Exhibit
      10.4


    ISDA®

    International
      Swaps and Derivatives Association, Inc.

    


    NOVATION
      AGREEMENT

    


    dated
      as
      of June 1, 2007 among:

    


    WACHOVIA
      BANK, NATIONAL ASSOCIATION (the "Remaining
      Party"),
      

    NOVASTAR
      MORTGAGE, INC. (the "Transferor")
      

    


    AND

    


    NOVASTAR
      MORTGAGE SUPPLEMENTAL INTEREST TRUST, SERIES 2007-2 (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")
      attached hereto as Exhibit I and subject to a 1992 ISDA Master Agreement dated
      as of September 15, 2003 (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”)
      relative to the New Transactions (defined below).

    


    With
      effect from and including June 1, 2007 (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 will enter
      into a new transaction (each a "New
      Transaction"
      and,
      collectively, the “New
      Transactions”)
      between them having terms identical to those of each applicable 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 each of 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.

    


    
      
         

      

      
         

        
          

        

      

      
         

      

    

    


    
      	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)	
              on
                the Novation Date, subject to Section 2(d) of this Novation Agreement,
                the
                Transferor hereby transfers all of its rights, liabilities, duties
                and
                obligations, with the exception of the Excluded Rights and Obligations,
                relative to, and in connection with the Old Transactions to the
                Transferee. For the sake of clarity, all references to Independent
                Amounts
                shall be deemed deleted from the confirmations for each New
                Transaction;

            


    

    


    
      	
            	(b)	
              subject
                to Section 2(d) of this Novation Agreement, the Remaining Party and
                the
                Transferor are each hereby 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 such Old Transaction;

            


    

    


    
      	
            	(c)	
              in
                respect of each New Transaction, the Remaining Party and the Transferee
                each hereby 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);

            


    

    


    
      	
            	(d)	
              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

            


    

    


    
      	
            	(e)	
              on
                the Novation Date, the Remaining Party shall transfer any and 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.

            


    

    


    
      	
            	(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.
                Transferor and the Remaining Party is each acting for its own account,
                and
                with respect to the Transferee, Deutsche Bank National Trust Company
                is
                executing as Trustee for the Transferee. Each 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; provided,
                however,
                that nothing in the foregoing shall be construed to relieve the Transferor
                from any liability it may have for any of its representations, warranties
                or obligations as the servicer or otherwise under the Pooling and
                Servicing Agreement among NovaStar
                Mortgage Funding, Inc., U.S. Bank, National Association, and Deutsche
                Bank
                National Trust Company dated as of June 1, 2007 (the “Pooling
                and Servicing Agreement”)

            


    

    


    
      	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, and subject
      to
      the Rating Agency Condition as defined in the New Agreement.

    


    
      	
              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 (other than Section 5-1401 of the New York General Obligations
      Law).

    


    
      	 	
              (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. 

            


    

    


    Deutsche
      Bank National Trust Company is signing this Novation Agreement solely in its
      capacity as Trustee to the Transferee under the Pooling and Servicing Agreement
      and in the exercise of the powers and authority conferred and vested in it
      thereunder and not in its individual capacity. It is expressly understood and
      agreed by the parties hereto that (i) each of the representations, undertakings
      and agreements herein stated to be those of the Transferee is made and intended
      for the purpose of binding only the Transferee, (ii) nothing herein contained
      shall be construed as creating any liability for Deutsche Bank National Trust
      Company, individually or personally, to perform any covenant (either express
      or
      implied) contained herein stated to be those of the Transferee, and all such
      liability, if any, is hereby expressly waived by the parties hereto, and (iii)
      under no circumstances shall Deutsche Bank National Trust Company be liable
      for
      the breach or failure of any obligation, representation, warranty or covenant
      made or undertaken by the Transferee under this Novation Agreement. 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 2007-2 (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.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

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

    


    
      	 	
              (d)

            	
              Pooling
                and Servicing Agreement.

            


    

     

    Capitalized
      terms used in this Novation Agreement that are not defined herein and are
      defined in the Pooling and Servicing Agreement shall have the respective
      meanings assigned to them in the Pooling and Servicing Agreement. 

     

    
      	 	
              (e)

            	
              Calculation

            


    

     

    Not
      later
      than each Reset Date, the Calculation Agent shall deliver in writing to the
      Trustee the results of any calculations made on such reset date to the Indenture
      Trustee address as provided in the notices portion of the New Agreement.


    


    
      	 	
              (f)

            	
              Account
                Details

            


    

    


    Remaining
      Party:

    Wachovia
      Bank, N.A.

    CIB
      Group, ABA 053000219

    Ref:
      Derivative Desk (Trade No: [______])

    Account#:
      04659360006116

    


    Transferee:

    Deutsche
      Bank National Trust Company

    ABA
      #
      021001033

    Acct
      #
      01419663

    Acct
      Name
      NYLTD Funds Control-Stars West

    Ref:
      Trust Administration- NS0702

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    


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

     

    
      	 	 	 	 
	WACHOVIA BANK, NATIONAL ASSOCIATION	 	 	NOVASTAR MORTGAGE, INC.
	 	 	 	 
	By: /s/
              Kim
              V. Farr	 	 	By:
              /s/ Dave
              Farris 
	
              
                

              

              Name:
                Kim V. Farr

              Title:
                Director 

            	 	 	
              
                

              

              Name:
                Dave Farris

              Title:
                Vice President

            


    

     

    
      	 	 	 	 
	NOVASTAR MORTGAGE SUPPLEMENTAL INTEREST
              TRUST, SERIES 2007-2	 	 	
            
	 	 	 	 
	By: Deutsche Bank National Trust Company,
              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 2007-2	 	 	 
	 	 	 	 
	By: /s/
              Ronaldo Reyes 	 	 	
            
	
              
                

              

              
                Name:
                  Ronaldo Reyes

                Title:
                  Vice President

              

            	 	 	
               

            


    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    


    Exhibit
      I

    


    [Old
      Hedge Confirmations attached behind this page]