UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended: September 30, 2008
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 001-11914
THORNBURG MORTGAGE, INC.
(Exact name of Registrant as specified in its
Charter)
|
|
|
Maryland
|
|
85-0404134
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification Number)
|
|
|
|
150 Washington Avenue
Santa Fe, New Mexico
|
|
87501
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code: (505) 989-1900
(Former name, former address and former fiscal year, if changed since last report)
Not applicable
Indicate by check mark whether
the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
Large accelerated filer
|
|
x
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
Non-accelerated filer
|
|
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
|
|
¨
|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934). Yes
¨
No
x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock ($.01 par value)
47,530,243 as of November 7, 2008
INDEX
In this quarterly report, we refer to Thornburg Mortgage, Inc. and its subsidiaries as we, us, or the Company, unless we specifically state otherwise or the
context indicates otherwise. Capitalized terms not otherwise defined in this quarterly report and financial statements below shall have the definitive meanings assigned to them in the Glossary at the end of this report.
2
PART I. FINANCIAL INFORMATION
Item 1.
|
FINANCIAL STATEMENTS
|
THORNBURG
MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
ARM Assets:
|
|
|
|
|
|
|
|
|
Purchased ARM Assets:
|
|
|
|
|
|
|
|
|
ARM securities, net
|
|
$
|
3,596,872
|
|
|
$
|
10,046,818
|
|
Purchased Securitized Loans, net
|
|
|
393,434
|
|
|
|
647,225
|
|
|
|
|
|
|
|
|
|
|
Purchased ARM Assets
|
|
|
3,990,306
|
|
|
|
10,694,043
|
|
|
|
|
|
|
|
|
|
|
ARM Loans:
|
|
|
|
|
|
|
|
|
Securitized ARM Loans, net
|
|
|
824,852
|
|
|
|
2,557,961
|
|
ARM Loans Collateralizing Debt, net
|
|
|
20,433,846
|
|
|
|
21,383,177
|
|
ARM loans held for sale or securitization, net
|
|
|
157,120
|
|
|
|
549,359
|
|
|
|
|
|
|
|
|
|
|
ARM Loans
|
|
|
21,415,818
|
|
|
|
24,490,497
|
|
|
|
|
|
|
|
|
|
|
ARM Assets
|
|
|
25,406,124
|
|
|
|
35,184,540
|
|
Cash and cash equivalents
|
|
|
16,699
|
|
|
|
149,109
|
|
Restricted cash and cash equivalents
|
|
|
354,600
|
|
|
|
538,505
|
|
Liquidity Reserve Fund
|
|
|
113,457
|
|
|
|
|
|
Hedging Instruments
|
|
|
6,139
|
|
|
|
17,523
|
|
Accrued interest receivable
|
|
|
120,812
|
|
|
|
190,484
|
|
Other assets
|
|
|
267,491
|
|
|
|
192,200
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,285,322
|
|
|
$
|
36,272,361
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements
|
|
$
|
4,638,927
|
|
|
$
|
11,547,354
|
|
Asset-backed CP
|
|
|
|
|
|
|
400,000
|
|
Collateralized Mortgage Debt
|
|
|
20,362,739
|
|
|
|
21,246,086
|
|
Whole loan financing facilities
|
|
|
72,777
|
|
|
|
453,500
|
|
Senior Notes
|
|
|
305,000
|
|
|
|
305,000
|
|
Senior Subordinated Secured Notes
|
|
|
406,964
|
|
|
|
|
|
Subordinated Notes
|
|
|
240,000
|
|
|
|
240,000
|
|
PPA and Additional Warrant Liability
|
|
|
423,355
|
|
|
|
|
|
Hedging Instruments
|
|
|
11,557
|
|
|
|
123,936
|
|
Accrued interest payable
|
|
|
62,379
|
|
|
|
90,260
|
|
Dividends payable
|
|
|
|
|
|
|
47,330
|
|
Accrued expenses and other liabilities
|
|
|
84,959
|
|
|
|
59,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,608,657
|
|
|
|
34,512,627
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred Stock: par value $0.01 per share
|
|
|
1,001,589
|
|
|
|
832,485
|
|
Common Stock: par value $0.01 per share; 3,955,985,785 and 458,585,500 shares authorized, respectively; 38,736,393 and 13,993,600 shares
issued and outstanding, respectively
|
|
|
387
|
|
|
|
140
|
|
Warrants
|
|
|
7,805
|
|
|
|
|
|
Additional paid-in-capital
|
|
|
3,329,734
|
|
|
|
2,897,462
|
|
Accumulated other comprehensive loss
|
|
|
(97,160
|
)
|
|
|
(172,432
|
)
|
Accumulated deficit
|
|
|
(4,565,690
|
)
|
|
|
(1,797,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(323,335
|
)
|
|
|
1,759,734
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
$
|
26,285,322
|
|
|
$
|
36,272,361
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest income from ARM Assets and cash equivalents
|
|
$
|
498,639
|
|
|
$
|
621,980
|
|
|
$
|
1,541,013
|
|
|
$
|
2,103,554
|
|
Interest expense on borrowed funds
|
|
|
(418,570
|
)
|
|
|
(585,829
|
)
|
|
|
(1,365,682
|
)
|
|
|
(1,874,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
80,069
|
|
|
|
36,151
|
|
|
|
175,331
|
|
|
|
229,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income, net
|
|
|
1,792
|
|
|
|
4,125
|
|
|
|
7,555
|
|
|
|
12,289
|
|
Mortgage services income, net
|
|
|
1,091
|
|
|
|
575
|
|
|
|
1,820
|
|
|
|
1,294
|
|
Gain (Loss) on ARM Assets, net
|
|
|
(662,904
|
)
|
|
|
(1,099,246
|
)
|
|
|
(3,178,574
|
)
|
|
|
(1,097,090
|
)
|
Gain (Loss) on Derivatives, net
|
|
|
(12,669
|
)
|
|
|
(25,271
|
)
|
|
|
(45,885
|
)
|
|
|
(16,995
|
)
|
Gain (Loss) on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
23,035
|
|
|
|
|
|
PPA and Additional Warrant Liability fair value changes
|
|
|
160,192
|
|
|
|
|
|
|
|
144,490
|
|
|
|
|
|
Senior Subordinated Secured Notes fair value changes
|
|
|
594,553
|
|
|
|
|
|
|
|
162,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noninterest income (loss)
|
|
|
82,055
|
|
|
|
(1,119,817
|
)
|
|
|
(2,885,150
|
)
|
|
|
(1,100,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of (provision for) loan losses
|
|
|
|
|
|
|
(2,628
|
)
|
|
|
7,057
|
|
|
|
(4,860
|
)
|
Management fee
|
|
|
(6,000
|
)
|
|
|
(6,183
|
)
|
|
|
(18,000
|
)
|
|
|
(19,770
|
)
|
Performance fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,742
|
)
|
Long-term incentive awards
|
|
|
(320
|
)
|
|
|
15,490
|
|
|
|
10,496
|
|
|
|
9,303
|
|
Other operating expenses
|
|
|
(16,047
|
)
|
|
|
(9,192
|
)
|
|
|
(44,824
|
)
|
|
|
(23,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for (benefit from) income taxes
|
|
|
139,757
|
|
|
|
(1,086,179
|
)
|
|
|
(2,755,090
|
)
|
|
|
(927,783
|
)
|
Provision for (benefit from) income taxes
|
|
|
290
|
|
|
|
(12,000
|
)
|
|
|
1,014
|
|
|
|
(12,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
140,047
|
|
|
$
|
(1,098,179
|
)
|
|
$
|
(2,754,076
|
)
|
|
$
|
(939,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
140,047
|
|
|
$
|
(1,098,179
|
)
|
|
$
|
(2,754,076
|
)
|
|
$
|
(939,783
|
)
|
Dividends declared on Preferred Stock
|
|
|
|
|
|
|
(10,238
|
)
|
|
|
(13,693
|
)
|
|
|
(20,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
140,047
|
|
|
$
|
(1,108,417
|
)
|
|
$
|
(2,767,769
|
)
|
|
$
|
(960,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
2.74
|
|
|
$
|
(89.41
|
)
|
|
$
|
(85.71
|
)
|
|
$
|
(80.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
1.23
|
|
|
$
|
(89.41
|
)
|
|
$
|
(85.71
|
)
|
|
$
|
(80.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income (loss)
|
|
$
|
140,047
|
|
|
$
|
(1,098,179
|
)
|
|
$
|
(2,754,076
|
)
|
|
$
|
(939,783
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
|
|
(113,391
|
)
|
|
|
(657,777
|
)
|
|
|
69,501
|
|
|
|
(894,944
|
)
|
Reclassification adjustment for net gains (losses) included in income
|
|
|
|
|
|
|
1,099,246
|
|
|
|
(194
|
)
|
|
|
1,097,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses) on securities
|
|
|
(113,391
|
)
|
|
|
441,469
|
|
|
|
69,307
|
|
|
|
202,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
|
|
(6,571
|
)
|
|
|
(330,402
|
)
|
|
|
(161,329
|
)
|
|
|
(30,878
|
)
|
Reclassification adjustment for net gains (losses) included in income
|
|
|
72,779
|
|
|
|
(64,790
|
)
|
|
|
167,294
|
|
|
|
(201,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses) on Hedging Instruments
|
|
|
66,208
|
|
|
|
(395,192
|
)
|
|
|
5,965
|
|
|
|
(232,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(47,183
|
)
|
|
|
46,277
|
|
|
|
75,272
|
|
|
|
(30,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
92,864
|
|
|
$
|
(1,051,902
|
)
|
|
$
|
(2,678,804
|
)
|
|
$
|
(969,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT) (Unaudited)
Nine Months Ended September 30, 2008 and 2007
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Warrants
|
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance, December 31, 2006
|
|
$
|
224,968
|
|
$
|
114
|
|
$
|
|
|
|
$
|
2,478,195
|
|
$
|
(312,048
|
)
|
|
$
|
(14,157
|
)
|
|
$
|
2,377,072
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(939,783
|
)
|
|
|
(939,783
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,146
|
|
|
|
|
|
|
|
202,146
|
|
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232,149
|
)
|
|
|
|
|
|
|
(232,149
|
)
|
Issuance of Common Stock
|
|
|
|
|
|
14
|
|
|
|
|
|
|
302,101
|
|
|
|
|
|
|
|
|
|
|
302,115
|
|
Issuance of Preferred Stock
|
|
|
633,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633,664
|
|
Dividends declared on Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C - $1.50 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,282
|
)
|
|
|
(9,282
|
)
|
Series D - $1.48 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,928
|
)
|
|
|
(5,928
|
)
|
Series E - $0.53 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,623
|
)
|
|
|
(1,623
|
)
|
Series F - $0.16 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,559
|
)
|
|
|
(3,559
|
)
|
Dividends declared on Common Stock - $13.60 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162,650
|
)
|
|
|
(162,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
858,632
|
|
$
|
128
|
|
$
|
|
|
|
$
|
2,780,296
|
|
$
|
(342,051
|
)
|
|
$
|
(1,136,982
|
)
|
|
$
|
2,160,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
832,485
|
|
$
|
140
|
|
$
|
|
|
|
$
|
2,897,462
|
|
$
|
(172,432
|
)
|
|
$
|
(1,797,921
|
)
|
|
$
|
1,759,734
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,754,076
|
)
|
|
|
(2,754,076
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,307
|
|
|
|
|
|
|
|
69,307
|
|
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,965
|
|
|
|
|
|
|
|
5,965
|
|
Issuance of Common Stock
|
|
|
|
|
|
32
|
|
|
|
|
|
|
324,418
|
|
|
|
|
|
|
|
|
|
|
324,450
|
|
Issuance of Preferred Stock
|
|
|
169,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,104
|
|
Issuance of Warrants
|
|
|
|
|
|
|
|
|
77,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,804
|
|
Exercise of Warrants
|
|
|
|
|
|
215
|
|
|
(69,999
|
)
|
|
|
71,395
|
|
|
|
|
|
|
|
|
|
|
1,611
|
|
Capital contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
36,459
|
|
|
|
|
|
|
|
|
|
|
36,459
|
|
Dividends declared on Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,693
|
)
|
|
|
(13,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
1,001,589
|
|
$
|
387
|
|
$
|
7,805
|
|
|
$
|
3,329,734
|
|
$
|
(97,160
|
)
|
|
$
|
(4,565,690
|
)
|
|
$
|
(323,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
140,047
|
|
|
$
|
(1,098,179
|
)
|
|
$
|
(2,754,076
|
)
|
|
$
|
(939,783
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization/accretion of premiums/discounts, net
|
|
|
(24,438
|
)
|
|
|
14,053
|
|
|
|
(38,942
|
)
|
|
|
19,744
|
|
Gains (loss) on ARM Assets, net
|
|
|
662,904
|
|
|
|
1,099,246
|
|
|
|
3,178,574
|
|
|
|
1,097,090
|
|
Gains (loss) on Derivatives, net
|
|
|
12,669
|
|
|
|
25,271
|
|
|
|
45,885
|
|
|
|
16,995
|
|
Provision for (Reversal of) loan losses
|
|
|
|
|
|
|
2,628
|
|
|
|
(7,057
|
)
|
|
|
4,860
|
|
PPA and Additional Warrant Liability fair value changes
|
|
|
(160,192
|
)
|
|
|
|
|
|
|
(144,490
|
)
|
|
|
|
|
Senior Subordinated Secured Notes fair value changes
|
|
|
(594,553
|
)
|
|
|
|
|
|
|
(162,409
|
)
|
|
|
|
|
Gain (loss) on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(23,035
|
)
|
|
|
|
|
Noncash interest income
|
|
|
(5,155
|
)
|
|
|
(14,856
|
)
|
|
|
(23,375
|
)
|
|
|
(51,164
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
11,084
|
|
|
|
166,771
|
|
|
|
68,126
|
|
|
|
133,382
|
|
Other assets
|
|
|
(7,673
|
)
|
|
|
(55,967
|
)
|
|
|
(112,034
|
)
|
|
|
(34,052
|
)
|
Accrued interest payable
|
|
|
25,420
|
|
|
|
(94,234
|
)
|
|
|
75,325
|
|
|
|
(79,795
|
)
|
Accrued expenses and other liabilities
|
|
|
(9,751
|
)
|
|
|
3,810
|
|
|
|
19,796
|
|
|
|
(7,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
50,362
|
|
|
|
48,543
|
|
|
|
122,288
|
|
|
|
160,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
(1,062,225
|
)
|
|
|
(750,412
|
)
|
|
|
(9,300,878
|
)
|
Proceeds on sales
|
|
|
|
|
|
|
15,696,126
|
|
|
|
2,445,368
|
|
|
|
17,349,369
|
|
Principal payments
|
|
|
156,098
|
|
|
|
901,051
|
|
|
|
833,479
|
|
|
|
3,223,031
|
|
Purchased securitized loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on sales
|
|
|
|
|
|
|
5,144,909
|
|
|
|
72,612
|
|
|
|
5,144,909
|
|
Principal payments
|
|
|
26,080
|
|
|
|
182,832
|
|
|
|
68,183
|
|
|
|
783,004
|
|
Securitized ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
(470,097
|
)
|
|
|
|
|
Principal payments
|
|
|
34,875
|
|
|
|
146,383
|
|
|
|
347,833
|
|
|
|
268,847
|
|
ARM loans collateralizing debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
|
859,092
|
|
|
|
728,201
|
|
|
|
3,253,711
|
|
|
|
2,662,885
|
|
ARM loans held for sale or securitization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and originations
|
|
|
|
|
|
|
(1,278,746
|
)
|
|
|
(792,295
|
)
|
|
|
(4,850,789
|
)
|
Proceeds on sales
|
|
|
98,062
|
|
|
|
|
|
|
|
98,062
|
|
|
|
|
|
Principal payments
|
|
|
7,341
|
|
|
|
38,163
|
|
|
|
23,955
|
|
|
|
105,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,181,548
|
|
|
|
20,496,694
|
|
|
|
5,130,399
|
|
|
|
15,386,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paydowns on Reverse Repurchase Agreements
|
|
|
(762,338
|
)
|
|
|
(14,213,920
|
)
|
|
|
(5,473,059
|
)
|
|
|
(10,191,821
|
)
|
Net paydowns of asset-backed CP
|
|
|
|
|
|
|
(7,201,965
|
)
|
|
|
(100,000
|
)
|
|
|
(7,906,300
|
)
|
Collateralized Mortgage Debt borrowings
|
|
|
|
|
|
|
2,673,624
|
|
|
|
2,869,081
|
|
|
|
5,340,953
|
|
Collateralized Mortgage Debt paydowns
|
|
|
(846,261
|
)
|
|
|
(786,833
|
)
|
|
|
(3,466,681
|
)
|
|
|
(2,902,803
|
)
|
Net paydowns on whole loan financing facilities
|
|
|
(139,239
|
)
|
|
|
(1,030,434
|
)
|
|
|
(380,723
|
)
|
|
|
(277,772
|
)
|
Net decrease (increase) in restricted cash and Liquidity Reserve Fund
|
|
|
633,693
|
|
|
|
(289,263
|
)
|
|
|
56,223
|
|
|
|
(125,696
|
)
|
Net proceeds from Financing Transaction
|
|
|
|
|
|
|
|
|
|
|
1,086,458
|
|
|
|
|
|
Issuance costs
|
|
|
(115,908
|
)
|
|
|
|
|
|
|
(164,863
|
)
|
|
|
|
|
Proceeds from Common Stock issued, net
|
|
|
91
|
|
|
|
66,778
|
|
|
|
319,280
|
|
|
|
302,115
|
|
Proceeds from Preferred Stock issued, net
|
|
|
|
|
|
|
533,211
|
|
|
|
169,104
|
|
|
|
633,664
|
|
Dividends paid
|
|
|
|
|
|
|
(89,191
|
)
|
|
|
(61,022
|
)
|
|
|
(254,538
|
)
|
Payments to purchase or terminate Hedging Instruments, net
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
(240,505
|
)
|
|
|
(415
|
)
|
Other
|
|
|
|
|
|
|
688
|
|
|
|
1,610
|
|
|
|
2,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,229,962
|
)
|
|
|
(20,338,333
|
)
|
|
|
(5,385,097
|
)
|
|
|
(15,380,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,948
|
|
|
|
206,904
|
|
|
|
(132,410
|
)
|
|
|
166,278
|
|
Cash and cash equivalents at beginning of period
|
|
|
14,751
|
|
|
|
14,533
|
|
|
|
149,109
|
|
|
|
55,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,699
|
|
|
$
|
221,437
|
|
|
$
|
16,699
|
|
|
$
|
221,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See noncash disclosures in Note 4, Note 7 and Note 9.
See Notes to Condensed Consolidated Financial Statements.
7
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In these financial statements, Thornburg Mortgage, Inc. and its subsidiaries are referred to as the Company, unless specifically stated otherwise or the context indicates otherwise. Capitalized terms not otherwise defined in
the Condensed Consolidated Financial Statements below shall have the definitive meanings assigned to them in the Glossary at the end of this report.
Note 1. Liquidity and Going Concern Uncertainty
The Company has been significantly and negatively impacted by the events
and conditions impacting the broader mortgage loan market. The broader mortgage loan market, including prime mortgage-backed securities and prime mortgage loans, has been adversely affected by weakening house prices, increasing rates of
delinquencies and defaults on mortgage loans, and rating agency downgrades of mortgage-backed securities which in turn have led to fewer sources of, and significantly reduced levels of, liquidity available to finance the Companys operations.
These events have adversely affected the Company mostly from a liquidity and financing perspective as opposed to a credit performance perspective.
The accompanying Condensed Consolidated Financial Statements of the Company were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The
Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Companys available liquidity and the
continued availability of financing for its ARM Assets.
As of March 6, 2008, the Company did not have enough liquid assets to satisfy
margin calls approximating $610 million. By March 12, 2008, the Company had received notices of events of default from five different Reverse Repurchase Agreement counterparties, with an aggregate amount of $1.8 billion in outstanding
obligations to these counterparties (all of which were subsequently cured). On March 17, 2008, the Company entered into a 364-day Override Agreement with five of its remaining Reverse Repurchase Agreement and Forward Auction Agreement
counterparties. As discussed in Note 2, additional liquidity issues exist due to ambiguities that arose with regard to the interpretations of the Override Agreement related to margin calls on downgraded securities and other matters. Pursuant to the
Override Agreement, the Company was required to raise $1 billion in new capital.
The Company completed a Financing Transaction through the
private placement of an aggregate of up to $1.35 billion in principal amount of Senior Subordinated Secured Notes, Initial Warrants, Escrow Warrants and Additional Warrants and participations in a Principal Participation Agreement on March 31,
2008. (See Note 2 for further discussion of this transaction.) Of the $1.35 billion amount, $200.0 million was deposited in escrow, of which approximately $11.4 million was released on June 30, 2008, and because the Company was unable to
complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the escrow was terminated in accordance with its terms and, as a result, the approximately $188.6 million remaining in escrow was released to the escrow
subscribers. The decrease in the rate of interest payable on the Senior Subordinated Secured Notes, as discussed in Note 2, and the termination of the Principal Participation Agreement are dependent upon the following events (the Additional
Financing Conditions):
|
(1)
|
Shareholder approval of a charter amendment to increase the number of authorized shares of capital stock from 500 million to 4 billion shares (which was
obtained on June 12, 2008),
|
|
(2)
|
Completion of a successful Exchange Offer and Consent Solicitation for at least 66
2
/
3
% of the outstanding shares of each series of Preferred Stock (which is equivalent to 66
2
/
3
% of the aggregate liquidation preference of the outstanding shares of each series of Preferred Stock) by December 31, 2008. Completion of a successful Exchange Offer and Consent
Solicitation requires approval from the holders of the Companys voting stock (which was obtained on June 12, 2008) and each series of Preferred Stock of an amendment to the Companys charter to modify the terms of each series of
Preferred Stock to eliminate certain rights of the Preferred Stock. The Company commenced the Exchange Offer and Consent Solicitation on July 23, 2008 (see Note 16 Subsequent Events), and
|
|
(3)
|
Issuance of Additional Warrants to the investors by December 31, 2008.
|
If the Company satisfies these three conditions by December 31, 2008, then it can terminate the Principal Participation Agreement by issuing to each Participant its prescribed share of the
Additional Warrants. If the Company does not satisfy these conditions by December 31, 2008, the PPA remains in effect. See discussion of the terms of the PPA in Note 2.
The Company believes that the satisfaction of the Additional Financing Conditions is vital for the Company to resume normalized business operations. The uncertainty as to the outcome of these
events, the available sources of liquidity and the availability of financing for certain of the Companys ARM Assets continue to raise substantial doubt about the Companys ability to continue as a going concern for the foreseeable future.
8
Note 2. Override Agreement and Financing Transaction
Override Agreement
On March 17, 2008, the Company entered into an Override Agreement with five
of its six remaining Reverse Repurchase Agreement and Forward Auction Agreement counterparties. Pursuant to the terms of the Override Agreement, the maturity date of all the existing Reverse Repurchase Agreements with the five counterparties is
deemed to be March 16, 2009, the termination date of the Override Agreement, and each of the counterparties agreed that it will not invoke margin calls or increase margin requirements beyond contractually specified levels during the term of the
Override Agreement. The interest rate on all existing Reverse Repurchase Agreements financing AAA and AA-rated mortgage-backed securities will be reset monthly and will not exceed one-month LIBOR plus 35 basis points. Interest rates on Reverse
Repurchase Agreements financing other than AAA and AA-rated mortgage-backed securities are not affected by the Override Agreement. During the term of the Override Agreement, each of the counterparties will collect all principal and interest payments
on the securities collateralizing its Reverse Repurchase Agreements and will apply 100% of the principal payments and generally 20% of the interest payments to reduce the balance of the outstanding obligations under its Reverse Repurchase Agreements
payable to the respective counterparties. If the Reverse Repurchase Agreement balances are not reduced to specified levels at each month end, the portion of interest payments applied to reduce those balances will be increased from 20% to 30% until
those balances are reduced to the specified levels. Each of the counterparties is obligated to return the amounts that were not applied to reduce the outstanding obligations under such financing agreements collected by it to the Company. The
counterparties to the Override Agreement are not obligated to return to the Company any collateral if the value of the collateral securing their obligations increases during the term of the Override Agreement. Any performance-based incentive fee
earned by the Manager during the term of the Override Agreement will be accrued, but not paid to the Manager until the Override Agreement terminates. Until the Override Agreement terminates, an amount equal to the incentive fee earned will be paid
to the counterparties to the Override Agreement and will be applied by them to reduce the Companys obligations to the counterparties under the Reverse Repurchase Agreements.
The covenants of the Override Agreement include, but are not limited to, the following:
|
(1)
|
the Company receiving proceeds of at least $1 billion of new capital by March 31, 2008,
|
|
(2)
|
the Companys payment of all unmet margin calls and certain other specified amounts by March 31, 2008 (which totaled $524.5 million),
|
|
(3)
|
the Company establishing and maintaining a Liquidity Reserve Fund of $350.0 million in the manner specified in the Override Agreement,
|
|
(4)
|
the Companys granting of a security interest to the counterparties to the Override Agreement in (a) the Liquidity Reserve Fund and the Companys
MSRs and (b) the collateral securing the Companys obligations to the counterparties under the Reverse Repurchase Agreements and the Forward Auction Agreements to secure all of the Companys obligations to the counterparties to the
Override Agreement, whether under the Reverse Repurchase Agreements and the Forward Auction Agreements or otherwise,
|
|
(5)
|
the Company issuing Override Warrants to the counterparties to the Override Agreement,
|
|
(6)
|
the Company not entering into any new transactions under existing, or entering into any new, Reverse Repurchase Agreements, secured lending agreements or Forward
Auction Agreements or delivering additional collateral thereunder other than as provided in the Override Agreement,
|
|
(7)
|
the Company suspending its dividend on Common Stock for the term of the Override Agreement, except that the Company may declare a dividend in December 2008 for
payment in January 2009 of up to 87% of its taxable income for 2008,
|
|
(8)
|
the Company suspending payment of its dividend on Preferred Stock if the amount in the Liquidity Reserve Fund falls below specified levels,
|
|
(9)
|
the Companys termination of its Reverse Repurchase Agreements with its one remaining counterparty not party to the Override Agreement by May 16, 2008
in an orderly manner, and
|
|
(10)
|
the Companys reducing its obligations under the Reverse Repurchase Agreements with one of the counterparties to the Override Agreement to a specified
level.
|
The Company believes it was in compliance with these covenants of the Override Agreement as of the filing date.
The counterparties may terminate the Override Agreement if the Company voluntarily or involuntarily becomes a debtor in a bankruptcy
proceeding, there is a Change In Control or it breaches certain of its covenants under the Override Agreement. When the Override Agreement terminates on March 16, 2009, or earlier as described above, the counterparties will again have the right
to exercise all of their other rights under the Reverse Repurchase Agreements, including repayment, and Forward Auction Agreements.
9
As a condition to the Override Agreement, the Company agreed to terminate its Reverse Repurchase
Agreements with its one remaining counterparty not party to the Override Agreement by May 16, 2008 in an orderly manner. As of May 16, 2008, all of the $471.1 million Reverse Repurchase Agreements with that counterparty had been terminated
through the sale of assets and financing of the remaining assets with a counterparty to the Override Agreement, resulting in a net gain of $13.0 million.
Beginning in July 2008, the Override Agreement counterparties began to make a series of margin calls as a result of a series of Rating Agency downgrades of mortgage-backed securities owned by the Company and financed
by the Override Agreement counterparties. In the context of those downgrades and their associated margin calls, some ambiguities arose with regard to the interpretations of the Override Agreement as it related to margin calls on downgraded
securities and other matters. In trying to resolve these issues, the Company and the Override Agreement counterparties entered into a series of negotiations to attempt to resolve the interpretative issues. And, as negotiations continued and
downgrades continued to be announced, the counterparties to the Override Agreement began to withhold funds payable to the Company under both the Override Agreement and the whole loan financing facility. On August 21, 2008, and in consideration
of ongoing negotiations with the Override Agreement counterparties continuing in good faith, the Company used amounts in the Liquidity Reserve Fund to pay margin calls totaling approximately $219.0 million based on its interpretation of the Override
Agreement, which was less than the amount owing based on downgrades under the counterparties interpretation of the Override Agreement. As of September 30, 2008, the Company had identified additional downgrades in its portfolio with a
current face of $631.0 million and a carrying value of $352.2 million which would have resulted in an additional margin call of $56.7 million under the Companys interpretation. Since September 30, 2008, and up to November 3, 2008,
the Company has received additional downgrades on mortgage-backed securities held in its portfolio and financed under the Override Agreement. Those downgrades had a current face of $510.3 million and a carrying value of $345.1 million and could
result in additional margin calls under the Companys interpretation of the Override Agreement of $138.6 million. In total, the Company believes an additional $195.3 million in margin calls could result from downgrades subsequent to
August 21, 2008. The Company has not paid any amounts on these potential additional margin calls to the counterparties to the Override Agreement.
There can be no assurance that active negotiations with the counterparties to the Override Agreement will continue or that an agreement will be reached. And, if the Company is unable reach a final agreement on these
interpretative issues, the counterparties to the Override Agreement may attempt to terminate the Override Agreement prior to March 16, 2009, in which case certain of our obligations under our Reverse Repurchase Agreements, securities lending
and Forward Auction Agreements will become immediately due and payable, which would have a material adverse effect on the Company as the Company does not have the wherewithal to pay any shortfalls resulting from the liquidation or sale of the
underlying collateral.
Financing Transaction
Senior Subordinated Secured Notes
On March 31, 2008, the Company raised an aggregate of up to $1.35 billion from the
sale of Senior Subordinated Secured Notes, Initial Warrants, Escrow Warrants and Additional Warrants and interests in a Principal Participation Agreement in a private placement to qualified institutional buyers under Section 4(2) of the
Securities Act of 1933, as amended, with MatlinPatterson as the lead investor. The Company received $1.15 billion of gross proceeds from the Financing Transaction with the remaining $200.0 million deposited in an escrow account. Because the Company
was unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the escrow was terminated in accordance with its terms and, as a result, the approximately $188.6 million which was then held in escrow was
released to the escrow subscribers.
The Senior Subordinated Secured Notes had an initial aggregate principal balance of $1.15 billion and
an initial annual interest rate of 18% which will be reduced to 12% upon satisfaction of the Additional Financing Conditions. The Senior Subordinated Secured Notes mature on March 31, 2015 and are not subject to either optional redemption by
the Company or mandatory redemption by the note holders except that, the holders of the Senior Subordinated Secured Notes have the right to require the Company to repurchase the Senior Subordinated Secured Notes for 101% of the principal amount,
plus accrued and unpaid interest, upon the occurrence of a Change In Control of the Company. The Senior Subordinated Secured Notes are secured by a lien junior to the lien securing the Senior Notes on the stock of certain of TMAs subsidiaries,
TMHLs MSRs and the interest payments due from the mortgage-backed securities underlying the Override Agreement after termination of the Override Agreement and after paying interest expense. In addition, certain of TMAs subsidiaries have
guaranteed payment of the Senior Subordinated Secured Notes on a senior subordinated basis.
10
Due to the Companys cash constraints and the unresolved issues relating to the Override Agreement,
the Company requested and received the consent of approximately 98.6% of the holders of the outstanding Senior Subordinated Secured Notes to pay the September 30, 2008 interest payment due on the Senior Subordinated Secured Notes in the form of
additional Senior Subordinated Secured Notes in lieu of a cash payment (the PIK Consent). As a result, $102.0 million principal amount of Senior Subordinated Secured Notes (the PIK Notes) was issued to such holders.
