EXHIBIT 10.2

 

Execution Copy

 

ISDA®

 

International Swaps and Derivatives Association, Inc.

 

NOVATION AGREEMENT

 

dated as of September 22, 2005 among:

 

THE ROYAL BANK OF SCOTLAND PLC. (the “Remaining Party”),

NOVASTAR FINANCIAL, INC. (the “Transferor”)

 

AND

 

NOVASTAR MORTGAGE SUPPLEMENTAL INTEREST TRUST, SERIES 2005-3 (the “Transferee”).

 

The Transferor and the Remaining Party have entered into one or more
Transactions (each an “Old Transaction”), each evidenced by a Confirmation (an
“Old Confirmation”) with reference numbers 5 IRG6691114, IRG6691124, IRG6717366,
IRG6717367, IRG6746213.2A, IRG6746215.2A, IRG6783567 and IRG6783568,
respectively, attached hereto as Exhibit I and subject to a 1992 ISDA Master
Agreement dated as of June 30, 2005 (the “Old Agreement”).

 

The Remaining Party and the Transferee are simultaneously entering into a 1992
ISDA Master Agreement dated as of the date hereof in the form attached hereto as
Exhibit II (the “New Agreement”).

 

With effect from and including September 22, 2005 (the “Novation Date”) the
Transferor wishes to transfer by novation to the Transferee, and the Transferee
wishes to accept the transfer by novation of, all the rights, liabilities,
duties and obligations of the Transferor under and in respect of each Old
Transaction, with the exception of the Excluded Rights and Obligations referred
to below, with the effect that the Remaining Party and the Transferee enter into
a new transaction (each a “New Transaction”) between them having terms identical
to those of each Old Transaction, subject to the same exceptions and as more
particularly described below.

 

The Remaining Party wishes to accept the Transferee as its sole counterparty
with respect to the New Transactions.

 

The Transferor and the Remaining Party wish to have released and discharged, as
a result and to the extent of the transfer described above, their respective
obligations under and in respect of the Old Transactions.

 

Accordingly, the parties agree as follows: —

 

1. Definitions.

 

Terms defined in the ISDA Master Agreement (Multicurrency-Cross Border) as
published in 1992 by the International Swaps and Derivatives Association, Inc.
(the “1992 ISDA Master Agreement”) are used herein as so defined, unless
otherwise provided herein. For purposes of this Novation Agreement, “Excluded
Rights and Obligations” means all obligations of each of the Transferor and the
Remaining Party to Transfer (as defined in the Credit Support Annex to the Old
Agreement) Eligible Collateral (as so defined) in respect of the Old
Transactions and all related rights of the Remaining Party and the Transferor
under the Old Agreement.

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2. Transfer, Release, Discharge and Undertakings.

 

Subject to the execution and delivery of the New Agreement by each of the
parties thereto to the other, with effect from and including the Novation Date
and in consideration of the mutual representations, warranties and covenants
contained in this Novation Agreement and other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged by each of the
parties):

 

  (a) subject to Section 2(d) of this Novation Agreement, the Remaining Party
and the Transferor are each released and discharged from further obligations to
each other with respect to each Old Transaction and their respective rights
against each other thereunder are cancelled, provided that such release and
discharge shall not affect any rights, liabilities or obligations of the
Remaining Party or the Transferor with respect to payments or other obligations
due and payable or due to be performed prior to the Novation Date, and all such
payments and obligations shall be paid or performed by the Remaining Party or
the Transferor in accordance with the terms of the Old Transaction;

 

  (b) in respect of each New Transaction, the Remaining Party and the Transferee
each undertake liabilities and obligations towards the other and acquire rights
against each other identical in their terms to each corresponding Old
Transaction (and, for the avoidance of doubt, as if the Transferee were the
Transferor and with the Remaining Party remaining the Remaining Party, save for
the Excluded Rights and Obligations and any other rights, liabilities or
obligations of the Remaining Party or the Transferor with respect to payments or
other obligations due and payable or due to be performed prior to the Novation
Date);

 

  (c) each New Transaction shall be governed by, form part of, and be subject to
the New Agreement and the relevant Old Confirmation (which, in conjunction and
as deemed modified to be consistent with this Novation Agreement, shall be
deemed to be a Confirmation between the Remaining Party and the Transferee), and
the offices of the Remaining Party and the Transferee for purposes of each New
Transaction shall be their offices at their addresses for notices provided for
in the New Agreement; and

 

  (d) on the Novation Date, the Remaining Party shall transfer all of the Posted
Collateral (as defined in the Credit Support Annex to the Old Agreement) held by
it in respect of the Old Transactions to the account or accounts of the
Transferor identified by it by notice given to the Remaining Party as provided
in the Old Agreement, and the Transferor shall transfer all Posted Collateral
held by it in respect of the Old Transactions to the account or accounts of the
Remaining Party identified by it by notice given to the Transferor as provided
in the Old Agreement, in each case together with all Interest Amount and
Distributions thereon (as so defined). The Remaining Party’s or the Transferor’s
failure to effect these transfers will continue to constitute Potential Events
of Default and may constitute Events of Default under the Old Agreement
notwithstanding the transfer by novation contemplated herein.

