Thornburg Is a Great Buy on This Dip

The mainstream media has done a pretty good job covering the Thornburg Mortgage (TMA) dust-up over margin calls related to its jumbo loan holdings. I recommend the Marketwatch piece for more information on the story.

If you ask me, Thornburg is a great buy on this dip -- as long as they face margin calls and not collateral seizures. If TMA is allowed to sell assets "selectively" (as the Company put it), they won't have to sell distressed securities and can raise cash using their more liquid MBS.

If TMA gets hit with collateral seizures again, back to the 7s we go.

Disclosure: No position

Comments

[jcrash]

Back to the 7s "we go" but you have no position?

[DSX Lover]

I totally agree. The changes in the Fannie Mae and Freddie Mac limits, raising the caps on individual mortgages, and the cuts by the FED will also help Thornburg's Premium Jumbo Loans, and will increase the company's liquidity and profitability. Thornburgh's Credit portfolio is excellent, and the company is selling below book value. With only Capitalization of $2 Billion, the company could easily be taken over by overseas Cash, Like Barclays (BCS), or ING, even the local JPM. The two foreigners have excellent capital ratios, very limited exposure to Subprime, which has almost been written down entirely off their books, and excess capital to invest in a Market were the news are far exceeding the actual situation of it.

[deefree]

Do you ever look at SEC filings and do bottom up balance sheet analysis or do you just look at stock prices, read articles in the mainstream press, and then write insipid predictions that have as much validity as a coin toss? Is Thornburg faced with imminent repayments of short term debt? Do they have adequate cash on hand to meet these mandatory payments? Are their assets held for sale actually securities or assets that a counter party would readily buy? Having a publicly traded company publicly announce "margin calls" sounds like a recipe for bankruptcy but without looking at their balance sheet who knows what the real situation is?

[Patrick1980SC]

Look at SEC filings? Sir, I write SEC filings for a living. I am acutely aware of Thornburg's balance sheet situation and I am very aware of their reliance on repo agreements and commercial paper to fund their portfolio. Everyone in mortgage finance is facing margin calls on non-agency backed MBS. Thornburg lends long and borrows short, just like every other mortgage REIT. Their assets are not held for sale - they are held for investment, as Thornburg is an originator of and investor in the residential loan sector. Thornburg believes they have adequate liquidity to meet additional margin calls, as they stated in their 10-K. Thornburg's risk of bankruptcy is extremely remote, as they have assets well in excess of their liabilities.

[HedgeFundManip]

So are so wrong. I posted this to the Yahoo chat room weeks ago. TMA will be bankrupt within 30-days.

THORNBURG - THE MARKET HAS GOT IT WRONG...AGAIN!

General consensus is that Thornburg Mortgage is the Gold Standard in mortgage lending and carries very little credit risk. Being in the mortgage industry for 20-years, I must question that assumption.

First off, we know that Thornburg primarily holds Interest Only Hybrid Intermediate-term ARMs with the majority in CA and FL. That should be enough to prove risk. However, below I have listed items from their recent 10q, page 39, which proves the point.

Banks and lenders love looking at 'averages' or 'median', because things look better of course. However, when you break their portfolio down line by line it is evident they own Billions in high-risk ALT-A loans that cannot be sold for any amount of money. Even if there was a functioning mortgage secondary market, old vintage hybrid interest only ARMs, much if it stated income, would not carry much value.

The facts are TMA is sitting on a portfolio of $36 Billion, that has a street value of much less. While these loans are spinning off payments currently, it does not change the fact that one decent margin call from one warehouser renders them insolvent. In an interview a couple of months back, Larry Goldstone mentioned they had relationships with 13 warehousers.

TMA has set aside the lowest loan loss reserves in the industry. To raise the amount of money to cover a margin call of any substance, the damage to shareholder equity would be tremendous, as they cannot sell loan assets to raise money. In my opinion, the only reason TMA has not experienced a mortal margin call is because the warehousers do not want this paper back on their books due to the mark to market consequences.

