Thornburg Mortgage - Wholesale - Jumbo, Alt-A

In a conference call on August 26th, President and CEO Larry Goldstone acknowledged that Thornburg Mortgage had ceased originating loans. Thornburg Mortgage has been struggling to cope with repeated margin calls and ratings downgrades on its portfolio of 2005, 2006 and 2007 vintage loans. Goldstone told listeners that of $350 million cash in their liquidity reserve fund, $245 million had been spent to satisfy those margin calls and more were likely to come.

"Loan origination continues to be very, very challenging in this market environment, particularly for Thornburg Mortgage and particularly for the non-banking entities. There is limited warehouse financing available out there, the terms and conditions of that warehouse financing are onerous to say the least, securitization activity in the second quarter and for the year have virtually come to a screeching halt, and we have not been able to complete or were not able to complete a securitization as we had anticipated in the second quarter. Our plan now is to affect a loan sale of the loans that are on the warehouse line. We believe that we are going to be successful in selling our loans and in fact we believe that that will get done in the third quarter.

We did close 244 million of loans in the second quarter in anticipation of securitizing them and financing them for our portfolio, but unfortunately that didn't happen. So as of now, huh, we're still have not figured out or found an opportunity to re-start our loan origination efforts but we continue to work on strategies to make that happen."

Asked if an acquisition or merger with a bank or other depository institution might be part of those strategies, Goldstone admitted "a considerable amount of thought" was being given to the possibility once current difficulties had been addressed. Among those difficulties are the Repurchase Agreements with their warehouse lenders which Goldstone mentioned, were five months into "override" - a nice term that implies over-extension, delinquency or a combination of both. Thornburg Mortgage is currently renegotiating terms of its Repurchase Agreements with override lenders, and extended a Preferred Exchange Offer to buy back 66 2/3rds percent of its preferred shares. As oft quoted in recent news articles, Goldstone referred to the situation as "precarious" but he expressed a belief they would eventually be able to resume originating and could return to profitability. For the time being, it is clear Thornburg Mortgage is not originating any new loans:

"The fact that we can't originate loans is causing us to expense our loan origination efforts as opposed to being able to capitalize some of those expenses as a yield adjustment going forward."

Oddly enough, the employees don't seem to be aware of this. When we called, a Loan Officer cheerfully reported "Yes, we're still doing business, but our pricing is high!" Thornburg Mortgage's rate sheet might give one the impression they've deliberately priced themselves out of market to cut off the flow of any new business.

The information in this article has partly been transcribed from a recorded conference call. The replay dial-in number is (800) 475-6701 in the U.S. and (320) 365-3844 internationally and will end at 1:59 p.m. EDT on September 26, 2008. The access code for both replay numbers is 957821.

Update - 2008-08-28: Thornburg Mortgage is putting up a valiant fight in the face of margin calls and downgrades. Reuters reported yet another downgrade yesterday by Friedman, Billings and Ramsey who cut their target price for TMA in half to 25 cents. The article notes, "On Tuesday, the company said its survival remained in doubt following additional margin calls, but that it is on track to complete a restructuring and avoid collapse."

We take this snippet from the blog of Mr. Mortgage:

"Thornburg has already shown signs of Jumbo-Prime and Alt-A downgrade pain, announcing a sizeable margin call last week. This is simply the after-effect of these downgrades. Thornburg getting a margin call can be viewed as equivalent to a bank taking a write-down on similar paper."

Shares in TMA saw a brief resurgence to 49 cents on Monday before dropping back once again. Forbes attributed the spike to better-than-expected earnings due largely to a new accounting rule which resulted in a $536.9 million reduction in liabilities. "Without the added benefit of the new rules, Thornburg would have only brought in $22.7 million." As of 11:13 AM (EDT) stocks were trading at $0.387.

Update - 2008-06-19: Shares nosed-dived over 55% this morning on news subpoenas were issued in April and May against Thornburg. Reuters reports Thornburg "received subpoenas from U.S. securities regulators and that its survival remains in doubt."

Shares which used to trade in the $25 to $30 range, were down to 24 cents this morning.

Update - 2008-06-12: Numerous reports came out today on TMA's release of 1st Quarter results. Late in the day, an AP report on Yahoo.Finance said shareholders had approved the issuance of 1.35 billion shares "clearing the way for a rescue by outside investors."

RTT News had a more detailed account of the actions approved by shareholders, noting the amendments would "increase the number of authorized shares of capital stock from 500 million to 4 billion."

In the New Mexico Business Weekly (NMBW), reference is made to statements by CEO Larry Goldstone in the earnings conference call earlier today:

"If the shareholders had not agreed, the company would have faced a number of dire consequences as part of the $1.35 billion March 31 deal; as President and CEO Larry Goldstone said in an earnings conference call earlier Thursday, the company would have found itself $2 billion in debt by 2015, with no assets and no cash flow."

