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| x                                                  |       | QUARTERLY REPORT PURSUANT TO SECTION 13      OR 15(d) OF THE SECURITIES  |
|----------------------------------------------------|--------------------------------|--------------------------------------------------------------------------|
|                                                    |                                | EXCHANGE ACT OF 1934                                                     |
|                                                    |                                |                                                                     |
| For the Quarterly Period Ended March 31,      2010 |
|                                                    |                                |                                                                     |
| o                                                  |                                | TRANSITION REPORT PURSUANT TO SECTION 13      OR 15(d) OF THE SECURITIES |
|                                                    |                                | EXCHANGE ACT OF  1934                                                    |

| Maryland                                              | 74-2830661                                |
|-------------------------------------------------------|-------------------------------------------|
| (State or Other Jurisdiction of      Incorporation or | (I.R.S. Employer Identification      No.) |
| Organization)                                         |                                           |

| 2114 Central Street, Suite 600, Kansas      City, MO | 64108     |
|------------------------------------------------------|-----------|
| (Address of Principal Executive      Office)         | (ZipCode) |

| Large accelerated filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyx |
|--------------------------|--------------------|------------------------|----------------------------|

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| NOVASTAR FINANCIAL, INC.FORM      10-QFor the Quarterly Period Ended March 31,      2010   |
|-------------------------------------------------------------------------------------------------|
|                                                                                                 |
|                                                                                            |
| TABLE OF      CONTENTS                                                                          |

|          |                                |                                                                                             |       |    |
|----------|--------------------------------|--------------------------------------------------------------------------------------------------|--------------------------------|---------|
| Part I   |       | Financial Information                                                                            |                           |    |
|     |                                |                                                                                                  |                           |    |
| Item 1.  |                                | Financial Statements    (Unaudited)                                                              |                           |  1 |
|          |                                | Condensed Consolidated Balance Sheets                                                            |                           |  1 |
|          |                                | Condensed Consolidated Statements of      Operations                                             |                           |  2 |
|          |                                | Condensed Consolidated Statement of Shareholders’ Deficit                                  |                           |  3 |
|          |                                | Condensed Consolidated Statements of      Cash Flows                                             |                           |  4 |
|          |                                | Notes to Condensed Consolidated Financial Statements                                             |                           |  6 |
|     |                                |                                                                                                  |                           |    |
| Item 2.  |                                | Management’s Discussion and Analysis of Financial Condition and      Results of Operations |                           | 25      |
|     |                                |                                                                                                  |                           |    |
| Item 3.  |                                | Quantitative and Qualitative Disclosures About MarketRisk                                        |                           | 33      |
|     |                                |                                                                                                  |                           |    |
| Item 4.  |                                | Controls and Procedures                                                                          |                           | 33      |
|     |                                |                                                                                                  |                           |    |
| Part II  |                                | Other Information                                                                                |                           |    |
|     |                                |                                                                                                  |                           |    |
| Item 1.  |                                | Legal Proceedings                                                                                |                           | 34      |
|     |                                |                                                                                                  |                           |    |
| Item 1A. |                           | Risk Factors                                                                                     |                           | 35      |
|     |                                |                                                                                                  |                           |    |
| Item 2.  |                                | Unregistered Sales of Equity Securities and Use of    Proceeds                                   |                           | 35      |
|     |                                |                                                                                                  |                           |    |
| Item 3.  |                                | Defaults Upon Senior Securities                                                                  |                           | 35      |
|     |                                |                                                                                                  |                           |    |
| Item 4.  |                                | Removed and Reserved                                                                             |                           | 35      |
|     |                                |                                                                                                  |                           |    |
| Item 5.  |                                | Other Information                                                                                |                           | 35      |
|     |                                |                                                                                                  |                           |    |
| Item 6.  |                                | Exhibits                                                                                         |                           | 36      |
|     |                                |                                                                                                  |                           |    |
|          |                                | Signatures                                                                                       |                           | 36      |

----

|                                                                                                                                                                                                                                |                                | March 31,                             |                                | December 31, |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|---------------------------------------|--------------------------------|--------------|
|                                                                                                                                                                                                                                |       | 2010                                  |       | 2009         |
| Assets                                                                                                                                                                                                                         |                                |                                       |                                |              |  |  |  |  |
|             Current Assets                                                                                                                                                                       |                                |                                       |                                |              |  |  |  |  |
|                    Unrestricted cash and cash      equivalents                                                                                                |                                | $       | 13,244                         |              |  | $       | 7,104 |  |
|                    Mortgage securities (includes CDO      securities of $747 and $959, respectively)                                                          |                                |                                       | 7,650                          |              |  |  | 7,990 |  |
|                    Notes receivable                                                                                                                           |                                |                                       | 4,748                          |              |  |  | 4,920 |  |
|                    Other current assets                                                                                                                       |                                |                                       | 3,445                          |              |  |  | 7,501 |  |
|        Total current assets                                                                                                                                                                      |                                |                                       | 29,087                         |              |  |  | 27,515 |  |
|        Securitization Trust Assets                                                                                                                                                               |                                |                                       |                                |              |  |  |  |  |
|                    Mortgage loans – held-in-portfolio, net      of allowance of $0 and $712,614, respectively                                           |                                |                                       | -                              |              |  |  | 1,289,474 |  |
|                    Accrued interest    receivable                                                                                                             |                                |                                       | -                              |              |  |  | 74,025 |  |
|                    Real estate owned                                                                                                                          |                                |                                       | -                              |              |  |  | 64,179 |  |
|        Total securitization trust    assets                                                                                                                                                      |                                |                                       | -                              |              |  |  | 1,427,678 |  |
|        Non-Current Assets                                                                                                                                                                        |                                |                                       |                                |              |  |  |  |  |
|                    Fixed assets, net of      depreciation                                                                                                     |                                |                                       | 1,611                          |              |  |  | 1,803 |  |
|                    Other assets (includes CDO other assets      of $352 and $428, respectively)                                                               |                                |                                       | 2,402                          |              |  |  | 2,495 |  |
|        Total non-current assets                                                                                                                                                                  |                                |                                       | 4,013                          |              |  |  | 4,298 |  |
|                                  Total assets                                           |                                | $                                     | 33,100                         |              |  | $ | 1,459,491 |  |
|                                                                                                                                                                                                                           |                                |                                       |                                |              |  |  |  |  |
| Liabilities and Shareholders’      Deficit                                                                                                                                                                               |                                |                                       |                                |              |  |  |  |  |
|        Liabilities:                                                                                                                                                                              |                                |                                       |                                |              |  |  |  |  |
|                    Current Liabilities                                                                                                                        |                                |                                       |                                |              |  |  |  |  |
|                           Accounts payable                                                                                 |                                | $                                     | 3,729                          |              |  | $ | 1,949 |  |
|                           Accrued expenses                                                                                 |                                |                                       | 5,952                          |              |  |  | 6,801 |  |
|                           Dividends payable                                                                                |                                |                                       | 38,377                         |              |  |  | 34,402 |  |
|                           Other current liabilities (includes CDO      debt and other liabilities of $1,108 and            |                                |                                       |                                |              |  |  |  |  |
|                                  $1,396, respectively)                                  |                                |                                       | 3,594                          |              |  |  | 2,962 |  |
|                    Total currentliabilities                                                                                                                   |                                |                                       | 51,652                         |              |  |  | 46,114 |  |
|                    Securitization Trust      Liabilities                                                                                                      |                                |                                       |                                |              |  |  |  |  |
|                           Due to servicer                                                                                  |                                |                                       | -                              |              |  |  | 136,855 |  |
|                           Other securitization trust      liabilities                                                      |                                |                                       | -                              |              |  |  | 3,729 |  |
|                           Asset-backed bonds secured by mortgage      loans                                                |                                |                                       | -                              |              |  |  | 2,270,602 |  |
|                    Total securitization trust      liabilities                                                                                                |                                |                                       | -                              |              |  |  | 2,411,186 |  |
|                    Non-Current Liabilities                                                                                                                    |                                |                                       |                                |              |  |  |  |  |
|                           Junior subordinated      debentures                                                              |                                |                                       | 77,938                         |              |  |  | 77,815 |  |
|                           Other liabilities                                                                                |                                |                                       | 934                            |              |  |  | 928 |  |
|                    Total non-current      liabilities                                                                                                         |                                |                                       | 78,872                         |              |  |  | 78,743 |  |
|                                  Total liabilities                                      |                                |                                       | 130,524                        |              |  |  | 2,536,043 |  |
|                                                                                                                                                                                                                           |                                |                                       |                                |              |  |  |  |  |
|             Commitments and contingencies (Note 7)                                                                                                                                               |                                |                                       |                                |              |  |  |  |  |
|                                                                                                                                                                                                                           |                                |                                       |                                |              |  |  |  |  |
|        Shareholders’    deficit:                                                                                                                                                           |                                |                                       |                                |              |  |  |  |  |
|                    Capital stock, $0.01 par value,      50,000,000 shares authorized:                                                                         |                                |                                       |                                |              |  |  |  |  |
|                    Redeemable preferred stock, $25      liquidating preference per share; 2,990,000 shares,                                                   |                                |                                       |                                |              |  |  |  |  |
|                           issued and outstanding                                                                           |                                |                                       | 30                             |              |  |  | 30 |  |
|                    Convertible participating preferred      stock, $25 liquidating preference per share; 2,100,000                                            |                                |                                       |                                |              |  |  |  |  |
|                           shares, issued and      outstanding                                                              |                                |                                       | 21                             |              |  |  | 21 |  |
|                    Common stock, 9,368,053, issued and      outstanding                                                                                       |                                |                                  | 94                             |              |  |  | 94 |  |
|                    Additional paid-in    capital                                                                                                              |                                |                                       | 787,103                        |              |  |  | 786,989 |  |
|                    Accumulated deficit                                                                                                                        |                                |                                       | (889,948                       | )            |  |  | (1,868,398 | ) |
|                    Accumulated other comprehensive      income                                                                                                |                                |                                       | 6,216                          |              |  |  | 5,111 |  |
|                    Other                                                                                                                                      |                                |                                       | (52                            | )            |  |  | (70 | ) |
|                           Total NFI shareholders’      deficit                                                       |                                |                                       | (96,536                        | )            |  |   | (1,076,223 | ) |
|                    Noncontrolling interests                                                                                                                   |                           |                                       | (888                           | )            |   |  | (329 | ) |
|                           Total shareholders’    deficit                                                             |                                |                                       | (97,424                        | )            |  |  | (1,076,552 | ) |
|                                  Total liabilities and shareholders’      deficit |                                | $                                     | 33,100                         |              |  | $ | 1,459,491 |  |
|                                                                                                                                                                                                                      |                                |                                       |                                |              |  |  |  |  |

