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Thornburg Mortgage Hit with Margin Calls


Thornburg Mortgage said today that it paid more than $300 million in margin calls since mid-February as a result of quickly deteriorating mortgage-backed securities, and could face more as conditions worsen.

Below is an excerpt from their 10-K filing which explains the series of events that took place and led to the margin calls:

“Beginning on February 14, 2008, there was once again a sudden adverse change in mortgage market conditions in general and more specifically in the valuations of mortgage securities backed by Alt-A mortgage loan collateral.”

“As of February 15, 2008, our Purchased ARM Assets included approximately $2.9 billion of super senior, credit-enhanced mortgage securities, all of which are AAA-rated and backed by Alt-A mortgage collateral. Our current credit assessment of these mortgage securities in our portfolio suggests a low possibility of future downgrades and even less risk of actual losses. We have not realized any losses on these mortgage securities to date. However, we have observed deterioration in the liquidity for these securities and increased difficulty in obtaining market prices.”

“Accordingly, market valuations of these securities have decreased between 10 and 15 percent since January 31, 2008, and as a result, we have been subject to margin calls on this collateral. Since February 14, 2008, we have met margin calls in excess of $300 million on our Reverse Repurchase Agreements, the substantial majority of which is related to the decline in valuations placed on these securities.”

“However, in the short term, the sudden decline in the valuation of these securities has left us with reduced readily available liquidity to meet future margin calls, relative to our cash and unpledged securities position of December 31, 2007. In the event that we cannot meet future margin calls from our available cash position, we might need to selectively sell assets in order to raise cash. To date, no such sales have been required to meet margin calls. However, there is no assurance that the value of our mortgage portfolio and derivatives portfolio will not decline further, that we will not experience a further decline in our book value, that lenders will not make additional margin calls or that we will be able to satisfy additional margin calls, if any.”

“Additionally, while we have successfully maintained our financing lines, increasing those lines has become more difficult since February 14, 2008. Given the current uncertainty regarding these market conditions, we are unable to offer any additional factual information on the situation and how it will impact us other than to disclose what we are currently seeing in the mortgage market.”

Thornburg also noted that the secondary market remains volatile, and mortgage-backed securities trading is still very challenging and limited.

As a result, the value of said securities could decline further and lead to additional margin calls and asset sales to meet them.

The Santa Fe, New Mexico-based mortgage lender specializes in jumbo adjustable-rate mortgages generally for the very wealthy.

Shares of Thornburg fell a whopping $1.96, or 16.98%, to $9.58 in afternoon trading on Wall Street.

Update: Marketwatch reported that a Valentine’s Day disclosure from UBS revealing that it had $26.6 billion in Alt-A exposure led to the price deterioration and subsequent margin calls.

(photo: revdancatt)

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