Mortgage-Backed Securities Market Rocked by Thornburg Default

On Wednesday, after the close, Thornburg Mortgage (TMA), a high quality and well respected originator and securitizer of jumbo (more than $417,000) mortgages, announced in a filing with the SEC that JP Morgan (JPM) had notified it that it would excercise its rights in an event of default to collect on $320 million owed to it by Thornburg. This event has triggered defaults on all of the company’s other reverse repurchase agreements and secured loan agreements (TMA 8-K) (pdf file).

Let's put this into simple English:

The company failed to meet its obligations under a loan with JP Morgan.

JP Morgan has decided to excercise its rights under the agreement to collect on the $320 million that it is owed.

This event has gone awry of clauses in all of Thornburg’s other lending agreements, and pushed it into default over them.

Thornburg is heavily leveraged and its large portfolio of mortgage backed securities is financed by debt. If it has to pay all that debt back immediately, it will have to sell large parts of its portfolio at fire sale prices in order to meet its obligations, resulting in massive losses.

Thornburg shares lost more than half its value on Thursday (TMA 2-Day Chart)(pdf file) with around 42 million, or more than 25% of outstanding shares trading hands!

And it doesn’t stop there.

Carlye Capital, a unit of private equity giant Carlye Group, finds itself in a similar pickle. It has failed to meet margin calls and received a notice of default from lenders that finance its $21.7 billion portfolio of government-sponsored mortgage-backed securities [Fannie Mae (FNM), Freddie Mac (FRE)] (subscription required).

The significant difference here is that while Thornburg’s mortgage are all private sector i.e. not guaranteed by Fannie or Freddie with the implicit backing of the U.S. government, Carlye’s principal is.

This has led to fear about virtual banks like Annaly (NLY) and others that make money by leveraging up, buying Fannie and Freddie guaranteed mortgage-backed securities, and pocketing the spread.

Prices of agency mortgage backed securities are sharply lower. A lot of this has happened in the past couple of days because of massive selling by leveraged investors.

- Kevin Cavin, Mortgage Strategist, FTN Financial

Annaly shares were down 15% yesterday on heavy volume - about 75 million of Annaly’s 461 million outstanding shares (16%) traded hands on Thursday (NLY 2-Day Chart) (pdf file).

Despite all of this, some investors are seeing opportunities here.

Comments

[gebby:]

so ....can i buy tma with the prospect of some kind of fed support for the mortgage market?

2008 Mar 08 12:45 PM

[swaps:]

I'm not too sure any investor should start looking for opportunity just yet. In January I bought into the fallen Brandywine REIT, only to see it plunge further. I had tried to catch a falling knife. The New York Times and other papers this morning are painting a dark scenario that will get only darker, much darker, before it is morning in America once again.

2008 Mar 08 02:33 PM

[WAKEUP:]

People STILL don't get it: Buying ANY of this trash is foolhardy. Isn't greed wonderfully blinding?

2008 Mar 08 02:52 PM

[CATALHOYUK:]

THERE IS NOT ENOUGH MONEY IN EXISTANCE TO BAIL EVERYONE OUT THE PRESIDENT SHOULD SIMPLY GIVE THE 62 % OF AMERICANS WITH POOR CREDIT THE ABILITY TO WIPE THEIR SLATE CLEAN AND START OVER BECAUSE THEY LACK THE ABILITY TO MAKE A MAJOR PURCHASE, THAT IS A CAR OR A HOME. IN REALITY THESE WERE SUBPRIME PEOPLE ANYWAYS. THEY COULD THEN BUY UP REO INVENTORY AND EXISTING RETAIL INVENTORY AT 50% OF PRE 2003 VALUES CREATING NEW LEGITIMATE PAPER THAT COULD BE ROLLED OVER IN POOLS. AND START THE CREDIT FAILURE CYCLE ALL OVER EXCEPT THE LENDERS WOULD KNOW THE ENSUING RESULTS AND BE ABLE TO WORK WITH THE DEBTOR INSTEAD OF WHAT THEY DID THIS TIME AROUND "TREATING THEM LIKE GARBAGE" AND HELP THEM TRANSITION INTO A TIME OF PROSPERITY.

2008 Mar 15 05:43 PM