----

|                                                                                             |                                | For the Three Months    Ended       |
|---------------------------------------------------------------------------------------------|--------------------------------|-------------------------------------|
|                                                                                             |                                | March      31,                      |
|                                                                                             |       | 2010                                |       | 2009 |
| Income and Revenues:                                                                        |                                |                                     |  |  |  |  |  |  |
|             Service fee income                                |                                | $          | 9,647 |  |  | $          | 1,685 |  |
|        Interest income – mortgage      loans            |                                |                                     | 10,848 |  |  |  | 29,273 |  |
|             Interest income – mortgage securities       |                                |                                     | 2,108 |  |  |  | 11,407 |  |
| Total                                                                                       |                                |                                     | 22,603 |  |  |  | 42,365 |  |
|                                                                                        |                                |                                     |  |  |  |  |  |  |
| Costs and Expenses:                                                                         |                                |                                     |  |  |  |  |  |  |
|             Cost of services                                  |                                |                                     | 9,069 |  |  |  | 2,468 |  |
|        Interest expense –      asset-backed bonds       |                                |                                     | 1,416 |  |  |  | 5,203 |  |
|             Provision for credit losses                       |                                |                                     | 17,433 |  |  |  | 101,474 |  |
|        Servicing fees                                         |                                |                                     | 731 |  |  |  | 2,991 |  |
|             Premiums for mortgage loan insurance              |                                |                                     | 308 |  |  |  | 3,341 |  |
|        Selling, general and      administrative expense       |                                |                                     | 5,544 |  |  |  | 5,455 |  |
|             Gain on derecognition of securitization trusts    |                                |                                     | (993,131 | ) |  |  | - |  |
|        Other (income)    expense                              |                                |                                     | (573 | ) |  |  | 12,073 |  |
| Total                                                                                       |                                |                                     | (959,203 | ) |  |  | 133,005 |  |
|                                                                                        |                                |                                     |  |  |  |  |  |  |
|             Other income                                      |                                |                                     | 794 |  |  |  | 186 |  |
|        Interest expense on trust      preferred securities    |                                |                                     | (324 | ) |  |  | (1,192 | ) |
|                                                                                        |                                |                                     |  |  |  |  |  |  |
| Income (loss) before income tax      expense                                                |                                |                                     | 982,276 |  |  |  | (91,646 | ) |
| Income tax expense                                                                          |                                |                                     | 412 |  |  |  | 52 |  |
| Net income (loss)                                                                           |                                |                                     | 981,864 |  |  |  | (91,698 | ) |
| Less: Net loss attributable to noncontrolling interests                                     |                                |                                     | (561 | ) |  |  | (334 | ) |
| Net income (loss)      attributable to NFI                                                  |                           | $                                   | 982,425 |  |  | $ | (91,364 | ) |
| Earnings Per Share attributable to NFI:                                                     |                                |                                     |  |  |  |  |  |  |
|                    Basic   |                                | $                                   | 87.27 |   |  | $ | (10.14 | ) |
|                    Diluted |                                | $                                   | 87.27 |  |   | $ | (10.14 | ) |
| Weighted average basic shares      outstanding                                              |                                |                                | 9,337,207 |  |  |  | 9,368,053 |   |
| Weighted average diluted shares outstanding                                                 |                                |                                     | 9,337,207 |  |  |   | 9,368,053 |  |
|                                                                                        |                                |                                     |  |  |  |  |  |  |

----

|                                                                                                   |        | Total NFI Shareholders’      Deficit |        |               |
|---------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------|
|                                                                                                   |        |                                            |        |               | Convertible |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |   |  |  |
|                                                                                                   |        | Redeemable                                 |        | Participating |  |  |  |  | Additional |  |  |  |  |  | Other |  |  |  |  |  |   |  | Total |
|                                                                                                   |        | Preferred                                  |        | Preferred     |  | Common |  | Paid-in |  | Accumulated |  | Comprehensive |  |  |  |  |  | Noncontrolling |  | Shareholders’ |
|                                                                                                   |   | Stock                                      |   | Stock         |   | Stock |   | Capital |   | Deficit |   | Income |   | Other |   | Interest |   | Deficit |
| Balance, January 1,2010                                                                           |        | $                      | 30     |               | $     | 21 |  | $     | 94 |  | $     | 786,989 |  | $     | (1,868,398 | ) |  | $     | 5,111 |  | $      | (70 | ) |  | $        | (329 | ) |  | $        | (1,076,552 | ) |
| Forgiveness of                                                                                    |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| founder’s notes                                                                             |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| receivable                                                                                        |        |                                            | -      |               |  | - |  |  | - |  |  | - |  |  | - |  |  |  | - |  |  | 18 |  |  |  | - |  |  |  | 18 |  |
| Compensation                                                                                      |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recognized under                                                                                  |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| stock compensation                                                                                |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| plans                                                                                             |        |                                            | -      |               |  | - |  |  | - |  |  | 114 |  |  | - |  |  |  | - |  |  | - |  |  |  | - |  |  |  | 114 |  |
| Accumulating                                                                                      |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| dividends on                                                                                      |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| preferred stock                                                                                   |        |                                            | -      |               |  | - |  |  | - |  |  | - |  |  | (3,975 | ) |  |  | - |  |  | - |  |  |  | - |  |  |  | (3,975 | ) |
| Other                                                                                             |        |                                            | -      |               |  | - |  |  | - |  |  | - |  |  | - |  |  |  | - |  |  | - |  |  |  | 2 |  |  |  | 2 |  |
| Comprehensive income:                                                                        |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|        Net      income (loss)                                       |        |                                            | -      |               |  | - |  |  | - |  |  | - |  |  | 982,425 |  |  |  | - |  |  | - |  |  |  | (561 | ) |  |  | 981,864 |  |
|        Other                                                        |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|        comprehensive                                                |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|        income                                                       |        |                                            | -      |               |  | - |  |  | - |  |  | - |  |  | - |  |  |  | 1,105 |  |  | - |  |  |  | - |  |  |  | 1,105 |  |
|                    Total         |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                    comprehensive |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |
|                    income        |        |                                            | -      |               |  | - |  |  | - |  |  | - |  |  | - |  |  |  | - |  |  | - |  |  |  | - |  |  |  | 982,969 |  |
| Balance, March 31, 2010                                                                           |        | $                                          | 30     |               | $ | 21 |  | $ | 94 |  | $ | 787,103 |  | $ | (889,948 | ) |  | $ | 6,216 |  | $ | (52 | ) |  | $ | (888 | ) |  | $ | (97,424 | ) |
|                                                                                              |        |                                            |        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

|                                                                                                                                                                              |                                | For the Three Months    Ended         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|---------------------------------------|
|                                                                                                                                                                              |                                | March 31,                             |
|                                                                                                                                                                              |       | 2010                                  |       | 2009 |
| Cash flows from operating      activities:                                                                                                                                   |                                |                                       |  |  |  |  |  |  |
| Net income (loss)                                                                                                                                                            |                                | $       | 981,864 |  |  | $       | (91,698 | ) |
| Adjustments to reconcile net income (loss) to net    cash                                                                                                               |                                |                                       |  |  |  |  |  |  |
|                    used in operating activities:                                                            |                                |                                       |  |  |  |  |  |  |
|        Accretion of available-for-sale and trading      securities                                                                             |                                |                                       | (705 | ) |  |  | (11,439 | ) |
|        Impairments on notesreceivable                                                                                                          |                                |                                       | 452 |  |  |  | - |  |
|        Interest capitalized on loans      held-in-portfolio                                                                                    |                                |                                       | - |  |  |  | (1,218 | ) |
|        Amortization of premiums on mortgage      loans                                                                                         |                                |                                       | 430 |  |  |  | 1,332 |  |
|        Amortization of deferred debt issuance      costs                                                                                       |                                |                                       | 448 |  |  |  | (480 | ) |
|        Provision for credit losses                                                                                                             |                                |                                       | 17,433 |  |  |  | 101,474 |  |
|        Impairments on mortgage securities –      available-for-sale                                                                      |                                |                                       | - |  |  |  | 202 |  |
|        Fair value adjustments                                                                                                                  |                                |                                       | (180 | ) |  |  | 5,710 |  |
|        Gain on derecognition of securitization      trusts                                                                                     |                                |                                       | (993,131 | ) |  |  | - |  |
|        (Gains) losses on derivative      instruments                                                                                           |                                |                                       | (26 | ) |  |  | 4,195 |  |
|        Loss on disposal of fixed    assets                                                                                                     |                                |                                       | 6 |  |  |  | - |  |
|        Forgiveness of founders’ promissory      notes                                                                                    |                                |                                       | 18 |  |  |  | 17 |  |
|        Other                                                                                                                                   |                                |                                       | 114 |  |  |  | (26 | ) |
|        Depreciation expense                                                                                                                    |                                |                                       | 188 |  |  |  | 231 |  |
|        Changes in:                                                                                                                             |                                |                                       |  |  |  |  |  |  |
|                    Accrued interest    receivable                                                           |                                |                                       | 1,300 |  |  |  | 1,239 |  |
|                    Other assets                                                                             |                                |                                       | 1,959 |  |  |  | 1,658 |  |
|                    Due to servicer                                                                          |                                |                                       | (5,080 | ) |  |  | 17,510 |  |
|                    Accounts payable and other      liabilities                                              |                                |                                       | 1,286 |  |  |  | (8,155 | ) |
|                           Net cash provided by operating      activities |                                |                                       | 6,376 |  |  |  | 20,552 |  |
|                                                                                                                                                                         |                                |                                       |  |  |  |  |  |  |
| Cash flows from investing      activities:                                                                                                                                   |                                |                                       |  |  |  |  |  |  |
| Proceeds from paydowns of mortgage      securities - available-for-sale                                                                                                      |                                |                                       | 1,569 |  |   |  | 3,897 |  |
| Proceeds from paydowns of mortgage securities - trading                                                                                                                      |                                |                                       | 227 |  |  |  | 2,485 |  |
| Proceeds from repayments of mortgage      loans held-in-portfolio                                                                                                            |                                |                                       | 15,041 |  |  |  | 28,072 |  |
| Proceeds from sales of assets acquired throughforeclosure                                                                                                                    |                                |                                       | 15,154 |  |  |  | 19,003 |  |
| Restricted cash, net                                                                                                                                                         |                                |                                       | 3,441 |  |  |  | (13 | ) |
| Proceeds from paydowns of notes receivable                                                                                                                                   |                                |                                  | 426 |   |  |  | - |  |
| Issuance of notes receivable                                                                                                                                                 |                           |                                       | (706 | ) |  |  | - |  |
| Purchases of property and equipment                                                                                                                                          |                                |                                       | (2 | ) |  |   | (571 | ) |
|                           Net cash provided by investing      activities |                                |                                       | 35,150 |  |  |  | 52,873 |  |
|                                                                                                                                                                              |                                |                                       |  |  |  |  | Continued |  |

