Posted on 03/06/2008 10:40:53 PM PST by TigerLikesRooster
March 7, 2008
Major US homes lender near bankruptcy
Tom Bawden in New York
Thornburg, the American mortgage lender, was teetering on the brink of bankruptcy last night as a key creditor demanded that it liquidate assets after failing to put up $28 million (£13.9 million) in extra collateral.
Thornburg’s escalating credit crisis coincided with new data showing that foreclosures on American properties hit a record in the fourth quarter of 2007.
The Dow Jones industrial average closed at 12,040.4, down 214.60, and the S&P 500 index fell by 29.35 points to finish at 1,304.35 as investors were forced to accept that the credit crunch was far from over.
The fall in US shares to their lowest for 18 months looks set to continue when the markets reopen today after Citigroup announced late last night that it planned to cut the value of mortgages it has on American properties by $45 billion, or 20 per cent, over the next year.
The bank plans to reduce its exposure primarily by parcelling up a greater portion of its mortgage book into bonds to be sold on. The resulting flood of new bonds is expected to exacerbate the credit crunch by further forcing down the price of securities.
JPMorgan issued Thornburg with a “default notice” after the lender was unable to meet a $28 million margin call, which the bank demanded after a significant decline in the value of its assets.
Thornburg, which specialises in mortgages of more than $417,000, also holds bonds backed by home loans on its balance sheet as investments. The value of both the mortgages and the bonds have plummeted in recent weeks as investors shy away from most forms of debt. Creditors such as JPMorgan, already reeling from huge writedowns and increasingly nervous about the prospect of further losses, have been demanding increasing amounts of collateral as the assets owned by debtors, such as Thornburg, decline in value.
JPMorgan, which has loaned Thornburg $320 million, said that it planned to force the mortgage group to liquidate some of its assets. The move is expected to trigger similar action from other creditors, which could push Thornburg into bankruptcy. Shares in Thornburg fell by 51.5 per cent to close at $1.65.
Jason Arnold, an RBC Capital Markets analyst, said: “Thornburg appears to be on the ropes and, barring a sizeable capital injection, which is possible but seems very unlikely at this point, in our view, we see little in the form of upside.
“Cross-default provisions will likely lead other lenders to follow suit in laying claim to assets, leaving little value remaining. With limited options, we now think a bankruptcy filing is a more likely outcome.” Thornburg is the latest in a fast-growing list of borrowers that face being forced to liquidate assets by their creditors because they cannot meet the calls for additional collateral.
Peloton Partners last week became the biggest margin-call victim in the UK as the hedge fund was forced by its bankers, led by Goldman Sachs and UBS, to sell assets at a 30 per cent discount to meet their cash calls. The fund saw about $2 billion of its equity wiped out as a result.
Analysts said that they expected many more forced asset liquidations in the coming months as new data showed that US housing foreclosures, a key source of the credit crunch, hit a record high in the final quarter of last year. Foreclosures jumped to 0.83 per cent in the fourth quarter, from 0.54 per cent the year before, partly because borrowers with variable-rate mortgages walked away from their properties before their payments rose, according to the Mortgage Bankers Association.
A foreclosure is a legal process typically set in motion when a borrower falls 90 days behind on mortgage repayments. About 40 per cent end in a forced sale or repossession of the house. In the remaining cases, the bank and borrower reach an alternative repayment schedule.
What is a flipper freeper and where can I find one?
Don't forget those who borrowed for homes they could not normally afford, encouraged by predatory lending and the conventional wisdom that housing prices would never fall. Housing prices never being allowed to fall is part of the basis on which our economy has been managed.
The liquidity crunch we are watching progress was never supposed to be possible, and there is no "plan B" for this situation. Thus the spectacle of Bernanke contradicting himself so often, and the impotence of the normally potent set of financial levers at his disposal.
This is the most disturbing part of this episode, and insiders should be very terrified at this situation. Thornburg isn't going bankrupt because it made bad loans, it is going bankrupt because it is over-leveraged in a falling market. Thornburg should have been able to prosper in this climate, if it did not rely so much on outside financing. If Thornburg can't survive, then less quality companies don't have a prayer, and the insiders know it.
I agree.
at the peak period (2005-2006), MEW(mortgage equity extraction) in the US was calculated at over 800 billion a year. People were using that money to buy cars, vacations, flat screen tvs, and drum roll please......................................investment real estate.
there are certainly cases of clearing firms screwing forced liquidations of cmo’s and other derivatives ( bear comes to mind)...be interesting to see what hits up for fire-sale in the coming days.
At this point even those shills realize it's foolish to continue stating 'there is no housing bubble', 'no inflation', 'don't worry about oil prices' and the 'American banks are rock solid' ....lol
"Thus, clearly, money and goods are not the same thing but are, on the contrary, exactly opposite things. Most confusion in economic thinking arises from failure to recognize this fact. Goods are wealth which you have, while money is a claim on wealth which you do not have. Thus goods are an asset; money is a debt. If goods are wealth; money is non-wealth, or negative wealth, or even anti-wealth."Tragedy and Hope: A History of the World in Our Time', by Carroll Quigley; Page 44
Thanks! (I think)
Thanks Mrs. Cleaver. Good night.
“Sic semper suis”.....
Never mind reducing assessments to match the ice cold market, even keeping assessments artificially inflated they are already talking about raising rates here.
You'd like to think that several years of record property revenues would be the best possible buffer before a downturn. Oppurtunity to buy back bonds, invest in long term infrastructure and equipment, build up an emergency savings fund.
Of course the reality is the exact opposite. When confronted with a one time windfall, they did what they always do: they made that amount their new general spending baseline, projected a similar (or even larger) increase in coming years, and promised every dime of it to the usual bottomless pits.
Now we come to the rainy day and nothing is paid off early, there's no savings fund, the only thing they did with all that money was buy new obligations.
If you ran your finances like that you'd be living in a cardboard box.
I assume the money in this quote is “Fiat” money..
Tragedy and Hope: A History of the World in Our Time', by Carroll Quigley; =========================================================
Deja vu!
How many times can a house flip be the house flips out?
Guess the loan originators didn't care and the banks were too lazy and greedy to find out.
If one has working capital to invest and not borrow to do the remodel, then it’s a decent way to make a buck. However, many people we counting on selling flipped properties within less than 6 months with the fad was hot on interest only loans and borrowed ‘equity’ for the remodeling expenses....very, very risky.
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