Key Quotes from Thornburg on Mortgage Lenders

by: SA Editor Judy Weil November 13, 2008 | about stocks: IMH / NLY / SFI / TMA    
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Thornburg Mortgage (TMA) is still dealing with “going concern” warnings that ratings agencies have placed upon it. The company wrote down its mortgage-backed securities portfolio by $655 million this quarter, and is planning a preferred/common share swap.

Notably, net interest income (income from loans and deposits), is up significantly this quarter. Here's what they have to say about the mortgage lending industry. From Thornburg Mortgage’s Q3’08 conference call:

MBS portfolio delinquencies are still rising:

We did see a notable increase in the 60 plus day delinquency rate on the $21.4 billion collateralized mortgage debt transactions portfolio.

If you look at what’s going on in the industry for prime adjustable rate mortgage lenders, at June 30, which this is not even the September 30 number… 8 1/4% of all prime adjustable rate mortgage loans are currently delinquent, 60 days plus or more or are in an REO category.

Delinquencies are significant in [our] $528 million pay option ARM portfolio. It’s doubling our delinquency rate or virtually doubling our delinquency rate… The company had losses and charge-offs related to disposition of REO in the third quarter of $6 million.

Thornburg says it is profitable in its core business:

Net interest income for the quarter was a positive $80 million. That was up a little more than 50% from the prior quarter's... net interest income of $53 million... There is substantial core profitability in this portfolio.

The yield in the portfolio increased by 22 basis points to 7.17%, the cost of funds in the quarter decreased primarily as a result of the drop in LIBOR in the quarter to 6.01%... Again, very strong profitability, a significant contributor was the accretion of the discount that we are carrying our assets at.

There are going to be two additional profit drivers for the company as we look out over the next three or four quarters. One is going to be hopefully the ability to accrete discount on all of our MBS portfolio and the second is going to be the elimination of the swap expense that will obviously improve our interest spread going forward.

Investors are buying loans:

We completed a loan sale in the third quarter of $111 million in loans and we were able to reduce our warehouse financing and then since September 30 we have an agreement to sell an additional $92 million worth of loans that is spending settlement in the next week.

If Moody’s follows Fitch and S&P in downgrading them, can they legally face more margin calls?

The override [financing] agreement does say that the lenders agreed to not make any additional margin calls, but it did have a carve-out for securities downgrades. The issue that we have is the document was not clear with respect to how to handle margin calls on downgraded securities. [Nor did the agreement] specify what rating agency had preference… Convention in the business historically has been the highest of the three ratings is the rating that carries today…

In many cases the rating agencies have rewritten the rules with respect to what qualifies as a AAA, a AA and A with hindsight… We certainly believe that we have a strong case, if we had to litigate, if we had to arbitrate, but we are trying not to go there.

 

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This article has 2 comments:

  •  
    Nov 13 02:18 PM
    You do a diservice to your readers by including excerpts of TMAs disclosure that highlight the doubling of their delinquency rates and the industry delinquency rate at June 30, 2008 of 8.25%, without noting that TMAs rate doubling was from 0.81% at June 30,2008 to 1.58% at September 30, 2008.

    TMA has always had far superior delinquency rates to just about any other mortgage reit.
    Reply | Link to Comment
  •  
    Dec 13 04:42 PM
    I bought some TMA @ $0.25. I hope they don't go under...
    Reply | Link to Comment
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