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Credit Crunch Continues, Thornburg Exec Says

Larry Goldstone still isn't sanguine about mortgage markets.

Thornburg Mortgage


operating chief Larry Goldstone applauds Tuesday's


rate cut but says his industry is still facing tough times ahead.

Federal Reserve Chairman Ben Bernanke cut the benchmark fed funds overnight lending interest rate by 50 basis points. The Fed said it feared that disruptions in the credit markets could seep into the economy.

Shares of financial companies rose sharply on the news, as investors breathed a sigh of relief. And Goldstone says he believes the Fed will continue to cut rates through year-end, to 4% from the recent 4.75%.

But Goldstone tells

that even with rate relief, credit worries will persist -- and the housing and mortgage industries are far from out of the woods.

"The moves that

the Fed made yesterday was absolutely the right move," Goldstone said in an interview Wednesday. "But at the end of the day, the market is still fairly dysfunctional."

He notes that companies are still having difficulties selling short-term commercial paper, a type of debt financing used by mortgage lenders to help fund loans. Scant few asset-backed and mortgage-backed securities have been structured and sold into the market in recent weeks.

"Mortgage spreads are as wide as they've been, so the Fed cut is not having an impact on mortgage rates per se," Goldstone notes.

Fed interest rate cut or no, providing loans for mom-and-pop types still will prove challenging, Goldstone says. He adds that people's difficulties in obtaining financing for credit cards and automobiles also may translate into bad news for the economy.

"There is a constricting credit environment and it threatens to permeate a lot of different areas of the market," Goldstone says.

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A lot of real estate still needs to be liquidated at a time when home values are falling sharply, Goldstone adds.

Santa Fe, N.M.-based Thornburg has seen the problems the credit market can cause first hand. The jumbo loan originator, which provides loans to homebuyers who need to borrow above the

Fannie Mae


cutoff line of $417,000, has had to scramble to raise cash to fund its loan business. The problem started when investors grew skittish about rising defaults on mortgage-related debt.

Over the past few weeks, Thornburg has sold $20.5 billion of its safest investments in order to generate funds. The mortgage lender also raised cash by selling a $575 million stake in itself and borrowing funds against $1.44 billion of mortgage assets in order to finance its lending business.

The lender has not been alone in its maneuvering. The largest U.S. mortgage lender,

Countrywide Financial


, has had to seek funding assistance from

Bank of America

(BAC) - Get Bank of America Corporation Report

to keep itself afloat. Smaller players such as


(IMH) - Get Impac Mortgage Holdings Inc. Report




have been cutting jobs, eliminating dividend payouts and generally trimming their sails.

Goldstone believes that for Thornburg's part, all the restructuring has positioned the lender to benefit from credit dislocation by being able to scoop up market share from the roughly 50 lenders that have gone under during the credit disruption.

That said, Goldstone believes that potential homeowners may want to reconsider the way they view homeownership in light of the mortgage shakeup.

"Real estate is not the asset class to be in, in my view," he says. Potential buyers "need to have a longer term view and realize that

housing is a really illiquid asset."