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New Margin Calls Could Sink Thornburg

Debra Borchardt

Shares of Thornburg Mortgage(TMA Quote - Cramer on TMA - Stock Picks) plummeting more than 60% to well below their 52-week lows, after the jumbo mortgage lender on Monday said new margin calls could spell its demise.

The Santa Fe, N.M.-based lender on Monday said it faces $270 million more in margin calls on top of the $300 million it disclosed last week. If it wasn't able to pay the calls, Thornburg may have to sell the pledged securities at a discount

"Such an occurrence would have a material adverse effect on the Company's ability to continue its business in the current manner," the company said in a statement.

Thornburg shares hit a low of $3.53 Monday afternoon, but rebounded slightly before the close on news it had financed a $992 million collateralized mortgage debt transaction of prime hybrid adjustable rate mortgages, giving it much-needed liquidity. The stock closed at down 51.5% to $4.32.

Wednesday, Thornburg was able to meet the first round of margin requirements on its reverse repurchase agreements, primarily for securities tied to Alt-A mortgages, that had declined significantly in value. Since then, Thornburg has seen "continued deterioration in market prices" for mortgage-related securities, this time primarily for what the company described as triple-A rated loans.

Thornburg said it has been left with limited capital to meet the new calls or even any future calls. The company said it could not assure investors that it would be able to sell assets or raise more money, and thus may be forced to declare default and liquidate the pledged securities. Thornburg is currently in default on one reverse repo and is working with the lender to repay the debt, it said.

"Although this is a difficult time for the company, we are working diligently to satisfy all of our lenders as soon as possible and return to financial stability," President and CEO Larry Goldstone said in a statement. "These difficult market conditions have also created increased profit opportunities as lower-priced mortgage assets will translate into wider mortgage spreads and improved portfolio margins going forward."

Citigroup analyst Donald Fandetti downgraded Thornburg to sell from hold following the news. The analyst also reduced his price target to $5 from $12 on higher liquidity risk.

"We are hopeful that [Thornburg's] quality assets will enable it to meet the margin calls, but the downside risks are simply too high to maintain a hold rating," he wrote.

Standard & Poor's on Friday lowered its counterparty rating on Thornburg to B- from B.

Other mortgage lenders have faced similar situations. Last July, American Home Mortgage had significant margin calls and the company faced bankruptcy. It was April 2007 when New Century Financial also declared bankruptcy unable to meet its creditor demands.

Countrywide Financial(CFC Quote - Cramer on CFC - Stock Picks), the nation's largest mortgage lender, agreed to sell itself to Bank of America(BAC Quote - Cramer on BAC - Stock Picks) last year, after its stock price took a beating amid rumors it was facing bankruptcy amid the mortgage market meltdown.