Why did NovaStar drop almost 8% today?

The market-maker exemption to Reg.SHO allows an options market maker to "hedge" a put position by selling shares but "fail-to-deliver" them.

NFI had open put positions that would have allowed the "sale" of up to 14.4 million "fake" shares.

Is it any wonder that a stock's price drops when the supply is "watered" with a fire hose?

NFI is an expensive stock to borrow.
http://www.dataexplorers.co.uk/

Borrowing it (to short it) requires that collateral be put up equal to 102% of the market value. When the stock price drops then excess collateral is returned to the borrower and the cost to borrow it drops, too.
"9.3 Subject to Borrower’s obligations under Section 9.1, if at any time the Market Value of all Collateral for Loans to Borrower shall be greater than the Margin Percentage of the Market Value of all the outstanding Loaned Securities subject to such Loans (a “Margin Excess”), Borrower may, by notice to Lender, demand that Lender transfer to Borrower such amount of the Collateral selected by Borrower so that the Market Value of the Collateral for such Loans, after deduction of such amounts, shall thereupon not exceed the Margin Percentage of the Market Value of the Loaned Securities"
http://www.bondmarkets.com/agrees/master_securities_loan_agreement_2000_version.pdf

The borrower can "pay-to-hold" shares until such time as dumping them on the market has the most impact, i.e., like now, during an apparent "quiet period", one hundred days before the next ex-date, and under cover of negative news on mortgages.
"Putting securities ‘on hold’ (referred to in the market as ‘icing’ securities) is the practice whereby the lender will reserve securities at the request of a borrower on the borrower’s expected need to borrow those securities at a future date. This occurs where the borrower must be sure that the securities will be available before committing to a trade that will require them.
...
A variation on icing is ‘pay-to-hold’ where the lender does receive a fee for putting the securities on hold. As such, they constitute a contractual agreement and are not open to challenge by other borrowers."

http://www.rmahq.org/NR/rdonlyres/49EC2955-3A7F-48A1-824D-35A3D5CE0168/0/AnIntroductiontoSecuritiesLendingThirdEdition.pdf page 20

Pedanticly,
Bidrec

NovaStar's share value has dropped by 40% since October 2006. Moreover, the company has been totally silent on the reasons for this disastrous decline. Multiple inquiries to their Investor Relations department results in simple referrals to prior news releases and old financial data.

Obviously, for a company this size to have their shares decline by 40% in a little more than three months, someone (other than their loyal shareholders) knows something. Even their competitors, like New Century Financial (NEW), have a relatively stable share price. Not so with NovaStar Financial -- and that has to make shareholders question just "what" is going on with their Board of Directors and executive staff!

Shareholders in NovaStar have taken a horrible beating and, by NovaStar's silence, it would appear the company has it's head stuck in the sand -- or has made some very bad business loans and decisions. Whatever is going on, it's now to late for shareholders to make any informed decisions because they have already lost 40%, or more, of their investment!

Does anyone know what's going on with this company?

If I've heard correctly, NFI will be reporting earnings today (Feb 6) after the close. Maybe people are dumping the stock prior to earnings since a negative earnings report might results in further losses?

HEAVY short selling begets more selling, especially when the broader market is trending higher (there aren't a lot of good stocks to short).

NFI's break below 30 (12/15/06) looks very much like Enron's chart from September 2001 to the single digits. Many of those who would normally buy the dips have been frightened away.

I don't follow NFI's accounting or underwriting criteria, but it seems that fraud would be a necessary precursor to any banko filing.

Never try to catch a falling knife.