In addition, as consideration for the PIK Consent, consenting holders received a consent fee, at their election, of either (i) 6.5217
shares of Common Stock in respect of each $1,000 principal amount of the Senior Subordinated Secured Notes (the Consent Shares) or (ii) additional Senior Subordinated Secured Notes with an aggregate principal amount equal to the
market value of the total number of Consent Shares on the date of issuance to which such holders otherwise would have been entitled (the Consent Notes). Approximately 60% of the consenting holders elected to receive Consent Notes in the
aggregate principal amount of $13.5 million, and approximately 40% of the consenting holders elected to receive 2,954,422 Consent Shares in the aggregate. The Consent Shares, recorded as additional paid-in capital at September 30, 2008, and
Consent Notes, recorded as a liability at September 30, 2008, were issued as of October 1, 2008.
Warrants
The purchasers of the Senior Subordinated Secured Notes received Initial Warrants on March 31, 2008. Additionally, the Escrow Warrants were placed in
escrow until the earlier of the satisfaction of the Additional Financing Conditions or September 30, 2008. Because the Company was unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the Escrow
Warrants were released pro rata to the investors in the Financing Transaction according to their aggregate principal amount of the Senior Subordinated Secured Notes. The Initial Warrants and the Escrow Warrants, in the aggregate, are exercisable for
shares of Common Stock equal to approximately 39.6% of the shares of Common Stock outstanding on a fully diluted basis as of April 11, 2008.
Exchange Offer and Consent Solicitation
On July 23, 2008, the Company commenced the Exchange Offer and Consent
Solicitation for all of its outstanding Preferred Stock. On October 1, 2008, the Company amended the Exchange Offer and Consent Solicitation to (i) extend the expiration of the Exchange Offer and Consent Solicitation, (ii) eliminate
the $5.00 in cash consideration previously offered for each share of preferred stock and (iii) change the number of shares of Common Stock of the Company offered for each share of Preferred Stock to three shares (after giving effect to the
Reverse Split), or up to 132,042,645 shares of Common Stock in the aggregate assuming 100% participation in the Exchange Offer and Consent Solicitation. On September 30, 2008, the Company received the consent of a majority of the participants
in the Principal Participation Agreement to permit the amended Exchange Offer and Consent Solicitation to satisfy the Additional Financing Conditions and to extend the deadline by which the Company must successfully complete the Exchange Offer and
Consent Solicitation in order to satisfy the Additional Financing Conditions to December 31, 2008. On October 31, 2008, the Company further extended the expiration of the Exchange Offer and Consent Solicitation until 5:00 p.m., New York
City time, on November 19, 2008.
The Exchange Offer and Consent Solicitation
will satisfy the Additional Financing Conditions if the Company purchases at least 66
2
/
3
% of the outstanding shares of each
series of Preferred Stock, and shareholders approve an amendment to the Companys charter to modify the terms of each series of Preferred Stock, including the elimination of dividends on Preferred Stock. Pursuant to the terms of the Financing
Transaction, the Company must use its best efforts to successfully complete the Exchange Offer and Consent Solicitation but is under no legal obligation to successfully complete the Exchange Offer and Consent Solicitation. As of November 3,
2008, the Company had received tenders for 71.0% of the outstanding shares of its Series C Preferred Stock, 73.3% of the outstanding shares of its Series D Preferred Stock, 75.1% of the outstanding shares of its Series E Preferred Stock, 66.2% of
the outstanding shares of its Series F Preferred Stock, and approximately 68.2% of the aggregate outstanding shares of Preferred Stock. The shares of Preferred Stock tendered as of November 3, 2008 remain subject to withdrawal until acceptance
by the Company of such shares of Preferred Stock for exchange (all in accordance with the terms of the Exchange Offer and Consent Solicitation).
11
Principal Participation Agreement
The Company and the investors in the Senior Subordinated Secured Notes have also entered into the Principal Participation Agreement whereby the investors will receive monthly payments in the amount of the principal
payments received on the Companys portfolio of mortgage-backed securities underlying the Override Agreement after deducting principal payments due under the financing agreements that relate to such assets. Investors will be entitled to receive
these payments beginning upon the expiration of the Override Agreement on March 16, 2009 and continuing through March 31, 2015. On March 31, 2015, the investors will receive the fair market value of the assets covered by the Principal
Participation Agreement after deducting the then outstanding balances of the financings that relate to such assets. The Principal Participation Agreement will terminate upon satisfaction of the Additional Financing Conditions.
On March 31, 2008, the Manager and certain shareholders of the Manager signed the TMAC Participation Agreement, whereby MP TMAC LLC, an affiliate of
MatlinPatterson, acquired a 75% participation interest in the base management fee, net of reasonable expenses, and gross proceeds of the performance-based incentive fee and in consideration, MP TMAC LLC granted the Manager the option to acquire the
aggregate of 2.5264% of the fully diluted authorized and issued shares of Common Stock (not to exceed 7,811,379 shares of Common Stock) for an exercise price of $0.01 per share. This option will be exercisable upon and from time to time after the
satisfaction of the Additional Financing Conditions. The Manager has transferred this option to the counterparties to the Override Agreement. MP TMAC LLC has agreed to offer each other investor (other than its affiliates) the opportunity to
participate on the same terms and conditions as MP TMAC LLC in the TMAC Participation Agreement on a pro rata basis based on the amount of such investors total investment under the Financing Transaction of $1.35 billion. The Company is in
preliminary negotiations to restructure the TMAC Participation Agreement, however the Company has not determined what the terms of an alternative arrangement would be and no assurance can be given that the TMAC Participation Agreement will be
restructured.
Accounting for the Override Agreement and the Financing Transaction
Override Agreement and Override Warrants
The Company determined that the terms of the Override
Agreement do not require it to be accounted for as a sale of the assets, a troubled debt restructuring or a substantial modification of the original debt based on a comparison of the cash flows under the Override Agreement to the cash flows under
the original debt and after considering the incremental costs of the Override Agreement. Therefore, no gain or loss resulted from the transaction. The Override Warrants issued by the Company to counterparties of the Override Agreement are part of
the consideration paid to the Override Agreement counterparties. Therefore the fair value of the Override Warrants of $25.1 million at March 31, 2008 was recorded in Shareholders Deficit on the Condensed Consolidated Balance Sheets. Of
that amount, $20.7 million, the amount related to Override Warrants issued to Reverse Repurchase Agreement counterparties, was deferred and recorded as a debt discount on Reverse Repurchase Agreements on the Condensed Consolidated Balance Sheets and
$4.5 million, the amount related to Override Warrants issued to Forward Auction Agreement counterparties, was recorded as an asset in Other Assets on the Condensed Consolidated Balance Sheets. The debt discount related to the Override Warrants
issued to Reverse Repurchase Agreement counterparties is being amortized over the term of the Override Agreement using the interest method. The asset related to the Override Warrants issued to the Forward Auction Agreement counterparties is
amortized over the term of the Override Agreement on a straight-line basis. The Company incurred $472,000 for third-party costs associated with the Override Agreement.
During the term of the Override Agreement, each of the counterparties collects all principal and interest payments on the securities collateralizing its Reverse Repurchase Agreements and will apply 100% of the
principal payments and generally 20% of the interest payments to reduce the balance of the outstanding obligations under its Reverse Repurchase Agreements payable to the respective counterparties. In addition, all amounts held or paid to the
counterparties for margin calls or cash collateral have been applied to the outstanding obligations under the Reverse Repurchase Agreements payable to the respective counterparties.
Option to acquire 7,811,379 shares of Common Stock from MP TMAC LLC
The fair value of this option of
$36.5 million at March 31, 2008 was considered a capital contribution to the Company by the Manager and has been recorded in Shareholders Deficit on the Condensed Consolidated Balance Sheets with $30.0 million, the amount related to the
option transferred to Reverse Repurchase Agreement counterparties, deferred and recorded as a debt discount on Reverse Repurchase Agreements on the Condensed Consolidated Balance Sheets and $6.5 million, the amount related to the option transferred
to Forward Auction Agreement counterparties, recorded as an asset in Other Assets on the Condensed Consolidated Balance Sheets. The debt discount related to the option transferred to Reverse Repurchase Agreement counterparties is being amortized
over the term of the Override Agreement using the interest method. The asset related to the option transferred to the Forward Auction Agreement counterparties will be amortized over the term of the Override Agreement on a straight-line basis. The
Company is in preliminary negotiations to restructure the TMAC Participation Agreement, however the Company has not determined what the terms of an alternative arrangement would be and no assurance can be given that the TMAC Participation Agreement
will be restructured.
12
Financing Transaction
The initial $1.15 billion in Financing Transaction proceeds was allocated to the Senior Subordinated Secured Notes, the Initial Warrants and Escrow Warrants, the commitment for the escrowed funds, and the PPA and
Additional Warrant Liability based on the relative fair values of these elements. As of March 31, 2008, $494.4 million was initially allocated to the Senior Subordinated Secured Notes, $55.7 million was allocated to the Initial Warrants and
Escrow Warrants, $592,500 was allocated to the commitment for the escrowed funds and $600.5 million was allocated to the PPA and Additional Warrant Liability. The Initial Warrants and Escrow Warrants are recorded in Shareholders Deficit, net
of $3.0 million in issuance costs. The Company recorded an asset of $592,500 on March 31, 2008 related to the commitment of the investors to lend up to the amount of the escrowed funds in exchange for additional Senior Subordinated Secured
Notes to be issued by the Company if the Additional Financing Conditions occurred. Because the Company was unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the escrow was terminated in accordance
with its terms and, as a result, the approximately $188.6 million which was then held in escrow was released to the escrow subscribers and the asset related to the commitment was written off.
PPA and Additional Warrant Liability
As a
derivative, the PPA and Additional Warrant Liability is required to be marked to fair value at the end of each period. At March 31, 2008, the adjustment to the PPA and Additional Warrant Liability after the initial allocation referenced above
was an increase to the liability of $520.5 million to a total of $1.1 billion, with $520.5 million recorded as PPA and Additional Warrant Liability fair value changes in the Condensed Consolidated Income Statements. The Company elected the fair
value option in accounting for the Senior Subordinated Secured Notes because it believes that it more accurately reflects the economic substance of the transaction at inception and on an ongoing basis. With the passage of time, a cost-based measure
would become irrelevant in assessing the Companys financial performance. The Company believes the fair value option provides users of the financial statements with more relevant and understandable information to better assess the
Companys financing costs and opportunities. At March 31, 2008, the $428.6 million difference between the initial allocation and the fair value of the Senior Subordinated Secured Notes of $923.0 million was recorded as a Senior
Subordinated Secured Notes fair value change in the Condensed Consolidated Income Statements. The amortization of the difference between the face amount of the initial Senior Subordinated Secured Notes of $1.15 billion and the March 31, 2008
fair value of $923.0 million is classified as interest expense, along with the accrual of the coupon interest, and is amortized over the term of the Senior Subordinated Secured Notes.
Fair Value of Financing Transaction Elements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Initial Fair
Value
|
|
Relative
Fair
Value
|
|
Reported
March 31,
2008
|
|
Reported
June 30,
2008
|
|
Fair Value of
PIK and
Consent Notes
|
|
Change
|
|
|
Reported
September 30,
2008
|
Senior Subordinated Secured Notes Payable
|
|
$
|
923,021
|
|
$
|
494,439
|
|
$
|
923,021
|
|
$
|
899,537
|
|
$
|
37,166
|
|
$
|
(529,739
|
)
|
|
$
|
406,964
|
PPA and Additional Warrant Liability
|
|
|
1,121,021
|
|
|
600,502
|
|
|
1,121,021
|
|
|
584,139
|
|
|
|
|
|
(160,784
|
)
|
|
|
423,355
|
Initial and Escrow Warrants Liability
|
|
|
103,892
|
|
|
55,652
|
|
|
52,681
|
|
|
7,805
|
|
|
|
|
|
|
|
|
|
7,805
|
Commitment Fee Asset
|
|
|
593
|
|
|
593
|
|
|
593
|
|
|
593
|
|
|
|
|
|
(593
|
)
|
|
|
|
The difference between the fair value of the Senior Subordinated Secured Notes of $923.0 million
at March 31, 2008 and the fair value of $407.0 million at September 30, 2008 was recorded as Senior Subordinated Secured Notes fair value changes in the Condensed Consolidated Income Statements. The difference between the fair value of the
PPA and Additional Warrant Liability of $1.1 billion at March 31, 2008 and the fair value of $423.4 million at September 30, 2008 was recorded as PPA and Additional Warrant Liability fair value changes in the Condensed Consolidated Income
Statements.
Note 3. Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information.
In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the consolidated financial statements have been included. The
operating results for the quarter ended September 30, 2008 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2008. The interim financial information should be read in conjunction
with Thornburg Mortgage, Inc.s 2007 Annual Report on Form 10-K/A and Form 8-K filed July 30, 2008.
13
Basis of presentation and principles of consolidation
The consolidated financial statements include the accounts of TMA, TMD, TMCR, TMFI, TMHS, TMHL, TMF and Adfitech. TMD, TMCR, TMFI and TMF
are qualified REIT subsidiaries and are consolidated with TMA for financial statement and tax reporting purposes. TMHL, Adfitech and TMHS are taxable REIT subsidiaries and are consolidated with TMA for financial statement purposes but are not
consolidated with TMA for tax reporting purposes. All material intercompany accounts and transactions are eliminated in consolidation. These interim consolidated financial statements reflect an immaterial reclassification in the Companys prior
period financial statements. As of December 31, 2007 the Company presented approximately $360 million held for sale loans in ARM Loans Collateralizing Debt. During the quarter ended March 31, 2008, the Company determined that these amounts
would be more appropriately presented in Securitized ARM Loans. The Company has reflected this immaterial reclassification in the accompanying consolidated financial statements.
Reverse Stock Split
On September 26, 2008, the Company effected a 1-for-10
Reverse Split of the Common Stock. As a result of the Reverse Split, every 10 shares of (old) Common Stock, par value $0.01 per share, which were outstanding as of September 26, 2008, the effective date, were combined into one share of (new)
Common Stock, par value of $0.01 per share. All historical numbers relating to shares of Common Stock have been adjusted to reflect the 1-for-10 Reverse Split.
Adoption of SFAS 157 Fair Value Measurements
The Company adopted SFAS 157, Fair Value
Measurements as of January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around fair value and establishes a fair value hierarchy based on whether the inputs to those valuation techniques are observable or
unobservable. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of
judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the
Companys market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1
Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value. For some financial instruments or in certain market conditions, observable inputs may not be available. For example, beginning in the second half of 2007, certain markets became illiquid, and some key
inputs used in valuing certain financial instruments were unobservable. When and if these markets are liquid, the valuation of these financial instruments will use the related observable inputs available at that time from these markets. Certain of
the inputs used in valuing the Financing Transaction are not observable, such as the estimated probability of certain events.
The adoption of SFAS 157 for financial assets and financial liabilities did not have a significant impact on the Companys consolidated financial statements.
Other accounting changes and other accounting developments
In February 2007, the
FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. Once a company chooses to
report an item at fair value, changes in fair value would be reported in earnings at each reporting date. SFAS 159 became effective for the Company on January 1, 2008. On January 1, 2008, the Company did not elect to measure any of its
assets or liabilities at fair value that were not previously carried at fair value. In connection with the Financing Transaction, the Company elected to measure the Senior Subordinated Secured Notes at fair value in accordance with SFAS 159.
In April 2007, the FASB issued FASB Staff Position FASB Interpretation No. 39-1, Amendment of FASB Staff
Position FASB Interpretation No. 39. FASB Interpretation No. 39-1 amends certain paragraphs of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contractsan interpretation of Accounting Research
Bulletin Opinion No. 10 and SFAS 105 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for
derivative instruments executed with the same counterparty under the same master netting arrangement. The Company has not elected to offset fair value amounts recognized for derivative instruments under master netting arrangements. FASB
Interpretation No. 39-1 became effective for the Company on January 1, 2008, and did not have a material impact on the Companys consolidated financial statements.
14
In November 2007, the SEC issued Staff Accounting Bulletin 109. Staff Accounting Bulletin
109 supersedes Staff Accounting Bulletin 105, Application of Accounting Principles to Loan Commitments. It clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings. However, it retains the guidance in Staff Accounting Bulletin 105 that internally-developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment. The guidance is effective on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109 became effective for the Company on
January 1, 2008. SAB 109 did not have a material impact on the Companys consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interest in Consolidated Financial Statementsan Amendment of Accounting Research Bulletin No. 51. SFAS 160 amends Accounting Research Bulletin 51 to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160 changes the way the consolidated income statement is presented. It requires consolidated net income or loss to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income or loss attributable to the parent and to the noncontrolling interest. SFAS 160
will become effective for the Company on January 1, 2009, and is not expected to have a material impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations. SFAS 141(R) retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141(R) requires costs incurred to effect the acquisition and restructuring costs to be recognized separately from
the acquisition. SFAS 141(R) applies to business combinations for which the acquisition date is on or after January 1, 2009.
In March 2008, the FASB issued SFAS 161, Disclosures About Derivative Instruments and Hedging Activities, an Amendment to FASB Statement No. 133 which is intended to enhance current disclosure to (1) better convey the
purpose of derivatives in terms of the risks an entity is intending to manage, (2) provide a more complete picture of the location in an entitys financial statements of both the derivative positions existing at period end and the effect
of using derivatives during the reporting period, (3) provide information on the potential effect on an entitys liquidity from using derivatives, and (4) help users of the financial statement locate important information about
derivative instruments. SFAS 161 will become effective for the Company on January 1, 2009.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates fair value.
Restricted cash and cash equivalents
Restricted cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less that are
held by counterparties as collateral for Reverse Repurchase Agreements and Hedging Instruments. The carrying amount of restricted cash and cash equivalents approximates fair value.
Liquidity Reserve Fund
The Liquidity Reserve Fund was established pursuant to the
Override Agreement which requires the Company to establish and maintain a securities account with a market value of $350.0 million in order to provide additional collateral to protect against further deterioration of mortgage-backed securities
prices. The Liquidity Reserve Fund can also be used to meet haircut changes on downgraded securities or, at the Companys discretion, in margin requirements as a result of credit rating changes. Amounts applied to meet these haircut or margin
requirements continue to be counted as part of the $350.0 million Liquidity Reserve Fund. A portion of the Liquidity Reserve Fund equal to 5% of the principal balance of Reverse Repurchase Agreements subject to the Override Agreement (the Liquidity
Maintenance Amount) must be invested in cash, treasuries or agency pass-through securities and up to $200.0 million in market value of mortgage-backed securities issued in connection with the Companys securitizations, provided that the market
value of such securities that are rated below Investment Grade shall not exceed one-third of the Liquidity Maintenance Amount. If the Company fails to maintain the Liquidity Reserve Fund in accordance with the terms of the Override Agreement, the
Override Agreement may be terminated. At September 30, 2008, $239.7 million of the Liquidity Reserve Fund has been paid to the Override Agreement counterparties, with $113.5 million, including $3.2 million of unrestricted interest received,
remaining in cash and cash equivalents. Upon termination of the Override Agreement, the Company will use any remaining proceeds in the Liquidity Reserve Fund to cover any market price or haircut deficiencies that exist at that time. After that, the
Company will no longer be required to maintain the Liquidity Reserve Fund.
15
ARM Assets
The Companys ARM Assets are comprised of Purchased ARM Assets and ARM Loans. All of the Companys ARM Assets are either Traditional ARMs or Hybrid ARMs.
Purchased ARM Assets are composed mainly of ARM securities and Purchased Securitized Loans acquired from third parties. The Company has
designated all of its Purchased ARM Assets as available-for-sale. Therefore, they are reported at fair value, with unrealized gains reported in OCI as a separate component of shareholders (deficit) equity. Any unrealized loss deemed to be
other-than-temporary is recorded as a realized loss in the Condensed Consolidated Income Statements. Realized gains or losses on the sale of Purchased ARM Assets are recorded in the Condensed Consolidated Income Statements at the time of sale and
are determined by the difference between net sale proceeds and the amortized cost, including any previously recognized other-than-temporary impairment, of the securities. At September 30, 2008, all unrealized losses on Purchased ARM Assets are
considered other-than-temporary impairments.
Purchased Securitized Loans are third-party loan securitizations in which the
Company initially purchased all principal classes of the securitizations, including the subordinated classes. In August 2007 and March 2008, the Company sold the majority of the AAA-rated principal classes and no longer holds all principal classes
originally purchased, yet maintains the credit risk indicative of holding all of the classes up to the value of the Companys securities. One of the Companys objectives in its acquisition of Purchased Securitized Loans was to obtain
assets that were Qualifying Interests for purposes of maintaining the Companys exemption from the Investment Company Act. Due to the sale of certain principal classes in 2007 and 2008, none of the Companys Purchased Securitized Loans at
September 30, 2008 are Qualifying Interests. However, all of the Companys ARM Loans are Qualifying Interests and enable the Company to maintain its exemption from the Investment Company Act.
ARM Loans Collateralizing Debt are designated as held-for-investment as the Company has the intent and ability to hold them for the
foreseeable future or until maturity. ARM Loans classified as held-for-investment are carried at their unpaid principal balances, including unamortized premium or discount, unamortized loan origination costs, unamortized deferred loan origination
fees, and allowance for loan losses in excess of other-than-temporary impairment losses recognized on the related Securitized ARM Loans. Securitized ARM Loans would absorb credit losses before the related ARM Loans Collateralizing Debt. At
September 30, 2008, Securitized ARM Loans and ARM loans held for sale or securitization were classified as held for sale because the Company may not have the ability to hold them until maturity. ARM Loans classified as held for sale are carried
at the lower of cost or fair value. Changes in fair value are recognized as valuation allowance adjustments; however, gains are only recognized to the extent the carrying value does not exceed the cost basis. ARM Loans are accounted for as loans in
accordance with SFAS 65, Accounting for Certain Mortgage Banking Activities, as amended.
Securitized ARM Loans
are loans originated or acquired by the Company, securitized by the Company into sequentially rated classes and financed with Reverse Repurchase Agreements. ARM Loans Collateralizing Debt are loans originated or acquired by the Company and
securitized by the Company into sequentially rated classes. In general, the Company retains all classes of the securitized loans and finances the AAA classes by selling those interests to AAA investors and it finances the remaining classes using
Reverse Repurchase Agreements. The entire transaction is accounted for as a financing, not a sale of assets. The principal balance associated with the AAA portion of the classes is recorded as loans in ARM Loans Collateralizing Debt and the
remaining classes are recorded in Securitized ARM Loans.
In accordance with SFAS 140, loan securitizations resulting in
Securitized ARM Loans and ARM Loans Collateralizing Debt are accounted for as secured borrowings under paragraphs 9(a)-9(c) of SFAS 140 because (1) the Company has the unilateral ability to cause the return of transferred assets and, therefore,
has maintained effective control over the transferred assets and (2) the transactions are completed through special purpose entities that do not meet the requirements of SFAS 140 to be considered qualified special purpose entities.
ARM loans held for sale or securitization are loans the Company has acquired or originated and may be securitized and retained by the
Company or sold, depending on market conditions.
Interest income on ARM Assets is accrued based on the outstanding
principal amount and contractual terms of the assets. Premiums and discounts associated with the purchase of the ARM Assets are amortized through interest income in accordance with SFAS 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases and FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application of Certain Investments. For
all ARM assets except ARM Loans securitized after December 31, 2007, premiums and discounts are amortized on the pool method over the estimated lives of the assets considering the actual and future estimated prepayments and interest
rates of the assets using the interest method in determining an effective yield. Similarly, for ARM Assets with other-than-temporary impairment, which result in a new cost basis, and for which the Company believes it can recover the principal
balance; the discounts or reduced premiums created by the other-than-temporary
16
impairment are amortized in a prospective manner on the pool method over the estimated lives of the assets considering the actual and future
estimated prepayments and interest rates of the assets using the interest method in determining an effective yield. Estimating future lifetime prepayments and estimating the remaining lives of the Companys ARM Assets requires management
judgment, which involves consideration of possible future interest rate environments and an estimate of how borrowers will behave in those environments. The actual lives of the ARM Assets could be longer or shorter than the lives estimated by
management. Premiums and discounts associated with ARM Loans securitized by the Company after December 31, 2007 are amortized on the loan level method which does not consider the impact of possible prepayments. Loan origination
fees, net of certain direct loan origination costs and the cost of securitizing ARM Loans designated as held-for-investment, are deferred and amortized as an interest income yield adjustment over the life of the related loans using the effective
yield method.
MSRs
Effective January 1, 2006 with the adoption of SFAS 156, Accounting for Servicing of Financial Assets, the Company does not capitalize any MSRs in connection with securitizations accounted for as secured borrowings under
SFAS 140. The Company did not elect to measure its previously existing servicing assets at fair value and continues to measure them at the lower of cost or fair value. Prior to January 1, 2006, MSRs were capitalized upon the securitization of
ARM Loans as required by GAAP by allocating a portion of the cost basis of the securitized loans to the estimated value of the servicing asset related to the loans retained by the Company as collateral in securitizations. MSRs are included in Other
assets on the Condensed Consolidated Balance Sheets. The servicing revenue, net of servicing costs, MSR amortization and impairment charges, is recorded as Servicing income, net, in the Condensed Consolidated Income Statements.
MSRs are amortized in proportion to, and over the expected period of, the estimated future net servicing income. MSRs are carried at the
lower of cost or fair value at the risk strata level and are periodically evaluated for impairment based on fair value, which is determined using a discounted future cash flow model that considers portfolio characteristics and assumptions regarding
prepayment speeds, delinquency rates of the serviced loans and other economic factors. Estimating prepayments and estimating the remaining lives of the Companys ARM Assets requires management judgment, which involves consideration of possible
future interest rate environments and an estimate of how borrowers will behave in those environments. The actual lives could be longer or shorter than the amount estimated by management. For purposes of evaluating and measuring impairment of MSRs,
the Company stratifies its portfolio on the basis of predominant risk characteristics, including loan type (Traditional ARM or Hybrid ARM).
Credit risk
and reserve for loan losses
As described in Note 1, there is substantial doubt about the Companys ability to
continue as a going concern. In addition, the Company may not have the ability to hold its Securitized ARM Loans and ARM loans held for sale or securitization to maturity. Accordingly, the Company has recognized the unrealized losses in its
Securitized ARM Loans and ARM loans held for sale or securitization portfolio. Therefore, the fair values of such loans presented in the Condensed Consolidated Balance Sheets reflect all expected credit losses.
In order to analyze the Companys expected credit losses in relation to its recognized unrealized losses, the Company performs an
analysis of its delinquent loans. The estimated credit losses are based on a variety of factors including, but not limited to, current economic conditions, the potential for natural disasters, loan portfolio composition, delinquency trends, credit
losses to date on underlying loans and remaining credit protection. The Company would record an allowance for loan losses if the expected credit losses exceed the amount of losses previously recorded through other-than-temporary impairment or lower
of cost or fair value adjustments. Additionally, once a loan is 90 days or more delinquent, or a borrower declares bankruptcy, the Company adjusts the value of its accrued interest receivable to what it believes to be collectible and stops accruing
interest on that loan.
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at the lower of cost basis or fair value at the date of foreclosure, less estimated costs of disposition. Fair value is based on valuation techniques applied at the date of acquisition, less estimated selling costs. The excess of the
recorded loan balance over the estimated fair value of the property at the time of acquisition is charged to the nonaccretable discount or lower-of-cost or fair value adjustment. Any subsequent write downs to fair value less cost to sell are charged
to the nonaccretable discount or lower-of-cost or fair value adjustment in the period of the decline in value. Any increase in fair value less cost to sell is recognized as an impairment reduction. Operating expenses of such properties and gains and
losses on their disposition are included in noninterest income and expense.
The Companys Purchased Securitized Loans
include credit loss classes of third-party ARM loan securitizations. When the Company acquired the classes that were below Investment Grade, the purchase price of those securities generally included a discount for probable credit losses. This
discount was recorded as part of the purchase price of that security. Based upon managements analysis and judgment, a portion of the purchase discount is subsequently accreted as interest income under the effective yield method while the
remaining portion of the purchase discount is treated as a nonaccretable discount which reflects
17
the estimated unrealized loss on the securities due to credit risk. If management ultimately concludes that the nonaccretable discount will not represent
realized losses, the balance is accreted into the Condensed Consolidated Income Statements over the remaining life of the security through the effective yield method. In the event that management concludes that losses may exceed the nonaccretable
discount, the Company revises its estimate of probable losses and the change in the estimate of losses is recorded as a loss on ARM Assets in the Condensed Consolidated Income Statements, to the extent the estimate of losses exceeds the
other-than-temporary fair value impairment.
Provisions for credit losses, other-than-temporary impairments and charges to
record assets at the lower of cost or fair value do not reduce taxable income and thus do not affect the dividends paid by the Company to shareholders in the period the provisions are taken. Actual losses realized by the Company do reduce taxable
income in the period the actual loss is realized, thereby affecting taxable income available for distribution and the amount of dividends that may be paid to shareholders for that tax year.
Valuation methods
The Company holds
Purchased ARM Assets, Hedging Instruments, the PPA and Additional Warrant Liability and the Senior Subordinated Secured Notes at fair value and Securitized ARM Loans, ARM loans held for sale or securitization and MSRs at the lower of cost or fair
value. In total, approximately 19% and 37% of assets, and 3% and 5% of liabilities, were accounted for at fair value or the lower of cost or fair value as of September 30, 2008 and December 31, 2007, respectively.
When available, the Company generally uses quoted market prices to determine the fair value, and classifies such items within Level 1 of
the fair value hierarchy. If quoted market prices are not available, fair value is determined using current market-based or independently sourced market parameters, such as quotes from broker-dealers that make markets in similar financial
instruments, interest rates, product type, credit rating, seasoning, duration, prepayment expectations, option volatilities, discounted cash flows and other relevant inputs.
Items valued using such valuation models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even
though there may be some significant inputs that are readily observable. Beginning in the second half of 2007, the liquidity crisis caused some markets to become illiquid, thus reducing the availability of certain observable data used in the
valuation models. When or if the liquidity returns to these markets, there may be more observable inputs to use in the valuations.
At September 30, 2008, the fair values (Level 3) for the Companys Purchased ARM Assets and Securitized ARM Loans were determined pursuant to the following methodologies (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Fair Value
|
|
% of Fair Value to
Total ARM Assets
|
|
Market Price Equivalent
|
|
557
|
|
$
|
2,611,397
|
|
10.3
|
%
|
Similar characteristics to a security with a Market Price Equivalent
|
|
71
|
|
|
828,195
|
|
3.3
|
%
|
Recent market transactions for similar securities
|
|
243
|
|
|
1,375,566
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
871
|
|
$
|
4,815,158
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
The fair value of ARM Loans Collateralizing Debt used for disclosure purposes is
estimated by the Company using the same pricing models employed by the Company to determine prices to sell loans in the open market, taking into consideration the aggregated characteristics of groups of loans such as, but not limited to, collateral
type, index, interest rate, margin, length of fixed interest rate period, life cap, periodic cap, underwriting standards, age and credit.
Purchase commitments for originated and purchased loans that will be held for sale or securitization generally qualify as derivatives under SFAS 133 and SFAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and are recorded at fair value. The fair value of the net unrealized gain or loss on purchase commitments is calculated using the same methodologies that are used to price the Companys originated ARM
Loans, adjusted for anticipated fallout for purchase commitments that will likely not be funded. The Companys net unrealized gain (loss) on purchase commitments is recorded as a component of ARM loans held for sale or securitization, net on
the Condensed Consolidated Balance Sheets with the respective changes in fair value recorded in Gain (Loss) on Derivatives, net in the Condensed Consolidated Income Statements.
The fair value of the PPA and Additional Warrant Liability was determined by probability weighting the mutually exclusive outcomes of the Principal Participation Agreement and the Additional
Warrants for the likelihood of the satisfaction of the Additional Financing Conditions. The fair value of the Principal Participation Agreement is based on the discounted cash flows that are estimated to be paid to the Participants from the
principal collected from the assets financed through July 31, 2009. The fair value of the Additional Warrants was derived from the Black-Scholes option pricing model using the Common Stock price, a strike price of $0.01, and the historical
volatility of the Companys Common Stock.
