Separation and Consulting Agreement between NovaStar Financial, Inc. and Gregory Metz

 SEPARATION AND CONSULTING AGREEMENT This Separation and Consulting Agreement (the "Agreement") is entered into as of the 3rd day of January 2008, by and between NovaStar Financial, Inc., on behalf of itself and all of its direct and indirect subsidiaries (all of the foregoing, collectively, the "Company") and Gregory Metz ("Consultant"). WHEREAS, the Company and Consultant are parties to an Employment Agreement dated January 15, 2004, as amended December 20, 2006 (as so amended, the "Employment Agreement"), which provides for certain benefits and obligations upon termination by the Company of Consultant's employment with the Company, without cause; WHEREAS, Consultant's employment by the Company will be terminated by the Company, without "cause" (as described in the Employment Agreement), as of January 3, 2008 (the "Termination Date") pursuant to this Agreement, and the Company desires to ensure a smooth and orderly transition of business by reserving the right to obtain Consultant's services for a limited period of time as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Company and Consultant agree as follows: 1. Termination of Employment. 1.1 Termination. Consultant's employment by the Company is hereby terminated by the Company, without "cause" (as described in the Employment Agreement), effective as of the Termination Date. Except to the extent expressly provided herein, the rights and obligations set forth in this Agreement supersede all rights and obligations of the parties under the Employment Agreement that otherwise would arise upon or be applicable following the Termination Date, including but not limited to severance compensation and other benefits; provided, however, that neither this Agreement nor any provision hereof shall be deemed to supersede or otherwise affect any rights to indemnification, defense, or similar rights under the Employment Agreement or, for the avoidance of doubt, under any other written agreement, the certificate of incorporation, bylaws or other organizational documents of the Company (including NovaStar Financial, Inc. and each of its direct and indirect subsidiaries), or any policy of directors and officers or other insurance. 1.2 Resignation as Officer and Director. In connection with and as a result of the termination of Consultant's employment by the Company, Consultant hereby resigns from all positions as an officer, manager, and/or director of the Company (including NovaStar Financial, Inc., and all of its direct and indirect subsidiaries), effective as of the Termination Date. Consultant and the Company agree that this Agreement constitutes notice of such resignation, and that the Company shall immediately take any and all additional actions necessary to give effect to each such resignation. 1.3 Accrued Wages, Vacation, and Business Expenses. Consultant shall be entitled to payment, in accordance with the Company's normal payroll schedule following the Termination Date, of (a) all wages accrued from the end of the period covered by Consultant's paycheck immediately preceding the Termination Date to the Termination Date, and (b) all accrued and unused vacation of Consultant as of the Termination Date. In addition, the Company shall reimburse Consultant, whether on or following the Termination Date, in accordance with the normal expense reimbursement policies of the Company, for any and all reasonable, customary and usual expenses incurred by Consultant on behalf of the Company prior to the Termination Date. 1 

 1.4 Outstanding Awards. (a) Immediately upon termination of employment on the Termination Date in accordance with this Agreement, Consultant shall be fully vested with respect to all stock options, restricted stock, and accumulated dividend equivalent rights that, in the case of each of the foregoing, were awarded or granted prior to the Termination Date and that would have been vested at the end of the year in which the termination occurred had Consultant remained an employee of the Company through the end of such year. The vesting of all other stock options, restricted stock, and accumulated dividend equivalent rights shall cease upon the Termination Date. (b) Accumulated dividend equivalent rights that vest upon the Termination Date pursuant to Section 1.4(a) above shall be paid by the Company to Consultant in cash upon the Termination Date, subject to Section 6.2 below. (c) Except as expressly provided in Section 1.4(a) and Section 1.4(b) above, all rights and obligations with respect to stock options, restricted stock, and dividend equivalent rights awarded or granted prior to the Termination Date shall be governed by the terms of the applicable plan and the applicable grant or award agreement. 1.5 Waiver of Incentive Compensation. Consultant and the Company agree that Consultant shall not receive, and Consultant hereby relinquishes and waives any and all right to any cash bonus from the Company that has not been paid prior to the Termination Date (including any cash bonus that otherwise would be payable as a result of or following the termination of Consultant's employment with the Company). 1.6 Health Benefits. Consultant shall be entitled to continue health benefits coverage upon and following the Termination Date pursuant to and to the extent provided by the terms of COBRA. Consultant shall not be entitled to receive, and hereby waives any and all right to, continued life insurance coverage from the Company, as of the Termination Date. 1.7 Financial and Tax Planning Services Reimbursement. Consultant shall be entitled to reimbursement in accordance with the Company's normal policies applicable to Consultant prior to the Termination Date for expenses incurred by Consultant for financial and tax planning services, whether prior to or following the Termination Date, provided that Consultant submits a proper request for such reimbursement with all required documentation within thirty (30) days following the Termination Date. Such reimbursement shall be paid to Consultant within ten (10) business days following submission of all required documentation. 1.8 Other Rights and Benefits. All rights with respect to benefits accrued under any benefit plan of the Company that is not expressly addressed by this Agreement shall be governed by the terms of such plan, subject to Section 6.2 hereof. 2. Consulting Services. 2.1. Consulting. During the period commencing on the Termination Date and ending on February 28, 2009 (the "Consulting Period"), Consultant agrees to make himself available to the Company for up to ten (10) hours per week, whether by telephone, e-mail, or in person, on an as-needed basis to consult with respect to matters that were within Consultant's job description during the course of 2 

