The Long Case for Thornburg Mortgage

Aug.20.07 | About: Thornburg Mortgage (THMR)

For those of you who have been on vacation for the last 10 days, the poster child for the mortgage/commercial paper meltdown has been Thornburg Mortgage (TMA). TMA is a mortgage REIT that invests in and originates high quality adjustable rate mortgages. As a REIT they are required to pay out the majority of income as dividends, and the stock has consistently yielded over 10%.

Starting with Cramer last week, and accelerating this week, the pundits and analysts started pushing TMA as a sell due to problems in the subprime mortgage market. As the pig pile increased the share prices of TMA dropped from over $25 a couple of weeks ago to around $7.50.

Thornburg delayed the payment of the $.68 quarterly dividend and issued a statement that they were not going bankrupt, and the stock recovered to $15 on Thursday, closing Friday at $15.04. That is a 100% return in a few days for those with the fortitude to buy when all the "experts" were yelling SELL!

Going forward from here these are what I think are the positives for TMA:

  • Outstanding management team led by Garrett Thornburg, CEO and Larry Goldstone, COO. They own significant stakes of TMA and believe in their model to provide high quality mortgages to high quality customers.
  • Diminishing competition: In the recent past there were many mortgage companies and banks that would sell mortgages at low margins to marginally qualified borrowers, Thornburg had difficulties maintaining decent margins for their very qualified customers. Most of those competitors are no longer.
  • Many of the companies that will still write mortgages will limit themselves to Freddie or Fannie conforming mortgages so they can be easily resold. Thornburg sells jumbo, non conforming loans to highly qualified buyers. They retain and service 100% of the mortgages they originate. They may be alone in that market for a while.
  • TMA holds $50 billion of high quality mortgages. Prepayment rates of these loans should slow waaay down, keeping cash flow high for TMA.
  • Negatives for TMA:

  • To fund mortgage originations Thornburg has to borrow funds in the repo and money markets. The rates they pay need to be around 200 basis points less that the mortgage rates. It is unclear if these types of funds are currently available to the company.
  • The beaten down stock price makes it difficult if not impossible to raise capital. Book value has also fallen about 25% with the current mortgage market woes.
  • What I think:

  • As a long time owner (4+ years) and recent buyer of more TMA, I believe the management at TMA can find a way to thrive in this market and improve profitability.
  • Even if they cut the current 68 cent quarterly dividend to 50 cents the stock is still yielding over 13%. Pretty good payment for taking the risk.
  • People are still going to buy homes and need mortgages. A strong well run company like Thornburg will do well as the housing market starts its recovery.
    In the current market buying TMA is a contrarian pick. Look at the facts and make your own decision.
  • Disclosure: Author has a long position in TMA

    TMA 1-yr chart

    TMA