Why Credit is not the Same as Cash: Thornburg Mortgage and Margin Calls.

As many of you may or may not be aware, the next big thing that is pushing mortgage lenders and financials into the ground is margin calls. What is occurring in the market is companies leveraged to the heavens, are now realizing the stark difference between liquid and illiquid assets. Take a look at Thornburg Mortgage:

“The news keeps getting worse for Thornburg Mortgage (TMA). The Santa Fe, N.M., jumbo mortgage lender saw its shares plunge 23% in premarket trading Monday after the company said it received more margin calls as the market value of its mortgage securities holdings continued to fall. Thornburg, whose shares fell sharply late last week after the company said it received $300 million in calls for more collateral, said Monday morning that it has gotten an added $270 million in margin calls since then – and that it hasn’t been able to meet most of them. The company said it “is working to meet all of its outstanding margin calls within a time frame acceptable to its lenders by either selling portfolio securities or raising additional debt or equity capital.” With Thornburg’s shares having lost three-quarters of their value over the past year, any capital-raising will come at a steep price to existing shareholders.”

What makes this significant is that Thornburg Mortgage did relatively well last year even in the face of many other lenders having problems after the credit crunch. These issues are not new and don’t only impact Thornburg. What is happening is the margin calls, occurring now when the secondary market is now defunct, are forcing these lenders to pony up money and if they do not have it, are forced to liquidate assets in a market that is quickly deteriorating. In essence, companies are being forced to mark-to-market and sell at the worst time possible. This again is why leveraging yourself massively on both sides can yield major gains but also put a suffocating clamp around your neck of growth.

It is important to understand that Thornburg was known for the quality of their assets and the mortgages they held in their portfolio. That is why the significant declines and inability to meet margin calls is sending further shockwaves in the market. That is, even quality mortgages, not only subprime, are now facing problems in the current retracting economy.

This also applies to many families right now. Many are now realizing that credit and liquidity are not the same. Having $50,000 in cash is very different from having $50,000 in a home equity line. Many are realizing that treating a credit line as money is a mistake:

“In one brief phone call, Nancy Corazzi’s lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago. The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth. “I got off the phone and I was shaking,” said Corazzi, who was using the money to pay preschool tuition for her twins .”I was near tears. We needed this credit line to get us through some tough times.”

And so many lenders thought the same thing. The secondary market on Wall Street served as a backup Mastercard. Now that the credit card has been cut in half with scissors, any market mishaps is enough to put a company in serious problems. As you are surely aware, the U.S. economy is having more than slight problems so the evaporation of the secondary market is forcing people to show their cards at the worst time.

Relying on a home equity line such as the family above, is a symptomatic problem of the U.S. economy. Many people started relying on these “good time” products and started treating them like cash. They worked like cash. Felt liquid like cash. Bought stuff like cash. Yet now with credit being taken away have no resemblance to cash. Don’t make the mistake of treating credit like cash.

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