 

3. Representations and Warranties.

 

  (a) On the date of this Novation Agreement:

 

  (i) Each of the parties makes to each of the other parties those
representations and warranties set forth in Section 3(a) of the 1992 ISDA Master
Agreement with references in such Section to “this Agreement” or “any Credit
Support Document” being deemed references to this Novation Agreement alone.

 

2

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  (ii) The Remaining Party and the Transferor each makes to the other, and the
Remaining Party and the Transferee each makes to the other, the representation
set forth in Section 3(b) of the 1992 ISDA Master Agreement, in each case with
respect to the Old Agreement or the New Agreement, as the case may be, and
taking into account the parties entering into and performing their obligations
under this Novation Agreement.

 

  (iii) Each of the Transferor and the Remaining Party represents and warrants
to each other and to the Transferee that:

 

  (A) it has made no prior transfer (whether by way of security or otherwise) of
the Old Agreement or any interest or obligation in or under the Old Agreement or
in respect of any Old Transaction; and

 

  (B) without prejudice to the obligations of the Remaining Party and the
Transferor referred to in Section 2(d) of this Novation Agreement, as of the
Novation Date, all obligations of the Transferor and the Remaining Party under
each Old Transaction required to be performed before the Novation Date have been
fulfilled.

 

  (iv) Each party represents to each of the other parties: —

 

  (A) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Novation Agreement and as to whether
this Novation Agreement is appropriate or proper for it based upon its own
judgment and upon advice from such advisers as it has deemed necessary. It is
not relying on any communication (written or oral) of the other parties as
investment advice or as a recommendation to enter into this Novation Agreement;
it being understood that information and explanations related to the terms and
conditions of this Novation Agreement shall not be considered investment advice
or a recommendation to enter into this Novation Agreement. No communication
(written or oral) received from any of the other parties shall be deemed to be
an assurance or guarantee as to the expected results of this Novation Agreement;

 

  (B) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this Novation
Agreement. It is also capable of assuming, and assumes, the risks of this
Novation Agreement; and

 

  (C) Status of Parties. None of the other parties is acting as a fiduciary for
or an adviser to it in respect of this Novation Agreement.

 

  (b) The Transferor makes no representation or warranty and does not assume any
responsibility with respect to the legality, validity, effectiveness, adequacy
or enforceability of any New Transaction or the New Agreement or any documents
relating thereto and assumes no responsibility for the condition, financial or
otherwise, of the Remaining Party, the Transferee or any other person or for the
performance and observance by the Remaining Party, the Transferee or any other
person of any of its obligations under any New Transaction or the New Agreement
or any document relating thereto and any and all such conditions and warranties,
whether express or implied by law or otherwise, are hereby excluded.

 

3

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4. Counterparts.

 

This Novation Agreement (and each amendment, modification and waiver in respect
of it) may be executed and delivered in counterparts (including by facsimile
transmission), each of which will be deemed an original.

 

5. Costs and Expenses.

 

The parties will each pay their own costs and expenses (including legal fees)
incurred in connection with this Novation Agreement and as a result of the
negotiation, preparation and execution of this Novation Agreement.

 

6. Amendments.

 

No amendment, modification or waiver in respect of this Novation Agreement will
be effective unless in writing (including a writing evidenced by a facsimile
transmission) and executed by each of the parties or confirmed by an exchange of
telexes or electronic messages on an electronic messaging system.

 

7. (a) Governing Law.

 

This Novation Agreement will be governed by and construed in accordance with the
laws of the State of New York without reference to the conflict of laws
provisions thereof.

 

  (b) Jurisdiction.

 

The terms of Section 13(b) of the 1992 ISDA Master Agreement shall apply to this
Novation Agreement with references in such Section to “this Agreement” being
deemed references to this Novation Agreement alone.

 

  (c) Not Acting in Individual Capacity.

 

JPMorgan Chase Bank, National Association is signing this Novation Agreement
solely in its capacity as Trustee under the Pooling and Servicing Agreement
among NovaStar Mortgage Funding Corporation, NovaStar Mortgage, Inc., Wachovia
Bank, National Association, and JPMorgan Chase Bank, National Association dated
as of September 1, 2005 (the “Pooling and Servicing Agreement”) and not in its
individual capacity, and all persons having any claim against the Trustee by
reason of the Transactions contemplated by this Novation Agreement shall look
only to the assets of NovaStar Mortgage Supplemental Interest Trust, Series
2005-3 (subject to the availability of funds therefor in accordance with the
Flow of Funds as set forth in Article IV of the Pooling and Servicing Agreement)
for payment or satisfaction thereof unless due to the Trustee’s own negligent
action, negligent failure to act, or willful misconduct, provided that:

 

  (i) this Section 7(c) does not limit the effect of paragraph (a) of
Section 8.01 of the Pooling and Servicing Agreement,

 

  (ii) the Trustee shall not be liable for any error of judgment made in good
faith by its Responsible Officer (as defined in the Pooling and Servicing
Agreement) unless it is proved that the Trustee was negligent in ascertaining
the pertinent facts, and

 

  (iii) the Trustee shall not be liable with respect to any action it take or
omits to take in good faith in accordance with a direction received by it from
the Majority Certificateholders (as defined in the Pooling and Servicing
Agreement).

