NovaStar Financial
(NYSE-NFI)
www.novastarmortgage.com

2006 First Quarter Earnings

Conference Call

May 5, 2006

Safe Harbor Statement

Certain matters discussed in this release constitute forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements are those that predict or describe future events and that do
not relate solely to historical matters. Forward-looking statements are subject to risks and uncertainties and
certain factors can cause actual results to differ materially from those anticipated. Some important factors that
could cause actual results to differ materially from those anticipated include: our ability to generate sufficient
liquidity on favorable terms; the size and frequency of our securitizations; interest rate fluctuations on our
assets that differ from our liabilities; increases in prepayment or default rates on our mortgage assets; changes
in assumptions regarding estimated loan losses and fair value amounts; changes in origination and resale
pricing of mortgage loans; our compliance with applicable local, state and federal laws and regulations or
opinions of counsel relating thereto and the impact of new local, state or federal legislation or regulations or
opinions of counsel relating thereto or court decisions on our operations; the initiation of margin calls under
our credit facilities; the ability of our servicing operations to maintain high performance standards and
maintain appropriate ratings from rating agencies; our ability to expand origination volume while maintaining
an acceptable level of overhead; our ability to adapt to and implement technological changes; the stability of
residual property values; the outcome of litigation or regulatory actions pending against us or other legal
contingencies; the impact of losses resulting from natural disasters; the impact of general economic conditions;
and the risks that are from time to time included in our filings with the SEC, including our Annual Report on
Form 10-K, for the period ending December 31, 2005. Other factors not presently identified may also cause
actual results to differ. This document speaks only as of its date and we expressly disclaim any duty to update
the information herein.

Opening Comments &
NovaStar Financial REIT Test
Discussion

Scott Hartman, CEO

Overview of Issues

NovaStar (REIT) aggressively hedges the
interest rate risk embedded in our mortgage
securities portfolio

Due to rates rising almost 4% during the past 24
months, the cash flow from our hedges has
substantially increased while the cash flow from
the mortgage securities portfolio has decreased.

Problem – too much hedge income in the REIT

The Math

Securitization strategy and example

Every $1B of loan “on-balance sheet” would generate
$70 million to $80 million of good REIT income per
year

NFI mortgage securities represent the same “economic”
interest, but less taxable income

Mtg securities = 5% of loan balance * 20% yield = $10 million

As of today, we believe excessive hedge income is
a 2006 only “bubble” due to the hedges expiring
for our 2003, 2004 and 2005 deals.

Steps Taken to
Solve the Problem

Step 1 - Put loans on NFI (REIT) balance sheet to
create more good REIT income and assets

$1 billion purchase of payment option ARMS

Structure 2006-1 as on-balance sheet financing

Financial impact of Step 1

Inconsistent GAAP results due to change in
securitization strategy

Elimination of gain-on-sale in consolidation

Up-front loan loss reserve

Slightly more GAAP income in subsequent periods

A little more capital used/lower ROE with financing
structure

Excess inclusion income

Steps Taken to
Solve the Problem

Step 2 – Reduce hedge income in REIT by
moving “hedge” securities to taxable REIT
subsidiary (TRS).

Because of securitization structure, we can move the
securities containing hedge cash flows to TRS

Impact of Step 2

Hedge cash flow is now taxed in TRS (slight drag on
GAAP income).

TRS has NOLs, no effect on cash flow (slight positive)

Build capital in TRS (slight positive)

Slightly less taxable income in REIT

Steps Taken to
Solve the Problem

Impact of Step 2 – GAAP Impairment
Issues

Our securities are well hedged with embedded
derivatives

Strategy doesn’t change security cash flow but
changes GAAP accounting and impairment risk
for the “mortgage only” security

Rates up 100bp would create a gain in the
“hedge” security (shown through equity) and an
impairment on the “mortgage” security (shown
through the income statement). The following
schedule shows an example.