NOVASTAR FINANCIAL, INC.
 
STOCK OPTION AGREEMENT
 
(W. Lance Anderson)
 
     THIS STOCK OPTION AGREEMENT (this “Agreement”), dated this 15th day of
March, 2011 (the “Date of Grant”), is by and between NovaStar Financial, Inc., a
Maryland corporation (the “Company”) and W. Lance Anderson, an individual
employee of the Company (the “Optionee”). The Company and the Optionee are
sometimes referred to herein individually as a “Party” and collectively as the
“Parties”.
 
     The Compensation Committee (“Committee”) of the Board of Directors has
determined that the Optionee is to be granted an option (the “Option”) to
purchase shares of the Company’s common stock, par value $0.01 per share
(“Common Stock”), on the terms and conditions set forth herein, and the Board of
Directors hereby grants such Option.
 
     1. Number of Shares; Option Price; Adjustment.
 
          (a) The Option entitles the Optionee to purchase 439,000 shares of the
Common Stock (the “Option Shares”), at a price (the “Option Price”) of $0.51 per
share, which is the closing price of the Common Stock as reported on the Pink
Sheets of the OTC on the Date of Grant.
 
          (b) In the event that the Company undergoes or effects any
recapitalization, reorganization, merger, consolidation, spin-off, combination,
repurchase or share exchange, stock split or stock dividend or other similar
corporate transaction or event which affects the shares of Common Stock such
that an adjustment is appropriate in order to prevent dilution or enlargement of
the rights of Optionee with respect to the Option, then the Board shall make
such appropriate adjustments in the number and kind of shares and in the
exercise price under this Option to preserve the benefits and potential benefits
thereof.
 
          (c) In the event that the Company does not effectuate and close its
recapitalization of preferred stock and related transactions as described in the
Form S-4 (Registration No. 333-171115), as amended, filed by the Company with
the Securities and Exchange Commission, by December 31, 2011, then the number of
Option Shares shall be reduced by 198,297 shares, and the number of shares
vesting over time shall be adjusted appropriately on a pro-rata basis.
 
     2. Period of Option. The term of the Option and of this Agreement shall
commence on the Date of Grant and terminate upon the expiration of ten years
from the Date of Grant. Upon termination of the Option, all rights of the
Optionee hereunder shall cease.
 

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     3. Conditions of Exercise.
 
          (a) Except as otherwise provided herein, the Option shall become
vested in and exercisable by the Optionee as follows:
 
          (i) Twenty-five percent (25%) of the Option Shares (which is equal to
109,750 Option Shares) on December 31, 2012;
 
          (ii) An additional twenty-five percent (25%) of the Option Shares
(which is equal to 109,750 Option Shares) on December 31, 2013;
 
          (iii) An additional twenty-five percent (25%) of the Option Shares
(which is equal to 109,750 Option Shares) on December 31, 2014; and
 
          (iv) An additional twenty-five percent (25%) of the Option Shares
(which is equal to 109,750 Option Shares) on December 31, 2015.
 
          (b) Notwithstanding the foregoing:
 
          (i) Through December 31, 2014, in no event shall Optionee be permitted
to exercise the Option such that, giving effect to such exercise, Optionee would
be deemed to own more than 4.9% of the outstanding stock of the Company, as such
ownership is calculated for purposes of evaluating an “ownership change” as
defined under Section 382 of the Internal Revenue Code of 1986, as amended, and
the regulations promulgated thereunder (the “Code”).
 
          (ii) in the event of a Change in Control (as defined below) of the
Company or in the event of a termination of Optionee’s employment with the
Company for Good Reason (pursuant to Section 6(d) hereof) or without Cause
(pursuant to Section 6(e) hereof), (x) the vesting of the Option shall be
accelerated and the full number of then-unexercised Option Shares shall become
exercisable in full and (y) the Company may, at its election, pay to the
Optionee in an immediate lump sum payment the excess of the value of the shares
of Common Stock for which the Option has not yet been exercised (calculated, in
the case of a Change of Control, in the same manner as it is calculated for
purposes of such Change in Control transaction, or if no such calculation
exists, at Fair Market Value as defined below) over the applicable Option Price
payable for such shares (the “Exercise Price Amount”), whereupon such payment
shall be deemed in full satisfaction of the Company’s obligations under this
Agreement. For purposes of this Agreement, a “Change in Control” shall be deemed
to have taken place if: (A) a third person, including a “group” as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, purchases or otherwise
acquires shares of the Company after the date hereof and as a result thereof
becomes the beneficial owner of shares of the Company having 50% or more of the
total number of votes that may be cast for election of directors of the Company,
(B) as the result of, or in connection with any cash tender or exchange offer,
merger or other business combination, or contested election, or any combination
of the foregoing transactions, the directors then serving on the Board of the
Company shall cease to constitute a majority of the Board of the Company or any
successor to the Company, or (C) the Company sells all or substantially all the
assets of the Company. 
 