----

|                                                                                                                                                     |                                | For the Three Months    Ended         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|---------------------------------------|
|                                                                                                                                                     |                                | March 31,                             |
| Cash flows from financing      activities:                                                                                                          |       | 2010                                  |       | 2009 |
| Payments on asset-backed bonds                                                                                                                      |                                |                                       | (35,341 | ) |  |   | (78,307 | ) |
| Contributions from noncontrolling interests                                                                                                         |                                |                                       | - |  |  |  | 100 |  |
| Dividends paid on vested stock      options                                                                                                         |                                |                                       | (45 | ) |  |   | - |  |
|        Net      cash used in financing activities                                                                     |                                |                                       | (35,386 | ) |  |   | (78,207 | ) |
| Net increase (decrease) in cash and cash      equivalents                                                                                           |                                |                                       | 6,140 |  |  |  | (4,782 | ) |
| Cash and cash equivalents, beginning of      period                                                                                                 |                                |                                       | 7,104 |  |  |  | 24,790 |  |
| Cash and cash equivalents, end of      period                                                                                                       |                                | $                                     | 13,244 |  |  | $ | 20,008 |  |
|                                                                                                                                                |                                |                                       |  |  |  |  |  |  |
|                                                                                                                                                |                                |                                       |  |  |  |  |  |  |
| Supplemental Disclosure of Cash Flow      Information                                                                                               |                                |                                       |  |  |  |  |  |  |
| (unaudited; dollars in      thousands)                                                                                                              |                                |                                       |  |  |  |  |  |  |
|                                                                                                                                                     |                                | For the Three Months    Ended         |
|                                                                                                                                                     |                                | March 31,                             |
|                                                                                                                                                     |                                | 2010                                  |  | 2009 |
| Cash paid for interest                                                                                                                              |                                | $       | 2,577 |  |  | $       | 12,581 |  |
| Cash paid for income taxes                                                                                                                          |                                |                                       | 256 |  |  |  | 466 |  |
| Non-cash investing and financing      activities:                                                                                                   |                                |                                       |  |  |  |  |  |  |
|        Assets acquired through      foreclosure                                                                       |                           |                                       | 6,283 |  |  |  | 39,783 |   |
|        Preferred stock dividends accrued, not yet      paid                                                           |                                |                                       | 3,975 |  |  |  | 3,696 |  |
|        Transfer of assets and liabilities upon      derecognition of securitization trusts:                           |                                |                                       |  |  |  |  |  |  |
|                    Mortgage loans – held-in-portfolio, net      of allowance |                                |                                       | 1,250,287 |   |  |  | - |  |
|                    Accrued interest    receivable                                  |                                |                                       | 72,725 |  |  |  | - |  |
|                    Real estate owned                                               |                                |                                       | 55,309 |  |  |  | - |  |
|                    Asset-backed bonds secured by mortgage      loans               |                                |                                       | 2,235,629 |  |  |   | - |  |
|                    Due to servicer                                                 |                                |                                  | 131,772 |  |  |  | - |  |
|                    Other liabilities                                               |                                |                                       | 4,047 |  |  |  | - |  |
|                                                                                                                                                |                                |                                       |  |  |  |  |  |  |
|        See notes to condensed consolidated financial      statements.                                                 |                                |                                       |  |  |  |  | Concluded |  |

----

| NOVASTAR FINANCIAL,      INC.NOTES TO CONDENSED CONSOLIDATED      FINANCIAL STATEMENTSAs of and for the period ended March 31, 2010      (Unaudited) |
|------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                                                          | Total                     |
|------------------------------------------------------------------------------------------|---------------------------|
| Assets:                                                                                  |                           |  |  |
|             Mortgage loans – held-in-portfolio       | $     | 1,953,188 |  |
|        Allowance for loan      losses                      |                           | (702,901 | ) |
|             Accrued interest receivable                    |                           | 72,725 |  |
|        Real estate owned                                   |                           | 55,309 |   |
|                                                                                     |                           |  |  |
| Total assets                                                                             |                      | 1,378,321 |  |
|                                                                                     |                      |   |   |
| Liabilities:                                                                             |                           |   |  |
|        Asset-backed bonds secured by      mortgage loans   |                           | 2,235,633 |  |
|        Due to servicer                                     |                           | 131,772 |  |
|        Other liabilities                                   |                           | 4,047 |  |
|                                                                                     |                           |  |  |
| Total      liabilities                                                                   |                           | 2,371,452 |  |
|                                                                                     |                           |  |  |
|        Gain on derecognition of      securitization trusts | $                         | 993,131 |  |
|                                                                                     |                           |  |  |

----

|                                                                                      | December 31,                    |
|--------------------------------------------------------------------------------------|---------------------------------|
|                                                                                      | 2009                            |
| Mortgage loans – held-in-portfolio      (A):                                   |                                 |  |  |
|             Outstanding principal                      | $      | 1,985,483 |  |
|        Net unamortized deferred      origination costs |                                 | 16,605 |   |
|             Amortized cost                             |                                 | 2,002,088 |  |
|        Allowance for credit      losses                |                                 | (712,614 | ) |
|             Mortgage loans – held-in-portfolio   | $                               | 1,289,474 |  |
|        Weighted average    coupon                      |                                 | 6.94% |   |
|                                                                                 |                                 |  |  |

| (A) |      | The Company did not hold any mortgage      loans-held-in-portfolio as of March 31, 2010 due to the derecognition of      the securitization trusts, see Note 3 to the condensed consolidated      financial statements for furtherdetails. |
|-----|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                            | For the Three Months      |
|--------------------------------------------|---------------------------|
|                                            | Ended March 31,           |
|                                            | 2010                      |       | 2009 |
| Balance, beginning of period               | $     | 712,614 |  |  | $     | 776,001 |  |
| Provision for credit losses                |                      | 17,433 |  |  |   | 101,474 |  |
| Charge-offs, net of recoveries             |                           | (27,146 | ) |  |  | (83,796 | ) |
| Derecognition of the securitization trusts |                           | (702,901 | ) |  |  | - |  |
| Balance, end of period                     | $                         | - |   |  | $ | 793,679 |   |
|                                       |                           |  |  |  |  |  |  |

----

----

|                   |       |              |                                |              | Assets After      Intercompany |        |                                |              |                                |              |
|-------------------|--------------------------------|--------------|--------------------------------|--------------|--------------------------------|--------|--------------------------------|--------------|--------------------------------|--------------|
|                   |                                |              |                                |              | Eliminations                   |        | Liabilities After              |              |                                |              |
|                   |                                |              |                                |              |                                |        |                                | Restricted   |                                | Intercompany |  | Recourse to the |
| Consolidated VIEs |                                | Total Assets |       | Unrestricted |       | (A)    |       | Eliminations |       | Company (B)  |
| March 31, 2010    |                                |              |                                |              |                                |        |                                |              |                                |              |  |  |  |  |  |
| CDO(C)            |                                | $            | 1,101                          |              | $                              | -      |                                | $            | 1,099                          |              | $ | 1,099 |  | $ | - |
| December 31, 2009 |                                |         |                                |              |                           |   |                           |              |                                |              |  |  |  |   |   |
| Mortgage Loan     |                           |              |                           |              |                                |        |                                |         |                                |         |   |  |  |  |  |
| VIEs(D)           |                                | $            | 1,435,671                      |         | $                              | -      |                                | $            | 1,427,501                      |              | $ | 2,453,181 |   | $ | - |
| CDO(C)            |                                |              | 1,389                          |              |                                | -      |                                |              | 1,387                          |              |  | 1,387 |  |  | - |
|              |                                |              |                      |              |                                |        |                                |              |                                |              |  |  |  |  |  |

| (A) |        | Assets      are considered restricted when they cannot be freely pledged or sold by      the Company.                                                                                                  |
|-----|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |        | This      column reflects the extent, if any, to which investors have recourse to      the Company beyond the assets held by the VIE and assumes a total loss of      the assets held by the VIE.      |
| (C) |        | For      the CDO, assets are primarily recorded in Mortgage securities and      liabilities are recorded in Other current liabilities.                                                                 |
| (D) |        | For      Mortgage Loan VIEs, assets are primarily recorded in Mortgage loans –      held-in-portfolio. Liabilities are primarily recorded in Asset-backed      bonds secured by mortgage assets. |

|                                  |       | Size/Principal |       | Assets      on |       | Liabilities |       | Maximum     |       | Year to   |       | Year to   |        |
|----------------------------------|--------------------------------|----------------|--------------------------------|----------------|--------------------------------|-------------|--------------------------------|-------------|--------------------------------|-----------|--------------------------------|-----------|--------|
|                                  |                                | Outstanding    |                           | Balance        |                                | on Balance  |                                | Exposure to |                                | Date Loss |                                | Date Cash |        |
|                                  |                                | (A)            |                                | Sheet          |                                | Sheet       |                                | Loss(B)     |                                | on Sale   |                                | Flows     |        |
| March 31, 2010                   |                                |                |                                |                |                                |             |                                |             |                                |           |                                |           |        |  |  |  |  |  |  |
| Residential mortgage             |                                |                |                                |                |                                |             |                                |        |                                |           |                                |           |        |  |  |  |  |  |  |
|     loans(C) |                                | $              | 8,198,079                      | (D)            | $                              | 6,904       |                           | $           | -                              |      | $                              | 6,904     |        | $ | - |  | $ | 2,838 |  |
| December 31, 2009                |                           |                |                           |           |                           |             |                                |             |                                |           |                                |           |        |  |   |   |  |  |  |
| Residential mortgage             |                                |           |                                |                |                                |             |                                |             |                                |           |                                |           |   |  |  |  |   |  |   |
|     loans(C) |                                | $              | 6,570,308                      |           | $                              | 7,031       |                                | $           | -                              |           | $                              | 7,031     |        | $ | - |  | $ | 5,801 | (E) |
|                             |                                |                |                           |                |                                |             |                                |             |                                |           |                                |           |        |  |  |  |  |  |  |

| (A) |        | Size/Principal Outstanding reflects the estimated principal of the      underlying assets held by the VIE.                                                                                                                                          |
|-----|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |        | The      maximum exposure to loss includes the following: the assets held by the      Company consist of retained interests in the VIEs/SPEs. The maximum      exposure to loss assumes a total loss on the referenced assets held by the      VIE. |
| (C) |        | Assets      on balance sheet are securities issued by the entity and are recorded in      Mortgage securities.                                                                                                                                      |
| (D) |        | Due to      derecognition of securitization trusts during the three months ended March      31, 2010, size/principal outstanding includes NHEL 2006-1, NHEL 2006-MTA1      and NHEL 2007-1 as of March 31, 2010.                                    |
| (E) |        | For      the three months ended March 31, 2009.                                                                                                                                                                                                     |