 

4

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The foregoing may not be construed to give to Majority Certificateholders any
rights under this Novation Agreement.

 

  (d) Agency Role of Greenwich Capital Markets, Inc. In connection with this
Novation Agreement, Greenwich Capital Markets, Inc. has acted as agent on behalf
of the Remaining Party. Greenwich Capital Markets, Inc. has not guaranteed and
is not otherwise responsible for the obligations of the Remaining Party under
this Agreement.

 

5

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IN WITNESS WHEREOF the parties have executed this Novation Agreement on the
respective dates specified below with effect from and including the Novation
Date.

 

THE ROYAL BANK OF SCOTLAND PLC

  NOVASTAR FINANCIAL, INC.

By:

 

Greenwich Capital Markets, Inc., its agent

       

By:

 

 

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By:

 

 

--------------------------------------------------------------------------------

Name:

     

Name:

 

David L. Farris

Title:

     

Title:

 

Vice President

Date:

     

Date:

   

 

NOVASTAR MORTGAGE

SUPPLEMENTAL INTEREST TRUST,

SERIES 2005-3

 

By: JPMorgan Chase Bank, National

Association, as Trustee under the Pooling and

Servicing Agreement, acting not in its individual

capacity, but solely in its capacity as Trustee to

NovaStar Mortgage Supplemental Interest Trust,

Series 2005-3

 

By:  

 

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Name:     Title:     Date:    

 

6

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Exhibit I

 

[Old Cap Confirmations attached behind this page]

 

7

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Our Reference: IRG6691114

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

Our Reference: IRG6691114

Re: USD 8,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     8         

--------------------------------------------------------------------------------

Our Reference: IRG6691114

 

Notional Amount    USD 8,000,000.00 Trade Date    01 March 2005 (time of trade
is available upon request) Effective Date    25 March 2005 Termination Date   
25 March 2007 subject to adjustment in accordance with the Modified Following
Business Day Convention Fixed Amounts      Fixed Amount Payer    Novastar
Financial Inc Fixed Rate    .36500 pct Fixed Amount Payer Payment Date   

The 25th day of each month, commencing 25 April 2005 to and including the
Termination Date, subject to adjustment in accordance with the Modified
Following Business Day Convention

 

Notional Amount times the Scale Factor times the Fixed Rate Day Count Fraction
times Fixed Rate

Fixed Rate Payer Payment Amount           Ten (10)      Applicable Scale Factor
     No Adjustment for Period End Dates      Fixed Rate Day Count Fraction   
30/360

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     9         

--------------------------------------------------------------------------------

Our Reference: IRG6691114

 

Business Days    New York Floating Amounts      Floating Rate Payer    The Royal
Bank of Scotland plc Floating Rate Payer Payment Dates    The 25th day of each
month, commencing 25 April 2005 to and including the Termination Date, subject
to adjustment in accordance with the Modified Following Business Day Convention
Floating Rate Payer Payment Amount    Notional Amount times the Scale Factor
times the Floating Rate Day Count Fraction times (Floating Rate Option minus Cap
Rate); provided, however, that no payment shall be made by Party A and the
Floating Rate Payer Payment Amount shall be zero if the Floating Rate Option is
less than or equal to the Cap Rate.      Ten (10) Scale Factor      Cap Rate   
3.95 pct

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     10         

--------------------------------------------------------------------------------

Our Reference: IRG6691114

 

Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month Reset Dates    The first day of cash
Calculation Period Business Days    New York Calculation Agent    The Royal Bank
of Scotland plc or, if different, as stated in the Agreement Account Details   
  Payments to The Royal Bank of Scotland plc    As per our Standard Settlement
Instructions Payments to Novastar Financial Inc    Any payments due to
yourselves in relation to this Transaction, where The Royal Bank of Scotland plc
currently hold your relevant Standard Settlement Instructions, these will be
applied to this Transaction. If these are not currently held by ourselves or are
not relevant to this Transaction, please advise. Offices      The Office of The
Royal Bank of Scotland plc for the Transaction is    London The Office of
Novastar Financial Inc for the Transaction is    Kansas City

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     11         

--------------------------------------------------------------------------------

Our Reference: IRG6691114

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015      +44 (0)20 7085 1720      +44 (0)20 7085
3459 Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     12         

--------------------------------------------------------------------------------

Our Reference: IRG6691114

 

Re: USD 8,000,000.00 Interest Rate Cap Our Ref: IRG6691114

 

We acknowledge receipt of your document dated 20 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 March 2005 and a Termination
Date of 25 March 2007, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:

 

Gaynor Kaye

Title:

 

Authorised Signatory

For and on Behalf of

The Royal Bank of Scotland plc

Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:

 

David L. Farris

Title:

 

Vice President

Novastar Financial Inc

Kansas City

 

Counterparty Deal Reference: CAP 50

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     13         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

{BarCode}

 

        LOGO [g20342rbslogo.jpg]        

Financial Markets

280 Bishopsgate

London EC2M 4RB

       

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

Our Reference: IRG6691124

Re: USD 2,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     14         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

