."

Valentin rates NovaStar "underperform" with a zero price target. Subprime lenders make loans to people with poor credit.

"We are pulling back to focus on NovaStar's core strengths and preserve liquidity," NovaStar Chief Executive Scott Hartman said in a statement. "The secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment."

NovaStar executives were unavailable for further comment.

FIRST AMERICAN CUTS AGAIN

Companies associated with the housing market are struggling with increasing defaults, falling home prices, rising borrowing costs and tighter lending standards. Sales of previously owned homes fell in July for a fifth straight month, as the supply of unsold homes hit the highest level since October 1991, according to the National Association of Realtors.

First American, the largest U.S. provider of insurance to protect homeowners against property claims, said it will cut 1,300 jobs, on top of 600 cuts announced in the second quarter, citing "rapidly changing economic conditions." It may also move more jobs to other countries.

The Santa Ana, California-based company implemented a salary and hiring freeze on September 1 and expects $108 million in savings from second- and third-quarter cutbacks, Chief Financial Officer Frank McMahon said at a Keefe, Bruyette & Woods insurance conference. First American ended 2006 with 39,670 employees.

LandAmerica Financial Group Inc (NYSE: - ), the third-largest title insurer, last Tuesday announced 1,100 job cuts.

"Housing prices remain way out of line with people's incomes, and were boosted by a lot of specialized mortgage products that aren't available anymore," said David Olson, president of Wholesale Access, a Columbia, Maryland-based firm that tracks the mortgage industry. "In a slowing economy, the mortgage and real estate markets will have to adjust."

SOUND PRODUCTS?

Investor fear of risk is also weighing on the providers of mortgage products that were once thought relatively sound.

Thornburg Mortgage Inc (NYSE: - ), a Santa Fe, New Mexico, specialist in "jumbo" mortgages for people with good credit, said it bolstered its finances by selling $1.44 billion of home loans.

The company plans to use proceeds to pay down credit lines and speed up lending, after last month selling $20.5 billion of securities to help pay off debt. Chief Operating Officer Larry Goldstone said in an interview many investors remain resistant to buying mortgage-related bonds.

Also on Tuesday, Freddie Mac (NYSE: - ) said it will not this quarter issue one of its standard mortgage securities for the first time since it began the program in April 2005, citing insufficient investor demand.

Several dozen mortgage companies have stopped lending or found buyers this year.

Tax preparer H&R Block Inc (NYSE: - ) is trying to save a sale of part of its Option One Mortgage Corp subprime business to private equity firm Cerberus Capital Management LP.

Another subprime lender, Accredited Home Lenders Holding Co (NasdaqGS: - ), on Friday said it will continue a lawsuit to enforce Lone Star's agreement in June to pay $15.10 per share for the company. It rejected Lone Star's lowered $8.50 per share bid.

NovaStar shares closed down $1.33 at $7.16. First American fell 43 cents to $41.40, Thornburg rose 43 cents to $12.21 and Freddie Mac rose 64 cents to $62.25. Accredited rose 64 cents, or 7.1 percent, to $9.69, after surging 43.4 percent on Friday.

(Additional reporting by Joseph A. Giannone, Mark McSherry and Al Yoon)