NEGATIVE EQUITY

We are learning very quickly that 'negative equity' is a leading cause of loan default, even greater than periodic ARM adjustments. This phenomenon cuts across all socio-economic boundaries and FICO scores. As a matter of fact, those with the most to lose may default the fastest. For example a person with a 750 score and $200k in the bank who is able to make a move and spare himself the losses of paying into a massively devaluating assets, may do so faster than the subprime borrower who must fight for the home simply because they need a roof over their head. The subprime borrower may have no other options such as to rent due to lack of money and credit. A recent Boston Fed study confirmed the 'negative equity effect'. www.bos.frb.org/econom...

In CA, we are seeing a very troubling trend of strong 'a' paper borrowers, buying a new home at a great price and letting their present home go into default due to negative equity. If you look at the numbers below, it is obvious that Thornburg is sitting in a great deal of negative equity in their pool of 40k loans.

Thornburg's default rate may be look good now, but chances are great it will begin to grow sharply as housing prices fall. Due to the fact that the Jumbo home loan market has virtually disappeared, stated income loans are all but gone, affordable loans are gone, and values are down, a large percentage of their portfolio cannot refinance. A short pay for a sale transaction is an option, but that results in a loss for TMA. Much of their 40k loans in their portfolio will be with them for a long time, increasing default risk substantially.

The new Fannie/Freddie limits being raised may help slightly for new business but it will not help their existing portfolio because the majority of TMA's loans were funded or acquired prior to July 2007. Only loans funded after July 2007 are eligible for purchase by the Agencies. The 'caps' being raised today that the market took as such good news was procedural and necessary to enable the Agencies to do jumbo loans and to buy closed loans back to July 2007, so this was old news. They had to raise the caps to do jumbo loans.

But aside from what the default rate does in the future, the facts remain that TMA sits on $36 Billion in DEBT on loans worth $18 Billion or less on a great day in the mortgage capital markets, which has not been seen in months. Many of their borrowers cannot refi or sell. They sit on a substantial number of homes in a risky negative equity position. Even if the capital markets improved what will the appetite be for old vintage stated income, interest only ARMs in CA and FL? Not much, if you ask this veteran.

FROM THE MOST RECENT 10Q, PAGE 39


(NOTE - both, hybrid intermediate-term ARMs and Pay Option ARMs are classified as ALT-A in most cases. Especially when they are STATED INCOME, which consists of 42.2% of their portfolio.)

-83.5% ($29 billion) of their portfolio in HYBRID INTERMEDIATE-TERM ARMS, primarily 5/1 and 10/1, which allows a low introductory TEASER RATES, mostly interest only for either 5 or 10 years respectively.

-16.5% ($6 billion) in traditional ARMs. Judging by the indices used of 1 month LIBOR, 6 month LIBOR, MTA and 'OTHER ($1.9 Billion), much of this could be PAY OPTION ARMs, which are worthless and currently not selling for any amount of money on the secondary market.

-42.2% of their portfolio are STATED INCOME . Stated income loans have virtually disappeared for anyone that is not self-employed. In the time that TMA acquired their portfolio, stated income was allowed for w-2 employees.

-43.6% are in CA. 7.2% in FL. 50.8% of their loans are in the worst two states in the nation for price depreciation.

-15.3% are Condos. Condo's are considered a risky property type.

-18.5% are second/vacation homes. 11.1% are Non-owner occupied. (both are very risky compared to owner occupied)

-48.1% have an ORIGINAL effective loan-to-value of between 70-80%. Recent studies show that at least 50% of all ARM holders have added a second mortgage over the past 3-years bring their effective CLTV much higher. Factor in a sharp value fall in CA and FL and much of TMA's portfolio is in a NEGATIVE EQUITY situation. A recent Boston Fed study released says 'negative equity is a leading contributor to loan default, even greater than periodic ARM adjustments.'

Sincerely,



Mr. Mortgage

[nyka]

A commentary overloaded with ifs, ands and butts. In English, that's called fence straddlling.

[HedgeFundManip]

TMA has no assets worth over par...there is where your 'thesis' runs afoul.