Even Thornburg, 'Strong' Lender, Is On the Brink

The survival of Thornburg, of Santa Fe, N.M., is of particular concern, because the company specialized in mortgages to relatively wealthy clients with strong credit -- not the subprime borrowers who led to the dissolution of many mortgage lenders last year. Thornburg could become one of the first lenders that focused on financially sound borrowers to fail in this housing crisis, even as delinquencies among its loans remain well below the industry average. Thornburg disclosed Friday that its independent auditor, KPMG LLC, questioned its ability to survive. Thornburg specializes in making and investing in adjustable-rate, or Alt-A mortgages -- whose credit quality falls between prime and subprime -- as well as "jumbo" loans, above the amount that until recently qualified to be bought by the government-sponsored Fannie Mae and Freddie Mac. William Gross, chief investment officer of U.S. bond titan Pacific Investment Management Co., said on CNBC on Friday that the firm bought about $100 million of Thornburg's debt in the last few days. He expected the return on the investment to be close to double-digits. Thornburg is also one of the few remaining real-estate investment trusts that originated home loans, raising questions as to whether this business model will disappear now that its inherent weakness to a liquidity crisis has been exposed. Several residential-mortgage REITs were wiped out last summer by the first wave of the subprime collapse. The demise of mortgage REITs eliminates an important source of housing finance, and renews the question about whether the REIT structure makes sense for residential-mortgage lenders who need cash cushions to meet margin calls. REITs are real-estate companies that pay no corporate income taxes as long as they pay 90% of their taxable income to investors as dividends. While many residential mortgage lenders are struggling with the credit crunch, the REIT structure "creates an additional headwind for you, because nearly every dollar you make you have to pay out in dividends," says Omotayo Okusanya, an analyst at UBS AG. A bank or thrift, meantime, can hold on to profits as storm clouds approach. Thornburg paid common stockholders $40 million in dividends on Jan 30. Moreover, mortgage lenders like Thornburg, because of their limited capital, rely on short-term credit lines more than other big financial institutions. To secure the funding, they use the loans they originate or securities they own as collateral. A sharp drop in the value of the collateral can lead banks to issue margin calls.