Bloomberg reported "Thornburg Mortgage Inc., the "jumbo" home lender that averted bankruptcy in April, said it lost $3.31 billion in the first quarter because of writedowns on securities linked to real estate."

"Thornburg said results were hurt by "modestly increasing delinquencies in our loan portfolio and some additional downgrades of our mortgage-backed securities." The overdue loans are likely to rise the rest of this year, Thornburg said."

While Reuters reported "Thornburg had warned in May that it expected to report a substantial quarterly loss," the NMBW article had this quote from Goldstone:

""The whole future of the company rides on this," Goldstone said. "We're not happy about the transaction, but I can go to bed at night and know we gave it our all.

I can assure you there was no alternative. This was it.""

Reuters had previously reported on 2008-05-20: "The company narrowly avoided bankruptcy after raising $1.35 billion in March from investors, including MatlinPatterson Global Advisers LLC, which invests in distressed companies."

Update - 2008-03-25: Bloomberg reports today that Thornburg has disclosed plans to sell $1.35 billion of debt, a last-ditch effort to raise the almost $1 billion needed "this week to meet margin calls from its bankers." The article notes investors "will receive warrants that may equal 48 percent of the common shares" and Thornburg needs NYSE approval. "Waiting for that approval "would seriously jeopardize the financial viability of the company," Thornburg said."

In a 2008-03-10 notice, Thornbrug provided customers with a "Loan Backlog Funding Update" - "an estimate of our expectations as to the resumption of funding the backlog of loans that are in the queue for funding/purchase."

"Once the outstanding margin calls have been met and as warehouse lines are reopened for new fundings, we will be prepared to resume funding the backlog. It is our expectation that this may occur before the end of this week. However, as this is a complicated and time consuming process, additional delays may occur which could cause the fundings resumption to be delayed further."

Update - 2008-03-10: Excerpts from a broker bulletin sent out today entitled "Thornburg Mortgage Loan Backlog Funding Update:"

"Due to our need to take a conservative approach and preserve cash and capital, funding delays did occur and, beginning on Friday February 29th, TMA has not funded any loans."

"Once the outstanding margin calls have been met and as warehouse lines are reopened for new fundings, we will be prepared to resume funding the backlog. It is our expectation that this may occur before the end of this week. However, as this is a complicated and time consuming process, additional delays may occur which could cause the fundings resumption to be delayed further."

Original Listing - 2008-03-07: Reports have been rolling out recently about the developing crisis surrounding Thornton Mortgage (NYSE: TMA) that could mean bankruptcy for the Santa Fe, NM based lender. Punctuating a week of bad news with more of its own, the company announced it had "determined that the financial statements for the year ended December 31, 2007, should be restated" and that they had "concluded that a $427.8 million charge for impairment on its purchased ARM assets is required as of December 31, 2007." Moody's downgraded TMA Thursday evening further into "junk status" as reported by Business Week.

The company's Friday press release provided more detail on the extent of the damage to its liquidity position:

"The company had readily available liquidity of approximately $580.0 million at December 31, 2007. Through the close of business on March 6, 2008, the company had received $1.777 billion in margin calls since December 31, 2007, and had satisfied $1.167 billion of those margin calls primarily by using its available liquidity, principal and interest payments and proceeds from the sale of assets. As of close of business on March 6, 2008, the company had outstanding margin calls of $610.0 million which significantly exceeded its available liquidity at that date. The company has entered into a temporary syndicate agreement with its remaining reverse repurchase agreement counterparties which freezes additional margin calls through Friday, March 7, 2008, while the company pursues solutions to its liquidity shortfall. This agreement is renewable at the option of the company's lenders and the company. Through the close of business on March 6, 2008, the company had received notices of event of default under reverse repurchase agreements from four different lenders."

Their plummeting stock caught headlines Wednesday 2008-03-05 in the Houston Chronicle, dropping to a 13-year low of $1.26. It was reported the company announced that evening "JPMorgan Chase & Co. issued a default notice after it failed to meet a $28 million margin call. That notice triggered cross-defaults on agreements Thornburg had with other lenders." In a 2008-03-05 article in the New Mexico Business Weekly, an analyst gave TMA a "one-in-four chance of bankruptcy", and said "the beating Thornburg has taken from $570 million in margin calls in the last month could prove to be too much to stay afloat." Marketwatch reported JP Mortgage Chase "told the company on Feb. 28 that it had defaulted on a $320 million financing agreement" after missing the $28 million margin call.

About TMA, from their web site:

"Founded in 1993, Thornburg Mortgage is a publicly traded single-family residential mortgage lender operating in all 50 states. We focus principally on the jumbo and super-jumbo segment of the adjustable rate mortgage market, lending directly to clients as well as through relationships with lending partners across the country."

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