Sept. 17 (Bloomberg) -- NovaStar Financial Inc., the subprime home lender trying to survive by conserving cash, scrapped plans to pay a dividend on 2006 profit and will forfeit its real estate investment trust tax status as a result.

The mortgage company, one of more than 110 that have halted lending or left the business since the start of 2006, said in a statement that the loss of REIT status will have a ``significant adverse impact'' on third-quarter results. Kansas City, Missouri- based NovaStar is reviewing its listing requirements with the New York Stock Exchange.

``Clearly, we did not anticipate the drop in market value or the level of demands on liquidity caused by the market turmoil this summer,'' said Chief Executive Officer Scott Hartman in the statement. ``Canceling the previously planned dividend is the only reasonable and prudent course of action.''

Auditors raised doubt about NovaStar's survival earlier this month as cash ran short and a plan to raise more than $100 million from private-equity investors collapsed. REITs, which can invest in property or mortgages, pay no federal taxes on most or all of their profit provided they pass 90 percent of taxable income directly to shareholders in the form of dividends.

The company's plan had been to pay out a $157 million dividend in the form of convertible preferred securities. NovaStar said today it can't ``create enough value through the issuance of preferred securities'' to make the needed dividend, in part because of a substantial drop in its market value.

`They Were Struggling'

``They were struggling to pay the dividend even before'' lenders to mortgage companies and home-loan asset investors conducted margin calls and tightened terms in August, said Brian Horey, general partner at Aurelian Partners LP, a New York-based firm that's bet against stocks of subprime lenders in the past and has no position in NovaStar. ``Surprised it took this long.''

NovaStar rose 14 cents to $8.24 during regular trading hours on the New York Stock Exchange. During extended trading after the announcement, the shares fell as low as $6.12. The stock has declined more than 92 percent this year, compared with a 50 percent drop for Bloomberg's index of mortgage REIT stocks.

The loss of REIT status will be retroactive to Jan. 1, 2006, NovaStar said. In May, the company said it would stop operating as a REIT at year-end. Tax losses for 2007 will offset the tax liability for 2006, avoiding the need to lay out any new cash, the statement today said.

Last Updated: September 17, 2007 19:27 EDT