Securities Purchase Agreement by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, and Jefferies Entities (July 16, 2007)

 EXHIBIT 10.1 - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT BY AND AMONG NOVASTAR FINANCIAL, INC., MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, JEFFERIES CAPITAL PARTNERS IV L.P., JEFFERIES EMPLOYEE PARTNERS IV LLC, AND JCP PARTNERS IV LLC DATED AS OF JULY 16, 2007 - -------------------------------------------------------------------------------- 

  TABLE OF CONTENTS ARTICLE I DEFINITIONS........................................................................2 SECTION 1.1. Definitions.......................................2 ARTICLE II ISSUANCE AND PURCHASE OF SERIES D-1 PREFERRED SHARES; RIGHTS OFFERING.............13 SECTION 2.1. Purchase of Series D-1 Preferred Shares..........13 SECTION 2.2. Closing..........................................13 SECTION 2.3. Deliveries.......................................13 SECTION 2.4. Restricted Shares and Options....................13 SECTION 2.5. Rights Offering..................................14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF NFI.............................................15 SECTION 3.1. Organization, Standing and Corporate Power.......15 SECTION 3.2. Capital Structure; Issuance of Shares............15 SECTION 3.3. Subsidiaries and Investments.....................17 SECTION 3.4. Authority........................................18 SECTION 3.5. Noncontravention; Consents.......................18 SECTION 3.6. SEC Reports; Financial Statements................20 SECTION 3.7. No Undisclosed Liabilities.......................21 SECTION 3.8. Absence of Certain Changes or Events.............21 SECTION 3.9. Employee Benefit Plans...........................21 SECTION 3.10. Taxes............................................23 SECTION 3.11. Compliance with Applicable Laws..................25 SECTION 3.12. Absence of Litigation............................26 SECTION 3.13. Lender and Servicer Qualifications...............26 SECTION 3.14. Warehouse Loans and Mortgage Loans...............27 SECTION 3.15. Loan Servicing Portfolio.........................28 SECTION 3.16. Contracts........................................30 SECTION 3.17. Insurance........................................32 SECTION 3.18. Intellectual Property............................32 SECTION 3.19. Interests in CDO; Operation of the CDO...........33 SECTION 3.20. Brokers..........................................34 SECTION 3.21. Board Approval...................................34 SECTION 3.22. Takeover Statute.................................35 SECTION 3.23. Properties; Absence of Liens.....................36 SECTION 3.24. Affiliate Transactions...........................36 -i- 

 SECTION 3.25. Opinions of Financial Advisor....................36 SECTION 3.26. Private Placement................................36 SECTION 3.27. Acknowledgment Regarding Investors' Purchase of NFI Securities...................................37 SECTION 3.28. Environmental Matters............................37 SECTION 3.29. Manipulation of Price............................38 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF INVESTORS.......................................38 SECTION 4.1. Organization, Standing and Corporate Power.......38 SECTION 4.2. Authority........................................38 SECTION 4.3. Noncontravention; Consents.......................39 SECTION 4.4. Litigation.......................................39 SECTION 4.5. Brokers..........................................40 SECTION 4.6. Available Funds..................................40 SECTION 4.7. No Public Sale or Distribution...................40 SECTION 4.8. Accredited Investor Status.......................40 SECTION 4.9. Restricted Securities............................40 SECTION 4.10. Ownership of Common Shares.......................41 SECTION 4.11. Excepted Holder Limit............................41 SECTION 4.12. No Additional Representations....................41 ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS.........................................41 SECTION 5.1. Conduct of Business of NFI.......................41 ARTICLE VI OTHER AGREEMENTS..................................................................43 SECTION 6.1. Access to Information; Confidentiality...........43 SECTION 6.2. Consents, Approvals and Filings..................44 SECTION 6.3. Public Announcements.............................45 SECTION 6.4. Further Assurances...............................45 SECTION 6.5. Notification of Certain Matters..................45 SECTION 6.6. Anti-Takeover Laws...............................46 SECTION 6.7. Shareholder Litigation...........................46 SECTION 6.8. Issuance of REIT Dividends; Availability of Common Shares for Conversion.....................46 SECTION 6.9. Restrictive Legend...............................47 SECTION 6.10. Listing Matters..................................48 SECTION 6.11. Reverse Stock Split..............................48 SECTION 6.12. Tax Matters......................................48 -ii- 

 SECTION 6.13. Filing of Series D-1 Articles Supplementary......49 SECTION 6.14. Charter Actions..................................49 SECTION 6.15. Shareholder Approval of Certain Provisions of the Articles Supplementary.......................49 ARTICLE VII CONDITIONS PRECEDENT..............................................................50 SECTION 7.1. Conditions to Each Party's Obligations...........50 SECTION 7.2. Conditions to Obligations of Investors...........50 SECTION 7.3. Conditions to Obligations of NFI.................53 ARTICLE VIII TERMINATION PRIOR TO CLOSING......................................................54 SECTION 8.1. Termination of Agreement.........................54 SECTION 8.2. Procedure Upon Termination and Consequences......54 ARTICLE IX INDEMNIFICATION...................................................................55 SECTION 9.1. Survival.........................................55 SECTION 9.2. Indemnification by NFI...........................55 SECTION 9.3. Indemnification by Investors.....................56 SECTION 9.4. Certain Limitations on Indemnification...........56 SECTION 9.5. Third Party Claim Procedures.....................57 SECTION 9.6. Independent Committee............................58 ARTICLE X GENERAL PROVISIONS................................................................58 SECTION 10.1. Fees and Expenses................................58 SECTION 10.2. Notices..........................................58 SECTION 10.3. Interpretation...................................60 SECTION 10.4. Entire Agreement; No Third Party Beneficiaries; No Other Representations.........................60 SECTION 10.5. Governing Law....................................60 SECTION 10.6. Assignment.......................................61 SECTION 10.7. Amendments.......................................61 SECTION 10.8. Enforcement......................................61 SECTION 10.9. Severability.....................................61 SECTION 10.10. Counterparts.....................................62 SECTION 10.11. Independent Nature of Investors' Obligations and Rights.......................................62 SECTION 10.12. Waiver of Jury Trial.............................62 -iii- 

 EXHIBIT A FORM OF ARTICLES SUPPLEMENTARY FOR SERIES D-2 PREFERRED SHARES EXHIBIT B KEY EMPLOYEES ANNEX I RESTRICTIVE LEGENDS -iv- 

 SECURITIES PURCHASE AGREEMENT, dated as of July 16, 2007 (this "Agreement"), by and among NovaStar Financial, Inc., a Maryland corporation ("NFI"), Massachusetts Mutual Life Insurance Company, a mutual life insurance company ("MassMutual"), Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC (collectively, "Jefferies" and, together with MassMutual, collectively, "Investors"). WHEREAS, NFI and Investors are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the United States Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 of Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act; WHEREAS, the Board of Directors of NFI has approved the authorization and issuance of 2,100,000 shares of 9.00% Series D-1 Mandatory Convertible Preferred Stock of NFI, par value $0.01 per share and liquidation preference of $25 per share plus any accrued but unpaid dividends (the "Series D-1 Preferred Shares"), which Series D-1 Preferred Shares shall have such voting powers, preferences and other special rights and the qualifications, limitations or restrictions as set forth in the Articles Supplementary for the 9.00% Series D-1 Mandatory Convertible Preferred Stock (the "Series D-1 Articles Supplementary"), and which Series D-1 Preferred Shares shall be convertible into shares of common stock of NFI, par value $0.01 per share (the "Common Shares"); WHEREAS, MassMutual wishes to purchase, and NFI wishes to sell, upon the terms and conditions stated in this Agreement, 1,050,000 Series D-1 Preferred Shares for an aggregate consideration of $24,412,500 (the "MassMutual Consideration"); WHEREAS, Jefferies wishes to purchase, and NFI wishes to sell, upon the terms and conditions stated in this Agreement, 1,050,000 Series D-1 Preferred Shares for an aggregate consideration of $24,412,500 (the "Jefferies Consideration"); WHEREAS, concurrently with the execution and delivery of this Agreement, the parties hereto shall execute and deliver a Registration Rights and Shareholders Agreement (the "Registration Rights and Shareholders Agreement"), pursuant to which NFI will agree to provide certain (i) registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities Laws with respect to the Common Shares into which Convertible Shares may be converted, and (ii) other rights powers, preferences and privileges to the holders of the Convertible Shares; WHEREAS, the Board of Directors of NFI has approved the distribution to holders of its Common Shares and holders of the Series D-1 Preferred Shares to be purchased by the Investors hereunder certain non-transferable rights to subscribe for and purchase, in connection with the rights offering described herein, certain shares of 9.00% Series D-2 Mandatory Convertible Preferred Stock of NFI, par value $0.01 per share and liquidation preference of $25 per share plus any accrued but unpaid dividends (the "Series D-2 Preferred Shares"), which Series D-2 Preferred Shares shall have such voting powers, preferences and other special rights and the qualifications, limitations or restrictions as set forth in the Articles 

 Supplementary for the 9.00% Series D-2 Mandatory Convertible Preferred Stock, which shall be in the form attached hereto as Exhibit A (the "Series D-2 Articles Supplementary" and, together with the Series D-1 Articles Supplementary, the "Articles Supplementary"); and WHEREAS, concurrently with the execution and delivery of this Agreement, NFI and the Investors shall execute and deliver a Standby Purchase Agreement (the "Standby Purchase Agreement"), providing, among other things, for the Investors, on the terms and subject to the conditions set forth therein, (i) to exercise the non-transferable subscription rights distributed to Investors in connection with such rights offering and subscribe for and purchase the Series D-2 Preferred Shares which are the subject of such subscription rights (but not to participate in the over-subscription option granted to other subscribing shareholders) and (ii) to purchase the Series D-2 Preferred Shares that are subject to similar subscription rights distributed to holders of Common Shares, to the extent such Series D-2 Preferred Shares are not otherwise subscribed for and purchased by holders of Common Shares pursuant to the exercise of such subscription rights. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Definitions. For purposes of this Agreement, the following terms shall have the respective meanings set forth below: "Affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person. The Affiliates of each Investor shall be deemed to include one or more funds under common management with such Investor and their respective limited partners, members and Affiliates. "Agency" means (a) any federal governmental authority or regulatory body and any subdivisions, agencies, instrumentalities, authorities or tribunals thereof, including HUD, the Federal Housing Administration, the Department of Veterans Affairs, the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation, or (b) the applicable State Agency. "Agreement" has the meaning set forth in the introductory paragraph. "Applicable Requirements" means and includes, as of the time of reference, with respect to the origination, brokering, servicing, insuring, purchase, sale or filing of claims in connection with Residential Mortgage Loans all of the following: (a) all contractual obligations of NFI and its Subsidiaries or any Originator including any contained in a Mortgage Loan Document or in a Mortgage Loan Sale Agreement; (b) requirements of applicable Laws binding upon NFI or any of its Subsidiaries or any Originator, including, without limitation, all applicable predatory and abusive lending laws, the federal Truth-in-Lending Act (as amended) and other federal and state consumer protection, usury, equal credit opportunity, disclosure and recording laws as then in -2- 

 effect and the Home Ownership and Equity Protection Act of 1994 as then in effect, and (c) all other applicable requirements, handbooks, manuals, policies, procedures and guidelines of NFI and its Subsidiaries and of each Governmental Authority having jurisdiction, and any Sponsor or Insurer that insured or purchased the Residential Mortgage Loans. "Articles Supplementary" has the meaning set forth in the recitals. "Bankruptcy Law" means Title 11 of the United States Code, as amended, and any similar federal or state law for the relief of debtors. "Business Day" means a day other than a day on which commercial banks in New York, New York are authorized or required by law to close. "CDO" means NovaStar ABS CDO I. "Charter" means the Articles of Amendment and Restatement of NFI, as amended and supplemented from time to time. "Closing" has the meaning set forth in Section 2.2. "Closing Date" has the meaning set forth in Section 2.2. "Code" means the United States Internal Revenue Code of 1986, as amended. "Collateral Manager" means NovaStar Asset Management Company. "Common Shares" has the meaning set forth in the recitals. "Confidentiality Agreement" means the confidentiality agreement entered into prior to the date hereof by MassMutual or its Affiliates and Jefferies or its Affiliates, respectively, with NFI in connection with the transactions contemplated hereby. For the avoidance of doubt, the term "Confidentiality Agreement" shall not include the confidentiality clause included in the summary of terms dated May 26, 2007 entered into by NFI with MassMutual or its Affiliates. "Contracts" has the meaning set forth in Section 3.16(b). "Convertible Shares" means the Series D-1 Preferred Shares and the Series D-2 Preferred Shares into which the Series D-1 Preferred Shares convert or which the Investors may purchase in the Rights Offering or otherwise pursuant to the Standby Purchase Agreement. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Data Room" means the electronic data room created by NFI and to which Investors have been given access in connection with the transactions contemplated by this Agreement. "Deferred Compensation Plan" means the NovaStar Mortgage, Inc. Deferred Compensation Plan. -3- 

 "Employee" means each individual who immediately prior to the Closing is employed by NFI or any Subsidiary of NFI. "Employee Benefit Plan" means any "employee benefit plan" (as defined in Section 3(3) of ERISA), whether or not subject to ERISA, and any other employee benefit plan, program, policy, arrangement or contract, whether written or oral, including without limitation, any pension, retirement, profit-sharing, thrift, savings, bonus plan, incentive, stock option or other equity or equity-based compensation, or deferred compensation arrangement, stock purchase, severance pay, retention, change of control, unemployment benefits, sick leave, vacation pay, salary continuation for disability, hospitalization, health or medical insurance, life insurance, fringe benefit, flexible spending account or scholarship program, maintained by NFI or any of its Subsidiaries, or to which NFI or any of its Subsidiaries is obligated to contribute, on behalf of current or former officers, directors, employees or consultants of NFI or any of its Subsidiaries. "Employment Agreement" has the meaning set forth in Section 3.9(a). "Enforceability Exceptions" means, with reference to the enforcement of the terms and provisions of this Agreement or any other Contract, that the enforcement thereof is or may be subject to the effect of (i) applicable bankruptcy, receivership, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer and other similar laws relating to or affecting the enforcement of the rights and remedies of creditors or parties to executory contracts generally; (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and the exercise of equitable powers by a court of competent jurisdiction; and (iii) applicable law or public policy limiting the enforcement of provisions providing for the indemnification of any person. "Environmental Law" means any Law relating to the environment, natural resources, or safety or health of human beings or other living organisms, including the manufacture, distribution in commerce and use or release of Hazardous Substances. "ERISA" means the United States Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Act Report" means each publicly available form, report, schedule, statement and other document filed with or furnished to the SEC by NFI pursuant to the Exchange Act prior to the date hereof (as such documents have since the time of their filing been amended prior to the date hereof). "Financial Services Authority" means any Governmental Entity that regulates Mortgage Banking or Insurance businesses conducted in any state in the United States of America or the District of Columbia. "Financial Services Consent" has the meaning set forth in Section 3.5(b). "GAAP" has the meaning set forth in Section 3.6(b). -4- 

 "GAAP December Balance Sheets" has the meaning set forth in Section 3.6(b). "Governmental Entity" has the meaning set forth in Section 3.5(b). "Hazardous Substances" means any pollutant, contaminant, hazardous substance, hazardous waste, medical waste, special waste, toxic substance, petroleum or petroleum-derived substance, waste or additive, radioactive material, or other compound, element, material or substance in any form whatsoever (including products) regulated, restricted or addressed by or under any applicable Environmental Law. "HSR Act" has the meaning set forth in Section 3.5(b). "HUD" means the United States Department of Housing and Urban Development. "Improvements" means all buildings, improvements and fixtures located on any Real Property, regardless of whether such buildings, improvements or fixtures are subject to reversion to the landlord or other third parties upon the expiration or termination of any lease or other agreement with respect to such Real Property. "Incentive Plans" means the NovaStar Financial, Inc. 1996 Executive and Non-Employee Director Stock Option Plan and the NovaStar Financial, Inc. 2004 Incentive Stock Plan. "Indemnified Party" has the meaning set forth in Section 9.5. "Indemnifying Party" has the meaning set forth in Section 9.5. "Insurance" means property insurance, life insurance, credit insurance and other types of insurance provided with respect to property or individuals located in any state in the United States of America or the District of Columbia. "Insurer" means a person who insures or guarantees all or any portion of the risk of loss on any Residential Mortgage Loan, including any provider of default insurance, standard hazard insurance, flood insurance, earthquake insurance or title insurance, with respect to any Residential Mortgage Loan or related Mortgaged Property. "Intellectual Property" means all intellectual property, including without limitation, patents, patent applications, trademarks, service marks, processes, formulae, technology, know-how and related improvements, trade names, copyrights, any copyrightable works (including software, code applications, databases, website content, documentation and related items), discoveries, domain names, logos, trade dress and other indicators, methodologies, inventions and other proprietary items and registrations of or applications for any of the foregoing. "Investment Company Act" means the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder. "Investor Disclosure Letters" has the meaning set forth in Article IV. "Investor Indemnitees" has the meaning set forth in Section 9.2. -5- 

 "Investor Material Adverse Effect" means, with respect to a particular Investor, any event, change, circumstance or effect that individually or in the aggregate (with other events, changes, circumstances or effects) is or is reasonably likely to be materially adverse to the ability of such Investor to consummate the transactions contemplated by this Agreement, the Registration Rights and Shareholders Agreement or the Standby Purchase Agreement. "Investors" has the meaning set forth in the introductory paragraph. "Jefferies" has the meaning set forth in the introductory paragraph. "Jefferies Cap" has the meaning set forth in Section 9.4(c). "Jefferies Consideration" has the meaning set forth in the recitals. "Jefferies Disclosure Letter" has the meaning set forth in Article IV. "Jefferies Indemnitees" has the meaning set forth in Section 9.2. "Jefferies Standby Consideration" means the aggregate amount of consideration paid by Jefferies (or any of its successors or permitted assigns) to NFI in connection with the purchase of any Series D-2 Preferred Shares (or any alternative security of NFI as contemplated by Section 21 of the Standby Purchase Agreement) by Jefferies (or any of its successors or permitted assigns) pursuant to the Standby Purchase Agreement. "Key Employee" means each of those employees of NFI listed in Exhibit B attached hereto. "Key Employee Letter Agreements" means the letter agreements entered into as of the date hereof by each of the Key Employees with the Investors and the Company. "Key Employment Agreements" means the existing Employment Agreements between NFI and each of the Key Employees. "Knowledge" means (i) with respect to NFI, the actual knowledge of those persons listed in Section 1.1(a) of the NFI Disclosure Letter and (ii) with respect to any Investor, the actual knowledge with respect to the applicable subject matter of the officers of such Investor with functional responsibility for the applicable subject matter. "Law" means any constitution, statute, law, code, administrative interpretation, regulation, rule, injunction, judgment, order, writ, decree, ordinance, directive judgment, policy, guideline or ruling of any Governmental Entity, including common law. "Lease" has the meaning set forth in Section 3.23(b). "Leased Real Property" has the meaning set forth in Section 3.23(a). -6- 

 "Liens" means any liens, pledges, charges, claims, security interests, options, mortgages, assignments, hypothecations, preferences, priorities, deposit arrangements, easements, options, proxies, voting trusts or other encumbrances of any nature whatsoever (statutory or otherwise). "Litigation" has the meaning set forth in Section 3.12. "Losses" has the meaning set forth in Section 9.2. "March 2007 GAAP Statements" has the meaning set forth in Section 3.6(b). "MassMutual" has the meaning set forth in the introductory paragraph. "MassMutual Cap" has the meaning set forth in Section 9.4(c). "MassMutual Consideration" has the meaning set forth in the recitals. "MassMutual Disclosure Letter" has the meaning set forth in Article IV. "MassMutual Indemnitees" has the meaning set forth in Section 9.2. "MassMutual Standby Consideration" means the aggregate amount of consideration paid by MassMutual (or any of its successors or permitted assigns) to NFI in connection with the purchase of any Series D-2 Preferred Shares (or any alternative security of NFI as contemplated by Section 21 of the Standby Purchase Agreement) by MassMutual (or any of its successors or permitted assigns) pursuant to the Standby Purchase Agreement. "Material Subsidiary" shall mean NovaStar Mortgage, Inc., Homeview Lending, Inc., NovaStar Home Mortgage, Inc. and NFI Holding Corporation. "MGCL" means the Maryland General Corporation Law. "Mortgage" means a mortgage, deed of trust or other security instrument that creates a Lien on Real Property. "Mortgage Banking" means making, buying, selling or servicing loans or extensions of credit secured by first and/or subordinate liens on real estate (or personal property that serves as a dwelling) located in any state in the United States of America or the District of Columbia. "Mortgage Loan" means any Residential Mortgage Loan, other than a Warehouse Loan, that was originated or purchased and subsequently sold by NFI or any of its Subsidiaries, as applicable, and that has not been repaid or refinanced. "Mortgage Loan Documents" means the documents relating to Residential Mortgage Loans required by Applicable Requirements to originate and service the Residential Mortgage Loans, whether on hard copy, microfiche or its equivalent or in electronic format and, to the extent required by Applicable Requirements, credit and closing packages and disclosures. -7- 

 "Mortgage Loan Sale Agreement" means an agreement (other than any Mortgage Loan Securitization Document) pursuant to which NFI or any of its Subsidiaries has sold or may sell mortgage loans to any third person. "Mortgage Loan Securitization Document" means any pooling and servicing agreement and any other related other document or agreement. "Mortgage Loan Servicing Agreement" means an agreement or agreements between NFI or any of its Subsidiaries on the one hand and any Sponsor on the other hand (other than a Mortgage Loan Securitization Document) setting forth the terms and conditions under which Residential Mortgage Loans are or are to be serviced or subserviced by NFI or any of its Subsidiaries. "Mortgage Loan Servicing Portfolio" means, in the aggregate, the Serviced Mortgage Loans. "Mortgage Note" means, with respect to a Residential Mortgage Loan, a promissory note or notes, or other evidence of indebtedness, with respect to such Residential Mortgage Loan secured by a Mortgage or Mortgages, together with any assignment, reinstatement, extension, endorsement or modification thereof. "Mortgaged Property" means the real property that secures a Mortgage Note and that is subject to a Mortgage. "Mortgagor" means the obligor(s) on a Mortgage Note or owners of a Mortgaged Property. "New York Court" has the meaning set forth in Section 10.8. "NFI" has the meaning set forth in the introductory paragraph. "NFI Disclosure Letter" has the meaning set forth in Article III. "NFI Indemnitees" has the meaning set forth in Section 9.3. "NFI Material Adverse Effect" means any event, change, circumstance or effect that individually or in the aggregate (with other events, changes, circumstances or effects) is or is reasonably likely to (A) be materially adverse to the ability of NFI to perform its obligations hereunder or under the other Transaction Documents, or (B) be materially adverse on the financial condition, assets, liabilities, business or results of operations of NFI and its Subsidiaries, taken as a whole, but shall exclude (only in the case of clause (B) above) any such event, change, circumstance or effect resulting from, relating to or arising out of (i) general economic or market conditions (including changes in interest rates), so long as such conditions do not have a disproportionate effect on NFI and its Subsidiaries, taken as a whole compared to other companies in the industries in which NFI and its Subsidiaries conduct their business; (ii) any occurrence or condition arising out of the negotiation and execution of this Agreement or under the other Transaction Documents, the consummation of the transactions contemplated hereby or thereby, or the public announcement thereof (including any occurrence or condition -8- 

 arising out of the identity of or facts relating to Investors); (iii) acts of war, armed hostilities, sabotage or terrorism, or any escalation or worsening of any such acts of war, armed hostilities, sabotage or terrorism threatened or underway as of the date of this Agreement; (iv) earthquakes, hurricanes, floods, or other natural disasters; (v) any action taken by NFI at the express written request of any of the Investors or with the express written consent of any of the Investors and (vi) any decrease in the market value or trading volume of the Common Shares of NFI on the NYSE or any failure by NFI or its Subsidiaries to meet any projections, estimates or budgets for any period prior to, on or after the date of this Agreement; provided, however, that this clause (vi) shall not exclude any underlying event, change, circumstance or effect that itself constitutes an NFI Material Adverse Effect that may have resulted in or contributed to such decrease in the market value or trading volume of the Common Shares of NFI on the NYSE or such failure by NFI or its Subsidiaries to meet any projections, estimates or budgets for any period prior to, on or after the date of this Agreement. "NYSE" has the meaning set forth in Section 3.5(b). "Options" means all stock options and other rights to purchase Common Shares heretofore granted under any stock option or similar plan of NFI. "Order" has the meaning set forth in Section 3.12. "Originator" means, with respect to any Residential Mortgage Loan, each entity or individual that (a) took the relevant Mortgagor's loan application, (b) processed the relevant Mortgagor's loan application or (c) closed and/or funded such Residential Mortgage Loan. "Outside Date" has the meaning set forth in Section 8.1(c). "Owned Intellectual Property" has the meaning set forth in Section 3.18(b). "Permits" has the meaning set forth in Section 3.11(a). "Permitted Liens" means (i) Liens for Taxes not yet delinquent, and Liens for Taxes being contested in good faith and for which there are reserves, if required, established on the financial statements of NFI in accordance with GAAP, consistently applied, (ii) Liens being contested in good faith by current administrative or judicial proceedings and for which a reserve has been established on the most recent consolidated balance sheet included in the SEC Filings filed prior to the date hereof, in accordance with GAAP, consistently applied, (iii) mechanics' and materialmen's Liens for construction in progress, and workmen's, repairmen's, warehousemen's and carriers' Liens arising in the ordinary course of business of NFI or any of its Subsidiaries for sums not yet due and payable, (iv) licenses of Intellectual Property of NFI or any of its Subsidiaries, (v) Liens that arise solely by virtue of this Agreement or any Transaction Document and (vi) other Liens on any asset that are not, individually or in the aggregate, material in amount and do not, individually or in the aggregate, detract from the value of such asset in any material respect or impair the existing use of such asset in any material respect. "person" means an individual, corporation, limited liability company, partnership, joint venture, association, trust, unincorporated organization or other entity. -9- 