18
Due to the absence of current market observable trades, the fair value of the Senior
Subordinated Secured Notes at September 30, 2008 is based on the net present value of the discounted cash flows available to Senior Subordinated Secured Note holders. Those cash flows were calculated for two alternative scenarios assuming
either the successful or unsuccessful completion of the Exchange Offer and Consent Solicitation. The alternative scenarios were further weighted by the probability of the respective scenarios occurrence. To determine an appropriate discount
rate to use, the Company started with the observable discount rate implied in actual trades of its Senior Notes and added a subordinated debt risk premium commensurate with the market subordinated debt risk premiums for comparable companies.
The fair values of the Companys Collateralized Mortgage Debt, Senior Notes and Subordinated Notes used for disclosure
purposes are based on market values.
Due to the inherent uncertainty embedded in assets and liabilities valued by
management, the estimated fair values may differ significantly from values that would have been used had a readily available market for these investments existed, and the differences could be material.
Cash and cash equivalents, restricted cash and cash equivalents, the Liquidity Reserve Fund and interest receivable are reflected in the
consolidated financial statements at cost. Other assets, whole loan financing facilities, accrued expenses and other liabilities are generally reflected in the consolidated financial statements at their amortized cost, which approximates their fair
value because of the short-term nature of these instruments. Reverse Repurchase Agreements are reflected in the consolidated financial statements at cost, which approximates fair value based on the terms of the Override Agreement. Asset-backed CP is
reflected in the consolidated financial statements at cost, which may be different from the fair value of the assets collateralizing the Asset-backed CP obligations.
PPA and Additional Warrant Liability
In connection with the Financing Transaction
described in Note 2 above, the Company initially recorded the PPA and Additional Warrant Liability representing (1) the liability for the subsequent issuance of Additional Warrants to the participants in the Principal Participation Agreement
and investors contributing to the escrowed funds upon the satisfaction of the Additional Financing Conditions or, (2) the liability for the Principal Participation Agreement in the event that the Additional Financing Conditions are not
satisfied. The likelihood of each of those events has been estimated by the Company and the liability reflects the probability adjusted fair value of the two alternatives. As of November 3, 2008, the Company had received tenders for 71.0% of
the outstanding shares of its Series C Preferred Stock, 73.3% of the outstanding shares of its Series D Preferred Stock, 75.1% of the outstanding shares of its Series E Preferred Stock, 66.2% of the outstanding shares of its Series F Preferred
Stock, and approximately 68.2% of the aggregate outstanding shares of Preferred Stock. The shares of Preferred Stock tendered as of November 3, 2008 remain subject to withdrawal prior to acceptance by the Company of such Preferred Stock for
exchange (all in accordance with the terms of the Exchange Offer and Consent Solicitation). The November 3, 2008 probability has not been considered in the value of the PPA and Additional Warrant Liability reported in the accompanying Condensed
Consolidated Balance Sheets. The PPA and Additional Warrant Liability is carried at fair value on the Condensed Consolidated Balance Sheets and is recorded at fair value at the end of each period with the change in fair value reflected as PPA and
Additional Warrant Liability fair value changes in the Condensed Consolidated Income Statements.
Hedging Instruments
All of the Companys Hedging Instruments are carried at fair value as an asset, if the fair value is positive, or as a liability, if
the fair value is negative. For those Hedging Instruments the Company has designated as cash flow hedges, the effective amount of change in the fair value of the Derivative is recorded in OCI and transferred to the Condensed Consolidated Income
Statements as the hedged item affects the Condensed Consolidated Income Statements. The ineffective amount of all Hedging Instruments is recognized in the Condensed Consolidated Income Statements each period. Generally, a hedging strategy is
effective under SFAS 133 if it achieves offsetting cash flows attributable to the risk being hedged and meets certain predetermined statistical thresholds pursuant to SFAS 133. If the hedging strategy is not successful in achieving offsetting cash
flows or meeting the statistical thresholds, it is ineffective and will not qualify for hedge accounting.
As the Company
enters into hedging transactions, it formally documents the desired relationship between the Hedging Instruments and the hedged items. The Company has also documented its risk management policies, including objectives and strategies, as they relate
to its hedging activities. The Company assesses, both at the inception of a hedging activity and on an on-going basis, whether or not the hedging activity is highly effective. If it is determined that a hedge has been highly effective, but will not
be prospectively, the Company discontinues hedge accounting prospectively, at which time the changes in fair value are recognized into the Condensed Consolidated Income Statements.
Hybrid ARM Hedging Instruments
The Company may enter into Hybrid ARM Hedging Instruments in order to manage its interest rate exposure when financing its Hybrid ARM Assets. Although the Company generally borrows money based on short-term interest
rates, its Hybrid ARM
19
Assets have an initial fixed interest rate period of three to ten years. As a result, the Companys existing and forecasted borrowings reprice to a new
rate on a more frequent basis than do the Hybrid ARM Assets. Consequently, the Company may use Hybrid ARM Hedging Instruments to fix, or cap, the interest rate on its borrowings during the expected fixed interest rate period of the Hybrid ARM Assets
to attempt to manage the interest rate risk by funding the ARM Assets with a combination of short-term borrowings and Hedging Instruments with a combined Effective Duration of less than one year. Pursuant to the terms of the Override Agreement, the
Company may not enter into any new Hedging Instruments or ISDA Agreements, except Cap Agreements and Swap Agreements. Given recent dislocations in the correlation between the Companys Hedging Instruments prices and prices on its
mortgage-backed securities, the Company has temporarily suspended its Net Effective Duration policy of less than one year.
Swap Agreements have the effect of converting the Companys variable-rate debt into fixed-rate debt over the life of the Swap Agreements. When the Company enters into a Swap Agreement, it generally agrees to pay a fixed rate of
interest and to receive a variable interest rate, generally based on LIBOR. The Company has two-way collateral agreements protecting its credit exposure to Swap Agreement counterparties.
The Company entered into Cap Agreements in connection with some of its Collateralized Mortgage Debt securitizations by incurring a
one-time fee or premium. Pursuant to the terms of the respective Cap Agreements, the Company will receive cash payments if the interest rate index specified in any such Cap Agreement increases above contractually specified levels. Therefore, such
Cap Agreements have the effect of capping the interest rate on a portion of the Companys borrowings so as not to exceed the level specified by the Cap Agreement. The purchase price of these Cap Agreements is expensed over the life of the Cap
Agreements and the expense increases as the Cap Agreements approach maturity.
The Company generally designates its Hybrid
ARM Hedging Instruments as cash flow hedges. All changes in the unrealized gains and losses on Hybrid ARM Hedging Instruments accounted for as cash flow hedges have been recorded in OCI and are reclassified to the Condensed Consolidated Income
Statements as interest expense when each of the forecasted financing transactions occurs. If it becomes probable that the forecasted transaction, which in this case refers to interest payments to be made under the Companys short-term borrowing
agreements or its debt obligations, will not occur by the end of the originally specified time period as documented at the inception of the hedging relationship, or within an additional two-month time period thereafter, then the related gain or loss
in OCI would be reclassified to the Condensed Consolidated Income Statements. The carrying value of these Hybrid ARM Hedging Instruments is included in Hedging Instruments on the Condensed Consolidated Balance Sheets.
The fair value of Swap Agreements is based on the discounted value of the remaining future net interest payments expected to be made over
the remaining life of the Swap Agreements. Therefore, over time, as the actual payments are made, the unrealized gain (loss) in OCI and the carrying value of the Swap Agreements adjust to zero and the Company therefore realizes a fixed financing
cost over the life of the Hedging Instrument.
In those circumstances where a cash flow hedge is terminated, the Company
conducts an analysis to determine when the amount in OCI should be reclassified into the Condensed Consolidated Income Statements in accordance with SFAS 133. If the original forecasted transaction was determined to be probable not to occur,
the net gain or loss in OCI is immediately reclassified into the Condensed Consolidated Income Statements. Otherwise, the net gain or loss remains in OCI and is reclassified into the Condensed Consolidated Income Statements in the same period
or periods during which the hedged forecasted transaction affects the Condensed Consolidated Income Statements.
Pipeline Hedging
Instruments
The Company entered into Pipeline Hedging Instruments to manage interest rate risk associated with
commitments to purchase correspondent and bulk loans. The Company does not currently apply hedge accounting to its Pipeline Hedging Instruments and, therefore, the change in fair value and the realized gains or losses on these Pipeline Hedging
Instruments are recorded in the Condensed Consolidated Income Statements. The net gain or loss related to Pipeline Hedging Instruments is reflected in Gain (Loss) on Derivatives, net, on the Condensed Consolidated Income Statements as an offset to
the net gain or loss recorded for the change in fair value of the loan commitments.
Long-term incentive awards
The Company has a long-term incentive plan which is more fully described in Note 11. Since inception of the Plan in 2002, the Company has
accounted for all awards at fair value on the grant date and recorded subsequent changes in the fair value of the awards in current period operations. The PSRs issued under the Plan are variable in nature and are settled in cash. The liability for
PSRs is measured each period based on the fair value of the Common Stock. The effects of changes in the stock price during the vesting period, generally three years, are recognized as expense or a reduction of expense over the vesting period.
Dividend-equivalent payments on DERs and vested PSRs are recognized as compensation expense in the period in which they are declared. PSRs generally do not earn a dividend-equivalent until they are vested.
20
Preferred Stock
In connection with the Financing Transaction, the Company has commenced the Exchange Offer and Consent Solicitation for all of its outstanding shares of Preferred Stock. (See Note 2. Override Agreement and Financing
TransactionExchange Offer and Consent Solicitation).
Accumulated other comprehensive income (loss)
SFAS 130, Reporting Comprehensive Income, divides comprehensive income into net income or loss and other comprehensive income
(loss), which includes unrealized gains and losses on debt securities classified as available-for-sale and unrealized gains and losses on derivative financial instruments that qualify for cash flow hedge accounting under SFAS 133.
Income taxes
The Company, excluding
TMHL, Adfitech and TMHS, elected to be taxed as a REIT. Accordingly, the Company will not be subject to federal income tax on that portion of its income that is distributed to shareholders in cash, common stock or a combination thereof as long as
certain asset, income, stock ownership and distribution tests are met. The Company must distribute at least 85% of its ordinary taxable income and 95% of its capital gains by the end of each calendar year (or declare the distribution in October,
November or December of the calendar year and pay it in January of the succeeding year) to not be subject to an excise tax on any portion of the Companys income. For this purpose, any amounts the Company retains and pays tax on are considered
distributed in the year they are earned. In addition, to maintain the Companys status as a REIT it must declare dividends of at least 90% of its ordinary income by the time the Company files its tax return for such year, and pay such dividends
in the twelve month period following the end of the taxable year and not later than the date of the first regular dividend payment after such declaration. As a REIT, the Company is subject to tax on the income it does not distribute. The rules allow
several options for both timing and method of qualifying dividend payments over the course of years.
TMHL, TMHLs
wholly owned subsidiary Adfitech, and TMHS are taxable REIT subsidiaries and, as such, are subject to both federal and state corporate income taxes.
Under FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, a tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of the tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the more likely
than not test, no tax benefit is recorded.
The common three year statute of limitation on additional tax assessments
used for most federal and state income tax matters means the Company is no longer subject to assessment for years before 2004. The company has filed, and will continue to file, all required tax returns, and maintains compliance with the tax
reporting requirements of each jurisdiction it is subject to, on a timely and accurate basis. At September 30, 2008, the Company did not have any unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax
benefits to increase significantly during the year ending December 31, 2008. The Company recognizes interest related to income tax matters in other interest expense and penalties related to income tax matters in other noninterest expense. The
Company does not have any amount accrued for interest and penalties.
In the third quarter of 2007, market conditions forced
the Company to dispose of a significant portion of the Companys portfolio of mortgage-backed securities, which, until the time they were disposed of, were a source of significant amounts of gross income that qualified for purposes of both the
REIT annual 75% gross income test and the REIT annual 95% gross income test. Also in the third quarter of 2007, the Company was compelled to dispose of or otherwise terminate associated Swap Agreements and thereby recognize a gain. The treatment of
gains from the disposition or termination of such Swap Agreements for purposes of the 95% gross income test is not clear. However, based on the amount of gross income the Company recognized for 2007, even if gross income from the Swap Agreements is
not qualifying for the 95% gross income test, the Company believes that it is in compliance with the 95% gross income test for the 2007 tax year.
In January 2008, the Company received an opinion concluding (i) the Company had qualified to be taxed as a REIT beginning with the taxable year ended December 31, 1993, through the taxable year ended
December 31, 2007, and (ii) the Companys organization and current and proposed method of operation will enable the Company to meet the requirement for qualification and taxation as a REIT in subsequent years. After this opinion was
rendered the Company entered into the Financing Transaction in March 2008. As described below, if the Company fails to satisfy the Additional Financing Conditions, this failure may adversely affect the Companys ability to continue to qualify
as a REIT.
The Companys taxable REIT subsidiaries provide for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period the change occurs. Subject to managements judgment, a valuation allowance is established if realization of deferred tax assets is not more likely than not.
21
While certain tax aspects of the transaction are still under review, the Company determined, in the 3rd quarter of 2008, that it is likely that an ownership
change, as defined under §382 of the Internal Revenue Code, had occurred. The ownership change is a result of the March 31, 2008 Financing Transaction. If it is so determined, the utilization of certain tax attributes, mainly net operating
losses and capital losses, would be limited. Additional limitations apply if the Company loses its REIT status.
The income
tax benefit for the nine months ended September 30, 2008 was $1,014,000, based on a combined federal and state effective tax rate of 39.6% on estimated current taxable income of $8.9 million and deferred taxable loss of $12.2 million. The
provision related to certain Cap Agreements owned by TMHS that were entered into in conjunction with certain securitization transactions. The provision for income taxes for the nine months ended September 30, 2007 was $12.0 million, based on a
combined federal and state effective tax rate of 39.2% on estimated deferred taxable income of $37.0 million. The significant differences between the financial statement carrying amount of existing assets and liabilities and their respective tax
bases relate to MSRs capitalized for financial statement purposes, REMIC transactions accounted for as financings for financial statement purposes and as sales for tax purposes, unrealized gains on Hedging Instruments and TMHLs net operating
loss from 2004 through 2007. As of December 31, 2007, TMHLs net operating loss approximated $289.0 million. Management has established a valuation allowance against the entire balance of TMHLs net deferred tax assets at
September 30, 2008 as it is more likely than not that the deferred tax assets will not be realized.
As discussed in
Note 1, the Company entered into the Financing Transaction on March 31, 2008. Terms of the Financing Transaction are dependent upon the Companys ability to satisfy the Additional Financing Conditions. Characterization of the rights of the
Company, on the one hand, and the participants, on the other hand, under the Principal Participation Agreement is not clear for federal income tax purposes. If the Additional Financing Conditions do not occur, then, under the terms of the Principal
Participation Agreement, the Companys rights to certain principal collections on assets owned by the Company that are subject to the Override Agreement would be viewed as having been transferred by the Company to the participants in the
Principal Participation Agreement. The Companys failure to satisfy the Additional Financing Conditions would adversely affect the Companys ability to comply with the REIT quarterly asset tests and annual gross income tests because the
participants in the Principal Participation Agreement would be considered to have acquired ownership interests in the principal payments on the assets subject to the Override Agreement for tax purposes. If that were to occur, it is likely that it
could result in termination of the Companys REIT status.
If its nontaxable REIT status is terminated, the Company
would be taxed as a C-Corporation for the entire 2008 calendar year and would be eligible to file a consolidated income tax return with the currently taxable subsidiaries of TMHS, TMHL and Adfitech. As a C-Corporation, the Company, in addition to
TMHS, TMHL and Adfitech, would be subject to federal and state income taxes and would be required to record current and deferred income tax expense as of and for the period ended September 30, 2008. If the Company elected to file a consolidated
income tax return, the Companys income tax provision would include the operations of TMHS, TMHL and Adfitech. The consolidated income tax provision would be based on income before tax, adjusted for certain permanent items, at an estimated
annual effective tax rate of 39%. In addition, it is likely that any deferred tax asset, mainly capital loss carryovers, would be subject to a 100% valuation allowance as it is more likely than not that the tax benefits would not be realized.
Although no provision is required currently, Management estimates that in the unlikely event the Company is required to be taxed as a C-Corporation in 2008 as a consequence of no longer qualifying as a REIT, there could potentially be an estimated
$36 million net deferred tax expense provision as of September 30, 2008. We anticipate there would be no current payment required, as the net expense is driven by estimated deferred taxable income. This payment would only arise if the Company
were to lose REIT status. This estimate could change significantly based on fourth quarter results. Also, as a C-Corporation, the Company would not be subject to the REIT distribution requirement or the related deductions from taxable income. As
such, the Company would be prohibited from making dividend distributions pursuant to the terms of the Override Agreement, which only allows for the payment of the 2008 required REIT dividend.
As discussed in Note 2, the Company suspended its dividend on Common Stock for the term of the Override Agreement. However, while not
obligated to do so, the Company may declare a dividend in December 2008 for payment in January 2009 of up to 87% of its taxable income for 2008. Applicable tax rules permit distributions paid in 2009 to qualify towards satisfaction of the 2008 90%
REIT distribution requirement. The Company has performed a projection of its 2008 taxable income and has determined that it is more likely than not that the Company will have the wherewithal to satisfy the 2008 REIT distribution requirement. In
meeting this requirement, the Company is analyzing various distribution alternatives, including the ultimate timing of the distribution as well as non-cash alternatives.
The Company is in compliance with the annual 75% and 95% gross income test for its 2008 taxable year based on operations through September 30, 2008 and expects to maintain compliance through
December 31, 2008. Management believes it is more likely than not that the Additional Financing Conditions will be satisfied and that the Principal Participation Agreement will be terminated. As a result of satisfying the Additional Financing
Conditions and the Companys annual asset, income, distribution and stock ownership tests, the Company believes that it is more likely than not that it will qualify to be taxed as a REIT for the year ending December 31, 2008.
22
Earnings (loss) per share
Basic EPS amounts are computed by dividing net income (loss) (adjusted for dividends on Preferred Stock) by the sum of the weighted average number of common shares outstanding and contingently
issuable, the weighted average number of shares issued or issuable for the Initial Warrants and the Escrow Warrants and the weighted average number of shares granted and issued or issuable for 4,696,000 of the Override Warrants issued. GAAP requires
the inclusion of these Warrants in the calculation of Basic EPS because they are issuable for little or no consideration. Diluted EPS amounts assume the conversion, exercise or issuance of all potential Common Stock instruments, unless the effect is
to reduce a loss or increase the earnings per common share. During the nine months ended September 30, 2008, 3,162,500 and 30,326,715 potentially dilutive shares from Series E and Series F Preferred Stock, respectively, were not included in the
computation of Diluted EPS because to do so would be anti-dilutive. Additional Warrants for approximately 252 million shares of Common Stock were not included in the computation of Basic EPS because the conditions of the contingency
(satisfaction of the Additional Financing Conditions) had not been satisfied at September 30, 2008.
Following is
information about the computation of the EPS data for the three-month periods ended September 30, 2008 and 2007 (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
Shares
|
|
EPS
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
140,047
|
|
|
|
|
|
|
|
Less Preferred Stock dividends
|
|
|
(26,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS, income available to common shareholders
|
|
|
114,008
|
|
|
41,681
|
|
$
|
2.74
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible Series E Preferred Stock
|
|
|
1,482
|
|
|
2,443
|
|
|
|
|
Convertible Series F Preferred Stock
|
|
|
19,325
|
|
|
65,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
134,815
|
|
|
110,051
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,098,179
|
)
|
|
|
|
|
|
|
Preferred Stock dividends
|
|
|
(10,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS and Diluted EPS, loss available to common shareholders
|
|
$
|
(1,108,417
|
)
|
|
12,397
|
|
$
|
(89.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,754,076
|
)
|
|
|
|
|
|
|
Less Preferred Stock dividends
|
|
|
(81,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS and Diluted EPS, loss available to common shareholders
|
|
$
|
(2,835,103
|
)
|
|
33,079
|
|
$
|
(85.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(939,783
|
)
|
|
|
|
|
|
|
Preferred Stock dividends
|
|
|
(20,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS and Diluted EPS, loss available to common shareholders
|
|
$
|
(960,175
|
)
|
|
11,905
|
|
$
|
(80.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
23
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 4. ARM Assets
The following tables present the Companys ARM Assets as of
September 30, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
ARM securities
|
|
|
Purchased
Securitized Loans
|
|
|
Securitized ARM
Loans
|
|
|
ARM Loans
Collateralizing
Debt
|
|
|
ARM loans held
for sale or securitization
|
|
|
Total
|
|
Principal balance outstanding
|
|
$
|
5,305,325
|
|
|
$
|
573,606
|
|
|
$
|
1,456,154
|
|
|
$
|
20,490,309
|
|
|
$
|
192,015
|
|
|
$
|
28,017,409
|
|
Net unamortized premium (discount)
|
|
|
(1,782,911
|
)
|
|
|
(176,529
|
)
|
|
|
|
|
|
|
(51,162
|
)
|
|
|
(7,356
|
)
|
|
|
(2,017,958
|
)
|
Lower of cost or fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
(386,912
|
)
|
|
|
|
|
|
|
(27,161
|
)
|
|
|
(414,073
|
)
|
Nonaccretable discounts
|
|
|
|
|
|
|
(22,355
|
)
|
|
|
(244,390
|
)
|
|
|
(5,301
|
)
|
|
|
|
|
|
|
(272,046
|
)
|
|
|
|
|
|
|
|
Net unrealized loss on purchase loan commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(378
|
)
|
|
|
(378
|
)
|
Principal payments receivable
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost, net
|
|
|
3,523,374
|
|
|
|
374,722
|
|
|
|
824,852
|
|
|
|
20,433,846
|
|
|
|
157,120
|
|
|
|
25,313,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
|
73,498
|
|
|
|
18,712
|
|
|
|
997
|
|
|
|
11,406
|
|
|
|
|
|
|
|
104,613
|
|
Gross unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,546,056
|
)
|
|
|
|
|
|
|
(1,546,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
3,596,872
|
|
|
$
|
393,434
|
|
|
$
|
825,849
|
|
|
$
|
18,899,196
|
|
|
$
|
157,120
|
|
|
$
|
23,872,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
3,596,872
|
|
|
$
|
393,434
|
|
|
$
|
824,852
|
|
|
$
|
20,433,846
|
|
|
$
|
157,120
|
|
|
$
|
25,406,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
ARM securities
|
|
|
Purchased
Securitized Loans
|
|
|
Securitized ARM
Loans
|
|
|
ARM Loans
Collateralizing
Debt
|
|
|
ARM loans held
for sale or securitization
|
|
|
Total
|
|
Principal balance outstanding
|
|
$
|
10,337,148
|
|
|
$
|
721,069
|
|
|
$
|
2,804,405
|
|
|
$
|
21,246,545
|
|
|
$
|
543,934
|
|
|
$
|
35,653,101
|
|
Net unamortized premium (discount)
|
|
|
(312,296
|
)
|
|
|
(72,158
|
)
|
|
|
|
|
|
|
147,058
|
|
|
|
5,922
|
|
|
|
(231,474
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,426
|
)
|
|
|
(365
|
)
|
|
|
(10,791
|
)
|
Nonaccretable discounts
|
|
|
|
|
|
|
(21,726
|
)
|
|
|
(247,812
|
)
|
|
|
|
|
|
|
|
|
|
|
(269,538
|
)
|
|
|
|
|
|
|
|
Net unrealized loss on purchase loan commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Principal payments receivable
|
|
|
18,952
|
|
|
|
151
|
|
|
|
1,368
|
|
|
|
|
|
|
|
|
|
|
|
20,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost, net
|
|
|
10,043,804
|
|
|
|
627,336
|
|
|
|
2,557,961
|
|
|
|
21,383,177
|
|
|
|
549,359
|
|
|
|
35,161,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
|
3,014
|
|
|
|
19,889
|
|
|
|
7,176
|
|
|
|
19,391
|
|
|
|
5,061
|
|
|
|
54,531
|
|
Gross unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(182,096
|
)
|
|
|
(283
|
)
|
|
|
(182,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
10,046,818
|
|
|
$
|
647,225
|
|
|
$
|
2,565,137
|
|
|
$
|
21,220,472
|
|
|
$
|
554,137
|
|
|
$
|
35,033,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
10,046,818
|
|
|
$
|
647,225
|
|
|
$
|
2,557,961
|
|
|
$
|
21,383,177
|
|
|
$
|
549,359
|
|
|
$
|
35,184,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
The gain or loss on ARM Assets, net, for the three and nine months ended September 30, 2008 and
September 30, 2007 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Gain (loss) on sale of ARM Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM securities
|
|
$
|
|
|
|
$
|
(727,580
|
)
|
|
$
|
(636,783
|
)
|
|
$
|
(725,424
|
)
|
Purchased Securitized Loans
|
|
|
|
|
|
|
(329,641
|
)
|
|
|
(1,124
|
)
|
|
|
(329,641
|
)
|
Securitized ARM Loans
|
|
|
|
|
|
|
(35,857
|
)
|
|
|
(123,624
|
)
|
|
|
(35,857
|
)
|
ARM loans held for sale or securitization
|
|
|
(13,179
|
)
|
|
|
|
|
|
|
(13,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,179
|
)
|
|
|
(1,093,078
|
)
|
|
|
(774,710
|
)
|
|
|
(1,090,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment and lower of cost or fair value charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM securities
|
|
|
(577,379
|
)
|
|
|
|
|
|
|
(1,847,589
|
)
|
|
|
|
|
Purchased Securitized Loans
|
|
|
(13,898
|
)
|
|
|
(6,020
|
)
|
|
|
(117,714
|
)
|
|
|
(6,020
|
)
|
Securitized ARM Loans
|
|
|
(64,627
|
)
|
|
|
|
|
|
|
(413,805
|
)
|
|
|
|
|
ARM loans held for sale or securitization
|
|
|
1,229
|
|
|
|
|
|
|
|
(27,161
|
)
|
|
|
|
|
Gain (loss) on sale of REO
|
|
|
4,950
|
|
|
|
(148
|
)
|
|
|
2,405
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(649,725
|
)
|
|
|
(6,168
|
)
|
|
|
(2,403,864
|
)
|
|
|
(6,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(662,904
|
)
|
|
$
|
(1,099,246
|
)
|
|
$
|
(3,178,574
|
)
|
|
$
|
(1,097,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008, the Company recorded a net loss of $637.9
million on the sale and liquidation of $4.9 billion of Purchased ARM Assets, of which $1.6 billion were liquidated in satisfaction of the Companys indebtedness by several of the Companys Reverse Repurchase Agreement counterparties. The
Company permanently financed $1.8 billion of Securitized ARM Loans during the nine months ended September 30, 2008. The Securitized ARM Loans permanently financed had been classified as held for sale at December 31, 2007 and were
reclassified to held for investment when they were permanently financed and recorded as ARM Loans Collateralizing Debt. Thus, the difference between the fair value when permanently financed and their recorded value resulted in a net loss of $123.6
million. The Company sold $111.2 million in ARM loans at a loss of $13.2 million during the third quarter of 2008. The Company realized a loss of $1.1 million on the sale of $23.6 billion of Purchased ARM Assets during the nine months ended
September 30, 2007.
The Company recorded losses of $577.4 million and $13.9 million in other-than-temporary impairment charges on its
ARM Securities and Purchased Securitized Loans, respectively, for the quarter ended September 30, 2008. Other-than-temporary impairment charges on its ARM Securities and Purchased Securitized Loans totaled $1.8 billion and $117.7 million,
respectively, for the nine months ended September 30, 2008. Losses of $413.8 million and $27.2 million were recognized for the nine months ended September 30, 2008 on the Companys Securitized ARM Loans and ARM loans held for sale or
securitization, respectively, to record those assets at the lower of cost or fair value. The losses enumerated above totaling $2.4 billion are recorded in loss on ARM Assets, net, in the Condensed Consolidated Income Statements for the nine months
ended September 30, 2008. The fair value prices of the ARM Assets used to calculate this loss reflect the prices at which the assets could have been sold on September 30, 2008 and are not meant to equal the Companys expected credit
losses on the ARM assets.
During the nine months ended September 30, 2008, the Company securitized $991.7 million of ARM loans into a
Collateralized Mortgage Debt securitization. While TMHL transferred all of the ARM loans to a separate bankruptcy-remote legal entity, on a consolidated basis the Company did not account for this securitization as a sale, but instead as a permanent
financing and, therefore, did not record any gain or loss in connection with the securitization. The Company retained $134.9 million of the resulting securities for its ARM Loan portfolio and financed $856.8 million with third-party investors,
thereby providing long-term collateralized financing for these assets. As of September 30, 2008 and December 31, 2007, the Company held $20.4 billion and $21.4 billion, respectively, of ARM Loans Collateralizing Debt. As of
September 30, 2008 and December 31, 2007, the Company held $824.9 million and $2.6 billion, respectively, of Securitized ARM Loans as a result of the Companys securitization efforts. All discussions relating to securitizations in
these financial statements and notes are on a consolidated basis and do not reflect the separate legal ownership of the loans by various bankruptcy-remote legal entities.
During the nine months ended September 30, 2008, the Company did not acquire any Purchased Securitized Loans. At September 30, 2008 and December 31, 2007, the Companys Purchased Securitized Loans
totaled $393.4 million and $647.2 million, respectively. Because the Company owns credit loss classes of these securitizations, the Company has credit exposure, up to the value of the Companys securities, on the entire balance of underlying
loans, which totaled $5.3 billion and $5.9 billion at September 30, 2008 and December 31, 2007, respectively. The purchase price of the classes that are less than Investment Grade generally includes a discount
25
for expected credit losses and, based on managements judgment, the portion of the purchase discount which reflects the estimated unrealized loss on the
securities due to credit risk is treated as a nonaccretable discount. As of September 30, 2008, 171 of the underlying loans of the Companys Purchased Securitized Loans were 60 days or more delinquent and had an aggregate balance of $145.0
million. The Company recorded impairment charges to recognize managements estimate of additional future losses due to credit risk inherent in its Purchased Securitized Loan portfolio of $4.2 million and $6.0 million during the nine months
ended September 30, 2008 and 2007, respectively. Activity in nonaccretable discounts for the nine month periods ended September 30, 2008 and 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Balance at beginning of period
|
|
$
|
21,726
|
|
|
$
|
15,087
|
|
Recoveries
|
|
|
806
|
|
|
|
|
|
Increase for expected future losses
|
|
|
4,225
|
|
|
|
6,020
|
|
Realized losses
|
|
|
(4,402
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
22,355
|
|
|
$
|
20,979
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, substantially all of the Companys available-for-sale securities
had contractual maturities in excess of ten years.
At September 30, 2008, the Company recorded nonaccretable discounts on its
Purchased Securitized Loans, Securitized ARM Loans, and ARM Loans Collateralizing Debt of $22.4 million, $244.4 million, and $5.3 million, respectively. The Companys Securitized ARM Loans and ARM loans held for sale or securitization had fair
value impairments below cost of $386.9 million and $27.2 million, respectively.
The Company has credit exposure on its ARM Loans.
