525,000 Shares

NovaStar Financial, Inc.

Common Stock

Underwriting Agreement

dated May 7, 2003

JMP SECURITIES LLC

FLAGSTONE SECURITIES, LLC

TABLE OF CONTENTS

i

TABLE OF CONTENTS

(continued)

ii

TABLE OF CONTENTS

(continued)

iii

TABLE OF CONTENTS

(continued)

LIST OF SCHEDULES

SCHEDULE A    LIST OF THE UNDERWRITERS

LIST OF EXHIBITS

EXHIBIT A    FORM OF LOCK-UP AGREEMENT

EXHIBIT B    FORM OF LEGAL OPINION OF COUNSEL TO THE COMPANY

EXHIBIT C    FORM OF LEGAL OPINION OF TAX COUNSEL TO THE COMPANY

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Underwriting Agreement

May 7, 2003

JMP Securities LLC

Flagstone Securities, LLC

c/o JMP Securities LLC

One Embarcadero Center, Suite 2100

San Francisco, California 94111

Ladies and Gentlemen:

Introductory.    NovaStar Financial, Inc., a Maryland corporation (the Company), proposes to issue and sell to the several underwriters named in Schedule A (the List of the Underwriters) attached hereto (collectively, the Underwriters) an aggregate of 525,000 Shares (the Firm Offered Shares) of its Common Stock, par value $0.01 per share (the Common Stock) in accordance with the terms and conditions set forth in this Underwriting Agreement (the Agreement). In addition, the Company has granted to the Underwriters an option to purchase up to an additional 78,750 shares (the Optional Offered Shares) of Common Stock, as provided in Section 2 (the Purchase, Sale, and Delivery of the Offered Shares). The Firm Offered Shares and, if and to the extent such option is exercised, the Optional Offered Shares are collectively called the Offered Shares.

The Company has prepared and filed with the Securities and Exchange Commission (the Commission) a registration statement on Form S-3 (File No. 333-74538) which contains a form of prospectus, subject to completion, to be used in connection with the public offering and sale of the Offered Shares. Such registration statement, as amended, including the financial statements, exhibits, and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the Securities Act), including all documents incorporated or deemed to be incorporated by reference therein and any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the Registration Statement. Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the Rule 462(b) Registration Statement, and from and after the date and time of filing of the Rule 462(b) Registration Statement, the term Registration Statement shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Offered Shares, as amended or supplemented to reflect the terms of the offering of the Offered Shares, is called the Prospectus; provided, however, if the Company has, with the consent of JMP Securities LLC (JMP), elected to rely upon Rule 434 under the Securities Act, the term Prospectus shall include the Companys prospectus subject to completion dated December 4, 2001 (each, a preliminary prospectus), together with the applicable term sheet (the Term Sheet) prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (EDGAR). All references in this Agreement to financial statements and schedules and other information which is contained, included, or stated in the Registration

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Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (collectively, the Exchange Act) which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be.

The Company hereby confirms its agreements with the Underwriters as follows:

Section 1.    Representations and Warranties of the Company.    The Company hereby represents, warrants, and covenants to each Underwriter as follows:

(a)    Compliance with Registration Requirements.    The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commissions satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission.

Each preliminary prospectus and the Prospectus, when filed, complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Offered Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain 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 not misleading. Each preliminary prospectus, as of its date and at all subsequent times, and the Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain 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. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, the preliminary prospectus, the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Underwriters expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required.

(b)    Offering Materials Furnished to the Underwriters.    The Company has delivered to the Underwriters one complete manually signed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, conformed copies of the Registration Statement (without exhibits), preliminary prospectuses, and the Prospectus, as amended or supplemented, in such quantities and at such places as the Underwriters have requested.

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(c)    Distribution of Offering Material by the Company.    The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as hereinafter defined) or the completion of the Underwriters distribution of the Offered Shares, any offering material in connection with the offering and sale of the Offered Shares other than a preliminary prospectus, the Prospectus, or the Registration Statement.

(d)    The Underwriting Agreement.    This Agreement has been duly authorized, executed, and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as (i) rights to indemnification hereunder may be limited by applicable law and (ii) the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles.

(e)    Authorization of the Offered Shares.    The Offered Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid, and non-assessable.

(f)    No Applicable Registration or Other Similar Rights.    There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived.

(g)    No Material Adverse Change.    Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations, or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a Material Adverse Change); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct, or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid, or made by the Company or, except for dividends paid to the Company or its other subsidiaries, any of its subsidiaries on any class of capital stock, or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock.

(h)    Independent Accountants.    Deloitte & Touche LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act and the Exchange Act.

(i)    Preparation of the Financial Statements.    The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles (GAAP) applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related

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