Novastar Financial, once a high-flying subprime lending operation counted among the nation’s largest, reported Wednesday a net loss of $598 million for the third quarter and said that bankruptcy was a possibility. The loss compares to income of $25.3 million in the year-ago period. NovaStar is obviously no longer the company it once was, describing itself in its latest earnings press release as “a non-conforming residential mortgage portfolio manager and retail broker of mortgage loans.” The company sold off its entire servicing portfolio to Saxon Mortgage Services, a unit of Morgan Stanley, on November 1 in a deal worth $147 million. The company also said in its SEC filing for the first time that bankruptcy is a possibility, noting that the company was a breach of a net worth covenant with its sole remainer creditor, Wachovia. A waiver has been extended through the end of November, but said it will not repay its outstanding debt by that time and that a failure to further extend the net worth waiver would “cause the company to file bankruptcy.” The rest of the earnings discussion in the press statement read like a company that is certainly fighting to stay alive: all dividends suspended, a likely de-listing from the NYSE, sale/transfer of whole loans at a cash loss, suspension of nearly all mortgage banking activities, and a continued decline in the value of its portfolio of mortgage securities. For more information, visit http://www.novastarmortgage.com.

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