Thornburg President: Anxiety Still Haunts Mortgage Sector
Thornburg Mortgage's president Larry Goldstone told CNBC Monday that there is still a crisis of investor confidence in the mortgage market but that the residential mortgage lender expects to be profitable.
"Investors' confidence in the mortgage financing space is not doing well," Goldstone said. "The market continues to struggle. Nobody can issue asset-backed securities, the commercial paper market is not functioning all that well."
"I suspect that even the reverse repurchase agreement market -- the only other place to finance mortgages outside the depositary system -- is still struggling as well," he said.
Thornburg's stock fell further Monday after the company said it sold 35 percent of its assets, valued at $20.5 billion, and reduced its borrowings to cut its risk amid a difficult market for home loans.
Thornburg said the actions will stabilize the company's ability to meet its financing
obligations and continue its mortgage lending operations. But the risk reduction will also result in a realized capital loss of about $930 million, Thornburg said.
Thornburg said its book value is about $12.40 per share as of August 17, compared with a book value of about $14.28 per share as of August 13.
In the CNBC interview, Goldstone said he believes Thornburg's asset sale garnered a fair price, in light of current conditions.
"We don't feel like we 'gave it away.' We had very good control over the process. Obviously, this is a distressed and illiquid market, but...we kept our cool. We executed as well as we could in the face of the market. And as a result, we preserved a lot of shareholder value."
Thornburg sold most of its lowest-yielding assets, including unprofitable loans, and expects to remain profitable on an operating basis in the third quarter.
The company said it believes yields on mortgages it makes are now at least 1.25 percent more than its cost of funding, which should improve its lending margins.
On Friday, the Federal Reserve cut the discount lending rate -- the interest rate that the Fed charges to make direct loans to banks -- to 5.75 percent from 6.25 percent. The Dow Jones industrial average shot up more than 300 points in early trading before slipping slightly to close up nearly 2 percent. But Goldstone thinks calls for other and deeper rate cuts might be premature -- and even harmful to the mortgage market.
"Im not so sure the Fed should do more," Goldstone said. "Obviously, the [discount rate] moves made on Friday are at least an indication that they're paying attention to what is going on. Unfortunately, it was a little too late for us."
"But," he added," it has only been one day. It is probably going to take a little bit of time for the Fed's action to work, to take effect."
As investors fret about the home loan market, where home prices are declining and defaults are rising, mortgage lenders, especially those in the secondary market such as Countrywide Financial, have increasingly had trouble financing their operations.
Countrywide , the largest U.S. mortgage lender, said last week it drew down an $11.5 billion bank credit line after losing some access to short-term borrowings.
"Companies with short-term funding still have challenges," said Bose George, analyst at Keefe, Bruyette & Woods in New York.