Forbearance Agreement among NovaStar Mortgage, Inc., NovaStar Financial, Inc., and The Bank of New York Trust Company, N.A. (April 29, 2008)

 Exhibit 10.1 FORBEARANCE AGREEMENT This FORBEARANCE AGREEMENT (this "Agreement"), dated as of April 29, 2008, is among NOVASTAR MORTGAGE, INC., a Virginia corporation (the "Company"); NOVASTAR FINANCIAL, INC., a Maryland corporation (the "Guarantor"); THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION (as successor to JPMorgan Chase Bank, National Association), as Trustee under the Indenture defined below (the "Indenture Trustee"); NOVASTAR CAPITAL TRUST I, a statutory trust created under the laws of the State of Delaware (the "Trust"); THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION (as successor to JPMorgan Chase Bank, National Association), as property trustee of the Trust (the "Property Trustee"); W. Lance Anderson, Rodney E. Schwatken and Todd M. Phillips, as administrative trustees of the Trust (collectively, the "Administrative Trustees"); TABERNA PREFERRED FUNDING I, LTD., a Cayman company, and TABERNA PREFERRED FUNDING II, LTD., a Cayman company, as the preferred securities holders (the "Preferred Securities Holders"); and THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION (as successor to JPMorgan Chase Bank, National Association), as trustee under the Guaranty defined below (the "Guaranty Trustee"). WHEREAS, pursuant to that certain NovaStar Mortgage, Inc. Floating Rate Series A Junior Subordinated Note due 2035, in the principal amount of $25,775,000, dated September 20, 2005 (the "Series A Note"), and that certain NovaStar Mortgage, Inc. Floating Rate Series B Junior Subordinated Note due 2035, in the principal amount of $25,775,000, dated September 20, 2005 (the "Series B Note" and, together with the Series A Note, the "Notes"), the Company promised to pay interest on the principal amount of the Notes quarterly in arrears; WHEREAS, the Guarantor guaranteed the obligations of the Company under the Notes and the Indenture pursuant to that certain Parent Guarantee Agreement, dated as of March 15, 2005, by the Guarantor and the Guarantee Trustee (the "Guaranty"); WHEREAS, the Company failed to pay the interest due on the principal amount of the Series A Note on March 30, 2008 (the "Existing Default") and expects to fail to pay the interest due on the principal amount of the Series B Note on April 30, 2008 (together with the Existing Default, the "Designated Defaults"); WHEREAS, each Designated Default constitutes an Event of Default under and as defined in that certain Amended and Restated Junior Subordinated Indenture, dated as of September 20, 2005, among the Company and the Indenture Trustee (the "Indenture"); WHEREAS, by reason of the existence of the Designated Defaults, the Indenture Trustee, the Trust, the Preferred Securities Holders, and the Guaranty Trustee have or will have full legal right to exercise their rights and remedies under the Indenture and the Guaranty; WHEREAS, the Company is the legal and beneficial holder of all of the common securities issued by the Trust, and the Preferred Securities Holders are the legal and beneficial holders of all of the preferred securities issued by the Trust; and 1 

 WHEREAS, the Company and the Guarantor have requested that the Indenture Trustee, the Trust, the Property Trustee, the Administrative Trustees, the Preferred Securities Holders, and the Guaranty Trustee forbear for a period of time from exercising their rights and remedies with respect to the Designated Defaults. NOW THEREFORE, in consideration of the Recitals, the mutual promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Capitalized terms used but not otherwise defined herein, including the Recitals, shall have the meanings assigned to them in the Indenture. 2. Forbearance. During the period commencing on the date hereof and ending without any notice from or other action by any Person on May 30, 2008 (the "Forbearance Period"), the Indenture Trustee, the Trust, the Property Trustee, the Administrative Trustees, the Preferred Securities Holders, and the Guaranty Trustee will forbear in the exercise of their rights and remedies under the Indenture, the Notes or any other document or instrument with respect to the Designated Defaults. Without limiting the generality of the foregoing, during the Forbearance Period, the Indenture Trustee, the Trust, the Property Trustee, the Administrative Trustees, the Preferred Securities Holders, and the Guaranty Trustee will not (i) accelerate the maturity of the Notes or initiate proceedings for the collection of the principal amount of, any interest on, or any other amount with respect to the Notes or the Indenture; (ii) file or join in filing any involuntary petition in bankruptcy with respect to the Company or the Guarantor, or otherwise initiate or participate in similar insolvency, reorganization, or moratorium proceedings for the benefit of creditors of the Company or the Guarantor; or (iii) demand payment pursuant to the Guaranty; in each case, with respect to the Designated Defaults. Notwithstanding anything herein to the contrary, with respect to any Event of Default other than the Designated Defaults, the Indenture Trustee, the Trust, the Property Trustee, the Administrative Trustees, the Preferred Securities Holders, and the Guaranty Trustee reserve and preserve all of their rights and remedies under the Indenture, the Notes and any other document or instrument. 3. Conditions to Forbearance. In consideration of the forbearance set forth in Section 2 hereof, the Company acknowledges and agrees as follows: (a) Indebtedness. During the Forbearance Period, the Company will not incur any additional indebtedness, other than ordinary trade accounts payable. (b) Sale of Assets. During the Forbearance Period, other than in the ordinary course of business, the Company will not convey, transfer or lease any of its properties and assets, and no Person shall receive or lease any of the Company's properties and assets. (c) Consolidation or Merger. During the Forbearance Period, the Company will not consolidate with or merge into any other Person, and no Person shall consolidate with or merge into the Company. (d) Senior Debt. As of the date hereof, the total amount of outstanding borrowings and any remaining fees due under those certain Master Repurchase Agreement 2 

