Sept. 4 (Bloomberg) -- NovaStar Financial Inc., the home lender trying to outlast an industry shakeout by conserving cash, abandoned plans to raise more than $100 million after its auditor said the company may not survive. The shares fell 16 percent.

NovaStar, one of more than 100 companies that have curtailed lending or sought buyers, said in a statement today that accounting firm Deloitte & Touche LLP wouldn't approve the plans without changes. Deloitte wanted the Kansas City, Missouri-based subprime lender to add disclosures including ``the uncertainty of NovaStar's ability to continue as a `going concern,' '' a phrase used to warn investors that a firm may soon fail.

``They're having trouble with cash flows to keep it operational,'' said Christopher Brendler, an analyst at Stifel Nicolaus & Co. who has a ``sell'' rating on NovaStar. ``They had this financing deal, it's fallen through and that's put more pressure on liquidity.''

Mortgage companies are short on cash because demand is dropping, defaults are rising and investors who buy the riskiest subprime home loans have stopped bidding. NovaStar responded in July by lining up Jefferies Capital Partners and MassMutual Capital Partners to provide new capital, and by curtailing new mortgages last month. NovaStar said today it will ``sharply reduce'' remaining retail loan operations.

NovaStar fell $1.33 to $7.16 at 4 p.m. in New York Stock Exchange composite trading. The shares have lost more than 90 percent this year, the worst performance in the 31-member Bloomberg REIT Mortgage Index, which is down about 51 percent.

Target of Zero

NovaStar ``will not have the liquidity to remain a solvent business,'' said a report from Friedman, Billings, Ramsey Group Inc. analyst Scott Valentin. He repeated his ``underperform'' rating and predicted the stock will fall to zero.

The company will cut its retail lending staff to about 125 people from 400 and close 12 offices, today's statement said. NovaStar expects an undetermined pretax charge from the job cuts, scheduled to begin immediately and end in the fourth quarter.

The workforce, which totaled about 3,500 in 2004, will fall to about 600 people after the cuts, the statement said.

NovaStar also plans to explore ``strategic alternatives'' such as partnering with other companies for its servicing unit, which handles billing and collections.

``We are pulling back to focus on NovaStar's core strengths and preserve liquidity,'' said Chief Executive Officer Scott Hartman in the statement.

Aborted Offering

The canceled offering involved units of Jefferies Capital and MassMutual Capital, which bought $48.8 million of convertible preferred stock July 16. They also agreed to buy as much as $101.2 million of a rights offering, NovaStar said at the time. The offering would have given all shareholders the right to buy convertible preferred shares at $25 each, raising more cash for NovaStar.

The company couldn't make changes to 2006 financial statements requested by Deloitte in time for filing deadlines, and MassMutual and Jefferies weren't willing to wait longer, today's statement said.

Deloitte and a unit of Citigroup Inc. are being sued by an investor for helping American Home Mortgage Investment Corp. sell stock 14 weeks before the Melville, New York-based lender went bankrupt. Deloitte spokeswoman Deborah Harrington said last week the firm didn't do anything wrong and Citigroup declined comment. Harrington wasn't available today to comment on NovaStar.

Loan Portfolio

NovaStar now plans to focus on managing its portfolio of securitized residential loans, which was $15.5 billion as of June 30, the statement said.

Thornburg Mortgage Inc., a home lender focused on borrowers with good credit, bolstered its finances today by completing a $1.44 billion sale of mortgage-backed bonds. The Santa Fe, New Mexico-based company stopped taking loan applications last month after running short of cash.

Overdue payments on U.S. subprime mortgages rose to the highest level since 2002 during the first quarter of this year, according to the Mortgage Bankers Association. That's made investors who buy mortgages reluctant to bid, driving down prices and cutting into the profit of home lenders.

``The secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs,'' Hartman said.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: September 4, 2007 16:26 EDT