Exhibit 10.1





                       SEPARATION AND CONSULTING AGREEMENT

     This Separation and Consulting  Agreement (the "Agreement") is entered into
as of the 3rd day of January 2008, by and between NovaStar  Financial,  Inc., on
behalf of itself  and all of its direct and  indirect  subsidiaries  (all of the
foregoing, collectively, the "Company") and Gregory Metz ("Consultant").

     WHEREAS,  the Company and Consultant are parties to an Employment Agreement
dated  January 15,  2004,  as amended  December  20,  2006 (as so  amended,  the
"Employment  Agreement"),  which provides for certain  benefits and  obligations
upon  termination by the Company of  Consultant's  employment  with the Company,
without cause;

     WHEREAS,  Consultant's  employment by the Company will be terminated by the
Company,  without  "cause" (as  described in the  Employment  Agreement),  as of
January 3, 2008 (the  "Termination  Date") pursuant to this  Agreement,  and the
Company  desires  to ensure a smooth  and  orderly  transition  of  business  by
reserving the right to obtain Consultant's services for a limited period of time
as provided herein.

     NOW,  THEREFORE,  in  consideration  of the mutual covenants and agreements
contained herein, the Company and Consultant agree as follows:

1.   Termination of Employment.

     1.1  Termination.   Consultant's   employment  by  the  Company  is  hereby
terminated  by the Company,  without  "cause" (as  described  in the  Employment
Agreement), effective as of the Termination Date. Except to the extent expressly
provided  herein,  the  rights  and  obligations  set  forth  in this  Agreement
supersede  all  rights  and  obligations  of the  parties  under the  Employment
Agreement  that  otherwise  would  arise  upon or be  applicable  following  the
Termination Date, including but not limited to severance  compensation and other
benefits;  provided,  however,  that neither this  Agreement  nor any  provision
hereof  shall  be  deemed  to  supersede  or  otherwise  affect  any  rights  to
indemnification,  defense, or similar rights under the Employment  Agreement or,
for the avoidance of doubt, under any other written  agreement,  the certificate
of  incorporation,  bylaws  or other  organizational  documents  of the  Company
(including  NovaStar  Financial,  Inc.  and  each  of its  direct  and  indirect
subsidiaries), or any policy of directors and officers or other insurance.

     1.2 Resignation as Officer and Director. In connection with and as a result
of the termination of Consultant's employment by the Company,  Consultant hereby
resigns  from all  positions  as an  officer,  manager,  and/or  director of the
Company (including NovaStar Financial,  Inc., and all of its direct and indirect
subsidiaries),  effective as of the Termination Date. Consultant and the Company
agree that this Agreement  constitutes notice of such resignation,  and that the
Company shall immediately take any and all additional  actions necessary to give
effect to each such resignation.

     1.3 Accrued Wages,  Vacation,  and Business  Expenses.  Consultant shall be
entitled to payment,  in accordance with the Company's  normal payroll  schedule
following  the  Termination  Date,  of (a) all wages accrued from the end of the
period covered by Consultant's  paycheck  immediately  preceding the Termination
Date to the  Termination  Date,  and (b) all  accrued  and  unused  vacation  of
Consultant as of the Termination Date. In addition,  the Company shall reimburse
Consultant, whether on or following the Termination Date, in accordance with the
normal  expense  reimbursement   policies  of  the  Company,  for  any  and  all
reasonable, customary and usual expenses incurred by Consultant on behalf of the
Company prior to the Termination Date.

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     1.4  Outstanding Awards.

          (a) Immediately upon termination of employment on the Termination Date
     in accordance  with this Agreement,  Consultant  shall be fully vested with
     respect to all stock options,  restricted  stock, and accumulated  dividend
     equivalent rights that, in the case of each of the foregoing,  were awarded
     or granted prior to the Termination Date and that would have been vested at
     the end of the  year in  which  the  termination  occurred  had  Consultant
     remained  an employee  of the  Company  through  the end of such year.  The
     vesting of all other  stock  options,  restricted  stock,  and  accumulated
     dividend equivalent rights shall cease upon the Termination Date.

          (b)  Accumulated   dividend  equivalent  rights  that  vest  upon  the
     Termination  Date  pursuant  to Section  1.4(a)  above shall be paid by the
     Company to Consultant in cash upon the Termination Date, subject to Section
     6.2 below.

