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MassMutual Invests In Subprime Lender, Despite Problems

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A unit of Massachusetts Mutual Life Insurance Company has joined with an investment banker to buy almost $49 million in shares of NovaStar Financial Inc., a significant player in the troubled mortgage lending market.

NovaStar, Kansas City, Mo., which manages subprime home loans, had suffered financial setbacks due to rising mortgage delinquencies. Until NovaStar announced the stock purchase plan on July 16th, its stock had plunged from $26.90 at the start of January to a low of $3.66 in mid-March. The price stood at $7.60 at the close of the day of the announcement.

Mortgage loans are classed as subprime when they are held by consumers with a weak credit history. Banks typically charge subprime customers much higher interest than more financially sound customers to balance the higher risk of default.

Under the agreement, MassMutual Capital Partners LLC, a subsidiary of the insurer, joined with Jefferies Capital Partners LLC, a unit of Jefferies & Company Inc., New York, to buy $48.8 million of convertible preferred stock. Each firm will buy half of the shares, a MassMutual spokesman said.

Potentially, the 2 firms’ investment could total as much as $150 million because they have also agreed to buy any unsold shares left over from NovaStar’s impending public offering of more than $101 million in convertible preferred stock.

As part of the agreement, both MassMutual and Jefferies will gain a seat on NovaStar’s board of directors, expanding that body to 8 directors from its current 6. Both could also add still another director each, based on the ultimate value of their stake in NovaStar.

An analyst for rating service Standard & Poor’s, New York, said that despite NovaStar’s troubled loan market, the deal would not affect its favorable evaluation of MassMutual.

“MassMutual tends to be very conservative with credit risk,” says the analyst, Ovadiah N. Jacob. “Given the size of the NovaStar investment, this is not a major play for MassMutual. It doesn’t create any concern for us.”

In a related development, the head of Aegon N.V., the Netherlands, was quoted as saying that he was not worried about the troubled home-mortgage market, despite his company’s heavy investment.

Aegon’s mortgage exposure totals almost $7 billion in mortgage-backed securities, according to Aegon chief executive officer Donald Shepard in an interview with MarketWatch, an online news service of Dow-Jones Inc., New York.

But, Shepard said he expects his company’s extensive portfolio of AA- and AAA-rated mortgage-backed securities will be unaffected to the problems at the lower end of the credit range.

Subprime loans were also blamed as the stock market plunged in on July 18th, which analysts widely blamed, at least in part, on a move by Bear, Stearns & Company Inc., New York, to unload 3 distressed funds.

In a letter to clients, the company acknowledged 2 of its troubled hedge funds had little or no remaining value due to recent dismal returns from mortgage-backed securities in the funds’ portfolio.

“In light of these returns, we will seek an orderly wind-down of the funds over time,” the letter stated.


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