----

|                                                                                        |                                                         |       |
|---------------------------------------------------------------------------------------------|---------------------------------------------------------|-------|
| Carrying amount/fair value of residual      interests                                       | $          | 6,904 |
| Weighted average life (in years)                                                            |                                                         | 3.42  |
| Weighted average prepayment speed      assumption (CPR) (percent)                           |                                                    | 16.2  |
|     Fair value      after a 10% increase in prepayment speed            | $                                                       | 6,315 |
|     Fair value      after a 25% increase in prepayment speed            | $                                                       | 5,797 |
| Weighted average expected annual credit losses (percent of current      collateral balance) |                                                         | 28.2  |
|     Fair value      after a 10% increase in annual credit losses        | $                                                       | 6,402 |
|     Fair value      after a 25% increase in annual credit losses        | $                                                       | 6,051 |
| Weighted average residual cash flows      discount rate (percent)                           |                                                    | 25.0  |
|     Fair value      after a 500 basis point increase in discount rate   | $                                                       | 6,704 |
|     Fair value      after a 1000 basis point increase in discount rate  | $                                                       | 6,515 |
| Market interest rates:                                                                      |                                                         |       |
|     Fair value      after a 100 basis point increase in market rates    | $                                                       | 4,617 |
|     Fair value      after a 200 basis point increase in market rates    | $                                                       | 2,787 |
|                                                                                        |                                                         |       |

|                                                     | March 31,                             |       | December 31, |
|-----------------------------------------------------|---------------------------------------|--------------------------------|--------------|
|                                                     | 2010                                  |                                | 2009         |
| Mortgage securities –      available-for-sale | $       | 6,866                          |         | $       | 6,903 |
| Mortgage securities – trading                 |                                  | 784                            |              |  | 1,087 |
| Total mortgage securities                           | $                                     | 7,650                          |              | $ | 7,990 |
|                                                |                                       |                                |              |  |  |

----

|                         |       |                                       |                                |        | Unrealized                            |            | Estimated                      |                                  | Average |
|-------------------------|--------------------------------|---------------------------------------|--------------------------------|--------|---------------------------------------|------------|--------------------------------|---------------------------------------|---------|
|                         |                                | Cost Basis                            |       | Gain   |              | Fair Value |       | Yield (A)                             |
| As of March 31, 2010    |                                | $       | 650                            |   | $       | 6,216      |                           | $       | 6,866   |  |             414.6 | % |
| As of December 31, 2009 |                                |                                       | 1,792                          |        |                                  | 5,111      |                                |                                  | 6,903   |  | 132.9 |  |
|                         |                                |                                       |                           |        |                                       |            |                                |                                       |         |  |  |  |

| (A) |       | The      average yield is calculated from the cost basis of the mortgage securities      and does not give effect to changes in fair value that are reflected as a      component of shareholders’ deficit. |
|-----|--------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |       |                                       |                                |        | Amortized Cost                        |            |                                |                                       |       | Average |
|---------------------------------------------|--------------------------------|---------------------------------------|--------------------------------|--------|---------------------------------------|------------|--------------------------------|---------------------------------------|-------|---------|
|                                             |                                | Original Face                         |       | Basis  |              | Fair Value |       | Yield (A)                             |
| As of March 31, 2010                        |                                |                                       |                                |        |                                       |            |                           |                                       |       |         |  |  |
| Subordinated securities pledged to      CDO |                                | $       | 332,489                        |        | $       | 87,815     |                                | $       | 747   |         |  |  |
| Other subordinated securities               |                                |                                       | 102,625                        |        |                                  | -          |                                |                                       | -     |         |  |  |
| Residual securities                         |                           |                                       | -                              |   |                                       | 374        |                                |                                  | 37    |    |   |  |
| Total                                       |                                | $                                     | 435,114                        |        | $                                     | 88,189     |                                | $                                     | 784   |         | 1.92 | % |
|                                             |                                |                                       |                           |        |                                       |            |                                |                                       |       |         |  |  |
| As of December 31, 2009                     |                                | $                                     | 435,114                        |        | $                                     | 104,012    |                                | $                                     | 1,087 |         |        4.79 | % |
|                                        |                                |                                  |                           |        |                                       |            |                                |                                       |       |         |  |  |

----

----

|                                                                                                  | For the Three Months                  |
|--------------------------------------------------------------------------------------------------|---------------------------------------|
|                                                                                                  | Ended March 31,                       |
|                                                                                                  | 2010                                  |      | 2009 |
| Net income (loss)                                                                                | $       | 981,864 |  | $       | (91,698 | ) |
| Other comprehensive (loss) income:                                                               |                                       |  |  |  |  |  |
| Change in unrealized gain (loss) on      mortgage securities – available-for-sale          |                                       | 1,105 |  |  | (2,322 | ) |
| Impairment on mortgage securities - available-for-sale reclassified      to earnings             |                                       | - |   |  | 202 |  |
| Change in unrealized gain (loss) on      derivative instruments used in cash flow hedges         |                                       | - |  |  | 8 |  |
| Net settlements of derivative instruments used in cash flow hedges      reclassified to earnings |                                       | - |  |  | 84 |  |
| Other comprehensive income    (loss)                                                             |                                  | 1,105 |  |  | (2,028 | ) |
| Total comprehensive income (loss)                                                                |                                       | 982,969 |  |  | (93,726 | ) |
| Comprehensive loss      attributable to noncontrolling interests                                 |                                       | 561 |  |   | 334 |   |
| Total comprehensive income (loss) attributable to NFI (A)                                        | $                                     | 983,530 |  | $ | (93,392 | ) |
|                                                                                             |                                       |  |  |  |  |  |

| (A) |        | Due to      the valuation allowance the Company has recorded on deferred income taxes,      there is no net income tax expense recorded against other comprehensive      income (loss). |
|-----|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

- Level 1—Quoted prices for  identical instruments in active markets. 
- Level 2—Quoted prices for similar  instruments in active markets; quoted prices for identical or similar  instruments in markets that are not active; and model-derived valuations whose  inputs are observable or whose significant value drivers are  observable. 
- Level 3—Instruments whose  significant value drivers are unobservable. 

|                                                     |                           |                                       |                                |           | Fair Value      Measurements at Reporting Date Using |
|-----------------------------------------------------|--------------------------------|---------------------------------------|--------------------------------|-----------|------------------------------------------------------|
|                                                     |                           |                                       |                                |           | Quoted Prices                                        |  |  |  |  |  |  |
|                                                     |                           |                                       |                                |           | in Active                                            |  | Significant |  |  |  |
|                                                     |                           |                                       |                                |           | Markets for                                          |  | Other |  |  |  |
|                                                     |                           | Fair Value at                         |                                | Identical |                                                      | Observable |  | Significant |
|                                                     |                           | March 31,                             |                                | Assets    |                                                      | Inputs |  | Unobservable |
| Description                                         |       | 2010                                  |       | (Level 1) |                             | (Level 2) |       | Inputs (Level 3) |
| Assets:                                             |                           |                                       |                                |           |                                                      |  |  |  |  |  |  |  |
| Mortgage securities -trading                        |                           | $       | 784                            |           | $                      | - |  | $       | - |  | $       | 784 |
| Mortgage securities –      available-for-sale |                           |                                       | 6,866                          |           |                                                      | - |  |  | - |  |  | 6,866 |
| Total    assets                                     |                           | $                                     | 7,650                          |           | $                                                    | - |  | $ | - |  | $ | 7,650 |
|                                                |                           |                                  |                           |      |                                                 |   |   |   |   |   |   |   |
| Liabilities:                                        |                           |                                  |                                |           |                                                      |  |  |  |  |  |  |  |
| Asset-backed bonds secured by                       |                           |                                       |                                |           |                                                      |   |  |   |  |  |   |  |
| mortgage      securities                            |                           | $                                     | 756                            |      | $                                                    | - |   | $ | - |   | $ | 756 |
| Total liabilities                                   |                           | $                                     | 756                            |           | $                                                    | - |  | $ | - |  | $ | 756 |
|                                                |                           |                                       |                                |           |                                                      |  |  |  |  |  |  |  |
|                                                |                           |                                       |                           |      |                                                 |   |   |   |   |   |   |   |
|                                                     |                           |                                       |                                |           | Fair Value      Measurements at Reporting Date Using |
|                                                     |                           |                                       |                                |           | Quoted Prices                                        |  |  |  |  |  |  |
|                                                     |                           |                                       |                                |           | in Active                                            |  | Significant |  |  |  |
|                                                     |                           |                                       |                                |           | Markets for                                          |  | Other |  | Significant |
|                                                     |                           | Fair Value at                         |                                | Identical |                                                      | Observable |  | Unobservable |
|                                                     |                           | December 31,                          |                                | Assets    |                                                      | Inputs |  | Inputs |
| Description                                         |                           | 2009                                  |                                | (Level 1) |                                                      | (Level 2) |  | (Level 3) |
| Assets:                                             |                           |                                       |                                |           |                                                      |  |  |  |  |  |  |  |
| Mortgage securities -trading                        |                           | $                                     | 1,087                          |           | $                                                    | - |  | $ | - |  | $ | 1,087 |
| Mortgage securities –      available-for-sale |                           |                                       | 6,903                          |           |                                                      | - |  |  | - |  |  | 6,903 |
| Total    assets                                     |                           | $                                     | 7,990                          |           | $                                                    | - |  | $ | - |  | $ | 7,990 |
|                                                |                           |                                  |                           |      |                                                 |   |   |   |   |   |   |   |
| Liabilities:                                        |                           |                                       |                                |           |                                                      |  |  |  |  |  |  |  |
| Asset-backed bonds secured by                       |                           |                                       |                                |           |                                                      |  |  |  |  |  |  |  |
| mortgage securities                                 |                           | $                                     | 968                            |           | $                                                    | - |  | $ | - |  | $ | 968 |
| Derivative instruments, net                         |                           |                                       | 157                            |           |                                                      | - |  |  | 157 |  |  | - |
| Total      liabilities                              |                           | $                                     | 1,125                          |           | $                                                    | - |  | $ | 157 |  | $ | 968 |
|                                                |                           |                                       |                                |           |                                                      |  |  |  |  |  |  |  |