          (c) Except as expressly  provided in Section 1.4(a) and Section 1.4(b)
     above, all rights and obligations with respect to stock options, restricted
     stock,  and  dividend  equivalent  rights  awarded or granted  prior to the
     Termination  Date shall be governed by the terms of the applicable plan and
     the applicable grant or award agreement.

     1.5 Waiver of Incentive Compensation. Consultant and the Company agree that
Consultant shall not receive,  and Consultant hereby relinquishes and waives any
and all right to any cash bonus from the Company that has not been paid prior to
the  Termination  Date (including any cash bonus that otherwise would be payable
as a result of or following the termination of Consultant's  employment with the
Company).

     1.6 Health  Benefits.  Consultant  shall be  entitled  to  continue  health
benefits coverage upon and following the Termination Date pursuant to and to the
extent  provided  by the terms of COBRA.  Consultant  shall not be  entitled  to
receive,  and  hereby  waives  any and all right to,  continued  life  insurance
coverage from the Company, as of the Termination Date.

     1.7 Financial and Tax Planning Services Reimbursement.  Consultant shall be
entitled to  reimbursement  in  accordance  with the Company's  normal  policies
applicable to Consultant prior to the Termination Date for expenses  incurred by
Consultant  for  financial  and  tax  planning  services,  whether  prior  to or
following  the  Termination  Date,  provided  that  Consultant  submits a proper
request for such  reimbursement  with all required  documentation  within thirty
(30) days following the Termination  Date. Such  reimbursement  shall be paid to
Consultant  within ten (10) business days  following  submission of all required
documentation.

     1.8 Other Rights and Benefits.  All rights with respect to benefits accrued
under any benefit  plan of the Company that is not  expressly  addressed by this
Agreement  shall be governed  by the terms of such plan,  subject to Section 6.2
hereof.

2.   Consulting Services.

     2.1.  Consulting.  During the period commencing on the Termination Date and
ending on February 28, 2009 (the "Consulting Period"), Consultant agrees to make
himself  available to the Company for up to ten (10) hours per week,  whether by
telephone,  e-mail,  or in person, on an as-needed basis to consult with respect
to matters that were within  Consultant's  job description  during the course of

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Consultant's employment with the Company. Consultant agrees to respond promptly,
reasonably and cooperatively to the Company's  requests for assistance.  Barring
special   circumstances,   the   consulting   hours  shall  not  be  cumulative;
accordingly,  hours not used within a given week will be waived by the  Company,
but Consultant will receive  Consultant's full consulting  compensation for such
week under Section 2.2 below. However, the Company reserves the right to require
Consultant  to provide more than ten (10) hours of service per week in the event
that special  circumstances  arise in which  Consultant's  unique  assistance is
required by the Company. (Examples of special circumstances include, but are not
limited to, assistance in litigation or responding to government  inquiries.) In
order to protect the Company's  confidential  and trade secret  information from
use or disclosure  to a party other than the Company,  and to enable the Company
to be able  to  obtain  the  benefits  of  Consultant's  consulting  obligations
hereunder,  Consultant  agrees that so long as he is accepting  consulting  fees
pursuant to this Agreement,  Consultant will abide by the provisions of Sections
3 and 4 below.  Notwithstanding  the  foregoing,  in the event  that  Consultant
accepts  employment  or other  consulting  work  within the  Consulting  Period,
Consultant  will be  required  to spend no more  than  five (5)  hours  per week
consulting with the Company.

     2.2. Consulting Fees;  Expenses.  In consideration of the services provided
by  Consultant  during  the  Consulting   Period,  the  Company  agrees  to  pay
Consultant,  each month during the Consulting  Period, a monthly  consulting fee
equal to one-twelfth of  Consultant's  base salary from the Company  immediately
prior to the Termination Date. The Company will pay the consulting fee by direct
deposit to an account designated from time to time by Consultant. The consulting
fee  shall  be  paid  by  the  Company  monthly  in  advance,  beginning  on the
Termination Date. In addition to the consulting fee, the Company shall reimburse
Consultant for all reasonable  out-of-pocket  expenses incurred by Consultant in
providing  cooperation  and assistance to the Company,  within ten (10) business
days following receipt by the Company of reasonable documentation thereof.