 (2007 Whole Loan), Master Repurchase Agreement (2007 Investment Grade) and Master Repurchase Agreement (2007 Non-Investment Grade), each expiring May 29, 2008, and including any amendments, modifications or waivers with respect thereto (collectively, the "Wachovia Facility") is $11,879,613.66. (e) Senior Debt Repayment. On or before May 30, 2008, the Company shall fully repay 100% of all outstanding borrowings and any remaining fees due under the Wachovia Facility. 4. Representations and Warranties. Each party hereto hereby represents and warrants to each other party hereto as follows: (a) Power; Authorization. Such Person has the corporate, limited liability, or trust power and authority and has been duly authorized by all requisite corporate, limited liability, trust or other action to execute and deliver this Agreement and to perform such Person's obligations hereunder. This Agreement has been duly executed and delivered by such Person. (b) Enforceability. This Agreement is the legal, valid, and binding obligation of such Person, enforceable against such Person in accordance with its terms. 5. Direction of Trustees. By execution of this Agreement, each of the Administrative Trustees, on behalf of the Trust, as the legal and beneficial holder of 100% in aggregate principal amount of the Outstanding Securities, and the Preferred Securities Holders, as the legal and beneficial holders of 100% in aggregate Liquidation Amount of the outstanding Preferred Securities, hereby (a) consents to the execution and delivery of this Agreement by the Indenture Trustee, the Property Trustee, and the Guaranty Trustee (collectively, the "Directed Trustees"), (b) directs each Directed Trustee to execute and deliver this Agreement, and (c) agrees to and does hereby release each Directed Trustee for any action taken or to be taken by any Directed Trustee in connection with its execution and delivery of this Agreement and for any liability or responsibility arising in connection herewith. None of the Directed Trustees shall be responsible in any manner whatsoever to any person for the validity or sufficiency of this Agreement or the due execution hereof by the Company, the Administrative Trustees or any Holder of Outstanding Securities or Preferred Securities, for any circumstance resulting from its execution of this Agreement or for or in respect of the recitals and statements of fact contained herein, all of which recitals and statements of fact are made solely by the Company, the Guarantor, the Administrative Trustees, and the Preferred Securities Holders, respectively. 6. Miscellaneous. (a) Benefit of Agreement. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their successors and assigns. No other Person shall be entitled to claim any right or benefit hereunder, including the status of a third-party beneficiary of this Agreement. 3 

 (b) Entire Agreement. Except as expressly set forth herein, there are no agreements or understandings, written or oral, among the parties hereto relating to this Agreement that are not fully and completely set forth herein. (c) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws of the State of New York applicable to contracts made and performed in that state, without regard to the choice of law principles thereof to the extent such principles would provide for the application of the substantive laws of a jurisdiction other than the State of New York, and any applicable laws of the United States of America. (d) Section Titles. The Section titles of this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. (e) Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts and by different parties to this Agreement on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile or other electronic transmission shall be deemed to be an original signature hereto. (f) Amendment. No amendment or modification of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the parties hereto. [Remainder of page blank] 4 

 IN WITNESS WHEREOF, the parties hereto duly executed this Agreement as of the date first written above. NOVASTAR MORTGAGE, INC. By: /s/ Rodney E. Schwatken -------------------------------------- Name: Rodney E. Schwatken ------------------------------------ Title: SVP, Chief Financial Officer and Secretary ----------------------------------- NOVASTAR FINANCIAL, INC. By: /s/ Rodney E. Schwatken -------------------------------------- Name: Rodney E. Schwatken ------------------------------------ Title: SVP, Chief Financial Officer and Secretary ----------------------------------- /s/ W. Lance Anderson ----------------------------------------- W. Lance Anderson, as the Administrative Trustee /s/ Rodney E. Schwatken ----------------------------------------- Rodney E. Schwatken, as the Administrative Trustee /s/ Todd M. Phillips ----------------------------------------- Todd M. Phillips, as the Administrative Trustee NOVASTAR CAPITAL TRUST I By: /s/ W. Lance Anderson ------------------------------------- Name: W. Lance Anderson ----------------------------------- Title: Administrative Trustee ---------------------------------- 5 

 THE BANK OF NEW YORK TRUST COMPANY, NATIONAL ASSOCIATION, as the Indenture Trustee, the Property Trustee, and the Guaranty Trustee By: /s/ Maria D. Calzado -------------------------------------- Name: Maria D. Calzado ------------------------------------ Title: Vice President ----------------------------------- [Signatures continue on next page] 6 

 TABERNA PREFERRED FUNDING I, LTD. By: TABERNA CAPITAL MANAGEMENT, LLC, as Collateral Manager By: /s/ Raphael Lict -------------------------------------- Name: Raphael Licht Title: Secretary TABERNA PREFERRED FUNDING II, LTD. By: TABERNA CAPITAL MANAGEMENT, LLC, as Collateral Manager By: /s/ Raphael Licht -------------------------------------- Name: Raphael Licht Title: Secretary 7