 "Portfolio Agreements" means each administration agreement, advisory agreement, collateral administration agreement, hedge agreement (if any), indenture, collateral management agreement, offering document, escrow agreement, fiscal agent agreement, charter documents of each issuer, insurance agreement (if any) and all other agreements and documents related to the CDO. For the avoidance of doubt, Portfolio Agreements does not include any agreement or document relating to any investments owned by the CDO. "Preferred Shares" means each class or series of shares of preferred stock of NFI. "Proxy Statement" means the letter to Shareholders, notice of meeting, proxy statement and form of proxy, or the information statement, as the case may be, required to be distributed to the Shareholders in connection with any annual or special meeting of the Shareholders, including any schedules or exhibits required to be filed with the SEC in connection therewith. "Real Property" means any lot, parcel or tract of land in which any person has a property interest and any Improvements located thereon. "Registration Rights and Shareholders Agreement" has the meaning set forth in the recitals. "Regulation D" has the meaning set forth in the recitals. "REIT Dividend Record Date" has the meaning set forth in Section 6.8(a). "REIT Dividends" means the dividend by NFI of the Series E Preferred Shares to be issued to satisfy NFI's Section 856 Trust distribution requirements. "REO" means Real Property relating to any Residential Mortgage Loan upon which NFI or any of its Subsidiaries has foreclosed and which is being held for resale in the ordinary course of business. "Residential Mortgage Loan" means a loan evidenced by a Mortgage Note secured by a Mortgage, with respect to which the Mortgaged Property is a single parcel of real property with a detached single-family residence thereon, or a two- to four-family dwelling, a townhouse, or an individual condominium unit in a condominium, a cooperative unit, or an individual unit in a planned unit development. "Residual Interests Cash Flow Schedule" has the meaning set forth in Section 3.6(c). "Restraint" has the meaning set forth in Section 7.1(d). "Restricted Shares" means grants under the Incentive Plans of shares of restricted stock, which have performance-based or time-based vesting conditions. "Retained Interests" has the meaning set forth in Section 3.15(h). "Reverse Stock Split" has the meaning set forth in Section 3.21. -10- 

 "Reverse Stock Split Effective Date" has the meaning set forth in Section 6.11. "Rights" has the meaning set forth in Section 2.5(a). "Rights Offering" has the meaning set forth in Section 2.5(a). "Rights Offering Registration Statement" has the meaning set forth in Section 2.5(c). "Rights Record Date" has the meaning set forth in Section 2.5(b). "SEC" has the meaning set forth in the recitals. "SEC Filings" has the meaning set forth in Section 3.6(a). "Section 3-601" has the meaning set forth in Section 3.22(b). "Section 3-602" has the meaning set forth in Section 3.22(b). "Section 3-702" has the meaning set forth in Section 3.22(c). "Section 856 Trust" has the meaning set forth in Section 3.10(b). "Securities Act" has the meaning set forth in the recitals. "Securitization Trust" means a common law or statutory trust established as a special purpose vehicle for the purpose of securitizing Residential Mortgage Loans (or previously-issued securities themselves backed by Residential Mortgage Loans). "Series C Preferred Shares" means the shares of 8.90% Series C Cumulative Redeemable Preferred Stock, of NFI. "Series D-1 Articles Supplementary" has the meaning set forth in the recitals. "Series D-1 Preferred Shares" has the meaning set forth in the recitals. "Series D-2 Articles Supplementary" has the meaning set forth in the recitals. "Series D-2 Preferred Shares" has the meaning set forth in the recitals. "Series E Preferred Shares" means the 9% Series E Mandatory Convertible Preferred Stock of NFI, par value $0.01 per share, and having such other terms as are consistent with the provisions of Section 6.8(b) and Schedule 6.8(b). "Serviced Mortgage Loan" means any (a) Warehouse Loan or (b) Residential Mortgage Loan which is serviced by NFI or any of its Subsidiaries pursuant to any Mortgage Loan Securitization Document or any Mortgage Loan Servicing Agreement. "Shareholders" means the holders of the Common Shares. -11- 

 "Share Units" means units provided under the Incentive Plans representing the right to receive Common Shares. "Sponsor" means any person, including a Securitization Trust, who owns or holds Mortgage Loans, or servicing rights related thereto, sold by NFI or any of its Subsidiaries. "Standby Purchase Agreement" has the meaning set forth in the recitals. "State Agency" means any state agency or other entity with authority to regulate the activities of NFI or any of its Subsidiaries relating to the origination or servicing of Residential Mortgage Loans or to determine the investment or servicing requirements with regard to mortgage loan origination, purchasing, servicing, master servicing or certificate administration performed by NFI or any of its Subsidiaries. "Subsequent Filings" means any reports, schedules, forms, statements or other documents (including in each case, exhibits, amendments or supplements thereto and any other information incorporated by reference therein) filed with the SEC after the date of this Agreement, but prior to the Closing. "Subsidiary" of any person means another person 50% or more of the total combined voting power of all classes of capital stock or other voting interests of which, or 50% or more of the equity securities of which, is owned directly or indirectly by such first person. "Tape" has the meaning set forth in Section 3.14(h). "Tax Return" means any return, report, claim, certificate, form, statement, disclosure, declaration, election, information return, estimate or other document (including any related or supporting information attached and any amended materials provided with respect to any of the foregoing) supplied to, or filed with, a Governmental Entity with respect to Taxes. "Taxes" has the meaning set forth in Section 3.10. "Third Party Claim" has the meaning set forth in Section 9.5. "Transaction Documents" means this Agreement, the Articles Supplementary, the Registration Rights and Shareholders Agreement, the Standby Purchase Agreement and the Key Employee Letter Agreements. "Treasury Regulations" means the Treasury Regulations promulgated under the Code. "Warehouse Lender" means each lender to NFI or any of its Subsidiaries which provides financing secured by Residential Mortgage Loans or mortgage servicing rights relating thereto. "Warehouse Loan" means a Residential Mortgage Loan that is financed by NFI or any of its Subsidiaries, including Residential Mortgage Loans that are financed by a Warehouse Lender. "401(k) Plan" means the NovaStar Financial, Inc. 401(k) Plan. -12- 

 ARTICLE II ISSUANCE AND PURCHASE OF SERIES D-1 PREFERRED SHARES; RIGHTS OFFERING SECTION 2.1 Purchase of Series D-1 Preferred Shares. Subject to the satisfaction (or waiver) of the conditions set forth in Article VII below, at the Closing, (a) NFI shall issue and sell to MassMutual and MassMutual shall purchase from NFI 1,050,000 Series D-1 Preferred Shares in exchange for the MassMutual Consideration, free and clear of all Liens (other than restrictions under applicable federal, foreign and state securities Laws), and (b) NFI shall issue and sell to Jefferies and Jefferies shall purchase from NFI 1,050,000 Series D-1 Preferred Shares in exchange for the Jefferies Consideration, free and clear of all Liens (other than restrictions under applicable federal, foreign and state securities Laws). SECTION 2.2 Closing. Subject to the provisions of Article VII, the closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New York, 10019-6092, as soon as practicable but in no event later than 10:00 a.m., on the date that is three Business Days after the day on which the last of the conditions set forth in Article VII shall have been satisfied or waived by the parties, or at such other place, at such other time or on such other date as Investors and NFI may mutually agree. The date on which the Closing actually occurs is herein referred to as the "Closing Date". SECTION 2.3 Deliveries. At the Closing, (a) MassMutual shall pay to NFI cash in an amount equal to the MassMutual Consideration by wire transfer of immediately available funds to an account designated by NFI pursuant to wire instructions previously provided by NFI no later than at least two Business Days prior to the anticipated Closing Date and shall deliver to NFI such other certificates and counterparts to agreements required by it to be delivered pursuant to Section 7.3 hereof, (b) Jefferies shall pay to NFI cash in an amount equal to the Jefferies Consideration by wire transfer of immediately available funds to an account designated by NFI pursuant to wire instructions previously provided by NFI no later than at least two Business Days prior to the anticipated Closing Date and shall deliver to NFI such other certificates and counterparts to agreements required by it to be delivered pursuant to Section 7.3 hereof, and (c) NFI shall deliver to each Investor (i) a certificate or certificates (in definitive form) duly executed on behalf of NFI registered in the name of such Investor (or its designee) representing the number of Series D-1 Preferred Shares purchased by such Investor from NFI pursuant to this Agreement and (ii) such other certificates, opinions, counterparts to agreements, documents or instruments required by it to be delivered to such Investor pursuant to Section 7.2 hereof. Notwithstanding anything herein to the contrary, payment of both the MassMutual Consideration and the Jefferies Consideration shall be required for the Closing to occur. SECTION 2.4 Restricted Shares and Options. Prior to the Closing, the administrator of the Incentive Plans shall not exercise any discretion it may have under the Incentive Plans to accelerate or waive any restrictions with respect to any Restricted Shares, Options or other awards granted under the Incentive Plans. -13- 

 SECTION 2.5 Rights Offering. (a) The Board of Directors of NFI has approved the making by NFI of a rights offering (the "Rights Offering") in connection with which (i) holders of record of Common Shares and holders of record of Series D-1 Preferred Shares (including Investors), in each case as of the close of business on the Rights Record Date, shall be entitled to receive a distribution from NFI of non-transferable rights (the "Rights") to subscribe for and purchase from NFI certain Series D-2 Preferred Shares at a price of $25.00 per share and on such other terms and subject to such conditions as set forth in the Series D-2 Articles Supplementary attached hereto, (ii) subscribers (other than Investors) who exercise their Rights in full may over-subscribe for the shares offered in the Rights Offering which have not been subscribed for and purchased, (iii) no fractional subscription Rights or cash in lieu of fractional Rights will be issued and fractional subscription Rights will be rounded to the nearest whole number, (iv) the Rights Offering shall commence on or prior to the seventh Business Day after the effective date of the Rights Offering Registration Statement, and end on a Business Day that shall not be less than 20 Business Days thereafter, subject to extension in the sole discretion of the Board of Directors, provided, however, that other than as may be necessary to comply with the requirements and regulations of the NYSE, the SEC or other applicable Law such period shall not be more than 30 Business Days without the prior written consent of the Investors, (v) any Series D-2 Preferred Shares remaining unsubscribed for and purchased after conclusion of the Rights Offering will be subject to purchase by the Investors in accordance with the terms and provisions of the Standby Purchase Agreement and (vi) the aggregate amount raised by NFI pursuant to the Rights Offering shall be $101,175,000. (b) Following effectiveness of the Rights Offering Registration Statement, NFI shall take, or cause to be taken, all necessary corporate action to declare and establish a record date (the "Rights Record Date") for the determination of the holders of Common Shares of record and holders of Series D-1 Preferred Shares of record entitled to receive the distribution of Rights in the Rights Offering. The Rights Record Date shall be a date not earlier than the day following the Reverse Stock Split Effective Date. On or prior to the Rights Record Date, NFI shall file the Series D-2 Articles Supplementary with the State Department of Assessments and Taxation of Maryland. (c) As promptly as practicable following the Closing, but in any event not later than 45 days after the Closing, NFI shall file with the SEC a registration statement on Form S-3 (or other applicable form) for the registration under the Securities Act of the Rights and the underlying Series D-2 Preferred Shares and the Common Shares issuable upon conversion of such Series D-2 Preferred Shares (the "Rights Offering Registration Statement"). NFI will use its reasonable best efforts to (i) cause the Rights Offering Registration Statement to become effective under the Securities Act as promptly as possible, but in no event prior to the filing with the SEC of NFI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, and (ii) effectuate the Rights Offering in a manner consistent with the Rights Offering Registration Statement and NFI's agreements and obligations under the Standby Purchase Agreement. -14- 

 ARTICLE III REPRESENTATIONS AND WARRANTIES OF NFI Except as otherwise disclosed in the Exchange Act Reports (other than risk factor and similar cautionary disclosure contained in the Exchange Act Reports under the headings "Risk Factors" or "Forward-Looking Statements" or under any other similar heading) and in the corresponding section of the Disclosure Letter delivered by NFI in connection with the execution and delivery of this Agreement, regardless of whether such representation or warranty specifically refers to the NFI Disclosure Letter (the "NFI Disclosure Letter"), NFI hereby represents and warrants to Investors as follows: SECTION 3.1 Organization, Standing and Corporate Power. Except as set forth in Section 3.1 of the NFI Disclosure Letter, NFI and each of its Subsidiaries is a corporation duly incorporated (or, if not a corporation, duly organized), validly existing and in good standing under the laws of the jurisdiction in which it is incorporated (or, if not a corporation, in which it is organized) and has the requisite power and authority to own, lease and operate its properties and assets and to carry on in all material respects its business as now being conducted. Except as set forth in Section 3.1 of the NFI Disclosure Letter, NFI and each of its Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified (individually or in the aggregate) would not have an NFI Material Adverse Effect. NFI has made available to Investors in the Data Room complete and correct copies of the Charter and Bylaws of NFI and the equivalent organizational documents of each of its Material Subsidiaries, in each case, as amended and in full force and effect. SECTION 3.2 Capital Structure; Issuance of Shares. (a) The authorized stock of NFI consists solely of 50,000,000 shares of capital stock, of which 2,990,000 shares have been designated as Series C Preferred Shares. As of June 30, 2007, 37,879,640 Common Shares and, as of the date hereof, 2,990,000 Series C Preferred Shares are issued and outstanding, and no shares of any other class of capital stock of NFI are outstanding. No Common Shares have been reserved for issuance under the Incentive Plans, upon exercise of Options, Restricted Shares or Share Units, under NFI's Direct Stock Purchase and Dividend Reinvestment Plan or under any Sales Agreement with Cantor & Fitzgerald & Co. Except as set forth above, no shares of capital stock of NFI are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of NFI are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive or similar rights. (b) Section 3.2(b) of the NFI Disclosure Letter contains a true and complete schedule as of July 1, 2007, setting forth (as applicable) (i) the holder, number, exercise price, number of Common Shares for which it is exercisable, grant date, vesting date and expiration date, in each case of each outstanding Option, (ii) the holder, grant date, number and vesting schedule, in the case of each outstanding Restricted Share and (iii) the holder and number, in the case of each outstanding Share Unit. NFI has not issued any Options, Restricted Shares or Share Units between July 1, 2007 and the date hereof. Each of NFI's Options has been duly authorized -15- 

 and validly issued by NFI, in each case with such exercise prices and on such dates that are in compliance in all material respects with applicable Laws and in accordance with the terms of the Incentive Plans, and neither NFI nor any of its Subsidiaries has any reason to believe that the authorization and issuance of any of the Options was not in compliance with applicable Laws and in accordance with the terms of the Incentive Plans. (c) Except as set forth in Section 3.2(c) of the NFI Disclosure Letter, there are no preemptive or similar rights on the part of any holder of any class of securities of NFI. Other than the securities listed in Section 3.2(c) of the NFI Disclosure Letter, NFI does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the shareholders of NFI on any matter submitted to shareholders or a separate class of holders of capital stock. Except as set forth above and except for the securities listed in Section 3.2(b) or Section 3.2(c) of the NFI Disclosure Letter, there are not any options, warrants, restricted stock, restricted stock units, calls, rights, convertible or exchangeable securities, "phantom" stock rights, stock appreciation rights, stock-based performance units, commitments, contracts, arrangements or undertakings of any kind to which NFI is a party or by which it is bound (i) obligating NFI to issue, deliver, sell or transfer or repurchase, redeem or otherwise acquire, or cause to be issued, delivered, sold or transferred or repurchased, redeemed or otherwise acquired, any shares of the capital stock of NFI, any additional shares of capital stock of, or other equity interests in, or any security convertible or exercisable for or exchangeable into any capital stock of, or other equity interest in, NFI, (ii) obligating NFI to issue, grant, extend or enter into any such option, warrant, call, right, security, commitment, contract, arrangement or undertaking, or (iii) obligating NFI pursuant to any right of first offer, right of first negotiation, right of first refusal, co-sale or similar provisions. Except as provided for under the 401(k) Plan or the Deferred Compensation Plan, there are no outstanding contractual obligations of NFI to sell, repurchase, redeem or otherwise acquire or to register any shares of capital stock of, or other equity interests in, NFI. There are no proxies, voting trusts or other agreements or understandings to which NFI is a party or is bound with respect to the voting of the capital stock of, or other equity interests in, NFI. No Common Shares or Preferred Shares are held by any wholly owned Subsidiary of NFI. (d) As of the Closing, there will be 2,100,000 Series D-1 Preferred Shares authorized, 2,100,000 of which shall be issued and outstanding. As of the Reverse Stock Split Effective Date, there will be 2,100,000 Series D-1 Preferred Shares and 6,147,000 Series D-2 Preferred Shares authorized for issuance. The issuance, sale and delivery of the Series D-1 Preferred Shares in accordance with this Agreement, and the issuance and delivery of the Common Shares issuable upon conversion of the Series D-1 Preferred Shares, will be on or prior to the Closing, duly authorized by all necessary corporate action on the part of NFI, and provided effect is given to the conversion and availability of at least 600,000 Series D-1 Preferred Shares pursuant to the Series D-1 Articles Supplementary prior to the conversion of the remaining issued and outstanding Series D-1 Preferred Shares all such Common Shares will be duly reserved for issuance. As of the Reverse Stock Split Effective Date such percentage shall not be less than 125% of the maximum number of Common Shares that would be issuable upon conversion of both the Series D-1 Preferred Shares at such time and the Series D-2 Preferred Shares contemplated by the Series D-2 Articles Supplementary. The Series D-1 Preferred Shares when issued, sold and delivered against payment therefor in accordance with the provisions of -16- 

 this Agreement, and the Common Shares issuable upon conversion of the Series D-1 Preferred Shares, when issued upon such conversion, will be duly and validly issued, fully paid and nonassessable, free and clear of any Liens (other than restrictions under applicable United States federal and state securities Laws) with the holders being entitled to all rights accorded to a holder of Common Shares under Maryland law and the organizational documents of NFI. No person has any preemptive right or right of first refusal which would be triggered by reason of the issuance of the Series D-1 Preferred Shares or the Common Shares issuable upon conversion of the Series D-1 Preferred Shares. (e) As of the Reverse Stock Split Effective Date, the amendment of the Charter effecting the Reverse Stock Split shall be effective and the authorized share capital of NFI shall consist of 50,000,000 shares of capital stock, of which (i) 2,990,000 shares have been designated as Series C Preferred Shares, (ii) 2,100,000 shares shall be designated as Series D-1 Preferred Shares and (iii) 6,147,000 shares shall be designated as Series D-2 Preferred Shares. As of the Reverse Stock Split Effective Date (and assuming for purposes of this representation and warranty that, between the date hereof and the Reverse Stock Split Effective Date, no conversions of the Series D-1 Preferred Shares shall have occurred, no Options shall have been exercised and no Common Shares shall have been issued under NFI's Direct Stock Purchase and Dividend Reinvestment Plan, the Sales Agreement with Cantor Fitzgerald & Co. or in connection with NFI's Section 856 Trust distribution requirement), (A) approximately 37,879,000 Common Shares, 2,990,000 Series C Preferred Shares and 2,100,000 Series D-1 Preferred Shares will be issued and outstanding, and no shares of any other class of capital stock of NFI will be outstanding or reserved for issuance. SECTION 3.3 Subsidiaries and Investments. (a) Section 3.3 of the NFI Disclosure Letter lists each Subsidiary of NFI, and in each case, its capitalization and its jurisdiction of organization. NFI does not have any Subsidiaries (other than the Material Subsidiaries) that would constitute a "significant subsidiary" (as defined in Rule 1-02 of Regulation S-X). All the outstanding shares of capital stock of each Subsidiary of NFI have been validly issued and are fully paid and nonassessable (and no such shares are subject to preemptive or similar rights) and, except as set forth in Section 3.3 of the NFI Disclosure Letter, are wholly owned beneficially and as of record by NFI, by one or more Subsidiaries of NFI or by NFI and one or more such Subsidiaries, free and clear of all Liens. Except as disclosed in Section 3.3 of the NFI Disclosure Letter, neither NFI nor any of its Subsidiaries is a member of (nor is any part of their respective businesses conducted through) any partnership or joint venture. (b) Except as set forth in Section 3.3(b) of the NFI Disclosure Letter, there are no preemptive or similar rights on the part of any holder of any class of securities of any Material Subsidiary. Other than the securities listed in Section 3.3(b) of the NFI Disclosure Letter, none of the Material Subsidiaries have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the shareholders of any such Material Subsidiary on any matter submitted to shareholders or a separate class of holders of capital stock. Except as set forth above and except for the securities listed in Section 3.3(a) or Section 3.3(b) of the NFI Disclosure Letter, there are not any options, warrants, restricted stock, restricted stock units, -17- 

 calls, rights, convertible or exchangeable securities, "phantom" stock rights, stock appreciation rights, stock-based performance units, commitments, contracts, arrangements or undertakings of any kind to which any Material Subsidiary is a party or by which any Material Subsidiary is bound (i) obligating any Material Subsidiary to issue, deliver, sell or transfer or repurchase, redeem or otherwise acquire, or cause to be issued, delivered, sold or transferred or repurchased, redeemed or otherwise acquired, any shares of the capital stock of any Material Subsidiary, any additional shares of capital stock of, or other equity interests in, or any security convertible or exercisable for or exchangeable into any capital stock of, or other equity interest in, any material Subsidiary, (ii) obligating any Material Subsidiary to issue, grant, extend or enter into any such option, warrant, call, right, security, commitment, contract, arrangement or undertaking, or (iii) obligating any Material Subsidiary pursuant to any right of first offer, right of first negotiation, right of first refusal, co-sale or similar provisions. There are no outstanding contractual obligations of any Material Subsidiary to sell, repurchase, redeem or otherwise acquire or to register any shares of capital stock of, or other equity interests in, any Material Subsidiary. There are no proxies, voting trusts or other agreements or understandings to which any Material Subsidiary is a party or is bound with respect to the voting of the capital stock of, or other equity interests in, any Material Subsidiary. SECTION 3.4 Authority. NFI has the requisite corporate power and authority to enter into this Agreement and the other Transaction Documents and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated by this Agreement and the other Transaction Documents. The execution, delivery and performance of this Agreement and the other Transaction Documents by NFI and the consummation by NFI of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of NFI. This Agreement has been and at the Closing, the Registration Rights and Shareholders Agreement, the Standby Purchase Agreement and the Series D-1 Articles Supplementary will be, duly executed and delivered by NFI and, assuming due authorization, execution and delivery of this Agreement, the Registration Rights and Shareholders Agreement and the Standby Purchase Agreement by Investors, constitute or will constitute, as the case may be, valid and binding obligations of NFI, enforceable against NFI in accordance with their respective terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. NFI will have at the Closing all requisite corporate power to effectuate the Reverse Stock Split and to issue and sell the Series D-1 Preferred Shares to Investors, and provided effect is given to the conversion and availability of at least 600,000 Series D-1 Preferred Shares pursuant to the Series D-1 Articles Supplementary prior to the conversion of the remaining issued and outstanding Series D-1 Preferred Shares, to issue the Common Shares issuable upon conversion of the Series D-1 Preferred Shares. NFI will have at the Reverse Stock Split Effective Date all requisite corporate power to issue and sell the Series D-2 Preferred Shares and to issue Common Shares issuable upon conversion of the Series D-2 Preferred Shares. SECTION 3.5 Noncontravention; Consents. -18- 

 (a) Except as set forth in Section 3.5(a) of the NFI Disclosure Letter, the execution and delivery of this Agreement and the other Transaction Documents by NFI do not, and the consummation of the transactions contemplated by this Agreement and the other Transaction Documents including, without limitation, (x) the issuance of the Series D-1 Preferred Shares or the issuance of Common Shares upon conversion of the Series D-1 Preferred Shares and (y) the issuance of the Series D-2 Preferred Shares in connection with the Rights Offering or the issuance of Common Shares upon conversion of the Series D-2 Preferred Shares will not, (i) subject to the completion of the Reverse Stock Split and giving effect to any securities being converted, conflict with any of the provisions of the Charter or Bylaws of NFI or the comparable organizational documents of any of its Material Subsidiaries, (ii) subject to the matters referred to in Section 3.5(b), conflict with, result in any violation or breach of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to the loss of a material benefit under any loan, guarantee of indebtedness or credit agreement, note, bond, mortgage, indenture, lease, agreement, contract, instrument, permit, concession, franchise, right or license binding upon NFI or any of its Material Subsidiaries, or result in the creation of any Lien on any property or asset of NFI or any of its Material Subsidiaries or (iii) subject to the matters referred to in Section 3.5(b), contravene or conflict with in any material respect or constitute a material violation of any provision of any Law binding upon or applicable to NFI or any of its Material Subsidiaries or any of their respective properties or assets, which, in the case of clause (ii), would have an NFI Material Adverse Effect. (b) No consent, approval or authorization of, or declaration or filing with, or notice to, any court, administrative agency or commission or other governmental or regulatory authority or agency, political subdivision, instrumentality or any securities exchange, in any jurisdiction (a "Governmental Entity"), and, except as would not have an NFI Material Adverse Effect, no consent, approval or authorization of any third party, is required by or with respect to NFI, any of its Subsidiaries or any Investor in connection with the execution, delivery and performance of this Agreement or the other Transaction Documents or the consummation by NFI or Investors of the transactions contemplated hereby or thereby, including, without limitation, (x) the issuance of the Series D-1 Preferred Shares and the issuance of Common Shares upon conversion of the Series D-1 Preferred Shares and (y) the issuance of the Series D-2 Preferred Shares in connection with the Rights Offering or the issuance of Common Shares upon conversion of the Series D-2 Preferred Shares, except for (i) the filing of premerger notification and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) consents, approvals, authorizations, declarations, filings or notices to any Financial Services Authority (each, a "Financial Services Consent") by NFI, any of its Affiliates or any of the Investors as are set forth in Section 3.5(b) of the NFI Disclosure Letter or are needed by Investors solely as a result of facts or circumstances specific to any Investor, (iii) the filing of any listing applications or supplemental listing applications with The New York Stock Exchange ("NYSE"), (iv) the filing of the Articles Supplementary with the State Department of Assessments and Taxation of Maryland, (v) the filing of registration statements with the SEC as contemplated by the Transaction Documents and (vi) such other consents, approvals, authorizations, declarations, filings or notices as are set forth in Section 3.5(b) of the NFI Disclosure Letter. The Financial Services Consents set forth in Section 3.5(b) of the NFI Disclosure Letter are based upon the following assumptions: (1) upon Closing each Investor will own, together with any Common Shares or Preferred Shares owned by an Affiliate of such -19- 