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          (c) The right of the Optionee to purchase shares with respect to which
this Option has become exercisable as herein provided may be exercised in whole
or in part at any time or from time to time up to ten (l0) years from the Date
of Grant, but only during the period in which such Option remains exercisable as
herein provided.
 
     4. Nontransferability of Option. The Option and this Agreement shall not be
transferable other than by will or by the laws of descent and distribution or
pursuant to a “qualified domestic relations order,” as defined in the Employee
Retirement Income Security Act of 1974; and except as otherwise provided herein,
the Option may be exercised, during the lifetime of the Optionee, only by the
Optionee or by the Optionee’s legal representative.
 
     5. Exercise of Option.
 
          (a) The Option shall be exercised in the following manner: the
Optionee, or the person or persons having the right to exercise the Option upon
the death or Disability of the Optionee, shall deliver to the Company written
notice specifying the number of Option Shares which he, she or it elects to
purchase, together with the Exercise Price Amount, which may be delivered in the
form of:
 
          (i) cash;
 
          (ii) shares of Common Stock valued at “Fair Market Value”, which for
purposes of this Agreement is defined as:
 
          (x) the closing price of the Common Stock on the date of exercise, if
the Common Stock is publicly traded (“Publicly Traded”) in that it is either
quoted on an interdealer quotation system (such as OTC, Bulletin Board or Pink
Sheets) or listed on a stock exchange (such as the New York Stock Exchange), or
 
          (y) if (x) does not apply, the fair market value of the Common Stock
on the date of exercise, as reasonably determined by the Company or, if such
determination is disputed by Optionee, by an appraiser mutually selected by the
Company and Optionee;
 
          (iii) cancellation of any indebtedness owed by the Company to the
Optionee; or
 
          (iv) any combination of the above, the sum of which equals the total
Exercise Price Amount.
 
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          (b) Notwithstanding Section 5(a), the Optionee may request that the
Committee agree that payment of all or any portion of the Exercise Price Amount
need not accompany the written notice of exercise, provided that such notice of
exercise either (i) requests that the Committee agree that the Company will pay
to the Optionee, in an immediate lump sum payment, the excess of the value of
the shares of Common Stock for which the Option is then being exercised (at Fair
Market Value) over the applicable Exercise Price Amount, after which the number
of Option Shares is reduced by the number of shares involved in such exercise or
(ii) irrevocably authorizes and directs a third party licensed broker to sell
shares of Common Stock (or a sufficient portion of shares) acquired upon
exercise of the Option and immediately remit to the Company a sufficient portion
of the sale proceeds thereof to pay the otherwise unpaid Exercise Price Amount
and any tax withholding resulting from such exercise. Such request shall be
promptly considered and may be granted or denied in the sole discretion of the
Committee. 
 
          (c) Upon delivery of the notice to exercise and the applicable
Exercise Price Amount, the underlying Common Stock for which such exercise
applies shall be purchased by the Optionee and promptly delivered to him,
provided, however, that the Company may, at its discretion, require the Optionee
to provide up to 15 days advance written notice of any exercise of the Option
(except in the case of exercise relating to a Change of Control pursuant to
Section 3(b)(ii) hereof or termination of Optionee’s employment with the Company
for Good Reason (pursuant to Section 6(d) hereof) or without Cause (pursuant to
Section 6(e) hereof), or where the term of the Option or its exercisability will
otherwise expire during such advance notice period).
 
          (d) No shares of Common Stock may be tendered in exercise of this
Option if such shares were acquired by Optionee through the exercise of an
Incentive Stock Option (within the meaning of Section 422 of the Code) unless
(i) such shares have been held by Optionee for at least one year, and (ii) at
least two years have elapsed since such Incentive Stock Option was granted.
 
          (e) If the Common Stock is Publicly Traded at the time when the Option
is desired to be exercised, the date of exercise must be a trading day
applicable to such Common Stock.
 
