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%!