     2.3. Consultant's Status;  Taxes.  Consultant's status under this Agreement
during the Consulting  Period shall be that of an independent  contractor to the
Company,  and not that of an agent or employee of the Company. The Company shall
not withhold federal or state taxes for Consultant on any amounts received under
this  Agreement.  Consultant is solely  responsible for and agrees to report and
pay all taxes on any income received under this Agreement.  Consultant agrees to
indemnify  and to hold  harmless  the Company from and against any and all taxes
and/or  penalties  with which  Consultant  is  assessed,  if any, as a result of
Consultant's non-payment of taxes on any amounts received under this Agreement.

     2.4.  No  Authority  to Bind the  Company.  The  Consultant  shall  have no
authority to enter into  contracts or  agreements on behalf of the Company or to
otherwise  legally bind the Company,  and shall not represent to any person that
Consultant has any such authority.

     2.5  Waiver  of  Non-Compete.   The  Company  hereby  waives  any  and  all
obligations,  including  but not limited to the  provisions of Section 11 of the
Employment  Agreement,  that  restrict  Consultant's  right to compete  with the
Company or to accept employment with or compensation from, manage, own an equity
interest in, consult with, or otherwise operate freely with respect to any other
person or  entity,  including  but not  limited  to any  person  or entity  that
competes with the Company, and agrees that such provisions and obligations shall
have no further force or effect from and after the Termination Date.

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3.   Non-Solicitation.

     Consultant agrees that, during the Consulting  Period: (a) Consultant shall
not  interfere  with the business of the Company;  and (b) except with the prior
consent of an executive officer of NovaStar Financial,  Inc., shall not directly
or indirectly solicit any of the Company's employees to leave the Company and/or
to work for another employer or business,  whether or not the solicited employee
would  commit  any  breach of his or her own  employment  terms by  leaving  the
service of the Company.

4.   Company Materials; Confidentiality.

     4.1 Company Materials.  Consultant agrees that all styles,  designs, lists,
materials,  books, files, reports,  correspondence,  records and other documents
used or prepared by Consultant in the scope of his  employment  with the Company
or made available to Consultant by the Company (all of the  foregoing,  "Company
Materials"),  are and will  remain the  property of the  Company.  Except to the
extent  and for  such  time as  reasonably  necessary  for  the  performance  of
consulting  services  to the Company  hereunder,  Consultant  shall  immediately
return all Company  Materials  to the Company and  Consultant  shall not make or
retain any copies thereof.

     4.2 Confidential Information.  Consultant acknowledges that the Company has
created,  developed  and adopted,  itself and through one or more third  parties
acting on its behalf, confidential,  proprietary and/or trade secret information
("Confidential  Information").  Confidential  Information  includes,  but is not
limited to: (a) the  Company's  lending,  brokering,  servicing,  and  investing
policies and procedures;  (b) lists of and information  regarding past,  present
and potential brokers, lenders, investors, suppliers, loan applicants, borrowers
and other customers and clients  ("Clients");  (c) contracts and agreements with
Clients;  (d) the manner in which  business is conducted  by the  Company,  with
particular Clients and otherwise; (e) business plans, strategies,  processes and
methodologies;  (f) financial  information,  budgets,  forecasts,  and financial
statements,  (g)  portfolio  data;  (h) sales  techniques;  (i)  methods of data
processing;  and  (j)  information  concerning  employees  and  their  salaries,
performance  and personnel  file  information.  Notwithstanding  the  foregoing,
Confidential  Information  shall not include any information to the extent known
by or made available to the public generally, other than as a direct or indirect
result of unauthorized disclosure thereof by Consultant.

     4.3   Non-Disclosure.   Consultant   acknowledges   and  agrees   that  the
Confidential Information belongs to the Company and not to Consultant,  that the
Confidential Information has independent actual or potential economic value from
not being generally known to the public or other persons who can obtain economic
value from its disclosure or use, that the  Confidential  Information is subject
to  reasonable  efforts  by the  Company  to  maintain  its  secrecy,  and  that
disclosure of Confidential Information in an unauthorized manner could be highly
prejudicial  to the Company  and/or its Clients.  Except to the extent as may be
expressly  authorized  by the Company in writing  from time to time or as may be
reasonably  necessary  in the course of  providing  consulting  services  to the
Company  hereunder,  Consultant  agrees  not to be  disclose  in any  manner any
Confidential  Information  to any third party,  either  directly or  indirectly,
except to the extent required to do so by applicable law, judicial or regulatory
process,  or other  governmental  authority.  Consultant  shall take  reasonable
precautions to prevent the  unauthorized  use,  disclosure,  or dissemination of
Confidential Information in Consultant's possession or control.

