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Thornburg Supposed to Be Safe

By Winthrop Quigley
Copyright 2007 Albuquerque Journal; Journal Staff Writer
    Santa Fe's highly regarded Thornburg Mortgage Inc. is just about the last company anyone would expect to be caught up in the sub-prime mortgage mess and generate national headlines.
    For one thing, Thornburg doesn't issue sub-prime mortgages, which are loans made to home buyers who are at the highest risk of defaulting.
    The 170-employee, 14-year-old company lends to the other end of the market. As recently as July, Kiplinger's Personal Finance, in a story headlined "A safe way to dabble in mortgages," said that Thornburg "writes adjustable-rate mortgages exclusively for the wealthy," and said the company hadn't experienced a default in five years.
    Thornburg president Larry Goldstone told CNBC last week that, of the 38,000 loans in its portfolio, only 58 were delinquent, meaning the payments were late.
    "The fundamental quality and credit characteristics of our portfolio are superior," Goldstone told the Journal on Friday. "The market events over the last two weeks have absolutely nothing to do with the quality of our mortgage loans or the quality of our mortgage portfolio."
   
The crisis hit
    Yet, Thornburg's credit rating was cut Aug. 10, stock analysts recommended dumping Thornburg shares, some speculated the company would be forced into bankruptcy, and the price of Thornburg stock collapsed from $24.67 at the market's close Aug. 1 to a low of $7.61 last Tuesday. It recovered to $15.04 at close of New York Stock Exchange trading Friday, and Goldstone says Thornburg is in no danger of failing.
    So what exactly happened last week?
    The short answer is that Thornburg got caught in a global credit squeeze that the Federal Reserve Bank is attempting to relieve by cutting the rate it charges banks for loans. A credit squeeze makes the cost of borrowing higher, assuming a company can find someone willing to lend money at all.
    The longer answer is a lot of people, including sophisticated investors, hedge fund managers and credit and stock analysts, suddenly realized the risks in the sub-prime mortgage market were bigger than they thought.
    They got that bit of news when sub-prime borrowers began defaulting on their loans in bigger and bigger numbers. Large hedge funds in the United States buckled under the weight of their sub-prime holdings.
    Things got even worse Aug. 9 when a major French company wouldn't allow mutual fund investors to buy or sell fund shares because it had no idea what, if anything, the sub-prime portion of its holdings was worth.
    Lenders and investors in mortgage-backed securities became more choosy about who got their money, and they demanded better returns. When they did that, even good risks like Thornburg found capital very hard to come by.
    "The mortgage lending business cannot function without substantial sources of liquidity and financing ability," Goldstone said Friday.
    Like other mortgage financing companies, Thornburg borrows a lot of money, which is the source of its liquidity. Thornburg's most recent quarterly report shows the company has assets— mostly mortgages— of $57.5 billion. It owes almost $55 billion.
    In normal times, this would be no problem, Albuquerque money manager Don Hurst told the Journal in an interview. That borrowed money is secured by the homes of wealthy people. Even if Thornburg could never borrow another cent, the homeowners can be relied upon to pay their bills.
   
The money game
    The problem is that Thornburg needs to borrow to pay older loans that have come due, to pay off short-term borrowings, and to originate new mortgages, according to Standard & Poor's stock analysts.
    S&P worries that Thornburg will have to sell assets "likely at a loss" to pay the money it owes because it could have trouble borrowing new money.
    An analyst with RBC Capital Markets warned that lenders could "force Thornburg to sell assets at fire sale prices, leading to earnings and book value erosion."
    Hurst said he was never a fan of Thornburg stock. He was selling a client's Thornburg shares a year ago because he didn't like the company's earnings growth. But the last several days have been unfair, he said.
    "They're really innocent, in my opinion," Hurst said. "The marketplace has just choked them. Their sources of mortgage money have really tightened up.
    "I think it's a great company," he added. "I just think they're in a different environment now."
   
Taking defensive steps
    Goldstone said the company is executing a plan to get the liquidity it needs. He declined to describe the strategy and said Thornburg "will have a public announcement when the time is appropriate."
    Goldstone added, "Our solvency is not in question. We are 100 percent guaranteed solvent and will be a going concern."
    On Friday, the Federal Reserve cut its discount rate, kicking off a stock market rally, and analysts said the move signaled the nation's central bank would not let a credit crunch kill the economy.
    But Thornburg is not out of the woods, Hurst said.
    "They may be just fine, particularly if they are able to find other sources of credit," he said. The question remains, he said, can Thornburg find the credit?