Another lender on the ropes

How bad is the Jumbo mortgage squeeze? So bad that Jumbo lender Thornburg Mortgage is fighting for survival tonight.

Backstory: Earlier this month, Jim Cramer of CNBC fame said that Thornburg could survive even the worst housing downturn because of its profile: it concentrates on Jumbo mortgages, lending money to wealthy people who like mortgages for the tax advantages.

Update: Thornburg took a standing eight count today in the market, losing 46% of its value before its shares were halted. Analysts couldn't downgrade the stock fast enough after the lender said it won't accept new rate lock requests for four days. The company blamed "the present unprecedented and irrational sentiment in the secondary mortgage market, which has generated conditions of illiquidity throughout the industry."

The Street.com: "...Five brokerage firms downgraded the stock, saying the company may be forced to sell assets to meet margin calls. One analyst said earlier Tuesday that news of a halt in rate locks 'could be the beginning of large liquidity issues for the company.'

After the market closed today, Thornburg put out a statement saying it has postponed its second-quarter dividend and that its book value is $14.28 per share (the stock was halted today at $7.65).

Our take: Perhaps the secondary mortgage market is irrational at the moment -- it's hard to say for sure, because we don't know how bad things will get. But we do know that the secondary mortgage market was wildly irrational in recent years -- that's why we're in the mess we're in at the moment. Oddly, no one complained about the market's irrationality on the way up.

Comments? Thoughts? Insights?

Comments

[MattJ]

Plenty of people were complaining about the market's irrationality on the way up; check out the archives of any of the older housing bubble blogs to see some examples. The problem is that no one in the mainstream, high visibility media was listening. I started telling people in the Northern Virginia area that I wouldn't be willing to buy a house in 2002; I was early by several years, and people who ignored me then probably are better off for having done so.

[Roger Moore]

Plenty of people complained about the market's irrationality on the way up. And not just a lunatic fringe, either; the Economist has been describing the housing market as part of a broader asset price bubble for years. It's just that the people who were making tons of money in the market were in complete denial.

That kind of thing happens all the time. The deniers keep ignoring anyone who tells them about the mistake they're making. When the situation gets so bad they can't ignore it anymore, they switch to denying that anyone could have forseen how bad things got-- even though plenty of people did. For another example of this, see the situation in Iraq.

[sunsetbeachguy]

I saw a good analogy on the piggington.com website for the secondary martkets response.

Say I have a muffin (mortgage) shop. I go out and get together all of the ingredients for a tasty muffin (mortgage to be resold on secondary market).

I have eggs, milk, flour, blueberries, etc. and one secret ingredient. I blend up all of the ingredients together and make my muffins (securitization into ABS, CDOs and CLOs) and sell them for a nice profit (for a while).

Suddenly, a market participant (Bear Stearns) discovers the secret ingredient is cows**t. That revelation makes the muffins not very appetizing. Never mind that cows**t is only 3-4% of the muffin by volume.

No one wants to buy a muffin with 3-4% cows**t (maybe more) by volume. It is all mixed in together and there is no easy way to unbake the muffin and take the cowsh**t out.

That is where the secondary markets are at and until confidence is restored in the mortgage securitization market (many years) nothing will happen that isn't Fannie/Freddie conforming.

Which coincidentally will whack CA property values very hard. Providing real declines of 40-50% that restore the housing markets fundamental ratios once again.

A more interesting question is why is California's RE market so bubble prone?

[The Dude abides]

Peter: Sunsetbeachguy raises a great question that I have asked myself many times, but to which I have not seen a good answer: Why are the booms and busts in SoCal so extreme? I would love it if you were able to post something on this issue

Other portions of the country have less exaggerated ups and downs. I know a lot of people say "California has great weather, etc." However, that is a constant; i.e., it is equally true during busts as well as in booms. (This is amusingly referred to by Dr. Housing Bubble as the sunshine tax, since of course the sun doesn't shine in other parts of the country.)

The extremeness of the RE market cycles in SoCal appears to be endemic: witness the boom and bust of the late 1800s in LA.

(A nice little piece of trivia is that USC, using donated wealth from that boom, was supposed to establish an observatory on Mt. Wilson. However, after the bust, it could no longer do so, leaving the door open for George Ellery Hale from U. of Chicago to come in, found the Mt. Wilson Observatory, and ultimately found CalTech in Pasadena, immediately below the observatory. One wonders what USC could have become!)

[Keith]

I'm sure plenty of people in the mainstream media, even the LA Times, knew what was coming. Lot's of average people did, but it's the mainstream media's job to sell and make money off of advertising. They will never be the ones to take pot shots at the Golden Goose in any situation. It's just not their nature. Now of course that everyone want's to hear how bad it is, there will be gobs of info on why it's crashing. But on the way up, the sexy story was about how it was on the way up. That's why you can't trust the media as far as you can throw them and why you have to think for yourself. If you make that the first rule of the prism of how you view news, you'll get a lot more value out of your news experience. Of course, there will always be a lot of stupid sheep around, that's what big media counts on.