 Consultant's employment with the Company. Consultant agrees to respond promptly, reasonably and cooperatively to the Company's requests for assistance. Barring special circumstances, the consulting hours shall not be cumulative; accordingly, hours not used within a given week will be waived by the Company, but Consultant will receive Consultant's full consulting compensation for such week under Section 2.2 below. However, the Company reserves the right to require Consultant to provide more than ten (10) hours of service per week in the event that special circumstances arise in which Consultant's unique assistance is required by the Company. (Examples of special circumstances include, but are not limited to, assistance in litigation or responding to government inquiries.) In order to protect the Company's confidential and trade secret information from use or disclosure to a party other than the Company, and to enable the Company to be able to obtain the benefits of Consultant's consulting obligations hereunder, Consultant agrees that so long as he is accepting consulting fees pursuant to this Agreement, Consultant will abide by the provisions of Sections 3 and 4 below. Notwithstanding the foregoing, in the event that Consultant accepts employment or other consulting work within the Consulting Period, Consultant will be required to spend no more than five (5) hours per week consulting with the Company. 2.2. Consulting Fees; Expenses. In consideration of the services provided by Consultant during the Consulting Period, the Company agrees to pay Consultant, each month during the Consulting Period, a monthly consulting fee equal to one-twelfth of Consultant's base salary from the Company immediately prior to the Termination Date. The Company will pay the consulting fee by direct deposit to an account designated from time to time by Consultant. The consulting fee shall be paid by the Company monthly in advance, beginning on the Termination Date. In addition to the consulting fee, the Company shall reimburse Consultant for all reasonable out-of-pocket expenses incurred by Consultant in providing cooperation and assistance to the Company, within ten (10) business days following receipt by the Company of reasonable documentation thereof. 2.3. Consultant's Status; Taxes. Consultant's status under this Agreement during the Consulting Period shall be that of an independent contractor to the Company, and not that of an agent or employee of the Company. The Company shall not withhold federal or state taxes for Consultant on any amounts received under this Agreement. Consultant is solely responsible for and agrees to report and pay all taxes on any income received under this Agreement. Consultant agrees to indemnify and to hold harmless the Company from and against any and all taxes and/or penalties with which Consultant is assessed, if any, as a result of Consultant's non-payment of taxes on any amounts received under this Agreement. 2.4. No Authority to Bind the Company. The Consultant shall have no authority to enter into contracts or agreements on behalf of the Company or to otherwise legally bind the Company, and shall not represent to any person that Consultant has any such authority. 2.5 Waiver of Non-Compete. The Company hereby waives any and all obligations, including but not limited to the provisions of Section 11 of the Employment Agreement, that restrict Consultant's right to compete with the Company or to accept employment with or compensation from, manage, own an equity interest in, consult with, or otherwise operate freely with respect to any other person or entity, including but not limited to any person or entity that competes with the Company, and agrees that such provisions and obligations shall have no further force or effect from and after the Termination Date. 3 