 Investor or any entity over which such Investor has or exerts control, less than 10% of the outstanding voting stock of NFI, including any Common Shares or Preferred Shares currently owned or acquired before Closing by such Investor; and (2) each Investor will independently vote its Common Shares or Preferred Shares and shall not, pursuant to any formal or informal agreement, oral or written, agree to vote such Common Shares or Preferred Shares in concert. SECTION 3.6 SEC Reports; Financial Statements. (a) Since January 1, 2005, NFI has filed all forms, reports, schedules, statements and other documents (including exhibits thereto) with the SEC relating to periods commencing on or after such date required to be filed by it pursuant to the United States federal securities laws and the SEC rules and regulations promulgated thereunder (such forms, reports, schedules, statements and other documents, in each case, as amended, supplemented or superseded, together with any documents filed during such period by NFI with the SEC on a voluntary basis on Form 8-K, in each case, together with any other information incorporated therein, being hereinafter referred to as the "SEC Filings"), and, as of their respective dates, each of the SEC Filings complied, and each of the Subsequent Filings will comply, in all material respects with all applicable requirements of the United States federal securities laws and the rules and regulations promulgated thereunder, and do not contain, and in the case of any Subsequent Filings, will not contain, in each case after taking into account all prior SEC Filings of NFI at the time of such filing, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as set forth in Section 3.6(a) of the NFI Disclosure Letter, none of the Subsidiaries of NFI is, or at any time since January 1, 2005 has been, required to file any form or report with the SEC. (b) NFI has made available to Investors true and complete copies of (i) the audited consolidated balance sheets of NFI and its Subsidiaries as of December 31, 2006, 2005 and 2004 (collectively, the "GAAP December Balance Sheets") and, in each case, the related consolidated (if applicable) statements of income, shareholders' equity and cash flows for the years then ended, together with the notes to such financial statements, and (ii) the unaudited consolidated balance sheet of NFI and its Subsidiaries as of March 31, 2007 and the related consolidated statements of income, shareholders' equity and cash flows for the three months then ended, together with the notes to such financial statements (collectively, the "March 2007 GAAP Statements"). Except as set forth in the notes thereto and except as otherwise permitted by the requirements applicable to the preparation of Quarterly Reports on Form 10-Q under the Exchange Act, the GAAP December Balance Sheets and March 2007 GAAP Statements were prepared, and any financial statements contained in any Subsequent Filing will be prepared, in accordance with U.S. generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods presented, fairly present, or will fairly present, as the case may be, the consolidated financial position of NFI and its consolidated Subsidiaries, as of the dates thereof and the consolidated (if applicable) results of their respective operations and cash flows for the periods then ended in conformity with GAAP applied on a consistent basis during the periods presented (subject, in the case of the March 2007 GAAP Statements, to normal year-end adjustments) and comply as to form, or will comply as to form, with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Since January 1, 2005, there has been no material change in NFI's accounting methods or principles -20- 

 that would be required to be disclosed in NFI's financial statements in accordance with GAAP, except as described in the notes to such NFI financial statements. (c) Section 3.6(c) of the NFI Disclosure Letter sets forth a true and complete schedule of NFI's expected cash flows from residual interests, which schedule has been previously provided to Investors (the "Residual Interests Cash Flow Schedule"). The Residual Interests Cash Flow Schedule was prepared in good faith based on reasonable assumptions. SECTION 3.7 No Undisclosed Liabilities. There are no liabilities or obligations of NFI or any of its Subsidiaries of a kind required to be disclosed on a balance sheet under GAAP or in the notes thereto other than (i) liabilities and obligations reflected or disclosed in the March 2007 GAAP Statements, in accordance with GAAP consistently applied, and (ii) liabilities or obligations incurred in the ordinary course of business consistent with past practice since March 31, 2007, other than, in the case of this clause (ii), those that would not reasonably be expected to have, individually or in the aggregate, an NFI Material Adverse Effect. SECTION 3.8 Absence of Certain Changes or Events. Since December 31, 2006, except as disclosed in the Exchange Act Reports and except as set forth in Section 3.8 of the NFI Disclosure Letter, (a) NFI and its Subsidiaries have carried on and operated their respective businesses in the ordinary course of business consistent with past practices and (b) there has not occurred (i) any event or change having an NFI Material Adverse Effect, (ii) any declaration, setting aside or payment of any dividend or other actual, constructive or deemed distribution (whether in cash, stock or property) with respect to any of NFI's outstanding capital stock (other than (x) dividends on the Series C Preferred Shares declared and paid in accordance with the terms thereof, (y) dividend payments on the Common Shares necessary to satisfy NFI's Section 856 Trust distribution requirement, as applicable, and (z) dividend equivalents paid with respect to awards under the Incentive Plans) or (iii) any action taken by NFI or any of its Subsidiaries through the date hereof that, if taken during the period from the date hereof through the Closing Date, would constitute a breach of Section 5.1. SECTION 3.9 Employee Benefit Plans. (a) Each material Employee Benefit Plan and each material employment, consulting, termination and severance contract for active, retired or former employees or directors of NFI and its Subsidiaries currently in effect or pursuant to which NFI or any of its Subsidiaries has ongoing obligations (each such contract and agreement, an "Employment Agreement") is listed in Section 3.9(a) of the NFI Disclosure Letter. With respect to each Employment Agreement, NFI and, to the Knowledge of NFI, each of the other parties thereto have taken such action as is necessary to waive any applicable "change of control" provisions set forth in any such Employment Agreement with respect to the transactions contemplated by this Agreement and the other Transaction Documents. NFI has delivered or made available to Investors and their counsel true and complete copies of all material documents in connection with each Employee Benefit Plan and each Employment Agreement, including, where applicable, (i) all Employee Benefit Plans and Employment Agreements as in effect on the date hereof, together with all amendments thereto, including, in the case of any Employee Benefit Plan or Employment Agreement not set forth in writing, a written description thereof; (ii) all -21- 

 current summary plan descriptions, summaries of material modifications, and material communications; (iii) all current trust agreements and all amendments thereto; (iv) the most recent Internal Revenue Service determination letter, if any, obtained with respect to each Employee Benefit Plan intended to be qualified under Section 401(a) of the Code or exempt under Section 501(a) or 501(c)(9) of the Code; and (v) the annual report on Internal Revenue Service Form 5500 for the last year for each Employee Benefit Plan required to file such form. (b) Each Employee Benefit Plan (including any related trust) is in compliance in all material respects with all applicable Laws and has been administered and operated in all material respects in accordance with its terms. (c) Each Employee Benefit Plan which is intended to be qualified within the meaning of Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service or is entitled to rely on a favorable opinion letter issued by the Internal Revenue Service and, to the Knowledge of NFI, no event has occurred and no condition exists since the date of such determination or opinion letter or letters to adversely affect the qualified status of any such Employee Benefit Plan or the exempt status of any such trust. (d) Full payment has been made of all amounts which NFI and its Subsidiaries were required under the terms of the Employee Benefit Plans to have paid as contributions to such Employee Benefit Plans on or prior to the date hereof (excluding any amounts not yet due) and all amounts not yet due but required to be accrued on NFI's or any of its Subsidiaries' financial statements have been properly accrued. (e) Neither NFI nor any ERISA Affiliate sponsors or has sponsored in the past six years, or has any liability with respect to, any benefit plan that is subject to Title IV of ERISA or Section 412 of the Code or that is a multiple employer welfare benefit arrangement (as defined in Section 3(40)(A) of ERISA). For purposes of this Section 3.9(e), an entity is an "ERISA Affiliate" of NFI if it would have ever been considered a single employer with NFI under 4001(b) of ERISA or part of the same controlled group as NFI for purposes of Section 302(d)(3) of ERISA. (f) Neither NFI nor any of its Subsidiaries or, to the Knowledge of NFI, any other "disqualified person" or "party in interest" (as defined in Section 4975(e)(2) of the Code and Section 3(14) of ERISA, respectively), has engaged in any transaction in connection with any Employee Benefit Plan that could reasonably be expected to result in the imposition of a material penalty pursuant to Section 502(i) or (l) of ERISA or a material tax pursuant to Section 4975 of the Code. (g) Neither NFI nor any of its Subsidiaries has maintained any Employee Benefit Plan which provides continuation of welfare benefits (including medical and life insurance benefits) following a director's, officer's, employee's or consultant's termination of service with NFI or any of its Subsidiaries (other than as required pursuant to Part 6 of Title I of ERISA or similar state law). Each Employee Benefit Plan subject to the requirements of Part 6 of Title I of ERISA or similar state law has been operated in material compliance therewith. -22- 

 (h) Except as required to comply with applicable Law, neither NFI nor any of its Subsidiaries has any commitment, or stated any intention, to create, materially modify or terminate any Employee Benefit Plan. Neither NFI nor any of its Subsidiaries has caused any condition or circumstance that could reasonably be expected to result in a material increase in benefits under or expense of maintaining any Employee Benefit Plan for the level of benefits or expense incurred for the most recent fiscal year ended thereof. (i) Except as set forth in Section 3.9(i) of the NFI Disclosure Letter, the execution of this Agreement and the consummation of the transactions contemplated hereby do not and will not constitute a triggering event under any Employee Benefit Plan, Employment Agreement or otherwise that (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment (whether of severance pay or otherwise), acceleration, vesting or increase in benefit to any current or former director, officer, employee or consultant of NFI or any of its Subsidiaries. Except as set forth in Section 3.9(i) of the NFI Disclosure Letter, the consummation of the transactions contemplated by this Agreement will not (either alone or upon the occurrence of any additional or subsequent event) result in any payment that would constitute an "excess parachute payment" for purposes of Sections 280G or 4999 of the Code. (j) Neither NFI nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor agreement. NFI and its Subsidiaries have been and are being operated in all material respects in compliance with all Laws in any jurisdiction relating to employees and employment practices, including employment standards, workplace safety and insurance and occupational health and safety, workers' compensation, human rights, labor relations or pay equity. There are no pending or outstanding material written claims or complaints, assessments, actions, causes of action, claims, complaints, demands, orders, prosecutions or suits nor, to the Knowledge of NFI, are there any threatened or anticipated claims or complaints, against NFI, any of its Subsidiaries or any of its directors, officers or agents in relation to any Laws in any jurisdiction relating to Employee Benefit Plans or employees, including employment standards, human rights, labor relations, occupational health and safety, workers' compensation or pay equity, except in any case for routine claims for benefits or employee grievances (none of which individually, or in the aggregate, are material or would reasonably be expected to be material to NFI or any of its Subsidiaries). There are no outstanding Orders, settlements or pending settlements that impose any material restriction upon NFI or any of its Subsidiaries in respect of their employees. SECTION 3.10 Taxes. (a) All material Tax Returns required to be filed on or before the Closing Date (after taking into account all applicable extensions to file) with respect to NFI and each of its Subsidiaries have been filed; (ii) all Taxes reported on such returns and reports or otherwise due and payable by NFI or any of its Subsidiaries have been or will be timely paid, withheld or adequately provided for the extent required by and in accordance with GAAP except to the extent any such Taxes are being contested in good-faith by current administrative or judicial proceedings; (iii) all such Tax Returns were true, correct and complete when filed; (iv) no material audit or other administrative proceeding or court proceeding in any jurisdiction exists, has been initiated or has been threatened in writing with regard to Taxes or Tax Returns of NFI or any of its Subsidiaries that have not been finally resolved; (v) neither NFI nor any of its -23- 

 Subsidiaries is a party to or bound by any Tax sharing or similar agreement other than such an agreement exclusively between or among NFI and its Subsidiaries; (vi) to the Knowledge of NFI, neither NFI nor any of its Subsidiaries has entered into any transaction that has been identified as a "listed transaction" as defined in Treasury Regulation §1.6011-4(b)(2) by the Internal Revenue Service pursuant to published guidance; (vii) neither NFI nor any of its Subsidiaries has granted any extension or waiver of the limitation period in respect of any Taxes or any Tax Returns which waiver or extension is currently still in effect in a material jurisdiction; and (viii) neither NFI nor any of its Subsidiaries has been a member of a group filing a consolidated federal income Tax return or a consolidated, combined or unitary state Tax return (other than a group the common parent of which was NFI or a Subsidiary of NFI) or has any liability for the Taxes of any person (other than an Affiliate of NFI) under Treasury Regulation §1.1502-6 (or any similar provision of state, local, or foreign Law) or as a transferee. (b) NFI, (i) for all taxable years commencing with its taxable year ending December 31, 1996 through December 31, 2006, has been subject to taxation as a real estate investment trust (a "Section 856 Trust") within the meaning of Sections 856 through 860 of the Code and has been organized and operated in conformity with the requirements for qualification and taxation as a Section 856 Trust for such years, (ii) has operated since December 31, 2006 to the date hereof in a manner that will permit it to qualify as a Section 856 Trust for the taxable year that includes the date hereof, (iii) intends to issue the REIT Dividends in sufficient value so as to meet NFI's 2006 Section 856 Trust distribution requirement and avoid Section 857(b) Taxes for NFI's 2006 taxable year; and (iv) intends to continue to operate in such a manner as to permit it to continue to qualify as a Section 856 Trust for the 2007 taxable year. NFI has not received any written notice that a challenge to its status as a Section 856 Trust is pending or threatened. (c) Neither NFI nor any of its Subsidiaries has held or currently holds, or is the successor to, any other entity that has filed, or intends to file, an election to be taxed as a Section 856 Trust. NFI does not hold any asset the disposition of which would be subject to rules similar to Section 1374 of the Code. NFI does not hold any interest in any entity other than a corporation that qualifies as a "qualified REIT subsidiary" within the meaning of Section 856(i) of the Code or a "taxable REIT subsidiary" within the meaning of Section 856(l) of the Code. (d) NFI has not incurred any material liability for Taxes under sections 857(b), 860(c) or 4981 of the Code which have not been previously paid. To the Knowledge of NFI, NFI has not engaged at any time in any "prohibited transactions" within the meaning of Section 857(b)(6) of the Code that have resulted in a material "prohibited transactions tax". To the Knowledge of NFI, no event has occurred, and no condition or circumstance exists, which presents a material risk that any Tax described in the preceding sentences will be imposed on NFI. (e) Other than the Retained Interests, (i) NFI neither owns nor is deemed to own any interest (other than a debt instrument rated BBB- or greater) in a taxable mortgage pool under Section 7701(i) of the Code, (ii) NFI has never earned any "excess inclusion" income within the meaning of Section 860E or Section 7701(i) of the Code and (iii) NFI does not hold any asset which could generate any "excess inclusion income" within the meaning of Section -24- 

 860E or Section 7701(i) of the Code. NFI and its Subsidiaries were required to recognize excess inclusion income within the meaning of Section 860E and Section 7701(i) of the Code of no more than $15,000,000 for the 2006 taxable year. (f) The CDO is a wholly owned indirect subsidiary of an entity that has filed an election to be a "taxable REIT subsidiary" of NFI. (g) The deferred tax asset balances for NFI and each Subsidiary of NFI as of March 31, 2007 are not less than the amounts set forth on the March 2007 GAAP Statements. The net deferred tax asset balances of NFI and its Subsidiaries as presented on the March 2007 GAAP Statements are materially accurate. (h) If NFI ceases to qualify as a Section 856 Trust under the Code, such Section 856 Trust disqualification will not cause any event of default, including without limitation, with respect to any Retained Interest. (i) Neither NFI nor any entity owned or controlled by NFI or in which NFI is treated as a partner for U.S. federal income tax purposes has any tenants (as such term is used for purposes of Section 856(d) of the Code) that are partnerships, corporations, trusts or other juridical entities, and neither NFI nor any entity owned or controlled by NFI or in which NFI is treated as a partner for U.S. federal income tax purposes derives any rents or other income from tenants (as each such term is used for purposes of Section 856(d) of the Code) that are partnerships, corporations, trusts or other juridical entities. (j) No existing stockholder of NFI is an "Excepted Holder" (as such term is defined in Section 11.1 of the Charter). As used in this Agreement, "Taxes" shall include all income, property, sales, excise, employment, payroll, withholding and other taxes, tariffs or governmental charges of any nature whatsoever imposed by any Governmental Entity (together with any interest or penalty, addition to Tax or additional amount imposed with respect thereto). SECTION 3.11 Compliance with Applicable Laws. (a) NFI and each of its Subsidiaries are in possession of and has in full force and effect all material approvals, authorizations, consents, franchises, licenses, permits, easements, variances, exceptions, certificates and rights required by any Governmental Entity (collectively, "Permits") necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, and no non-renewal, suspension, cancellation or materially adverse modification of any of the Permits is pending or, to the Knowledge of NFI, threatened. There has occurred no violation of, default (with or without the lapse of time or the giving of notice, or both) under, or event giving to others any right of termination, amendment or cancellation of, with or without notice or lapse of time or both, any such Permit, except as would not be material to NFI and its Subsidiaries taken as a whole. NFI and its Subsidiaries are, and since January 1, 2005, each of them has been, in compliance in all material respects with all applicable Laws, other than any such noncompliance which has not impaired or would not reasonably be expected to impair the conduct or operation of the business of NFI or any of its Subsidiaries, or has not resulted in, or would not reasonably be expected to result in, the payment -25- 

 of fines or the incurrence of expenses or other costs to NFI or any of its Subsidiaries in excess of $50,000 individually, or $200,000 in the aggregate. (b) Neither NFI nor any of its Subsidiaries has received written notice (or to the Knowledge of NFI, other notice) from any Governmental Entity of a violation of applicable Law in connection with the origination of any Warehouse Loan or Mortgage Loan or the servicing of any portion of the Mortgage Loan Servicing Portfolio, other than any such violations which have not impaired or would not reasonably be expected to impair the conduct or operation of the business of NFI or any of its Subsidiaries, or have not resulted in, or would not reasonably be expected to result in, the payment of fines or the incurrence of expenses or other costs to NFI or any of its Subsidiaries in excess of $50,000 individually, or $200,000 in the aggregate. SECTION 3.12 Absence of Litigation. Except as set forth in Section 3.12 of the NFI Disclosure Letter, there is no suit, action, litigation, claim, investigation, inquiry, hearing, petition, grievance, complaint, controversy, proceeding or arbitration (collectively, "Litigation") pending or, to the Knowledge of NFI, threatened against NFI or any of its Subsidiaries or Affiliates (and, to the Knowledge of NFI, there are no facts or circumstances that are reasonably expected to result in any such Litigation) that (i) seeks to restrain or enjoin the consummation of any of the transactions contemplated by this Agreement or (ii) would have an NFI Material Adverse Effect, nor is there any judgment, decree, injunction, ruling, notice, declaration, writ or arbitration award or other award (or agreement entered into in any administrative, judicial or arbitration proceeding with any Governmental Entity) or order of any Governmental Entity or arbitrator (each, an "Order") outstanding against NFI or any of its Subsidiaries that would have an NFI Material Adverse Effect. Except for customary ongoing audits, examinations, investigations and due diligence reviews, neither NFI nor any of its Subsidiaries has received written notice (or to the Knowledge of NFI any other notice) that any audit or investigation by a Governmental Entity, a Sponsor or an Insurer with respect to any Warehouse Loan or Mortgage Loan or with respect to the servicing of any portion of the Mortgage Loan Servicing Portfolio is pending and, to the Knowledge of NFI, no such audit or investigation is threatened. SECTION 3.13 Lender and Servicer Qualifications. NFI and each of its Subsidiaries has been and is in compliance in all material respects with all Applicable Requirements applicable to it, its assets and its conduct of business, other than any such noncompliance which has not impaired or would not reasonably be expected to impair the conduct or operation of the business of NFI or any of its Subsidiaries, or has not resulted in, or would not reasonably be expected to result in, the payment of fines or the incurrence of expenses or other costs to NFI or any of its Subsidiaries in excess of $50,000 individually, or $200,000 in the aggregate. NFI and each of its Subsidiaries has timely filed, or will have timely filed by the Closing Date, all material reports that any Sponsor, Governmental Entity or Insurer or any Applicable Requirements. To the Knowledge of NFI, neither NFI nor any of its Subsidiaries has done or caused to be done, or has failed to do or omitted to be done, any act, the effect of which would operate to invalidate or materially impair (i) any private mortgage insurance or commitment of any private mortgage Insurer to insure, (ii) any title insurance policy, (iii) any hazard insurance policy, (iv) any flood insurance policy, (v) any fidelity bond, direct surety bond, or errors and omissions insurance policy required by private mortgage insurers, (vi) any surety or guaranty agreement, or (vii) any Permits necessary for the operation of the business -26- 

 except for such invalidations or impairments as would not reasonably be expected to have an NFI Material Adverse Effect. No Agency, Sponsor or Insurer has claimed that NFI or any of its Subsidiaries has violated or has not complied with the applicable underwriting standards with respect to the Mortgage Loans sold by NFI or any of its Subsidiaries to a Sponsor or Agency, or with respect to any sale of mortgage servicing rights to a Sponsor; except as would not reasonably be expected to have an NFI Material Adverse Effect. SECTION 3.14 Warehouse Loans and Mortgage Loans. (a) Except as would not reasonably be expected to have an NFI Material Adverse Effect, each Warehouse Loan (i) is eligible for sale to, and insurance by, or pooling to collateralize securities issued or guaranteed by, a Sponsor, Agency or Insurer and (ii) is evidenced by a Mortgage Note with such terms as are customary in the industry in which NFI and its Subsidiaries operate, is duly secured by a Mortgage with such terms as are customary in the industry in which NFI and its Subsidiaries operate and which grants the holder thereof either a first lien on the subject property (including any Improvements thereon) with respect to Warehouse Loans originated as first Mortgages, and with respect to Warehouse Loans originated as second Mortgages, a second priority lien on the subject property, and which constitutes a security interest that has been duly perfected and maintained (or is in the process of perfection in due course) and is in full force and effect and is insured by a title policy issued by a company or covered by an attorney's opinion as to title, in either case acceptable to the applicable Agency or sponsor to the extent required by the applicable Agency or sponsor, and, is covered by a policy of private mortgage insurance, if required by the terms of any contract or any applicable Law. (b) With respect to each Mortgage Loan previously sold to a Sponsor, and except as set forth in Section 3.14(a) of the NFI Disclosure Letter or as would not reasonably be expected to have an NFI Material Adverse Effect as of the date NFI or any of its Subsidiaries sold such Mortgage Loan, the Mortgage Loan was eligible for sale to, and insurance by, or pooling to collateralize securities issued or guaranteed by, the applicable Sponsor, Agency or Insurer. (c) With respect to each Warehouse Loan, and except as would not reasonably be expected to have an NFI Material Adverse Effect, to the Knowledge of NFI such Warehouse Loan is the genuine, valid and legally binding obligation of the Mortgagor thereunder, has been duly executed by a Mortgagor of legal capacity, is enforceable in accordance with its respective terms, and is not subject to any right of rescission, set off, counterclaim or defense, subject to (i) the Enforceability Exceptions, (ii) applicable Laws requiring creditors to proceed against the collateral before pursuing the borrower and (iii) applicable Laws on deficiencies. (d) With respect to each Mortgage Loan previously sold to a Sponsor, and except as would not reasonably be expected to have an NFI Material Adverse Effect, as of the date NFI sold such Mortgage Loan, the Mortgage Loan was a genuine, valid and legally binding obligation of the Mortgagor thereunder, had been duly executed by a Mortgagor of legal capacity, was enforceable in accordance with its respective terms, and was not subject to any right of rescission, set off, counterclaim or defense, subject to (i) the Enforceability Exceptions, (ii) applicable Laws requiring creditors to proceed against the collateral before pursuing the borrower and (iii) applicable Laws on deficiencies. -27- 

 (e) All Warehouse Loans owned by NFI or any of its Subsidiaries are owned free and clear of any Lien other than Liens in favor of the related Warehouse Lender. Except as would not reasonably be expected to have an NFI Material Adverse Effect, neither NFI nor any of its Subsidiaries has, with respect to any such Warehouse Loan, released any security therefor, except upon receipt of Sponsor or Agency approval, or accepted prepayment of any such Warehouse Loan which has not been promptly applied to such Warehouse Loan in accordance with the terms thereof. (f) To the Knowledge of NFI, the Originators have operated in compliance with Applicable Requirements in connection with the Mortgages acquired by NFI or its Subsidiaries and such acquired Mortgages were originated by the Originators in compliance with all Applicable Requirements, except as would not be expected to have an NFI Material Adverse Effect. (g) Neither NFI nor any of its Subsidiaries has any obligations (whether current or contingent) under any Mortgage Loan Sale Agreement, except for obligations expressly set forth in any such Mortgage Loan Sale Agreement and which are of a customary and routine nature. Neither NFI nor any of its Subsidiaries has received written notice (or to the Knowledge of NFI, any other notice) that it is in breach of or default under any Mortgage Loan Securitization Document, Mortgage Loan Servicing Agreement or Mortgage Loan Sale Agreement, other than any such breach or default which has not impaired or would not reasonably be expected to impair the conduct or operation of the business of NFI or any of its Subsidiaries, or has not resulted in, or would not reasonably be expected to result in, the incurrence of liabilities to NFI or any of its Subsidiaries in excess of $50,000 individually, or $200,000 in the aggregate. (h) The information contained in the Residential Mortgage Loan "tape" is true and correct in all material respects (the "Tape"). The Tape includes and designates all Warehouse Loans and all Serviced Mortgage Loans, except for de minimis and inadvertent omissions. Except as set forth in the Tape (and other than de minimis exceptions and inadvertent omissions), no Residential Mortgage Loan reflected thereon is more than 90 days past due as of the applicable date. (i) NFI and each applicable Subsidiary of NFI are eligible to issue investment grade asset-backed securities using Form S-3 under the Securities Act. SECTION 3.15 Loan Servicing Portfolio. (a) To the Knowledge of NFI, there does not exist an event of default or event of termination, or any event that with notice could constitute an event of default or event of termination under any Mortgage Loan Servicing Agreement or Mortgage Loan Securitization Document with respect to NFI or any of its Subsidiaries. (b) NFI or one of its Subsidiaries possesses the entire right, title and interest in and to the servicing of the Mortgage Loan Servicing Portfolio and the sole right to service the Mortgage Loan Servicing Portfolio, subject to the Mortgage Loan Servicing Agreements and the -28- 

