Filed under: JPMorgan Chase (JPM), Federal Natl Mtge (FNM), Economic data, Housing, Federal Reserve
AFXNews reports that Thornburg Mortgage Inc. (NYSE: TMA) is bankrupt. That’s because it couldn’t come up with $28 million it owed JPMorgan Chase & Co. (NYSE: JPM). Specifically, Thornburg needed to pay JPMorgan — to whom it owes $320 million — the $28 million for a margin call.
According to The Associated Press, the notice of default from JPMorgan triggered cross-defaults “under all of the company’s other reverse repurchase agreements and its secured loan agreements.” According to MarketWatch, Thornburg has been facing margin calls due to a 15% drop in the value of mortgage-related securities in early February.
Margin calls are a common response from investors when securities bought with loans rapidly lose value. If they fall too far too fast, they might hit triggers that require the issuing company to either shore up their position or sell off additional assets.
What exactly is going on here? Thornburg specialized in adjustable-rate “jumbo” mortgages — those greater than $417,000 and “Alt-A” loans — which, like subprime ones, have been abused by people who overstated their income on mortgage applications. The jumbo loans are typically not bought by Federal National Mortgage (NYSE: FNM) so they’re less liquid. And the Alt-A loans have seen rising defaults and are the subject of government investigations.
Garbage in, garbage out. In response to this morning’s announcement, Thornburg stock is down 43% in pre-market.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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