Why We Can't Trust: Thornburg Mortgage
A: In a sign of the times, jumbo mortgage lender Thornburg Mortgage is getting whacked as I write this because of deterioration in the value of their mortgage backed securities holdings. The losses are resulting in margin calls at the worst possible time. There is no market right now for these risky assets, except from vulture investors who will scoop up holdings at a high discount. But that is not the story here. Take one look inside Thornburg's Industry Expert Spotlight, as publicly displayed in the news section of their website, and you can see why we just can't trust what is told to us.
The news. According to Yahoo Finance's article "Thornburg May Be Forced Out Of Business":
Jumbo mortgage lender Thornburg Mortgage Inc. said Monday it may be forced out of business as it faces an additional $270 million in margin calls on top of the more than $300 million it was being forced to repay, or provide more collateral for, last week.LOOK AT WHAT I BOLDED! The margin calls are 'strictly a result of the continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions'. Now take a look at what their website states about their business model in mid 2007: Origination Strategies: Above The Fray; Thornburg Mortgage takes the high road on risk in its origination niche serving high-end borrowers.
Thornburg said it has not met the majority of the most recent calls, but is working to repay them by selling assets or through the raising of additional debt or capital. If Thornburg is unable to meet the current calls, it said the result could materially affect its ability to continue to operate.
Margin calls force borrowers to repay loans or put up more collateral to secure them. Thornburg said the margin calls are "strictly a result of the continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions." The calls are not reflective of the actual performance of the securities, the company added.
Note that Larry Goldstone is Thornburg's President & CEO, as stated in this publication. WTF! If this is the case, then why the hell would they be forced into margin calls because "of the continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions"...? Didn't Goldstone state in that publication that..."...company isn't driven by what he calls 'gain on sale' model, referring to the business of providing mortgages and selling them to investors" and then state right after this that..."The Thornburg model is a throwback to the old-school way that mortgage lending occurred"?
If they are not driven by the so-called 'gain on sale' model of packaging up mortgages and reselling them to investors, why would they have to meet margin calls due to the continued deterioration of prices of mortgage backed securities? But if that doesn't light a flame under your a$$, here are some more tidbits from this publication:
* "We are risk managers before anything else, and there's a discipline required to being an effective risk manager" says Goldstone
* "In my own personal opinion, what happened in the subprime sector is history repeating itself," Goldstone says, referring to past real estate boom-bust cycles. "It's no surprise to me, I've been anticipating it".
A sign of the times. We STILL do not know who holds what, what IT is worth, and HOW much further the secondary mortgage market will deteriorate bringing up more margin calls like this one at Thornburg. The shame of this whole thing is that investors may have bought into TMA stock because they thought their model was safer, and their risk managers had the discipline to avoid this type of situation. After all, this is what was told to them!
Thornburg's stock price is currently trading down 54%!
Posted by price stout
Mon Mar 3rd, 2008 01:33 PM
I think you might be missing the point w/ Thornburg. I don't know their business so this is speculation, but I'll apply Occam's Razor:
The CEO can be telling the truth that they're not a gain on sale originator but that MBS market deterioration is crushing their busienss. Even if they hold loans to maturity, they still need some form of financing (they are not a bank with deposits), and that's where they've run into trouble with their borrow short, lend long strategy: they can't borrow short anymore. They were presumably using some kind of repo agreements to get short term financing, but now the lenders are saying, in effect, I'll only loan you some (very small) fraction of par on these repo lines and hence the "margin call." Furthermore, the Wall Street banks presumably lending on these repo lines are increasingly capital constrained themselves, so they might be making margin calls out of some combination of genuine concern about the collateral and also as an indirect way to force Thornburg to go away, so they can free up some of their own very scarce capital.
When Thornburg can't roll that repo financing, well, then they're toast (actually, what they'll do is sell off the balance sheet, but they'll do so at big losses).
Read "When Genius Failed" and you'll see that one of the (rarely commented on) results of LTCM's failure was the failure of many, many REITs who were margin called to death, just like Thornburg might be seeing today. This was in fact "the good old way" of doing mortgages, but this is also mortgage REITs fail first in a credit crunch.
Posted by Noah
Mon Mar 3rd, 2008 02:09 PM
Price - thank you for a great comment. Was on phone with wsj reporter and we were both discussing just this; that they ran into trouble by borrowing short and lending long..
makes sense. it was where the financing was coming from that I was very confused on.
How many other banks employ this strategy? I assume many, especially of the niche lenders like Thornburg. Any ideas?
Posted by Noah
Mon Mar 3rd, 2008 03:28 PM
does anybody out there know TMA's balance sheet or business model in more detail that could confirm what Price Stout suggested is the main reason here?
why cant Thornburg borrow at discount window from fed or be one of the bidders at one of the TAF? Is this NOT an option to them because as PS said, they are not a bank with deposits? Do they have ANY options other than selling assets, capital injections, bankruptcy?
Does Thornburg NOT have any MBS holdings?
Posted by uwsider
Mon Mar 3rd, 2008 04:37 PM
What affects do you think this will have on the "new conforming" limit is any? Will lenders start to question large-sized loans more than usual?
Posted by Price Stout
Mon Mar 3rd, 2008 04:45 PM
It won't surprise you that I write this, but I am correct.
TMA is not a bank. They cannot borrow from the Fed, nor can they get repo financing from the FHLBs.
