Thornburg Mortgage (TMA) has declined from $3.56 two days ago to $1.65 today. The stock traded at $26 in May 2007. The company is in technical default and it appears to be heading towards an actual default.
Thornburg Mortgage has historically been one of the best managed mortgage REITs in the world. These have always owned AAA rated paper and did not change their stripes in the go-go days of the housing market to boost short term profits. The management is dedicated, transparent and has put their own money on the line by buying in the open market.
There is no better way to describe what is happening to TMA other than a Black Swan event. Make no mistake about it, we are witnessing a dislocation in the credit markets that can be best described as tectonic plates shifting against each other and causing all kind of havoc with TMA caught in the middle.
What is happening to TMA?
The market for non-agency paper is all but closed. Trades that are completed price these mortgages at lower and lower levels. That means that large holders of non-agency paper—like TMA which owned a $36B portfolio of non-agency, AAA rated, ARM loans at the end of the last quarter—have to constantly mark-to-market at lower prices. At some point the portfolio gets marked so low the people lending money to TMA get scared and start asking for some of it back.
This is where things get interesting, since the repo provider can either try to work out a deal with TMA and avoid a forced liquidation or ask for their money back NOW (a.k.a. margin call).
It appears that one or more of TMA’s lenders got spooked. Faced with a margin call, TMA was than forced to sell at the worst possible time which caused further price erosion and decline in the stated value of the rest of their portfolio. JP Morgan may have dealt the fatal blow, putting the company into technical default and triggering a waterfall of other debt covenants. The rating agencies lowered their ratings on the company (not the mortgages they own) further into junk making it impossible for the company to borrow more money.
So how does all this effect CIM?
Well, for every seller forced at gun point to liquidate there is a buyer with cash and time. When TMA and others--and there are many others, just today it was announced that UBS is dumping its Alt-A loans and Citi will be liquidating $45B in mortgages over the next 12 months--are selling CIM will be buying at better spreads than they were even a month ago.
The short term price drop of CIM and other mortgage REITs does not change the thesis I laid out in these posts.
CIM is still managed by some of the smartest people in the business. They are still one of the only buyers in the market and can set their own price. They have only been in operation since November 2007 and still have a very small portfolio that was already bought at the discount. And now CIM is trading at below book value of $14.25.
I have added to my initial position in the “Best Ideas” portfolio as well as my personal accounts. I will continue to add to my position if the stock continues to fall.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
2 comments:
Assume CIM bought some of the TMA AAA rated loans at a great discount..... Isn't CIM running the same risk that TMA had,
in that CIM repo lenders decide the collateral has dropped in value and they call on CIM to put up more capital? Probably not a problem now as CIM is new, but as CIM deploys all their capital and gets more leveraged, couldn't the same squeeze hit them especially if housing prices continue to decline which I think is likely?
Farwest99 ....yes, anyone that borrows short term faces the possibility of having to pay back their loans unexpectedly. CIM and NLYface the same risks as TMA but I don't think they have the same risk profile. TMA was leveraged 16-to-1, while NLY is closer to 8/9-to-1 and at this point CIM is even lower than that. As CIM's book grows it will be my job as an investor to decide if they are leveraged to much, but at this point their low leverage is a big advantage.
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