     4.4 Legally Required  Disclosure.  In the event that Consultant is required
by  applicable  law,  judicial  or  regulatory  process,  or other  governmental
authority to disclose any  Confidential  Information,  Consultant shall promptly
notify the Company of such required  disclosure and shall  reasonably  cooperate
with the Company,  at the  Company's  expense,  in any attempt by the Company to
obtain an order or other

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assurance  that  confidential  treatment  will be accorded  to any  Confidential
Information required to be disclosed.

5.   Release and Waiver of Claims.

     5.1 Release and Waiver. In exchange for this Agreement, effective as of the
date hereof,  Consultant (on behalf of Consultant and anyone claiming through or
on behalf of Consultant) releases the Company, its affiliated entities,  each of
their  respective  successors and assigns,  and the past and present  employees,
officers, directors, managers, members, stockholders, representatives and agents
of any of the  foregoing  from,  and  hereby  waives,  any  and all  claims  and
potential  claims,  demands and causes of action,  whether  known or unknown and
whether  or not  matured  or  contingent,  that  Consultant  has or may have had
against any of them arising out of  Consultant's  service or employment with the
Company  through the date hereof or out of the termination of such employment in
accordance with this Agreement,  including claims,  demands and causes of action
not currently  known to or  contemplated  by the parties,  to the maximum extent
permitted  by law.  This  release  includes,  but is not limited to, any and all
claims,  demands and causes of action through and including the date hereof that
arise  under or out of,  relate to, or  concern:  any oral or  written  promise,
agreement or undertaking concerning or relating to Consultant's  employment with
the Company;  compensation  or benefits;  discrimination  under local,  state or
federal law;  Title VII of the Civil Rights Act of 1964; the Civil Rights Act of
1991;  the  Americans  With  Disabilities  Act; the Employee  Retirement  Income
Security Act of 1974; the Family and Medical Leave Act; any tort,  including but
not  limited  to  invasion  or  privacy,  defamation,  fraud and  infliction  of
emotional distress; and all other claims, demands, and causes of action, whether
they arise in the United  States of  America  or  elsewhere,  that arise out of,
relate to, or concern Consultant's  service as an officer,  director or employee
of the Company or the termination of Consultant's  employment in accordance with
this Agreement.

     5.2 Exclusions.  Notwithstanding Section 5.1 or any other provision of this
Agreement,  nothing  in this  Agreement  shall be deemed to  release or waive or
otherwise compromise, limit or restrict: (a) any rights or benefits provided for
under this Agreement;  (b) any rights to  indemnification,  defense,  or similar
benefits under the certificate of incorporation,  bylaws or other organizational
documents of the Company  (including  NovaStar  Financial,  Inc. and each of its
direct and indirect subsidiaries),  under any written indemnification agreement,
or under any policy of  directors  and officers or other  insurance;  or (c) any
claims,  demands or causes of action  arising  under or out of,  relating to, or
concerning any of the foregoing.

6.   Compliance.

     6.1  Securities  Laws.  Consultant  agrees  to comply  with all  applicable
federal and state  securities  laws in connection  with the purchase and sale of
shares of the Company's capital stock arising by reason of or in connection with
the former employment relationship of the Consultant with the Company, including
but not limited to compliance with Rule 10b-5  promulgated  under Securities and
Exchange Act of 1934, as amended.

     6.2 Section 409A of the Internal  Revenue Code.  To the extent  applicable,
this Agreement and the Employment Agreement shall be interpreted,  construed and
operated in  accordance  with the Section 409A of the  Internal  Revenue Code of
1986, as amended (the "Code"),  and the Treasury  regulations and other guidance
issued  thereunder.  If on the date of the Consultant's  separation from service
(as  defined  in  Treasury  Regulation  ss.1.409A-1(h))  with  the  Company  the
Consultant is a specified employee (as defined in Code Section 409A and Treasury
Regulation   ss.1.409A-1(i)),   no  payment   constituting   the   "deferral  of
compensation" within the meaning of Treasury Regulation ss.1.409A-1(b) and