----

|                                                                                                    |                                       |                          |                 |                          |                                       |          |        |        | Estimated Fair                        |
|----------------------------------------------------------------------------------------------------|---------------------------------------|--------------------------|-----------------|--------------------------|---------------------------------------|----------|--------|--------|---------------------------------------|
|                                                                                                    |                                       |                          |                 |                          |                                       |          |        |        | Value of                              |
|                                                                                                    |                                       |                          |                 |                          |                                       |          |        |        | Mortgage                              |
|                                                                                                    | Cost Basis                            |      | Unrealized Loss |      | Securities                            |
| As of December 31, 2009                                                                            | $       | 104,013                  |                 |                          | $       | (102,926 | )      |        | $       | 1,087 |  |
|        Increases (decreases) to      mortgage securities - trading   |                                       |                          |                 |                          |                                       |          |        |        |                                       |  |  |
|             Accretion of income                                      |                                  | 278                      |                 |                          |                                       | -        |        |        |                                       | 278 |  |
|        Proceeds from paydowns of      securities                     |                                       | (227                     | )               |                          |                                       | -        |        |        |                                       | (227 | ) |
|             Other than temporary impairments                         |                                       | (15,876                  | )               |                          |                                       | 15,876   |        |        |                                       | - |  |
|        Mark-to-market value      adjustment                          |                                       | -                        |                 |                          |                                       | (354     | )      |   |                                       | (354 | ) |
|        Net      (decrease) increase to mortgage securities - trading |                                       | (15,825                  | )               |                     |                                       | 15,522   |   |        |                                  | (303 | ) |
| As of March 31, 2010                                                                               | $                                     | 88,188                   |                 |                          | $                                     | (87,404  | )      |        | $                                     | 784 |  |
|                                                                                               |                                       |                          |                 |                          |                                       |          |        |        |                                       |  |  |
|                                                                                               |                                       |                          |                 |                          |                                       |          |        |        |                                       |  |  |
|                                                                                                    |                                       |                          |                 |                          |                                       |          |        |        | Estimated Fair                        |
|                                                                                                    |                                       |                          |                 |                          |                                       |          |        |        | Value of                              |
|                                                                                                    |                                       |                          |                 |                          |                                       |          |        |        | Mortgage                              |
|                                                                                                    | Cost Basis                            |                          | Unrealized Loss |                          | Securities                            |
| As of December 31, 2008                                                                            | $                                     | 433,968                  |                 |                          | $                                     | (426,883 | )      |        | $                                     | 7,085 |  |
|        Increases (decreases) to      mortgage securities - trading   |                                       |                          |                 |                          |                                       |          |        |        |                                       |  |  |
|             Accretion of income                                      |                                       | 6,917                    |                 |                          |                                       | -        |        |        |                                       | 6,917 |  |
|        Proceeds from paydowns of      securities                     |                                       | (2,485                   | )               |                          |                                       | -        |        |        |                                       | (2,485 | ) |
|             Mark-to-market value adjustment                          |                                       | -                        |                 |                          |                                       | (7,750   | )      |        |                                       | (7,750 | ) |
|        Net (decrease) increase to      mortgage securities - trading |                                  | 4,432                    |                 |                          |                                  | (7,750   | )      |        |                                  | (3,318 | ) |
| As of March 31,      2009                                                                          | $                                     | 438,400                  |                 |                          | $                                     | (434,633 | )      |        | $                                     | 3,767 |  |
|                                                                                               |                                       |                          |                 |                          |                                       |          |        |        |                                       |  |  |

|                                                                                                                |                                       |                          |                 |                          |                                       |       |        | Estimated Fair                        |
|---------------------------------------------------------------------------------------------------------------------|---------------------------------------|--------------------------|-----------------|--------------------------|---------------------------------------|-------|--------|---------------------------------------|
|                                                                                                                     |                                       |                          |                 |                          |                                       |       |        | Value of                              |
|                                                                                                                     |                                       |                          |                 |                          |                                       |       |        | Mortgage                              |
|                                                                                                                     | Cost Basis                            |      | Unrealized Gain |      | Securities                            |
| As of December 31, 2009                                                                                             | $       | 1,794                    |                 |                          | $       | 5,109 |        | $       | 6,903 |  |
|        Increases (decreases) to      mortgage securities – available-for-sale   |                                       |                          |                 |                     |                                       |       |        |                                       |  |  |
|             Accretion of income (A)                                                   |                                       | 427                      |                 |                          |                                       | -     |        |                                       | 427 |  |
|        Proceeds from paydowns of      securities (A) (B)                              |                                       | (1,569                   | )               |                          |                                       | -     |        |                                       | (1,569 | ) |
|             Mark-to-market value adjustment                                           |                                       | -                        |                 |                          |                                  | 1,105 |   |                                  | 1,105 |  |
|        Net (decrease) increase to      mortgage securities – available-for-sale |                                  | (1,142                   | )               |                          |                                       | 1,105 |        |                                       | (37 | ) |
| As of March 31,      2010                                                                                           | $                                     | 652                      |                 |                          | $                                     | 6,214 |        | $                                     | 6,866 |  |
|                                                                                                                |                                       |                          |                 |                          |                                       |       |        |                                       |  |  |

| (A) |        | Cash      received on mortgage securities with no cost basis was $1.4 million for      the three months ended March 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----|--------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |                                      | For      mortgage securities with a remaining cost basis, the Company reduces the      cost basis by the amount of cash that is contractually due from the      securitization trusts. In contrast, for mortgage securities in which the      cost basis has previously reached zero, the Company records in interest      income the amount of cash that is contractually due from the      securitization trusts. In both cases, there are instances where the      Company may not receive a portion of this cash until after the balance      sheet reporting date. Therefore, these amounts are recorded as receivables      from the securitization trusts. As of March 31, 2010, the Company had no      receivables from securitization trusts related to mortgage securities      available-for-sale with a remaining costbasis. |

----

|                                                                                                                |                                       |                          |        |                          |                                       |        |                     |        |                                       |
|---------------------------------------------------------------------------------------------------------------------|---------------------------------------|--------------------------|--------|--------------------------|---------------------------------------|--------|---------------------|--------|---------------------------------------|
|                                                                                                                     |                                       |                          |        |                          |                                       |        |                     |        | Estimated Fair                        |
|                                                                                                                |                                  |                     |   |                     |                                  |   |  Value      of |
|                                                                                                                     |                                       |                          |        |                          | Unrealized Gain                       |        | Mortgage            |
|                                                                                                                     | Cost Basis                            |      | (Loss) |      | Securities                            |
| As of December 31, 2008                                                                                             | $       | 3,771                    |        |                          | $       | 9,017  |                     |        | $       | 12,788 |  |
|        Increases (decreases) to      mortgage securities – available-for-sale   |                                       |                          |        |                          |                                       |        |                     |        |                                       |  |  |
|             Accretion of income (A)                                                   |                                       | 4,522                    |        |                          |                                       | -      |                     |        |                                  | 4,522 |  |
|        Proceeds from paydowns of      securities (A) (B)                              |                                       | (3,897                   | )      |                          |                                       | -      |                     |        |                                       | (3,897 | ) |
|             Impairment on mortgage securities – available-                      |                                       |                     |        |                          |                                       |        |                     |        |                                  |   |  |
|        for      -sale                                                                 |                                       | (202                     | )      |                     |                                       | -      |                     |        |                                       | (202 | ) |
|        Mark-to-market value      adjustment                                           |                                       | -                        |        |                          |                                  | (2,120 | )                   |   |                                       | (2,120 | ) |
|        Net      (decrease) increase to mortgage securities – available-for-sale |                                       | 423                      |   |                          |                                       | (2,120 | )                   |        |                                       | (1,697 | ) |
| As of March 31, 2009                                                                                                | $                                     | 4,194                    |        |                          | $                                     | 6,897  |                     |        | $                                     | 11,091 |  |
|                                                                                                                |                                       |                          |        |                          |                                       |        |                     |        |                                       |  |  |

| (A) |        | Cash      received on mortgage securities with no cost basis was $32,000 for the      three months ended March 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-----|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |                                 | For      mortgage securities with a remaining cost basis, the Company reduces the      cost basis by the amount of cash that is contractually due from the      securitization trusts. In contrast, for mortgage securities in which the      cost basis has previously reached zero, the Company records in interest      income the amount of cash that is contractually due from the      securitization trusts. In both cases, there are instances where the      Company may not receive a portion of this cash until after the balance      sheet reporting date. Therefore, these amounts are recorded as receivables      from the securitization trusts. As of March 31, 2009, the Company had no      receivable due from securitizationtrusts. |

|                   |                     |                                       |                          | Fair Value Measurements at Reporting      Date Using |
|-------------------|--------------------------|---------------------------------------|--------------------------|------------------------------------------------------|
|                   |                     |                                       |                          | Quoted Prices in                                     |  | Significant |  |  |  |
|                   |                     |                                       |                          | Active Markets for                                   |  | Other |  | Significant |
|                   |                     | Real Estate                           |                          | Identical Assets                                     |  | Observable |  | Unobservable |
| Fair Value at     |      | Owned (A)                             |      | (Level 1)                                            |      | Inputs (Level 2) |       | Inputs (Level 3) |
| December 31, 2009 |                     | $       | 64,179                   |                                                 | $       | - |   | $       | - |   | $       | 64,179 |
|              |                     |                                       |                          |                                                      |  |  |  |  |  |  |  |

| (A) |        | The      Company did not hold any Real Estate Owned as of March 31,  2010. |
|-----|--------------------------------------|----------------------------------------------------------------------------|

|                                                               |                                |              |                                | Fair Value Adjustments    For         |                                |        |
|---------------------------------------------------------------|--------------------------------|--------------|--------------------------------|---------------------------------------|--------------------------------|--------|
|                                                               |                                |              |                                | the Three Months Ended                |                                |        |
|                                                               |                                |              |                                | March 31,                             |                                |        |
|                                                               |                                | Fair Value   |                                |                                       |                                |        |  |  |  |  |  |  |
| Asset or Liability Measured      at                           |                                | Measurement  |                                |                                       |                                |        |  |  |  |  |  | Statement of Operation    Line |
| Fair Value                                                    |       | Frequency    |       | 2010                                  |       | 2009   |       | Item Impacted |
| Mortgage securities - trading                                 |                                | Recurring    |                                | $       | (354                           | )      |  | $       | (7,750 | ) |  | Other income (expense) |
| Mortgage securities – available-                        |                                |              |                                |                                       |                                |        |  |  |  |  |  |  |
|        for-sale                 |                                | Recurring    |                                |                                       | -                              |   |  |  | (202 | ) |  | Other income (expense) |
| Real estate owned                                             |                           | Nonrecurring |                                |                                       | (178                           | )      |  |  | (4,179 | ) |   | Other income (expense) |
| Derivative instruments, net                                   |                                | Recurring    |                           |                                  | 157                            |        |  |  | (4,195 | ) |  | Other income (expense) |
| Asset-backed bonds secured by                                 |                                |              |                                |                                       |                                |        |  |  |  |  |  |  |
|             mortgage securities |                                | Recurring    |                                |                                       | 534                            |        |  |   | 2,040 |   |  | Other income (expense) |
| Total fair value losses                                       |                                |              |                                | $                                     | 159                            |        |  | $ | (14,286 | ) |  |  |
|                                                               |                                |              |                                |                                       |                           |        |  |  |  |  |  |  |

