March 3, 2008

Premier Lender Thornburg Mortgage Headed Towards Bankruptcy?

Thornburg Mortgage, one of the premier jumbo ARM and Alt-A mortgage lenders, has at least one analyst raising the specter of bankruptcy as the lender failed to meet its latest round of margin calls (to the tune of $270 million).

Thornburg said in a regulatory filing it is facing margin calls because the value of the alt-A mortgage-backed securities has plummeted between 10% and 15% since the end of January. The margin calls come amid "a sudden adverse change in mortgage market conditions in general" that began on Feb. 14, Thornburg said in the filing.

Thornburg doesn’t do subprime and is well known throughout the Bay Area for its single-minded focus on wealthy creditworthy borrowers.

Thornburg Hasn't Met $270 Million in New Margin Calls [Bloomberg]
JustQuotes: Signs Of Some (Prime) Liquidity In The Mortgage Market [SocketSite]
Mortgage woes force Thornburg to pay $300M [CNNMoney]

First Published: March 3, 2008 10:35 AM

Comments from "Plugged In" Readers

Wasn't Alt-A about 70% of the SF market?

And now it's in trouble.

Amazing.

Posted by: Tipster at March 3, 2008 11:31 AM

The way I read these articles – the issues at Thornburg are due to investors balking at Alt-A backed securities, but it never suggested that they were experiencing a large number of defaults on their loans. It’ll be interesting to watch this story develop to see if we do get more details on how many defaults they are actually experiencing on their own loans….not just the broader fallout from investors being skittish about Alt A loans.

Posted by: Lance at March 3, 2008 1:12 PM

Actually, Lance, default rates are up across the board. Alt-A and prime jumbo default rates are up 18% each, according to S&P:

http://money.cnn.com/news/newsfeeds/articles/apwire/2457db1cee2e7f849389fb1219ffd92f.htm

This isn't specific to Thornburg but I'd wager they're seeing similar stats.

Posted by: Dude at March 3, 2008 1:35 PM

Could this default of an Alt-A lender be indicative of a failing of the FICO credit-scoring system?

In the sense that people with substantial assets and income can often have middling credit scores, while people with no substantial assets or income can have excellent credit scores by simply "pressing the right buttons" and using the credit system to boost their scores?

Classifying peoples' creditworthiness based on a single number (and then loaning them huge sums of money on that basis) clearly carries some substantial, underappreciated risks for lenders.

Posted by: Jimmy (Bitter Renter) at March 3, 2008 2:02 PM

The problem with a lot of mortgage lenders as well as banks now is not just in loans going bad, it's that the whole mechanism has stopped. Lenders kept on lending after the summer of 2007 and now are holding a bunch of loans that they can't sell to the secondary market without writing them down significantly - so that's where there's a lot of the problem is. They are also making far fewer loans and generating less income now. Adding these two factors to the loan losses and possible legal exposure to loans going bad makes this a pretty tough lending environment.

Posted by: Miles at March 3, 2008 2:17 PM

This is simply people who can perfectly afford their mortgage walk away from homes worth less than their mortgage. Makes sense, doesn't it?

Posted by: anon at March 3, 2008 2:26 PM

I think Miles got it right. Lenders like Thornburg did not have huge amounts of capital. They relied on turning over whatever mortgages they wrote in the secondary markets. Now they're not only unable to sell a big chunk of what they are holding but they are also getting margin calls from their own lenders. Spiraling cash flow problem with its roots in the fact that nobody in the secondary markets will touch this stuff because underwriting was so sloppy nobody can determine what is garbage and what is not.

Posted by: Trip at March 3, 2008 2:50 PM

On the retail lending side Triton Funding laid off all their salaried people last week. Dorian has joined other ex Triton people at Americorp. The First Security office on Sutter was just taken over by RPM. And the two offices are blending together

Posted by: jack at March 3, 2008 2:59 PM

I suspect that a lot of Thornburg's lenders were just looking for any excuse to make margin calls in order to get cash to shore up their own balance sheets. And therein lies the big problem here: large parts of the credit markets are basically dysfunctional now and a lot of banks are in serious trouble as a result.

On the flip side, if Thornburg is going to borrow low to lend high, it's own creditors have the right to know if the security Thornburg puts up in the form of Alt-A mortgages are actally worth something. Since no once can sell these securities, they have to be marked to market at prices that realize losses that Thornburg- admittedly in their own estimation- has no intention of taking.

There is a total loss of confidence in the credit markets where banks don't trust other banks because no one knows what the default rate of these mortgages will be.

Is this going to get even uglier? I think so. Here comes the recession.

Posted by: anono at March 3, 2008 3:21 PM

Could this default of an Alt-A lender be indicative of a failing of the FICO credit-scoring system?

Many (including me) believe so.

Some research this year showed that default rates were NOT well correlated to FICO scores.

instead, they were best correlated to
-Loan to Value ratio (LTV)
-Debt to income ratios (DTI)

the higher the LTV the higher the defaults (especially if over 80-90%), regardless of credit score.

the higher the debt to income ratio (DTI), the higher the defaults, regardless of credit score.

this is one of the reasons that Fair Isaacs is coming out with their "new" FICO system.

a lot of people have good credit scores, but high LTV or high DTI ratios.
thus, they can't afford their payments.

Thornberg going down is big news IF IT HAPPENS (good chance it won't). They have a VERY GOOD Alt-a loan profile. Alt A doesn't get much better than Thornberg. IMO it's sad to see because they have seemed to be a pretty good outfit.

Posted by: ex SF-er at March 3, 2008 3:29 PM

The 99 year mortgage is just around the corner - and you think I'm joking....

Posted by: Michael L at March 3, 2008 6:49 PM

"The 99 year mortgage is just around the corner"

Didn't Japan do this, or something similar, and it did nothing to improve the situation?


Posted by: badlydrawnbear at March 3, 2008 7:25 PM

Long term revenue stream to off set short term loss(s)..

Posted by: Michael L. at March 4, 2008 8:16 AM

All the news about the how these Alt-A mortgages are crashing in value makes me wish it were possible to buy my own mortgage back for pennies on the dollar.

Posted by: Rillion at March 4, 2008 8:59 AM

Rillion,

That's exactly what Uncle Ben proposed today...

Posted by: Jay at March 4, 2008 12:35 PM

Unfortunately in reading the details I'd have to owe more on the mortgage then my place is worth and with the almost identical condo next door to mine selling recently for more 3% more then I paid I can't really expect to be negative equity even if I did sell my place tomorrow for what my neighbor got I'd still end up out money (due to the transaction costs eating into my downpayment). So I'm kind of stuck in between, too much equity to benefit from any bailout, not enough equity to cash out. Instead I am stuck making payments I can easily afford to live in a place I really like.

Posted by: Rillion at March 4, 2008 2:55 PM

the benchmark that would be set by the auction of assets of thmr would throw a big wrench in geithner's plan. he doesnt want any comparison for what he is doing and this benchmark would be lower than what the banks would entertain. i think if they were going to file bk they would have already. i feel geithner wants this taken care of asap and i feel he will broker a deal to clear this roadblock up. i dont feel they will file i think they are being shopped to merge or bought out. check bloomberg.com about this. jmo

Posted by: sf at April 13, 2009 10:40 AM

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