Nonaccrual loans totaling $239.2 million and $66.3 million were outstanding at September 30, 2008 and December 31, 2007, respectively. There were no loans that were 90 days or more past due, based on contractual terms, and still accruing
interest at September 30, 2008 and December 31, 2007. The following tables summarize ARM Loan delinquency information as of September 30, 2008 and December 31, 2007 (dollar amounts in thousands):
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Status
|
|
Loan Count
|
|
Loan Balance
of Impaired Loans
|
|
Percent of
# of ARM
Loans
|
|
|
Percent of
ARM Loan
Portfolio
|
|
|
Percent of
Total Assets
|
|
TMHL Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 to 89 days
|
|
47
|
|
$
|
41,897
|
|
0.19
|
%
|
|
0.26
|
%
|
|
0.16
|
%
|
90 days or more
|
|
10
|
|
|
11,819
|
|
0.04
|
|
|
0.07
|
|
|
0.04
|
|
In bankruptcy and foreclosure
|
|
110
|
|
|
91,220
|
|
0.45
|
|
|
0.57
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
144,936
|
|
0.68
|
(1)
|
|
0.90
|
(1)
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 to 89 days
|
|
22
|
|
|
24,094
|
|
0.21
|
|
|
0.40
|
|
|
0.09
|
|
90 days or more
|
|
26
|
|
|
28,691
|
|
0.25
|
|
|
0.47
|
|
|
0.11
|
|
In bankruptcy and foreclosure
|
|
109
|
|
|
107,458
|
|
1.07
|
|
|
1.77
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
160,243
|
|
1.53
|
(2)
|
|
2.64
|
(2)
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
$
|
305,179
|
|
0.96
|
%
|
|
1.38
|
%
|
|
1.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated as a percent of total TMHL originations.
|
(2)
|
Calculated as a percent of total bulk acquisitions.
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Status
|
|
Loan Count
|
|
Loan Balance
of Impaired Loans
|
|
Percent of
# of ARM
Loans
|
|
|
Percent of
ARM Loan
Portfolio
|
|
|
Percent of
Total Assets
|
|
TMHL Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 to 89 days
|
|
12
|
|
$
|
7,360
|
|
0.05
|
%
|
|
0.04
|
%
|
|
0.02
|
%
|
90 days or more
|
|
6
|
|
|
3,469
|
|
0.02
|
|
|
0.02
|
|
|
0.01
|
|
In bankruptcy and foreclosure
|
|
26
|
|
|
17,411
|
|
0.10
|
|
|
0.10
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
28,240
|
|
0.17
|
(1)
|
|
0.16
|
(1)
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Status
|
|
Loan Count
|
|
Loan Balance
of Impaired Loans
|
|
Percent of
# of ARM
Loans
|
|
|
Percent of
ARM Loan
Portfolio
|
|
|
Percent of
Total Assets
|
|
Bulk Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 to 89 days
|
|
14
|
|
|
16,829
|
|
0.12
|
|
|
0.25
|
|
|
0.05
|
|
90 days or more
|
|
11
|
|
|
8,261
|
|
0.10
|
|
|
0.12
|
|
|
0.02
|
|
In bankruptcy and foreclosure
|
|
45
|
|
|
37,165
|
|
0.41
|
|
|
0.55
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
62,255
|
|
0.63
|
(2)
|
|
0.92
|
(2)
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
$
|
90,495
|
|
0.31
|
%
|
|
0.37
|
%
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated as a percent of total TMHL originations.
|
(2)
|
Calculated as a percent of total bulk acquisitions.
|
As of September 30, 2008, the Company owned $30.6 million of REO properties as a result of foreclosing on delinquent loans. The 61 REO properties had principal loan balances of $45.8 million and a valuation
reserve of $15.2 million.
No allowance for loan losses has been recorded in 2008 as the lower of cost or fair value adjustment and
other-than-temporary impairment losses totaling $631.3 million reflected in its Securitized ARM Loans include all probable credit losses inherent in the ARM Loan portfolio at September 30, 2008.
Activity in allowance for loan losses for the nine months ended September 30, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
September 30, 2007
|
|
Balance at beginning of the period
|
|
$
|
13,908
|
|
Provision for loan losses
|
|
|
4,860
|
|
Charge offs to REO
|
|
|
(1,686
|
)
|
Realized losses
|
|
|
(51
|
)
|
Reversal of allowance for loan losses
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
17,031
|
|
|
|
|
|
|
The Company originates fully amortizing loans with initial interest only payment terms for a
period not to exceed ten years. Interest only loans represented 86.9% and 87.5% of ARM Loans at September 30, 2008 and December 31, 2007, respectively. At September 30, 2008, the Companys investment in Fixed Option ARMs and
Traditional Pay Option ARMs comprised 4.1% of ARM Assets and accumulated deferred interest totaled $75.9 million. Loans with interest only features, Fixed Option ARMs and Traditional Pay Option ARMs have been identified as potentially having a
concentration of credit risk as defined in SFAS 107, Disclosures about Fair Value of Financial Instruments. The Company believes that its pricing, underwriting, appraisal, and other processes are sufficient to manage potential credit
risks.
In accordance with SFAS 156, no MSRs were capitalized in connection with the securitization of $991.7 million and $5.7 billion of
ARM loans during the nine months ended September 30, 2008 and 2007, respectively, because the securitizations were accounted for as secured borrowings under SFAS 140. MSRs of $22.3 million, net of amortization of $3.9 million during the nine
months ended September 30, 2008, are included in Other Assets on the Condensed Consolidated Balance Sheets at September 30, 2008. MSRs of $26.2 million, net of amortization of $5.9 million during 2007, are included in Other Assets on the
Condensed Consolidated Balance Sheets at December 31, 2007. At September 30, 2008, the approximate fair value of the MSRs of $36.1 million equaled or exceeded their carrying basis in each risk stratum. The Company granted a security
interest in the Companys MSRs to the counterparties to the Override Agreement to secure the Companys obligations to the counterparties under the Reverse Repurchase Agreements and the Forward Auction Agreements.
The Company had no significant commitments to purchase or originate ARM loans at September 30, 2008.
Note 5. PPA and Additional Warrant Liability
In
connection with the Financing Transaction described in Note 2 above, the Company initially recorded a PPA and Additional Warrant Liability of $600.5 million with $32.1 million of associated issuance costs. The allocated value of the PPA and
Additional Warrant Liability was determined based on its relative fair value in allocating the financing proceeds to the Senior Subordinated Secured Notes, the Initial Warrants and the Escrow Warrants, the commitment for escrowed funds and the PPA
and Additional Warrant Liability as described in Note 2. At March 31, 2008, the PPA and Additional Warrant Liability was reported at the estimated fair value of $1.1 billion after a fair value charge of $552.6 billion. The PPA and Additional
Warrant Liability represents (1) the liability for the subsequent issuance of Additional Warrants to the participants in the Principal Participation Agreement upon the
27
satisfaction of the Additional Financing Conditions or, (2) the liability for the Principal Participation Agreement in the event that the Additional
Financing Conditions are not satisfied. The likelihood of each of those events has been estimated by the Company and the liability reflects the probability adjusted fair value of the two alternatives. The PPA and Additional Warrant Liability is
recorded at fair value at the end of each period with the change in fair value reflected as PPA and Additional Warrant Liability fair value changes in the Condensed Consolidated Income Statements. The PPA and Additional Warrant Liability was $423.4
million at September 30, 2008, and the Company recorded an adjustment of $160.7 million for the change in its fair value in the third quarter as a decrease to the liability.
Note 6. Hedging Instruments
Hybrid ARM Hedging Instruments
As of September 30, 2008 and December 31, 2007, the Company was counterparty to Swap Agreements having aggregate notional
balances of $516.2 million and $8.0 billion, respectively.
In response to the market dislocations in the first quarter of
2008, the Company terminated all of its Swap Agreements in the first quarter of 2008 except for those which are held by bankruptcy-remote legal entities in connection with ARM Loans Collateralizing Debt. Upon termination, the Company paid $241.3
million, including accrued interest of $29.7 million, to terminate Swap Agreements with aggregate notional balances of $7.0 billion. At September 30, 2008, the net unrealized loss recorded in OCI relating to these terminations totaled $139.6
million. For these terminations, the reclassification of these amounts reflected in OCI to the Condensed Consolidated Income Statements will occur as the original hedged transactions that are still probable of occurring impact the Condensed
Consolidated Income Statements. This reclassification totaled $82.3 million in the nine months ended September 30, 2008, and was recorded in interest expense on borrowed funds.
In the nine months ended September 30, 2008, the Company reclassified a net $27.4 million of OCI to the Condensed Consolidated Income
Statements, recorded in Gain (loss) on Derivatives, net, because the original forecasted transactions for certain Swap Agreements that were terminated in a previous period are now probable of not occurring within the original period or an additional
two month period. The Company also reclassified $28.9 million of OCI to the Condensed Consolidated Income Statements, recorded in interest expense on borrowed funds, related to Swap Agreements that were terminated in a previous period for which the
original forecasted transactions continue to be probable of occurring as the originally forecasted cash flows affected earnings in the current period.
As of September 30, 2008, the net unrealized loss recorded in OCI related to all terminated Swap Agreements totaled $179.6 million. In the twelve month period following September 30, 2008 based on the
current level of interest rates, $176.0 million of net unrealized losses related to terminated Swap Agreements are expected to be reclassified into the Condensed Consolidated Income Statements as interest expense on borrowed funds.
As of September 30, 2008, the remaining active Swap Agreements had a weighted average maturity of 1.9 years. In accordance with the
Swap Agreements, the Company will pay a fixed rate of interest during the term of these Swap Agreements and receive a payment that varies monthly with the one-month LIBOR rate. The combined weighted average fixed rate payable of the Swap Agreements
was 3.21% and 4.76% at September 30, 2008 and December 31, 2007, respectively.
The net unrealized loss on active
Swap Agreements at September 30, 2008 of $6.0 million included no Swap Agreements with gross unrealized gains and is included in Hedging Instruments on the Condensed Consolidated Balance Sheets. As of December 31, 2007, the net unrealized
loss on active Swap Agreements of $108.2 million included Swap Agreements with gross unrealized losses of $111.9 million and gross unrealized gains of $3.7 million. In the twelve month period following September 30, 2008 based on the current
level of interest rates, $2.9 million of these net unrealized losses currently reflected in OCI are expected to be reclassified into the Condensed Consolidated Income Statements as interest expense.
As of September 30, 2008 and December 31, 2007, the Companys Cap Agreements used to manage the interest rate risk exposure
on the financing of Hybrid ARM Loans Collateralizing Debt had remaining net notional amounts of $467.7 million and $630.9 million, respectively. The Company has also entered into Cap Agreements that have start dates ranging from 2008 to 2010. The
notional balance at the start date will be the lesser of the scheduled amount of $197.5 million or the balance of Hybrid ARM loans associated with these Cap Agreements. The fair value of these Cap Agreements at September 30, 2008 and
December 31, 2007 was $538,000 and $1.6 million, respectively, and is included in Hedging Instruments on the Condensed Consolidated Balance Sheets. The unrealized losses on these Cap Agreements of $3.8 million and $6.9 million as of
September 30, 2008 and December 31, 2007, respectively, are included in OCI. In the twelve month period following September 30, 2008, $1.6 million of net unrealized losses are expected to be realized. Pursuant to the terms of these
Cap Agreements and subject to future prepayment behavior, the notional amount of the Cap Agreements declines such that it is expected to equal the balance of the Hybrid ARM Loans Collateralizing Debt hedged with these Cap Agreements. Under these Cap
Agreements, the Company will receive cash payments should the one-month LIBOR increase above the contract rates of these Hedging Instruments, which range from 3.61% to 9.67% and average 6.47%. The Cap Agreements had an average maturity of 2.9 years
as of September 30, 2008 and will expire between 2009 and 2013.
28
Interest expense on borrowed funds for the three and nine months ended September 30,
2008 includes net expense related to Hybrid ARM Hedging Instruments of $53.0 million and $119.3 million, respectively. Interest expense on borrowed funds for the same periods in 2007 includes net receipts on Hybrid ARM Hedging Instruments of $53.5
million and $195.4 million, respectively.
Pipeline Hedging Instruments
Purchase commitments for originated and purchased loans that will be held for sale or securitization generally qualify as Derivatives under SFAS 133 and SFAS 149 and are recorded at fair value.
The Company may hedge these purchase commitments with Pipeline Hedging Instruments. The change in fair value of the Pipeline Hedging Instruments is included in Gain (loss) on Derivatives, net in the Condensed Consolidated Income Statements. There
were no Pipeline Hedging Instruments at either September 30, 2008 or December 31, 2007.
Gain (Loss) on Derivatives
The Company recorded a net loss of $45.9 million on Derivatives during the nine months ended September 30, 2008. This loss consisted
of a net loss of $18.0 million on commitments to purchase loans from correspondent lenders and bulk sellers, a net loss on terminated Swap Agreements of $27.4 million and a net loss of $160,000 on other Derivative transactions. The Company recorded
a net loss of $17.0 million on Derivatives during the same period in 2007. This loss included a net loss of $12.0 million on commitments to purchase loans from correspondent lenders and bulk sellers, partially offset by a net gain of $3.3 million on
Pipeline Hedging Instruments. The Company also recognized a net gain of $5.5 million on Swap Agreement terminations and a $13.8 million unrealized loss on Swap Agreements which were originally intended to qualify as cash flow hedges but did not due
to the reduction in borrowings in August 2007.
Note 7. Borrowings
Reverse Repurchase Agreements
As more fully described in Note 2, the Company entered
into an Override Agreement on March 17, 2008 with its five remaining Reverse Repurchase Agreement and Forward Auction Agreement counterparties. Pursuant to the terms of the Override Agreement, the maturity date of all the existing Reverse
Repurchase Agreements with the five counterparties is deemed to be March 16, 2009, the termination date of the Override Agreement, and each of the counterparties has agreed that it will not invoke margin calls or increase margin requirements
beyond contractually specified levels during the term of the Override Agreement. The interest rate on all existing Reverse Repurchase Agreements financing AAA and AA-rated mortgage-backed securities will be reset monthly and will not exceed
one-month LIBOR plus 35 basis points. Interest rates on Reverse Repurchase Agreements financing other than AAA and AA-rated mortgage-backed securities are not affected by the Override Agreement. Under the terms of the Override Agreement, prior to
March 16, 2009 or the date on which the Override Agreement is earlier terminated pursuant to its terms, the Company may not enter into any new transactions under existing or new Reverse Repurchase Agreements, securities lending agreements or
Forward Auction Agreements or deliver additional collateral there under other than as provided in the Override Agreement.
In connection with the Override Agreement and the Financing Transaction, the Company has recorded a debt discount related to Reverse Repurchase Agreements totaling $24.5 million at September 30, 2008 which consists of $10.0 million,
the value of Override Warrants issued to Reverse Repurchase Agreement counterparties and $14.5 million, the value of the option transferred by the Manager to Reverse Repurchase Agreement counterparties. The debt discount is being amortized over the
term of the Override Agreement using the interest method.
As of September 30, 2008, the Company had a principal
balance of $4.7 billion of Reverse Repurchase Agreements outstanding with counterparties to the Override Agreement. At September 30, 2008, the outstanding Reverse Repurchase Agreements had a weighted average borrowing rate of 3.25% and a
weighted average remaining maturity of 5.6 months. As of December 31, 2007, the Company had $11.5 billion of Reverse Repurchase Agreements outstanding with a weighted average borrowing rate of 5.22% and a weighted average remaining maturity of
8.6 months.
During the term of the Override Agreement, each of the counterparties will collect all principal and interest
payments on the securities collateralizing its Reverse Repurchase Agreements and will apply 100% of the principal payments and generally 20% of the interest payments to reduce the balance of the outstanding obligations under its Reverse Repurchase
Agreements payable to the respective counterparties. If the Reverse Repurchase Agreement balances are not reduced to specified levels at each month end, the portion of interest payments applied to reduce those balances will be increased from 20% to
30% until those balances are reduced to the specified levels. Each of the counterparties is obligated to return the amounts that were not applied to reduce the outstanding obligations under such financing agreements collected by it to the Company.
The counterparties to the Override Agreement are not obligated to return to the Company any collateral if the value of the collateral securing their obligations increases during the term of the Override Agreement.
29
Beginning in July 2008, the Override Agreement counterparties began to make a series of margin calls as a
result of a series of Rating Agency downgrades of mortgage-backed securities owned by the Company and financed by the Override Agreement counterparties. In the context of those downgrades and their associated margin calls, some ambiguities arose
with regard to the interpretations of the Override Agreement as it related to margin calls on downgraded securities and other matters. In trying to resolve these issues, the Company and the Override Agreement counterparties entered into a series of
negotiations to attempt to resolve the interpretative issues. And, as negotiations continued and downgrades continued to be announced, the counterparties to the Override Agreement began to withhold funds payable to the Company under both the
Override Agreement and the whole loan financing facility. On August 21, 2008, and in consideration of ongoing negotiations with the Override Agreement counterparties continuing in good faith, the Company used amounts in the Liquidity Reserve
Fund to pay margin calls totaling approximately $219.0 million based on its interpretation of the Override Agreement, which was less than the amount owing based on downgrades under the counterparties interpretation of the Override Agreement.
As of September 30, 2008, the Company had identified additional downgrades in its portfolio with a current face of $631.0 million and a carrying value of $352.2 million which would have resulted in an additional margin call of $56.7 million
under the Companys interpretation. Since September 30, 2008, and up to November 3, 2008, the Company has received additional downgrades on mortgage-backed securities held in its portfolio and financed under the Override Agreement.
Those downgrades had a current face of $510.3 million and a carrying value of $345.1 million and could result in additional margin calls under the Companys interpretation of the Override Agreement of $138.6 million. In total, the Company
believes an additional $195.3 million in margin calls could result from downgrades subsequent to August 21, 2008. The Company has not paid any amounts on these potential additional margin calls to the counterparties to the Override Agreement.
There can be no assurance that active negotiations with the counterparties to the Override Agreement will continue or that an agreement
will be reached. And, if the Company is unable reach a final agreement on these interpretative issues, the counterparties to the Override Agreement may attempt to terminate the Override Agreement prior to March 16, 2009, in which case certain
of our obligations under our Reverse Repurchase Agreements, securities lending and Forward Auction Agreements will become immediately due and payable, which would have a material adverse effect on the Company as the Company does not have the
wherewithal to pay any shortfalls resulting from the liquidation or sale of the underlying collateral.
Asset-backed CP
The Company, through TMCR, a bankruptcy-remote subsidiary of the Company, had an Asset-backed CP facility, which until the dislocation in
the credit markets beginning in August 2007 provided the Company with an alternative way to finance its High Quality ARM Assets portfolio. The Company was not a guarantor of the payments on these notes, and there is no contractual recourse to the
Company for the nonpayment of the notes or any insufficiency after liquidation. The Asset-backed CP program was terminated on April 15, 2008. On April 14, 2008, TMCR did not make payment on the final maturity date of $300.0 million of
notes due under TMCRs Asset-backed CP program. The failure to make such payment constituted a default under the Asset-backed CP program. The Company was legally released from $294 million of the notes in exchange for tendering the AAA-rated
MBS collateral and $14.2 million cash collateral. The net fair value of the liquidated AAA-rated MBS and cash collateral after liquidation expenses was $271.0 million, resulting in a gain on extinguishment of debt of $23.0 million. TMCR is liable
for the remaining balance of $6.0 million in claims on the notes, which is recorded in accrued expenses and other liabilities on the September 30, 2008 Condensed Consolidated Balance Sheet. Subsequent to the April 14, 2008 default of the
Asset-backed CP facility, no interest has been recorded on the remaining $6.0 million claim on the notes.
Collateralized Mortgage Debt
All of the Companys Collateralized Mortgage Debt is secured by ARM loans. For financial reporting purposes, the ARM loans held as
collateral are recorded as assets and the Collateralized Mortgage Debt is recorded as debt. In some transactions, Hedging Instruments are held by bankruptcy-remote legal entities and recorded as assets or liabilities of the Company. The Hedging
Instruments either fix the interest rates of the pass-through certificates or cap the interest rate exposure on these transactions.
30
The following tables present the Collateralized Mortgage Debt and the related Hedging Instruments held by
bankruptcy-remote legal entities that were outstanding as of September 30, 2008 and December 31, 2007 (dollar amounts in thousands):
September 30, 2008
|
|
|
|
|
|
|
Description
|
|
Principal Balance
|
|
Effective Interest
Rate (1)
|
|
Floating-rate financing
|
|
$
|
2,619,121
|
|
3.62
|
%
|
Capped floating-rate financing (2)
|
|
|
13,058,306
|
|
3.62
|
%
|
Pass-through rate financing
|
|
|
3,592,409
|
|
6.29
|
%
|
Fixed-rate financing (3)
|
|
|
1,092,903
|
|
4.31
|
%
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,362,739
|
|
4.13
|
%
|
|
|
|
|
|
|
|
(1)
|
Effective interest rate includes the impact of issuance costs and Hedging Instruments.
|
(2)
|
Includes financing hedged with Cap Agreements with strike prices in excess of one-month LIBOR with a notional balances of $13.1 billion as of September 30,
2008.
|
(3)
|
Includes floating-rate financing hedged with Swap Agreements with aggregate notional balances of $516.2 million and fixed-rate financing of $576.7 million as of
September 30, 2008.
|
December 31, 2007
|
|
|
|
|
|
|
Description
|
|
Principal Balance
|
|
Effective Interest
Rate (1)
|
|
Floating-rate financing
|
|
$
|
1,255,655
|
|
5.11
|
%
|
Capped floating-rate financing (2)
|
|
|
15,779,226
|
|
5.11
|
%
|
Pass-through rate financing
|
|
|
1,975,825
|
|
6.36
|
%
|
Fixed-rate financing (3)
|
|
|
2,235,380
|
|
4.68
|
%
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,246,086
|
|
5.18
|
%
|
|
|
|
|
|
|
|
(1)
|
Effective interest rate includes the impact of issuance costs and Hedging Instruments.
|
(2)
|
Includes financing hedged with Cap Agreements with strike prices in excess of one-month LIBOR with notional balances of $15.8 billion as of December 31,
2007.
|
(3)
|
Includes floating-rate financing hedged with Swap Agreements with aggregate notional balances of $885.9 million and Cap Agreements with strike prices less than
one-month LIBOR with aggregate notional balances of $701.9 million and fixed-rate financing of $647.6 million as of December 31, 2007.
|
As of September 30, 2008 and December 31, 2007, the Collateralized Mortgage Debt was collateralized by ARM Loans with a principal balance of $20.5 billion and $21.2 billion, respectively. The debt matures
between 2033 and 2048 and is callable by the Company at par once the total balance of the loans collateralizing the debt is reduced to 20% of their original balance. The balance of this debt is reduced as the underlying loan collateral is paid down
and is expected to have an average life at September 30, 2008 and December 31, 2007 of approximately 3.5 years.
In connection
with its Collateralized Mortgage Debt, the Company structured certain securitization transactions with expected final distribution dates that preceded the final maturity dates of the underlying collateral. Accordingly the Company is obligated to
refinance or reissue the Collateralized Mortgage Debt associated with any residual underlying collateral for the remaining life of the collateral at current interest rates. In order to achieve this, the Company issued securities that included an
auction process. Through the auction process, the Company agreed to purchase or cause the purchase of any securities that remained outstanding on the auction date at an amount equal to the certificates outstanding principal balance or par. In
order to ensure a AAA rating on the highest rated classes of these securities, the Company facilitated an auction agreement between the respective trust and a AAA/AA counterparty, and entered into an offsetting auction agreement that needed to be
collateralized between the AAA/AA counterparty and the Company.
With respect to the former, the Company arranged and paid a fee on behalf
of certain trusts holding the ARM Loans Collateralizing Mortgage Debt to enter into Forward Auction Agreements with AAA/AA rated counterparties that obligated the Forward Auction Agreement counterparty to pay the shortfall, if any, between the
outstanding certificates principal balance and the amount realized upon the auction of those certificates on specified auction dates to the trusts. The excess, if any, of any amount realized upon the auction of the certificates over the
outstanding principal balance of the certificates on the specified
31
auction dates is paid to the Forward Auction Agreement counterparty. Neither the trusts nor the Forward Auction Agreement counterparties are required to post
any margin to collateralize these future obligations. The purpose of these agreements is to ensure to the degree sufficient to obtain a AAA rating on the most senior classes of the securitizations that the certificate holders of the Companys
Collateralized Mortgage Debt will be paid in full at the auction date.
In the respective offsetting agreements, the Company has received a
fee to enter into Forward Auction Agreements with the same Forward Auction Agreement counterparties that have identical terms to the Forward Auction Agreements described above between the trusts and the Forward Auction counterparties whereby the
Company is obligated to pay the shortfall, if any, between the outstanding certificates principal balance and the amount realized upon the auction of those certificates on specified auction dates to the Forward Auction Agreement
counterparties. The excess, if any, of any amount realized upon the auction of the certificates over the outstanding principal balance of the certificates on the specified auction dates is paid to the Company. The Company is required to post margin
with the Forward Auction Agreement counterparties to collateralize these future obligations and had posted cash collateral totaling $336.0 million at September 30, 2008. The purpose of these offsetting agreements is to ensure that the Forward
Auction Agreement counterparties do not take on undue market risks and to ensure that the Company bears the risk of any shortfall between the auction proceeds and the outstanding certificate balance at the auction dates. The Companys
obligation is covered by the Override Agreement and, accordingly, the Company is not exposed to additional requests for collateral on the Forward Auction Agreements during its term. A shortfall of approximately $164.9 million on auctions in 2008 was
paid using collateral held by Forward Auction Agreement counterparties. The payments are recorded as a premium on Collateralized Mortgage Debt and amortized to interest expense over the estimated remaining life of the respective Collateralized
Mortgage Debt. The collateral posted on the Forward Auction Agreements by the Company as of September 30, 2008 (in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
Auction Date
|
|
Current Certificate
Balance
|
|
Certificate Balance at
Auction Date at Current
1 mo CPR
|
|
Collateral Held by
Forward Auction
Agreement Counterparties*
|
2008
|
|
$
|
1,080,300
|
|
$
|
1,061,812
|
|
$
|
27,981
|
2009
|
|
|
3,634,831
|
|
|
3,446,104
|
|
|
135,911
|
2010
|
|
|
244,073
|
|
|
244,073
|
|
|
35,040
|
2011
|
|
|
3,773,433
|
|
|
2,695,676
|
|
|
72,161
|
2012
|
|
|
2,994,651
|
|
|
2,366,132
|
|
|
64,878
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,727,288
|
|
$
|
9,813,797
|
|
$
|
335,971
|
|
|
|
|
|
|
|
|
|
|
*
|
Collateral held was allocated pro-rata to Forward Auction Agreements based on estimated future payment requirements.
|
The excess or shortfall on the respective certificates is dictated by the interplay of future interest rates, prepayment speeds and mortgage spreads. All
of these collateral characteristics are highly variable and impossible to predict with certainty. The table below sets forth the expected excesses or shortfalls at September 30, 2008 based on certain CPR and MBS spread assumptions which are
within the range of recent historical experience (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generic 10 Year Hybrid ARM Pricing Spread Over Swaps*
|
|
Product CPR
|
|
150
|
|
200
|
|
|
250
|
|
|
300
|
|
|
350
|
|
|
450
|
|
|
500
|
|
Actual 1 Month
|
|
$
|
54.6
|
|
$
|
14.2
|
|
|
$
|
(112.0
|
)
|
|
$
|
(284.2
|
)
|
|
$
|
(456.9
|
)
|
|
$
|
(629.5
|
)
|
|
$
|
(802.1
|
)
|
15%
|
|
|
52.3
|
|
|
17.8
|
|
|
|
(92.3
|
)
|
|
|
(241.8
|
)
|
|
|
(391.6
|
)
|
|
|
(541.5
|
)
|
|
|
(691.3
|
)
|
20%
|
|
|
40.8
|
|
|
9.3
|
|
|
|
(90.6
|
)
|
|
|
(224.5
|
)
|
|
|
(358.7
|
)
|
|
|
(492.9
|
)
|
|
|
(627.1
|
)
|
25%
|
|
|
31.5
|
|
|
2.7
|
|
|
|
(88.1
|
)
|
|
|
(208.1
|
)
|
|
|
(328.4
|
)
|
|
|
(448.6
|
)
|
|
|
(568.9
|
)
|
30%
|
|
|
24.2
|
|
|
(2.2
|
)
|
|
|
(84.8
|
)
|
|
|
(192.5
|
)
|
|
|
(300.4
|
)
|
|
|
(408.3
|
)
|
|
|
(516.3
|
)
|
35%
|
|
|
18.7
|
|
|
(5.5
|
)
|
|
|
(80.9
|
)
|
|
|
(177.7
|
)
|
|
|
(274.6
|
)
|
|
|
(371.6
|
)
|
|
|
(468.6
|
)
|
*
|
Every certificate priced has unique characteristics that required different nominal pricing spreads. Only 10 year Hybrid ARM nominal pricing spreads are shown in
the above table but appropriate pricing spreads for other products were used depending on the specific attributes of the respective certificate marked.
|
The average one-month CPR for the underlying collateral on September 30, 2008 was 8.3%. This compares to the three-month and nine-month CPRs of 12.7% and 15.1%, respectively. The spreads on prime collateral
backed, AAA-rated MBS at September 30, 2008 were at the high end of historical observations and ranged from 280 to 800 BPs, with an average for the Companys portfolio of 450 BPs.
The fees paid by the Company on behalf of the trusts exceed the fees received by the Company from the Forward Auction Agreement counterparties by an amount approximating 6 BPs. The fees paid on
behalf of the trusts are amortized as a yield adjustment and the fees received by the Company are accreted into income based on projected cash flows that results in income and expense recognition that is not consistently offsetting. In the nine
months ended September 30, 2008 interest income recognized on the Forward Auction Agreements totaled $10.6 million and the associated interest expense totaled $18.6 million.
32
Whole Loan Financing Facilities
As of September 30, 2008, the Company had $72.8 million outstanding on two whole loan financing facilities at an effective rate of 4.86%. As of December 31, 2007, the Company had $453.5
million borrowed against these facilities at an effective rate of 5.42%. The amount borrowed on the whole loan financing facilities at September 30, 2008 was collateralized by $15.0 million of cash and ARM Loans with a carrying value of $167.7
million.
On May 7, 2008, the Company and two of its warehouse lenders entered into amendments to the whole loan
financing facilities that had been suspended in March 2008 in order to reactivate these facilities. The terms of each amendment are contingent upon the Company having at least one additional whole loan financing facility with similar terms. As a
result of the amendments, the Company has two committed facilities that each has a committed borrowing capacity of $200.0 million. Both facilities expire on November 7, 2008, but have been extended to November 14, 2008 or such date that
the outstanding amounts are paid off from the pending sale of whole loans. The Company does not expect to renew these facilities. The facilities are collateralized by ARM loan collateral as well as cash collateral of up to $10 million per facility.
The interest rates on the facilities are one-month LIBOR plus 175 basis points for whole loans that have been financed for 90 days or less and one-month LIBOR plus 225 basis points for whole loans that have been financed for over 90 days. The
facilities are not covered by the Override Agreement and are subject to margin calls based on age and estimated values of the whole loans. Each of the whole loan financing facilities requires the Company to pay a 1% commitment fee for the term of
the facility and has financial covenants limiting the Companys leverage. The Company is currently not in compliance with the leverage requirement and has received a waiver of this covenant through the termination of these facilities.
Senior Notes
The
Company had $305.0 million in Senior Notes outstanding at September 30, 2008 and December 31, 2007. The Senior Notes bear interest at 8.0%, payable each May 15 and November 15, and mature on May 15, 2013. The Senior Notes
are redeemable at a declining premium, in whole or in part, beginning on May 15, 2008, and at par beginning on May 15, 2011. In connection with the issuance of the Senior Notes, the Company incurred costs of $5.4 million, which are being
amortized to interest expense on borrowed funds over the expected life of the Senior Notes. The Company received premiums totaling $3.6 million in connection with the issuance of Senior Notes, which are being amortized over the remaining expected
life of the Senior Notes. At September 30, 2008 and December 31, 2007, the balance of the Senior Notes outstanding, net of unamortized issuance costs and premium, was $304.5 million and $304.4 million, respectively, and had an effective
cost of 8.06%, which reflects the effect of issuance costs and premiums received at issuance.