 Mortgage Loan Securitization Documents, free and clear of all Liens, other than Permitted Liens or Liens created under NFI's existing bank credit facilities. (c) All amounts payable in respect of the Mortgage Loan Servicing Portfolio which NFI or any of its Subsidiaries, as servicer of the Residential Mortgage Loans in the Mortgage Loan Servicing Portfolio, is responsible for paying under the Mortgage Loan Servicing Agreements and the Mortgage Loan Securitization Documents, directly or on behalf of any holder of any Residential Mortgage Loan, have, in all material respects, been paid when due and payable. (d) Except in the ordinary course of business, neither NFI nor any of its Subsidiaries is a party to any agreement pursuant to which NFI or any of its Subsidiaries has provided a guarantee, funds for a reserve account, liquidity facility, derivative transaction or similar credit enhancement relating to any Serviced Mortgage Loan. (e) No trigger event has occurred and is continuing as of the date hereof which has caused an increase in a reserve requirement, increase in an overcollateralization requirement (or prevented a decrease in any overcollateralization requirement), early amortization of securities issued by any Securitization Trust or termination of any reinvestment or revolving period under any Mortgage Loan Servicing Agreement or Mortgage Loan Securitization Document. (f) To the Knowledge of NFI, the prospectuses, prospectus supplements and registration statements for the offering of securities, and any amendments or supplements thereto, distributed, delivered or filed in connection with the sales of securities that have been issued prior to the date hereof by any Securitization Trust, as of their respective dates, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The information provided by NFI and its Subsidiaries for inclusion in the prospectuses, prospectus supplements and registration statements for the offering of securities, and any amendments or supplements thereto, distributed, delivered or filed in connection with the sales of securities that have been issued in connection with any securitization by a third party of Mortgage Loans purchased by such third party from NFI or any of its Subsidiaries, as of their respective dates, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (g) No trust, arrangement, issuer or other entity will be required to register as an investment company under the Investment Company Act, and no issue of securities or securities transaction will be required to be registered under the Securities Act as a result of the sale of the Series D-1 Preferred Shares pursuant to this Agreement. The statutory or regulatory foundations for exemptions from registration under the Investment Company Act, on which the Securitization Trust rely include only Rule 3a-7, Section 3(c)(7), Section 3(c)(5)(C) and Section 3(c)(5)(A) of the Investment Company Act. (h) The Exchange Act Reports or Section 3.15(h) of the NFI Disclosure Schedule set forth the retained interests owned by NFI and its Subsidiaries (the "Retained -29- 

 Interests"). The Retained Interests owned by NFI or any of its Subsidiaries are owned free and clear of any Lien, subject to any Liens under NFI's existing bank credit facilities, and may be freely sold, mortgaged, pledged, charged or otherwise encumbered, subject to any restrictions on transfer arising under applicable Law, including restrictions arising under U.S. federal and state securities laws. NFI's and each of its Subsidiaries' investments in its portfolios of Mortgage Loans entitles it to receive the cash flow generated by the Mortgage Loans in excess of the required payments under contractual obligations to the Sponsors of interest and principal payments due on any third party financings of the Mortgage Loans and other expenses of the securitization, including servicing fees, trustee fees and insurer premiums. SECTION 3.16 Contracts. (a) Except as listed in Section 3.16(a) of the NFI Disclosure Letter and except for any agreements or contracts filed as exhibits to the Exchange Act Reports, neither NFI nor any of its Subsidiaries is a party to or bound by: (i) any agreement relating to indebtedness with third parties where the amount as to which NFI or any of its Subsidiaries is, or may become, obligated is in excess of $2,000,000; (ii) any joint venture, partnership, limited liability company or other similar agreement or arrangement; (iii) any agreement relating to the acquisition or disposition of any business or real property (whether by merger, purchase or sale of stock or purchase or sale of assets) for an amount in excess of $2,000,000; (iv) other than intercompany agreements between NFI and/or its Subsidiaries, any agreement entered into with (A) any person directly or indirectly owning, controlling or holding with power to vote, 5% or more of the outstanding voting securities of NFI or any of its Material Subsidiaries, (B) any person 5% or more of the outstanding voting securities of which are directly or indirectly owned, controlled or held with power to vote by NFI or any of its Subsidiaries or (C) any current director or officer of NFI or any of its Subsidiaries or any "associates" or members of the "immediate family" (as such terms are respectively defined in Rule 12b-2 and Rule 16a-1 of the Exchange Act) of any such director or officer; (v) any agreement that limits or restricts in any material respect either the type of business in which NFI or its Subsidiaries may engage or the manner or locations in which any of them may so engage in any business (including any covenant not to compete or, except for confidentiality agreements entered into by NFI or any of its Subsidiaries since January 1, 2005, not to solicit employees) or which contains any standstill or similar provision that would survive the Closing Date or could require the disposition of any assets or line of business of NFI or its Subsidiaries; (vi) any agreement containing a right of first refusal, first offer or first negotiation in respect of assets, businesses or shares of capital stock of NFI or any of its Subsidiaries; -30- 

 (vii) any agreement (other than Employee Benefit Plans) with any current or former employee, director, officer or consultant of NFI or any of its Subsidiaries under which NFI or its Subsidiaries may have ongoing or future payment obligations for services rendered or to be rendered for amounts in excess of $500,000; (viii) other than with respect to any REO, any (A) real property or personal property leases or (B) agreement providing for the sale or exchange of, or option to sell or exchange, any Leased Real Property, or for the purchase or exchange of, or option to purchase or exchange, any real estate, in each case (x) that cannot be cancelled upon fewer than 60 days' notice without penalty, premium or other liability or (y) providing for payments in excess of $1,000,000 in any fiscal year; (ix) any agreement that cannot be canceled upon fewer than 60 days' notice without penalty, premium or other liability or that provides for continuing indemnification obligations of NFI or any of its Subsidiaries, in each case in excess of $2,000,000 in any fiscal year; (x) any agreement with any Governmental Entity other than in the ordinary course of business; (xi) any other agreement (A) the termination or breach of which or the failure to obtain consent in respect of which is reasonably likely to be material to NFI or any of its Subsidiaries, or (B) pursuant to which NFI or any of its Subsidiaries is required to pay or is scheduled to receive (assuming full performance pursuant to the terms thereof) $5,000,000 or more during any 12-month period following the date of this Agreement; (xii) any agreement containing "change of control" provisions triggered by the execution of this Agreement or the consummation of the transactions contemplated hereby that, if consent was not obtained, would impair the conduct or operation of the business of NFI or any of its Subsidiaries, or would give rise to the incurrence of liabilities by NFI or any of its Subsidiaries (other than de minimis liabilities); or (xiii) any other agreement that NFI or any of its Subsidiaries has filed or would be required to describe in any Exchange Act Report, or to file as an exhibit thereto under Items 401 or 601(b)(10) of Regulation S-K under the Exchange Act. (b) The material agreements, commitments, arrangements and plans listed or required to be listed in Section 3.16(a) of the NFI Disclosure Letter or the agreements, commitments, arrangements and plans filed as exhibits to Exchange Act Reports are referred to herein as the "Contracts". All of the Contracts that are required to be filed as exhibits to the Exchange Act Reports have been so filed as exhibits thereto other than with respect to a Securitization Trust. (c) Each Contract is a valid and binding agreement of NFI or one or more of its Subsidiaries, as the case may be, and is in full force and effect and is the valid, legal and binding obligation of NFI or one or more of its Subsidiaries (as applicable) enforceable in accordance with its terms, subject to the Enforceability Exceptions. None of NFI, any of its Subsidiaries or, to the Knowledge of NFI, any other party thereto is in default or breach in any -31- 

 material respect under the terms of, or has provided any written notice of any intention to terminate, any such Contract and, to the Knowledge of NFI, no event or circumstance has occurred, or will occur by reason of the execution of this Agreement or the consummation of any of the transactions contemplated hereby, that, with notice or lapse of time or both, would constitute any event of default thereunder or would result in a termination thereof. True, correct and complete copies of each Contract have been made available to Investors in the Data Room or have been filed as exhibits to the Exchange Act Reports. (d) Neither NFI nor any of its Subsidiaries has received any notice of or expects to receive any notice of, nor has any event occurred or is any event reasonably expected to occur that in either case could give rise to, and neither NFI nor any of its Subsidiaries has any Knowledge of or reason to believe that NFI or any of its Subsidiaries will be subject to, during the twelve-month period following the Closing, any default or cross-default under, or any event giving rise to a right of termination, cancellation or acceleration under any line of credit, warehouse facility, securitization transaction or other similar credit facility, agreement or arrangement to which NFI or any of its Subsidiaries is a party. (e) NFI and its Subsidiaries have the ability to draw upon all amounts available under each of NFI's and its Subsidiaries' outstanding credit and/or warehouse facilities or any other similar agreement or arrangement to which NFI or any of its Subsidiaries is a party, in each case, without any renegotiation of the terms thereof. SECTION 3.17 Insurance. Section 3.17 of the NFI Disclosure Letter contains a true, complete and correct list of all currently in effect liability, property and casualty, employee liability, directors and officers liability, surety bonds, key man life insurance and other similar insurance contracts of NFI and its Subsidiaries that insure the business, properties, operations or affairs of NFI or its Subsidiaries and the amount of coverage, insurance carrier, policy number and deductible or self-insured retention under each such insurance contract. All premiums due on all such insurance contracts of NFI and its Subsidiaries have been paid, NFI and its Subsidiaries have complied in all material respects with the terms and conditions of each such insurance contract, no notice of termination or cancellation of any such insurance contract has been received and all such insurance contracts are in full force and effect. To the Knowledge of NFI, no event has occurred that, with notice or the lapse of time or both, would constitute a breach or default under, or permit termination of, any insurance policy of NFI, and there has been no threatened termination or non-renewal of, or material premium increase with respect to, any insurance policy of NFI. To the Knowledge of NFI, no insurance carrier has sought to deny coverage to NFI or any of its Subsidiaries for any pending Litigation due to a failure by NFI or any of its Subsidiaries to report such Litigation to the applicable insurance carrier. SECTION 3.18 Intellectual Property. (a) Except as would not, individually or in the aggregate, reasonably be expected to have an NFI Material Adverse Effect, either NFI or one of its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use, subject to any existing licenses or other grants of rights to third parties, all Intellectual Property used in the conduct of the business of NFI and its Subsidiaries. -32- 

 (b) Except as set forth in Section 3.18(b) of the NFI Disclosure Letter, to the Knowledge of NFI, the conduct of the business of NFI and its Subsidiaries does not infringe upon or misappropriate the Intellectual Property of any third party. To the Knowledge of NFI, there are no infringements or misappropriations of material Intellectual Property owned by NFI or any of its Subsidiaries (the "Owned Intellectual Property") by any third party. (c) Except as set forth in Section 3.18(c) of the NFI Disclosure Letter, there are no material claims pending, or to the Knowledge of NFI, threatened: (i) alleging that the business of NFI or any of its Subsidiaries as currently conducted infringes upon or constitutes an unauthorized use of the Intellectual Property of any third party; (ii) alleging that the Owned Intellectual Property is being infringed by any third party; or (iii) challenging the ownership, validity or enforceability of the Owned Intellectual Property. SECTION 3.19 Interests in CDO; Operation of the CDO. (a) Section 3.19 of the NFI Disclosure Letter contains a true and complete list of all debt, equity and other interests in the CDO owned by NFI or any of its Subsidiaries and NFI or its Subsidiaries owns each such debt, equity and other interest in the CDO required to be listed in Section 3.19 of the NFI Disclosure Letter free and clear of all Liens, including any right of first offer or first refusal, or purchase option and each such equity interest is fully paid and non-assessable and each such debt or other interest has no obligation or commitment on the part of NFI or any of its Subsidiaries to make any further investments, payments or advances in respect thereof. Prior to the date hereof, NFI has made available to Investors a complete set of Portfolio Agreements relating to the CDO, including copies of all amendments, modifications and waivers related thereto. (b) Except as set forth in Section 3.19(b) of the NFI Disclosure Letter, the CDO has been managed in a manner that is consistent with the ordinary course of business and since March 31, 2007, there has not been any material change, event or development or any discovery of any pre-existing facts, that has been materially adverse to the assets, liabilities or financial condition of the CDO. (c) Except as set forth in Section 3.19(c) of the NFI Disclosure Letter, since March 31, 2007 no default, termination event, payout event, overcollateralization triggers, early amortization event, other portfolio measurement tests failure, the failure of which would limit reinvestment or other activities by the Collateral Manager or would impact the application of the funds of the CDO or a similar event (whether now cured or uncured) and no event (whether now cured or uncured) that with the giving of notice or the passage of time or both would constitute any such event, has occurred in connection with the CDO, and, to the Knowledge of NFI, no allegation that any such event has occurred has been made. Except as set forth in Section 3.19(c) of the NFI Disclosure Letter, no event that permits the removal or termination of the Collateral Manager, Collateral Manager default, termination of any collateral management agreement or substantially similar event (whether now cured or uncured) and no event (whether now cured or uncured) that with the giving of notice or the passage of time or both would constitute any such event, has occurred in connection with the CDO, and to the Knowledge of NFI no allegation that any such event has occurred has been made. Each of the Portfolio Agreements to which NFI, any of its Subsidiaries or any CDO issuer is a party was duly authorized and is the legal, valid -33- 

 and binding obligation of each of the parties thereto enforceable in accordance with its terms except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought; none of the execution, delivery or performance of this Agreement would permit the termination, amendment, non-renewal or revocation of any such Portfolio Agreement. With respect to any Portfolio Agreement, neither NFI nor any of its Subsidiaries has received any notice from or given notice to any other party to that Portfolio Agreement indicating that NFI, any of its Subsidiaries or such other party, as the case may be, intends to terminate that Portfolio Agreement. (d) Except as set forth in Section 3.19(d) of the NFI Disclosure Letter, (i) no ratings assigned at original issuance to any class of securities issued by the CDO have been reduced, qualified or withdrawn, and (ii) no such class is on "watchlist" or similar rating agency status or under review by any rating agency for possible downgrade. (e) The offerings of securities of and other interests in the CDOs complied in all material respects with all applicable Laws. The offering memoranda, offering circulars, prospectuses and any other offering documents for the offering of securities or other interests in the CDO, and any amendments or supplements thereto, distributed, delivered or filed in connection with the CDO, as of their dates, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (f) No payments with respect to securities issued by the CDO have been made by any insurer of such securities and, to the Knowledge of NFI, no claim therefor is outstanding. SECTION 3.20 Brokers. No broker, investment banker, financial advisor or other person, other than Deutsche Bank Securities Inc. or Stifel, Nicolaus & Company, Incorporated, the fees and expenses of which will be paid by NFI, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement or the other Transaction Documents based upon arrangements made by or on behalf of NFI or any Affiliate. SECTION 3.21 Board Approval. The Board of Directors of NFI, at a meeting duly called and held, has taken unanimous action to duly and validly approve and take all corporate action required to be taken by the Board of Directors to (a) authorize the issuance of the Series D-1 Preferred Shares and the Common Shares into which such Series D-1 Preferred Shares may be converted to Investors, the terms of the Series D-1 Preferred Shares and the consummation of the transactions contemplated hereby, (b) authorize and make effective a 1 to 4 reverse stock split of the Common Shares in accordance with applicable Laws (the "Reverse Stock Split"), (c) subject to the completion of the Reverse Stock Split, authorize and approve the Rights Offering and the issuance of the Series D-2 Preferred Shares and the Common Shares into which such Series D-2 Preferred Shares may be converted as well as the terms of the Series D-2 Preferred Shares, (d) increase the size of NFI's Board of Directors to eight directors, (e) approve in principle the terms of the Key Employee compensation arrangements attached to the Key -34- 

 Employee Letter Agreements and (f) exempt such Investor from the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit (as such terms are defined in the Charter), as the case may be, pursuant to Section 11.2.7 of the Charter in connection with the purchase and holding by Investors of the Series D-1 Preferred Shares pursuant to this Agreement, the purchase and holding of any Series D-2 Preferred Shares by Investors in the Rights Offering, including pursuant to the Standby Purchase Agreement, the holding of any Common Shares into which any of the foregoing are convertible or converted, and as otherwise contemplated by this Agreement and the other Transaction Documents. SECTION 3.22 Takeover Statute. (a) No state "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation is applicable to the issuance of the Series D-1 Preferred Shares to Investors or the other transactions contemplated by this Agreement and the other Transaction Documents. (b) In accordance with Section 3-602 of the MGCL ("Section 3-602"), NFI and the Board of Directors of NFI have, prior to the execution hereof, approved (i) the execution, delivery and issuance by NFI of the Series D-1 Preferred Shares, the issuance of the Common Shares issuable upon conversion of the Series D-1 Preferred Shares and the other transactions contemplated by this Agreement and the other Transaction Documents and (ii) any transaction that results in any Investor or any "affiliate" (as defined in Section 3-601 of the MGCL ("Section 3-601")) or "associate" (as defined in Section 3-601) of an Investor becoming an "interested stockholder" (as defined in Section 3-601) by virtue of such Investor or its respective "affiliates" or "associates" owning any Common Shares owned as of the date hereof or Convertible Shares acquired pursuant to this Agreement or the other Transaction Documents. Accordingly, the ownership by each Investor, its "affiliates" and "associates" of Common Shares owned as of the date hereof or Convertible Shares acquired pursuant to this Agreement or the other Transaction Documents will not result in the provisions of Section 3-602 being applicable to a "business combination" (as defined in Section 3-601) between such persons (or their affiliates or associates) and NFI. A copy of the resolutions taking such actions has been provided to Investors. (c) In accordance with Section 3-702 of the MGCL ("Section 3-702"), NFI has taken such actions under its Bylaws as were necessary to approve or exempt for purposes of Subtitle 7 of Article 3 of the MGCL (i) the execution, delivery and issuance by NFI of the Series D-1 Preferred Shares, the issuance of the Common Shares issuable upon conversion of the Series D-1 Preferred Shares and the other transactions contemplated by this Agreement and the other Transaction Documents and (ii) any transaction contemplated by or pursuant to this Agreement or the other Transaction Documents that results in any Investor or any "associate" (as defined in Section 3-701 of the MGCL) of an Investor owning any "control shares" (as defined in Section 3-701 of the MGCL) by virtue of such Investor owning any Common Shares as of the date hereof or Convertible Shares acquired pursuant to this Agreement or the other Transaction Documents. Accordingly, the ownership by each Investor or its "associates" of Common Shares owned as of the date hereof or Convertible Shares acquired pursuant to this Agreement or the other Transaction Documents will not result in the provisions of Section 3-702 being applicable to a "control share acquisition" (as defined in Section 3-701 of the MGCL) between such persons -35- 

 and NFI. A copy of the Bylaws providing for such approval or exemption has been provided to Investors. (d) Subject to the Reverse Stock Split becoming effective prior to the Rights Offering and giving effect to the Series D-1 Preferred Shares being available to NFI as authorized but unissued shares of capital stock of NFI following their conversion, the Boards of Directors of NFI and its Subsidiaries have taken all necessary action to ensure that any regulation or provision of the Charter and Bylaws of NFI (or other comparable instrument), or other organizational or constitutive document or governing instrument of any of NFI's Subsidiaries, is consistent with this Agreement and the other Transaction Documents and the transactions contemplated by this Agreement and the other Transaction Documents. SECTION 3.23 Properties; Absence of Liens. (a) Neither NFI nor any of its Subsidiaries owns any real property other than REO. NFI or one of its Subsidiaries has a good and valid leasehold interest in each parcel of real property leased by NFI or any of its Subsidiaries (the "Leased Real Property"), free and clear of all Liens except for any Permitted Liens. NFI or one of its Subsidiaries has the right to use and occupy the Leased Real Property for the full term of the lease or sublease relating thereto, except for any failure which would not be material to NFI and its Subsidiaries taken as a whole. (b) With respect to the Leased Real Property, (i) each of the agreements by which NFI or any of its Subsidiaries has obtained a leasehold interest in such Leased Real Property (each, a "Lease") is in full force and effect in accordance with its respective terms and NFI or one of its Subsidiaries is the holder of the lessee's or tenant's interest thereunder, (ii) to the Knowledge of NFI, there exists no default under any Lease and no circumstance exists which, with the giving of notice, the passage of time or both, could result in such a default, and (iii) there are no leases, subleases, licenses concessions or any other contracts granting to any person or entity other than NFI or any of its Subsidiaries any right to the possession, use, occupancy or enjoyment of any Leased Real Property or any portion thereof, except which would not be material to NFI and its Subsidiaries taken as a whole. SECTION 3.24 Affiliate Transactions. Between the date of NFI's proxy statement for its 2007 annual meeting of Shareholders filed with the SEC and the date of this Agreement, no event has occurred that would be required to be reported by NFI pursuant to Item 404 of Regulation S-K under the Exchange Act. SECTION 3.25 Opinions of Financial Advisor. NFI has received a written opinion from Stifel Nicolaus & Company Incorporated, dated the date of this Agreement, and to the effect that as of the date hereof, the MassMutual Consideration and the Jefferies Consideration, taken in the aggregate, to be received by NFI pursuant to this Agreement, is fair, from a financial point of view, to NFI. True and complete signed copies of such opinions have been delivered to Investors. SECTION 3.26 Private Placement. Neither NFI nor any person acting on NFI's behalf has sold or offered to sell or solicited any offer to buy the Series D-1 Preferred Shares by means of any form of general solicitation or advertising within the meaning of Rule -36- 

 502 under the Securities Act. Neither NFI nor any person acting on behalf of NFI has, directly or indirectly, at any time within the past six months, made any offer or sale of any security or solicitation of any offer to buy any security of NFI under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D in connection with the offer and sale by NFI of the Series D-1 Preferred Shares as contemplated hereby or (ii) cause the offering of the Series D-1 Preferred Shares and the Common Shares into which the Series D-1 Preferred Shares may be converted pursuant to this Agreement to be integrated with prior offerings by NFI for purposes of any applicable Law or Shareholder approval requirements, including, without limitation, under the rules and regulations of the NYSE. None of NFI or its Subsidiaries or any person acting on their behalf will take any action or steps referred to in the preceding sentence that would require the registration of any of the Series D-1 Preferred Shares and the Common Shares into which the Series D-1 Preferred Shares may be converted (except as contemplated by the Registration Rights Agreement) under the Securities Act or cause the offering to be integrated with any other offerings for purposes of any applicable Law or Shareholder approval requirements. Neither NFI nor any of its Subsidiaries is an "investment company" as defined in the Investment Company Act, or is registered or required to be registered thereunder. Neither NFI nor any of its Subsidiaries is a securities broker or dealer, as defined in the Exchange Act. NFI is not a United States real property holding corporation within the meaning of the Foreign Investment in Real Property Tax Act of 1980. Assuming the accuracy of the representations and warranties made by the Investors in this Agreement, no consent, license, permit, waiver approval or authorization of, or designation, declaration, registration or filing with, the SEC or any state securities regulatory authority is required in connection with the offer, sale, issuance or delivery by NFI of the Series D-1 Preferred Shares and the Common Shares into which the Series D-1 Preferred Shares may be converted, other than the possible filing of a Form D with the SEC. Assuming the accuracy of the representations and warranties made by Investors in this Agreement, the offer and issuance by NFI of the Series D-1 Preferred Shares is exempt from registration under the Securities Act. SECTION 3.27 Acknowledgment Regarding Investors' Purchase of NFI Securities. NFI acknowledges and agrees that Investors are acting solely in the capacity of arm's length purchasers with respect to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby. NFI further acknowledges that Investors are not acting as financial advisors or fiduciaries of NFI (or in any similar capacity) with respect to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby and any advice given by Investors or any of their respective representatives or agents in connection with this Agreement or the other Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to Investors' purchase of the Series D-1 Preferred Shares. SECTION 3.28 Environmental Matters. Except as would not, individually or in the aggregate, reasonably be expected to have an NFI Material Adverse Effect: (a) To the Knowledge of NFI, NFI and its Subsidiaries (i) are in material compliance with all Environmental Laws, (ii) are not the subject of any pending notice from any Governmental Authority alleging the violation of any applicable Environmental Laws, (iii) are not currently subject to any Order arising under any Environmental Law, and (iv) have not used -37- 

 any of their properties for the disposal of Hazardous Substances except as permitted under applicable Environmental Laws. (b) Notwithstanding any other provision of this Agreement, this Section 3.28 sets forth NFI's sole and exclusive representations and warranties with respect to the Hazardous Substances, Environmental Laws or other environmental matters. SECTION 3.29 Manipulation of Price. NFI has not, and to its Knowledge no person acting on its behalf has, in violation of applicable securities Laws, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of NFI, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Series D-1 Preferred Shares or Common Shares into which such Series D-1 Preferred Shares may be converted, or (iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of NFI. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF INVESTORS Except as otherwise disclosed in the corresponding section of the Disclosure Letter delivered by such Investor in connection with the execution and delivery of this Agreement, regardless of whether such representation or warranty specifically refers to the applicable Investor Disclosure Letter (the "MassMutual Disclosure Letter" and the "Jefferies Disclosure Letter" respectively and together, the "Investor Disclosure Letters"), each Investor, individually, but not jointly, represents and warrants to NFI as follows: SECTION 4.1 Organization, Standing and Corporate Power. Such Investor is a corporation duly incorporated (or, if not a corporation, duly organized), validly existing and in good standing under the laws of the jurisdiction in which it is incorporated (or, if not a corporation, in which it is organized) and has the requisite company power and authority to own, lease and operate its properties and assets and to carry on in all material respects its business as now being conducted. Such Investor is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified (individually or in the aggregate) would not have an Investor Material Adverse Effect on such Investor. SECTION 4.2 Authority. Such Investor has the requisite company power and authority to enter into this Agreement and the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party. The execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party by such Investor and the consummation by such Investor of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party have been duly authorized by all necessary corporate or similar organizational action on the part of such Investor. No action by the members, shareholders or limited partners of such Investor is necessary to authorize the execution and delivery by such Investor of this Agreement -38- 

 and the other Transaction Documents to which it is a party and the consummation by such Investor of the transactions contemplated hereby and thereby. This Agreement has been and at the Closing, the Registration Rights and Shareholders Agreement and the Standby Purchase Agreement will be, duly executed and delivered by such Investor and, assuming due authorization, execution and delivery of this Agreement and the other Transaction Documents by NFI and the other Investor, if a party thereto, constitute or will constitute, as the case may be, valid and binding obligations of such Investor, enforceable against such Investor in accordance with their respective terms subject to the Enforceability Exceptions. SECTION 4.3 Noncontravention; Consents. The execution and delivery of this Agreement and the other Transaction Documents to which it is a party by such Investor do not, and the consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party will not, (i) conflict with any of the provisions of the governing documents of such Investor or the governing documents of any of its material Subsidiaries, (ii) subject to the matters referred to in the next sentence, conflict with, result in any violation or breach of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to the loss of a material benefit under any loan, guarantee of indebtedness or credit agreement, note, bond, mortgage, indenture, lease, agreement, contract, instrument, permit, concession, franchise, right or license binding upon such Investor or any of its material Subsidiaries, or result in the creation of any Lien on any property or asset of such Investor or any of its material Subsidiaries or (iii) subject to the matters referred to in the next sentence, contravene or conflict with or constitute a violation of any provision of any Law binding upon or applicable to such Investor or any of its material Subsidiaries, which, in the case of clauses (ii) and (iii) above, would have an Investor Material Adverse Effect on such Investor. No consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity, and no consent, approval or authorization of any third party is required by or with respect to such Investor or any of its material Subsidiaries in connection with the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party by such Investor or the consummation by such Investor of any of the transactions contemplated hereby and thereby, except for (a) the filing of any required premerger notification and report forms under the HSR Act, (b) any required Financial Services Consents, (c) the filing of any listing applications or supplemental listing applications with the NYSE, (d) the filing of the Articles Supplementary with the State Department of Assessments and Taxation of Maryland, (e) the filing of any registration statements with the SEC as contemplated by the Transaction Documents and (f) such other consents, approvals, authorizations, declarations, filings or notices as are set forth in Section 4.3 of the Investor Disclosure Letter of such Investor. SECTION 4.4 Litigation. There is no Litigation pending or, to the Knowledge of such Investor, threatened in writing against or affecting in any material respect such Investor or any Subsidiary of such Investor that seeks to restrain or enjoin the consummation of any of the transactions contemplated by this Agreement. Neither such Investor nor, to the Knowledge of such Investor, any officer, director or employee of such Investor or any of its Affiliates has been permanently or temporarily enjoined or barred by any Order of any Governmental Entity from engaging in or continuing any conduct or practice in connection with the business conducted by NFI or any of its Subsidiaries that could reasonably be expected to have an Investor Material Adverse Effect. -39- 