Notional Amount    USD 2,000,000.00 Trade Date    01 March 2005 (time of trade
is available upon request) Effective Date    25 March 2005 Termination Date   
25 March 2008 subject to adjustment in accordance with the Modified Following
Business Day Convention Fixed Amounts      Fixed Amount Payer    Novastar
Financial Inc Fixed Rate    .46000 pct Fixed Amount Payer Payment Date    The
25th day of each month, commencing 25 April 2005 to and including the
Termination Date, subject to adjustment in accordance with the Modified
Following Business Day Convention      Notional Amount times the Scale Factor
times the Fixed Rate Day Count Fraction times Fixed Rate Fixed Rate Payer
Payment Amount           Ten (10) Scale Factor    Applicable No Adjustment for
Period End Dates           30/360 Fixed Rate Day Count Fraction     

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     15         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

Business Days    New York Floating Amounts      Floating Rate Payer    The Royal
Bank of Scotland plc Floating Rate Payer Payment Dates    The 25th day of each
month, commencing 25 April 2005 to and including the Termination Date, subject
to adjustment in accordance with the Modified Following Business Day Convention
Floating Rate Payer Payment Amount    Notional Amount times the Scale Factor
times the Floating Rate Day Count Fraction times (Floating Rate Option minus Cap
Rate); provided, however, that no payment shall be made by Party A and the
Floating Rate Payer Payment Amount shall be zero if the Floating Rate Option is
less than or equal to the Cap Rate.      Ten (10) Scale Factor      Cap Rate   
4.15 pct

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     16         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month Reset Dates    The first day of each
Calculation Period Business Days    New York Calculation Agent    The Royal Bank
of Scotland plc or, if different, as stated in the Agreement Account Details   
  Payments to The Royal Bank of Scotland plc    As per our Standard Settlement
Instructions Payments to Novastar Financial Inc    Any payments due to
yourselves in relation to this Transaction, where The Royal Bank of Scotland plc
currently hold your relevant Standard Settlement Instructions, these will be
applied to this Transaction. If these are not currently held by ourselves or are
not relevant to this Transaction, please advise. Offices      The Office of The
Royal Bank of Scotland plc for the Transaction is    London The Office of
Novastar Financial Inc for the Transaction is    Kansas City

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     17         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     18         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     19         

--------------------------------------------------------------------------------

Our Reference: IRG6691124

 

Re: USD 2,000,000.00 Interest Rate Cap Our Ref: IRG6691124

 

We acknowledge receipt of your document dated 20 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 March 2005 and a Termination
Date of 25 March 2008, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:

 

Gaynor Kaye

Title:

 

Authorised Signatory

For and on Behalf of

The Royal Bank of Scotland plc

Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:

 

David L. Farris

Title:

 

Vice President

Novastar Financial Inc

Kansas City

 

Counterparty Deal Reference: CAP 51

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     20         

--------------------------------------------------------------------------------

Our Reference: IRG6717366

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

AMENDMENT

This Confirmation supersedes and replaces any previous communication received
from

ourselves in relation to the below referenced transaction

 

Our Reference: IRG6717366

Re: USD 8,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     21         

--------------------------------------------------------------------------------

Our Reference: IRG6717366

 

Notional Amount    USD 8,000,000.00 Trade Date    01 April 2005 (time of trade
is available upon request) Effective Date    25 April 2005 Termination Date   
25 April 2007 subject to adjustment in accordance with the Modified Following
Business Day Convention Fixed Amounts      Fixed Amount Payer    Novastar
Financial Inc Fixed Rate    .36700 pct Fixed Amount Payer Payment Date    The
25th day of each month, commencing 25 May 2005 to and including the Termination
Date, subject to adjustment in accordance with the Modified Following Business
Day Convention      Notional Amount times the Scale Factor times the Fixed Rate
Day Count Fraction times Fixed Rate Fixed Rate Payer Payment Amount          
Ten (10) Scale Factor      Fixed Rate Day Count Fraction    30/360 No Adjustment
for Period End Dates    Applicable

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     22         

--------------------------------------------------------------------------------

Our Reference: IRG6717366

 

Business Days    New York Floating Amounts      Floating Rate Payer    The Royal
Bank of Scotland plc Floating Rate Payer Payment Dates    The 25th day of each
month, commencing 25 May 2005 to and including the Termination Date, subject to
adjustment in accordance with the Modified Following Business Day Convention
Floating Rate Payer Payment Amount    Notional Amount times the Scale Factor
times the Floating Rate Day Count Fraction times (Floating Rate Option minus Cap
Rate); provided, however, that no payment shall be made by Party A and the
Floating Rate Payer Payment Amount shall be zero if the Floating Rate Option is
less than or equal to the Cap Rate. Scale Factor    Ten (10) Cap Rate    4.15
pct Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     23         

--------------------------------------------------------------------------------

Our Reference: IRG6717366

 

Reset Dates    The first day of each Calculation Period Business Days    New
York Calculation Agent    The Royal Bank of Scotland plc or, if different, as
stated in the Agreement Account Details      Payments to The Royal Bank of
Scotland plc    As per our Standard Settlement Instructions Payments to Novastar
Financial Inc    Any payments due to yourselves in relation to this Transaction,
where The Royal Bank of Scotland plc currently hold your relevant Standard
Settlement Instructions, these will be applied to this Transaction. If these are
not currently held by ourselves or are not relevant to this Transaction, please
advise. Offices      The Office of The Royal Bank of Scotland plc for the
Transaction is    London The Office of Novastar Financial Inc for the
Transaction is    Kansas City