The Companys Senior
Note obligations contain both financial and nonfinancial covenants. Significant financial covenants include limitations on the Companys ability to incur indebtedness beyond contractually specified levels, restrictions on the Companys
ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of, or payment of dividends on, its own equity securities that the Company makes. If, at the end of any quarter, the total
unencumbered assets of the Company fall below 125% of the aggregate principal amount of unsecured indebtedness of the Company (the Minimum Unencumbered Asset Amount), the Company will be required to maintain the debt to net worth ratio calculated as
of the end of such quarter until the total unencumbered assets of the Company exceeds the Minimum Unencumbered Asset Amount. As of September 30, 2008, the Company was in compliance with all financial and nonfinancial covenants on its Senior
Note obligations.
As part of the Financing Transaction described in Note 2, the Company entered into a second supplemental
indenture and security agreement with respect to the Senior Notes to secure the Senior Notes on a basis senior to the lien provided for the Senior Subordinated Secured Notes. Certain of TMAs subsidiaries have guaranteed payment of the Senior
Notes on a senior basis.
Senior Subordinated Secured Notes
The Company had Senior Subordinated Secured Notes with an aggregate principal balance of $1.3 billion outstanding and a carrying value of $407.0 million at September 30, 2008, consisting of
the Senior Subordinated Secured Notes issued in the Financing Transaction on March 31, 2008, the PIK Notes and the Consent Notes. (See Note 2. Override Agreement and Financing TransactionSenior Subordinated Secured Notes for a description
of the Senior Subordinated Secured Notes).
The Senior Subordinated Secured Notes with a principal balance of $1.15 billion
were initially recorded on the Companys Condensed Consolidated Balance Sheets at their allocated fair value of $494.4 million as of March 31, 2008. The initial balance of the Senior Subordinated Secured Notes was determined based on their
relative fair value in allocating the financing proceeds to the Senior Subordinated Secured Notes, the Initial Warrants and the Escrow Warrants, the commitment for escrowed funds and the PPA and Additional Warrant Liability as described in Note 2.
At March 31, 2008, Senior Subordinated Secured Notes were recorded at estimated fair value of $923.0 million after a fair value increase of $457.1 million, including issuance costs of $28.5 million. The Company elected to carry the Senior
Subordinated Secured Notes (including the PIK Notes and Consent Notes) at fair value, which was $407.0 million at September 30, 2008 and recorded a $162.4 million increase in the fair value of
33
the Senior Subordinated Secured Notes as Senior Subordinated Secured Notes fair value changes in the Condensed Consolidated Income Statements for the nine
months ended September 30, 2008 in order to reflect the Senior Subordinated Secured Notes at fair value based on reported trades of the Senior Subordinated Secured Notes. The difference between the face amount of the initial Senior Subordinated
Secured Notes of $1.15 billion and the $227.0 million discount to their issue date fair value of $923.0 million is being amortized to interest expense over the term of the Senior Subordinated Secured Notes using the interest method. At
September 30, 2008, the unamortized initial debt discount was $220.2 million.
The Companys Senior Subordinated
Note obligations contain both financial and nonfinancial covenants. Significant financial covenants include limitations on the Companys ability to incur indebtedness beyond contractually specified levels, restrictions on the Companys
ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of, or payment of dividends on, its own equity securities that the Company makes. As of September 30, 2008, the Company was in
compliance with all financial and nonfinancial covenants of its Senior Subordinated Note obligations.
The Senior
Subordinated Secured Notes are secured by a lien junior to the lien securing the Senior Notes on, among other things, the stock of certain of TMAs subsidiaries, TMHLs MSRs and the interest payments due from the mortgage-backed securities
underlying the Override Agreement after termination of the Override Agreement and after paying interest expense. In addition, certain of TMAs subsidiaries have guaranteed payment of the Senior Subordinated Secured Notes on a senior
subordinated basis.
Subordinated Notes
The Company had $240.0 million in Subordinated Notes outstanding at September 30, 2008 and December 31, 2007. TMA holds $53.5 million of the Subordinated Notes at September 30, 2008, and is a guarantor
of the remaining $186.5 million Subordinated Notes held by TMHL. The Subordinated Notes bear interest at a weighted average fixed rate of 7.47% for the first ten years and thereafter at a variable rate equal to three-month LIBOR plus a weighted
average margin of 2.56%, payable each January 30, April 30, July 30 and October 30, and mature between October 30, 2035 and April 30, 2036. TMHL has the option to redeem the Subordinated Notes at par, in whole
or in part, on or after October 30, 2010. The Subordinated Notes may also be redeemed at a premium under limited circumstances on or before October 30, 2010. In connection with the issuance of the Subordinated Notes, the Company incurred
costs of $7.2 million, which are being amortized over the remaining expected life of the Subordinated Notes.
At
September 30, 2008 and December 31, 2007, the balance of all Subordinated Notes outstanding, net of unamortized issuance costs was $233.5 million and $233.3 million, respectively, and had an effective cost of 7.79%, which reflects the
effect of issuance costs. The Subordinated Note obligations contain nonfinancial covenants. As of September 30, 2008, the Company was in compliance with all nonfinancial covenants on its Subordinated Note obligations. (See Note 16
Subsequent Events)
Other
The total cash paid for interest on borrowed funds was $367.8 million and $670.1 million for the quarters ended September 30, 2008 and 2007, respectively, and $1.2 billion and $1.9 billion for the nine months ended September 30,
2008 and 2007, respectively.
Note 8. Fair Value of Financial Instruments and Off-Balance Sheet Credit Risk
The following table presents the carrying amounts and estimated fair values of the Companys financial instruments at September 30, 2008 and
December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM securities
|
|
$
|
3,596,872
|
|
$
|
3,596,872
|
|
$
|
10,046,818
|
|
$
|
10,046,818
|
Purchased Securitized Loans
|
|
|
393,434
|
|
|
393,434
|
|
|
647,225
|
|
|
647,225
|
Securitized ARM Loans
|
|
|
824,852
|
|
|
825,849
|
|
|
2,557,961
|
|
|
2,565,137
|
ARM Loans Collateralizing Debt
|
|
|
20,433,846
|
|
|
18,899,196
|
|
|
21,383,177
|
|
|
21,220,472
|
ARM loans held for sale or securitization
|
|
|
157,120
|
|
|
157,120
|
|
|
549,359
|
|
|
554,137
|
Hedging Instruments
|
|
|
6,139
|
|
|
6,139
|
|
|
17,523
|
|
|
17,523
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements
|
|
$
|
4,638,927
|
|
$
|
4,638,927
|
|
$
|
11,547,354
|
|
$
|
11,547,354
|
Asset-backed CP
|
|
|
|
|
|
|
|
|
400,000
|
|
|
400,000
|
Collateralized Mortgage Debt
|
|
|
20,362,739
|
|
|
19,385,316
|
|
|
21,246,086
|
|
|
20,519,546
|
Whole loan financing facilities
|
|
|
72,777
|
|
|
72,777
|
|
|
453,500
|
|
|
453,500
|
34
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Senior Notes
|
|
305,000
|
|
137,250
|
|
305,000
|
|
257,725
|
Senior Subordinated Secured Notes
|
|
406,964
|
|
406,964
|
|
|
|
|
Subordinated Notes
|
|
240,000
|
|
56,640
|
|
240,000
|
|
154,200
|
PPA and Additional Warrant Liability
|
|
423,355
|
|
423,355
|
|
|
|
|
Hedging Instruments
|
|
11,557
|
|
11,557
|
|
123,936
|
|
123,936
|
Note 9. Common Stock, Preferred Stock and Common Stock Warrants
Reverse Stock Split
On September 26, 2008, the
Company effected a 1-for-10 Reverse Split of the Common Stock. As a result of the Reverse Split, every 10 shares of (old) Common Stock, a par value of $0.01 per share, which were outstanding as of September 26, 2008, the effective date, were
combined into one share of (new) Common Stock, par value of $0.01 per share. All historical numbers relating to shares of Common Stock have been adjusted to reflect the 1-for-10 Reverse Split. The Reverse Split did not impact the number of
authorized shares.
Common Stock and Preferred Stock
In January 2008, the Company received net proceeds of $229.8 million from the concurrent public offerings of 805,000 shares of Common Stock and 9,137,000 shares of Series F Preferred Stock.
During the three and nine months ended September 30, 2008, the Company issued 29,602 and 2,424,837 shares, respectively, of Common Stock under the
DRSPP and received net proceeds of $91,000 and $258.5 million, respectively.
In October 2008, the Company issued 2,954,422 shares of
Common Stock as consideration to certain holders of the Senior Subordinated Secured Notes who consented to receive the September 30, 2008 interest payment due on the Senior Subordinated Secured Notes in additional Senior Subordinated Secured
Notes in lieu of cash. In accordance with GAAP, these shares are reflected in additional paid-in capital as of September 30, 2008 and the related par value will be reclassified to Common Stock upon actual issuance of the shares.
35
The following table presents the Companys Preferred Stock at September 30, 2008 and
December 31, 2007 (dollars in thousands,):
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
Preferred Stock: par value $0.01 per share;
|
|
|
|
|
|
|
Series B Cumulative Preferred shares aggregate preference in liquidation $0; 0 and 22,000 shares authorized, respectively; no shares issued
and outstanding
|
|
$
|
|
|
$
|
|
8% Series C Cumulative Redeemable shares, aggregate preference in liquidation $163,125; 6,525,000 and 7,230,000 shares authorized,
respectively; 6,525,000 shares issued and outstanding
|
|
|
157,958
|
|
|
157,958
|
Series D Adjusting Rate Cumulative Redeemable shares, aggregate preference in liquidation $100,000; 4,000,000 and 5,000,000 shares authorized,
respectively; 4,000,000 shares issued and outstanding
|
|
|
96,303
|
|
|
96,303
|
7.50% Series E Cumulative Convertible Redeemable shares, aggregate preference in liquidation $79,063; 3,162,500 and 6,162,500 shares
authorized, respectively; 3,162,500 shares issued and outstanding
|
|
|
76,172
|
|
|
76,172
|
10% Series F Cumulative Convertible Redeemable shares, aggregate preference in liquidation $758,168 and $529,743, respectively; 30,326,715 and
23,000,000 shares authorized, respectively; 30,326,715 and 21,190,000 shares issued and outstanding, respectively
|
|
|
671,156
|
|
|
502,052
|
|
|
|
|
|
|
|
|
|
$
|
1,001,589
|
|
$
|
832,485
|
|
|
|
|
|
|
|
The following table presents the dividends paid on Preferred Stock during the nine months ended
September 30, 2008 and 2007 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
Per Share
|
|
Total
|
|
Per Share
|
|
Total
|
Series C
|
|
$
|
0.50
|
|
$
|
544
|
|
$
|
1.50
|
|
$
|
9,282
|
Series D
|
|
|
0.49
|
|
|
328
|
|
|
1.48
|
|
|
5,928
|
Series E (1)
|
|
|
0.47
|
|
|
247
|
|
|
0.53
|
|
|
1,623
|
Series F (2)
|
|
|
0.64
|
|
|
12,574
|
|
|
0.16
|
|
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,693
|
|
|
|
|
$
|
20,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Series E Preferred Shares were first issued in June 2007.
|
(2)
|
Series F Preferred Shares were first issued in September 2007.
|
On January 4, 2008, the Company declared a quarterly dividend of $0.63723 per share of Series F Preferred Stock, which was paid on February 15, 2008 to shareholders of record on January 31, 2008. On
March 24, 2008, the Board of Directors of the Company determined that the Company did not have sufficient liquidity to make its next scheduled payments of dividends on Preferred Stock and indefinitely suspended the payment of dividends on all
series of Preferred Stock. Therefore, dividends were neither declared nor paid on the Series C, D and E Preferred Stock since April 15, 2008 and the Company has not declared or paid dividends on the Series F Preferred Stock since
February 15, 2008. Dividends on Preferred Stock accumulate whether or not the Company has earnings, whether or not there are funds legally available for their payment and whether or not such dividends have been declared. The Company has not
accrued the cumulative unpaid dividends because they have not been declared as of September 30, 2008. Cumulative unpaid dividends on Preferred Stock totaled $67.3 million at September 30, 2008. However, the Company has proposed an
amendment to modify the terms of each series of Preferred Stock to, among other things, make dividends non-cumulative. The amendment requires approval from the holders of the Companys voting stock, which was obtained at the annual meeting of
shareholders held on June 12, 2008 and from the holders of the Companys Preferred Stock in connection with the Exchange Offer and Consent Solicitation. The amendment would have the effect of eliminating any cumulative dividends that have
not been declared or paid as of the date such amendment becomes effective.
In connection with the Financing Transaction, the Company has
commenced the Exchange Offer and Consent Solicitation for all of its outstanding shares of Preferred Stock (See Note 2. Override Agreement and Financing TransactionExchange Offer and Consent Solicitation).
36
On March 17, 2008, the Company filed a Form S-3ASR, an automatic shelf registration statement of
securities of well-known seasoned issuers, with the SEC so that the Company may offer debt securities, equity securities, warrants and shareholder rights from time to time. On July 30, 2008, the Company filed a post-effective amendment to the
registration statement to add the Subsidiary Guarantors as additional registrants and thereby permit the Company to register the Senior Subordinated Secured Notes under the registration statement.
On April 1, 2008, the Company entered into an amendment to the Shareholders Rights Agreement, dated as of January 21, 2001, as amended, to
terminate the Shareholders Rights Agreement as of April 2, 2008.
On June 12, 2008, the Companys shareholders approved an
amendment to the Companys articles of incorporation to increase the number or authorized shares of capital stock from 500 million to 4 billion shares and on June 13, 2008, the Company filed articles of amendment to its articles of
incorporation, reflecting the increase in the authorized capital stock. At the 2008 annual meeting held on June 12, 2008, the Companys shareholders also approved an amendment to modify the terms of each of the Companys existing
series of Preferred Stock to eliminate certain rights of the Preferred Stock. The Company must still obtain the requisite consents from the holders of each series of Preferred Stock to the modification of the terms of the Preferred Stock before
those modifications can become effective. The Company is seeking such consents in connection with the Exchange Offer and Consent Solicitation for the Preferred Stock.
Common Stock Warrants
In connection with the Override Agreement and the Financing Transaction
described in Note 2, the Company issued or will issue the following Warrants:
(1) Initial Warrants to purchase 16,860,655
shares of Common Stock were issued to the investors in the Financing Transaction on March 31, 2008. Escrow Warrants to purchase 3,300,021 (as adjusted to reflect anti-dilution protection for the issuance of the Consent Shares but not adjusted
to reflect any subsequent anti-dilution adjustments) shares of Common Stock were released from escrow effective September 30, 2008 and issued to the holders of the Senior Subordinated Secured Notes on a pro rata basis based on the aggregate
principal amount of Senior Subordinated Secured Notes outstanding. The Escrow Warrants, prior to exercise, will be subject to further anti-dilution protection pursuant to the Warrant Agreement.
(2) Override Warrants to purchase 4,696,000 shares of Common Stock were issued to counterparties to the Override Agreement on
April 1, 2008. Upon satisfaction of the Additional Financing Conditions, the remaining Override Warrants will be issued to the Counterparties to the Override Agreement to the extent not provided under the TMAC Participation Agreement.
(3) Upon satisfaction of the Additional Financing Conditions, investors who are participants in the terminated Principal
Participation Agreement and investors that contributed escrowed funds will receive Additional Warrants such that the Additional Warrants, together with the 16,860,655 Initial Warrants issued on March 31, 2008 and the 3,300,021 (as adjusted to
reflect anti-dilution protection for the issuance of the Consent Shares but not adjusted to reflect any subsequent anti-dilution adjustments) Escrow Warrants issued out of escrow will be exercisable for shares of Common Stock that will constitute
approximately 90% of Common Stock outstanding on a fully diluted basis after giving effect to such issuance and all anti-dilution adjustments in all existing instruments and agreements of the Company, which is estimated to equal Additional Warrants
to purchase approximately 252 million shares of Common Stock. The Additional Warrants will constitute 63.8% of the fully diluted shares of Common Stock after giving effect to the issuance of Common Stock in the Exchange Offer and Consent
Solicitation, assuming 100% participation in the Exchange Offer and Consent Solicitation. The Company has agreed to register the shares underlying the Additional Warrants for resale and expects to file a prospectus with the SEC to accomplish such
registration shortly after delivering, upon satisfaction of the Additional Financing Conditions, the Additional Warrants.
All of the
Warrants are exercisable at a price of $0.01 per share. The Initial Warrants and the Override Warrants issued on April 1, 2008 described in (1) and (2) above have been exercised. The Company filed a resale prospectus with the SEC on
June 19, 2008, for 21,556,655 shares of Common Stock issued upon exercise of the Initial Warrants and Override Warrants. As of November 3, 2008, 1,041,993 of the Escrow Warrants described in (1) above have been exercised. On
October 10, 2008 the Company filed a resale prospectus amending and restating the June 19, 2008 resale prospectus to register a total of 27,667,089 shares of Common Stock (including additional shares issuable upon exercise of the Escrow
Warrants as a result of anti-dilution adjustments) issued or issuable upon exercise of the Initial Warrants, the Escrow Warrants and the Override Warrants. The Override Warrants issued to the counterparties to the Override Agreement expire on
April 1, 2013. The Warrants issued to investors in the Financing Transaction expire on March 31, 2015.
37
The Initial Warrants and the Escrow Warrants were recorded in Shareholders Deficit at $52.7
million, net of $3.0 million of issuance costs. The values of the Initial Warrants and the Escrow Warrants were determined based on their relative fair values in allocating the financing proceeds to the Senior Subordinated Secured Notes, the Initial
Warrants and the Escrow Warrants, the commitment for escrowed funds and the PPA and Additional Warrant Liability as described in Note 2. The Override Warrants issuable to the counterparties to the Override Agreement were recorded in
Shareholders Deficit at $25.1 million. The fair value of the option transferred to the Override Agreement counterparties by the Manager was also recorded in Shareholders Deficit at $36.5 million. During the nine months ended
September 30, 2008, Initial Warrants of $44.9 million were exercised, leaving $7.8 million of Escrow Warrants at September 30, 2008.
Upon completion of all of the transactions referenced above, the exercise of all the Initial Warrants, Escrow Warrants, Additional Warrants and Override Warrants and the issuance of approximately 132 million shares of Common Stock to
tendering preferred shareholders in a successfully completed Exchange Offer and Consent Solicitation, assuming 100% participation in the Exchange Offer and Consent Solicitation, shares of Common Stock outstanding as of April 11, 2008 will
represent approximately 3.8% of Common Stock outstanding on a fully diluted basis.
TMHL Adjusted Net Worth Compliance
TMHL is a mortgage lender that is regulated by various states and the District of Columbia. Additionally, TMHL is a seller/servicer approved by
various agencies, including the U.S. Department of Housing and Urban Development, Fannie Mae and Freddie Mac. Certain of these agencies and state regulators require TMHL to maintain minimum levels of adjusted net worth varying from $25,000 to
$250,000. As of December 31, 2007 and March 31, 2008, TMHL was not in compliance with these adjusted net worth requirements. By executing a plan of recapitalization of TMHL through the Companys forgiveness of intercompany debt and
the Companys assumption of certain third party debt of TMHL, TMHL regained compliance with all adjusted net worth requirements as of June 30, 2008 and has maintained adjusted net worth compliance going forward. As of
September 30, 2008, the adjusted net worth of TMHL was approximately $12.4 million. During the period of noncompliance, TMHL was in continuous discussions with the agencies and regulators, and to date no agency or regulator has revoked any of
TMHLs approvals or licenses. In a matter related to minimum net worth compliance, on October 15, 2008, TMHL voluntarily entered into a consent agreement with the state of Tennessee, whereby TMHL agreed to cease lending in that state
until such time as TMHL can demonstrate improved and consistent financial results. No other state or agency has made an indication of pursuing a similar action.
Note 10. Comprehensive Income (Loss)
Comprehensive income (loss) is composed of net income or loss
and OCI, which includes the change in unrealized gains and losses on available-for-sale Purchased ARM Assets and Hedging Instruments designated as cash flow hedges. The following table presents OCI balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
(losses) on Purchased
ARM Assets (1)
|
|
|
Unrealized
gains (losses)
on Hedging
Instruments (2)
|
|
|
Accumulated
other
comprehensive
loss
|
|
Balance, December 31, 2006
|
|
$
|
(464,109
|
)
|
|
$
|
152,061
|
|
|
$
|
(312,048
|
)
|
Net change
|
|
|
202,146
|
|
|
|
(232,149
|
)
|
|
|
(30,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
(261,963
|
)
|
|
$
|
(80,088
|
)
|
|
$
|
(342,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
22,903
|
|
|
$
|
(195,335
|
)
|
|
$
|
(172,432
|
)
|
Net change
|
|
|
69,307
|
|
|
|
5,965
|
|
|
|
75,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
92,210
|
|
|
$
|
(189,370
|
)
|
|
$
|
(97,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Prior to December 31, 2007, unrealized gains and losses on Purchased ARM Assets were included in OCI. Beginning on December 31, 2007, unrealized losses
are realized as impairment charges and unrealized gains are included in OCI.
|
(2)
|
At September 30, 2008, the unrealized losses on Hedging Instruments included losses totaling $179.6 million recorded in OCI related to terminated Swap
Agreements.
|
Note 11. Long-Term Incentive Awards
The Board of Directors adopted the Plan, effective September 29, 2002. The Plan authorizes TMAs Compensation Committee to grant DERs, SARs and PSRs.
38
As of September 30, 2008, there were 148,149 DERs outstanding, all of which were vested, and
2,550,824 PSRs outstanding, of which 565,391 were vested. (The value of PSRs and DERs is based on our Common Stock. Therefore, PSRs and DERs were also subject to a 1 for 10 reverse stock split effective September 26, 2008.) The Company recorded
an expense associated with DERs and PSRs of $320,000 during the quarter ended September 30, 2008. The expense recorded consists of $2.9 million resulting from the impact of the decrease in the Common Stock price on the value of the PSRs which
was recorded as a fair value adjustment, offset by $3.2 million related to the amortization of unvested PSRs. The Company recorded an expense recapture associated with DERs and PSRs of $15.5 million for the quarter ended September 30, 2007. The
recapture recorded in the third quarter of 2007 consisted of $17.9 million resulting from the impact of the decrease in the Common Stock price on the value of the PSRs which was recorded as a fair value adjustment, partially offset by $1.9 million
associated with dividend equivalents paid on DERs and PSRs and $384,000 related to the amortization of unvested PSRs. To date, the Company has not issued SARs under the Plan.
On April 22, 2008, the Compensation Committee reviewed concerns about the effects on employee morale and retention resulting from the decline in value of the Companys employees
PSRs, which represent a significant portion of their compensation, and the continued volatility in the mortgage industry and employees concerns about the effects of that volatility on the future of the industry and the Company. The
Compensation Committee recommended the granting of one-time special awards of PSRs to certain employees to induce them to remain with the Company. On June 12, 2008, the Company granted an aggregate of 2,399,781 PSRs (adjusted for the Reverse
Split), to certain employees of the Company and the Board of Directors, as one-time special awards to vest over three years subject to continued service to the Company. The grant value totaled $31.0 million ($12.90 per share).
Pursuant to the terms of the Override Agreement, the Company may not purchase PSRs from participants in the Plan during the term of the Override
Agreement.
Note 12. Transactions with Affiliates
The Company is managed externally by the Manager under the terms of the Management Agreement. The Management Agreement, which expires in July 2014, provides for an annual review by the independent directors of the
Board of Directors of the Managers performance and the reasonableness of the compensation paid to the Manager. If the Company terminates the Management Agreement other than for cause, the Company must pay the Manager a substantial cancellation
fee. The Management Agreement contains a provision, which was waived for the Financing Transaction, that in the event a person or entity obtains more than 20% of Common Stock, there is a change in the majority of the Board of Directors of the
Company, the Company is combined with or acquired by another entity, or the Company terminates the Management Agreement other than for cause, the Company is obligated to acquire substantially all of the Managers assets through an exchange of
shares with a value based on a formula tied to the Managers net profits. On March 31, 2008, the Company entered into an amendment to the Management Agreement where it was agreed that the Financing Transaction would not constitute an
acquisition event within the meaning of such Management Agreement. Furthermore, the parties agreed that the Manager would not receive any performance fee during the term of the Override Agreement. Consequently, the Manager will not be entitled to
receive any performance-based compensation until the Override Agreement terminates. The Company has the right to terminate the Management Agreement upon the occurrence of certain specific events, including a material breach by the Manager of any
provision contained in the Management Agreement.
The Manager receives an annual base management fee of 1.47% on the first $300 million of
Average Historical Equity, plus 1.08% on Average Historical Equity above $300 million but less than $1.5 billion. The additional fee earned on Average Historical Equity is limited to 0.95% on Average Historical Equity greater than $1.5 billion but
less than $2.0 billion, to 0.89% for Average Historical Equity greater than $2.0 billion but less than $2.5 billion, to 0.83% for Average Historical Equity greater than $2.5 billion but less than $3.0 billion, and is capped at 0.78% on any Average
Historical Equity greater than $3.0 billion. These percentages are subject to an inflation adjustment each July based on changes to the Consumer Price Index over the prior twelve month period. On March 14, 2008, the Board of Directors
authorized a minimum base management fee of $2 million per month for the period January 1, 2008 through April 30, 2008. On April 22, 2008, the Company and the Manager entered into an amendment to the Management Agreement to establish
a minimum monthly base management fee of $2.0 million and to provide that the Compensation Committee of the Board of Directors review and approve the compensation proposed to be paid by the Manager to all senior officers of the Company.
Each quarter, the Manager may earn a performance-based incentive fee of 20% of the Companys annualized net income, before performance-based
compensation, above an annualized ROE as defined in the Management Agreement equal to the Ten Year U.S. Treasury Rate plus 1%, with the fee limited such that once the Manager has earned a performance fee of $30 million, the performance fee
percentage of 20% is reduced by 1% for each additional $5 million earned in performance fees until reaching a performance fee percentage of 15% for any amount greater than $50 million. Pursuant to the terms of the Override Agreement, any incentive
fee earned by the Manager during the term of the Override Agreement will be accrued, but not paid to the Manager until the Override Agreement terminates. Until the Override Agreement terminates, an amount equal to the incentive fee earned will be
paid to the counterparties to the Override Agreement and will be applied by them to reduce the Companys obligations to the counterparties under the Reverse Repurchase Agreements.
39
The Management Agreement provides for an annual review of the Managers performance by the
Companys independent directors. In addition, the Board of Directors reviews the Companys financial results, policy compliance and strategic direction on a quarterly basis.
Subject to the limitations set forth below, the Company pays all its operating expenses except those that the Manager is specifically required to pay under the Management Agreement. The operating
expenses that the Manager is required to pay include the compensation of personnel who are performing management services for the Manager and the cost of office space, equipment and other overhead-related expenses required in connection with those
personnel providing management services for the Manager. The expenses that the Company is required to pay include costs related to the acquisition, disposition, securitization and financing of mortgage loans, the compensation and expenses of
operating personnel, marketing expenses, regular legal and auditing fees and expenses, the fees and expenses of its directors, the costs of printing and mailing proxies and reports to shareholders, the fees and expenses of its custodian and the
Agent, if any, and the reimbursement of any obligation of the Manager for any New Mexico gross receipts tax liability.
On March 31,
2008, the Manager and certain shareholders of the Manager signed the TMAC Participation Agreement, whereby MP TMAC LLC, an affiliate of MatlinPatterson, shall acquire a 75% participation interest in the base management fee, net of reasonable
expenses, and gross proceeds of the performance-based incentive fee and in consideration, MP TMAC LLC granted the Manager the option to acquire an aggregate of 2.5264% of the fully diluted authorized and issued shares of Common Stock (not to exceed
7,811,379 shares of Common Stock) for an exercise price of $0.01 per share. This option will be exercisable upon and from time to time after the satisfaction of the Additional Financing Conditions. The Manager has transferred this option to the
counterparties to the Override Agreement. At March 31, 2008, the $36.5 million fair value of this option was considered a capital contribution to the Company by the Manager and has been recorded in Shareholders Deficit on the Condensed
Consolidated Balance Sheets with $30.0 million, the amount related to the option transferred to Reverse Repurchase Agreement counterparties, deferred and recorded as a debt discount on Reverse Repurchase Agreements on the Condensed Consolidated
Balance Sheets and $6.5 million, the amount related to the option transferred to Forward Auction Agreement counterparties, recorded as an asset in Other Assets on the Condensed Consolidated Balance Sheets. The debt discount related to the option
transferred to Reverse Repurchase Agreement counterparties is being amortized over the term of the Override Agreement using the interest method. The asset related to the option transferred to the Forward Auction Agreement counterparties is being
amortized over the term of the Override Agreement on a straight-line basis.
MP TMAC LLC has agreed to offer each other investor (other
than its affiliates) the opportunity to participate on the same terms and conditions as MP TMAC LLC in the TMAC Participation Agreement on a pro rata basis based on the amount of such investors total investment under the Financing Transaction
over $1.35 billion.
So long as MP TMAC LLC (or any other participant in the TMAC Participation Agreement) and its affiliates holds 30% of
the TMAC Participation Agreement (Major Participant), the prior written consent of such participant shall be required before the Manager may enter into, amend, modify, supplement or terminate, or waive any provision under, any material contract of
the Manager, including without limitation the Management Agreement, any employment agreement or other contracts relating to employees of the Manager, or other contracts relating to the Company. A Major Participant may request the Managers
Board of Directors to take any action or refrain from taking any action with respect to any matter pertaining to the Manager, on the one hand, and either the Company or any current or prospective employee, consultant or adviser of the Manager, on
the other hand. If the Board of Directors of the Manager (or, as the case may be, the shareholders of the Manager signatories to the TMAC Participation Agreement) shall unreasonably fail to implement such a request in a timely manner, then the Major
Participant which made the request shall have the right to elect to designate up to a majority of the members of the Managers Board of Directors.
The Company is in preliminary negotiations to restructure the TMAC Participation Agreement, however the Company has not determined what the terms of an alternative arrangement would be and no assurance can be given
that the TMAC Participation Agreement will be restructured.
In connection with the PIK Consent sought and received by the Company to pay
the September 30, 2008 interest payment due on the Subordinated Notes in the form of additional Senior Subordinated Secured Notes in lieu of a cash payment, MatlinPatterson received approximately $42.8 million in aggregate principal amount of
Senior Subordinated Secured Notes as the interest payment. In addition, MatlinPatterson elected to receive Consent Notes as consideration for its consent, and received an additional $9.5 million aggregate principal amount of Senior Subordinated
Secured Notes as such consideration. In connection with these issuances of additional Senior Subordinated Secured Notes to MatlinPatterson, the Company obtained a fairness opinion from an independent financial advisor and filed such opinion with
trustees of the Senior Notes and the Senior Subordinated Secured Notes pursuant to the indenture governing each.
During the quarters ended
September 30, 2008 and 2007, the Company paid certain reimbursement expenses of $2.9 million and $3.7 million, respectively, to the Manager in accordance with the contractual terms of the Management Agreement. During the nine months ended
September 30, 2008 and 2007, the Company reimbursed the Manager $9.5 million and $10.7 million, respectively, for expenses. As of September 30, 2008 and December 31, 2007, $1.0 million and $2.4 million, respectively, was payable by
the Company to the Manager for these reimbursable expenses.
40
For the quarters ended September 30, 2008 and 2007, the Company incurred base management fees of
$6.0 million and $6.2 million, respectively, in accordance with the terms of the Management Agreement. For the nine months ended September 30, 2008 and 2007, the Company incurred base management fees of $18.0 million and $19.8 million,
respectively. As of September 30, 2008 and December 31, 2007, $2.0 million and $1.6 million, respectively, was payable by the Company to the Manager for the base management fee.
For the three and nine months ended September 30, 2008, the Company did not incur any performance-based fee and no amount was paid to the counterparties of the Override Agreement since the
Manager did not earn any fee. For the three and nine months ended September 30, 2007, the Company incurred performance-based fees in the amount of zero and $17.7 million, respectively. As of September 30, 2008 and December 31, 2007,
zero and $9.8 million, respectively, was payable by the Company to the Manager for performance-based compensation.