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after   application   of  the   exemptions   provided  in  Treasury   Regulation
ss.ss.1.409A-1(b)(4) and 1.409A-1(b)(9)(iii)  shall be made to Consultant at any
time during the six (6) month period following the Consultant's  separation from
service,  and any such amounts  shall instead be paid in a lump sum on the first
payroll  payment date  following  expiration of such six (6) month  period.  For
purposes of conforming the Employment Agreement to Section 409A of the Code, the
parties  agree  that  the  definition  of "Good  Reason"  under  the  Employment
Agreement is hereby amended to conform with the IRS safe harbor definition under
Treasury  Regulation  ss.1.409A-1(n)(2)(ii)  and that the  Company  shall have a
period of thirty (30) days to remedy any conditions giving rise to a Good Reason
termination. Consultant understands and acknowledges that payment of the portion
of Consultant's  benefit under the Company's Deferred  Compensation Plan that is
subject to Section 409A of the Code and that has not been  distributed  prior to
the  Termination  Date is  required to be delayed for a period of six (6) months
following the Termination Date.

7.   Miscellaneous Provisions.

     7.1  Governing  Law and Consent to  Jurisdiction.  This  Agreement  and all
disputes relating to the  interpretation/enforcement  of this Agreement shall be
subject to,  governed by, and construed in accordance with the laws of the State
of Missouri,  notwithstanding  any authority to the contrary.  Each party hereby
expressly  submits  and  consents to the  exclusive  personal  jurisdiction  and
exclusive venue of the federal and state courts of competent jurisdiction in the
State of Missouri,  irrespective of the fact that one or both of the parties now
is or may  become a  resident  of a  different  state  and  notwithstanding  any
authority to the contrary.

     7.2 Entire  Agreement.  This  Agreement  constitutes  the entire  agreement
between the parties with respect to the subject  matter hereof and supersede all
prior agreements or understandings,  if any, between the parties with respect to
such matters;  provided,  however, that neither this Agreement nor any provision
hereof  shall  be  deemed  to  supersede  or  otherwise  affect  any  rights  to
indemnification,   defense,   or  similar  benefits  under  the  certificate  of
incorporation,   bylaws  or  other  organizational   documents  of  the  Company
(including  NovaStar  Financial,  Inc.  and  each  of its  direct  and  indirect
subsidiaries),  under any written indemnification agreement, or under any policy
of directors and officers or other insurance.

     7.3  Amendment.  This  Agreement  may be  modified  or  amended  only by an
agreement in writing signed by both parties.

     7.4 No Waiver.  The failure of either party to insist on the performance of
any of the terms or conditions of this  Agreement,  or failure to enforce any of
the  provisions  of this  Agreement,  shall  not be  construed  as a waiver or a
relinquishment  of any such  provision.  Any waiver or failure to enforce on any
one occasion is effective only in that instance,  and the  obligations of either
party with respect of any  provision in this  Agreement  shall  continue in full
force and effect.

     7.5  Severability.  The provisions of this Agreement  shall be severable in
the event that any of the  provisions  hereof are held by a court with competent
jurisdiction to be invalid, void or otherwise  enforceable,  and other remaining
provisions shall remain enforceable to the fullest extent permitted by the law.

     7.6 Construction of Agreement. This Agreement is the product of negotiation
by and between the parties  and shall not be  strictly  construed  or  otherwise
interpreted  against either party. In construing  this  Agreement,  any court of
competent  jurisdiction/arbitrator  shall  give  effect  to  the  intent  of the
parties.

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     7.7 Counterparts; Signatures. This Agreement may be executed in one or more
counterparts, and by original or facsimile signature, which taken together shall
constitute one and the same original agreement.

     IN WITNESS  WHEREOF,  the  parties  have  executed  and  entered  into this
Agreement,  with the intent to be legally bound by the provisions  hereof, as of
the date first set forth above.


                                       CONSULTANT:


                                       /s/ Gregory S. Metz
                                       -----------------------------------------
                                       Gregory S. Metz



                                       COMPANY:

                                       NOVASTAR FINANCIAL, INC.,
                                       for itself and on behalf of all of its
                                       direct and indirect subsidiaries



                                       By:  /s/ W. Lance Anderson
                                           -------------------------------------

                                       Name:  W. Lance Anderson
                                             -----------------------------------

                                       Title:  President
                                              ----------------------------------

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