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     24         

--------------------------------------------------------------------------------

Our Reference:IRG6717366

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     25         

--------------------------------------------------------------------------------

Our Reference: IRG6717366

 

Re: USD 8,000,000.00 Interest Rate Cap Our Ref: IRG6717366

 

We acknowledge receipt of your document dated 20 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 April 2005 and a Termination
Date of 25 April 2007, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:

 

Gaynor Kaye

Title:

 

Authorised Signatory

For and on Behalf of

The Royal Bank of Scotland plc

Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:

 

David L. Farris

Title:

 

Vice President

Novastar Financial Inc

Kansas City

 

Counterparty Deal Reference: CAP 54

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     26         

--------------------------------------------------------------------------------

Our Reference: IRG6717367

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

AMENDMENT

This Confirmation supersedes and replaces any previous communication received
from

ourselves in relation to the below referenced transaction

 

Our Reference: 1RG6717367

Re: USD 2,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     27         

--------------------------------------------------------------------------------

Our Reference: IRG6717367

 

Notional Amount    USD 2,000,000.00 Trade Date    01 April 2005 (time of trade
is available upon request) Effective Date    25 April 2005 Termination Date   
25 April 2008 subject to adjustment in accordance with the Modified Following
Business Day Convention Fixed Amounts      Fixed Amount Payer    Novastar
Financial Inc Fixed Rate    .45200 pct Fixed Amount Payer Payment Date    The
25th day of each month, commencing 25 May 2005 to and including the Termination
Date, subject to adjustment in accordance with the Modified Following Business
Day Convention      Notional Amount times the Scale Factor times the Fixed Rate
Day Count Fraction times Fixed Rate Fixed Rate Payer Payment Amount          
Ten (10) Scale Factor    Applicable No Adjustment for Period End Dates    30/360

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     28         

--------------------------------------------------------------------------------

Our Reference: IRG6717367

 

Fixed Rate Day Count Fraction      Business Days    New York

Floating Amounts

     Floating Rate Payer    The Royal Bank of Scotland plc Floating Rate Payer
Payment Dates    The 25th day of each month, commencing 25 May 2005 to and
including the Termination Date, subject to adjustment in accordance with the
Modified Following Business Day Convention Floating Rate Payer Payment Amount   
Notional Amount times the Scale Factor times the Floating Rate Day Count
Fraction times (Floating Rate Option minus Cap Rate); provided, however, that no
payment shall be made by Party A and the Floating Rate Payer Payment Amount
shall be zero if the Floating Rate Option is less than or equal to the Cap Rate.
     Ten (10)

Scale Factor

     Cap Rate    4.35 pct

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     29         

--------------------------------------------------------------------------------

Our Reference: IRG6717367

 

Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month Reset Dates    The first day of each
Calculation Period Business Days    New York Calculation Agent    The Royal Bank
of Scotland plc or, if different, as stated in the Agreement

Account Details

     Payments to The Royal Bank of Scotland plc    As per our Standard
Settlement Instructions Payments to Novastar Financial Inc    Any payments due
to yourselves in relation to this Transaction, where The Royal Bank of Scotland
plc currently hold your relevant Standard Settlement Instructions, these will be
applied to this Transaction. If these are not currently held by ourselves or are
not relevant to this Transaction, please advise.

Offices

     The Office of The Royal Bank of Scotland plc for the Transaction is   
London The Office of Novastar Financial Inc for the      Transaction is   
Kansas City

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     30         

--------------------------------------------------------------------------------

Our Reference:IRG6717367

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     31         

--------------------------------------------------------------------------------

Our Reference: IRG6717367

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     32         

--------------------------------------------------------------------------------

Our Reference: IRG6717367

 

Re: USD 2,000,000.00 Interest Rate Cap Our Ref: IRG6717367

 

We acknowledge receipt of your document dated 20 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 April 2005 and a Termination
Date of 25 April 2008, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:

 

Gaynor Kaye

Title:

 

Authorised Signatory

For and on Behalf of

The Royal Bank of Scotland plc

Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:

 

David L. Farris

Title:

 

Vice President

Novastar Financial Inc

Kansas City

 

Counterparty Deal Reference: CAP 55

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     33         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

AMENDMENT

This Confirmation supersedes and replaces any previous communication received
from

ourselves in relation to the below referenced transaction

 

Our Reference: IRG6746213.2A

Re: USD 8,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     34         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

Notional Amount    USD 8,000,000.00 Trade Date    11 May 2005 (time of trade is
available upon request) Effective Date    25 May 2005 Termination Date    25 May
2007 subject to adjustment in accordance with the Modified Following Business
Day Convention Fixed Amounts      Fixed Amount Payer    Novastar Financial Inc
Fixed Rate    .32200 pct Fixed Amount Payer Payment Date    The 25th day of each
month, commencing 27 June 2005 to and including the Termination Date, subject to
adjustment in accordance with the Modified Following Business Day Convention  
   Notional Amount times the Scale Factor times the Fixed Rate Day Count
Fraction times Fixed Rate Fixed Rate Payer Payment Amount           Ten (10)
Scale Factor           Applicable No Adjustment for Period End Dates    30/360