----

|                                     |                          | Unpaid Principal                      |                          | Year to Date Gain |                                       |                          |            |        |
|-------------------------------------|--------------------------|---------------------------------------|--------------------------|-------------------|---------------------------------------|--------------------------|------------|--------|
| Unpaid Principal Balance as      of |      | Balance                               |      | Recognized        |                                       |      | Fair Value |
| March 31, 2010                      |                          | $       | 324,128                  |              | $       | 534                      |            |        | $       | 756 |
| December 31, 2009                   |                          |                                       | 323,999                  |                   |                                       | 2,040                    |   (A) |   |  | 968 |
|                                |                          |                                       |                          |                   |                                       |                          |            |        |  |  |

| (A) |        | For      the Three Months Ended March 31,2009. |
|-----|--------------------------------------|------------------------------------------------|

----

----

| For the Three Months Ended March 31,      2010                                                               |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |
|--------------------------------------------------------------------------------------------------------------|---------------------------------------|--------------------------|-----------|--------------------------|---------------------------------------|--------------------------|--------------|--------------------------|---------------------------------------|--------|--------|--------|---------------------------------------|--------|--------|--------|---------------------------------------|
|                                                                                                              |                                       |                          |           |                          |                                       |                          |              |                          |                                  |        |        |        |                                       |        |        |        |                                       |
|                                                                                                              | Securitization                        |                          |           |                          |                                       |                          | Appraisal    |                          |                                  |        |        |        |                                       |
|                                                                                                              | Trusts                                |      | Corporate |      | Management                            |      | Eliminations |      | Total                                 |
| Income and    Revenues:                                                                                      |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|             Service fee income                                                 | $       | -                        |           |                          | $       | -                        |              |                          | $       | 9,647  |        |        | $       | -      |        |        | $       | 9,647 |  |
|        Interest income –      mortgage                                   |                                  |                     |           |                          |                                  |                     |              |                          |                                  |        |        |        |                                       |   |        |        |                                  |  |   |
|                    loans                    |                                       | 10,681                   |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | 167    |        |        |                                       | 10,848 |  |
|             Interest income – mortgage                                   |                                       |                     |           |                          |                                       |                     |              |                          |                                       |   |        |        |                                       |   |        |        |                                       |   |  |
|                    securities               |                                       | 246                      |           |                          |                                       | 1,862                    |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 2,108 |  |
| Total                                                                                                        |                                       | 10,927                   |           |                          |                                       | 1,862                    |              |                          |                                       | 9,647  |        |        |                                       | 167    |        |        |                                       | 22,603 |  |
|                                                                                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
| Costs and Expenses:                                                                                          |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|             Cost of services                                                   |                                       | -                        |           |                          |                                       | -                        |              |                          |                                       | 9,069  |        |        |                                       | -      |        |        |                                       | 9,069 |  |
|        Interest expense –      asset-                                    |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |   |        |                                       |        |        |        |                                       |  |  |
|                    backed bonds             |                                       | 1,416                    |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 1,416 |  |
|             Provision for credit losses                                        |                                       | 17,433                   |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 17,433 |  |
|        Servicing fees                                                          |                                       | 731                      |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 731 |  |
|             Premiums for mortgage loan                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    insurance                |                                       | 297                      |           |                          |                                       | 11                       |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 308 |  |
|        Selling, general and                                                    |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    administrative expense   |                                       | 14                       |           |                          |                                       | 4,756                    |              |                          |                                       | 774    |        |        |                                       | -      |        |        |                                       | 5,544 |  |
|             Gain on derecognition of                                           |                                       |                     |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    securitization trusts    |                                       | (993,131                 | )         |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                  | -      |        |        |                                       | (993,131 | ) |
|        Other expenses    (income)                                              |                                       | 560                      |           |                          |                                       | (1,222                   | )            |                          |                                       | 19     |        |        |                                       | 70     |        |        |                                       | (573 | ) |
| Total                                                                                                        |                                  | (972,680                 | )         |                          |                                       | 3,545                    |              |                          |                                       | 9,862  |        |        |                                       | 70     |        |        |                                       | (959,203 | ) |
|                                                                                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|             Other income                                                       |                                       | -                        |           |                          |                                       | 794                      |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 794 |  |
|        Interest expense on      trust                                          |                                       |                          |           |                          |                                       |                          |              |                          |                                  |        |        |        |                                       |   |        |        |                                  |  |  |
|                    preferred securities     |                                       | -                        |      |                          |                                  | (324                     | )            |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | (324 | ) |
|                                                                                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
| Income (loss) before incometax                                                                               |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    expense                  |                                       | 983,607                  |           |                          |                                       | (1,213                   | )            |                          |                                       | (215   | )      |        |                                       | 97     |        |        |                                       | 982,276 |  |
| Income tax expense                                                                                           |                                       | -                        |           |                          |                                       | 412                      |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 412 |  |
| Net income (loss)                                                                                            |                                       | 983,607                  |           |                          |                                       | (1,625                   | )            |                          |                                       | (215   | )      |        |                                       | 97     |   |        |                                       | 981,864 |  |
| Less: Net loss attributable to                                                                               |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    noncontrolling interests |                                       | -                        |           |                          |                                       | (535                     | )            |                          |                                       | (26    | )      |        |                                       | -      |        |        |                                       | (561 | ) |
| Net income (loss) attributable    to                                                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    NFI                      | $                                     | 983,607                  |           |                          | $                                     | (1,090                   | )            |                          | $                                     | (189   | )      |        | $                                     | 97     |        |        | $                                     | 982,425 |  |
|                                                                                                         |                                  |                     |      |                     |                                  |                     |         |                     |                                  |   |   |   |                                  |   |   |   |                                  |   |   |
| March 31, 2010:                                                                                              |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
| Total    assets                                                                                              | $                                     | 1,099                    |           |                          | $                                     | 25,314                   |              |                          | $                                     | 6,989  |        |        | $                                     | (302   | )      |        | $                                     | 33,100 |  |
|                                                                                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |

----

| For the Three Months Ended March 31,      2009                                                             |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |
|------------------------------------------------------------------------------------------------------------|---------------------------------------|--------------------------|-----------|--------------------------|---------------------------------------|--------------------------|--------------|--------------------------|---------------------------------------|--------|--------|--------|---------------------------------------|--------|--------|--------|---------------------------------------|
|                                                                                                            |                                       |                          |           |                          |                                       |                          |              |                          |                                  |        |        |        |                                       |        |        |        |                                       |
|                                                                                                            | Securitization                        |                          |           |                          | Appraisal                             |                          |         |                          |                                       |        |        |
|                                                                                                            | Trusts                                |      | Corporate |      | Management                            |      | Eliminations |      | Total                                 |
| Income and Revenues:                                                                                       |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|             Service fee income                                               | $       | -                        |           |                          | $       | -                        |              |                          | $       | 1,685  |        |        | $       | -      |        |        | $       | 1,685 |  |
|        Interest income –      mortgage                                 |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    loans                  |                                       | 29,127                   |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | 146    |        |        |                                       | 29,273 |  |
|             Interest income – mortgage                                 |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    securities             |                                       | 4,921                    |           |                          |                                       | 8,327                    |              |                          |                                       | -      |        |        |                                       | (1,841 | )      |        |                                       | 11,407 |  |
| Total                                                                                                      |                                       | 34,048                   |           |                          |                                       | 8,327                    |              |                          |                                       | 1,685  |        |        |                                       | (1,695 | )      |        |                                       | 42,365 |  |
|                                                                                                       |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
| Costs and Expenses:                                                                                        |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|             Cost of services                                                 |                                       | -                        |           |                          |                                       | -                        |              |                          |                                       | 2,468  |        |        |                                       | -      |        |        |                                       | 2,468 |   |
|        Interest expense –      asset-                                  |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    backed bonds           |                                       | 5,203                    |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 5,203 |  |
|             Provision for credit losses                                      |                                       | 101,474                  |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 101,474 |  |
|        Servicing fees                                                        |                                       | 2,991                    |           |                          |                                       | -                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 2,991 |  |
|             Premiums for mortgage loan                                       |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    insurance              |                                       | 3,339                    |           |                          |                                       | 2                        |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 3,341 |  |
|        Selling, general and                                                  |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    administrative expense |                                       | 94                       |           |                          |                                       | 5,104                    |              |                          |                                       | 314    |        |        |                                       | (57    | )      |        |                                       | 5,455 |  |
|             Other expenses                                                   |                                       | 1,646                    |           |                          |                                       | 10,409                   |              |                          |                                       | 18     |        |        |                                       | -      |        |        |                                       | 12,073 |  |
| Total                                                                                                      |                                       | 114,747                  |           |                          |                                       | 15,515                   |              |                          |                                       | 2,800  |        |        |                                       | (57    | )      |        |                                       | 133,005 |  |
|                                                                                                       |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|             Other (expense) income                                           |                                       | (13                      | )         |                          |                                       | 199                      |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 186 |  |
|        Interest expense on      trust                                        |                                       |                     |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
|                    preferred securities   |                                       | -                        |           |                          |                                       | (1,192                   | )            |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | (1,192 | ) |
|                                                                                                       |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
| Loss before income tax expense                                                                             |                                       | (80,712                  | )         |                          |                                       | (8,181                   | )            |                          |                                       | (1,115 | )      |        |                                       | (1,638 | )      |        |                                       | (91,646 | ) |
| Income tax expense                                                                                         |                                       | -                        |           |                          |                                       | 52                       |              |                          |                                       | -      |        |        |                                       | -      |        |        |                                       | 52 |  |
| Net loss                                                                                                   |                                       | (80,712                  | )         |                          |                                       | (8,233                   | )            |                          |                                       | (1,115 | )      |        |                                       | (1,638 | )      |        |                                       | (91,698 | ) |
| Less: Net loss attributable to                                                                             |                                  |                          |           |                          |                                       |                          |         |                          |                                       |        |        |        |                                       |   |        |        |                                       |  |  |
|             noncontrolling interests                                         |                                       | -                        |           |                          |                                       | -                        |              |                          |                                       | (334   | )      |        |                                       | -      |        |        |                                       | (334 | ) |
| Net loss      attributable to NFI                                                                          | $                                     | (80,712                  | )         |                          | $                                     | (8,233                   | )            |                          | $                                     | (781   | )      |        | $                                     | (1,638 | )      |   | $                                     | (91,364 | ) |
|                                                                                                       |                                       |                          |           |                          |                                       |                          |              |                          |                                       |        |        |        |                                       |        |        |        |                                       |  |  |
| December 31, 2009:                                                                                         |                                       |                          |           |                          |                                       |                          |              |                          |                                  |        |        |        |                                       |        |        |        |                                  |  |  |
| Total    assets                                                                                            | $                                     | 1,437,059                |           |                          | $                                     | 26,706                   |              |                          | $                                     | 4,164  |        |        | $                                     | (8,438 | )      |        | $                                     | 1,459,491 |  |
|                                                                                                       |                                  |                     |      |                     |                                  |                     |         |                     |                                  |   |   |   |                                  |   |   |   |                                  |   |   |