 3. Non-Solicitation. Consultant agrees that, during the Consulting Period: (a) Consultant shall not interfere with the business of the Company; and (b) except with the prior consent of an executive officer of NovaStar Financial, Inc., shall not directly or indirectly solicit any of the Company's employees to leave the Company and/or to work for another employer or business, whether or not the solicited employee would commit any breach of his or her own employment terms by leaving the service of the Company. 4. Company Materials; Confidentiality. 4.1 Company Materials. Consultant agrees that all styles, designs, lists, materials, books, files, reports, correspondence, records and other documents used or prepared by Consultant in the scope of his employment with the Company or made available to Consultant by the Company (all of the foregoing, "Company Materials"), are and will remain the property of the Company. Except to the extent and for such time as reasonably necessary for the performance of consulting services to the Company hereunder, Consultant shall immediately return all Company Materials to the Company and Consultant shall not make or retain any copies thereof. 4.2 Confidential Information. Consultant acknowledges that the Company has created, developed and adopted, itself and through one or more third parties acting on its behalf, confidential, proprietary and/or trade secret information ("Confidential Information"). Confidential Information includes, but is not limited to: (a) the Company's lending, brokering, servicing, and investing policies and procedures; (b) lists of and information regarding past, present and potential brokers, lenders, investors, suppliers, loan applicants, borrowers and other customers and clients ("Clients"); (c) contracts and agreements with Clients; (d) the manner in which business is conducted by the Company, with particular Clients and otherwise; (e) business plans, strategies, processes and methodologies; (f) financial information, budgets, forecasts, and financial statements, (g) portfolio data; (h) sales techniques; (i) methods of data processing; and (j) information concerning employees and their salaries, performance and personnel file information. Notwithstanding the foregoing, Confidential Information shall not include any information to the extent known by or made available to the public generally, other than as a direct or indirect result of unauthorized disclosure thereof by Consultant. 4.3 Non-Disclosure. Consultant acknowledges and agrees that the Confidential Information belongs to the Company and not to Consultant, that the Confidential Information has independent actual or potential economic value from not being generally known to the public or other persons who can obtain economic value from its disclosure or use, that the Confidential Information is subject to reasonable efforts by the Company to maintain its secrecy, and that disclosure of Confidential Information in an unauthorized manner could be highly prejudicial to the Company and/or its Clients. Except to the extent as may be expressly authorized by the Company in writing from time to time or as may be reasonably necessary in the course of providing consulting services to the Company hereunder, Consultant agrees not to be disclose in any manner any Confidential Information to any third party, either directly or indirectly, except to the extent required to do so by applicable law, judicial or regulatory process, or other governmental authority. Consultant shall take reasonable precautions to prevent the unauthorized use, disclosure, or dissemination of Confidential Information in Consultant's possession or control. 4.4 Legally Required Disclosure. In the event that Consultant is required by applicable law, judicial or regulatory process, or other governmental authority to disclose any Confidential Information, Consultant shall promptly notify the Company of such required disclosure and shall reasonably cooperate with the Company, at the Company's expense, in any attempt by the Company to obtain an order or other 4 

 assurance that confidential treatment will be accorded to any Confidential Information required to be disclosed. 5. Release and Waiver of Claims. 5.1 Release and Waiver. In exchange for this Agreement, effective as of the date hereof, Consultant (on behalf of Consultant and anyone claiming through or on behalf of Consultant) releases the Company, its affiliated entities, each of their respective successors and assigns, and the past and present employees, officers, directors, managers, members, stockholders, representatives and agents of any of the foregoing from, and hereby waives, any and all claims and potential claims, demands and causes of action, whether known or unknown and whether or not matured or contingent, that Consultant has or may have had against any of them arising out of Consultant's service or employment with the Company through the date hereof or out of the termination of such employment in accordance with this Agreement, including claims, demands and causes of action not currently known to or contemplated by the parties, to the maximum extent permitted by law. This release includes, but is not limited to, any and all claims, demands and causes of action through and including the date hereof that arise under or out of, relate to, or concern: any oral or written promise, agreement or undertaking concerning or relating to Consultant's employment with the Company; compensation or benefits; discrimination under local, state or federal law; Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Americans With Disabilities Act; the Employee Retirement Income Security Act of 1974; the Family and Medical Leave Act; any tort, including but not limited to invasion or privacy, defamation, fraud and infliction of emotional distress; and all other claims, demands, and causes of action, whether they arise in the United States of America or elsewhere, that arise out of, relate to, or concern Consultant's service as an officer, director or employee of the Company or the termination of Consultant's employment in accordance with this Agreement. 5.2 Exclusions. Notwithstanding Section 5.1 or any other provision of this Agreement, nothing in this Agreement shall be deemed to release or waive or otherwise compromise, limit or restrict: (a) any rights or benefits provided for under this Agreement; (b) any rights to indemnification, defense, or similar benefits under the certificate of incorporation, bylaws or other organizational documents of the Company (including NovaStar Financial, Inc. and each of its direct and indirect subsidiaries), under any written indemnification agreement, or under any policy of directors and officers or other insurance; or (c) any claims, demands or causes of action arising under or out of, relating to, or concerning any of the foregoing. 6. Compliance. 6.1 Securities Laws. Consultant agrees to comply with all applicable federal and state securities laws in connection with the purchase and sale of shares of the Company's capital stock arising by reason of or in connection with the former employment relationship of the Consultant with the Company, including but not limited to compliance with Rule 10b-5 promulgated under Securities and Exchange Act of 1934, as amended. 6.2 Section 409A of the Internal Revenue Code. To the extent applicable, this Agreement and the Employment Agreement shall be interpreted, construed and operated in accordance with the Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury regulations and other guidance issued thereunder. If on the date of the Consultant's separation from service (as defined in Treasury Regulation ss.1.409A-1(h)) with the Company the Consultant is a specified employee (as defined in Code Section 409A and Treasury Regulation ss.1.409A-1(i)), no payment constituting the "deferral of compensation" within the meaning of Treasury Regulation ss.1.409A-1(b) and 5 