When you ask, Who has this borrow-short, lend-long strategy, the answer obviously if every single bank. But banks, with the benefit of FDIC insurance, get deposits and have access to what's effectively repo financing from the fed gov't.
I have no idea if TMA has MBS or not (I assume they do). What difference does that make?
My guess is that TMA will be bought by a small bank. Supposedly they have a pretty good balance sheet. If you could pick up that balance sheet for 80 cents (as a small bank purchaser), then you'd have a killer ROE for the next few years.
Posted by Jonathan J. Miller
Mon Mar 3rd, 2008 04:53 PM
Good post Noah? - the jumbo mortgage world seems to have less light at the end of the tunnel than the conforming world does. The announcement by Cuomo today is interesting because it moves to fix conforming loan quality issues (except AMCs) but jumbos are not part of the solution. I wonder how investors are going to view the increase in conforming loan limits in certain markets. The higher mortgage loans have got to be priced differently than conforming mortgages are or we have learned nothing since last summer.
Posted by Noah
Mon Mar 3rd, 2008 05:12 PM
Price Stout - I am not surprised at all!! Bought some TMA at $4 this afternoon. Yayyy!
Now Im short financials via SKF, short real estate via SRS, short emerging markets via EEV, long gld & iau, and long TMA.
GO TMA!!!!! SELL MORTIMER SELL!! TURN THESE MACHINES BACK ON!!!!
Posted by Noah
Mon Mar 3rd, 2008 05:16 PM
JM - are you talking about the cap limits being raised at Fannie & Freddie? Just got back and didnt see announcement from Cuomo, link?
One thing I agree on though is that we have not learned much yet. I think going through some pain will alter that though.
Posted by Noah
Mon Mar 3rd, 2008 05:17 PM
Ahhh, you mean the appraisal cleanup announcement! That doesn't include Jumbos?
Posted by jefff
Tue Mar 4th, 2008 08:35 AM
Noah,
I think your going to be happy with the TMA as my understanding is that their holdings are prime and super prime and default rates are quite low (.5%)....even if they rise some they should be in relatively good shape. Interestingly, TMA, the firm that didn't securitize....they used repos as financing....has rescued itself by doing an emergency securitization. There is an important point here. Something is wrong when a large customer holding high quality paper gets massive margin calls by their bank lenders, but gets saved by selling paper into the investment markets. It is a strong comment about where we are right now. Banks are in trouble and running away from risk r.e. Auction rate note auctions, margin calls, CMBS etc, etc. Meanwhile investors like hedge funds are seeing some fire sale prices on safe looking paper and they are starting to buy it. The question is can the investors prop up the markets or the banks long enough to prevent a big bank failure and will the downturn we are heading into be bad enough to spoil even the currently good smelling paper. These are still open questions, so keep your waders on.
Posted by Noah
Tue Mar 4th, 2008 08:54 AM
thx Jeff for the great comment!!
Posted by mike
Tue Mar 4th, 2008 10:13 AM
i'm starting to see what Jeff is talking about also. Hedge funds, insurance companies, pension funds, etc have money that they need to start putting to work - they can't just sit on it, and they've done primarily nothing for the first two months of the year. They have 10 months left to turn some profit and need to step in an start buying. There is a ton of yield out there and that could create a bottom in a lot of markets with cash rich buyers simply because capital starts flowing.
Posted by borrowerbe
Tue Mar 4th, 2008 06:38 PM
So as a borrower who recently locked in, but has not yet closed on a mortgage loan with Thornburg, should I be alarmed at the Thornburg news of this week?
Posted by fj60 rick
Thu Mar 13th, 2008 07:46 PM
Noah:
Are you still long TMA? You have to realize that there is currently no equity value left - it's just a matter of time before TMA issues the press release that reads something like the following:
- Our lenders have exercised their rights under our repo agreements to seize and sell our collateral. We couldn't meet margin calls. So we have to file bankruptcy protection from our creditors.
- We still, however, firmly believe that the market is being irrational, and the value of the securities will ultimately be recognized, as we are good underwriters and these are good loans.
Note that the above are not mutually exclusive. Both can very well be true. But the outcome is a bad one for TMA.
Stout, it will likely turn out to be a killer buy for someone at 80c. But given the leverage that TMA operates with, 80c = Zero Equity for TMA. They will buy the assets, not the company.
Posted by Rob
Tue Mar 18th, 2008 04:58 PM
When you borrow short and lend long you have to have continued credit available. You borrow at 5% and lend at 5.2% and massively leverage to turn your .2% profit margin to 20%. However, if credit drys up (it has) you are screwed. If short rates raise above the long rates your loaned at (it has) you are screwed (TMA hedged but not enough for this credit crunch). Heck, Municipals have to pay more than treasuries even with tax benefits and insurance and Gen Obligation taxing power. TMAs may not fail (but they may) but their yield to TMA is often below the cost of short term funding. Collarteral impaired (instead on there loan being secured by a 1,000,000 house in Miami it is secured by a 850,000 house under water). Many of TMA was Alt A and interest only (even if it was to high credit score borrowers). Lend long borrow short is the way banks do it but as Price stated they have a lot more backstops than a REIT (FED, FDIC, State Banking Regulators, etc etc). Effectively they were an old school bank without the protections afforded currently real banks (depression era initiatives to stop runs on banks)
-Rob