----

|                                                                                                                           |                          | For the Three Months    Ended |
|---------------------------------------------------------------------------------------------------------------------------|--------------------------|-------------------------------|
|                                                                                                                           |                          | March      31,      |
|                                                                                                                           |      | 2010                          |      | 2009 |
| Numerator:                                                                                                                |                          |                               |  |  |  |  |  |  |
|        Net      income (loss)                                                               |                     | $         | 981,864 |   |   | $     | (91,698 | ) |
|        Less loss attributable to      noncontrolling interests                              |                          |                               | (561 | ) |  |  | (334 | ) |
|             Dividends on preferred shares                                                   |                          |                               | (3,975 | ) |  |  | (3,696 | ) |
|        Allocation of undistributed      income to convertible participating preferred stock |                          |                               | (163,625 | ) |  |  | - |  |
|             Income (loss) available to common shareholders                                  |                          | $                             | 814,825 |  |  | $ | (95,060 | ) |
|                                                                                                                      |                          |                               |  |  |  |  |  |  |
| Denominator:                                                                                                              |                          |                               |  |  |  |  |  |  |
| Weighted average common shares      outstanding – basic                                                             |                          |                               | 9,337,207 |  |  |  | 9,368,053 |  |
|                                                                                                                      |                          |                               |  |  |  |  |  |  |
| Weighted average common shares outstanding – dilutive:                                                              |                          |                               |  |  |  |  |  |  |
|        Weighted average common shares      outstanding – basic                        |                          |                               | 9,337,207 |  |  |  | 9,368,053 |  |
|                    Stock options                         |                          |                               | - |  |  |  | - |  |
| Weighted average common shares      outstanding – dilutive                                                          |                          |                               | 9,337,207 |  |  |  | 9,368,053 |  |
|                                                                                                                      |                          |                               |  |  |  |  |  |  |
| Basic earnings per    share:                                                                                              |                          |                               |  |  |  |  |  |  |
|        Net      income (loss)                                                               |                          | $                             | 105.16 |  |  | $ | (9.79 | ) |
|        Less loss attributable to      noncontrolling interests                              |                          |                               | (0.06 | ) |  |  | (0.04 | ) |
|             Dividends on preferred shares                                                   |                          |                               | (0.43 | ) |  |  | (0.39 | ) |
|        Allocation of undistributed      income to convertible participating preferred stock |                          |                               | (17.52 | ) |  |  | - |  |
|        Net      income (loss) available to common shareholders                              |                          | $                             | 87.27 |  |  | $ | (10.14 | ) |
|                                                                                                                      |                          |                               |  |  |  |  |  |  |
| Diluted earnings per    share:                                                                                            |                          |                               |  |  |  |  |  |  |
|        Net      income (loss)                                                               |                     | $                             | 105.16 |  |  | $ | (9.79 | ) |
|        Less loss attributable to      noncontrolling interests                              |                          |                               | (0.06 | ) |   |  | (0.04 | ) |
|             Dividends on preferred shares                                                   |                          |                               | (0.43 | ) |  |  | (0.39 | ) |
|        Allocation of undistributed      income to convertible participating preferred stock |                          |                               | (17.52 | ) |  |  | - |  |
|        Net      income (loss) available to common shareholders                              |                          | $                             | 87.27 |  |  | $ | (10.14 | ) |
|                                                                                                                      |                          |                               |  |  |  |  |  |  |

|                                                       |                          | For the Three Months      |
|-------------------------------------------------------|--------------------------|---------------------------|
|                                                       |                          | Ended March 31,           |
|                                                       |      | 2010                      |      | 2009 |
| Number of stock options (in      thousands)           |                          |                           | 277 |  |  | 155 |
| Weighted average      exercise price of stock options |                     | $     | 22.22 |   | $     | 57.36 |
|                                                  |                          |                           |  |  |  |  |

----

|                                                                                                                                       |                          | As of March 31, 2010      |                          | As of December 31,  2009 |
|---------------------------------------------------------------------------------------------------------------------------------------|--------------------------|---------------------------|--------------------------|--------------------------|
|                                                                                                                                       |      | Carrying Value            |      | Fair Value               |      | Carrying Value |      | Fair Value |
| Financial assets:                                                                                                                     |                          |                           |                          |                          |  |  |  |  |  |  |  |  |  |  |
|             Cash and cash equivalents                                                                   |                          | $     | 13,244                   |                          | $     | 13,244 |  | $     | 7,104 |  |  | $     | 7,104 |  |
|        Restricted cash                                                                                  |                          |                           | 1,901                    |                          |  | 1,791 |  |  | 5,342 |  |  |  | 5,206 |  |
|             Mortgage loans - held-in-portfolio                                                          |                          |                           | -                        |                          |  | - |  |  | 1,289,474 |  |  |  | 1,160,527 |  |
|        Mortgage securities -      trading                                                               |                          |                           | 784                      |                          |  | 784 |  |  | 1,087 |  |  |  | 1,087 |  |
|             Mortgage securities - available-for-sale                                                    |                          |                           | 6,866                    |                          |  | 6,866 |  |  | 6,903 |  |  |  | 6,903 |  |
|        Accrued interest receivable                                                                 |                          |                           | -                        |                          |  | - |  |  | 74,025 |  |  |  | 74,025 |  |
|             Notes receivable                                                                            |                          |                           | 4,748                    |                          |  | 4,748 |  |  | 4,920 |  |  |  | 4,920 |   |
| Financial liabilities:                                                                                                                |                          |                           |                          |                     |  |  |  |  |  |  |  |  |  |  |
|             Borrowings:                                                                                 |                          |                           |                          |                          |  |  |  |  |  |   |  |  |  |  |
|                    Asset-backed bonds secured by mortgage loans      |                          |                           | -                        |                          |  | - |  |  | 2,270,602 |  |  |  | 1,297,980 |  |
|                    Asset-backed bonds secured by mortgage securities |                          |                           | 756                      |                          |  | 756 |   |  | 968 |  |  |   | 968 |  |
|                    Junior subordinated debentures                    |                          |                           | 77,938                   |                          |  | 5,451 |  |   | 77,815 |  |  |  | 6,225 |  |
|        Accrued interest    payable                                                                      |                     |                      | 397                      |                          |   | 397 |  |  | 751 |  |   |  | 751 |  |
| Derivative instruments:                                                                                                               |                          |                           | -                        |                          |  | - |  |  | (157 | ) |  |  | (157 | ) |
|                                                                                                                                  |                          |                           |                          |                          |  |  |  |  |  |  |  |  |  |  |

----

----

- maintaining and/or generating  adequate liquidity to sustain us and allow us to take advantage of investment  opportunity, and 
- generating income for our  shareholders. 

| Table 1 — Summary of Financial      Highlights and Key Performance Metrics (dollars in thousands; except per      share amounts) |
|----------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                        |  | March 31, |  | December 31, |
|                                                                                                                                        |      | 2010 |      | 2009 |
| Unrestricted cash and cash      equivalents                                                                                            |  | $     | 13,244 |  | $     | 7,104 |  |
|                                                                                                                                   |  |   |
|                                                                                                                                        |  | For the Three Months |
|                                                                                                                                        |  | Ended March 31, |
|                                                                                                                                        |  | 2010 |  | 2009 |
| Net      income (loss) available to common shareholders per diluted share                                                              |   | $ | 87.27 |   | $ | (10.14 | ) |
|                                                                                                                                   |  |  |  |  |  |  |  |

----

| Table 2 — Assets and Liabilities of Loan      Trusts and Gain Recognized upon Derecognition (dollars in      thousands) |
|-------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                               |  |  |  |  |  |  |  |  |  | Eliminations |  |  |  |  |
|                                                                                                                               |  | NHEL 2006-MTA1 |    | NHEL 2006-1 |    | NHEL 2007-1 |    | (A) |    | Total |
| Assets:                                                                                                                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       Mortgage      loans – held-in-portfolio                                                  |  | $    | 528,388 |  |  | $    | 399,507 |  |   | $    | 1,033,296 |  |  | $    | (8,003 | ) |  | $    | 1,953,188 |  |
|       Allowance for loan losses                                                                      |  |  | (147,147 | ) |  |  | (115,191 | ) |  |  | (440,563 | ) |  |  | - |  |  |  | (702,901 | ) |
|       Accrued      interest receivable                                                               |   |  | 6,176 |  |  |  | 20,521 |  |  |  | 46,028 |  |  |  | - |  |  |  | 72,725 |  |
|       Real estate owned                                                                              |  |  | 11,842 |  |  |  | 17,919 |   |  |  | 25,548 |  |  |  | - |  |  |  | 55,309 |  |
|                                                                                                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Total assets                                                                                                                  |  |  | 399,259 |  |  |  | 322,756 |  |  |  | 664,309 |  |  |  | (8,003 | ) |  |  | 1,378,321 |  |
|                                                                                                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Liabilities:                                                                                                                  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  |  |  |  |  |  |
|            Asset-backed bonds                                                                        |  |  | 588,434 |  |  |  | 465,164 |  |  |  | 1,175,608 |  |  |  | 6,427 |  |  |   | 2,235,633 |  |
|       Due to servicer                                                                                |  |  | 17,298 |   |   |   | 32,835 |  |  |  | 81,639 |  |  |  | - |  |  |  | 131,772 |  |
|       Other      liabilities                                                                         |  |  | 9,432 |  |  |  | 12,368 |  |  |  | 24,017 |  |  |  | (41,770 | ) |   |  | 4,047 |  |
|                                                                                                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Total liabilities                                                                                                             |  |  | 615,164 |  |  |  | 510,367 |  |  |  | 1,281,264 |  |   |  | (35,343 | ) |  |  | 2,371,452 |  |
|                                                                                                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       Gain on      derecognition of securitization trusts                                            |  | $ | 215,905 |  |  | $ | 187,611 |  |  | $ | 616,955 |  |  | $ | (27,340 | ) |  | $ | 993,131 |  |
|                                                                                                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| (A) |         | Eliminations      relate to intercompany accounts at the consolidated financial statement      level, there are no intercompany balances between the securitization      trusts. |
|-----|--------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

- Mortgage Loans -  Held-in-Portfolio 
- Allowance for Loan Losses 
- Accrued Interest Receivable 
- Real Estate Owned 
- Due to Servicer 
- Asset-backed Bonds Secured by  Mortgage Assets 
- Other securitization trust  liabilities 

