Struggling mortgage investor Luminent Mortgage Capital Inc and home loan lender Thornburg Mortgage Inc took steps to bolster liquidity on Monday, but the companies signaled the trouble is not completely gone.
Thornburg said it sold $20.5 billion of mortgage assets, and reduced its short-term borrowings by an equivalent amount, in a bid to reduce the risk of its losing access to short-term credit markets. The sale amounted to more than 35 percent of its assets as of June 30.
Luminent, meanwhile, said it will sell a majority of itself at a deep discount to shore up its financial condition. Arco Capital Corp., a San Juan, Puerto Rico-based holding company, will have the right to buy up to 51 percent of the company at a price 76 percent below Friday's closing price.
With U.S. home values weakening and mortgage defaults rising, investors have balked at buying home loans in any form, and mortgage bonds have broadly dropped relative to Treasuries. That has left mortgage lenders strapped for cash.
Countrywide Financial Corp., the largest U.S. mortgage lender, said on Thursday it drew down an $11.5 billion bank credit line after losing access to some short-term borrowings.
Difficulty in the mortgage market should come as no surprise and isn't likely to disappear in the near term, said Marshall Front, chairman of Front Barnett Associates in Chicago.
The mortgage industry grew disproportionately large and it's going to have to shrink now, Front said.
The Federal Reserve on Friday cut the rate at which it lends to banks, giving a lift to mortgage-backed securities and mortgage credit markets. The cost of protecting Countrywide's debt against default fell on Friday and Monday.
But the industry's problems are far from over, traders said, and mortgage assets are still much weaker than at the start of 2006.
Thornburg said on Monday that the estimated net value of its assets, or book value, fell 13 percent to $12.40 per share last week amid difficult market conditions.
Thornburg's shares fell 10.2 percent to $13.50 in early afternoon trading on the New York Stock Exchange, after trading at low as $13.10. The company's shares traded as low as $7.50 last week. Thornburg's shares closed 2006 at $25.13.
Luminent, a San Francisco-based real estate investment trust that buys mortgages and other related instruments, said Arco would inject up to $60 million of capital, buy $65 million of mortgage securities, and may buy other company assets. Arco will receive five-year warrants to buy up to 51 percent of Luminent at 18 cents per share.
Luminent's shares rose a penny to 76 cents in early afternoon trading.