 SECTION 4.5 Brokers. No broker, investment banker, financial advisor or other person, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement or the other Transaction Documents to which it is a party based upon arrangements made by or on behalf of such Investor or any Affiliate of such Investor. SECTION 4.6 Available Funds. Such Investor has as of the date hereof and will have on the Closing Date sufficient funds available to pay the MassMutual Consideration (in the case of MassMutual) or the Jefferies Consideration (in the case of Jefferies) on the terms and conditions contemplated by this Agreement, to consummate the other transactions contemplated by this Agreement and to pay all associated costs and expenses required to be paid by such Investor. SECTION 4.7 No Public Sale or Distribution. Such Investor (a) is acquiring the Series D-1 Preferred Shares and (b) upon conversion of the Series D-1 Preferred Shares will acquire the Common Shares issuable upon conversion of the Series D-1 Preferred Shares, for its own account for investment purposes only and not with a view towards, or for resale in connection with, the public sale or distribution thereof; provided, however, that by making the representation and warranty herein, such Investor does not agree to hold any of such Series D-1 Preferred Shares or Common Shares for any minimum or other specific term and reserves the right to dispose of such Series D-1 Preferred Shares or Common Shares, in accordance with the Series D-1 Articles Supplementary, at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. SECTION 4.8 Accredited Investor Status. Each Investor acknowledges its understanding that the offering and sale of the Series D-1 Preferred Shares has not been registered under the Securities Act, on the basis of the exemption in Section 4(2) thereof relating to transactions not involving a Public Offering, or any state securities laws. Such Investor understands that NFI's reliance on the Section 4(2) exemption is based on the representations herein made by the Investors. Such Investor is an "accredited investor" (as that term is defined in Rule 501(a) of Regulation D). SECTION 4.9 Restricted Securities. (a) Each Investor acknowledges that it is familiar with the limitations which are imposed by the Securities Act on any transfer of an interest in the Series D-1 Preferred Shares. Such Investor understands and acknowledges that it may have to hold such shares for an indefinite period of time unless the Series D Preferred Shares are subsequently registered under the Securities Act or an exemption therefrom is available. (b) Each Investor has been given access to the Data Room and provided with an opportunity to ask questions of NFI in connection with the evaluation of its investment in the Series D-1 Preferred Shares. Such Investor and its representatives have been solely responsible for Investor's investigation of NFI and its management and business, for Investor's own analysis of the merits and risks of its investment pursuant to this Agreement, and for its own analysis of the fairness and desirability of the terms of the investment. -40- 

 (c) EACH INVESTOR ACKNOWLEDGES THAT (I) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND (II) THESE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN EXEMPTION FROM SUCH REGISTRATION UNDER SAID ACT. SECTION 4.10 Ownership of Common Shares. Except as set forth in Section 4.10 of the Investor Disclosure Letters, no Investor nor any of its Subsidiaries or Affiliates beneficially owns, directly or indirectly, any Common Shares. SECTION 4.11 Excepted Holder Limit. Each Investor on its own behalf and on behalf of its successors and assigns represents that it neither Beneficially Owns (as such term is defined in the Charter) nor Constructively Owns (as such term is defined in the Charter) shares of capital stock of NFI that would result in NFI (i) being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or (ii) otherwise failing to qualify as a Section 856 Trust (including, but not limited to, Beneficial Ownership or Constructive Ownership that would result in NFI owning (actually or Constructively (as such term is defined in the Charter)) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by NFI from such tenant would cause NFI to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). Each Investor does not own, actually or Constructively, an interest in a tenant of NFI (or a tenant in any entity owned or controlled by NFI) that would cause NFI, actually or Constructively, to own actually or Constructively more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant. Each Investor hereby agrees that any violation or attempted violation of such representation or the covenants in Section 6.12(c) will result in such shares being automatically transferred to a trust in accordance with Sections 11.2.1(b) and 11.3 of the Charter. NFI acknowledges that in making the representations set forth in this Section 4.11 each Investor has acted in reliance upon the representation of NFI set forth in Section 3.10(i) and the undertaking of NFI set forth in Section 6.12(c)(ii). SECTION 4.12 No Additional Representations. Each Investor acknowledges that except for the representations and warranties set forth in this Agreement or the other Transaction Documents, neither NFI nor any other person has made any representation or warranty, express or implied, with respect to NFI, any of its Subsidiaries or the transactions contemplated by this Agreement and the other Transaction Documents. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS SECTION 5.1 Conduct of Business of NFI. During the period from the date of this Agreement and continuing until the Closing Date, NFI agrees as to itself and each of its Subsidiaries that (except (i) as permitted or required by Section 5.1(b) or any other provision of this Agreement or the other Transaction Documents, (ii) as set forth in Section 5.1 of the NFI Disclosure Letter or (iii) with the prior written consent of each Investor) (a) NFI shall, and shall -41- 

 cause each of its Subsidiaries to, conduct its business in the ordinary course, consistent with past practice, and shall use its commercially reasonable efforts (1) to preserve substantially intact its business organization and goodwill and relationships with Governmental Entities, rating agencies, financing counterparties, customers, suppliers, creditors, lessors, employees and others having business dealings with it, (2) to keep available the services of its current officers and key employees, and (3) to maintain its current rights and franchises, subject to the terms of this Agreement, and (b) NFI will not and will cause each of its Subsidiaries not to: (i) (A) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions (whether in cash, stock or property) in respect of, any of NFI's outstanding capital stock (other than (x) dividends on the Series C Preferred Shares declared and paid in accordance with the terms thereof, (y) dividend payments on the Common Shares necessary to satisfy NFI's Section 856 Trust distribution requirement, as applicable, and (z) dividend equivalents paid with respect to awards under the Incentive Plans), (B) split, combine or reclassify any of its outstanding capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its outstanding capital stock or (C) purchase, redeem or otherwise acquire any shares of outstanding capital stock of NFI or any of its Subsidiaries or any rights, warrants, commitments, subscriptions or options to acquire any such shares (other than transactions solely among NFI and any of its wholly owned Subsidiaries); (ii) authorize for issuance, issue, sell, grant, pledge or otherwise encumber any shares of NFI's capital stock, options, warrants, commitments, subscriptions or any other securities or rights of any kind to acquire any capital stock, or any other ownership interest, except to NFI or its wholly owned Subsidiaries or reprice any options or warrants with respect to any shares of its capital stock; (iii) amend or otherwise change any provision of its Charter or Bylaws, or similar organizational or governance documents; (iv) merge or consolidate with or acquire any corporation, partnership, joint venture, association or other business organization or division thereof, or substantially all of the assets of any of the foregoing or any other property other than (A) acquisitions of Residential Mortgage Loans in the ordinary course of business or (B) acquisitions for a purchase price not in excess of $1,000,000 individually or $3,000,000 in the aggregate; (v) make any material change in accounting methods, principles, policies, procedures or practices used by NFI or any of its Subsidiaries or any of its methods of reporting income, deductions or other material items for financial accounting purposes, except insofar as may be required by applicable Law or by a change in GAAP; (vi) sell or dispose of any of its assets or properties, other than sales or dispositions in the ordinary course of business consistent with past practices, and in an amount not greater than $2,000,000, or sales or dispositions required by any Contract in effect on the date of this Agreement; -42- 

 (vii) (A) grant any increase in the compensation or benefits of any employees, directors, consultants, independent contractors or service providers, except in the ordinary course of business consistent with past practice, (B) pay any pension, severance or retirement benefits not required by any existing Employee Benefit Plan or Employment Agreement to any such employees, directors, consultants, independent contractors or service providers, (C) enter into, amend, alter, adopt, implement or otherwise commit itself to any compensation or benefit plan, program, policy, arrangement or agreement including any Employee Benefit Plan or collective bargaining agreement with or for the benefit of any employee, director, consultant, independent contractor or service provider or (D) accelerate the vesting of, or the lapsing of restrictions with respect to, any stock options or other stock-based compensation or otherwise accelerate any rights or benefits, or make any determinations that would result in a material increase in liabilities under any Employee Benefit Plan, except, in each case, (x) for such actions as are required by an existing agreement, including any Employee Benefit Plan, or (y) for purposes of updating or complying with Section 409A of the Code, the Pension Plan Protection Act or other requirements of Law; (viii) adopt a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization of NFI or any of its Subsidiaries; (ix) terminate the employment of the Employees listed in Section 5.1(b)(ix) of the NFI Disclosure Letter or replace any such Employees or their successors, whether due to termination of such Employee's employment by NFI or its Subsidiaries or otherwise, unless such replacement is reasonably satisfactory to Investors; (x) enter into any transaction, agreement, arrangement or understanding between (A) NFI or any of its Subsidiaries, on the one hand, and (B) any Affiliate of the NFI (other than its Subsidiaries), on the other hand, of the type that would be required to be disclosed under Item 404 of Regulation S-K promulgated by the SEC; (xi) take or omit to take any action that could reasonably be expected to cause NFI to fail to qualify as a Section 856 Trust; or (xii) agree to take any of the foregoing actions. ARTICLE VI OTHER AGREEMENTS SECTION 6.1 Access to Information; Confidentiality. NFI and its Subsidiaries shall afford to Investors and to the respective officers, directors, employees, Affiliates, financing sources and authorized advisors, representatives and other agents of Investors reasonable access during the period prior to the Closing Date to all of its properties, facilities, books, contracts, commitments, records, data, systems, personnel, consultants, auditors and advisors and, during such period, NFI and its Subsidiaries shall furnish to Investors and to their respective officers, directors, employees, Affiliates, financing sources and authorized advisors, representatives and other agents such information concerning its business, properties, financial condition, operations and personnel as Investors may from time to time reasonably -43- 

 request. Notwithstanding the foregoing, NFI and its Subsidiaries shall not be obligated to disclose (i) any information that in the reasonable judgment of NFI, would result in the loss of attorney-client privilege or other legal privilege with respect to such information or (ii) any information that would result in a breach of an agreement to which NFI or any of its Subsidiaries is a party. In addition, notwithstanding the foregoing, in fulfilling its obligations under this Section 6.1, neither NFI nor any of its Subsidiaries shall be required to violate any applicable Law. Investors agree that their access to such investigation shall be conducted in such a manner as not to interfere unreasonably with the operations of NFI and its Subsidiaries. All requests for access or information pursuant to this Section 6.1 shall be directed to such person or persons as NFI shall designate. Without limiting the terms thereof, the Confidentiality Agreement shall govern the obligations of the respective Investors party thereto and their respective officers, directors, employees, Affiliates, financing sources and authorized advisors, representatives and other agents with respect to all information of any type furnished or made available to them pursuant to this Section 6.1. SECTION 6.2 Consents, Approvals and Filings. (a) The parties will each use their commercially reasonable efforts, and will cooperate fully with each other (i) to comply as promptly as practicable with all requirements of Governmental Entities applicable to the transactions contemplated by this Agreement and the other Transaction Documents, (ii) to obtain as promptly as practicable all necessary permits, Orders or other consents, approvals or authorizations of Governmental Entities and consents or waivers of all third parties necessary in connection with the consummation of the transactions contemplated by this Agreement and the other Transaction Documents, and (iii) otherwise to take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements that may be imposed on such party and its Subsidiaries with respect to the transactions contemplated by this Agreement and the other Transaction Documents, including the issuance of the Convertible Shares to Investors and to consummate the transactions contemplated by the Transaction Documents as promptly as practicable. In connection therewith, the parties will make and cause their respective Affiliates to make all legally required filings as promptly as practicable in order to facilitate prompt consummation of the transactions contemplated by this Agreement, and will provide and will cause their respective Affiliates to provide such information and communications to Governmental Entities as such Governmental Entities may request. Each of the parties shall provide to the other parties copies of all applications or other communications to Governmental Entities in connection with this Agreement in advance of the filing or submission thereof. Without limiting the generality of the foregoing, NFI shall use its commercially reasonable efforts to obtain, and each of the Investors shall cooperate in all reasonable respects with NFI's efforts to obtain, any Financial Services Consents required to be obtained by an Investor or by NFI or its Affiliates in connection with the transactions contemplated by this Agreement. All expenses associated with obtaining such Financial Service Consents shall be borne by NFI; provided, however, that each of NFI and each Investor shall bear its own expenses incurred in connection with its cooperation with NFI's efforts to obtain such Financial Services Consents, including the costs and fees payable to its own counsel in connection therewith. -44- 

 (b) Without limiting the generality of the foregoing, as promptly as practicable, but in any event within 30 days after the date hereof, each party shall use commercially reasonable efforts to file with all applicable Governmental Entities any requests for approval of the transactions contemplated by this Agreement required to be obtained by such party, and all such requests shall include all required exhibits. A reasonable time prior to furnishing any written materials to any Governmental Entity in connection with the transactions contemplated by this Agreement, the party making such filing shall furnish the other parties with a copy thereof, and such other parties shall have a reasonable opportunity to provide comments thereon. Each party shall give to the other parties prompt written notice if it receives any notice or other communication from any Governmental Entity in connection with the transactions contemplated by this Agreement, and, in the case of any such notice or communication which is in writing, shall promptly furnish such other parties with a copy thereof. SECTION 6.3 Public Announcements. Investors and NFI, and their respective Affiliates, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statement with respect to the transactions contemplated by this Agreement and shall not issue any such press release or make any such public statement without the advance approval of the other parties following such consultation (such approval not to be unreasonably withheld or delayed), except as may be required by applicable Law or by any Governmental Entity. SECTION 6.4 Further Assurances. NFI agrees to execute and deliver, and cause each of its Subsidiaries to execute and deliver, and each Investor agrees to execute and deliver, such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement or the other Transaction Documents. SECTION 6.5 Notification of Certain Matters. NFI shall give prompt notice to Investors to the extent that it acquires knowledge of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be reasonably likely to cause any representation or warranty of NFI contained in this Agreement to be untrue or inaccurate as of the date hereof or as of the Closing Date and (ii) any failure of NFI to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. Each Investor shall give prompt notice to NFI and the other Investor to the extent that it acquires knowledge of (A) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be reasonably likely to cause any representation or warranty of such Investor contained in this Agreement to be untrue or inaccurate as of the date hereof or as of the Closing Date, (B) any failure of such Investor to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder and (C) any event that would trigger the obligation for NFI or such Investor to file with the SEC or any other Governmental Entity a notification of change in beneficial ownership of the Convertible Shares or the Common Shares, as the case may be. Each of the Investors shall promptly file with the SEC or any other Governmental Entity any applicable change in beneficial ownership notifications, in connection with its ownership of the Convertible Shares or the Common Shares. Notwithstanding the foregoing, the delivery of any notice pursuant to this Section 6.5 shall not affect the representations, warranties or agreements of the parties, the conditions to the performance by the parties hereunder, or limit or otherwise affect the remedies available hereunder to the party receiving such notice. -45- 

 SECTION 6.6 Anti-Takeover Laws. If any "fair price," "business combination" or "control share acquisition" statute or other similar statute or regulation is or shall become applicable to the transactions contemplated by the Transaction Documents, Investors, NFI and their respective Boards of Directors shall use commercially reasonable efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated by the Transaction Documents may be consummated as promptly as practicable on the terms contemplated hereby and shall otherwise act to minimize the effects of any such statute or regulation on the transactions contemplated hereby. SECTION 6.7 Shareholder Litigation. NFI shall give Investors the opportunity to participate in the defense or settlement of any shareholder Litigation against NFI and/or its directors relating to the transactions contemplated by this Agreement. SECTION 6.8 Issuance of REIT Dividends; Availability of Common Shares for Conversion. (a) On or prior to September 17, 2007, NFI shall declare the REIT Dividends, which REIT Dividends shall have a record date not earlier than the earlier of (i) the earlier of (x) the date that the Rights Offering shall have ended and all shares offered in the Rights Offering shall have been subscribed for and purchased in the Rights Offering and (y) the first Business Day following the closing under the Standby Purchase Agreement or (ii) December 10, 2007 (the "REIT Dividend Record Date"). NFI shall pay the REIT Dividends following the REIT Dividend Record Date but on or prior to December 31, 2007. (b) The REIT Dividends at the time of declaration by NFI shall be in the form of Series E Preferred Shares, which shall be convertible into Common Shares (it being understood that NFI may pay cash in lieu of fractional shares in connection with the payment of the REIT Dividends). The Series E Preferred Shares issued in connection with the REIT Dividends, if any, will rank pari passu with the Series D-1 Preferred Shares and Series D-2 Preferred Shares and otherwise have the terms that are set forth on Schedule 6.8(b); provided, however, that the Board of Directors of NFI shall be permitted to use its reasonable discretion to establish the definitive terms for the dividend rate, conversion price and number of shares to be issued in connection with the REIT Dividends. (c) Except as provided for under the Deferred Compensation Plan or the 401(k) Plan, NFI will not issue or agree to issue any Common Shares or options, rights or warrants to purchase Common Shares or securities convertible into or exchangeable for Common Shares or take any other action if, after giving effect thereto, the number of Common Shares remaining unissued and duly reserved for issuance upon conversion of the Series D-1 Preferred Shares, Series D-2 Preferred Shares and/or the number of Series E Preferred Shares and Common Shares issued in connection with the REIT Dividends and the Common Shares issuable upon conversion of the Series E Preferred Shares shall be insufficient to permit conversion of all the then outstanding Series D-1 Preferred Shares, Series D-2 Preferred Shares and/or Series E Preferred Shares after giving effect to any adjustment in the number of Common Shares into which such Series D-1 Preferred Shares, Series D-2 Preferred Shares and/or Series E Preferred Shares are convertible as a result of such action. NFI shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, (i) after the Reverse Stock Split -46- 

 Effective Date, no less than 125% of the maximum number of Common Shares issuable upon conversion of the Series D-1 Preferred Shares and Series D-2 Preferred Shares as of any such time and (ii) prior to the issuance of the Series E Preferred Shares, no less than 125% of the maximum number of Common Shares issuable upon conversion of the Series E Preferred Shares as of any such time. SECTION 6.9 Restrictive Legend. Each certificate representing (a) the Series D-1 Preferred Shares, (b) the Common Shares or Series D-2 Preferred Shares issued upon conversion of the Series D-1 Preferred Shares, or (c) any other securities issued in respect of the Series D-1 Preferred Shares or the Common Shares or Series D-2 Preferred Shares issued upon conversion of the Series D-1 Preferred Shares, upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted or unless the securities evidenced by such certificate shall have been registered under the Securities Act or sold pursuant to Rule 144 or Regulation A thereunder) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws) and the legends set forth in Annex I attached hereto: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN EXEMPTION FROM SUCH REGISTRATION UNDER SAID ACT. Upon request of a holder of such a certificate, NFI shall remove the foregoing legend from the certificate or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, NFI shall have received an opinion of counsel reasonably acceptable to NFI to the effect that any transfer by such holder of the securities evidenced by such certificate will not require registration under the Securities Act. Each certificate representing the Series D-1 Preferred Shares shall, as described in the Series D-1 Articles Supplementary, be stamped or otherwise imprinted with a legend substantially in the following form: THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO RESTRICTION PURSUANT TO SECTION 9 OF THE ARTICLES SUPPLEMENTARY FOR THE 9.00% SERIES D1 MANDATORY CONVERTIBLE PREFERRED STOCK OF THE CORPORATION, AS AMENDED AND IN EFFECT FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION UPON REQUEST. Each certificate representing the Series D-2 Preferred Shares shall, as described in the Series D-2 Articles Supplementary, be stamped or otherwise imprinted with a legend substantially in the following form: THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO RESTRICTION PURSUANT TO SECTION 7 OF THE -47- 

 ARTICLES SUPPLEMENTARY FOR THE 9.00% SERIES D2 MANDATORY CONVERTIBLE PREFERRED STOCK OF THE CORPORATION, AS AMENDED AND IN EFFECT FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION UPON REQUEST. SECTION 6.10 Listing Matters. NFI agrees that prior to the Closing, NFI shall have complied with the requirements of the NYSE for purposes of reserving for listing on the NYSE the Common Shares issuable upon conversion of the Series D-1 Preferred Shares and such shares shall have been approved for listing subject to official notice of issuance. NFI further agrees that at or prior to the closing of the Rights Offering, NFI shall comply with the requirements of the NYSE for purposes of reserving for listing on the NYSE the Common Shares issuable upon conversion of the Series D-2 Preferred Shares and such shares shall be approved for listing subject to official notice of issuance. SECTION 6.11 Reverse Stock Split. Immediately following the Closing, the Board of Directors of NFI shall take all action necessary to effect the Reverse Stock Split, which effective date shall be on or prior to a date 15 days following the Closing Date (the "Reverse Stock Split Effective Date"). NFI shall provide notice of the Reverse Stock Split to the Shareholders and take such other actions in accordance with applicable Law and the rules and regulations of the NYSE as are necessary to effectuate the Reverse Stock Split. SECTION 6.12 Tax Matters. (a) For each taxable year after the date hereof that NFI qualifies as a Section 856 Trust under the Code NFI will distribute to its stockholders such amounts as are necessary for NFI to avoid any liability for Taxes under section 857(b) of the Code. (b) If NFI ceases to be a Section 856 Trust, NFI shall take, and shall cause its Subsidiaries to take, all such steps as are reasonably necessary to mitigate the effects of the net operating losses (for federal income Tax purposes) of NFI and its Subsidiaries being subject to any limitations on their utilization under the rules applicable to "separate return limitation years" under the Code and applicable Treasury Regulations. (c) (i) Each Investor, on its own behalf and on behalf of its successors and assigns, undertakes that it will neither Beneficially Own (as such term is defined in the Charter) nor Constructively Own (as such term is defined in the Charter) shares of capital stock of NFI that would result in NFI (A) being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or (B) otherwise failing to qualify as a Section 856 Trust (including, but not limited to, Beneficial Ownership or Constructive Ownership that would result in NFI owning (actually or Constructively (as such term is defined in the Charter)) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by NFI from such tenant would cause NFI to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). Each Investor undertakes that it will not own, actually or Constructively, an interest in a tenant of NFI (or a tenant in any partnership, corporation, trust or other juridical entity owned or controlled by NFI) that would cause NFI, actually or Constructively, to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in -48- 

 such tenant. NFI acknowledges that in giving the undertakings set forth in this Section 6.12(c)(i) each Investor has acted in reliance upon the representation of NFI set forth in Section 3.10(i) and the undertaking of NFI set forth in Section 6.12(c)(ii). (ii) NFI undertakes that it will not have, nor will it own or control any entity that has, any tenants (as such term is used for purposes of Section 856(d) of the Code) that are partnerships, corporations, trusts or other juridical entities. (iii) The covenants contained in this Section 6.12(c) shall survive until December 31, 2007 or, if later, the last day of the last taxable year for which NFI maintains its election to be a Section 856 Trust. SECTION 6.13 Filing of Series D-1 Articles Supplementary. Immediately prior to the Closing, NFI shall file the Series D-1 Articles Supplementary with the State Department of Assessments and Taxation of Maryland. SECTION 6.14 Charter Actions. NFI shall take, or cause to be taken, all corporate action required to be taken by NFI or the Board of Directors of NFI to authorize and approve an amendment to the Charter to prohibit any issuance or transfer of NFI's stock if such issuance or transfer would cause an "ownership change" (within the meaning of such term for the purposes of Section 382(g) of the Code), with respect to NFI or any of its Subsidiaries. In furtherance of the foregoing, NFI shall make its commercially reasonable efforts to submit and recommend such amendment to the Charter to the Shareholders for approval at the next annual or special meeting of the Shareholders. SECTION 6.15 Shareholder Approval of Certain Provisions of the Articles Supplementary. NFI shall take, or cause to be taken, all corporate action required to be taken by NFI or the Board of Directors of NFI to authorize and approve the Series D-1 Articles Supplementary and the Series D-2 Articles Supplementary. In furtherance of the foregoing, NFI shall make its commercially reasonable efforts to submit a proposal to the Shareholders at the next annual or special meeting of the Shareholders for approval of Section 6(e)(i) of the Series D-1 Articles Supplementary and Section 6(e)(i) of the Series D-2 Articles Supplementary, and neither NFI nor its Board of Directors shall recommend against approval of such proposal by the Shareholders. NFI agrees that it shall prepare and file with the SEC under the Exchange Act, a Proxy Statement in form and substance reasonably acceptable to Investors and, after consultation with Investors, to respond promptly to any comments made by the SEC with respect to the Proxy Statement and any preliminary version thereof and cause the Proxy Statement to be mailed to the Shareholders in accordance with the rules and regulations of the SEC and the NYSE. NFI shall give Investors and their counsel a reasonable opportunity to review and comment on the Proxy Statement (including any amendments, exhibits and supplements thereto) prior to its being filed with the SEC or disseminated to the Shareholders. In addition, NFI shall provide Investors and their counsel with any comments NFI or its counsel may receive from the SEC or its staff with respect to the Proxy Statement promptly after receipt of such comments, shall consult with Investors and their counsel prior to responding to such comments, and shall give Investors and their counsel reasonable opportunity to review and comment on such responses prior to their being filed with, or submitted to, the SEC. Each of NFI and each Investor shall promptly correct any information provided by it for use in the Proxy Statement, if and to the extent that it shall -49- 

