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Liquidity Crisis at Thornburg

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Jumbo mortgage lender Thornburg Mortgage Inc. warned today it is facing margin calls that could materially impact its ability to carry on.

The Santa Fe, N.M.-based company announced today that it faces $270 million in margin calls on its reverse repurchase agreement borrowings outstanding as of Feb. 29.

The margin calls come on top of $300 million in calls the company satisfied since Feb. 14. Those margin calls, disclosed in a Securities and Exchange Commission filing Thursday, were on approximately $2.9 billion of AAA-rated super senior, credit-enhanced mortgage securities backed by Alt-A loans as of Feb. 15.

“These margin calls are strictly the result of continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions,” the company explained. “After meeting all of its margin calls as of February 27, 2008, Thornburg Mortgage saw further continued deterioration in the market prices of its high quality, primarily AAA-rated mortgage securities, which triggered additional margin calls.”

While Thornburg is working with lenders to meet the latest round of margin calls within an acceptable time frame by either selling portfolio securities or raising additional debt or equity capital, it has not met the majority of them.

After meeting the calls in early February, the real estate investment trust said it was left with limited liquidity. It has already defaulted on one reverse repurchase agreement counterparty — though that lender has not yet moved forward with liquidation of pledged collateral.

“There is no assurance as to Thornburg Mortgage’s ability to sell such assets or raise additional funds in the current market at acceptable prices, or to raise additional capital,” the company stated. “If the company is unable to satisfy outstanding margin calls, any or all of its reverse repurchase agreement counterparties may declare an event of default and liquidate the pledged securities.

“Such an occurrence would have a material adverse effect on the company’s ability to continue its business in the current manner.”

Thornburg went on to say that even if it does meet the latest round of margin calls, it could still see further declines in the value of its portfolio — which could trigger even more calls.

“The turmoil in the mortgage financing market that began last summer continues to be exacerbated by the mark-to-market accounting rules which are forcing companies to take unrealized write-downs on assets they have no intention of selling,” Thornburg President and Chief Executive Officer Larry Goldstone said in the announcement. “In this environment, the current market price of assets has become disconnected from their underlying recoverable value, resulting in increased volatility and imprecise quarter-to-quarter comparisons of asset valuations.”

Goldstone noted sellers of high quality mortgage securities currently outnumber buyers substantially as a result of a continued lack of trust and confidence in the broader financial markets.

He added, however, that falling prices on mortgage assets have also created opportunities for higher profits going forward.

Shares of Thornburg, which have traded as high as $28.40 during the past year, plunged more than $5 in early afternoon trading to $3.85.

Related:

Alt-A Liquidity Worsens
Thornburg Mortgage Inc. is facing margin calls on its Alt-A investments.

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