Why Thornburg Mortgage Will Survive

It is about a year ago now that the credit crisis first started affecting jumbo mortgage originator Thornburg Mortgage (TMA). In early August 2007 the stock was still trading in the low $20’s and rumors were just starting about what was soon to become a full blown crisis in the mortgage industry. Thornburg was hit hard in the fall of 2007, but it appeared that the company would continue OK on the strength of its high quality mortgage portfolio. The share price fell as low as $7.60 before recovering to the $10 range until late February. Business seemed to be going well as the 4th quarter earnings were released in February 2008 and by that time many competitors had dropped from the market and the company anticipated growing profitability.

Within 3 weeks, however, the other shoe fell. Thornburg started receiving margin call on repo agreements pledged with the company’s mortgage securities. Soon the margin calls approached $1 billion, some mortgage assets were taken by some lenders and suddenly Thornburg was within days of going out of business. To save the company, management found investors willing to provide about $1.3 billion in cash in exchange for 18% interest and a couple of billion stock warrants at a penny each. The investors also would collect the principal payments on most of Thornburg’s $20 billion (guesstimate) mortgage portfolio until the end of time unless the current shareholders agreed to a couple of changes.