 have become false or misleading in any material respect prior to the annual or special meeting of the Shareholders, as applicable. NFI shall cause the Proxy Statement, as so corrected, to be filed with the SEC and to be disseminated to the holders of Common Shares, in each case, as and to the extent required by applicable federal securities Laws. The review, comment and other rights granted to Investors in this Section 6.15 shall only apply to such portions of the Proxy Statement as are relevant to the approval of Section 6(e)(i) of the Series D-1 Articles Supplementary and Section 6(e)(i) of the Series D-2 Articles Supplementary. ARTICLE VII CONDITIONS PRECEDENT SECTION 7.1 Conditions to Each Party's Obligations. The respective obligations of each party to consummate the issuance and sale to, and purchase by, Investors of the Series D-1 Preferred Shares, and the other actions to be taken at the Closing are subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) Governmental Approvals. All filings required to be made prior to the Closing Date with, and all consents, approvals, permits and authorizations required to be obtained prior thereto from, Governmental Entities in connection with the consummation of the transactions contemplated by the Transaction Documents by NFI and Investors, including the Financial Services Consents, shall have been made or obtained and shall remain in full force and effect. (b) Third Party Consents. All third party consents listed on Section 7.1(b) of the NFI Disclosure Letter shall have been received. (c) HSR Act. The waiting period (and any extension thereof) applicable to the transactions contemplated by the Transaction Documents under the HSR Act shall have been terminated or shall have otherwise expired, any investigation opened by means of a second request for additional information or otherwise shall have been terminated or closed and no action shall have been instituted by the Department of Justice or the Federal Trade Commission challenging or seeking to enjoin the consummation of the transactions contemplated by the Transaction Documents, which action shall not have been withdrawn or terminated and all approvals, if any, required to be obtained under any foreign antitrust, competition or similar Laws, in each case in connection with the consummation of the transactions contemplated by the Transaction Documents, shall have been obtained. (d) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other Order issued by any court of competent jurisdiction and no statute, rule or regulation of any Governmental Entity (each, a "Restraint") preventing the consummation of any of the transactions contemplated by the Transaction Documents shall be in effect. SECTION 7.2 Conditions to Obligations of Investors. The obligations of each Investor to consummate the purchase of the Series D-1 Preferred Shares to be purchased by it -50- 

 and the other actions to be taken at the Closing are further subject to the satisfaction, or waiver by such Investor, on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of NFI set forth in this Agreement (i) that are not qualified as to materiality or an NFI Material Adverse Effect shall be true and correct in all material respects as of the date hereof and as of the Closing Date as though made on and as of the Closing Date (other than those representations and warranties that speak as of a specified date, which shall be true and correct in all material respects as of such date), and (ii) that are qualified as to materiality or an NFI Material Adverse Effect shall be true and correct in all respects as of the date hereof and as of the Closing Date as though made on and as of the Closing Date (other than those representations and warranties that speak as of a specified date, which shall be true and correct in all respects as of such date), provided, however, that the representations and warranties of NFI set forth in (x) the first sentence of Section 3.1 and (y) Sections 3.2 and 3.4 shall be true and correct in all respects as of the date hereof and as of the Closing Date as though made on and as of the Closing Date (other than those representations and warranties that speak as of a specified date, which shall be true and correct in all respects as of such date); and Investors shall have received a certificate signed on behalf of NFI by the chief executive officer or chief financial officer of NFI to the effect set forth in this paragraph. (b) Performance of Obligations of NFI. NFI shall have performed or complied in all material respects with all obligations, agreements and covenants required to be performed or complied with by it under this Agreement on or prior to the Closing Date, and Investors shall have received a certificate signed on behalf of NFI by the chief executive officer or chief financial officer of NFI to such effect. (c) No Litigation or Regulatory Proceedings. (i) There shall be no pending or threatened Litigation by any Governmental Entity, (A) seeking to restrain or prohibit the issuance of the Series D-1 Preferred Shares or the consummation of any of the transactions contemplated by this Agreement or the other Transaction Documents, or challenging the acquisition by Investors of any Series D-1 Preferred Shares or Common Shares, or seeking to obtain from NFI or any Investor any damages that are material in relation to NFI and its Subsidiaries taken as a whole, (B) seeking to prohibit or limit the ownership or operation by NFI, any Investor or any of their respective Subsidiaries of any material portion of the business or assets of NFI, or to compel NFI, any Investor or any of their respective Subsidiaries to dispose of or hold separate any material portion of the business or assets of NFI or any of its Subsidiaries, as a result of the transactions contemplated hereby, or (C) seeking to impose limitations on the ability of any Investor to acquire or hold, or exercise full rights of ownership of, any Series D-1 Preferred Shares or Common Shares, including the right to vote the Series D-1 Preferred Shares purchased by it or the Common Shares received by it upon conversion of such Series D-1 Preferred Shares on all matters properly presented to the Shareholders. (ii) Since the date of this Agreement, no material Litigation shall have been filed against NFI or any of its Subsidiaries in connection with the conduct and operation of their respective businesses, and no judgment shall have been entered against NFI or any of its Subsidiaries, which judgment remains unstayed and in effect for 60 days and which either (x) requires NFI or any of its Subsidiaries to pay in excess of $10,000,000 in damages or (y) results -51- 

 in an injunction or other equitable relief that materially prevents NFI and its Subsidiaries from conducting their respective businesses in a manner consistent with past practice. (iii) Since the date of this Agreement, no Litigation shall have been commenced or Order instituted, in either case by any Governmental Entity, seeking to suspend, revoke or modify any Permit that would result in NFI or any of its Subsidiaries being prohibited from doing business in any jurisdiction in which a material portion of the operations of NFI and its Subsidiaries, taken as a whole, are conducted as of the date of this Agreement. (iv) Since the date of this Agreement, none of NFI, any Subsidiary of NFI or any Key Employee shall have become subject to any criminal indictment in connection with the conduct or operation of the business of NFI and its Subsidiaries. (d) Restraints. No Restraint that would reasonably be expected to result, directly or indirectly, in any of the effects referred to in clauses (A) through (C) of Section 7.2(c)(i) shall be in effect. (e) No Material Adverse Effect. Since the date of this Agreement, there shall not have been an NFI Material Adverse Effect; and Investors shall have received a certificate signed on behalf of NFI by the chief executive officer or chief financial officer of NFI to the effect set forth in this paragraph. (f) Transaction Documents. NFI shall have (i) executed and delivered to such Investor counterparts of the Registration Rights and Shareholders Agreement, the Articles Supplementary and the Standby Purchase Agreement and (ii) filed the Series D-1 Articles Supplementary with the State Department of Assessments and Taxation of Maryland. (g) Legal Opinion. Such Investor shall received a legal opinion of counsel to NFI. (h) REIT Opinion. Such Investor shall have received an opinion of counsel, in form and substance satisfactory to Investors, to the effect that NFI was organized and has operated in conformity with the requirements for qualification and taxation as a Section 856 Trust, effective for each of its taxable years ended December 31, 1996, through and including December 31, 2006, and its current organization and intended method of operation will enable it to continue to meet the requirements for qualification and taxation as a Section 856 Trust for taxable year 2007. In rendering such opinion, counsel may rely on customary assumptions and qualifications, and also on representations from NFI as to factual matters, including representations made by NFI's management regarding its organization, assets, sources of gross income and other matters related to the conduct of NFI's business operations, which representations shall be in form and substance satisfactory to Investors. Such opinion shall provide that it may be relied upon by NFI and its successors and assigns. (i) No Bankruptcy. Neither NFI nor any of its Subsidiaries pursuant to or within the meaning of any Bankruptcy Law shall have (i) commenced a voluntary case or proceeding, (ii) consented to the entry of an order for relief against it in an involuntary case, (iii) consented to the appointment of a Custodian of it or for all or substantially all of its property or (iv) made a general assignment for the benefit of its creditors. In addition, no court of competent -52- 

 jurisdiction shall have entered an order or decree under any Bankruptcy Law that (i) is for relief against NFI or any of its Subsidiaries in an involuntary case, (ii) appoints a Custodian of NFI or any of its Subsidiaries or for all or substantially all of any of their respective assets or (iii) orders the liquidation of NFI or any of its Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. (j) Key Employment Agreements. (i) The Key Employees shall remain employed by NFI (and shall not have given notice of their intent to terminate their employment with NFI), (ii) the Key Employment Agreements will continue to be in full force and effect, and (iii) no action will have been taken by any Key Employee to terminate or rescind any such Key Employment Agreement. (k) Increase in Board Size. NFI shall have taken such actions as are necessary to increase the size of NFI's Board of Directors to eight directors. (l) Secretary's Certificate. NFI shall have delivered to such Investor a certificate executed by the Secretary or an Assistant Secretary of NFI and dated as of the Closing Date, in form and substance reasonably acceptable to such Investor, attaching copies of and certifying as to (i) the resolutions adopted by NFI's Board of Directors authorizing the consummation of the transactions contemplated by the Transaction Documents, (ii) no amendments to the Charter since a specified date, (iii) the Bylaws of NFI in effect at the Closing and (iv) incumbency and signatures of the officers of NFI executing this Agreement and any of the other Transaction Documents. (m) Charter and Good Standing Certificates. NFI shall have delivered to such Investor (i) a copy of the Charter certified as of a recent date by the State Department of Assessments and Taxation of Maryland and (ii) a certificate of good standing, or the equivalent thereof, of NFI and each of the Material Subsidiaries, issued as of a recent date by the applicable Governmental Entity of the jurisdiction of its organization, and a certificate evidencing foreign qualification as of a date within 10 days of the Closing Date of NFI and each such Material Subsidiary issued by the applicable Governmental Entity of each jurisdiction in which it conducts a material amount of business. SECTION 7.3 Conditions to Obligations of NFI. The obligations of NFI to consummate the sale and issuance of the Series D-1 Preferred Shares to Investors and the other actions to be taken at the Closing are further subject to the satisfaction, or waiver by NFI, on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of each Investor set forth in this Agreement (i) that are not qualified as to materiality or an Investor Material Adverse Effect shall be true and correct in all material respects as of the date hereof and as of the Closing Date as though made on and as of the Closing Date (other than those representations and warranties that speak as of a specified date, which shall be true and correct in all material respects as of such date), and (ii) that are qualified as to materiality or an Investor Material Adverse Effect shall be true and correct in all respects as of the date hereof and as of the Closing Date as though made on and as of the Closing Date (other than those representations and warranties that speak as of a specified date, which shall be true and correct in all respects as of -53- 

 such date; and NFI shall have received a certificate signed on behalf of each Investor by an executive officer of such Investor to the effect set forth in this paragraph. (b) Performance of Obligations of Investors. Each Investor shall have performed or complied in all material respects with all obligations, agreements and covenants required to be performed or complied with by it under this Agreement on or prior to the Closing Date, and NFI shall have received a certificate signed on behalf of such Investor by an executive officer of such Investor to such effect. (c) Transaction Documents. Each of the Investors shall have executed and delivered to NFI such Investor's counterpart of the Registration Rights and Shareholders Agreement and the Standby Purchase Agreement. ARTICLE VIII TERMINATION PRIOR TO CLOSING SECTION 8.1 Termination of Agreement. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written consent of NFI and Investors; (b) by NFI or either Investor, if there shall be any Order of any Governmental Entity which prohibits or restrains any party from consummating the transactions contemplated hereby, and such Order shall have become final and nonappealable; (c) by NFI or either Investor, if the Closing has not occurred on or prior to September 15, 2007 (the "Outside Date"); provided, however, that the right to terminate this Agreement under this Section 8.1(c) shall not be available to a party if such party has failed to fulfill any obligation under this Agreement and such failure has materially contributed to the failure of the Closing to occur on or prior to such date. (d) by either Investor (if such Investor is not in material breach of its obligations under this Agreement), in the event of any breach by NFI of any of NFI's agreements, representations or warranties contained herein that (i) would reasonably be expected to result in the failure of a condition set forth in Section 7.1, 7.2(a) or 7.2(b) to be satisfied, and (ii) cannot be or has not been cured by the Outside Date; or (e) by NFI (if NFI is not in material breach of its obligations under this Agreement), in the event of any breach by either Investor of any of such Investor's agreements, representations or warranties contained herein that (i) would reasonably be expected to result in the failure of a condition set forth in Section 7.1, 7.3(a) or 7.3(b) to be satisfied and (ii) cannot be or has not been cured by the Outside Date. SECTION 8.2 Procedure Upon Termination and Consequences. Either Investor or NFI may terminate this Agreement when permitted pursuant to Section 8.1 by delivering written notice of such termination to the other parties, and such termination shall be effective upon delivery of such notice in accordance with Section 10.2. If this Agreement is -54- 

 terminated as provided herein, (a) Investors (and their respective agents and representatives) shall return to NFI all documents, and other material obtained from NFI that constitutes confidential information under such Investor's Confidentiality Agreement, whether obtained before or after the execution hereof, and (b) such termination shall be the sole remedy of Investors and NFI with respect to breaches of any agreement, representation or warranty contained in this Agreement and none of the parties hereto nor any of their respective trustees, directors, officers or Affiliates, as the case may be, shall have any liability or further obligation to any other party to this Agreement except with respect to this Section 8.2, Article X, the terms of the other Transaction Documents and the Confidentiality Agreement, including with respect to information that is subject to the Confidentiality Agreement pursuant to this Agreement, each of which shall survive the termination of this Agreement. Notwithstanding the foregoing, none of the parties hereto shall be relieved or released from any liabilities or damages arising out of its breach of this Agreement. ARTICLE IX INDEMNIFICATION SECTION 9.1 Survival. The representations and warranties of the parties contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing for a period of eighteen months following the Closing Date; provided that the representations and warranties in (a) the first sentence of each of Sections 3.1 and 4.1 and (b) Sections 3.2, 3.4, 3.20, 3.21, and 4.2 shall survive indefinitely, and the representations and warranties in Sections 3.9 and 3.10 shall survive until the expiration of the applicable statute of limitations. The covenants and agreements of the parties contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing indefinitely or for any shorter period expressly specified therein. Notwithstanding the preceding sentences, any breach of representation, warranty, covenant or agreement in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentences, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time. SECTION 9.2 Indemnification by NFI. From and after the Closing, NFI shall defend, indemnify and hold harmless MassMutual and its Affiliates, members, partners, directors, shareholders and their respective officers, directors, employees, agents, advisers and representatives (collectively, the "MassMutual Indemnitees") and Jefferies and its Affiliates, members, partners, directors, shareholders and their respective officers, directors, employees, agents, advisers and representatives (collectively, the "Jefferies Indemnitees" and, together with the MassMutual Indemnitees, the "Investor Indemnitees") from and against, and pay or reimburse the Investor Indemnitees for, any and all damage, loss, liability, Taxes and expense (including reasonable expenses of investigation, enforcement and collection and reasonable attorneys' and accountants' fees and expenses in connection with any Litigation and any incidental or indirect damages, losses, liabilities or expenses, and diminution in value of the Convertible Shares), whether or not involving a third party claim, but excluding consequential, special, exemplary or punitive damages other than out-of-pocket damages or damages for the diminution in value of the Convertible Shares (collectively, "Losses"), resulting from or arising -55- 

 out of (a) any inaccuracy in or breach of any representation or warranty, when made or deemed made by NFI in or pursuant to this Agreement or any certificate delivered at Closing by NFI pursuant to this Agreement, or (b) any failure of NFI to perform any covenant or agreement under this Agreement. SECTION 9.3 Indemnification by Investors. From and after the Closing, each Investor, individually but not jointly, shall defend, indemnify and hold harmless NFI and its officers, directors, employees, agents, advisers and representatives (collectively, the "NFI Indemnitees") from and against, and pay or reimburse the NFI Indemnitees for, any and all Losses resulting from or arising out of (a) any inaccuracy in or breach of any representation or warranty made or deemed made by such Investor in or pursuant to this Agreement or any certificate delivered by or on behalf of such Investor at Closing pursuant to this Agreement or (b) any failure of such Investor to perform any covenant or agreement under this Agreement. NFI acknowledges, on behalf of the NFI Indemnitees, that an NFI Indemnitee may assert a claim for indemnification pursuant to this Section 9.3 solely against that Investor in breach of the representation, warranty or covenant giving rise to such claim, and not against the other Investor unless such other Investor is also in breach of a representation, warranty or covenant giving rise to such claim. SECTION 9.4 Certain Limitations on Indemnification. (a) Any indemnification payment due to the Investor Indemnitees or the NFI Indemnitees, as the case may be, pursuant to this Article IX shall be satisfied by cash reimbursement thereof. (b) For purposes of determining the amount of Losses to be indemnified pursuant to this Article IX (but not for purposes of determining whether an inaccuracy in or breach of any representation or warranty has occurred), any inaccuracy in or breach of any representation or warranty (other than the representation and warranty contained in Section 3.8) shall be determined without regard to any materiality, "NFI Material Adverse Effect," "Investor Material Adverse Effect" or similar qualification contained in or otherwise applicable to such representation or warranty. (c) Notwithstanding anything to the contrary contained in this Agreement, except with respect to any Third Party Claims which shall not be subject to the limitations set forth in this Section 9.2(c), NFI shall not be required to indemnify (i) any MassMutual Indemnitee for Losses under Section 9.2(a) (excluding Losses under Section 9.2(a) in respect of a Third Party Claim) to the extent the aggregate amount of such Losses for which NFI has actually indemnified the MassMutual Indemnitees under Section 9.2(a) with respect to prior claims exceeds the MassMutual Consideration plus the MassMutual Standby Consideration (the "MassMutual Cap") and (ii) any Jefferies Indemnitee for Losses under Section 9.2(a) (excluding Losses under Section 9.2(a) in respect of a Third Party Claim) to the extent the aggregate amount of such Losses for which NFI has actually indemnified the Jefferies Indemnitees under Section 9.2(a) with respect to prior claims exceeds the Jefferies Consideration plus the Jefferies Standby Consideration (the "Jefferies Cap"). Notwithstanding anything to the contrary contained in this Agreement, MassMutual shall not be required to indemnify any NFI Indemnitees for Losses under Section 9.3(a) to the extent the aggregate amount such Losses for which MassMutual has -56- 

 actually indemnified the NFI Indemnitees under Section 9.3(a) with respect to prior claims exceeds the MassMutual Cap. Notwithstanding anything to the contrary contained in this Agreement, Jefferies shall not be required to indemnify any NFI Indemnitees for Losses under Section 9.3(a) to the extent the aggregate amount such Losses for which Jefferies has actually indemnified the NFI Indemnitees under Section 9.3(a) with respect to prior claims exceeds the Jefferies Cap. (d) The rights and remedies of any party in respect of any inaccuracy or breach of any representation, warranty, covenant or agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts or circumstances upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement as to which there is no inaccuracy or breach. The representations, warranties and covenants of NFI and Investors' rights to indemnification with respect thereto shall not be affected or deemed waived by reason of any investigation made by or on behalf of Investors (including by any of their respective advisors, consultants or representatives) or by reason of the fact that Investors or any of such advisors, consultants or representatives knew or should have known that any such representation or warranty is, was or might be inaccurate. (e) Except as provided in Section 10.8, the indemnity provided for in this Article IX shall be the sole and exclusive remedy of Investor Indemnitees or NFI Indemnitees, as the case may be, after the Closing for any inaccuracy of any representation or warranty of NFI or Investors, respectively, herein or any other breach of this Agreement, provided that nothing herein shall limit in any way any such party's remedies in respect of fraud by the other party in connection with the transactions contemplated hereby. (f) No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party (or any of its Affiliates) for any special, exemplary, punitive or consequential damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, other than any out-of-pocket damages or damages for the diminution in value of the Convertible Shares. (g) Any indemnification payments made pursuant to this Agreement shall be treated for Tax purposes as an adjustment to the MassMutual Consideration or the Jefferies Consideration, as applicable. In calculating any Loss there shall be deducted any insurance recovery actually received by the Indemnified Party in respect thereof (and no right of subrogation shall accrue hereunder to any insurer). SECTION 9.5 Third Party Claim Procedures. In the case of any Litigation asserted by a third party (a "Third Party Claim") against a party entitled to indemnification under this Agreement (an "Indemnified Party"), notice shall be given by the Indemnified Party to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of such Third Party Claim, and the Indemnifying Party, at its option and at its own expense, shall have the right to conduct and control, through counsel of its choosing (which counsel must be reasonably satisfactory to the Indemnified Party), the defense, compromise or settlement of any Third Party Claim against such Indemnified Party as to which indemnification will be sought by any Indemnified Party from any Indemnifying Party -57- 

 hereunder, and in any such case the Indemnified Party shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnifying Party in connection therewith; provided, that (a) the Indemnified Party may participate, through counsel chosen by it and at its own expense, in the defense of any such Third Party Claim as to which the Indemnifying Party has so elected to conduct and control the defense thereof and (b) the Indemnifying Party shall not, without the written consent of the Indemnified Party (which written consent shall not be unreasonably withheld or delayed), pay, compromise or settle any such Third Party Claim. Notwithstanding the foregoing, in the event any Third Party Claim is solely for money damages, the Indemnifying Party shall have the right to pay, settle or compromise any such Third Party Claim without such consent, provided, that the Indemnifying Party acknowledges and agrees in writing that it has an obligation to provide indemnification hereunder pursuant to such Third Party Claim. SECTION 9.6 Independent Committee. All actions of NFI with respect to a claim for indemnification pursuant to this Article IX, whether by Investor Indemnitees or NFI Indemnitees, including negotiation or settlement with Investors or Investor Indemnitees, decisions regarding the making or defending of indemnification claims and the hiring of legal counsel and other advisors with respect thereto shall be taken by a committee of the Board of Directors of NFI consisting solely of "independent directors" pursuant to the rules of the NYSE who are not specifically designated by Investors pursuant to Sections 10(a)-(e) of the Registration Rights and Shareholders Agreement. ARTICLE X GENERAL PROVISIONS SECTION 10.1 Fees and Expenses. Upon the Closing, NFI shall pay the reasonably documented out-of-pocket expenses of Investors incurred in connection with the transactions contemplated by this Agreement. Upon the earlier of (x) the closing of the transactions under the Standby Purchase Agreement and (y) the termination of the Standby Purchase Agreement, NFI shall pay the reasonably documented out-of-pocket expenses of Investors incurred after the Closing in connection with the Rights Offering and/or the transactions contemplated by any of the Transaction Agreements (whether or not the Rights Offering or any such transactions are actually consummated). SECTION 10.2 Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally, by facsimile (which is confirmed) or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): -58- 

 (a) if to MassMutual, to Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, Massachusetts 01111 Fax: (413) 744-6350 Attention: Larry N. Port and Babson Capital Management LLC 1500 Main Street, Suite 2800 Springfield, Massachusetts 01111 Fax: (413) 226-2064 Attention: Rodney J. Dillman, Esq. with copies to: Sidley Austin LLP 1 South Dearborn Chicago, Illinois 60603 Fax: (312) 853-7036 Attention: Larry A. Barden, Esq. (b) if to Jefferies, to Jefferies Capital Partners 520 Madison Avenue New York, New York 10022 Fax: (212) 284-1717 Attention: Brian P. Friedman with copies to: Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038-4982 Fax: (212) 806-6006 Attention: Melvin Epstein, Esq. -59- 

 (c) if to NFI, to NovaStar Financial, Inc. 8140 Ward Parkway, Suite 300 Kansas City, Missouri 64114 Attention: Jeffrey Ayers, Esq. with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Fax: (212) 259-6333 Attention: John Altorelli, Esq. SECTION 10.3 Interpretation. When a reference is made in this Agreement to a Section, Exhibit, or Schedule, such reference shall be to a Section of, or an Exhibit, or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". Whenever the singular is used herein, the same shall include the plural, and whenever the plural is used herein, the same shall include the singular, where appropriate. SECTION 10.4 Entire Agreement; No Third Party Beneficiaries; No Other Representations. This Agreement (including the NFI Disclosure Letter, the MassMutual Disclosure Letter, the Jefferies Disclosure Letter and all Exhibits hereto), together with the other Transaction Documents and the Confidentiality Agreement, supersedes all prior agreements and understandings among the parties with respect to such subject matter and supersedes any letters, memoranda or other documents or communications, whether oral, written or electronic, submitted or made by (i) Investors or their respective agents or representatives to NFI or any of their respective agents or representatives, or (ii) NFI, Deutsche Bank Securities Inc., or their respective agents or representatives to Investors or any of their agents or representatives, in connection with the bidding process which occurred prior to the execution of this Agreement or otherwise in connection with the negotiation and execution of this Agreement. Except for the provisions of Article IX (which shall be for the benefit of the Investor Indemnitees and the NFI Indemnitees), this Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 10.5 Governing Law. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of New York, without giving effect to its principles or rules of conflict of laws except Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York. -60- 

 SECTION 10.6 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by any of the parties without the prior written consent of the other parties, and any such assignment that is not consented to shall be null and void. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. Notwithstanding anything to the contrary in this Section 10.6, but subject to applicable legal requirements each Investor may assign, without the prior written consent of any other parties hereto, (i) all or any portion of its respective rights, benefits or obligations hereunder to an Affiliate of such Investor or any investment fund under the control of any Affiliate of such Investor and (ii) any rights under this Agreement to such Investor's financing institutions and subsequent purchasers of such Investor or substantially all of its assets, or (iii) any of its respective rights, benefits or obligations hereunder to the other Investor or any Affiliate of any Investor, provided, that in the case of clause (i), (ii) or (iii) above, no such assignment shall relieve such Investor of obligations under this Agreement that have not been performed timely by any such Affiliate assignee. SECTION 10.7 Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by each of the parties hereto or, in the case of a waiver, by the party waiving compliance; provided, that after the Closing Date, no amendments to this Agreement, or waivers hereunder, shall be made unless the amendment or waiver has been approved (i) by NFI's independent directors, as determined under the applicable provisions of the Exchange Act and the rules and regulations of the NYSE, or (ii) upon a vote of the Shareholders as a class (excluding any Common Shares held by Investors). SECTION 10.8 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to, in addition to any other remedies at law or otherwise, specific performance of this Agreement or an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States or any state court which in either case is located in the City and County of New York (any such federal or state court, a "New York Court"), in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any New York Court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction or venue by motion or other request for leave from any such New York Court. SECTION 10.9 Severability. (a) Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable Law, but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable Law in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. -61- 