 after application of the exemptions provided in Treasury Regulation ss.ss.1.409A-1(b)(4) and 1.409A-1(b)(9)(iii) shall be made to Consultant at any time during the six (6) month period following the Consultant's separation from service, and any such amounts shall instead be paid in a lump sum on the first payroll payment date following expiration of such six (6) month period. For purposes of conforming the Employment Agreement to Section 409A of the Code, the parties agree that the definition of "Good Reason" under the Employment Agreement is hereby amended to conform with the IRS safe harbor definition under Treasury Regulation ss.1.409A-1(n)(2)(ii) and that the Company shall have a period of thirty (30) days to remedy any conditions giving rise to a Good Reason termination. Consultant understands and acknowledges that payment of the portion of Consultant's benefit under the Company's Deferred Compensation Plan that is subject to Section 409A of the Code and that has not been distributed prior to the Termination Date is required to be delayed for a period of six (6) months following the Termination Date. 7. Miscellaneous Provisions. 7.1 Governing Law and Consent to Jurisdiction. This Agreement and all disputes relating to the interpretation/enforcement of this Agreement shall be subject to, governed by, and construed in accordance with the laws of the State of Missouri, notwithstanding any authority to the contrary. Each party hereby expressly submits and consents to the exclusive personal jurisdiction and exclusive venue of the federal and state courts of competent jurisdiction in the State of Missouri, irrespective of the fact that one or both of the parties now is or may become a resident of a different state and notwithstanding any authority to the contrary. 7.2 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements or understandings, if any, between the parties with respect to such matters; provided, however, that neither this Agreement nor any provision hereof shall be deemed to supersede or otherwise affect any rights to indemnification, defense, or similar benefits under the certificate of incorporation, bylaws or other organizational documents of the Company (including NovaStar Financial, Inc. and each of its direct and indirect subsidiaries), under any written indemnification agreement, or under any policy of directors and officers or other insurance. 7.3 Amendment. This Agreement may be modified or amended only by an agreement in writing signed by both parties. 7.4 No Waiver. The failure of either party to insist on the performance of any of the terms or conditions of this Agreement, or failure to enforce any of the provisions of this Agreement, shall not be construed as a waiver or a relinquishment of any such provision. Any waiver or failure to enforce on any one occasion is effective only in that instance, and the obligations of either party with respect of any provision in this Agreement shall continue in full force and effect. 7.5 Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof are held by a court with competent jurisdiction to be invalid, void or otherwise enforceable, and other remaining provisions shall remain enforceable to the fullest extent permitted by the law. 7.6 Construction of Agreement. This Agreement is the product of negotiation by and between the parties and shall not be strictly construed or otherwise interpreted against either party. In construing this Agreement, any court of competent jurisdiction/arbitrator shall give effect to the intent of the parties. 6 

 7.7 Counterparts; Signatures. This Agreement may be executed in one or more counterparts, and by original or facsimile signature, which taken together shall constitute one and the same original agreement. IN WITNESS WHEREOF, the parties have executed and entered into this Agreement, with the intent to be legally bound by the provisions hereof, as of the date first set forth above. CONSULTANT: /s/ Gregory S. Metz ----------------------------------------- Gregory S. Metz COMPANY: NOVASTAR FINANCIAL, INC., for itself and on behalf of all of its direct and indirect subsidiaries By: /s/ W. Lance Anderson ------------------------------------- Name: W. Lance Anderson ----------------------------------- Title: President ---------------------------------- 7