     6. Treatment of the Option Upon Termination of Employment.
 
          (a) Termination by Death. If the Optionee’s employment with the
Company terminates by reason of his death, the Option may thereafter be
exercised by the legal representative of the estate or by the legatee of the
Optionee under the will of the Optionee, to the extent the Option Shares are
then vested, for a period of twelve (12) months or until the expiration of the
stated term of such Option, whichever period is shorter.
 
          (b) Termination for Disability. If the Optionee retires from the
Company (or his employment with Company is terminated by the Company) for
reasons of Disability (as defined below and determined in good faith by the
Board of Directors), the Option may thereafter be exercised, to the extent the
Option Shares are then vested, for a period of twelve (12) months from the date
of such termination of employment or until the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that if the
Optionee dies within such twelve (12) month period and prior to the expiration
of the stated term of such Option, such Option may thereafter be exercised for a
period of twelve (12) months from the date of death or until the expiration of
the stated term of such Option, whichever period is shorter. For purposes of
this Agreement, “Disability” shall mean permanent and total disability as
determined under the Company’s disability program or policy. If no such
disability program or policy exists, then the Optionee shall be considered to be
suffering from a “Disability” if, as determined in the good faith judgment of
the Board of Directors, the Optionee is unable to materially perform his duties
to the Company with reasonable accommodation for an aggregate of at least
one-hundred twenty (120) days (whether or not consecutive) during any one
hundred eighty (180) consecutive day period. 
 
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          (c) Termination for Cause. If the Optionee’s employment with the
Company is terminated by the Company for “Cause”, as defined below, then the
Option shall terminate and no longer be exercisable by the Optionee. For
purposes of this Agreement, “Cause” shall mean the existence of, or a good faith
belief by the Company (as evidenced by the minutes or resolutions of the Board
of Directors) in the existence of, facts which constitute a basis for
termination of Optionee’s employment due to Optionee’s:
 
          (i) Failure, in any material respect, to perform his primary duties as
Chief Executive Officer in accordance with reasonable standards established by
the Company;
 
          (ii) Gross insubordination of a legitimate, material and explicit
direction of the Board of Directors or willful breach of important policies and
procedures of the Company, in any material respect, that irrevocably impugn the
Optionee’s authority or integrity as an officer of the Company;
 
          (iii) Breach of fiduciary duties in any material respect; or
 
          (iv) Conviction or plea of guilty or nolo contendere to a felony or
crime involving moral turpitude, misappropriation, embezzlement or fraud.
 
Notwithstanding the foregoing, a termination of employment of Optionee for Cause
due to paragraphs (i), (ii) or (iii) above shall not be considered as having
occurred for purposes of this Agreement unless the Company provides written
notice to Optionee of the events or conditions constituting Cause promptly
(within sixty (60) days following the occurrence or discovery thereof),
specifying that the Company believes such events or conditions to constitute
Cause, and (if such events or conditions can be remedied) the Optionee has been
afforded a period of at least fifteen (15) days following delivery of such
notice to remedy the events or conditions constituting Cause and has not done so
to the reasonable satisfaction of the Board of Directors (it being acknowledged
that Optionee may not exercise the Option during such fifteen-day period).
 
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          (d) Termination for Good Reason. If the Optionee’s employment with the
Company is terminated by him for “Good Reason”, as defined below, then the
vesting of the Option shall be accelerated and the full number of
then-unexercised Option Shares shall become exercisable in full, for a period of
nine (9) months from the effective date of such termination of employment or
until the expiration of the stated term of such Option, whichever period is
shorter. For purposes of this Agreement, “Good Reason” shall mean the
occurrence, without the Optionee’s written consent, of any one or more of the
following events:
 
          (i) Except in connection with the Company’s termination of Optionee’s
employment for Cause or as a result of Optionee’s death or disability: (i) a
material (25% or more) reduction in Optionee’s salary compensation; or (ii) a
decrease in the responsibilities or title of Optionee to a level that, on the
whole, is materially inconsistent with the Chief Executive Officer position; or
 
          (ii) The Company requires that Optionee relocate more than fifty (50)
miles from Kansas City, Missouri, and the Optionee objects to such relocation in
writing promptly (within 30 days) after being notified in writing thereof; or
 
          (iii) The Company’s material breach of any of the provisions of this
Agreement or of any other material agreement between the Company and Optionee
concerning compensation.
 