 (b) No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. SECTION 10.10 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. SECTION 10.11 Independent Nature of Investors' Obligations and Rights. The obligations of each Investor under any Transaction Document are individual and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Investor confirms that it has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. NFI acknowledges that each Investor has independently participated in the negotiation of the transaction contemplated hereby and did not act as a group. Each Investor shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose. SECTION 10.12 Waiver of Jury Trial. Each of the parties hereby expressly waives any right to trial by jury in any dispute, whether sounding in contract, tort or otherwise, between or among any of the parties arising out of or related to the transactions contemplated by this Agreement, or any other instrument or document executed or delivered in connection herewith. Any party may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of the parties to the waiver of their right to trial by jury. -62- 

 IN WITNESS WHEREOF, NFI, MassMutual and Jefferies have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. NOVASTAR FINANCIAL, INC. By: /s/ Scott F. Hartman ----------------------------------------------- Name: Scott F. Hartman Title: Chairman and Chief Executive Officer MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: Babson Capital Management LLC, its investment adviser By: /s/ Larry N. Port ----------------------------------------------- Name: Larry N. Port Title: Managing Director JEFFERIES CAPITAL PARTNERS IV L.P. JEFFERIES EMPLOYEE PARTNERS IV LLC JCP PARTNERS IV LLC By: JEFFERIES CAPITAL PARTNERS IV LLC, as Manager By: /s/ Brian P. Friedman ------------------------------------------------ Name: Brian P. Friedman Title: Managing Member -63- 

 EXHIBIT A NOVASTAR FINANCIAL, INC. ARTICLES SUPPLEMENTARY 9.00% SERIES D2 MANDATORY CONVERTIBLE PREFERRED STOCK (Par Value $0.01 Per Share) Novastar Financial, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Under a power set forth in Article VI of the Charter of the Corporation, as amended, the Board of Directors of the Corporation, by resolution duly adopted classified and designated 6,147,000 shares of the authorized but unissued shares of common stock, par value $0.01 per share, of the Corporation as the "9.00% Series D2 Mandatory Convertible Preferred Stock"; and SECOND: The preferences, conversion, and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of shares of the 9.00% Series D2 Mandatory Convertible Preferred Stock are as follows: Section 1. Designation and Number. A series of Preferred Stock, designated as the "9.00% Series D2 Mandatory Convertible Preferred Stock" (the "Series D2 Preferred Stock") is hereby established. The number of shares of Series D2 Preferred Stock shall be 6,147,000 shares. The par value of the Series D2 Preferred Stock shall be $0.01 per share. Certain defined terms used in these Articles Supplementary have the meaning assigned thereto in Section 8. Section 2. Ranking. The Series D2 Preferred Stock shall rank, with respect to payment of dividends and distribution of assets upon a Liquidation Event: (i) senior to the common stock, par value $0.01 per share, of the Corporation (the "Common Stock"), whether now outstanding or hereafter issued, and to each other class or series of shares of the Capital Stock of the Corporation established by the Board of Directors of the Corporation (the "Board of Directors") after the date hereof, the terms of which do not expressly provide that such class or series of Capital Stock ranks senior to or pari passu with the Series D2 Preferred Stock as to payment of dividends and distribution of assets upon a Liquidation Event (collectively referred to as "Junior Shares"); (ii) pari passu with the 8.90% Series C Cumulative Redeemable Preferred Stock of the Corporation (the "Series C Preferred Stock"), the 9.00% Series D1 Convertible Preferred Stock of the Corporation (the "Series D1 Preferred Stock"), the 9.00% Series E Mandatory Convertible Preferred Stock of the Corporation (the "Series E Preferred Stock") and each class or series of shares of the Corporation, the terms of which expressly provide that such class or series ranks pari passu with the Series D2 Preferred Stock as to payment of dividends and distribution of assets upon a Liquidation Event (collectively referred to as "Parity Shares"); and (iii) junior to each other class or series of shares of the Corporation, the terms of which expressly provide that such class or series ranks senior to the Series D2 Preferred Stock as to payment of dividends and distribution of assets upon a Liquidation Event (collectively referred Ex. A-1 

 to as "Senior Shares"). The Corporation's ability to issue, authorize or increase the authorized amount of Senior Shares shall be subject to the provisions of Section 5. Section 3. Dividends. (a) Payment of Dividends. Dividends on the Series D2 Preferred Stock shall be cumulative and shall accumulate daily, whether or not such dividends have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends, at the rate per annum of 9.00% on the Adjusted Stated Value of each share of Series D2 Preferred Stock. Accumulated dividends on the Series D2 Preferred Stock shall be added to the Adjusted Stated Value of the Series D2 Preferred Stock (i) semi-annually on January ___ and July ___ of each year (each, a "Dividend Payment Date") and (ii) upon conversion of the Series D2 Preferred Stock into Common Stock. The amount of dividends accumulating on the Series D2 Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30-day months. Notwithstanding the foregoing, if authorized by the Board of Directors, the Corporation may elect to pay dividends that have accumulated on the Series D2 Preferred Stock since the last Dividend Payment Date in cash (rather than increasing the Adjusted Stated Value of the Series D-2 Preferred Stock), out of funds legally available for the payment of dividends. Cash dividends shall be paid on the first Dividend Payment Date following their authorization by the Board of Directors and declaration by the Corporation to the Holders of record at the close of business on the 30th day preceding such Dividend Payment Date; provided that, if any Dividend Payment Date falls on a day that is not a Business Day, the related dividend will be paid on the next day that is a Business Day, with the same force and effect as if the dividend payment had been made on such Dividend Payment Date with interest at the Dividend Rate with respect to the delayed payment. If the Board of Directors authorizes a cash dividend, the Corporation shall make a public announcement thereof not less than 20 days prior to the relevant Dividend Payment Date. Further notwithstanding the foregoing, if, after giving effect to the addition of all or any part of accumulated dividends to the Adjusted Stated Value of Series D2 Preferred Stock, the Corporation would not have sufficient number of unreserved authorized shares of Common Stock for issuance upon the conversion in full of all outstanding shares of Series D2 Preferred Stock and all other convertible, exercisable or exchangeable securities of the Corporation that are then convertible into, exercisable for or exchangeable for shares of Common Stock (other than any such securities for which shares of Common Stock have been reserved by the Corporation for issuance upon conversion, exercise or exchange thereof), then the amount of such dividend that would cause there to be such an insufficient number of unreserved authorized shares of Common Stock shall, to the extent that the Board of Directors and the Corporation may lawfully do so under the terms of the MGCL, be authorized by the Board of Directors and declared and paid by the Corporation in cash rather than such amount being added to the Adjusted Stated Value of the Series D2 Preferred Stock. (b) Payment of Cash Dividends on Parity Stock. No dividends or other distributions (other than a dividend or distribution payable solely in shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of fractional shares) may be declared, made or paid, or set apart for payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any Parity Stock or Junior Stock) by or on behalf of the Corporation (including by any Subsidiary of the Corporation), directly or indirectly, including without limitation, any such dividend, distribution, redemption, purchase or acquisition of Ex. A-2 

 Capital Stock of any Subsidiary of the Corporation (except by conversion into or exchange for shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock)) unless all cash dividends on the Series D2 Preferred Stock that have been authorized by the Board of Directors are paid in full, or a sum sufficient for the payment thereof in full is set apart for such payment. For the avoidance of doubt, this Section 3(b) does not limit the ability of the Corporation to add accumulated dividends to the Adjusted Stated Value of the Series D2 Preferred Stock as provided in Section 3(a). (c) Participation Rights in Common Stock Dividends. In the event the Corporation should at any time or from time to time after the date Articles Supplementary for the Series D2 Preferred Stock are first filed with the State Department of Assessments and Taxation of Maryland, fix a record date for the making of any dividend, distribution or payment of any sort or kind to holders of shares of Common Stock, including, without limitation, distributions of evidences of indebtedness, assets (including cash), other property or shares of Common Stock or other securities in the Corporation or rights, options or warrants with respect thereto, the Corporation may not pay any such dividend, distribution or payment unless the Corporation also pays to each Holder of Series D2 Preferred Stock a distribution equal to the distribution such Holder would have been entitled to receive if such Holder had exercised its right to convert all of its Series D2 Preferred Stock for shares of Common Stock pursuant to Section 6 immediately prior to the record date with respect to such dividend or distribution. The payment made to Holders of Series D2 Preferred Stock under the preceding sentence shall be made concurrently with the payment of the dividend or distribution to the holders of shares of Common Stock. Any dividend or distribution that is paid with respect to the shares of Series D2 Preferred Stock pursuant to this Section 3(c) shall be in addition to, separate from, and shall not reduce or otherwise affect, the dividends accruing on each share of Series D2 Preferred Stock pursuant to Section 3(a). (d) Certain Determinations for Preferential Rights Upon Dissolution. Solely for purposes of determining whether a distribution (other than upon voluntary or involuntary dissolution) by dividend, redemption or other acquisition of shares of the Corporation or otherwise is permitted under Maryland law, amounts that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the holders of the Series D2 Preferred Stock will not be added to the Corporation's total liabilities. Section 4. Liquidation Preference. (a) Liquidation Event. In the event of any voluntary or involuntary liquidation (in bankruptcy or otherwise), dissolution or winding-up of the Corporation (each, a "Liquidation Event"), each Holder of Series D2 Preferred Stock, by reason of its ownership thereof, shall be entitled to receive out of the assets of the Corporation available for distribution to shareholders of the Corporation, prior and in preference to any payment or distribution of assets of the Corporation to the holders of its shares of Common Stock or any other Junior Shares, but after any distribution on any Senior Shares, an amount equal to the greater of (i) the aggregate Liquidation Preference attributable to the Series D2 Preferred Stock held by such Holder, or (ii) the amount that such Holder would have been entitled to receive with respect to such Liquidation Event if it had exercised its right to convert all of its Series D2 Preferred Stock into shares of Ex. A-3 

 Common Stock pursuant to Section 6 immediately prior to such Liquidation Event. The "Liquidation Preference" of each share of Series D2 Preferred Stock shall be the Adjusted Stated Value per share of Series D2 Preferred Stock plus all accumulated dividends per share of Series D2 Preferred Stock that have not already been added to the Adjusted Stated Value thereof or paid in cash pursuant to Section 3(a). (b) Manner of Distribution. In the event the assets of the Corporation available for distribution or payment to Holders upon any Liquidation Event shall be insufficient to pay in full all amounts to which such Holders are entitled pursuant to Section 4(a), (i) no such distribution or payment shall be made on account of any Junior Shares upon such Liquidation Event; and (ii) no such distribution or payment shall be made on account of any Parity Shares upon such Liquidation Event unless proportionate amounts are paid on account of the Series D2 Preferred Stock, with all such distributions or payments on account of the Series D2 Preferred Stock and any Parity Shares made pro rata on the basis of the aggregate liquidation preference of the outstanding shares of each such class or series of Capital Stock and (without double-counting) accumulated dividends to which the holder of each such class or series is entitled to receive upon such Liquidation Event. After the payment to the Holders of the full preferential amounts provided for above, the Holders, in their capacities as holders of Series D2 Preferred Stock (and no other capacity), shall have no right or claim to any of the remaining assets of the Corporation. Section 5. Voting Rights. (a) Except as provided in Section 5(c) or required by applicable law, the Series D2 Preferred Stock shall be entitled to notice of, attend and vote at all general and special meetings of the Corporation as a single class with all other shareholders entitled to notice of, attend and vote at such general or special meetings of the Corporation on the same terms as a holder of Common Stock. At any such general or special meeting, each Holder shall have the number of votes for each share of Series D2 Preferred Stock held by such Holder equal to the whole number of shares of Common Stock into which such share of Series D2 Preferred Stock may be converted pursuant to Section 6 as of the record date for the vote (provided, that the number of fractional shares resulting from the conversion of shares of Series D2 Preferred Stock held by a Holder shall be aggregated for purposes of determining the number of shares of Common Stock for which such Holder is entitled to vote). (b) Except as provided in Section 5(c), so long as any shares of Series D2 Preferred Stock are outstanding, in addition to any other vote of shareholders of the Corporation required under applicable law (including, without limitation, the MGCL) or the Charter or Bylaws of the Corporation, the prior approval or written consent, in accordance with the MGCL, the Charter and Bylaws of the Corporation, of the Holders of a majority of the number of outstanding shares of Series D2 Preferred Stock, voting separately as a class, will be required for the Corporation to (i) create, issue, authorize or increase (including by way of a recapitalization) the authorized amount of, or create, issue or authorize any obligation or security convertible into, or exercisable or exchangeable for, or evidencing a right to purchase, any Senior Shares, (ii) amend, alter, change or repeal any provision of the Charter, if such amendment, alteration, change or repeal materially and adversely affects the rights of the Series D2 Preferred Stock, or (iii) reclassify any authorized shares of the Corporation into any Senior Shares, or any obligation or security convertible into or, exercisable or exchangeable for, or evidencing a right to purchase any Senior Shares. Ex. A-4 

 (c) Notwithstanding Sections 5(a) and (b), except as required by applicable law, the Series D2 Preferred Stock shall be non-voting and shall not be entitled to the voting rights included in Sections 5(a) and (b) prior to the date on which all of the Regulatory Approvals have been obtained or made (a "Voting Activation Event"). The Corporation shall make a public announcement of a Voting Activation Event within five days from the occurrence thereof; provided that the failure of the Corporation to make such an announcement shall have no effect on the voting rights of the Series D2 Preferred Stock and the Series D2 Preferred Stock shall automatically become voting and entitled to the voting rights set forth in Sections 5(a) and (b) on the date of the occurrence of a Voting Activation Event. Section 6. Conversion of Series D2 Preferred Stock into Common Stock. The Series D2 Preferred Stock may be converted into Common Stock as follows (the "Conversion Rights"): (a) Holder's Right to Convert. Subject to Section 6(d), each share of Series D2 Preferred Stock shall be convertible, at the option of the Holder thereof, at any time and from time to time, into a number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Adjusted Stated Value of such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. (b) Corporation's Right to Convert. If at any time on or after the three-year anniversary of the Issue Date, (i) the Common Stock is Publicly Traded as of the date the Corporation delivers a Forced Conversion Announcement and (ii) the Closing Sale Price of the Common Stock exceeds 200% of the then existing Conversion Price for 40 of the 50 consecutive Trading Days preceding the date of delivery by the Corporation of the Forced Conversion Announcement, then the Corporation may elect to cause all (but not less than all) of the outstanding shares of Series D2 Preferred Stock to be converted into a number of fully paid and nonassessable shares of Common Stock determined by dividing, with respect to each share of Series D2 Preferred Stock, the Adjusted Stated Value of such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Any election to convert pursuant to this Section 6(b) shall be made by public announcement thereof (a "Forced Conversion Announcement"). (c) Mandatory Conversion. On the ninth anniversary of the Issue Date, each share of Series D2 Preferred Stock shall automatically be converted into a number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Adjusted Stated Value for such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on such ninth anniversary date. (d) Mechanics of Conversion. Before any holder of Series D2 Preferred Stock in certificated form shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series D2 Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. Before any holder of Series D2 Preferred Stock in book-entry form shall be entitled Ex. A-5 

 to convert the same into shares of Common Stock, he shall comply with the procedures of the depositary for the shares of Series D2 Preferred Stock held by such Holder. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series D2 Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the full number of shares of Common Stock to which such holder shall be entitled as aforesaid. In case any Series D2 Preferred Stock share certificate shall be surrendered for partial conversion, the Corporation shall execute and deliver to the Holder of the Series D2 Preferred Stock so surrendered, without charge to such Holder, a new share certificate in an aggregate Adjusted Stated Value equal to the unconverted portion of the surrendered certificate. Such conversion shall be deemed to have been made immediately prior to the close of business on the date on which the requirements set forth in this Section 6(d) have been satisfied, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act, the conversion may, at the option of any holder tendering such Series D2 Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock upon conversion of such Series D2 Preferred Stock shall not be deemed to have converted such Series D2 Preferred Stock until immediately prior to the closing of such sale of securities. (e) Conversion Price Adjustments of Series D2 Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series D2 Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If at any time the Corporation should issue (or be deemed to issue) any Additional Stock without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall be adjusted pursuant to this Section 6(e)(i), as follows: the new Conversion Price shall be the result of (A) (i) the total number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Stock (on a fully-diluted basis assuming exercise, conversion or exchange of all outstanding exercisable, convertible or exchangeable securities of the Corporation) ("Outstanding Common") multiplied by the applicable Conversion Price in effect prior to the issuance of such Additional Stock, plus (ii) the net aggregate amount of the consideration received by the Corporation for such Additional Stock, divided by (B) the number of shares of Outstanding Common plus the number of shares of such Additional Stock so issued. (B) No adjustment of the Conversion Price for the Series D2 Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Sections 6(e)(i)(E)(3) and 6(e)(i)(E)(4), no adjustment of such Conversion Price pursuant to this Section 6(e)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. Ex. A-6 

 (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid or payable therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Issue Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 6(e)(i) and Section 6(e)(ii): 1. The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 6(e)(i)(C) and 6(e)(i)(D)), if any, received or receivable by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. In case any such options to purchase or rights to subscribe for Common Stock shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such options or rights by the parties thereto, such options and/or rights shall be deemed to have been issued without consideration (except to the extent consideration is payable to the Corporation upon the exercise of such options or rights). 2. The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received or receivable by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution Ex. A-7 

 adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 6(e)(i)(C) and 6(e)(i)(D)). In case any such convertible or exchangeable securities shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such convertible or exchangeable securities by the parties thereto, such convertible and/or exchangeable securities shall be deemed to have been issued without consideration (except to the extent consideration is payable to the Corporation upon conversion or exchange of such securities or upon the exercise of any related options or rights). 3. In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series D2 Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 4. Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series D2 Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. 5. The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Sections 6(e)(i)(E)(1) and 6(e)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 6(e)(i)(E)(3) or 6(e)(i)(E)(4). Anything in this Section 6(e)(i) to the contrary notwithstanding, no adjustment to the Conversion Price shall be made pursuant to this Section 6(e)(i) unless the Shareholder Vote has been obtained. If the Shareholder Vote is obtained, then the Conversion Price for a share of Series D1 Preferred Stock will be automatically adjusted as of the date the Shareholder Vote is obtained to take into account all issuances (or deemed issuances) of Additional Stock, if any, that were made prior to the date the Shareholder Vote was obtained and which would have a resulted in an adjustment to the Conversion Price of such share of Series D1 Preferred Stock under this Ex. A-8 

 Section 6(e)(i) if the Shareholder Vote had been obtained as of the date of such issuance (or deemed issuance). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 6(e)(i)(E)) by the Corporation after the Issue Date) other than: (A) Common Stock issued pursuant to a transaction described in Section 6(e)(iii) hereof; (B) Shares of Common Stock issued or issuable to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors; (C) Shares of Common Stock issued or issuable upon conversion of the Series D1 Preferred Stock, the Series D2 Preferred Stock; and (D) Shares of Series E Preferred Stock or shares of Common Stock, issued in satisfaction of the 2007 Section 858 Dividend and shares of Common Stock issued upon conversion of such shares of Series E Preferred Stock. (iii) In the event the Corporation should at any time or from time to time after the date Articles Supplementary for the Series D2 Preferred Stock are first filed with the State Department of Assessments and Taxation of Maryland, fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock Issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series D2 Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series D2 Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 6(e)(i)(E); provided that this Section 6(e)(iii) shall not be applicable to any dividend or other distribution that is actually paid to the Holders of Series D2 Preferred Stock pursuant to Section 3(b). (iv) If the number of shares of Common Stock outstanding at any time after the Issue Date is decreased by a combination of the outstanding shares of Common Stock, then, following the date of such combination, the Conversion Price for the Series D2 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable Ex. A-9 

 on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in these Articles Supplementary) provision shall be made so that the holders of the Series D2 Preferred Stock shall thereafter be entitled to receive upon conversion of such Series D2 Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 6 with respect to the rights of the holders of such Series D2 Preferred Stock after the recapitalization to the end that the provisions of this Section 6 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of such Series D2 Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (g) No Impairment. The Corporation will not, by amendment of its Charter or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Series D2 Preferred Stock against impairment. The Corporation shall, as a condition precedent to any such reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or other voluntary action, cause any successor to the Corporation or acquiring person or entity, as the case may be, to issue convertible preferred stock to each Holder of Series D2 Preferred Stock with preferences, conversion and other rights, powers, restrictions, limitations, qualifications and terms and conditions as nearly equivalent as may be practicable to those contained in these Articles Supplementary, including the right to convert such preferred stock into the kind and amount of shares and other securities and property which the Holder would have owned or have been entitled to receive after the happening of any such reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action had such Holder converted its Series D2 Preferred Stock into Common Stock immediately prior to such action. Without limitation of the foregoing, such preferred stock shall provide for adjustments in respect of such shares of stock and other securities and property, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 6(e). The provisions of this Section 6(g) will similarly apply to successive reorganizations, recapitalizations, transfers of assets, consolidations, mergers, dissolutions, issuances or sales of securities or other voluntary actions. (h) No Fractional Shares and Notice as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series D2 Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded upward to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares Ex. A-10 

 of Series D2 Preferred Stock the Holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series D2 Preferred Stock pursuant to this Section 6, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and make a public announcement thereof setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. (iii) All adjustments to the Conversion Price shall be calculated to the nearest one one-thousandth (1/1000) of a cent. (i) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall make a public announcement at least twenty (20) days prior to the date specified therein specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. From and after the date that the Corporation consummates a four to one reverse stock split, the Corporation shall at all times keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series D2 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Series D2 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series D2 Preferred Stock, in addition to such other remedies as shall be available to the holder of Series D2 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to (i) obtain the requisite stockholder approval of any necessary amendment to the Charter of the Corporation or (ii) consummate a reverse stock split. Section 7. Transfer Restrictions. (a) Certain Definitions. As used in this Section 7: "5-Percent Stockholder" means a "5-percent shareholder" of the Corporation as defined in Treasury Regulation Section 1.382-2T(g). "Completion" occurs, and a Transfer is "Completed," when all steps have been taken to effect the Transfer of beneficial ownership. "Entity" means an entity within the meaning of Treasury Regulation Section 1.382-3(a)(l). Ex. A-11 

 "IRC" means the Internal Revenue Code of 1986, as amended from time to time. "Notice Date" means a testing date (as described in Treasury Regulation Section 1.382-2(a)(4)) on which the aggregate Percentage Stock Increases are equal to or greater than the Threshold Percentage less ten percentage points. "Percentage Stock Increase" means on any testing date (as defined in Treasury Regulation Section 1.382-2(a)(4)) the increase in the Percentage Stock Ownership of Stock of the Corporation by a 5-Percent Stockholder over the lowest Percentage Stock Ownership of Stock of the Corporation by such 5-Percent Stockholder at any time during the testing period (as defined in Section 382(i) of the Code). For this purpose, Treasury Regulation Section 1.382-2T(g)(5)(i)(A) shall apply in determining the Percentage Stock Increase of any 5-Percent Stockholder. "Percentage Stock Ownership" means percentage stock ownership of Stock of the Corporation determined in accordance with the Treasury Regulations under Section 382 of the IRC. "Prohibited Transfer" means a purported Substantial Stockholder Transfer, but only to the extent that such Transfer is null and void ab initio under Section 7(b) or Section 7(c). "Restriction Notice" means a written notice provided by the Corporation to a potential Transferee, prior to 5:00 p.m. (New York time) on the fifth Business Day following the day of receipt by the Corporation of a Transfer Notice, which written notice states that the Corporation believes that a Restriction Period either has or has not commenced and, if it has, that the Termination Date either has or has not occurred. "Restriction Period" means a period: (1) beginning on a testing date (as described in Treasury Regulation Section 1.382-2(a)(4)) on which the aggregate Percentage Stock Increases of all 5-Percent Stockholders on such testing date (taking into account all pending Transfers) equals or exceeds the Threshold Percentage; and (2) ending on the earliest date on which the Board of Directors determines that (a) an ownership change (within the meaning of section 382 of the IRC) would not result in a substantial limitation on the ability of the Corporation (or a direct or indirect subsidiary of the Corporation) to use otherwise available Tax Benefits, or (b) no significant value attributable to Tax Benefits would be preserved by continuing the Transfer restrictions herein (the earliest of the dates described in this clause (2) being hereafter referred to as the "Termination Date"). "Stock" means stock as that term is used in Section 382(k)(6)(A) of the IRC. "Substantial Stockholder" means an individual or Entity that acquires or, if the Transfer Restrictions or the Notice Restrictions are then applicable, that purports to acquire direct beneficial ownership of Series D2 Preferred Stock in a Substantial Stockholder Transfer. Ex. A-12 

