Thornburg Mortgage Business Model and Brink of Collapse

Thornburg Mortgage's business model was built on a high-risk, high-reward strategy that ultimately led to its downfall. The company's focus on subprime mortgages made up a significant portion of its portfolio.

Thornburg Mortgage's aggressive expansion and increasing reliance on short-term funding made it vulnerable to market fluctuations. This was evident in the company's growing use of commercial paper to finance its mortgage-backed securities.

As the housing market began to slow, Thornburg Mortgage's subprime mortgage portfolio started to show signs of distress. The company's inability to sell off these securities at a profit led to a significant decline in its stock price.

Thornburg Mortgage's CEO, Larry Goldstone, had previously expressed confidence in the company's ability to navigate the changing market, but the company's financial struggles soon became apparent.

If this caught your attention, see: What Company Is Elan Financial Services

Thornburg Mortgage's business model was heavily reliant on the subprime mortgage market, which eventually collapsed. The company's focus on high-risk, high-reward loans made it vulnerable to the downturn.

In 2007, Thornburg Mortgage's stock price plummeted from $32 to $1.50 as the subprime mortgage crisis deepened. The company's assets also declined significantly, from $14 billion to $1.4 billion.

The collapse of the subprime market had a devastating impact on Thornburg Mortgage's business, leading to a series of costly write-downs and a significant decline in its financial health.

In 2008, Thornburg Mortgage was facing a major financial crisis. The company announced on March 7 that it would be restating its 2007 financial results.

It had a staggering $610 million in outstanding margin calls, far exceeding its available cash. This put the company at risk of needing to seek bankruptcy protection.

Financial analysts were worried that Thornburg Mortgage might not be able to recover from this situation. The company was struggling to meet its financial obligations.

Thornburg Mortgage managed to reach an agreement with five of its creditors, including Bear Stearns and Citigroup, which temporarily halted additional margin calls. However, this agreement came with a condition that the company needed to raise $948 million within seven business days.

The company planned to raise the necessary funds through the sale of convertible notes, initially scheduled for March 20 but later pushed back to March 24. This was a critical deadline for Thornburg Mortgage to avoid bankruptcy.

For another approach, see: Safe Auto Insurance Company

2009 was a pivotal year for business collapses. Thornburg Mortgage announced on April 1, 2009, that it would cease operations and enter Chapter 11 bankruptcy.

This marked a significant turning point for the company, which would eventually sell off its remaining assets and cease to exist as a going concern.

In 2007, Thornburg Mortgage faced severe financial difficulties.

The company's stock price plummeted 47% after announcing a delayed dividend payment on August 14.

An analyst with Deutsche Bank had downgraded Thornburg Mortgage to "Sell" in August, citing concerns about increasing margin calls.

This downgrade was based on the high rating of the company's mortgage-backed securities, which would later experience a "sudden and unprecedented" decline in value.

The company sold $20.5 billion of its mortgage-backed securities portfolio, incurring a capital loss of $930 million.

This move was an attempt to mitigate the potential for margin calls.

Thornburg Mortgage raised $500 million through a preferred share offering, described as a "desperate attempt to stay afloat".

The company began accepting loan applications again after this move.

Thornburg Mortgage's business model was a key factor in its success, but also contributed to its downfall. The company originally operated as a conventional passive mortgage REIT, but later branched out to originating mortgages.

This shift allowed Thornburg Mortgage to sell directly to consumers and wholesale origination, reducing expenses by avoiding the need for a network of branches. By outsourcing underwriting and servicing of mortgages, the company was able to cut costs even further.

The company's customers were typically affluent individuals with superior credit, with an average annual income of $204,012 and a FICO score of 743. This demographic was attractive to Thornburg Mortgage, as it historically had a significantly lower rate of borrower default compared to the industry average.

You might enjoy: Commercial Mortgages

Thornburg Mortgage was on the brink of collapse in 2007 due to a sudden and unprecedented decline in the value of its mortgage-backed securities, which led to a massive increase in margin calls.

The company's stock price plummeted from over $26 a year ago to less than $2, a staggering 92% decline.

Thornburg's market capitalization was less than $300 million, making it difficult for the company to raise the $1 billion needed to meet outstanding margin calls and pay off debts.

Analysts were skeptical that Thornburg could raise the necessary funds, with Egan Jones Ratings predicting a 90% chance of bankruptcy.

In a desperate attempt to stay afloat, Thornburg sold $20.5 billion of its mortgage-backed securities portfolio, incurring a capital loss of $930 million.

The company also raised $500 million through a preferred share offering, but this move was seen as a last-ditch effort to avoid bankruptcy.

Thornburg's struggles were not unique, as the company was not the only financial institution facing difficulties in 2007 and 2008.

In fact, Bear Stearns was forced into a takeover by JPMorgan Chase just a week after Thornburg's struggles became public, highlighting the severity of the financial crisis at the time.

Thornburg's shares fell by $1.28, or 57%, in afternoon trading, a stark reminder of the company's precarious financial situation.

Discover more: What Not to Do When Applying for a Mortgage?

The company's agreement with creditors, which included stopping additional margin calls for a year, was contingent on Thornburg raising $1 billion in fresh capital within seven days.

However, analysts were pessimistic about Thornburg's ability to raise the necessary funds, given the company's struggling financial situation and the ongoing problems in the mortgage industry.

The SEC's case against Thornburg Mortgage executives was a long and winding road. The agency dropped its civil case against Larry Goldstone and Clarence Simmons, two former executives accused of hiding the financial condition of Thornburg as it stumbled towards collapse.

The SEC initially set the case for a re-trial on February 21. However, they decided to drop the case altogether, marking a setback in their push to hold executives accountable for their actions during the US housing meltdown and financial crisis.

A jury had previously returned a mixed verdict in the initial trial, finding Goldstone and Simmons not liable on five of 10 counts while deadlocking on the other claims. The SEC later dropped three remaining claims and said they would no longer pursue what the defense called their central allegation.

The defense team for Goldstone and Simmons maintained that their clients had acted in good faith during the financial crisis.

Thornburg Mortgage posted a $3.31 billion first-quarter loss due to the plummeting value of its mortgages and other securities.

The company's net loss before preferred stock dividends totaled $20.64 per share, a stark contrast to its year-earlier profit of $75 million, or 62 cents per share.

In May, Thornburg had warned that it expected to report a substantial quarterly loss, and analysts on average expected a loss of $3.32 per share.

The company's vulnerability to tighter credit markets and demands for more collateral from its own lenders contributed to its financial struggles.

Thornburg made $548.7 million of loans in the first quarter, despite temporarily halting lending to preserve capital.

Assets totaled $30.8 billion at the end of March, with a $1.54 billion write-down of the value of mortgage-backed securities and securitized loans Thornburg owns.

A $651.6 million loss on the sale of some adjustable-rate mortgages and an unrealized $126.1 million loss on a separate adjustable-rate mortgage transaction also weighed on the company's finances.

Thornburg raised $1.35 billion at the end of March from investors, including MatlinPatterson Global Advisers, which invests in distressed companies.

A different take: First California Mortgage