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WIKI ANALYSIS
Thornburg Mortgage (TMA) is a residential mortgage lender that originates, acquires, and makes investments in ARM (adjustable-rate mortgage) assets. The company elects to be treated as a REIT (Real Estate Investment Trust) for federal income tax purposes. The company's ARM assets consist of purchased ARM assets and ARM loans. Purchased ARM assets are mortgage-backed securities that represent interests in pools of ARM loans. The company's ARM loans are either loans that were originated by TMA, loans used as collateral to support the issuance of CDO's (collateralized debt obligations) or loans pending securitization. The company finances its loan purchases and originations through various sources including equity issuance, unsecured debt, CDO's and short term borrowings. When the company borrows short-term funds, they generally enter into interest hedging transactions to mitigate the impact of fluctuations in short-term rates.
Thornburg, which caters to borrowers with strong credit, specializes in "jumbo" mortgages - loans that exceed $417,000. It avoids subprime loans, generally. Until Feb 2008, Thornburg’s loans were too big to be purchased by Federal National Mortgage Association (FNM) and Freddie Mac (FRE).
The company originates its mortgage loans through 313 correspondent lenders and directly to consumers in all 50 states. The company also has 18 field executives and 541 brokerage firms to facilitate its wholesale business. TMA outsources most of its standardized origination functions, loan processing, closing, and servicing, to third-party providers. As a result, the company does not have a nationwide branch network.
Business Financials
The company makes money from the net spread, or the difference between income from interest on ARM assets and the cost of borrowings. As of September 30, 2007, the company had total assets of $36.3 billion, short-term borrowings in the form of commercial paper, reverse repurchase agreements and whole loan financing of $12.2 billion, and permanent mortgage debt, in collaterals, of $21.1 billion. The company concentrates it business on larger balance high credit loans, which decreases default risk. As of September 30, 2007, the company's portfolio consisted of 94.8% AAA-rated assets and 5.2% below AAA-rated assets.
Subprime Crisis
Thornburg Mortgage Inc. (TMA) said on 25th March 2008 that it would raise $1.35 billion through a private-placement deal to help keep the company in business and avoid bankruptcy. It avoided subprime loans, which have had the highest rates of default, but ran short on cash after falling home sales reduced demand and investors wary of mortgage-backed assets retreated from the company’s securities.
Thornburg has lost 95% of its value in the past year, and is desperately fighting to stay afloat. It needs approximately $1 billion this week to meet margin calls from bankers. A previous plan to raise about $1 billion in convertible notes with an interest rate of 12% failed and was subsequently terminated.
Having suspended its preferred dividends and offered to buy back 90% of its preferred stock, Thornburg is now seeking to raise $1.35 billion using debt that pays an 18% interest rate. If the New York Stock Exchange grants its approval, Thornburg will issue senior subordinated secured notes due in 2015 without shareholder approval, which the company says would take too long.
An infusion of fresh capital is the centerpiece of a recent agreement Thornburg struck with its creditors, who agreed to freeze their demands for more collateral, so long as the company can raise at least $948 million in seven business days. If this offer fails, and the company’s creditors withdraw from the agreement, Thornburg will likely be forced into bankruptcy.
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