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     35         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

Fixed Rate Day Count Fraction      Business Days    New York Floating Amounts   
  Floating Rate Payer    The Royal Bank of Scotland plc Floating Rate Payer
Payment Dates    The 25th day of each month, commencing 25 June 2005 to and
including the Termination Date, subject to adjustment in accordance with the
Modified Following Business Day Convention Floating Rate Payer Payment Amount   
Notional Amount times the Scale Factor times the Floating Rate Day Count
Fraction times (Floating Rate Option minus Cap Rate); provided, however, that no
payment shall be made by Party A and the Floating Rate Payer Payment Amount
shall be zero if the Floating Rate Option is less than or equal to the Cap Rate.
     Ten (10) Scale Factor      Cap Rate    4.05 pct

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     36         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month Reset Dates    The first day of each
Calculation Period Business Days    New York Calculation Agent    The Royal Bank
of Scotland plc or, if different, as stated in the Agreement Account Details   
  Payments to The Royal Bank of Scotland plc    As per our Standard Settlement
Instructions Payments to Novastar Financial Inc    Any payments due to
yourselves in relation to this Transaction, where The Royal Bank of Scotland plc
currently hold your relevant Standard Settlement Instructions, these will be
applied to this Transaction. If these are not currently held by ourselves or are
not relevant to this Transaction, please advise. Offices      The Office of The
Royal Bank of Scotland plc for the Transaction is    London The Office of
Novastar Financial Inc for the Transaction is    Kansas City

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     37         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

 

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclicntconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     38         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     39         

--------------------------------------------------------------------------------

Our Reference: IRG6746213.2A

 

Re: USD 8,000,000.00 Interest Rate Cap Our Ref: IRG6746213.2A

 

We acknowledge receipt of your document dated 20 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 May 2005 and a Termination
Date of 25 May 2007, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:   Gaynor Kaye Title:   Authorised Signatory For and on Behalf of The Royal
Bank of Scotland plc Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:   David L. Farris Title:   Vice President Novastar Financial Inc Kansas
City

 

Counterparty Deal Reference: CAP 58

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     40         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

AMENDMENT

This Confirmation supersedes and replaces any previous communication received
from

ourselves in relation to the below referenced transaction

 

Our Reference: IRG6746215.2A

Re: USD 2,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     41         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

Notional Amount    USD 2,000,000.00 Trade Date    11 May 2005 (time of trade is
available upon request) Effective Date    25 May 2005 Termination Date    25 May
2008 subject to adjustment in accordance with the Modified Following Business
Day Convention Fixed Amounts      Fixed Amount Payer    Novastar Financial Inc
Fixed Rate    .42900 pct Fixed Amount Payer Payment Date    The 25th day of each
month, commencing 27 June 2005 to and including the Termination Date, subject to
adjustment in accordance with the Modified Following Business Day Convention  
   Notional Amount times the Scale Factor times the Fixed Rate Day Count
Fraction times Fixed Rate Fixed Rate Payer Payment Amount           Ten (10)  
   Applicable Scale Factor      No Adjustment for Period End Dates      Fixed
Rate Day Count Fraction    30/360

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     42         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

Business Days    New York Floating Amounts      Floating Rate Payer    The Royal
Bank of Scotland plc Floating Rate Payer Payment Dates    The 25th day of each
month, commencing 25 June 2005 to and including the Termination Date, subject to
adjustment in accordance with the Modified Following Business Day Convention
Floating Rate Payer Payment Amount    Notional Amount times the Scale Factor
times the Floating Rate Day Count Fraction times (Floating Rate Option minus Cap
Rate); provided, however, that no payment shall be made by Party A and the
Floating Rate Payer Payment Amount shall be zero if the Floating Rate Option is
less than or equal to the Cap Rate.      Ten (10) Scale Factor      Cap Rate   
4.15 pct

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     43         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month Reset Dates    The first day of each
Calculation Period Business Days    New York Calculation Agent    The Royal Bank
of Scotland plc or, if different, as stated in the Agreement Account Details   
  Payments to The Royal Bank of Scotland plc    As per our Standard Settlement
Instructions Payments to Novastar Financial Inc    Any payments due to
yourselves in relation to this Transaction, where The Royal Bank of Scotland plc
currently hold your relevant Standard Settlement Instructions, these will be
applied to this Transaction. If these are not currently held by ourselves or are
not relevant to this Transaction, please advise. Offices      The Office of The
Royal Bank of Scotland plc for the Transaction is    London The Office of
Novastar Financial Inc for the Transaction is    Kansas City

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     44         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgment and upon
advice from such advisers as it has deemed necessary. It is not relying, and has
not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorized and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     45         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     46         

--------------------------------------------------------------------------------

Our Reference: IRG6746215.2A

 

Re: USD 2,000,000.00 Interest Rate Cap Our Ref: IRG6746215.2A

 

We acknowledge receipt of your document dated 2 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 May 2005 and a Termination
Date of 25 May 2008, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorized
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:   Gaynor Kaye Title:   Authorised Signatory For and on Behalf of The Royal
Bank of Scotland plc Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:   David L. Farris Title:   Vice President Novastar Financial Inc Kansas
City

 

Counterparty Deal Reference: CAP 59

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     47         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

