Thornburg: Out of the Woods?

Some analysts think the mortgage company's moves to shore up its finances have stabilized its position, at least for now

by Ben Steverman

by Ben Steverman

In early August, Thornburg Mortgage (TMA) gave investors a big scare. News that the mortgage company was running out of cash sent the stock plunging 47% in one day.

Thornburg was supposed to be safe. While subprime worries were spreading up and down Wall Street, Thornburg investors knew the company's portfolio was built on mortgages with high credit quality.

A real estate investment trust, or REIT, Thornburg stayed clear of subprime or other risky forms of mortgage debt. Nonetheless, by early August, the disruptions to the mortgage market seemed to be threatening Thornburg's survival.

By Tuesday, Sept. 4, at least some analysts and investors were seeing signs of hope for Thornburg.

Paul Miller, an analyst at Friedman, Billings, Ramsey & Company (FBR), upgraded the stock from "underperform" to "outperform." Miller cited a "stabilized business model."

On Tuesday, Thornburg shares rose 3.65% to close at $12.21.

Thornburg was squeezed in early August when its creditors panicked because of concerns about the secondary mortgage market. Many investors were refusing to buy up mortgage debt, and the market disruption was hurting the value of Thornburg's portfolio.

That worried creditors because, though Thornburg focused on more credit-worthy mortgages, it borrowed heavily to do so. Its debt to equity ratio was 12 to 1.

The key change for Thornburg has been a series of measures designed to raise capital. By late last week, the company said it had reduced its debt ratio to 8 to 1. It sold off $20.5 billion in assets on Aug. 20. It raised $500 million by issuing special stock. And, it borrowed $1.44 billion by using a pool of home loans as collateral.

"We believe this capital will shore up [Thornburg's] liquidity position and also help it open up additional lines of credit for originating new loans," A.G. Edwards (AGE) analyst Greg Mason wrote recently. However, he warned Thornburg had paid a price to obtain the financing. "This is very expensive capital in our opinion," he wrote.

Thornburg's market niche has been jumbo mortgages. These are mortgages, generally above $417,000, that are too large to be sold to the congressionally chartered Fannie Mae (FNM) and Freddie Mac (FRE).

Recent troubles had forced Thornburg to stop originating new jumbo loans, but recently it has started to reverse that.

The new capital at Thornburg has "solidified [its] liquidity position," FBR's Miller wrote. Rather than suffering from mortgage troubles, Thornburg can now take advantage of them.

Pain in the mortgage marketplace means Thornburg can get some good deals. "It made the company a buyer of discounted jumbo mortgage loans vs. a seller of distressed assets," Miller wrote. In the future, Thornburg may be able to take advantage of "significantly higher yield" on new jumbo mortgages.

Things may look better for Thornburg, but there are few reasons to celebrate.

Despite the gains, the stock is volatile, reflecting deep worries about Thornburg's industry. Big worries remain about rising numbers of mortgage default and falling home prices around the country.

Thornburg's stock, now above $12, was priced above $25 a month ago. FBR's Miller's target price is $14. He says it could take 12 to 24 months for the market to stabilize.

(Thornburg is an investment banking client of both A.G. Edwards and FBR; also, FBR also operates its own mortgage company.)

Steverman is a reporter for BusinessWeek's Investing channel.