Pursuant to an employee
residential mortgage loan program approved by the Board of Directors as part of the Companys residential loan mortgage origination activities, certain of the directors and officers of the Company and employees of the Manager and of other
affiliates of the Company have obtained residential first lien mortgage loans from the Company. In general, the terms of the loans and the underwriting requirements are identical to the loan programs that the Company offers to unaffiliated third
parties, except that participants in the program qualify for an employee discount on the interest rate. At the time each participant enters into a loan agreement, such participant executes an addendum that provides for the discount on the interest
rate, which is subject to cancellation at the time such participants employment or association with the Company or the related entity is terminated for any reason. Effective with the enactment of the Sarbanes-Oxley Act of 2002 on July 30,
2002, any new loans made to directors or executive officers are not eligible for the employee discount. As of September 30, 2008, the aggregate balance of mortgage loans outstanding to directors and officers of the Company, and employees of the
Manager and other affiliates amounted to $44.4 million and had a weighted average interest rate of 5.22%, and maturities ranging between 2031 and 2038.
Note 13. Litigation
Preferred Shareholder Class Action Litigation
On October 27, 2008, a purported class action complaint, or the Class Action Complaint, entitled
Roney v. Thornburg,
et. al.
was filed in the United States District Court, District of New Mexico. The Class Action Complaint alleges that the Company, certain of its officers, all of its current directors and certain of its former directors violated federal
securities laws by issuing false and misleading statements regarding the Companys tender offer for its outstanding Preferred Stock in proxy statements filed with the SEC in April and July 2008; alleges that these defendants, as well as two of
the Companys largest shareholders, breached their fiduciary duty to the Companys shareholders by entering into the Financing Transaction on March 31, 2008; and petitions for the dissolution of the Company. The Class Action Complaint
seeks declaratory and injunctive relief, rescission of the tender offer to the extent implemented, recovery of the costs and expenses of the action and other relief that may be granted by the court. The Company believes the allegations are without
merit, and intends to defend against them vigorously.
Securities Class Action Litigation
On May 27, 2008, a consolidated amended complaint (CAC),
In re Thornburg Mortgage Inc. Securities Litigation
, was
filed against the Company, certain of the Companys officers and directors, and the underwriters of some of the Companys securities offerings. This consolidated proceeding encompasses the actions previously reported as
Slater v.
Thornburg
,
Gonsalves v. Thornburg
,
Smith v. Thornburg Mortgage, Inc.
, S
edlmyer v. Thornburg Mortgage, Inc
., and
Snydman v. Thornburg Mortgage, Inc
. The CAC alleges that the Company and certain individual defendants
violated federal securities laws by issuing false and misleading statements in financial reports filed with the SEC, press releases and other public statements, which resulted in artificially inflated market prices of the Companys Common
Stock, and that the named plaintiffs and the members of the putative class purchased Common Stock at these artificially inflated market prices between April 19, 2007 and March 19, 2008. The CAC also alleges that all defendants are liable
under federal securities laws for materially false and misleading statements in the registration statements and prospectuses for the Companys May 2007, June 2007, September 2007, and January 2008 securities offerings. The CAC seeks
unspecified money damages in favor of the putative class of purchasers of the Companys securities, injunctive relief, restitution, the costs and expenses of the action, and other relief that may be granted by the court. The Company believes
the allegations are without merit, and intends to defend against them vigorously. At September 30, 2008, no loss amount had been accrued because a loss is not considered probable or estimable.
41
Shareholder Derivative Litigation
On August 24, 2007, a shareholder derivative complaint, or the Derivative Complaint, was filed in the First Judicial District Court (Santa Fe County, New Mexico) by an alleged
shareholder of the Company alleging that certain of the Companys officers and all of its directors violated state law, breached their fiduciary duties, and were unjustly enriched, during the period between October 2005 and August 24,
2007, resulting in substantial monetary losses and other damages to the Company. The Derivative Complaint seeks unspecified money damages, along with changes in corporate governance and internal procedures.
This derivative litigation is in its preliminary stages, and the Company cannot predict its outcome, as the litigation process is
inherently uncertain. However, the Company believes the allegations are without merit, and intends to defend itself vigorously. All parties to this action have stipulated to an indefinite stay of all proceedings, and have asked the court to enter an
order accordingly. At September 30, 2008, no loss amount had been accrued because a loss is not considered probable or estimable.
Note 14. Fair
Value (SFAS 157 and SFAS 159)
Effective January 1, 2008, the Company adopted SFAS 157 and SFAS 159. Both standards address aspects
of the expanding application of fair value accounting and define fair value, expand disclosure requirements around fair value and establish a fair value hierarchy. SFAS 157 requires the Company to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, or an exit price. Under SFAS 159, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. On
January 1, 2008, the Company did not elect to measure any of its assets or liabilities at fair value that were not previously carried at fair value. In connection with the Financing Transaction, the Company elected to measure the elements of
that transaction at fair value in accordance with SFAS 159. After initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsiderations events
occur. The fair value election may not be revoked once an election is made.
Fair Value Hierarchy
SFAS 157 establishes a fair value hierarchy based on whether the inputs to those valuation techniques are observable or unobservable. The
degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect
the Companys market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1
Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable
Determination of Fair Value
The Company measures fair value using the procedures set out below for all assets and liabilities measured at fair value.
When available, the Company generally uses quoted market prices to determine the fair value, and classifies such items within Level 1 of the fair value hierarchy. If quoted market prices are not available, fair value
is determined using current market-based or independently sourced market parameters, such as quotes from broker-dealers that make markets in similar financial instruments, interest rates, product type, credit rating, seasoning, duration, prepayment
expectations, option volatilities, discounted cash flows and other relevant inputs.
Items valued using such valuation
models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure different financial instruments at fair value,
including an indication of the level in the fair value hierarchy in which each instrument is generally classified. Where appropriate the description includes details of the valuation models, and the key inputs to those models, as well as any
significant assumptions.
Purchased ARM Assets and Securitized ARM Loans
For Purchased ARM Assets and Securitized ARM Loans which consist of mortgage-backed securities that are traded over-the-counter, fair
value generally is based upon quoted market prices or Market Price Equivalents, both of which use, where possible, current market-based or independently sourced market parameters, such as quotes from broker-dealers that make markets in similar
financial instruments, interest rates, product type, credit rating, seasoning, duration, prepayment expectations, option volatilities, discounted cash flows and other relevant inputs.
42
For securities valued by management, the Company first looks to identify a security in
its portfolio for which a quoted market price is available that has similar characteristics including interest coupon, product type, credit rating, seasoning, duration and prepayment expectations. The quoted market price of the similar security is
then used to value the security for which there was no quoted market price, by applying the percentage change in price of the similar security for the relevant period to the price of the security for which there was no quoted market price. The
objective is to use the quoted market price as the primary valuation indicator; however, if the Company is unable to identify a similar security in its portfolio, management looks to recent market transactions of similar securities or makes
inquiries of broker-dealers that trade similar securities and uses the data obtained to calculate a Market Price Equivalent based on a yield or spread target. Items valued using quoted market prices are classified according to the lowest level input
or value driver that is significant to the valuation. Purchased ARM Assets and Securitized ARM Loans priced using the methods described above are generally classified as Level 2. However, when less liquidity exists for a security, a quoted market
price is stale or prices from independent sources vary, a security is generally classified as Level 3. As a result of the severe reduction in the level of activity in the relevant market beginning in the second half of 2007, observable market prices
for directly comparable securities to those in the Companys portfolio have not been readily available. Therefore, such securities are classified within Level 3 of the fair value hierarchy.
ARM Loans Held for Sale or Securitization
Prior to January 1, 2008, ARM loans held for sale or securitization were classified as held-for-investment and carried at amortized cost until subsequent securitization on March 3, 2008. As a result of liquidity issues (see Note
1), ARM loans held for sale or securitization that were not securitized subsequent to December 31, 2007 are designated as held for sale and carried at the lower of cost or fair value at September 30, 2008. The fair value of ARM loans held
for sale or securitization is estimated by the Company based on the price that would be received if the loans were sold as whole loans taking into consideration the aggregated characteristics of groups of loans such as, but not limited to,
collateral type, index, interest rate, margin, length of fixed interest rate period, life cap, periodic cap, underwriting standards, age and credit. Because of the specialized nature of the Companys loan portfolio, there are no quoted prices
for identical or similar loans. As a result, ARM loans held for sale or securitization are generally classified within Level 3 of the fair value hierarchy.
Mortgage Servicing Rights
Effective January 1, 2006 with the adoption of SFAS 156, Accounting for
Servicing of Financial Assets, the Company does not capitalize any MSRs in connection with securitizations accounted for as secured borrowings under SFAS 140. The Company did not elect to measure its previously existing servicing assets at
fair value and continues to measure them at the lower of cost or fair value. Fair value is determined using an internal valuation model based on discounted future cash flows and considers portfolio characteristics and assumptions regarding
prepayment speeds, discount rates, delinquency rates of the serviced loans and other economic factors. These inputs are largely unobservable and as a result, these items are classified within Level 3 of the fair value hierarchy. MSRs are included in
Other assets on the Condensed Consolidated Balance Sheets.
PPA and Additional Warrant Liability
The Financing Transaction described in Note 2 resulted in the Company recording a freestanding PPA and Additional Warrant Liability. This liability is
recorded at fair value at September 30, 2008 using Level 3 inputs. The principal inputs used to determine the fair value are discounted cash flows, Black-Scholes calculation of the Additional Warrant Liability fair value and the Companys
estimate of the likelihood of the satisfaction of the Additional Financing Conditions. As of November 3, 2008, the Company had received tenders for 71.0% of the outstanding shares of its Series C Preferred Stock, 73.3% of the outstanding shares
of its Series D Preferred Stock, 75.1% of the outstanding shares of its Series E Preferred Stock, 66.2% of the outstanding shares of its Series F Preferred Stock, and approximately 68.2% of the aggregate outstanding shares of Preferred Stock. While
the shares of Preferred Stock tendered as of November 3, 2008 remain subject to withdrawal prior to the expiration date of the Exchange Offer and Consent Solicitation (all in accordance with the terms of the Exchange Offer and Consent
Solicitation), the existence of such tenders as of November 3, 2008 has resulted in a significant upward adjustment in the probability of the Additional Warrants being issued and the Principal Participation Agreement being terminated. The
application of this revised probability assessment would result in a significant fair value reduction in the PPA and Additional Warrant Liability. The November 3, 2008 probability has not been considered in the value of the PPA and Additional
Warrant Liability reported in the accompanying Condensed Consolidated Balance Sheets.
Hedging Instruments
The majority of derivatives entered into by the Company are executed over the counter and so are valued using valuation techniques as no quoted market
prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flows. The key inputs include interest rate yield curves, the spot price of the underlying, volatility and correlation. All of the
hedging instruments are considered in Level 2 based on the observability of the inputs to the model. Correlation and items with longer tenors are generally less observable.
43
Senior Subordinated Secured Notes
Due to the absence of current market observable trades, the fair value of the Senior Subordinated Secured Notes at September 30, 2008 is based on the net present value of the discounted cash
flows available to Senior Subordinated Note holders. Those cash flows were calculated for two alternative scenarios assuming either the successful or unsuccessful completion of the Exchange Offer and Consent Solicitation. The alternative
scenarios were further weighted by the probability of the respected scenarios occurrence. To determine an appropriate discount to use, the Company started with the observable discount rate implied in actual trades of its Senior Notes.
There were recent trades on the Senior Notes which were at a higher discount rate than what was initially gleaned from the bid offer prices posted on the Senior Notes on September 30, 2008. The Company then added a subordinated debt risk premium
commensurate with the market subordinated debt risk premiums for comparable companies.
Items Measured at Fair Value on a Recurring Basi
s
The following table presents for each of the fair value hierarchy levels the Companys assets and
liabilities that are measured at fair value on a recurring basis at September 30, 2008 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased ARM Assets
|
|
$
|
|
|
$
|
|
|
$
|
3,990,306
|
|
$
|
3,990,306
|
Hedging Instruments
|
|
|
|
|
|
6,139
|
|
|
|
|
|
6,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
6,139
|
|
$
|
3,990,306
|
|
$
|
3,996,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
PPA and Additional Warrant Liability
|
|
$
|
|
|
$
|
|
|
$
|
423,355
|
|
$
|
423,355
|
Senior Subordinated Secured Notes
|
|
|
|
|
|
406,964
|
|
|
|
|
|
406,964
|
Hedging Instruments
|
|
|
|
|
|
11,557
|
|
|
|
|
|
11,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
418,521
|
|
$
|
423,355
|
|
$
|
841,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies financial instruments in Level 3 of the fair-value
hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that
are readily observable either directly or indirectly. Thus the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs. The following table presents the changes in the Level 3 fair value
category for the nine months ended September 30, 2008. (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
ARM Assets
|
|
|
PPA and
Additional
Warrant
Liability
|
|
|
Total
|
|
Balance, January 1, 2008
|
|
$
|
10,694,043
|
|
|
$
|
|
|
|
$
|
10,694,043
|
|
Additions
|
|
|
796,330
|
|
|
|
(600,502
|
)
|
|
|
195,828
|
|
PPA and Additional Warrant Liability fair value changes
|
|
|
|
|
|
|
(520,519
|
)
|
|
|
(520,519
|
)
|
Sales
|
|
|
(4,332,219
|
)
|
|
|
|
|
|
|
(4,332,219
|
)
|
Impairments (1)
|
|
|
(1,233,439
|
)
|
|
|
|
|
|
|
(1,233,439
|
)
|
Change in unrealized gain (1)
|
|
|
5,165
|
|
|
|
|
|
|
|
5,165
|
|
Transfers In/Out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (2)
|
|
|
(418,117
|
)
|
|
|
|
|
|
|
(418,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008
|
|
|
5,511,763
|
|
|
|
(1,121,021
|
)
|
|
|
4,390,742
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
PPA and Additional Warrant Liability fair value changes
|
|
|
|
|
|
|
536,881
|
|
|
|
536,881
|
|
Sales
|
|
|
(536,742
|
)
|
|
|
|
|
|
|
(536,742
|
)
|
Impairments (1)
|
|
|
(140,588
|
)
|
|
|
|
|
|
|
(140,588
|
)
|
Change in unrealized gain (1)
|
|
|
177,533
|
|
|
|
|
|
|
|
177,533
|
|
Transfers In/Out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (2)
|
|
|
(221,132
|
)
|
|
|
|
|
|
|
(221,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
4,790,834
|
|
|
|
(584,140
|
)
|
|
|
4,206,694
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
ARM Assets
|
|
|
PPA and
Additional
Warrant
Liability
|
|
|
Total
|
|
PPA and Additional Warrant Liability fair value changes
|
|
|
|
|
|
|
160,193
|
|
|
|
160,193
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments (1)
|
|
|
(572,908
|
)
|
|
|
|
|
|
|
(572,908
|
)
|
Change in unrealized gain (1)
|
|
|
(113,391
|
)
|
|
|
|
|
|
|
(113,391
|
)
|
Transfers In/Out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (2)
|
|
|
(114,229
|
)
|
|
|
592
|
|
|
|
(113,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
3,990,306
|
|
|
$
|
(423,355
|
)
|
|
$
|
3,566,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains still held (3)
|
|
$
|
92,210
|
|
|
$
|
|
|
|
$
|
92,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Unrealized losses on Purchased ARM Assets are recorded as impairments and included in Loss on ARM assets on the Condensed Consolidated Income Statements.
Unrealized gains on Purchased ARM Assets are recorded in OCI on the Condensed Consolidated Balance Sheets.
|
(2)
|
Other includes principal payments, amortization of premium and the write-of the debt commitment fee associated with the escrowed funds.
|
(3)
|
Represents the amount of total gains attributable to the change in fair value relating to assets and liabilities classified as Level 3 that are still held at
September 30, 2008.
|
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a non-recurring basis and therefore are not included in the tables above. Securitized ARM
Loans and ARM loans held for sale or securitization are classified as loans held-for-sale that are measured at the lower of cost or fair value and were recognized at a fair value below cost at September 30, 2008. At September 30, 2008,
Securitized ARM Loans carried at the lower of cost or fair value with an aggregate amortized cost basis of $1.2 billion, which reflects a basis adjustment of $244.0 million recorded at December 31, 2007, were written down to a carrying value
totaling $824.9 million, based on Level 3 inputs according to the methodology described above. At September 30, 2008, ARM loans held for sale or securitization carried at the lower of cost or fair value with an aggregate amortized cost basis of
$184.7 million were written down to a fair value totaling $157.1 million, based on Level 3 inputs according to the methodology described above. At September 30, 2008, MSRs carried at lower of cost or fair value with an aggregate amortized cost
basis of $24.2 million were written down to a fair value totaling $22.3 million, based on Level 3 inputs according to the methodology described above.
Note 15. Condensed Consolidating Financial Information
TMA is the issuer of the Common Stock, Preferred Stock, Senior Notes
and Senior Subordinated Secured Notes. In addition to TMA, four of the directly or indirectly wholly-owned subsidiaries of TMA (Thornburg Mortgage Home Loans, Inc., Adfitech, Inc., Thornburg Mortgage Hedging Strategies, Inc. and Thornburg
Acquisition Subsidiary, Inc.), (collectively the Guarantor Subsidiaries) have guaranteed fully and unconditionally, on a joint and several basis, the obligations of TMA to pay principal and interest under the Senior Notes and the Senior Subordinated
Secured Notes. TMAs other subsidiaries, including, but not limited to, the subsidiaries engaged in the issuance of mortgage-backed securities, (collectively the Non-Guarantor Subsidiaries) have not provided a guarantee of the Senior Notes or
the Senior Subordinated Secured Notes. The pro-forma effects of the certain possible outcomes of the Exchange Offer and Consent Solicitation were presented in the Senior Subordinated Secured Notes prospectus supplement. The financial condition and
results of operations from the third quarter of 2008 as reported in the accompanying consolidated financial statements would impact those pro-forma results.
Each of the Guarantor Subsidiaries is a wholly-owned, direct or indirect subsidiary of TMA. The related guarantee of the Senior Notes and Senior Subordinated Secured Notes is provided by each Guarantor Subsidiary on a
fully unconditional basis jointly and severally with each of the other Guarantor Subsidiaries. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying condensed
consolidating financial information. The following condensed consolidating financial information presents the results of operations, financial position, and cash flow information of (i) TMA, (ii) the Guarantor Subsidiaries, (iii) the
Non-Guarantor Subsidiaries, and (iv) the eliminations to arrive at the total consolidated amounts for the Company:
45
Thornburg Mortgage, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet Information
September 30, 2008
(dollars in thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMA
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Condensed
Consolidated
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM securities, net
|
|
$
|
3,596,872
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,596,872
|
|
Purchased Securitized Loans, net
|
|
|
393,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393,434
|
|
Securitized ARM Loans, net
|
|
|
598,184
|
|
|
|
|
|
|
|
|
|
|
|
226,668
|
|
|
|
824,852
|
|
ARM Loans Collateralizing Debt, net
|
|
|
20,433,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,433,846
|
|
ARM loans held for sale or securitization, net
|
|
|
|
|
|
|
157,120
|
|
|
|
|
|
|
|
|
|
|
|
157,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM Assets
|
|
|
25,022,336
|
|
|
|
157,120
|
|
|
|
|
|
|
|
226,668
|
|
|
|
25,406,124
|
|
Other assets
|
|
|
966,264
|
|
|
|
174,426
|
|
|
|
|
|
|
|
(261,492
|
)
|
|
|
879,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,988,600
|
|
|
$
|
331,546
|
|
|
$
|
|
|
|
$
|
(34,824
|
)
|
|
$
|
26,285,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating debt (1)
|
|
$
|
25,001,666
|
|
|
$
|
72,777
|
|
|
$
|
(14,876
|
)
|
|
$
|
14,876
|
|
|
$
|
25,074,443
|
|
Long-term debt (2)
|
|
|
765,464
|
|
|
|
212,733
|
|
|
|
|
|
|
|
(26,233
|
)
|
|
|
951,964
|
|
Other liabilities
|
|
|
544,805
|
|
|
|
54,602
|
|
|
|
34,541
|
|
|
|
(51,698
|
)
|
|
|
582,250
|
|
Shareholders equity (deficit)
|
|
|
(323,335
|
)
|
|
|
(8,566
|
)
|
|
|
(19,665
|
)
|
|
|
28,231
|
|
|
|
(323,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
$
|
25,988,600
|
|
|
$
|
331,546
|
|
|
$
|
|
|
|
$
|
(34,824
|
)
|
|
$
|
26,285,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thornburg Mortgage, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet Information
December 31, 2007
(dollars in thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMA
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
|
Condensed
Consolidated
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM securities, net
|
|
$
|
9,731,394
|
|
$
|
|
|
|
$
|
315,424
|
|
$
|
|
|
|
$
|
10,046,818
|
Purchased Securitized Loans, net
|
|
|
626,756
|
|
|
|
|
|
|
20,469
|
|
|
|
|
|
|
647,225
|
Securitized ARM Loans, net
|
|
|
2,275,354
|
|
|
|
|
|
|
83,382
|
|
|
199,225
|
|
|
|
2,557,961
|
ARM Loans Collateralizing Debt, net
|
|
|
21,383,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,383,177
|
ARM loans held for sale or securitization, net
|
|
|
|
|
|
549,359
|
|
|
|
|
|
|
|
|
|
|
549,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM Assets
|
|
|
34,016,681
|
|
|
549,359
|
|
|
|
419,275
|
|
|
199,225
|
|
|
|
35,184,540
|
Other assets
|
|
|
1,120,542
|
|
|
156,060
|
|
|
|
41,107
|
|
|
(229,888
|
)
|
|
|
1,087,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
35,137,223
|
|
$
|
705,419
|
|
|
$
|
460,382
|
|
$
|
(30,663
|
)
|
|
$
|
36,272,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating debt (1)
|
|
$
|
32,793,440
|
|
$
|
453,500
|
|
|
$
|
410,382
|
|
$
|
(10,382
|
)
|
|
$
|
33,646,940
|
Long-term debt (2)
|
|
|
305,000
|
|
|
249,933
|
|
|
|
|
|
|
(9,933
|
)
|
|
|
545,000
|
Other liabilities
|
|
|
279,049
|
|
|
50,340
|
|
|
|
25,608
|
|
|
(34,310
|
)
|
|
|
320,687
|
Shareholders equity (deficit)
|
|
|
1,759,734
|
|
|
(48,354
|
)
|
|
|
24,392
|
|
|
23,962
|
|
|
|
1,759,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
$
|
35,137,223
|
|
$
|
705,419
|
|
|
$
|
460,382
|
|
$
|
(30,663
|
)
|
|
$
|
36,272,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Operating debt includes Reverse Repurchase Agreements, Asset-backed CP, Collateralized Mortgage Debt and whole loan financing facilities.
|
(2)
|
Long-term debt includes Senior Notes, Senior Subordinated Secured Notes, Subordinated Notes and inter-company debt that are eliminated in consolidation.
|
46
Thornburg Mortgage, Inc. and Subsidiaries
Condensed Consolidating Income Statement Information
Nine Months Ended
September 30, 2008
(dollars in thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMA
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Condensed
Consolidated
|
|
Interest income
|
|
$
|
1,387,898
|
|
|
$
|
13,574
|
|
|
$
|
5,720
|
|
|
$
|
133,821
|
|
|
$
|
1,541,013
|
|
Interest expense
|
|
|
1,336,800
|
|
|
|
25,542
|
|
|
|
3,544
|
|
|
|
(204
|
)
|
|
|
1,365,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
51,098
|
|
|
|
(11,968
|
)
|
|
|
2,176
|
|
|
|
134,025
|
|
|
|
175,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Servicing Fees
|
|
|
|
|
|
|
13,236
|
|
|
|
|
|
|
|
(5,681
|
)
|
|
|
7,555
|
|
Gain (loss) on ARM Assets, net
|
|
|
(3,139,770
|
)
|
|
|
(58,138
|
)
|
|
|
|
|
|
|
19,334
|
|
|
|
(3,178,574
|
)
|
Loss on Derivatives, net
|
|
|
(27,760
|
)
|
|
|
(18,125
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,885
|
)
|
Gain (loss) on extinguishment of debt
|
|
|
67,847
|
|
|
|
|
|
|
|
(44,812
|
)
|
|
|
|
|
|
|
23,035
|
|
PPA and Additional Warrant Liability fair value changes
|
|
|
144,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,490
|
|
Senior Subordinated Secured Note fair value changes
|
|
|
162,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,409
|
|
Other noninterest income, net
|
|
|
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
Other expenses
|
|
|
(12,390
|
)
|
|
|
(29,691
|
)
|
|
|
(864
|
)
|
|
|
(1,312
|
)
|
|
|
(44,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,754,076
|
)
|
|
$
|
(102,866
|
)
|
|
$
|
(43,500
|
)
|
|
$
|
146,366
|
|
|
$
|
(2,754,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thornburg Mortgage, Inc. and Subsidiaries
Condensed Consolidating Income Statement Information
Nine Months Ended
September 30, 2007
(dollars in thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMA
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Condensed
Consolidated
|
|
Interest income
|
|
$
|
1,668,959
|
|
|
$
|
78,115
|
|
|
$
|
357,548
|
|
|
$
|
(1,068
|
)
|
|
$
|
2,103,554
|
|
Interest expense
|
|
|
1,472,630
|
|
|
|
96,575
|
|
|
|
314,988
|
|
|
|
(9,733
|
)
|
|
|
1,874,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
196,329
|
|
|
|
(18,460
|
)
|
|
|
42,560
|
|
|
|
8,665
|
|
|
|
229,094
|
|
Loan Servicing Fees
|
|
|
|
|
|
|
24,193
|
|
|
|
|
|
|
|
(11,904
|
)
|
|
|
12,289
|
|
Gain (loss) on ARM Assets, net
|
|
|
(1,097,090
|
)
|
|
|
(14,237
|
)
|
|
|
(10,382
|
)
|
|
|
24,619
|
|
|
|
(1,097,090
|
)
|
Gain (loss) on Derivatives, net
|
|
|
(8,229
|
)
|
|
|
(8,766
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,995
|
)
|
Other noninterest income, net
|
|
|
|
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
1,294
|
|
Other expenses
|
|
|
(30,793
|
)
|
|
|
(35,859
|
)
|
|
|
(654
|
)
|
|
|
(1,069
|
)
|
|
|
(68,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(939,783
|
)
|
|
$
|
(51,835
|
)
|
|
$
|
31,524
|
|
|
$
|
20,311
|
|
|
$
|
(939,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Thornburg Mortgage, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flow Information
Nine Months Ended
September 30, 2008
(dollars in thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMA
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Condensed
Consolidated
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,754,076
|
)
|
|
$
|
(102,866
|
)
|
|
$
|
(43,500
|
)
|
|
$
|
146,366
|
|
|
$
|
(2,754,076
|
)
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale of ARM Assets, net and Derivative, net
|
|
|
3,167,530
|
|
|
|
76,263
|
|
|
|
|
|
|
|
(19,334
|
)
|
|
|
3,224,459
|
|
Other
|
|
|
(308,432
|
)
|
|
|
36,650
|
|
|
|
50,719
|
|
|
|
(127,032
|
)
|
|
|
(348,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
105,022
|
|
|
|
10,047
|
|
|
|
7,219
|
|
|
|
|
|
|
|
122,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM Asset purchases
|
|
|
(2,139,899
|
)
|
|
|
(780,980
|
)
|
|
|
(83,658
|
)
|
|
|
991,733
|
|
|
|
(2,012,804
|
)
|
ARM Asset sales and principal payments
|
|
|
6,894,268
|
|
|
|
1,062,954
|
|
|
|
177,714
|
|
|
|
(991,733
|
)
|
|
|
7,143,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
4,754,369
|
|
|
|
281,974
|
|
|
|
94,056
|
|
|
|
|
|
|
|
5,130,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (paydowns) from Reverse Repurchase Agreements
|
|
|
(5,473,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,473,059
|
)
|
Collateralized Mortgage Debt borrowings
|
|
|
2,869,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,869,081
|
|
Collateralized Mortgage Debt paydowns
|
|
|
(3,466,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,466,681
|
)
|
Proceeds from Senior Subordinated Debt
|
|
|
1,086,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,086,458
|
|
Other
|
|
|
4,976
|
|
|
|
(291,650
|
)
|
|
|
(114,222
|
)
|
|
|
|
|
|
|
(400,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(4,979,225
|
)
|
|
|
(291,650
|
)
|
|
|
(114,222
|
)
|
|
|
|
|
|
|
(5,385,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash equivalents
|
|
|
(119,834
|
)
|
|
|
371
|
|
|
|
(12,947
|
)
|
|
|
|
|
|
|
(132,410
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
133,168
|
|
|
|
2,994
|
|
|
|
12,947
|
|
|
|
|
|
|
|
149,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,334
|
|
|
$
|
3,365
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thornburg Mortgage, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flow Information
Nine Months Ended
September 30, 2007
(dollars in thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMA
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Condensed
Consolidated
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(939,783
|
)
|
|
$
|
(51,836
|
)
|
|
$
|
31,524
|
|
|
$
|
20,312
|
|
|
$
|
(939,783
|
)
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of ARM Assets, net and Derivative, net
|
|
|
1,105,319
|
|
|
|
23,003
|
|
|
|
10,382
|
|
|
|
(24,619
|
)
|
|
|
1,114,085
|
|
Other
|
|
|
(137,817
|
)
|
|
|
29,458
|
|
|
|
89,981
|
|
|
|
4,307
|
|
|
|
(14,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
27,719
|
|
|
|
625
|
|
|
|
131,887
|
|
|
|
|
|
|
|
160,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM Asset purchases
|
|
|
(6,602,428
|
)
|
|
|
(5,322,760
|
)
|
|
|
(3,702,849
|
)
|
|
|
1,476,370
|
|
|
|
(14,151,667
|
)
|
ARM Asset sales and principal payments
|
|
|
14,746,988
|
|
|
|
5,840,749
|
|
|
|
10,426,531
|
|
|
|
(1,476,370
|
)
|
|
|
29,537,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
8,144,560
|
|
|
|
517,989
|
|
|
|
6,723,682
|
|
|
|
|
|
|
|
15,386,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (paydowns) borrowings from Reverse Repurchase Agreements
|
|
|
(10,191,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,191,821
|
)
|
Collateralized Mortgage Debt borrowings
|
|
|
5,340,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,340,953
|
|
Collateralized Mortgage Debt paydowns
|
|
|
(4,237,947
|
)
|
|
|
|
|
|
|
1,335,144
|
|
|
|
|
|
|
|
(2,902,803
|
)
|
Proceeds from asset backed CP
|
|
|
|
|
|
|
|
|
|
|
(7,906,300
|
)
|
|
|
|
|
|
|
(7,906,300
|
)
|
Net (paydowns) borrowings from whole loan financing
|
|
|
|
|
|
|
(277,772
|
)
|
|
|
|
|
|
|
|
|
|
|
(277,772
|
)
|
Other
|
|
|
1,059,630
|
|
|
|
(241,142
|
)
|
|
|
(260,929
|
)
|
|
|
|
|
|
|
557,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(8,029,185
|
)
|
|
|
(518,914
|
)
|
|
|
(6,832,085
|
)
|
|
|
|
|
|
|
(15,380,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash equivalents
|
|
|
143,094
|
|
|
|
(300
|
)
|
|
|
23,484
|
|
|
|
|
|
|
|
166,278
|
|
Cash and cash equivalents, beginning of period
|
|
|
36,727
|
|
|
|
1,967
|
|
|
|
16,465
|
|
|
|
|
|
|
|
55,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
179,821
|
|
|
$
|
1,667
|
|
|
$
|
39,949
|
|
|
$
|
|
|
|
$
|
221,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Note 16. Subsequent Events
On July 23, 2008, the Company commenced its Exchange Offer and Consent Solicitation for all of its outstanding Preferred Stock. On October 1, 2008, the Company announced a change in the consideration offered
for each share of Preferred Stock tendered to three shares of Common Stock and on October 30, 2008, announced a further extension of the Exchange Offer and Consent Solicitation until 5:00 p.m. New York City time on November 19, 2008 (See
Note 2. Override Agreement and Financing Transaction Exchange Offer and Consent Solicitation).
