Exhibit
      10.4

    ISDA®

    International
      Swaps and Derivatives Association, Inc.

    


    NOVATION
      AGREEMENT

    


    dated
      as
      of February 28, 2007 among:

    


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

    NOVASTAR
      MORTGAGE, INC. (the "Transferor")
      

    


    AND

    


    NOVASTAR
      MORTGAGE SUPPLEMENTAL INTEREST TRUST, SERIES 2007-1 (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 February 28, 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.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    


    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.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    


    (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 February 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 2007-1 (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.

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    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- Novastar 2007-1, Hedge confirm #
      [______]


    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    


    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/ David L. Farris            

            
	
              Name:
                Kim V. Farr

            	
              Name:
                Dave Farris

            
	
              Title:
                Director

            	
              Title:
                Vice President

            


    

    


    


    


    
      	
              NOVASTAR
                MORTGAGE SUPPLEMENTAL INTEREST TRUST, SERIES 2007-1

               

              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 2007-1

               

               

              By: 
                /s/ Karlene Benvenuto        

              Name:
                Karlene Benvenuto

              Title:
                Authorized Signer

               

            


    

     

    



    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    


    


    Exhibit
      I

    


    [Old
      Hedge Confirmations attached behind this page]

    


    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    

      


      


      


      


      


      


      


      



    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Exhibit
      II

    


    [Form
      of
      New Agreement attached behind this page]