20 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

AMENDMENT

This Confirmation supersedes and replaces any previous communication received
from

ourselves in relation to the below referenced transaction

 

Our Reference: IRG6783567

Re: USD 8,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

 

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     48         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

Notional Amount    USD 8,000,000.00 Trade Date    06 July 2005 (time of trade is
available upon request) Effective Date    25 July 2005 Termination Date    25
July 2007 subject to adjustment in accordance with the Modified Following
Business Day Convention Fixed Amounts      Fixed Amount Payer    Novastar
Financial Inc Fixed Rate    .28800 pct Fixed Amount Payer Payment Date    The
25th day of each month, commencing 25 August 2005 to and including the
Termination Date, subject to adjustment in accordance with the Modified
Following Business Day Convention      Notional Amount times the Scale Factor
times the Fixed Rate Day Count Fraction times Fixed Rate Fixed Rate Payer
Payment Amount    Applicable No Adjustment for Period End Dates           30/360
Fixed Rate Day Count Fraction           Ten (10)

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     49         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

Scale Factor           New York Business Days      Floating Amounts     
Floating Rate Payer    The Royal Bank of Scotland plc Floating Rate Payer
Payment Dates    The 25th day of each month, commencing 25 August 2005 to and
including the Termination Date, subject to adjustment in accordance with the
Modified Following Business Day Convention Floating Rate Payer Payment Amount   
Notional Amount times the Scale Factor times the Floating Rate Day Count
Fraction times (Floating Rate Option minus Cap Rate); provided, however, that no
payment shall be made by Party A and the Floating Rate Payer Payment Amount
shall be zero if the Floating Rate Option is less than or equal to the Cap Rate.
     Ten (10) Scale Factor     

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     50         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

Cap Rate    4.15 pct Floating Rate Option    USD-LIBOR-BBA Floating Rate Day
Count Fraction    Actual/360 Designated Maturity    1 month Reset Dates    The
first day of each Calculation Period Business Days    New York Calculation Agent
   The Royal Bank of Scotland plc or, if different, as stated in the Agreement
Account Details      Payments to The Royal Bank of Scotland plc    As per our
Standard Settlement Instructions Payments to Novastar Financial Inc    Any
payments due to yourselves in relation to this Transaction, where The Royal Bank
of Scotland plc currently hold your relevant Standard Settlement Instructions,
these will be applied to this Transaction. If these are not currently held by
ourselves or are not relevant to this Transaction, please advise. Offices     
The Office of The Royal Bank of Scotland plc for the Transaction is    London
The Office, of Novastar Financial Inc for the    Kansas City

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     51         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

Transaction is

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     52         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     53         

--------------------------------------------------------------------------------

Our Reference: IRG6783567

 

Re: USD 8,000,000.00 Interest Rate Cap Our Ref: IRG6783567

 

We acknowledge receipt of your document dated 20 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 July 2005 and a Termination
Date of 25 July 2007, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours sincerely,

/s/ Gaynor Kaye

--------------------------------------------------------------------------------

Name:   Gaynor Kaye Title:   Authorised Signatory For and on Behalf of The Royal
Bank of Scotland plc Confirmed as of the date first written

/s/ David L. Farris

--------------------------------------------------------------------------------

Name:   David L. Farris Title:   Vice President Novastar Financial Inc Kansas
City

 

Counterparty Deal Reference: CAP 64

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     54         

--------------------------------------------------------------------------------

Our Reference: IRG6783568

 

{BarCode}

 

LOGO [g20342rbslogo.jpg]

Financial Markets

280 Bishopsgate

London EC2M 4RB

19 September 2005

 

Novastar Financial Inc

Kansas City

 

Dear Sirs,

 

Our Reference: IRG6783568

Re: USD 2,000,000.00 Interest Rate Cap

 

The purpose of this document is to set forth the terms and conditions of the
transaction entered into between The Royal Bank of Scotland plc and yourselves
on the Trade Date specified below (the “Transaction”). This document constitutes
a “Confirmation” as referred to in the Agreement specified below.

 

The Definitions and provisions contained in the 2000 ISDA Definitions, as
published by the International Swaps and Derivatives Association, Inc., are
incorporated into this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this Confirmation will
govern.

 

This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA
Master Agreement dated as of 30 June 2005, as amended and supplemented from time
to time (the “Agreement”), between yourselves and The Royal Bank of Scotland
plc. All provisions contained in the Agreement govern this Confirmation except
as expressly modified below.

The terms of the particular Transaction to which this Confirmation relates are
as follows:

 

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The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     55         

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Our Reference: IRG6783568

 

Notional Amount   USD 2,000,000.00 Trade Date   06 July 2005 (time of trade is
available upon request) Effective Date   25 July 2005 Termination Date   25 July
2008 subject to adjustment in accordance with the Modified Following Business
Day Convention Fixed Amounts     Fixed Amount Payer   Novastar Financial Inc
Fixed Rate   .40100 pct Fixed Amount Payer Payment Date   The 25th day of each
month, commencing 25 August 2005 to and including the Termination Date, subject
to adjustment in accordance with the Modified Following Business Day Convention
    Notional Amount times the Scale Factor times the Fixed Rate Day Count
Fraction times Fixed Rate Fixed Rate Payer Payment Amount         Applicable    
Ten (10) No Adjustment for Period End Dates     Scale Factor         30/360
Fixed Rate Day Count Fraction    