On October 23, 2008, the Company
entered into an exchange agreement with certain holders (the Holders) of the Subordinated Notes whereby the Company agreed to exchange over time up to $53.5 million aggregate principal amount of the Subordinated Notes for up to a maximum
of 8,333,240 shares of Common Stock (the Shares). The exchange price for the notes equals 25% of the principal amount of Subordinated Notes exchanged plus accrued and unpaid interest, and the number of Shares to be received in exchange
for Subordinated Notes equals the exchange price of the Subordinated Notes exchanged, divided by 95% of the last sale price of the Shares immediately prior to the sale. Subject to a $5.0 million per business day limitation on exchanges (which may be
waived by the Company), the Holders have the discretion to choose the date on which Subordinated Notes will be exchanged and the principal amount of Subordinated Notes to be exchanged. As of November 3, 2008, the Company had exchanged
$16.0 million aggregate principal amount of Subordinated Notes for approximately 2.8 million shares.
In October 2008, the
Company completed a sale of $37.3 million of ARM Loans at a realized loss of approximately $7.1 million and used the proceeds to reduce whole loan financing facility. In addition, the Company has a pending sale of $92.2 million of ARM loans due to
settle in November 2008 for an estimated realized loss of $40.8 million, which reflects a further deterioration in the value of the loans from September 30, 2008. These two transactions are expected to be sufficient to pay off the whole loan
financing facilities in full.
49
In this quarterly report, we refer to Thornburg Mortgage, Inc. and its subsidiaries as we,
us, or the Company, unless we specifically state otherwise or the context indicates otherwise. Capitalized terms not otherwise defined in this quarterly report shall have the definitive meanings assigned to them in the
Glossary at the end of this report.
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Executive Overview
We have been significantly and negatively impacted by the events and conditions
impacting the broader mortgage loan market. The broader mortgage market, including prime mortgage-backed securities and prime mortgage loans, has been adversely affected by weakening house prices, increasing rates of delinquencies and defaults on
mortgage loans, and rating agency downgrades of mortgage-backed securities which in turn have led to fewer sources of, and significantly reduced levels of, liquidity available to finance the Companys operations. These events have adversely
affected the Company mostly from a liquidity and financing perspective as opposed to a credit performance perspective. After negotiating the Override Agreement described below, we were able to complete a Financing Transaction on March 31, 2008,
also described below, which we believe is vital to our ability to continue as a going concern and resume normalized business operations.
Override
Agreement
As of March 6, 2008, we did not have enough liquid assets to satisfy margin calls approximating $610 million. By
March 12, 2008, we had received notices of events of default from five different Reverse Repurchase Agreement counterparties, with an aggregate amount of $1.8 billion in outstanding obligations to these counterparties (all of which were
subsequently cured). On March 17, 2008, we entered into an Override Agreement with five of our six remaining Reverse Repurchase Agreement and Forward Auction Agreement counterparties. Pursuant to the terms of the Override Agreement, the
maturity date of all the existing Reverse Repurchase Agreements with the five counterparties is deemed to be March 16, 2009, the termination date of the Override Agreement, and each of the counterparties has agreed that it will not invoke
margin calls or increase margin requirements beyond contractually specified levels during the term of the Override Agreement. The interest rate on all existing Reverse Repurchase Agreements financing AAA and AA-rated mortgage-backed securities will
be reset monthly and will not exceed one-month LIBOR plus 35 basis points. Interest rates on Reverse Repurchase Agreements financing other than AAA and AA-rated mortgage-backed securities are not affected by the Override Agreement. During the term
of the Override Agreement, each of the counterparties will collect all principal and interest payments on the securities collateralizing the Reverse Repurchase Agreements and will apply 100% of the principal payments and generally 20% of the
interest payments to reduce the balance of the outstanding obligations under its Reverse Repurchase Agreements payable to the respective counterparties. If the Reverse Repurchase Agreement balances are not reduced to specified levels at each month
end, the portion of interest payments applied to reduce those balances will be increased from 20% to 30% until those balances are reduced to the specified levels. Each of the counterparties is obligated to return the amounts that were not applied to
reduce the outstanding obligations under such financing agreements collected by it to us. The counterparties to the Override Agreement are not obligated to return to us any collateral if the value of the collateral securing their obligations
increases during the term of the Override Agreement. Any performance-based incentive fee earned by the Manager during the term of the Override Agreement will be accrued, but not paid to the Manager until the Override Agreement terminates. Until the
Override Agreement terminates, an amount equal to the incentive fee earned will be paid to the counterparties to the Override Agreement and will be applied by them to reduce our obligations to the counterparties under the Reverse Repurchase
Agreements.
The covenants of the Override Agreement include, but are not limited to, the following:
|
(1)
|
receive proceeds of at least $1 billion of new capital by March 31, 2008,
|
|
(2)
|
pay all unmet margin calls and certain other specified amounts by March 31, 2008 (which totaled $524.5 million),
|
|
(3)
|
establish and maintain a Liquidity Reserve Fund of $350.0 million in the manner specified in the Override Agreement,
|
|
(4)
|
grant a security interest to the counterparties to the Override Agreement in (a) the Liquidity Reserve Fund and our MSRs and (b) the collateral
securing our obligations to the counterparties under the Reverse Repurchase Agreements and the Forward Auction Agreements to secure all of our obligations to the counterparties to the Override Agreement, whether under the Reverse Repurchase
Agreements and the Forward Auction Agreements or otherwise,
|
|
(5)
|
issue to the counterparties to the Override Agreement, the Override Warrants,
|
|
(6)
|
not enter into any new transactions under existing, or entering into any new Reverse Repurchase Agreements, secured lending agreements or Forward Auction
Agreements, or delivering additional collateral there under other than in the event of a credit rating downgrade as provided in the Override Agreement.
|
|
(7)
|
suspend our dividend on Common Stock for the term of the Override Agreement, except that we may declare a dividend in December 2008 for payment in January 2009
of up to 87% of our taxable income for 2008,
|
50
|
(8)
|
suspend our dividend on Preferred Stock if the amount in the Liquidity Reserve Fund falls below specified levels,
|
|
(9)
|
terminate our Reverse Repurchase Agreements with our one remaining counterparty not party to the Override Agreement by May 16, 2008 in an orderly manner,
and
|
|
(10)
|
reduce our obligations under the Reverse Repurchase Agreements with one of the counterparties to the Override Agreement to a specified level.
|
We believe we were in compliance with all the covenants of the Override Agreement as of November 3, 2008.
The counterparties may terminate the Override Agreement if we voluntarily or involuntarily become a debtor in a bankruptcy proceeding,
there is a Change In Control or if we breach certain of the covenants under the Override Agreement. When the Override Agreement terminates on March 16, 2009, or earlier as described above, the counterparties will again have the right to invoke
margin calls and exercise all of their other rights, including the right to require repayment, under the Reverse Repurchase Agreements and Forward Auction Agreements.
As a condition to the Override Agreement, we agreed to terminate our Reverse Repurchase Agreements with our one remaining counterparty not party to the Override Agreement by May 16, 2008 in an orderly manner. As
of May 16, 2008, all of the Reverse Repurchase Agreements with that counterparty had been terminated. Our Reverse Repurchase Agreements with that counterparty totaled $471.1 million at March 31, 2008. To facilitate the termination of
$353.1 million of the Reverse Repurchase Agreements, we sold $293.6 million in assets at a net gain of $13.0 million. The remaining mortgage assets were financed with a counterparty to the Override Agreement with $118.0 million of Reverse Repurchase
Agreements.
Beginning in July 2008, the Override Agreement counterparties began to make a series of margin calls as a result of a series
of Rating Agency downgrades of mortgage-backed securities owned by us and financed by the Override Agreement counterparties. In the context of those downgrades and their associated margin calls, some ambiguities arose with regard to the
interpretations of the Override Agreement as it related to margin calls on downgraded securities and other matters. In trying to resolve these issues, we and the Override Agreement counterparties entered into a series of negotiations to attempt to
resolve the interpretative issues. And, as negotiations continued and downgrades continued to be announced, the counterparties to the Override Agreement began to withhold funds payable to us under both the Override Agreement and the whole loan
financing facility. On August 21, 2008, and in consideration of ongoing negotiations with the Override Agreement counterparties continuing in good faith, we used amounts in the Liquidity Reserve Fund to pay margin calls totaling approximately
$219.0 million based on our interpretation of the Override Agreement, which was less than the amount owing based on downgrades under the counterparties interpretation of the Override Agreement. As of September 30, 2008, we had identified
additional downgrades in its portfolio with a current face of $631.0 million and a carrying value of $352.2 million which would have resulted in an additional margin call of $56.7 million under our interpretation. Since September 30, 2008, and
up to November 3, 2008, we have received additional downgrades on mortgage-backed securities held in our portfolio and financed under the Override Agreement. Those downgrades had a current face of $ 510.3 million and a carrying value of
$345.1 million and could result in additional margin calls under our interpretation of the Override Agreement of $138.6 million. In total, we believe an additional $195.3 million in margin calls could result from downgrades subsequent to
August 21, 2008. We have not paid any amounts on these potential additional margin calls to the counterparties to the Override Agreement.
There can be no assurance that active negotiations with the counterparties to the Override Agreement will continue or that an agreement will be reached. And, if we are unable reach a final agreement on these interpretative issues, the
counterparties to the Override Agreement may attempt to terminate the Override Agreement prior to March 16, 2009, in which case certain of our obligations under our Reverse Repurchase Agreements, securities lending and Forward Auction
Agreements will become immediately due and payable, which would have a material adverse effect on us as we are not in a position to pay any shortfalls resulting from the liquidation or sale of the underlying collateral.
51
Financing Transaction
Senior Subordinated Secured Notes
On March 31, 2008, we raised an
aggregate of up to $1.35 billion from the sale of Senior Subordinated Secured Notes, the Initial Warrants, Escrow Warrants, and Additional Warrants and interests in a Principal Participation Agreement in a private placement to qualified
institutional buyers under Section 4(2) of the Securities Act of 1933, as amended, with MatlinPatterson as the lead investor. We received $1.15 billion of gross proceeds from the Financing Transaction with the remaining $200.0 million deposited
in an escrow account. Because we were unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the escrow was terminated in accordance with its terms and, as a result, the approximately $188.6 million
which was then held in escrow was released to the escrow subscribers.
The Senior Subordinated Secured Notes have an initial aggregate
principal balance of $1.15 billion and an initial annual interest rate of 18% which will be reduced to 12% upon satisfaction of the Additional Financing Conditions. The Senior Subordinated Secured Notes mature on March 31, 2015 and are not
subject to either optional redemption by us or mandatory redemption by the note holders except that the holders of the Senior Subordinated Secured Notes have the right to require us to repurchase the Senior Subordinated Secured Notes for 101% of the
principal amount, plus accrued and unpaid interest, upon the occurrence of a Change In Control of the Company. The Senior Subordinated Secured Notes are secured by a lien junior to the lien securing the Senior Notes on the stock of certain of
TMAs subsidiaries, TMHLs MSRs and the interest payments due from the mortgage-backed securities underlying the Override Agreement after termination of the Override Agreement and after paying interest expense. In addition, certain of
TMAs subsidiaries have guaranteed payment of the Senior Subordinated Secured Notes on a senior subordinated basis.
Due to our cash
constraints and the unresolved issues relating to the Override Agreement, we requested and received the PIK Consent of approximately 98.6% of the holders of the Senior Subordinated Secured Notes to pay the September 30, 2008 interest payment
due on the Senior Subordinated Secured Notes in the form of additional Senior Subordinated Secured Notes in lieu of a cash payment. As a result, $102.0 million principal amount of Senior Subordinated Secured Notes (PIK Notes) were issued to such
holders as the interest payment.
In addition, as consideration for their PIK Consent, consenting holders received a consent fee, at their
election, of either (i) 6.5217 shares of Common Stock in respect of each $1,000 principal amount of Senior Subordinated Secured Notes (Consent Shares) or (ii) additional Senor Subordinated Notes with an aggregate principal amount equal to
the market value of the total number of Consent Shares on the date of issuance to which such holders otherwise would have been entitled (Consent Notes). Approximately 60% of the consenting holders elected to receive Consent Notes in the aggregate
principal amount of $13.5 million, and approximately 40% of the consenting holders elected to receive 2,954,422 Consent Shares in the aggregate.
Warrants
The purchasers of the Senior Subordinated Secured Notes received Initial Warrants on
March 31, 2008. All of these Initial Warrants have now been exercised. Additionally, Escrow Warrants were placed in escrow until the earlier of the satisfaction of the Additional Financing Conditions or September 30, 2008. Because we were
unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the Escrow Warrants were released pro rata to the investors in the Financing Transaction according to their aggregate principal amount of the
Senior Subordinated Secured Notes. The Initial Warrants and Escrow Warrants, in the aggregate, are exercisable for shares of Common Stock equal to approximately 39.6% of the shares of Common Stock outstanding on a fully diluted basis as of
April 11, 2008.
Exchange Offer and Consent Solicitation
On July 23, 2008, we commenced our Exchange Offer and Consent Solicitation for all of our outstanding Preferred Stock. On October 1, 2008, we
amended to (i) extend the expiration of the Exchange Offer and Consent Solicitation, (ii) eliminate the $5.00 in cash consideration previously offered for each share of preferred stock and (iii) change the number of shares of our
common stock offered for each share of preferred stock to three shares (after giving effect to the Reverse Split), or up to 132,042,645 shares of common stock in the aggregate assuming 100% participation in the Exchange Offer and Consent
Solicitation. On September 30, 2008, we received the consent of a majority of the participants in the Principal Participation Agreement to permit the amended Exchange Offer and Consent Solicitation to satisfy the Additional Financing Conditions
and to extend the deadline by which we must successfully complete the Exchange Offer and Consent Solicitation in order to satisfy the Additional Financing Conditions to December 31, 2008. On October 31, 2008, we further extended the
expiration of the Exchange Offer and Consent Solicitation until 5:00 p.m., New York City time, on November 19, 2008.
The Exchange
Offer and Consent Solicitation will satisfy the Additional Financing Conditions if we purchase at least 66 2/3% of the outstanding shares of each series of Preferred Stock, and shareholders approve an amendment to our charter to modify the terms of
each series of Preferred Stock, including the elimination of dividends on Preferred Stock. Pursuant to the terms of the Financing Transaction, we must use our best efforts to successfully complete the Exchange Offer and Consent Solicitation but are
under no legal obligation to successfully complete the Exchange Offer and Consent Solicitation.
52
We have also entered into the Principal Participation Agreement with the investors in the Senior
Subordinated Secured Notes whereby the investors will receive monthly payments in the amount of the principal payments received on our portfolio of mortgage-backed securities underlying the Override Agreement after deducting principal payments due
under the financing agreements that relate to such assets. Investors will be entitled to receive these payments beginning upon the expiration of the Override Agreement on March 16, 2009 and continuing through March 31, 2015. On
March 31, 2015, the investors will receive the fair market value of the assets covered by the Principal Participation Agreement after deducting the then outstanding balances of the financings that relate to such assets. The Principal
Participation Agreement will terminate upon satisfaction of the Additional Financing Conditions.
We also entered into a registration
rights agreement with the purchasers of the Senior Subordinated Secured Notes and we filed a prospectus supplement registering the $1.15 billion aggregate principal amount of outstanding Senior Subordinated Secured Notes on July 30, 2008.
On March 31, 2008, the Manager and certain shareholders of the Manager signed the TMAC Participation Agreement, whereby MP TMAC LLC,
an affiliate of MatlinPatterson, shall acquire a 75% participation interest in the base management fee, net of reasonable expenses, and gross proceeds of the performance-based incentive fee and in consideration, MP TMAC LLC granted the Manager the
option to acquire the aggregate of 2.5264% of the fully diluted authorized and issued shares of Common Stock (not to exceed 7,811,379 shares of Common Stock) for an exercise price of $0.01 per share. This option will be exercisable upon and from
time to time after the satisfaction of the Additional Financing Conditions. The Manager has transferred this option to the counterparties to the Override Agreement.
We are in preliminary negotiations to restructure the TMAC Participation Agreement, however we have not determined what the terms of an alternative arrangement would be and no assurance can be given that the TMAC
Participation Agreement will be restructured.
In connection with the Financing Transaction, we agreed that MatlinPatterson may designate
up to three directors to our Board of Directors, depending on MatlinPattersons level of ownership of the Warrants and Common Stock, and that we would appoint to our Board of Directors at least two directors designated by investors party to the
Warrant Agreement other than MatlinPatterson. On April 22, 2008, MatlinPatterson exercised its right to designate two directors to the Board of Directors, and currently has the right to designate one additional director to the Board of
Directors. Effective April 22, 2008, our former directors Michael B. Jeffers and Owen M. Lopez, both of whom were Class II directors, resigned from the Board of Directors and David J. Matlin and Mark R. Patterson were elected by the Board of
Directors to fill the resulting vacancies. Messrs. Matlin and Patterson were elected to the Board of Directors for three year terms at the 2008 Annual Meeting. MatlinPatterson retains the right to designate a third director at any time during which
it meets the relevant stock ownership requirement. Effective July 14, 2008, Stuart C. Sherman, a Class III director, resigned from the Board and effective July 17, 2008, Thomas F. Cooley was elected by the Board to fill the resulting
vacancy. Mr. Cooley was recommended to the Nominating/Corporate Governance Committee by one of the investors in the Financing Transaction other than MatlinPatterson and represents one of the two directors that such other investors may
designate.
Reverse Stock Split
On
September 26, 2008, we effected a 1-for-10 Reverse Split of the Common Stock. As a result of the Reverse Split, every 10 shares of (old) Common Stock, par value of $0.01 per share, outstanding on September 26, 2008, the effective date, was
combined into one share of (new) Common Stock, par value of $0.01 per share. All historical numbers relating to shares of Common Stock have been adjusted to reflect the 1-for-10 Reverse Split.
53
Strategic Focus
Our primary focus over the coming months will be to successfully complete the Exchange Offer and Consent Solicitation, to complete the sale of the remaining loans currently financed on our warehouse lines of credit,
to explore a variety of alternative financing opportunities to replace our Reverse Repurchase Agreement financing and to mitigate other long and short-term risks. Each of these initiatives is an important near-term objective to achieve as we attempt
to return to normalized business operations. Additionally, lending in this market environment remains extremely challenging because warehouse financing is difficult to obtain, warehouse financing terms are much less cost effective than they used to
be, rating agencies are revising credit enhancement practices and downgrading many mortgage-backed securities, mortgage loans and mortgage-backed securities prices continue to decline, and mortgage-backed securities issuance and trading is at a
minimum. Over the longer term, we believe our loan origination franchise provides value to consumers and provides us with high quality assets. Finally, despite a continued increase in loan delinquencies in 2008, the credit quality of our originated
and acquired loan portfolios continue to perform well and their performance is consistent with our expectations. As a result, we believe that our credit performance through this difficult market environment validates our historical approach to
credit lending for first mortgage loan borrowers.
Third Quarter Financial Results
In the third quarter of 2008, net income before Preferred Stock dividends was $140.0 million, as compared to net loss before Preferred Stock dividends of $1.1 billion a year ago. The increase in
our profitability is primarily due to decreases in the fair value of the PPA and Additional Warrant Liability and the Senior Subordinated Secured Notes of $160.2 million and $594.6 million, respectively, partially offset by a net loss on ARM Assets
of $662.9 million. Net interest income was $80.1 million compared to $36.2 million for the same quarter of 2007, or 121% more than a year ago. We recorded a net loss of $12.7 million on Derivatives during the third quarter of 2008 primarily as a
result of reclassifications related to terminated swaps because the original forecasted transactions are now probable of not occurring. For the quarter, operating expenses as a percentage of average assets increased to 0.32% at September 30,
2008, from zero for the quarter ended September 30, 2007. This increase resulted from a reduction in the capitalizable costs of the operations of TMHL because of reduced loan production and was partially offset because the Manager did not earn
an incentive fee for the quarter. The operating expenses for the quarter ended September 30, 2007 were unusually low due to a benefit in long-term incentive awards due to the decline in our stock price during the period.
Book value at September 30, 2008 was a deficit of $(34.20) per common share, as compared to $(36.76) per common share at June 30, 2008. The
decrease in the per share deficit is principally due to the PPA and Additional Warrant Liability fair value improvement and other factors discussed above, partially offset by a $47.2 million net decrease in the unrealized market value of our
Purchased ARM Assets and hedging instruments recorded in OCI.
The portfolio yield during the third quarter of 2008 increased 22 BPs to
7.17% from 6.95% in the prior quarter, primarily due to a 30 basis point increase in accretion of asset discounts.
Our average cost of
funds decreased to 6.01% in the third quarter from 6.19% in the prior quarter. This resulted in an average net interest margin of 1.16% for the quarter. The primary cause of the decrease in our cost of funds from the second quarter of 2008 was a
decrease in the 1-month LIBOR rate during the period.
54
Discount accretion for the quarter ended September 30, 2008 resulted in accretion of $81.7 million
for the third quarter of 2008, which reflects an actual CPR for the quarter of 12%, down from 16% and 14%, respectively, for the quarters ended June 30, 2008 and September 30, 2007, respectively. In calculating our amortization for the
third quarter of 2008, we have assumed prepayments for our portfolio will be 13% CPR for three months before accelerating to a forecasted average CPR of 17.2%. Our forecast is based on prepayment rates and the age, coupon and product-based vectors
of our portfolio. We believe our prepayment assumptions are prudent yet representative of the competing factors of current mortgage interest rates offset by declining real estate values and considerably tighter lending standards. Largely as a result
of the other-than-temporary impairment charges taken in the fourth quarter of 2007 and the first three quarters of 2008, we own our mortgage assets at a net discount of 9.65%, which suggests that any increase in prepayments will have a positive
impact on our portfolio spreads and margins.
Asset Acquisitions
As noted in the description of the Override Agreement above, we may not enter into any new Reverse Repurchase Agreement transactions until March 2009; thus, we did not acquire any Purchased ARM Assets in the third
quarter of 2008. Also, we did not originate or purchase any loans during the third quarter of 2008.
Credit Quality
We remain committed to preserving strong asset quality. At September 30, 2008, based on the highest rating received by at least one of the Rating
Agencies, approximately 96.5% of our ARM Asset portfolio was High Quality of which 13.6% represented Purchased ARM Assets rated AAA or AA and the remaining 82.9% was comprised of High Quality ARM Loans.
Purchased Securitized Loans comprised 1.5% of ARM assets at September 30, 2008. We have retained the credit risk associated with the ownership of
these Purchased Securitized Loans which have a total principal balance of underlying loans of $5.3 billion. Accordingly, we have estimated credit losses in the form of a nonaccretable discount of $22.4 million, or 0.42% of the balance of these
securities.
Actual loss and delinquency experience, among other performance factors, indicate that the credit quality of our entire
portfolio of ARM Assets continues to outperform the market in general. None of the mortgage assets in our Purchased ARM Assets portfolio are credit enhanced or credit guaranteed by any of the private sector mono-line credit insurers. Our ARM Loan
portfolio has experienced very few early payment defaults and only 324 of our 33,591 ARM Loans, or 96 BP, are more than 60 days delinquent and another 61 are REO at September 30, 2008. Further, we have no repurchase obligations on any ARM Loans
that we have originated. In the third quarter the ratings agencies continued their broad reassessment of the structure and credit enhancement of mortgage backed securities, particularly those issued in 2006 and 2007. In the second quarter and
through August 22, 2008 of the third quarter, the majority of the downgrades were precipitated by Fitch Ratings. However, more recently Standard & Poors and Moodys Investors Service have reassessed MBS included in our
portfolio as well. As of September 30, 2008, as a result of this ongoing reassessment, current face of $2.0 billion and carrying value of $1.2 billion of MBS in our portfolio had been downgraded by at least one ratings agency since
June 30, 2008. Additional MBS with a current face value of $510.3 million and carrying value of $345.1 million which also serve as collateral under the Reverse Repurchase Agreements were downgraded during the period from September 30, 2008
to November 3, 2008. The MBS downgraded by ratings agencies reported on a cumulative basis by the lowest current rating as of the ends of both the second and third quarters of 2008 and as of November 3, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Bonds Downgraded as of June 30, 2008
|
|
|
Downgraded
|
|
Not Downgraded
|
|
Total
|
Current Rating
|
|
Current Face
|
|
Fair Value
|
|
Current Face
|
|
Fair Value
|
|
Current Face
|
|
Fair Value
|
Agency
|
|
$
|
|
|
$
|
|
|
$
|
235,705
|
|
$
|
236,695
|
|
$
|
235,705
|
|
$
|
236,695
|
Prime AAA
|
|
|
|
|
|
|
|
|
2,624,835
|
|
|
2,298,046
|
|
|
2,624,835
|
|
|
2,298,046
|
Alt-A AAA
|
|
|
|
|
|
|
|
|
2,696,251
|
|
|
2,112,776
|
|
|
2,696,251
|
|
|
2,112,776
|
AA
|
|
|
|
|
|
|
|
|
887,672
|
|
|
584,467
|
|
|
887,672
|
|
|
584,467
|
A
|
|
|
|
|
|
|
|
|
425,530
|
|
|
231,382
|
|
|
425,530
|
|
|
231,382
|
BBB
|
|
|
58,049
|
|
|
31,403
|
|
|
235,388
|
|
|
107,139
|
|
|
293,436
|
|
|
138,543
|
BB
|
|
|
9,707
|
|
|
4,262
|
|
|
126,388
|
|
|
44,062
|
|
|
136,095
|
|
|
48,324
|
B
|
|
|
22,279
|
|
|
7,501
|
|
|
96,927
|
|
|
20,913
|
|
|
119,206
|
|
|
28,414
|
Less Than B
|
|
|
33,869
|
|
|
4,895
|
|
|
106,701
|
|
|
12,349
|
|
|
140,571
|
|
|
17,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,904
|
|
$
|
48,061
|
|
$
|
7,435,397
|
|
$
|
5,647,829
|
|
$
|
7,559,301
|
|
$
|
5,695,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Bonds Downgraded as of September 30, 2008
|
|
|
Downgraded
|
|
Not Downgraded
|
|
Totals
|
Current Rating
|
|
Current Face
|
|
Fair Value
|
|
Current Face
|
|
Fair Value
|
|
Current Face
|
|
Fair Value
|
Agency
|
|
$
|
|
|
$
|
|
|
$
|
220,616
|
|
$
|
221,624
|
|
$
|
220,616
|
|
$
|
221,624
|
Prime AAA
|
|
|
|
|
|
|
|
|
1,991,333
|
|
|
1,586,939
|
|
|
1,991,333
|
|
|
1,586,939
|
Alt-A AAA
|
|
|
|
|
|
|
|
|
1,578,090
|
|
|
1,131,159
|
|
|
1,578,090
|
|
|
1,131,159
|
AA
|
|
|
360,500
|
|
|
223,762
|
|
|
794,918
|
|
|
443,462
|
|
|
1,155,418
|
|
|
667,224
|
A
|
|
|
526,475
|
|
|
325,166
|
|
|
301,915
|
|
|
146,407
|
|
|
828,390
|
|
|
471,572
|
BBB
|
|
|
488,129
|
|
|
314,288
|
|
|
154,606
|
|
|
64,220
|
|
|
642,734
|
|
|
378,508
|
BB
|
|
|
178,341
|
|
|
83,272
|
|
|
88,253
|
|
|
27,534
|
|
|
266,594
|
|
|
110,807
|
B
|
|
|
379,617
|
|
|
194,624
|
|
|
62,213
|
|
|
11,577
|
|
|
441,830
|
|
|
206,200
|
Less Than B
|
|
|
114,637
|
|
|
16,676
|
|
|
101,460
|
|
|
7,999
|
|
|
216,098
|
|
|
24,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,047,699
|
|
$
|
1,157,788
|
|
$
|
5,293,404
|
|
$
|
3,640,921
|
|
$
|
7,341,103
|
|
$
|
4,798,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Bonds Downgraded as of November 3, 2008
|
|
|
Downgraded
|
|
Not Downgraded
|
|
Total
|
Current Rating
|
|
Current Face
|
|
Fair Value
|
|
Current Face
|
|
Fair Value
|
|
Current Face
|
|
Fair Value
|
Agency
|
|
$
|
|
|
$
|
|
|
$
|
220,616
|
|
$
|
221,624
|
|
$
|
220,616
|
|
$
|
221,624
|
Prime AAA
|
|
|
|
|
|
|
|
|
1,577,358
|
|
|
1,284,481
|
|
|
1,577,358
|
|
|
1,284,481
|
Alt-A AAA
|
|
|
|
|
|
|
|
|
1,509,771
|
|
|
1,097,903
|
|
|
1,509,771
|
|
|
1,097,903
|
AA
|
|
|
488,503
|
|
|
326,408
|
|
|
794,918
|
|
|
443,462
|
|
|
1,283,421
|
|
|
769,870
|
A
|
|
|
561,729
|
|
|
342,911
|
|
|
274,490
|
|
|
133,486
|
|
|
836,219
|
|
|
476,397
|
BBB
|
|
|
396,440
|
|
|
223,125
|
|
|
147,965
|
|
|
61,763
|
|
|
544,405
|
|
|
284,888
|
BB
|
|
|
428,970
|
|
|
264,407
|
|
|
88,253
|
|
|
27,534
|
|
|
517,222
|
|
|
291,941
|
B
|
|
|
546,119
|
|
|
323,936
|
|
|
62,213
|
|
|
11,577
|
|
|
608,333
|
|
|
335,513
|
Less Than B
|
|
|
136,283
|
|
|
22,079
|
|
|
107,475
|
|
|
14,013
|
|
|
243,758
|
|
|
36,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,558,044
|
|
$
|
1,502,866
|
|
$
|
4,783,059
|
|
$
|
3,295,843
|
|
$
|
7,341,103
|
|
$
|
4,798,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 3, 2008, MBS in our portfolio with a current face value of $2.6 billion and
$1.5 billion in carrying value have been downgraded. The tables below set forth both the MBS portfolio in total and the subset of downgraded securities based on the type of loan collateral (Prime and Alt A), current rating, the percentage of 60 plus
day delinquent loans in each category, the original loan-to-value and remaining credit enhancement. The downgrades presented reflect the lowest current rating of any of the ratings agencies. Notwithstanding the downgrades, our Purchased ARM Asset
portfolio continues to perform well from a credit loss standpoint because of the significant amount of remaining credit enhancement that absorbs credit losses as they occur, despite recent rating agency activities.