Notwithstanding the foregoing, a termination of employment by Optionee for Good
Reason shall not be considered as having occurred for purposes of this Agreement
unless the Optionee provides written notice to the Company of the events or
conditions constituting Good Reason, specifying that the Optionee believes such
events or conditions to constitute Good Reason, and (if such events or
conditions can be remedied) the Company has been afforded a period of at least
fifteen (15) days following delivery of such notice to remedy the events or
conditions constituting Good Reason and has not done so to the reasonable
satisfaction of the Optionee.
 
          (e) Termination Without Cause. If the Optionee’s employment with the
Company is terminated by the Company without Cause, then the vesting of the
Option shall be accelerated and the full number of then-unexercised Option
Shares shall become exercisable in full, for a period of nine (9) months from
the effective date of such termination of employment or until the expiration of
the stated term of such Option, whichever period is shorter.
 
     7. Investment Purpose; Restrictions on Transfer; Registration Rights.
 
          (a) The Optionee represents that, in the event of the exercise of the
Option by the Optionee, or any part thereof, he intends to purchase the shares
acquired on such exercise for investment and not with a view to resale or other
distribution; except that the Committee, at its election, may waive or release
this condition in the event the shares acquired on exercise of the Option are
registered under the Securities Act of 1933, or upon the happening of any other
contingency which the Committee shall determine warrants the waiver or release
of this condition.
 
          (b) The Optionee agrees that the certificates evidencing the shares
acquired by him on exercise of all or any part of this Option may bear a
restrictive legend, if appropriate, indicating any restrictions on the transfer
thereof, which legend may be in such form as the Company shall determine to be
proper.
 
          (c) In connection with this Agreement, the Parties are entering into
that certain Registration Rights Agreement of even date herewith.
 
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     8. Option Not an Incentive Stock Option. It is intended that this Option
shall not be treated as an incentive stock option under Section 422 of the Code.
 
     9. Section 409A Requirements. This Option is intended to be exempt from
Code Section 409A, and this Agreement shall be interpreted and operated in
accordance with this intent.
 
     10. No Contract of Employment. Nothing contained in this Agreement shall be
considered or construed as creating a contract of employment for any specified
period of time.
 
     11. Notices. Any notice required or permitted under this Agreement shall be
deemed given when delivered personally, or when deposited and mailed by
certified mail with postage prepaid, addressed, as appropriate, to the Optionee
either at the Optionee’s address set forth below or such other address as the
Optionee may designate in writing to the Company, or the Company: Attention:
Board of Directors/Corporate Secretary, at the Company’s address or such other
address as the Company may designate in writing to the Optionee.
 
     12. No Waiver. Either Party’s failure to enforce at any time any of the
provisions of this Agreement or to require at any time any performance by the
other Party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement, or
any part hereof, or the right such Party thereafter to enforce each and every
provision in accordance with the terms of this Agreement.
 
     13. Amendments. This Agreement may be amended or modified at any time by an
instrument in writing signed by the parties hereto.
 
     14. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the Parties with respect to the
subject matter of this Agreement.
 
     15. Severability. If any provision of this Agreement shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
 
     16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland without regard to the
principles of conflicts of law which might otherwise apply.
 
     17. Binding Effect. This Agreement shall be binding not only upon the
Parties hereto, but also upon their heirs, legal representatives, executors,
administrators, successors or assigns, and the Parties hereby agree to execute
any instruments and to perform any acts which may be necessary or proper to
carry out the purpose of this Agreement.
 
     18. Construction. The headings of the sections and subsections of this
Agreement are for reference only and do not limit, expand or otherwise affect
the contents of the Agreement.
 
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     19. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument. Counterpart signature pages to this
Agreement transmitted by facsimile transmission, by electronic mail in portable
document format (.pdf), or by any other electronic means intended to preserve
the original graphic and pictorial appearance of a document, will have the same
effect as physical delivery of the paper document bearing an original signature.
 
[signature page follows]
 
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     IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and
year first above written.
 

       COMPANY: NOVASTAR FINANCIAL, INC.         By: /s/ Gregory T. Barmore    
    Name:  Gregory T. Barmore         Title: Chairman – Compensation Committee  
  Lead Outside Director

 
 
 
 

 
 

       OPTIONEE: Signature:   /s/ W. Lance Anderson         Address: c/o
NovaStar Financial, Inc.     2114 Central Street, Suite 600     Kansas City, MO
64108

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