June 30 was the day when Thornburg Mortgage Inc. (NYSE: TMA) had hoped to complete at least 90% of its preferred stock repurchase as part of a last ditch effort to save the company from bankruptcy and return it to viability. CEO Larry Goldstone continues to state that bankruptcy is not an option.

Well, when the stock has lost 99% of its value, the company posted a $3 billion quarterly loss, no one will buy what you have to sell, shareholders who have lost just about everything don't want to play anymore, and Moody's handed the company a C (for crap) rating.

Bankruptcy looks like a realistic scenario. And just to keep things interesting, the SEC is investigating the company's 2007 financial results, the timing of margin calls, as well as accounting practices for the company's mortgage-backed securities.

Thornburg's problems have nothing to do with the sub-prime mortgage debacle, at least not directly. Thornburg specializes in jumbo mortgages to those with impeccable credit. Its default rate is the envy of the mortgage industry. So the problem is not creditworthiness, but liquidity. Investors simply are not interested in purchasing mortgage-backed securities of whatever quality in the secondary market.

Thornburg's latest last ditch effort calls for the company to purchase 90% of its preferred stock in exchange for $5 and 3.5 shares of common stock for each share of preferred stock. Shareholders recently gave the company permission to increase the number of shares outstanding from 500 million to four billion in order to make the tender offer possible. The deadline for tendering preferred shares has been extended to September 30. The stock is currently trading at $0.22 per share, way down from its 52 week high of $27.82.

Even a contrarian speculator will have to work very hard to find value in this one.

Investors bailing on Thornburg Mortgage (NYSE: TMA) are being short sighted. The stock is well on its way to recovering ground it lost on Monday when trading was halted after the stock lost 50% when ratings agencies downgraded it. The stock closed Thursday at $12.38, up $1.82 for the day, having already gained back 50% of its loss.

Why did the ratings agencies downgrade the stock? Perhaps because of the word "mortgage" in its name. But Thornburg Martgage has nothing to do with the subprime mortgage mess. Thornburg Mortgage writes only jumbo mortgages, average mortgage is just shy of $1 million, and only for high net worth individuals with superior credit. Delinquent loans total a mere 0.21% of Thornburg's $24.7 billion portfolio. This delinquency level is one-tenth of the average comparable portfolio's default level.

Up until Monday, Thornburg Mortgage was doing very well, originating $1.7 billion in new loans in 2Q 2007. The company presently has more than 20,000 customers, and holds just under $14 billion in loans. During the quarter, net income rose 20% to $83.4 million, interest income jumped 27% to $102.3 million, and operating expenses remained very low, 0.19% of assets. Not a single security in Thornburg's portfolio has been downgraded. Rather several dozen securities have been upgraded. The ARM portfolio is 94.6% AAA or AA rated. The problem is clearly not one of quality of the stock, but the fact that securitized mortgage bundles are no longer as liquid as previously anticipated.

CEO Garrett Thornburg has stated that the company will be able to self-finance as of mid-September after it has received August payments. It will pay out the quarterly dividend at that time. Garrett Thornburg's personal money is involved here, as is his reputation as a philanthropist in his howmtown. He is not about to risk either one. Contrarian investors need to look over Thornburg Mortgage quick while it's still a bargain.