User 174636

Don't Count on a Fast Turnaround for Thornburg Mortgage

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TMA - THORNBURG MORTGAGE INC
SEC Form DEFA14A Period: MAY. 12. 08

Thornburg Mortgage’s situation

Why did the industry fall on such hard times?

The mortgage industry is facing some of its most difficult years in the history of the industry. Residential real estate values have declined significantly throughout the United States and defaults and foreclosures are reaching historic highs. Due to fears in the marketplace and demands of lenders, Thornburg Mortgage – and much of the mortgage industry – was faced with and continues to face sudden and severe liquidity problems stemming from large volumes of margin calls on mortgage-backed securities -from our lenders.

How is Thornburg still in business?

Beginning on February 14, 2008, mortgage-backed securities prices once again declined significantly, and there was a deterioration in the liquidity and market prices for high quality mortgage-backed securities in our portfolio. This made it difficult for us to obtain financing, and, as a result of these declining prices, we were also subject to margin calls and margin increases on our collateralized financings. From December 31, 2007 through March 6, 2008, we received $1.8 billion in margin calls, of which approximately $907 million occurred after February 14, 2008. While we were able to meet margin calls of $1.2 billion, on March 6, 2008, we were unable to meet $610 million of remaining margin calls. Despite negotiations with our reverse repurchase agreement counterparties during the first two weeks of March, by March 12, 2008, we had received notices of events of default from five different reverse repurchase agreement counterparties, on an aggregate amount of $1.8 billion in outstanding obligations to these counterparties. We were able to negotiate with our reverse repurchase agreement and auction swap agreement lenders to secure a 364-day reprieve from margin calls and a reduction of margin requirements. This agreement required us to raise at least $1 billion in capital in a very short period of time. We were able to raise $1.35 billion in financing from MatlinPatterson and 49 other investors that helped maintain our ability to stay afloat.

Is Thornburg Mortgage out of trouble?

No. We are still navigating through these tough times, and, the financing transaction with MatlinPatterson and the other investors included conditions that we must meet in order for us to be put in a position to resume normalized business operations. Approval of the proposals in the proxy is necessary to meet some of those conditions and approval will help us rebuild our core business: originating and securitizing loans. We still have a lot to do, but these proxy issues are a priority. Your vote is very important for the future of Thornburg Mortgage.

Wouldn’t bankruptcy be a better option?

The Board of Directors considered other alternatives, including financing certain unencumbered assets, publicly offering for sale preferred stock and convertible debt, declaring bankruptcy, liquidating all of our assets and selling ourselves to another company, but determined that each of these alternatives was unavailable, insufficient to pay all margin calls and provide sufficient reserves to cover additional margin calls, insufficient to meet the terms of the Override Agreement or even more dilutive to shareholders than completion of the recent financing transaction.

In addition, given the terms and conditions of the standard reverse repurchase agreement contracts and the fact that certain provisions of U.S. bankruptcy law do not offer protection with respect to these agreements, the Board determined that existing shareholders were likely to receive nothing if we were to declare bankruptcy.