[Colin]

I can personally testify that I sold Thornburg-backed loans through their correspondent line and they were all super-jumbo, somewhat riskier than market loans.

Typically if you had a loan that didn't fit the standard wholesale lenders, you would take it to Thornburg in the hopes that they could do it. I don't think their loans are necessarily riskier than others, they're just probably huge loan amounts that the secondary market wants nothing to do with.

[Pete Viles]

MattJ, Roger Moore, and Keith: I should have been more clear. Yes, I remember plenty of people questioning the fundamentals of the bubble, and the logic of the housing market, on the way up. I was talking specifically about the market for mortgage-backed securities -- I don't remember is anyone complaining that investors had lost their minds the way they were gobbling up any and all mortgage backed securities. It didn't take a genius to predict that a sizeable percentage of borrowers with spotty credit histories would default on their mortgages. Yet the financial markets behaved as if this was the most shocking development since gambling in Casablanca. They were shocked -- shocked! -- that sub-prime borrowers defaulted.

[Cal]

http://www.theonion.com/content/statshot/how_are_we_paying_off_our

[Stacy]

Speaking of USC's misfortune RE history. My father, a very dedicated and active USC alum, tells us back in the 1930s USC was offered the property where Pepperdine now is located in Mailbu as a donation, if they would move the campus there. Some moron Dean at the time refused the offer thinking that it was too remote for the campus. What a mistake, the reason I do not send my kids there now is the present location in downtown LA and the fear they may not come back alive. It goes to show you again location is everything RE, even institutions such as USC.

[Richard Humpal, JD]

All this talk is circular reasoning. The foundation of this problem is one created by the Federal Reserve Bank which is NOT part of our government. Lenders have been commiting moneylaundering for a long time, that is, not being able to trace the alleged funds that were supposed to be lent. The problem is simple: There is NOT enough money in the world to pay off the debts. DUH?

[xtine]

Stacey - I never would have gone to USC if it was in Malibu. I cannot afford to live in Malibu and it is only accessible from PCH. So I'd spend half my life stuck in traffic on a two-lane highway. At least downtown is accessible.
So HOORAY for the moron Dean who cares about his students.

[Laura]

(Sorry Peter for the tangent)

“The reason I do not send my kids [to USC] now is the present location in downtown LA and the fear they may not come back alive.”

As a recent USC alum, I find comments like Stacy’s tiresome and ignorant. The USC community has created many programs to positively interact with the local residents and continually improve the surrounding area, as opposed to fleeing the neighborhood. It was the strength of this relationship between students, faculty, staff and residents that compelled Time Magazine to name USC its university of the year in 1999. It makes sense that people tucked away in their little bubbles would have no idea what’s going on in the neighborhood they’ve spooked themselves into avoiding. I’m proud of my school and its location because we do not demean the people living around it, but try our best to lift them (and us) up instead.

[Paul King]

The same kind of blinders that individuals wear vis-a-vis asset bubbles can also be applied to USC's prime location in the heart of Los Angeles. It is a top school that is easily accessible and from which you can quickly get to all parts of LA. More importantly to recent buyers of homes in its nearby historic neighborhoods, not only are there big beautiful houses on large lots at reasonable prices, but neighbors are friendly and the crime rates are on par with West Los Angeles.

[buz algood]

I have visited many, many college campuses across the country and can say without reservation that USC is in one of the worst locales. John Hopkins Medical in north Baltimore is a close second. How can anyone deny that South LA is a third world neighborhood? Hello. I dare any of you USC retards to send your daughter to do her laundry at an off campus laundry at night.

[haywood]

If USC had moved its campus to Malibu in the 1930s, it wouldn't be USC today -- it would be Pepperdine. No thanks.

p.s. anyone who would send their kid to Pepperdine over USC is an idiot.

[MyLessThanPrimeBeef]

I might be wrong and it happened before, but I thought money is just bank debt...modern money, that is. The Federal Reserve creates money by creating debt.

[sheila]

sorry to state the obvious, but where is the "rainy day fund" that all sensible people sock away for riding out the tough times? it appears that these people who manage money for a living and control the destinies of billions of dollars (and millions of people) think that dividends and bonuses were a smart way to use their obviously windfall profits, instead of stashing away a few years' worth of operating capital for this predictable slowdown.

anyone remember the ant and the grasshopper? been around for thousands of years? by overdoing it during the good times, while not preparing for any pendulum swing, they turned an "upswing" into an insane "boom," and a "downturn" into an insane "bust." the comparison to iraq is an apt one.

so the real question is, how do people like these completely incompetent fund managers, loan execs and politicians get into positions of power that can ruin the lives and livelihoods of millions of people while we all stare, glassy-eyed, at American Idol?