NovaStar Financial, Inc. Articles Supplementary Reclassifying Preferred Stock to Common Stock

 Exhibit 4.2 NOVASTAR FINANCIAL, INC. ARTICLES SUPPLEMENTARY NovaStar Financial, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Prior to the date hereof, pursuant to terms set forth in the charter of the Corporation (the "Charter"), (a) all shares of Class A Convertible Preferred Stock (as defined in the Charter) that were issued and subsequently acquired by the Corporation upon conversion of such shares into Common Stock (as defined in the Charter) or otherwise acquired by the Corporation were restored to the status of authorized but unissued shares of Capital Stock (as defined in the Charter), without further designation as to class or series and (b) all shares of Class B Preferred Stock (as defined in the Charter) that were issued and subsequently acquired in any manner by the Corporation were restored to the status of authorized but unissued shares of Common Stock. SECOND: Under a power contained in Article VI of the Charter, the Board of Directors of the Corporation (the "Board of Directors"), by resolutions duly adopted, classified and designated (a) one authorized but unissued share of Class A Convertible Preferred Stock, (b) 3,549,999 authorized but unissued shares of Capital Stock and (c) 14,286 authorized but unissued shares of Class B Preferred Stock as 3,564,286 shares (the "Shares") of Common Stock, with the preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of Common Stock generally set forth in the Charter. THIRD: After giving effect to the foregoing classification of the Shares, the Company is authorized to issue 47,010,000 shares of Common Stock and 2,990,000 shares of Series C Preferred Stock (as defined in the Charter). FOURTH: The Shares have been classified and designated by the Board of Directors under the authority contained in the Charter. FIFTH: These Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law. SIXTH: The undersigned Chairman and Chief Executive Officer acknowledges these Articles Supplementary to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned Chairman and Chief Executive Officer acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. [SIGNATURE PAGE FOLLOWS] 

 IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be signed in its name and on its behalf by its Chairman and Chief Executive Officer and attested by its Secretary on this 16th day of July, 2007. ATTEST: NOVASTAR FINANCIAL, INC. /s/ Jeffery D. Ayers By: /s/ Scott F. Hartman - ------------------------------ -------------------------------(SEAL) Jeffery D. Ayers Scott F. Hartman Secretary Chairman and Chief Executive Officer