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Mortgage Market on Roller Coaster

Mortgage Market on Roller CoasterRecent earnings and corporate activity

March 12, 2008


Panic market conditions have been soothed by the Federal Reserve’s plan to provide liquidity to the mortgage securities market. Still, mortgage firms continue to struggle.

Covered bonds issued by WM Covered Bond Program were downgraded by Moody’s Investors Service after the agency considered credit enhancement, swap agreements and uncertainty about how the FDIC would treat the program if its sponsor, Washington Mutual Bank, entered receivership.

Franklin Credit Management Corp. announced it will remain listed on the NASDAQ Stock Market at least through the end of the month. But it will need to maintain a $5 million market value for 10 consecutive trading days and file a Form 10-Q with the Securities and Exchange Commission by April 1, 2008, in order to stay listed. If it doesn’t meet these thresholds by the required date, it intends to apply to move its listing from NASDAQ’s Global Market to the NASDAQ Capital Market — where the minimum market capitalization requirement is only $1 million.

In addition, Franklin’s shares, which currently trade at around $0.64, would need to increase its share price to $1 by Aug. 18, 2008.

IndyMac Bancorp Inc. warned Tuesday that panic conditions in the capital markets have caused spreads on mortgage investments to widen substantially over U.S. Treasuries. The latest activity is expected to negatively impact the Pasadena, Calif.-based company’s portfolio of mortgage-backed securities and first quarter earnings.

But markets were subsequently calmed by an announcement from the Federal Reserve that it would expand its securities lending program and lend up to $200 billion of Treasury securities for a term of 28 days by a pledge of securities that included federal agency residential MBS and non-agency AAA/Aaa-rated private-label residential MBS. Fitch Ratings noted it was “encouraged” by the Fed’s move and said “it has potential positive implications for U.S. financial institutions.”

“Fitch believes the broadening of acceptable collateral by the Fed, particularly for mortgage-backed securities, should relieve some of the recent market pressures,” the ratings agency said in an announcement.

Investors were cheered by the Fed’s move, sending the Dow Jones Industrial Average 417 points higher yesterday and up another 131 points early today to 12,288.

Thornburg Mortgage Capital Resources LLC saw its extended notes downgraded by Fitch, reflecting concerns about ongoing “declines in the market value of the collateral supporting the program, continued deterioration in the liquidity of the mortgage-backed securities market, the reduced availability of repo financing, and the potential for additional liquidations of similar collateral by other market participants.”

Fitch said that unless capital markets improve prior to liquidation, “there exists a high likelihood of loss to the noteholders.”

The downgrades followed Thornburg Mortgage Inc.’s disclosure Tuesday that it restated its 2007 financial statements. An impairment charge was raised to $676.6 million from a previously reported $427.8 million because it may not be able to hold some of its securitized adjustable-rate mortgages to maturity.

“Our immediate challenge is meeting margin calls from our lenders that has been brought on by the dramatic decline in high quality mortgage-backed securities prices,” Thornburg President and Chief Executive Officer Larry Goldstone said in the statement. “While we aggressively pursue more permanent solutions to our liquidity issues, we are in discussions with our lenders to reach a mutually satisfactory agreement that will enable us to meet all of our outstanding margin calls within an acceptable timeframe for our lenders and also mitigate the sale of high-quality assets at a significant loss in this environment.”

Thornburg warned Friday it may not be able to continue in business. But the outlook has apparently improved for the Santa Fe, N.M.-based company, which saw its shares soar from $0.69 Monday to $3.40 today. The positive trading activity reflects both the move by the Fed and the likelihood that the real estate investment trust will be able to work out a deal with its creditors.

Ocwen Financial Corp. said yesterday it would scrap a plan to go private, though a special committee of independent directors that was formed to consider the buyout will continue to consider possible strategic opportunities for the West Palm Beach, Fla.-based company, which reported a $13.1 million fourth quarter loss.

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