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     56         

--------------------------------------------------------------------------------

Our Reference: IRG6783568

 

Business Days    New York Floating Amounts      Floating Rate Payer    The Royal
Bank of Scotland plc Floating Rate Payer Payment Dates    The 25th day of each
month, commencing 25 August 2005 to and including the Termination Date, subject
to adjustment in accordance with the Modified Following Business Day Convention
Floating Rate Payer Payment Amount    Notional Amount times the Scale Factor
times the Floating Rate Day Count Fraction times (Floating Rate Option minus Cap
Rate); provided, however, that no payment shall be made by Party A and the
Floating Rate Payer Payment Amount shall be zero if the Floating Rate Option is
less than or equal to the Cap Rate.      Ten (10) Scale Factor      Cap Rate   
4.20 pct

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     57         

--------------------------------------------------------------------------------

Our Reference: IRG6783568

 

Floating Rate Option    USD-LIBOR-BBA Floating Rate Day Count Fraction   
Actual/360 Designated Maturity    1 month Reset Dates    The first day of each
Calculation Period Business Days    New York Calculation Agent    The Royal Bank
of Scotland plc or, if different, as stated in the Agreement Account Details   
  Payments to The Royal Bank of Scotland plc    As per our Standard Settlement
Instructions Payments to Novastar Financial Inc    Any payments due to
yourselves in relation to this Transaction, where The Royal Bank of Scotland plc
currently hold your relevant Standard Settlement Instructions, these will be
applied to this Transaction. If these are not currently held by ourselves or are
not relevant to this Transaction, please advise. Offices      The Office of The
Royal Bank of Scotland plc for the Transaction is   

London The Office of Novastar Financial Inc for the      Transaction is   
Kansas City

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     58         

--------------------------------------------------------------------------------

Our Reference: IRG6783568

 

Each party represents to the other party on the Trade Date of this Transaction
that (in the absence of a written agreement between the parties that expressly
imposes affirmative obligations to the contrary for this Transaction):-

 

(a) Non-Reliance. It is acting for its own account, and it has made its own
independent decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own judgement and
upon advice from such advisers as it has deemed necessary. It is not relying,
and has not relied, on any communication (written or oral) of the other party as
investment advice or as a recommendation to enter into this Transaction; it
being understood that information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction, no communication (written or
oral) received from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction.

 

(b) Assessment and Understanding. It is capable of assessing the merits of and
understanding (on its own behalf or through independent professional advice),
and understands and accepts, the terms, conditions and risks of this
Transaction. It is also capable of assuming, and assumes, the risks of this
Transaction.

 

(c) Status of Parties. The other party is not acting as a fiduciary for or an
adviser to it in respect of this Transaction.

 

This Transaction has been entered into between yourselves and The Royal Bank of
Scotland plc a member of the London Stock Exchange, authorised and regulated by
the Financial Services Authority.

 

This Confirmation is in final form and supersedes all previous Confirmations and
communications in respect of this Transaction. No hard Copy will follow.

 

In the event that you disagree with any part of this Confirmation, please notify
us via the contact details below, so that the discrepancy may be quickly
resolved. Please note that our telephone conversations with you may be recorded.

 

Telephone    +44 (0)20 7085 4015     

+44 (0)20 7085 1720

+44 (0)20 7085 3459

Fax    +44 (0)20 7085 6724 E-mail    *fmirdclientconfirmations@rbos.com

 

We are pleased to have completed this Transaction and look forward to dealing
with you again in the near future.

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     59         

--------------------------------------------------------------------------------

Our Reference: IRG6783568

 

Please confirm that the foregoing correctly sets forth the terms of our
agreement by a return document to The Royal Bank of Scotland plc substantially
to the following effect:

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     60         

--------------------------------------------------------------------------------

Our Reference: IRG6783568

 

Re: USD 2,000,000.00 Interest Rate Cap Our Ref: IRG6783568

 

We acknowledge receipt of your document dated 19 September 2005 with respect to
the above-referenced Transaction between The Royal Bank of Scotland plc and
Novastar Financial Inc with an Effective Date of 25 July 2005 and a Termination
Date of 25 July 2008, and confirm that such document correctly set forth the
terms of our agreement relating to the Swap Transaction described therein. Yours
faithfully, Novastar Financial Inc, by specify name and title of authorised
officer.

 

Yours Sincerely,

/s/ Gaynor Kaye

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Name:   Gaynor Kaye Title:   Authorised Signatory For and on Behalf of The Royal
Bank of Scotland plc Confirmed as of the date first written

/s/ David L. Farris

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Name:   David L. Farris Title:   Vice President Novastar Financial Inc Kansas
City

 

Counterparty Deal Reference: CAP 65

 

{BarCode}

 

LOGO [g20342rbsfooter.jpg]        

The Royal Bank of Scotland plc is registered in Scotland No. 90312

Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

 

A member of the London Stock Exchange authorised and regulated

by the Financial Services Authority

 

Agency agreements exist between members of The Royal Bank of

Scotland Group

     61         

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Exhibit II

 

[Form of New Agreement attached behind this page]

 

62