No. of Recommendations: 9
I owned some Thornburg (TMA) which went belly up. Here's what I think happened. They held jumbo loans from high net worth borrowers who had assets to cover their mortgages. I think I was right there but TMA still went belly up. Here's what I think happened.

Thornburg was in the business of writing mortgages, and then bundling them up in an RMBS. Say it would take a year to create a $100M RMBS. They would borrow money to pay for the loans that they underwrote with a repo, that is if they had a mortgage for 500K, they would used that as collateral for a short term loan on a haircut, i.e. TMA received 499K, say, from a bank. The bank, I think, legally owned the loan, and promised to sell the loan back to TMA for 500K after a year. There was the added condition that the bank could call the loan if the market for the loan went down or some other condition. If TMA could not meet the call, the bank could sell the loan and TMA would owe the bank the difference between what the bank received and value of the loan.

OK, some mortgage bundler, e.g. New Century, went belly because they underwrote lousy loans which started going bad quickly and the repo market froze. One couldn't get a quote on the repos. It didn't matter if the mortgage unerlying the repo was good, you couldn't get a quote. The banks called TMA's repos and TMA could not met the call. TMA argued (correctly I think) that the mortgages were good, and if you couldn't quotes you couldn't call them (or something like that). In the end TMA went belly up.

That's my understanding of what went on with TMA, and I'm sure there are errors in the details. The moral is that you can still go belly up if you underwrote good loans.

I wonder what would have happened to NLY if the government did not make the guarantee explicit. Now that the agency loans have explicit government guanatees, something like this seems less likely to happen to mREITs dealing with agency paper.

Corrections, comments and bricks welcome

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