Some really interesting stuff playing out today in what else: mortgage backed securities.
Yesterday (Wed) after the close, Thornburg Mortgage (TMA), a high quality and well respected originator and securitizer of jumbo (more than $417,000) mortgages, announced in a filing with the SEC that JP Morgan had notified it that it would excercise its rights in an event of default to collect on $320 million owed to it by Thornburg. This event has triggered defaults on all of the company’s other reverse repurchase agreements and secured loan agreements (TMA 8-K).
To put this in english, they failed to meet their obligations under a loan with JP Morgan; JP Morgan has decided to excercise their rights under the agreement to collect on the $320 million that they are owed; this event has gone awry of clauses in all of Thornburg’s other lending agreements and pushed them into default on them.
Thornburg is heavily leveraged and its large portfolio of mortgage backed securities is financed by debt. If it has to pay all that debt back immediately, it will have to sell large parts of its portfolio at fire sale prices in order to meet its obligations, resulting in massive losses.
Thornburg shares have lost more than half their value today (TMA 2 Day Chart) with around 42 million, currently, more than 25% of outstanding shares trading hands!!!
And it doesn’t stop there.
Carlye Capital, a unit of private equity giant Carlye Group, finds itself in a similar pickle. It has failed to meet margin calls and received a notice of default from lenders that finance its $21.7 billion portfolio of Government Sponsored mortgage backed securities (Fannie Mae, Freddie Mac) (subscription required).
The significant difference here is that while Thornburg’s mortgage are all private sector i.e. not guaranteed by Fannie or Freddie with the implicit backing of the US government, Carlye’s principal is.
This has led to fear about virtual banks like Annaly (NLY) and others that make money by leveraging up, buying Fannie and Freddie guaranteed mortgage backed securities and pocketing the spread.
Prices of agency mortgage backed securities are sharply lower. A lot of this has happened in the past couple of days because of massive selling by leveraged investors.
– Kevin Cavin, Mortgage Strategist, FTN Financial
Annaly shares are down 15% today on heavy volume – about 75 million of Annaly’s 461 million outstanding shares (16%) have traded hands today (NLY 2 Day Chart).
Some investors are seeing opportunities here.