 "Substantial Stockholder Transfer" means a Transfer that results in a Percentage Stock Increase or, if the Transfer Restrictions or the Notice Restrictions are then applicable, that would result in a Percentage Stock Increase if it occurred and were not void ab initio. "Tax Benefits" means net operating loss carryovers (as defined in Section 172(b)(2) of the IRC) and net unrealized built-in loss (as defined in Section 382(h)(1)(B) of the IRC). "Threshold Percentage" means 40%. "Transfer" means any direct or indirect sale, transfer, exchange, issuance, grant, redemption, repurchase assignment, conveyance or other disposition for consideration, whether voluntary or involuntary, and whether by operation of law or otherwise, but not including an issuance, grant, redemption or repurchase of Series D2 Preferred Stock. "Transferee" means any individual or Entity to whom direct beneficial ownership of Stock is Transferred and who is, or would become as a result of such Transfer, a Substantial Stockholder. "Transfer Notice" means a written notice provided by a Substantial Stockholder to the Corporation, at least seven and not more than twelve Business Days prior to Completion of a Substantial Stockholder Transfer, which notice states (i) the name, address, facsimile number and e-mail address, and Percentage Stock Ownership of the Substantial Stockholder prior to the Substantial Stockholder Transfer, (ii) if known to the Substantial Stockholder, the name and address of the transferor, (iii) the number of shares subject to the Substantial Stockholder Transfer, and (iv) the proposed date of Completion of the Substantial Stockholder Transfer. For purposes of this definition, if a Substantial Stockholder does not exist with respect to a Substantial Stockholder Transfer, then the Transfer Notice shall be provided by the individual or Entity that purports to engage in the Transfer that will cause the Substantial Stockholder Transfer. "Treasury Regulation" means a Treasury Regulation promulgated under the IRC. (b) Transfer Restrictions. Unless specifically waived by the Board of Directors, a Substantial Stockholder Transfer that is Completed during a Restriction Period shall be null and void ab initio and shall not be effective to Transfer Series D2 Preferred Stock, but only to the extent necessary to prevent the Transfer from being a Substantial Stockholder Transfer (the "Transfer Restrictions"). With respect to a transaction entered into through the facilities of any national securities exchange or any national securities quotation system, the sole remedy pursuant to this Section 7(b) shall be the recovery of the Prohibited Transfer as described in Section 7(d). The term "beneficial" used in this paragraph shall mean beneficial ownership for U.S. federal income tax purposes. (c) Notice and Permitted Transfers. No Transfer Notice is required for Transfers that occur prior to issuance by the Corporation of a Notice Date Press Release (defined below). A Substantial Stockholder Transfer that is Completed shall be null and void ab initio unless a Transfer Notice is provided to the Corporation (the "Notice Restriction"). If the Corporation receives a Transfer Notice on a day that is not in a Restriction Period (taking into Ex. A-13 

 account all prior Transfers (i) for which a previous Transfer Notice was received by the Corporation, (ii) for which a Schedule 13D or Schedule 13G was theretofore filed, or (iii) of which the Corporation was otherwise previously aware) and the Transfer Notice references a Substantial Stockholder Transfer that, upon Completion, would cause a Restriction Period to commence, such Transfer shall be treated as a Prohibited Transfer to the extent necessary for a Restriction Period not to commence. If the Corporation receives more than one such Transfer Notice on the same day, the Transfers referenced in such Transfer Notices shall be treated as Prohibited Transfers to the extent necessary for a Restriction Period not to commence, and the amount of the Stock referenced in each Transfer Notice that is treated as Prohibited Stock shall be in proportion to the amounts of Stock referenced in each such Transfer Notice. The Corporation shall provide a Restriction Notice to each Substantial Stockholder that files a Transfer Notice. The determination of whether a Transfer referenced in a Transfer Notice is a Prohibited Transfer is made on the date the Transfer Notice is received by the Corporation. From and after receipt of a Transfer Notice until Completion of the Transfer described in such Transfer Notice (and thereafter to the extent such Transfer is Completed and is not a Prohibited Transfer), the determination of whether a Restriction Period has commenced with respect to any other Transfer (i) for which a Transfer Notice was not theretofore received by the Corporation, (ii) for which a Schedule 13D or Schedule 13G was not theretofore filed, or (iii) of which the Corporation was not otherwise previously aware, shall be made by taking into account the Percentage Stock Increase referenced in such Transfer Notice (or if Completion has occurred, the Percentage Stock Increase that resulted from that part of the Transfer referenced in such Transfer Notice that was not a Prohibited Transfer). (d) Recovery of Prohibited Transfers. The Corporation may institute legal proceedings to force rescission of a Prohibited Transfer. Notwithstanding the preceding sentence, the sole remedy with respect to a Prohibited Transfer entered into through the facilities of any national securities exchange or any national securities quotation system shall be as provided below. Upon written demand by the Corporation, the purported Transferee or member of a Prohibited Party Group (as defined below) with respect to a Prohibited Transfer shall deliver or cause to be delivered to an agent designated by the Board of Directors (the "Securities Transfer Agent"), all certificates and other evidences of ownership of the Stock that is the subject of the Prohibited Transfer (the "Prohibited Stock"), together with any dividends or other distributions that were received from the Corporation with respect to such Prohibited Stock ("Prohibited Distributions"). The Securities Transfer Agent promptly shall sell the Prohibited Securities to one or more buyers. Disposition of Prohibited Stock by the Securities Transfer Agent shall be deemed to occur simultaneously with the Prohibited Transfer to which the Prohibited Stock relates. The Securities Transfer Agent shall not act or be treated as acting as an agent for or on behalf of the purported Transferee or Prohibited Party Group or for or on behalf of the Corporation and shall have no right to bind any of them, in contract or otherwise, but shall act only to carry out the ministerial functions assigned to it in these Transfer Restrictions. If a purported Transferee or member of a Prohibited Party Group has resold Prohibited Stock before receiving the Corporation's demand to surrender the Prohibited Stock to the Securities Transfer Agent, the purported Transferee or member of a Prohibited Party Group shall be deemed to have sold the Prohibited Stock on behalf of the Securities Transfer Agent and shall be required to Transfer to the Securities Transfer Agent any Prohibited Distributions and the proceeds of such sale of Prohibited Stock. If a purported Transferee or member of a Prohibited Party Group fails to surrender Prohibited Stock or proceeds of a sale of Prohibited Stock to the Securities Transfer Ex. A-14 

 Agent, together with any Prohibited Distributions, within three Business Days from the date the Corporation makes a demand for surrender of such Prohibited Stock, the Corporation may institute legal proceedings to compel such surrender. If a Prohibited Transfer occurs, but does not result from a Transfer of direct beneficial ownership of Stock, each individual or Entity whose ownership of Stock is attributed to the 5-Percent Stockholder that had a Percentage Stock Increase (collectively, the "Prohibited Party Group") shall be required to deliver, and shall be deemed to have delivered to the Securities Transfer Agent, prior to the Transfer, a sufficient number of shares of Stock (which Stock shall be so delivered in the inverse order in which it was acquired by members of the Prohibited Party Group) to cause the Transfer, following such delivery, not to be a Prohibited Transfer. (e) Treatment of Prohibited Transfers and Prohibited Stock. No employee or agent of the Corporation shall record any Prohibited Transfer and the purported Transferee shall not be recognized as a stockholder of Prohibited Stock for any purpose whatsoever and shall not be entitled, with respect to such Prohibited Stock, to any rights of a stockholder of the Corporation, including, without limitation, the right to vote such Prohibited Stock or to receive dividend distributions, whether liquidating or otherwise, in respect thereof. Once Prohibited Stock has been acquired in a Transfer that is not a Prohibited Transfer, the Prohibited Stock shall cease to be Prohibited Stock. (f) Proceeds of Prohibited Transfers. The Securities Transfer Agent shall apply any proceeds of a sale by it of Prohibited Stock (or, if the purported Transferee resold the Prohibited Stock before the Securities Transfer Agent could recover the Prohibited Stock from the Purported Transferee, the proceeds from such resale of Prohibited Stock by the Purported Transferee), as follows: (a) first, to reimburse itself for its costs and expenses in connection with its duties as Securities Transfer Agent hereunder; (b) second, from such proceeds as well as other funds available in the Prohibited Transfers Fund, to reimburse the purported Transferee for the amounts paid by the purported Transferee for the Prohibited Stock, and (c) third, to pay any remaining balance of such proceeds into a fund (the "Prohibited Transfers Fund") that will hold all excess proceeds from sales of Prohibited Stock. The Securities Transfer Agent shall be the disbursing agent of the Prohibited Transfers Fund, and such fund shall be used to reimburse purported Transferees for the amounts paid by the purported Transferees for Prohibited Stock. At the end of a Restriction Period, any remaining amounts in the Prohibited Transfers Fund shall be paid to the U.S. Treasury Department. (g) Amendment of Transfer Restrictions. An affirmative vote of two-thirds of the holders of Series D2 Preferred Stock shall be required to amend this Section 7 if such amendment would impose additional restrictions, burdens or requirements on any Transfer of Series D2 Preferred Stock. (h) Legend on Certificates. All certificates reflecting Series D2 Preferred Stock, until the end of a Restriction Period, bear a conspicuous legend in substantially the following form: THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO RESTRICTION PURSUANT TO SECTION 7 OF THE ARTICLES SUPPLEMENTARY FOR THE 9.00% SERIES D2 MANDATORY Ex. A-15 

 CONVERTIBLE PREFERRED STOCK OF THE CORPORATION, AS AMENDED AND IN EFFECT FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION UPON REQUEST. (i) Press Releases. Within five (5) Business Days after the Corporation determines that a Notice Date has occurred, the Corporation shall issue a press release stating that fact and stating that the Transfer Notice requirements of this Section 7 have therefore become operative (the "Notice Date Press Release"). Within five (5) Business Days after the Corporation determines that a Restriction Period has commenced, the Corporation shall issue a press release stating such fact. (j) Administration of Transfer Restrictions. The Board of Directors shall have the power to determine, in its sole discretion, all matters related to this Section 7, including matters necessary or desirable to administer, to waive or to determine compliance with this Section 7. Section 8. Definitions. (a) "2007 Section 858 Dividend" means the dividend issued by the Corporation in calendar year 2007 in order to satisfy the Corporation's obligation to distribute the Corporation's calendar year 2006 real estate investment trust taxable income in order to maintain its status as a real estate investment trust. (b) "Additional Stock" has the meaning set forth in Section 6(e)(ii). (c) "Adjusted Stated Value" means the Initial Stated Value per share of Series D2 Preferred Stock, as adjusted from time to time for (i) the addition of dividends to the Adjusted Stated Value of the Series D2 Preferred Stock pursuant to Section 3(a) and (ii) any Extraordinary Stock Event. (d) "Board of Directors" has the meaning set forth in Section 2. (e) "Business Day" means any day other than a Saturday or Sunday or any other day on which banks in the City of New York are authorized or required by law or executive order to close. (f) "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents however designated of corporate stock, capital stock or other equity participations, including partnership interests (whether general or limited), membership interests or other equivalents (however designated), of such Person and any rights, warrants, options or other securities to acquire an equity interest in such Person. (g) "Charter" means the Charter of the Corporation, as amended, restated or supplemented from time to time. (h) "Closing Sale Price" on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in the composite transactions for the principal U.S. national securities exchange on which the Common Stock is traded or, if the Common Stock is not listed on a U.S. national securities Ex. A-16 

 exchange, as reported by the NASDAQ Stock Market. If the Common Stock is not listed for trading on a U.S. national securities exchange and not reported by the NASDAQ Stock Market on the relevant date, the Closing Sale Price shall be the last quoted bid price for the Common Stock in the over-the-counter market on the relevant date as reported by the OTC Bulletin Board. (i) "Common Stock" has the meaning set forth in Section 2. (j) "Common Stock Equivalents" has the meaning set forth in Section 6(e)(iii). (k) "Conversion Price" means $28 per share of Series D2 Preferred Stock, subject to adjustment from time to time pursuant to Section 6(e). (l) "Conversion Price Adjustment Provisions" means the provisions of Section 6(e)(i) hereof and Section 6(e)(i) of the Articles Supplementary setting forth the terms of the Series D1 Preferred Stock. (m) "Conversion Rights" has the meaning set forth in Section 6. (n) "Corporation" means Novastar Financial, Inc., a Maryland corporation. (o) "Dividend Payment Date" has the meaning set forth in Section 3(a). (p) "Extraordinary Stock Event" means any stock split or combination of shares of Series D2 Preferred Stock. (q) "Forced Conversion Announcement" has the meaning set forth in Section 6(b). (r) "Holder" means the Person in whose name a share of Series D2 Preferred Stock is registered. (s) "Initial Stated Value" means $25.00 per share of Series D2 Preferred Stock. (t) "Issue Date" means the first date on which shares of Series D2 Preferred Stock are first issued. (u) "Investors" means MassMutual Capital Partners LLC, Jefferies Capital Partners IV LP, Jefferies Employee Partners IV LLC, and JCP Partners IV LLC. (v) "Junior Shares" has the meaning set forth in Section 2. (w) "Liquidation Event" has the meaning set forth in Section 4(a). (x) "Liquidation Preference" has the meaning set forth in Section 4(a). (y) "MGCL" means the Maryland General Corporation Law. Ex. A-17 

 (z) "Outstanding Common" has the meaning set forth in Section 6(e). (aa) "Parity Shares" has the meaning set forth in Section 2. (bb) "Person" means any individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. (cc) "Publicly Traded" means, with respect to the Common Stock, that the Common Stock is (i) listed on a U.S. national securities exchange, (ii) quoted on NASDAQ or (iii) traded in the domestic over-the-counter market, which trades are reported by the OTC Bulletin Board. (dd) "Regulatory Approvals" means the approvals of and notices to governmental authorities set forth on Exhibit A for the ownership of Capital Stock of the Corporation in connection with (i) the issuance of the Series D1 Preferred Stock pursuant to the Securities Purchase Agreement, (ii) the issuance of the Series D2 Preferred Stock pursuant to the Rights Offering and (iii) the issuance of Series D2 Preferred Stock pursuant to the Standby Purchase Agreement. (ee) "Rights Offering" means a rights offering in connection with which holders of record of Common Stock and holders of record of Series D2 Preferred Stock will be entitled to receive a distribution from the Corporation of non-transferable rights to subscribe for and purchase from the Corporation shares of Series D1 Preferred Stock and certain holders of Series D2 Preferred Stock will have the obligation to purchase shares of Series D1 Preferred Stock that are not purchased pursuant to such rights, all as further described in (i) Section 2.5 of the Securities Purchase Agreement and (ii) Section 2 and Exhibit A of the Standby Purchase Agreement. (ff) "Securities Act" means the Securities Act of 1933, as amended. (gg) "Securities Purchase Agreement" means the Securities Purchase Agreement dated as of July 16, 2007, by and among the Corporation and the Investors, as amended, supplemented or otherwise modified from time to time. (hh) "Series C Preferred Stock" has the meaning set forth in Section 2. (ii) "Series D1 Preferred Stock" has the meaning set forth in Section 2. (jj) "Series D2 Preferred Stock" has the meaning set forth in Section 1. (kk) "Series E Preferred Stock" has the meaning set forth in Section 2. (ll) "Senior Shares" has the meaning set forth in Section 2. (mm) "Shareholder Vote" means the vote or written consent of the requisite shareholders of the Corporation in accordance with the MGCL, the Charter and Bylaws of the Ex. A-18 

 Corporation and the rules and regulations of the New York Stock Exchange approving both Conversion Price Adjustment Provisions. (nn) "Standby Purchase Agreement" means the Standby Purchase Agreement dated as of July 16, 2007, by and among the Corporation and the Investors, as amended, supplemented or otherwise modified from time to time. (oo) "Subsidiary" means, with respect to any Person as of any time of determination, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership or limited liability company (A) a majority of the general partners or the managing general partner (in the case of any partnership), or a majority of the managers or the sole managing member or manager (in the case of a limited liability company), of which is at such time such Person or a Subsidiary of such Person or (B) the only general partners (in the case of any partnership), or the only managing members or managers (in the case of a limited liability company), of which are at such time such Person or of one or more Subsidiaries of such Person (or any combination thereof). (pp) "Trading Day" means a day during which (i) trading in Common Stock generally occurs and (ii) a Closing Sale Price for the Common Stock is provided on The New York Stock Exchange or, if the Common Stock is not listed on The New York Stock Exchange, on the principal other U.S. national securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a U.S. national securities exchange, on NASDAQ, or if the Common Stock is not quoted on NASDAQ, on the OTC Bulletin Board. (qq) "Voting Activation Event" has the meaning set forth in Section 5(c). Section 9. Miscellaneous. (a) The Corporation covenants that any shares of Common Stock issued upon conversion of the Series D2 Preferred Stock or issued in respect of a share dividend payment shall be validly issued, fully paid and non-assessable, and issued in compliance with all federal and state laws. (b) The Corporation shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Series D2 Preferred Stock or shares of Common Stock or other securities or property issued or distributed in respect of shares of the Series D2 Preferred Stock pursuant hereto. (c) The shares of Series D2 Preferred Stock are perpetual and not redeemable, other than as set forth in Articles Supplementary containing the terms of the Series D2 Preferred Stock. (d) Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the Ex. A-19 

 extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable law. (e) The headings of the various sections and subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (f) If any of the voting powers, preferences and relative, participating, optional and other special rights of the Series D2 Preferred Stock and qualifications, limitations and restrictions thereof set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series D2 Preferred Stock and qualifications, limitations and restrictions thereof set forth herein which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series D2 Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series D2 Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series D2 Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. (g) Shares of Series D2 Preferred Stock that have been issued and reacquired by the Corporation in any manner, including Series D2 Preferred Stock purchased or converted, shall be returned to the status of authorized but unissued shares of Common Stock. (h) If any certificate for Series D2 Preferred Stock shall be mutilated, lost, stolen or destroyed, the Corporation shall issue, in exchange and in substitution for and upon cancellation of the mutilated certificate for Series D2 Preferred Stock, or in lieu of and substitution for the certificate for Series D2 Preferred Stock lost, stolen or destroyed, a new certificate for Series D2 Preferred Stock of like tenor and representing an equivalent amount of Series D2 Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such certificate for Series D2 Preferred Stock and indemnity, if requested, satisfactory to the Corporation. (i) The shares of Series D2 Preferred Stock are subject to the provisions of Article XI of the Charter. (j) No Holder of shares of Series D2 Preferred Stock shall be entitled to exercise the rights of an objecting stockholder under Title 3, Subtitle 2 of the MGCL or any successor provision. Ex. A-20 

 (k) Except for any amendment described in Section 5(b), the terms and conditions set forth in these Articles Supplementary may be amended, modified or waived upon the approval of holders of Capital Stock of the Corporation required by the MGCL. THIRD: The shares of Series D2 Preferred Stock have been classified and designated by the Board of Directors under the authority contained in the Charter. FOURTH: These Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law. FIFTH: 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. * * * Ex. A-21 

 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. ______________________________ By:_______________________________(SEAL) Jeffery D. Ayers Scott F. Hartman Secretary Chairman and Chief Executive Officer Ex. A-22 

 EXHIBIT A REGULATORY APPROVALS NovaStar Mortgage, Inc. Pre-Closing/Prior Approval Required 1. Approval of the Georgia Department of Banking and Finance for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Mortgage Lender License. GA. CODE ANN. §§ 7-1-1008, 7-1-1000(18). 2. Approval of the Kentucky Office of Financial Institutions for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Mortgage Loan Company License. KY. REV. STAT. ANN. § 294.075. 3. Approval of the Michigan Office of Financial and Insurance Services for the ownership of 12.6% or more of the voting Capital Stock of the Corporation under the First Mortgage Broker, Lender and Servicer License. Mich. Comp. Laws Ann. § 445.1659. 4. Approval of the Michigan Office of Financial and Insurance Services for the ownership of 12.6% or more of the voting Capital Stock of the Corporation under the Secondary Mortgage Broker, Lender and Servicer Registration. Mich. Comp. Laws Ann. § 493.63. 5. Approval of the New York Banking Department for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Mortgage Banker License. N.Y. BANKING LAW § 594-b. Pre-Closing Notification Required 1. Notification to the Federal National Mortgage Association for the ownership of voting Capital Stock of the Corporation under the Federal National Mortgage Association Seller/Servicer Approval. FNMA Seller Guide Part I, § 201.05; FNMA Servicer Guide Part I, § 204. 2. Notification to the Federal Home Loan Mortgage Corporation for the ownership of voting Capital Stock of the Corporation under the Federal Home Loan Mortgage Corporation Seller/Servicer Approval. FHLMC Seller/Servicer Guide, Ch. 4-11. 3. Notification to the California Department of Corporations for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Residential Mortgage Lender License. CAL. FIN. CODE §§ 50206, 50003. 4. Notification to the Connecticut Department of Banking for the ownership of 10% or more of the voting Capital Stock of the Corporation under the First Mortgage Lender/Broker Licenses. CONN. GEN. STAT. ANN. §§ 36a-490(b). Ex. A-23 

 5. Notification to the Connecticut Department of Banking for the ownership of voting Capital Stock of the Corporation under the Secondary Mortgage Lender/Broker License. CONN. GEN. STAT. ANN. § 36a-515. 6. Notification to the Delaware Office of the State Bank Commissioner for the ownership of voting Capital Stock of the Corporation under the Licensed Lender License. DEL. CODE ANN. tit. 5, § 2206. 7. Notification to the Illinois Department of Financial and Professional Regulation, Division of Banking, at least 10 days prior to closing, for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Residential Mortgage License. Ill. Admin. Code tit. 38, §§ 1050.110, 1050.480. 8. Notification to the Massachusetts Division of Banks, at least 15 days prior to closing, for ownership of 10% or more of the voting Capital Stock of the Corporation under the Mortgage Lender and Broker License. 209 MASS. CODE REGS. § 42.12(3). 9. Notification to the Massachusetts Division of Banks, at least 15 days prior to closing, for ownership of 10% or more of the voting Capital Stock of the Corporation under the Third Party Loan Servicer Registration. 209 MASS. CODE REGS. § 18.08(2). 10. Notification to the Nevada Division of Mortgage Lending for the ownership of 5% or more of the voting Capital Stock of the Corporation under the Mortgage Banker License. Nev. Rev. Stat. Ann. § 645E.390. 11. Notification to the Nevada Division of Mortgage Lending for the ownership of 5% or more of the voting Capital Stock of the Corporation under the Mortgage Broker License. Nev. Rev. Stat. Ann. § 645B.095. 12. Notification to the Washington State Department of Financial Institutions, at least 10 days prior to closing, for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Consumer Loan License. Wash. Admin. Code § 208-620-490(1). Ex. A-24 

 HomeView Lending, Inc. Pre-Closing/Prior Approval Required 1. Approval of the Georgia Department of Banking and Finance for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Mortgage Lender License. GA. CODE ANN. §§ 7-1-1008, 7-1-1000(18). 2. Approval of the Kentucky Office of Financial Institutions for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Mortgage Loan Company License. KY. REV. STAT. ANN. § 294.075. 3. Approval of the Oklahoma Department of Consumer Credit for the ownership of voting Capital Stock of the Corporation under the Supervised Lender License. OKLA. ADMIN. CODE § 160:65-3-4. Pre-Closing Notification Required 1. Notification to the Connecticut Department of Banking for the ownership of 10% or more of the voting Capital Stock of the Corporation under the First Mortgage Lender/Broker Licenses. CONN. GEN. STAT. ANN. §§ 36a-490(b). 2. Notification to the Connecticut Department of Banking for the ownership of voting Capital Stock of the Corporation under the Secondary Mortgage Lender/Broker License. CONN. GEN. STAT. ANN. § 36a-515. 3. Notification to the Delaware Office of the State Bank Commissioner for the ownership of voting Capital Stock of the Corporation under the Licensed Lender License. DEL. CODE ANN. tit. 5, § 2206. 4. Notification to the Illinois Department of Financial and Professional Regulation, Division of Banking, for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Residential Mortgage License. ILL. ADMIN. CODE tit. 38, §§ 1050.130, 1050.480. 5. Notification to the Washington State Department of Financial Institutions, at least 10 days prior to closing, for the ownership of 10% or more of the voting Capital Stock of the Corporation under the Consumer Loan License. WASH. ADMIN. CODE § 208-620-490(1). Ex. A-25 

 EXHIBIT B KEY EMPLOYEES Scott Hartman Lance Anderson Mike Bamburg Ex. B-1 

 ANNEX I RESTRICTIVE LEGENDS THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER, ON REQUEST AND WITHOUT CHARGE, A FULL STATEMENT OF THE INFORMATION REQUIRED BY SECTION 2-211(B) OF THE CORPORATIONS AND ASSOCIATIONS ARTICLE OF THE ANNOTATED CODE OF MARYLAND WITH RESPECT TO THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS AND OTHER DISTRIBUTIONS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE CORPORATION HAS AUTHORITY TO ISSUE AND, IF THE CORPORATION IS AUTHORIZED TO ISSUE ANY PREFERRED OR SPECIAL CLASS IN SERIES, (I) THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES TO THE EXTENT SET, AND (II) THE AUTHORITY OF THE BOARD OF DIRECTORS TO SET SUCH RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. THE FOREGOING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE CHARTER OF THE CORPORATION, A COPY OF WHICH WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS. SUCH REQUEST MUST BE MADE TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON BENEFICIAL OWNERSHIP AND CONSTRUCTIVE OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUBJECT TO CERTAIN FURTHER RESTRICTIONS AND EXCEPT AS EXPRESSLY PROVIDED IN THE CORPORATION'S CHARTER, (I) NO PERSON MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF THE CORPORATION'S COMMON STOCK IN EXCESS OF 9.8 PERCENT (IN VALUE OR NUMBER OF SHARES) OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE CORPORATION UNLESS SUCH PERSON IS AN EXCEPTED HOLDER (IN WHICH CASE THE EXCEPTED HOLDER LIMIT SHALL BE APPLICABLE); (II) NO PERSON MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK OF THE CORPORATION IN EXCESS OF 9.8 PERCENT OF THE VALUE OF THE TOTAL OUTSTANDING SHARES OF CAPITAL STOCK OF THE CORPORATION, UNLESS SUCH PERSON IS AN EXCEPTED HOLDER (IN WHICH CASE THE EXCEPTED HOLDER LIMIT SHALL BE APPLICABLE); (III) NO PERSON MAY BENEFICIALLY OR CONSTRUCTIVELY OWN CAPITAL STOCK THAT WOULD RESULT IN THE CORPORATION BEING "CLOSELY HELD" UNDER SECTION 856(H) OF THE CODE OR OTHERWISE CAUSE THE CORPORATION TO FAIL TO QUALIFY AS A Annex Pg. 1 

 REIT; AND (IV) NO PERSON MAY TRANSFER SHARES OF CAPITAL STOCK IF SUCH TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE CORPORATION BEING OWNED BY FEWER THAN 100 PERSONS. ANY PERSON WHO BENEFICIALLY OWNS OR CONSTRUCTIVELY OWNS OR ATTEMPTS TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK WHICH CAUSES OR WILL CAUSE A PERSON TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OR IN VIOLATION OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION. ATTEMPTED TRANSFERS OF OWNERSHIP IN VIOLATION OF THESE RESTRICTIONS SHALL BE NULL AND VOID AB INITIO. IN ADDITION, IF ANY OF THE RESTRICTIONS ON TRANSFER OR OWNERSHIP ARE VIOLATED, THE SHARES OF CAPITAL STOCK REPRESENTED HEREBY MAY BE AUTOMATICALLY TRANSFERRED TO A TRUSTEE OF A TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN ADDITION, UPON THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE RESTRICTIONS DESCRIBED ABOVE MAY BE VOID AB INITIO. ALL CAPITALIZED TERMS IN THIS LEGEND HAVE THE MEANINGS DEFINED IN THE CHARTER OF THE CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF CAPITAL STOCK OF THE CORPORATION ON REQUEST AND WITHOUT CHARGE. THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A CERTAIN REGISTRATION RIGHTS AND SHAREHOLDERS AGREEMENT, DATED AS OF JULY 16, 2007, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER SET FORTH THEREIN. A COMPLETE AND CORRECT COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE CORPORATION AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.