Thornburg receives default notice as its mortgage assets tumble

Posted Mar 6th 2008 8:35AM by Peter Cohan
Filed under: JPMorgan Chase (JPM), Federal Natl Mtge (FNM), Economic Data, Housing, Federal Reserve

AFXNews reports that Thornburg Mortgage Inc. (NYSE: TMA) has defaulted on a credit agreement with one of its banks. That's because it could not come up with $28 million it owed JPMorgan Chase & Co. (NYSE: JPM). Specifically, Thornburg needed to pay JPMorgan -- to whom it owes $320 million -- the $28 million for a margin call.

According to The Associated Press, the notice of default from JPMorgan triggered cross-defaults "under all of the company's other reverse repurchase agreements and its secured loan agreements." According to MarketWatch, Thornburg has been facing margin calls due to a 15% drop in the value of mortgage-related securities in early February.

Margin calls are a common response from investors when securities purchased with loans rapidly lose value. If they fall too far too fast, they may hit triggers that require the issuing company to either shore up their position or sell off additional assets.

What exactly is going on here? Thornburg specialized in adjustable-rate "jumbo" mortgages -- those greater than $417,000 and "Alt-A" loans -- which, like subprime ones, have been abused by people who overstated their income on mortgage applications. The jumbo loans are typically not purchased by Federal National Mortgage (NYSE: FNM) so they're less liquid. And the Alt-A loans have seen rising defaults and are the subject of government investigations.

Garbage in, garbage out. In response to this morning's announcement, Thornburg stock is down 43% in pre-market.

Update: I mistakenly used the term 'bankrupt' and I have received the following comment from Thornburg: "While the company has seen a dramatic increase in margin calls, and has received a default notice, the company has not filed for bankruptcy." Technically, Thornburg is still solvent. But I would not buy the stock on the assumption that it will not file for bankruptcy.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Tags: featured, housing, housing market, HousingMarket, jpm, margin calls, MarginCalls, subprime mortgage, SubprimeMortgage, thornburg mortgage, ThornburgMortgage