----

| Table 3 — Values of Individual Mortgage      Securities – Available-for-Sale (dollars in thousands) |                                |                                 |                                |                   |
|-----------------------------------------------------------------------------------------------------------------|--------------------------------|---------------------------------|--------------------------------|-------------------|
|                                                                                                                 |                                | March 31, 2010                  |                                | December 31, 2009 |
|                                                                                                                 |                                |                                 |                                |                   |  |  |  |  |  |  | Expected |  |  |  |  |  |  |  |  |  |  | Expected |
| Securitization                                                                                                  |                                | Estimated                       |                                |                   |  |  | Constant Pre- |  | Credit |  | Estimated |  |  |  |  | Constant Pre- |  | Credit |
| Trust (A)                                                                                                       |       | Fair Value                      |       | Discount Rate     |       | payment      Rate |       | Losses |       | Fair Value |       | Discount Rate |       | payment Rate |       | Losses |
| 2002-3                                                                                                          |                                | $      | 1,822                          |              |       25 | % |  |       17 | % |  |      0.8 | % |  | $      | 1,997 |  |       25 | % |  |       15 | % |  |      1.0 | % |
| 2003-1                                                                                                          |                                |                            | 3,320                          |                   | 25 |  |  | 14 |  |  | 2.1 |   |  |   | 3,469 |   | 25 |  |  | 13 |  |  | 2.1 |  |
| 2003-3                                                                                                          |                                |                                 | 1,214                          |                   | 25 |   |  | 11 |  |  | 2.6 |  |  |  | 1,437 |  | 25 |  |  | 10 |  |  | 2.7 |  |
| 2003-4                                                                                                          |                                |                                 | 510                            |                   | 25 |  |  | 13 |   |  | 2.6 |  |  |  | - |  | 25 |   |  | 12 |   |  | 2.7 |  |
| Total                                                                                                           |                                | $                               | 6,866                          |                   |  |  |  |  |  |  |  |  |  | $ | 6,903 |  |  |  |  |  |  |  |  |  |
|                                                                                                            |

| (A)       We established the trust      upon securitization of the underlying loans, which generally were      originated by us. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Table 4 — Income (Expense) of      Consolidated Loan Securitization; Gain on Disposition of Mortgage Assets      (dollars in thousands) |                                 |                                |      |  |                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|--------------------------------|------|--|---------------------------------|
|                                                                                                                                               | For the Three Months            |
|                                                                                                                                               | Ended March 31,                 |
|                                                                                                                                               | 2010                            |       | 2009 |
| Gain on derecognition of securitization      trusts                                                                                           | $      | 993,131                        |      |  | $      | – |  |
| Interest income – mortgage loans                                                                                                        |                                 | 10,681                         |      |  |                                 | 29,127 |  |
| Interest expense – asset-backed      bonds                                                                                              |                            | (1,416                         | )    |  |                                 | (5,203 | ) |
| Provision for credit losses                                                                                                                   |                                 | (17,433                        | )    |  |                                 | (101,474 | ) |
| Servicing fees                                                                                                                                |                                 | (731                           | )    |  |                                 | (2,991 | ) |
| Premiums for mortgage loan insurance                                                                                                          |                                 | (297                           | )    |  |                                 | (3,339 | ) |
| Other expense                                                                                                                                 |                                 | (560                           | )    |  |                                 | (1,646 | ) |
|                                                                                                                                          |                                 |                                |      |  |                                 |  |  |

----

|                                                     | For the Three Months Ended March      31, |
|-----------------------------------------------------|-------------------------------------------|
|                                                     | 2010                                      |  | 2009 |
|                                                     | Total                                     |       | Per Unit |       | Total |       | Per Unit |
| Completed appraisal orders    (units)               |                                           | 25,527 |  |  |  |  |  |  |  | 4,809 |  |  |  |  |  |
|                                                |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Service fee income                                  | $                                         |      9,647 |  |  | $ |      378 |  |  | $ | 1,685 |  |  | $ |      350 |  |
| Cost of      services                               |                                           | 9,069 |  |  |  | 355 |   |  |  | 2,468 |  |  |  | 513 |  |
| Selling, general and administrative      expense    |                                           | 774 |   |  |   | 30 |  |  |  | 314 |  |  |  | 65 |   |
| Other      expense                                  |                                           | 19 |  |  |  | 1 |  |  |  | 18 |  |  |  | 4 |  |
|                                                |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Net      loss                                       |                                      | (215 | ) |  |  | (8 | ) |  |  |      (1,115 | ) |  |  | (232 | ) |
| Less: Net loss attributable to      noncontrolling  |                                           |  |  |  |  |  |  |  |  |  |   |  |  |  |  |
|             interests |                                           | (26 | ) |  |  | (1 | ) |  |  | (334 | ) |  |   | (69 | ) |
| Net      loss attributable to NFI                   | $                                         | (189 | ) |  | $ | (7 | ) |  | $ | (781 | ) |  | $ | (163 | ) |
|                                                |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

| Table 6 — Contractual Obligations (dollars in thousands) As of      March 31, 2010 |
|------------------------------------------------------------------------------------------|
|                                                                                          |   |  |  |  | Less |  |  |  |  |  |  |  |  |  |
|                                                                                          |   |  |  |  | than |  |  |  |  |  |  |  | After |
| Contractual Obligations                                                                  |       | Total |       | 1 Year |       | 1-3 Years |       | 3-5 Years |       | 5 Years |
| Junior subordinated debentures                                                           |   | $ | 97,999 |  | $ | 781 |  | $ | 1,563 |  | $ | 1,563 |  | $ | 94,092 |
| Operating leases                                                                         |   |  | 4,106 |  |  | 1,597 |  |  | 1,977 |  |   | 532 |  |  | - |
| Total obligations                                                                        |   | $ |      102,105 |  | $ |      2,378 |  | $ |      3,540 |  | $ |      2,095 |  | $ |      94,092 |
|                                                                                     |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

|                                                       |                                      | For the Three Months |
|-------------------------------------------------------|--------------------------------------|----------------------|
|                                                       |                                      | Ended March 31,      |
|                                                  |        | 2010                 |        | 2009 |
| Primary sources:                                      |                                      |                      |  |  |  |  |  |  |
| Fees received for appraisal management      services  |                                      | $                    | 10,128 |  |  | $ | 1,483 |   |
| Cash flows received from mortgage securities          |                                      |                 | 2,838 |  |  |  | 6,382 |  |
|                                                  |                                      |                      |  |  |  |  |  |  |
| Primary uses:                                         |                                      |                      |  |  |  |  |  |  |
| Payment of corporate, general and      administrative |                                      |                      |  |   |  |  |  |  |
| expenses                                              |                                      |                      | (1,794 | ) |  |   | (9,779 | ) |
| Payments for appraisals and related administrative    |                                      |                      |  |  |  |  |  |  |
| expenses                                              |                                      |                      |      (7,891 | ) |  |  |      (2,891 | ) |
|                                                  |                                      |                      |  |  |  |  |  |  |

|                                              |                                            | For the Three Months |
|----------------------------------------------|--------------------------------------------|----------------------|
|                                              |                                            | Ended March 31,      |
|                                              |         | 2010                 |        | 2009 |
| Consolidated Statements of Cash      Flows:  |                                            |                      |  |  |  |  |  |  |
| Cash provided by operating      activities   |                                            | $                    | 6,376 |   |  | $ | 20,552 |   |
| Cash flows provided by investing activities  |                                            |                 | 35,150 |  |  |  | 52,873 |  |
| Cash flows used in financing      activities |                                            |                      |         (35,386 | ) |   |  |         (78,207 | ) |
|                                         |                                            |                      |  |  |  |  |  |  |

----

- As short-term interest rates declined and continue to remain low, the net  spread to us has increased and remains high,        
- Higher credit losses have decreased cash available to distribute with  respect to our securities,        
- We have lower average balances of our mortgage  securities—available-for-sale portfolio as the securities have paid down and  we have not acquired new bonds. 

----

----

| Issuer Purchases of Equity      Securities |
|--------------------------------------------|
|                                            |  |  |  |  |  | Total Number of |  |  |  |
|                                            |  |  |  |  |  | Shares |  | Approximate Dollar |
|                                            |  |  |  |  |  | Purchased as |  | Value of Shares |
|                                            |  |  |  |  |  | Part of Publicly |   | That May Yet Be |
|                                            |  | Total Number |  | Average |  | Announced |  | Purchased Under |
|                                            |   | of Shares |  | Price Paid |  | Plans or |  | the Plans or |
|                                            |        | Purchased |         | per Share |        | Programs |        | Programs (A) |
| January 1 – January 31, 2010         |  | - |  | - |  | - |   | $ | 1,020 |
| February 1 – February 28, 2010       |  | - |  | - |   | - |  | $ | 1,020 |
| March 1, 2010 – March 31, 2010       |  | - |  | - |  | - |   | $ |       1,020 |
|                                       |

| (A) |         | A current report on Form 8-K was      filed on October 2, 2000 announcing that the Board of Directors authorized      the Company to repurchase its common shares, bringing the total      authorization to $9 million. |
|-----|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Exhibit No. |         | Description of  Document                                                                            |
|-------------|--------------------------------------------|-----------------------------------------------------------------------------------------------------|
| 11.1(1)     |                                            | Statement Regarding Computation of Per      Share Earnings                                          |
|             |                                            |                                                                                                |
| 31.1        |                                            | Chief Executive Officer Certification -      Section 302 of the Sarbanes-Oxley Act of 2002          |
|             |                                            |                                                                                                |
| 31.2        |                                            | Principal Financial Officer      Certification - Section 302 of the Sarbanes-Oxley Act of 2002      |
|             |                                            |                                                                                                |
| 32.1        |                                            | Chief Executive Officer Certification -      Section 906 of the Sarbanes-Oxley Act of 2002          |
|             |                                            |                                                                                                |
| 32.2        |                                            | Principal      Financial Officer Certification - Section 906 of the Sarbanes-Oxley Act of      2002 |

| (1) |         | See Note 13 to the condensed      consolidated financial statements. |
|-----|--------------------------------------------|----------------------------------------------------------------------|

| NOVASTAR FINANCIAL, INC. |                                           |
|--------------------------|------------------------------------------------|
|                     |                                                |  |
| DATE: May 17, 2010       |   /s/ W. Lance      Anderson              |   |
|                     |   W. Lance Anderson, Chairman of      the |
|                     |   Board of Directors and      Chief       |
|                     |   Executive Officer                       |
|                     |   (Principal Executive      Officer)      |
|                          |                                           |
| DATE: May 17, 2010       |   /s/ Rodney E.      Schwatken            |   |
|                     |   Rodney E. Schwatken,    Chief           |
|                     |   Financial Officer                       |
|                     |   (Principal Financial      Officer)      |

----