56
Prime Mortgage Backed Securities Downgraded between Override Date and November 3, 2008
Based on Current Rating as of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current Face
|
|
Fair Value
|
|
Seriously
Delinquent
|
|
|
LTV
|
|
|
Credit
Enhancement
|
|
AA
|
|
$
|
140,993
|
|
$
|
110,057
|
|
4.19
|
%
|
|
70.95
|
%
|
|
15.25
|
%
|
A
|
|
|
332,257
|
|
|
212,315
|
|
12.03
|
|
|
73.59
|
|
|
11.19
|
|
BBB
|
|
|
181,282
|
|
|
66,807
|
|
2.56
|
|
|
69.58
|
|
|
2.09
|
|
BB
|
|
|
411,159
|
|
|
259,530
|
|
13.16
|
|
|
72.17
|
|
|
8.73
|
|
B
|
|
|
211,445
|
|
|
128,946
|
|
3.47
|
|
|
67.12
|
|
|
4.30
|
|
NR
|
|
|
102,384
|
|
|
17,580
|
|
4.74
|
|
|
69.57
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,379,520
|
|
$
|
795,235
|
|
8.47
|
|
|
71.08
|
|
|
7.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A Mortgage Backed Securities Downgraded between Override Date and November 3, 2008
|
|
Based on Current Rating as of September 30, 2008
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current Face
|
|
Fair Value
|
|
Seriously
Delinquent
|
|
|
LTV
|
|
|
Credit
Enhancement
|
|
AA
|
|
$
|
347,508
|
|
$
|
216,351
|
|
10.95
|
%
|
|
72.77
|
%
|
|
11.81
|
%
|
A
|
|
|
229,472
|
|
|
130,596
|
|
11.61
|
|
|
69.79
|
|
|
10.23
|
|
BBB
|
|
|
215,158
|
|
|
156,318
|
|
14.27
|
|
|
75.62
|
|
|
13.72
|
|
BB
|
|
|
17,811
|
|
|
4,877
|
|
11.34
|
|
|
70.50
|
|
|
7.94
|
|
B
|
|
|
334,674
|
|
|
194,990
|
|
29.18
|
|
|
75.93
|
|
|
14.39
|
|
NR
|
|
|
33,899
|
|
|
4,499
|
|
17.12
|
|
|
70.09
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,178,522
|
|
$
|
707,631
|
|
17.04
|
|
|
73.50
|
|
|
12.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Securities Downgraded between Override Date and November 3, 2008
|
|
Based on Current Rating as of September 30, 2008
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current Face
|
|
Fair Value
|
|
Seriously
Delinquent
|
|
|
LTV
|
|
|
Credit
Enhancement
|
|
AA
|
|
$
|
488,503
|
|
$
|
326,408
|
|
9.00
|
%
|
|
72.25
|
%
|
|
12.80
|
%
|
A
|
|
|
561,729
|
|
|
342,911
|
|
11.86
|
|
|
72.04
|
|
|
10.80
|
|
BBB
|
|
|
396,440
|
|
|
223,125
|
|
8.91
|
|
|
72.86
|
|
|
8.40
|
|
BB
|
|
|
428,970
|
|
|
264,407
|
|
13.09
|
|
|
72.10
|
|
|
8.70
|
|
B
|
|
|
546,119
|
|
|
323,936
|
|
19.23
|
|
|
72.52
|
|
|
10.48
|
|
NR
|
|
|
136,283
|
|
|
22,079
|
|
7.82
|
|
|
69.70
|
|
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,558,044
|
|
$
|
1,502,866
|
|
12.42
|
|
|
72.19
|
|
|
9.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Prime Mortgage Backed Securities
|
|
Based on Current Rating as of September 30, 2008
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current Face
|
|
Fair Value
|
|
Seriously
Delinquent
|
|
|
LTV
|
|
|
Credit
Enhancement
|
|
AAA
|
|
$
|
1,583,372
|
|
$
|
1,290,495
|
|
3.16
|
%
|
|
66.92
|
%
|
|
8.71
|
%
|
AA
|
|
|
918,756
|
|
|
541,578
|
|
2.63
|
|
|
67.78
|
|
|
5.46
|
|
A
|
|
|
607,005
|
|
|
345,994
|
|
7.60
|
|
|
70.50
|
|
|
7.05
|
|
BBB
|
|
|
326,598
|
|
|
127,333
|
|
2.15
|
|
|
68.04
|
|
|
1.74
|
|
BB
|
|
|
499,304
|
|
|
286,975
|
|
11.17
|
|
|
71.16
|
|
|
7.36
|
|
B
|
|
|
271,903
|
|
|
140,518
|
|
3.10
|
|
|
66.89
|
|
|
3.46
|
|
NR
|
|
|
188,768
|
|
|
23,926
|
|
3.35
|
|
|
68.03
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,395,706
|
|
$
|
2,756,819
|
|
4.50
|
|
|
68.20
|
|
|
6.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A Mortgage Backed Securities
|
|
Based on Current Rating as of September 30, 2008
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current Face
|
|
Fair Value
|
|
Percent
Seriously
Delinquent
|
|
|
LTV
|
|
|
Credit
Enhancement
|
|
AAA
|
|
$
|
1,509,771
|
|
$
|
1,097,903
|
|
16.69
|
%
|
|
72.98
|
%
|
|
19.41
|
%
|
AA
|
|
|
363,993
|
|
|
227,890
|
|
10.62
|
|
|
72.54
|
|
|
11.50
|
|
A
|
|
|
229,473
|
|
|
130,596
|
|
11.61
|
|
|
69.79
|
|
|
10.23
|
|
BBB
|
|
|
218,220
|
|
|
157,764
|
|
14.11
|
|
|
75.46
|
|
|
13.56
|
|
BB
|
|
|
17,919
|
|
|
4,966
|
|
11.36
|
|
|
70.51
|
|
|
7.93
|
|
B
|
|
|
336,430
|
|
|
194,995
|
|
29.14
|
|
|
75.88
|
|
|
14.31
|
|
NR
|
|
|
48,975
|
|
|
6,153
|
|
17.13
|
|
|
70.21
|
|
|
4.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,724,781
|
|
$
|
1,820,266
|
|
7.51
|
|
|
73.15
|
|
|
16.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
Based on Current Rating as of September 30, 2008
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current Face
|
|
Fair Value
|
|
Percent
Seriously
Delinquent
|
|
|
LTV
|
|
|
Credit
Enhancement
|
|
AAA
|
|
$
|
3,093,143
|
|
$
|
2,388,398
|
|
9.76
|
%
|
|
69.88
|
%
|
|
13.93
|
%
|
AA
|
|
|
1,282,749
|
|
|
769,468
|
|
4.90
|
|
|
69.13
|
|
|
7.18
|
|
A
|
|
|
836,478
|
|
|
476,590
|
|
8.70
|
|
|
70.30
|
|
|
7.92
|
|
BBB
|
|
|
544,818
|
|
|
285,097
|
|
6.94
|
|
|
71.02
|
|
|
6.47
|
|
BB
|
|
|
517,222
|
|
|
291,941
|
|
11.18
|
|
|
71.14
|
|
|
7.38
|
|
B
|
|
|
608,333
|
|
|
335,513
|
|
17.50
|
|
|
71.86
|
|
|
9.46
|
|
NR
|
|
|
237,743
|
|
|
30,079
|
|
6.19
|
|
|
68.48
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,120,487
|
|
$
|
4,577,085
|
|
9.19
|
|
|
70.09
|
|
|
10.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Despite the generally elevated percentage of delinquent loans in the 60+ day category within the segment
of downgraded bonds, the loans backing the securities have loan to value ratios that average 70.1% at origination and also have substantial percentage amounts of current credit enhancement in the form of subordination. In the case of these bonds,
the classes within the securitization structure that have a lower rating than ours absorb losses before our classes would realize any principal losses. Further, for certain of the AAA rated assets, the credit enhancement percentage may increase
as the lower rated classes are precluded by the structure from receiving any monthly principal pay downs until specified elevated credit enhancement levels are attained. As a result, the aggregate credit enhancement could potentially grow as a
percentage of the total outstanding loan balance as the portfolio ages. Realized losses offset and may reverse this effect. Based on our assessment of these new ratings, we believe that only the BB, B and NR classes are likely to experience any
actual principal losses, and we further expect that those losses are likely to be very small relative to the size of our portfolio, and for the B rated class, the largest class, to the extent that losses occur, those losses are likely to be realized
far in the future. To the extent that these securities are carried at fair value, we further believe that the fair value adjustments more than adequately reflect our potential for principal loss.
Originated and Bulk Purchased Loan Portfolio
At
September 30, 2008, 60-day plus delinquent loans and REO properties in our originated and bulk purchased loans totaled 1.58% of our $21.4 billion portfolio of securitized and unsecuritized ARM Loans, up from 0.81% at June 30, 2008, but
still significantly below the industrys conventional prime ARM loan delinquency ratio of 8.25% at June 30, 2008 as reported by the Mortgage Bankers Association. One category of bulk purchased loans, specifically $528.0 million of Pay
Option ARMs purchased from one seller, continues to exhibit substantially higher delinquencies than the rest of our loan portfolio and is effectively doubling our total portfolio delinquency rate. However, we expected that these loans would
experience higher delinquencies and losses when we made the acquisition and are managing these delinquencies so as to control losses. We believe that the impairments totaling $631.3 million reflected in our Securitized ARM Loans greatly exceeded all
probable credit losses inherent in the ARM loan portfolio at September 30, 2008.
ARM Loan Sale and Securitization Activity
Consistent with broader market conditions and a lack of liquidity for securitized loans at reasonable prices, we did not complete a securitization in the
second or third quarters of 2008. We completed a sale of $111.2 million in ARM loans at a loss of $13.2 million during the third quarter of 2008 due to the need to reduce our warehouse financing and the inaccessibility of the securitization market.
We will continue to pursue loan sale opportunities in the fourth quarter of 2008.
59
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are based on our current expectations, estimates and projections. Pursuant to those sections, we may obtain a safe harbor for forward-looking statements by identifying those statements and by
accompanying those statements with cautionary statements, which identify factors that could cause actual results to differ from those expressed in the forward-looking statements. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. The words believe, anticipate, intend, aim, expect, will, strive, target, have
confidence, estimate and project and similar words identify forward-looking statements. Such statements are not guarantees of future performance, events or results and involve potential risks and uncertainties.
Accordingly, our actual results may differ from our current expectations, estimates and projections.
Important factors that may impact our
actual results or may cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf include, but are not limited to, the impact of the Financing Transaction; our ability to meet our
interest payment obligations under the Senior Subordinated Secured Notes, our ability to meet the ongoing conditions of the Override Agreement and ongoing negotiations with the parties thereto with respect to the application of such agreement and
the interpretation of certain ambiguities under such agreement, general economic conditions, ongoing volatility in the mortgage and mortgage-backed securities industry, our ability to meet the ongoing conditions of the Override Agreement, our
ability to complete the Exchange Offer and Consent Solicitation, changes in interest rates, changes in yields on adjustable and variable rate mortgage assets available for purchase, changes in the yield curve, changes in prepayment rates, changes in
the supply of mortgage-backed securities and loans, changes in market prices for mortgage-backed securities, our ability to obtain financing and the terms of any financing that we do obtain, our ability to raise additional capital, our ability to
retain or sell additional assets, our ability to meet additional margin calls and our ability to continue as a going concern. Other factors that may impact our actual results are discussed herein. The risk factors discussed in Item 1A hereof
update the risk factors previously disclosed in our 2007 Annual Report on Form 10-K/A. We do not intend to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Corporate Governance
We pride ourselves on maintaining an ethical workplace in which the highest standards of professional conduct are practiced. Accordingly, we would like to
highlight the following facts relating to our corporate governance:
|
|
|
The Board of Directors is, and always has been, composed of a majority of independent directors. The Audit, Nominating/Corporate Governance and Compensation
Committees of the Board of Directors are, and always have been, composed exclusively of independent directors. The Board of Directors 1) reviews our financial results, policy compliance and strategic direction on a quarterly basis, 2) reviews our
budget and three-year strategic plan annually and 3) performs an annual review of the Managers compensation, performance and implementation of our strategic plan.
|
|
|
|
We have a Code of Conduct and Corporate Governance Guidelines that cover a wide range of business practices and procedures that apply to all of our employees,
officers, directors and the Manager that foster the highest standards of ethics and conduct in all of our business relationships. In addition, we have instituted a Nonretaliation Policy and Procedure for Whistleblowers that sets forth procedures by
which any officer or employee of the Company or the Manager may raise concerns regarding alleged violations of federal fraud or securities laws, which may involve financial matters, such as accounting, auditing or financial reporting, as well as
nonfinancial matters, with the appropriate supervisors, officers or committees of the Board of Directors.
|
|
|
|
We have an Insider Trading Policy to prohibit any of the directors, officers or employees of the Company or the Manager from buying or selling our stock on the
basis of material nonpublic information or communicating material nonpublic information to others.
|
|
|
|
We are managed externally by the Manager under the terms of the Management Agreement, subject to the supervision of the Board of Directors. The Managers
compensation is based on formulas tied to our success in increasing equity capitalization and generating net income above defined Return on Equity targets. The Compensation Committee and the independent directors annually evaluate the Managers
performance and determine whether the compensation paid to the Manager is reasonable in relation to the nature and quality of services performed.
|
|
|
|
We have a formal internal audit function to further the effective functioning of our internal controls and procedures. Our internal audit plan is approved
annually by the Audit Committee of the Board of Directors and is based on a formal risk assessment and is intended to provide management and the Audit Committee with an effective tool to identify and address areas of financial or operational
concerns and ensure that appropriate controls and procedures are in place. Section 404 of the Sarbanes-Oxley Act of 2002 requires an annual evaluation of internal control over financial reporting. See Controls and Procedures
Managements Annual Report on Internal Control over Financial Reporting in our 2007 Annual Report on Form 10-K/A.
|
Our internet website address is www.thornburgmortgage.com. We make available free of charge, through our internet website, under the InvestorsInvestor Information SEC Filings section, our annual report on Form 10-K,
our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
You may also find the Code of Conduct, the Corporate Governance
Guidelines and the charters of the Audit Committee, Nominating/Corporate Governance Committee and Compensation Committee of the Board of Directors at our website under the Investors Corporate Governance section. These documents
are also available in print to anyone who requests them by writing to us at the following address: 150 Washington Avenue, Suite 302, Santa Fe, New Mexico, 87501, or by phoning us at 1-888-898-8698.
Critical Accounting Policies and Estimates
Our
consolidated financial statements are prepared in conformity with GAAP, which requires the use of estimates and assumptions. In accordance with SEC guidance, those material accounting policies and estimates that we believe are the most critical to
an investors understanding of our financial results and condition and require complex management judgment are discussed below.
|
|
Accounting for the Override Agreement and the Financing Transaction.
The terms of the Override Agreement entered into on March 17, 2008 and the
Financing Transaction completed on March 31, 2008 are highly complex and include components that are not common to many borrowing transactions, such as the Principal Participation Agreement and the Additional Financing Conditions. In allocating
the financing proceeds amongst the components of the Financing Transaction, we maximized the use of observable inputs to measure the fair value of the components. However, given the highly complex nature of the transactions, the observable inputs
such as our Common Stock price and the trading of puts and calls on our Common Stock may not have reflected their actual fair value if the market had not completely and accurately interpreted the terms of the transactions. When an observable input
was not available, we used unobservable inputs reflecting our market assumptions. Also, because there will be different outcomes dependent upon whether the Additional Financing Conditions are satisfied or not, we estimated the probability of their
satisfaction and we may not have estimated the probability correctly.
|
We determined that the terms of the
Override Agreement do not require it to be accounted for as a sale of the assets, a troubled debt restructuring or a substantial modification of the original debt based on a comparison of the cash flows under the Override Agreement to the cash flows
under the original debt and after considering the incremental costs of the Override Agreement. Therefore, no gain or loss resulted from the transaction. The Override Warrants issued by us to counterparties of the Override Agreement are part of the
consideration paid to the Override Agreement counterparties. Therefore the fair value of the Override Warrants of $25.1 million at March 31, 2008 was recorded in Shareholders Deficit on the Condensed Consolidated Balance Sheets. Of that
amount, $20.7 million, the amount related to Override Warrants issued to Reverse Repurchase Agreement counterparties, was deferred and recorded as a debt discount on Reverse Repurchase Agreements on the Condensed Consolidated Balance Sheets and $4.5
million, the amount related to Override Warrants issued to Forward Auction Agreement counterparties, was recorded in Other Assets on the Condensed Consolidated Balance Sheets. The debt discount related to the Override Warrants issued to Reverse
Repurchase Agreement counterparties is being amortized over the term of the Override Agreement using the interest method. The asset related to the Override Warrants issued to the Forward Auction Agreement counterparties is amortized over the term of
the Override Agreement on a straight-line basis. We incurred $472,000 for third-party costs associated with the Override Agreement.
On March 31, 2008, the Manager and certain shareholders of the Manager signed the TMAC Participation Agreement, whereby MP TMAC LLC, an affiliate of MatlinPatterson, acquired a 75% participation interest in the base management fee, net
of reasonable expenses, and gross proceeds of the performance-based incentive fee and in consideration, MP TMAC LLC granted the Manager the option to acquire the aggregate of 2.5264% of the fully diluted authorized and issued shares of Common Stock
(not to exceed 7,811,379 shares of Common Stock) for an exercise price of $0.01 per share. This option will be exercisable upon and from time to time after the satisfaction of the Additional Financing Conditions. The Manager has transferred this
option to the counterparties to the Override Agreement. The fair value of this option of $36.5 million at March 31, 2008 was considered a capital contribution to the Company by the Manager and has been recorded in Shareholders Deficit on
the Condensed Consolidated Balance Sheets with $30.0 million, the amount related to the option transferred to Reverse Repurchase Agreement
60
counterparties, deferred and recorded as a debt discount on Reverse Repurchase Agreements on the Condensed Consolidated Balance Sheets and $6.5 million, the
amount related to the option transferred to Forward Auction Agreement counterparties, recorded in Other Assets on the Condensed Consolidated Balance Sheets. The debt discount related to the option transferred to Reverse Repurchase Agreement
counterparties is being amortized over the term of the Override Agreement using the interest method. The asset related to the option transferred to the Forward Auction Agreement counterparties will be amortized over the term of the Override
Agreement on a straight-line basis. The Company is in preliminary negotiations to restructure the TMAC Participation Agreement, however the Company has not determined what the terms of an alternative arrangement would be and no assurance can be
given that the TMAC Participation Agreement will be restructured.
The initial $1.15 billion in Financing Transaction
proceeds was allocated to the Senior Subordinated Secured Notes, the Initial Warrants and Escrow Warrants, the commitment for the escrowed funds, and the PPA and Additional Warrant Liability based on the relative fair values of these elements. As of
March 31, 2008, $494.4 million was initially allocated to the Senior Subordinated Secured Notes, $55.7 million was allocated to the Initial Warrants and Escrow Warrants, $592,500 was allocated to the commitment for the escrowed funds and $600.5
million was allocated to the PPA and Additional Warrant Liability. The Initial Warrants and Escrow Warrants are recorded in Shareholders Deficit, net of $3.0 million in issuance costs. The remaining $188.6 million in escrowed funds was
released at September 30, 2008 to the escrow subscribers due to our failure to satisfy the Additional Financial Conditions. The Companys initial $592,500 asset, related to the commitment of the investors to lend up to the remaining
escrowed funds in exchange for additional Senior Subordinated Secured Notes to be issued by the Company upon the satisfaction of the Additional Financing Conditions, expired and was written off as of September 30, 2008.
As a derivative, the PPA and Additional Warrant Liability is required to be marked to fair value at the end of each period. At
March 31, 2008, the adjustment to the PPA and Additional Warrant Liability after the initial allocation referenced above was an increase to the liability of $520.5 million to a total of $1.1 billion, with $520.5 million recorded as PPA and
Additional Warrant Liability fair value changes in the Condensed Consolidated Income Statements. The Company elected the fair value option in accounting for the Senior Subordinated Secured Notes because it believes that it more accurately reflects
the economic substance of the transaction at inception and on an ongoing basis. With the passage of time, a cost-based measure would become irrelevant in assessing the Companys financial performance. The Company believes the fair value option
provides users of the financial statements with more relevant and understandable information to better assess the Companys financing costs and opportunities. At March 31, 2008, the difference between the initial allocation and the fair
value of the Senior Subordinated Secured Notes of $923.0 million of $428.6 million was recorded as Senior Subordinated Secured Notes fair value changes in the Condensed Consolidated Income Statements. The amortization of the difference between the
face amount of the initial Senior Subordinated Secured Notes of $1.15 billion and the March 31, 2008 fair value of $923.0 million is classified as interest expense, along with the accrual of the coupon interest, over the term of the Senior
Subordinated Secured Notes.
|
|
Revenue Recognition.
Interest income on ARM Assets is a combination of the interest earned based on the outstanding balance and contractual terms of the
assets and the amortization of yield adjustments, principally the amortization of purchase premiums and discounts and other-than-temporary impairments. Premiums and discounts associated with the purchase of ARM Assets and other-than-temporary
impairments are amortized or accreted into interest income over the estimated lives of the assets in accordance with SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases, using the interest method. For all ARM assets except ARM Loans securitized after December 31, 2007, premiums and discounts are amortized on the pool method considering the effects of actual and future estimated
prepayments and the current index on ARM assets. Premiums and discounts associated with ARM Loans securitized by us after December 31, 2007 are amortized on the loan level method which does not consider the impact of possible
prepayments. In accordance with SFAS 65, Accounting for Certain Mortgage Banking Activities, as amended, other-than-temporary impairments recorded on ARM Loans are not amortized, but deferred and recovered upon sale or maturity of the
asset. The use of these methods requires us to project cash flows over the remaining life of each asset based on these factors. These projections include assumptions about interest rates, prepayment rates, timing and amount of credit losses,
estimates regarding the likelihood and timing of calls of securities at par, and other factors. Estimating prepayments and estimating the remaining lives of our ARM Assets requires management judgment, which involves consideration of possible future
interest rate environments and an estimate of how borrowers will behave in those environments. We review our cash flow projections on an ongoing basis and monitor these projections based on input and analyses received from external sources, internal
models, and our own judgment and experience. We regularly review our assumptions and make adjustments to the cash flows as deemed necessary. There is no assurance that the assumptions we use to estimate future cash flows, or the current
periods yield for each asset, will prove to be accurate.
|
The following table presents a sensitivity
analysis to show the one time adjustment we would have to make to our net discount of $2.0 billion at September 30, 2008 for 1% and 2% CPR increases and decreases to our lifetime prepayment assumptions. The purpose of this analysis is to
provide an indication of the impact that changes to the lifetime prepayment assumptions have on our net discount. We believe the current assumptions used, which average 17.2% CPR, are appropriate and consistent with our long-term portfolio
experience.
61
|
|
|
|
|
Changed Assumption
|
|
Increase (Decrease)
in Net Discount
(in thousands)
|
|
Prepayment assumption increased by 1% CPR
|
|
$
|
(4,077
|
)
|
Prepayment assumption increased by 2% CPR
|
|
$
|
(8,195
|
)
|
Prepayment assumption decreased by 1% CPR
|
|
$
|
3,617
|
|
Prepayment assumption decreased by 2% CPR
|
|
$
|
7,353
|
|
Future discount or premium accretion will also be influenced by new asset acquisitions, actual
prepayments, changes in the forward interest rate curve and changes in the indices that drive future yields on Hybrid ARM and Traditional ARM assets.
|
|
Fair Value.
We record our Purchased ARM Assets, commitments to purchase ARM Loans and Hybrid ARM Hedging Instruments at fair value. Securitized ARM Loans,
ARM loans held for sale or securitization and MSRs are recorded at the lower of cost or fair value. The fair values of most of our Purchased ARM Assets, Securitized ARM Loans and all of our Hybrid ARM Hedging Instruments are based on Market Price
Equivalents. If the fair value of a Purchased ARM Asset is not reasonably available from a quoted market price, management estimates the fair value. For Purchased ARM Assets valued by management, we first look to identify a security in our portfolio
for which a quoted market price is available that has similar characteristics including interest coupon, product type, credit rating, seasoning and duration. The quoted market price of the similar security is then used to value the security for
which there was no quoted market price, by applying the percentage change in price of the similar security for the relevant period to the price of the security for which there was no quoted market price. Our objective is to use the quoted market
price as the primary valuation indicator; however, if we are unable to identify a similar security in our portfolio, we look to recent market transactions of similar securities or make inquiries of broker-dealers that trade similar securities and
use the data obtained to calculate a market price based on a yield or spread target. The net unrealized gain or loss on loans expected to be purchased from correspondent lenders and bulk sellers and the fair value of ARM Loans held for sale or
securitization are calculated using the same methodologies that are used to price our ARM Loans, adjusted for anticipated fallout of purchase loan commitments that will likely not be funded. The fair value of MSRs is based on internally developed
valuation models. The fair values reported reflect estimates and may not necessarily be indicative of the amounts we could realize in a current market exchange. At September 30, 2008, managements judgment was used to estimate the fair
value of $4.8 billion or 18.9% of our ARM Assets and 100% of our commitments to purchase ARM Loans. See Note 3 to the Condensed Consolidated Financial Statements for a summary table of the methodologies used to value ARM Assets.
|
|
|
Impairment of Purchased ARM Assets and Nonaccretable Discounts on Purchased ARM Assets.
Purchased ARM Assets are evaluated for impairment on a quarterly
basis, or more frequently if events or changes in circumstances indicate that these investments may be impaired. We evaluate whether our Purchased ARM Assets are considered impaired, evaluate whether the impairment is other-than-temporary, and, if
the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the amortized cost basis of the Purchased ARM Asset and its fair value. These evaluations require management to make estimates and judgments based
on changes in market interest rates, changes in credit ratings, delinquency data on the loans underlying the respective securities and other information to determine whether unrealized losses are reflective of credit deterioration and to evaluate
managements ability and intent to hold the investment to maturity or recovery. Because the estimate for other-than-temporary impairment requires management judgment, we consider this to be a critical accounting estimate. We do not believe the
declines in the market value of our securities are reflective of deterioration in the actual credit performance of our assets. However, we determined that we may not have the ability to hold our Purchased ARM Assets until recovery; therefore the
differences between the amortized cost basis and the market value of these assets were determined to be other-than-temporary impairments and recognized in the Condensed Consolidated Income Statements. We believe the fair values presented in the
Condensed Consolidated Balance Sheets reflect all expected credit losses.
|
A portion of our Purchased
Securitized Loans are rated less than Investment Grade and represent subordinated interests in high-quality, first lien residential mortgage loans. We generally purchase the less than Investment Grade classes at a discount. Based upon
managements analysis and judgment, a portion of the purchase discount is subsequently accreted as interest income under the effective yield method while the remaining portion of the purchase discount is treated as a nonaccretable discount
which reflects the estimated unrealized loss on the securities due to credit losses on the underlying loans. We review Purchased Securitized Loans quarterly for impairment and record or adjust nonaccretable discounts accordingly. Nonaccretable
discounts are increased by recognizing an impairment loss when management determines that there is a decline in the fair value of a Purchased Securitized Loan that is considered other-than-temporary and decreased when there is improvement in the
risk exposures. Any such determinations are based on managements assessment of numerous factors affecting the fair value of Purchased Securitized Loans, including, but not limited to, current economic conditions, potential for natural
disasters, delinquency trends, credit losses to date on underlying mortgages and remaining credit protection. If management ultimately concludes that the nonaccretable discounts will not represent realized losses, the balances are accreted into the
Condensed Consolidated Income Statements over the remaining life of the loan under the interest method.
For additional information on our
significant accounting policies, see Note 3 to the Condensed Consolidated Financial Statements.
62
Recently Adopted Accounting Pronouncements
Adoption of SFAS 157 Fair Value Measurement
We adopted SFAS 157,
Fair Value Measurements as of January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around fair value and establishes a fair value hierarchy based on whether the inputs to those valuation techniques are
observable or unobservable. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 Quoted
prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable
This hierarchy requires us to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value. For some financial instruments or in certain market conditions, observable inputs may not be available. For example, beginning in the second half of 2007, certain markets became illiquid, and some key
inputs used in valuing certain financial instruments were unobservable. When and if these markets are liquid, we will use the related observable inputs available at that time from these markets to value these financial instruments.
The adoption of SFAS 157 for financial assets and financial liabilities did not have a significant impact on our consolidated financial
statements.
Other accounting changes and other accounting developments
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159
permits companies to choose to measure many financial instruments and certain other items at fair value. Once a company chooses to report an item at fair value, changes in fair value would be reported in earnings at each reporting date. SFAS 159
became effective for the Company on January 1, 2008. On January 1, 2008, the Company did not elect to measure any of its assets or liabilities at fair value that were not previously carried at fair value. In connection with the Financing
Transaction, the Company elected to measure the elements of that transaction at fair value in accordance with SFAS 159.
In
April 2007, the FASB issued FASB Staff Position FASB Interpretation Number 39-1, Amendment of FASB Staff Position FASB Interpretation Number 39. FASB Interpretation Number 39-1 amends certain paragraphs of FASB Interpretation Number 39,
Offsetting of Amounts Related to Certain Contracts, an interpretation of Accounting Research Bulletin Opinion Number 10 and SFAS 105 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim
cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. We have elected to offset fair value amounts
recognized for derivative instruments under master netting arrangements. FASB Interpretation Number 39-1 became effective for us on January 1, 2008, and did not have a material impact on our consolidated financial statements.
In November 2007, the SEC issued Staff Accounting Bulletin 109. Staff Accounting Bulletin 109 supersedes Staff Accounting Bulletin 105,
Application of Accounting Principles to Loan Commitments. It clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are
accounted for at fair value through earnings. However, it retains the guidance in Staff Accounting Bulletin 105 that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The
guidance is effective on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109 became effective for us on January 1, 2008. SAB 109 did not have a material impact
on our consolidated financial statements.
63
In December 2007, the FASB issued SFAS 160, Noncontrolling Interest in Consolidated
Financial Statementsan Amendment of Accounting Research Bulletin No. 51. SFAS 160 amends Accounting Research Bulletin 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement changes the
way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of
the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 will become effective for us on January 1, 2009, and is not expected to have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007), Business
Combinations. SFAS 141(R) retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS
141(R) requires costs incurred to effect the acquisition and restructuring costs to be recognized separately from the acquisition. SFAS 141(R) applies to business combinations for which the acquisition date is on or after January 1, 2009.
In March 2008, the FASB issued SFAS 161, Disclosures About Derivative Instruments and Hedging Activities, an
Amendment to FASB Statement No. 133 which is intended to enhance current disclosure to (1) better convey the purpose of derivatives in terms of the risks an entity is intending to manage, (2) provide a more complete picture of
the location in an entitys financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period, (3) provide information on the potential effect on an entitys
liquidity from using derivatives, and (4) help users of the financial statement locate important information about derivative instruments. SFAS 161 will become effective for us on January 1, 2009.
General
We are a single-family (one-to-four unit)
residential mortgage lender that originates, acquires and retains investments in ARM Assets, thereby providing capital to the single-family residential housing market. Our ARM Assets consist of Purchased ARM Assets and ARM Loans and are comprised of
Traditional ARM Assets and Hybrid ARM Assets. Purchased ARM Assets are MBS that represent interests in pools of ARM loans, which are publicly rated and issued by third parties and generally include credit enhancements against losses from loan
defaults. ARM Loans are either loans that we have securitized from our own loan origination or acquisition activities, loans that we use as collateral to support the issuance of Collateralized Mortgage Debt or loans pending securitization. Like
traditional banking institutions, our income is generated primarily from the net spread or difference between the interest income we earn on our ARM Assets and the cost of our borrowings. Our strategy is to maximize the long-term sustainable
difference between the yield on our ARM Assets and the cost of financing these assets, and to maintain that difference through interest rate and credit cycles.
64
While we are not a bank or savings and loan institution and we do not have the same access to liquidity
or insured deposits, our business purpose, portfolio, strategy and method of operation are best understood in comparison to such institutions. Unlike a bank or savings and loan institution, we finance the purchases and originations of our ARM Assets
with equity capital, unsecured debt, Collateralized Mortgage Debt and short-term borrowings that are subject to rollover risk instead of deposits or Federal Home Loan Bank advances. When we borrow short-term or floating-rate funds to finance our
Hybrid ARM Assets, we may enter into interest rate hedging transactions, which are intended to fix, or cap, our borrowing costs during the fixed-rate period of the Hybrid ARM assets. We manage our exposure to changes in interest rates by holding
primarily ARM Assets and generally maintain a portfolio Effective Duration of less than one year, which is a calculation expressed in months or years that is a measure of the expected price change of our ARM Assets, Hedging Instruments and other
borrowings based on changes in interest rates. Pursuant to the terms of the Override Agreement, we may not enter into any new Hedging Instruments or ISDA Agreements, except Cap Agreements and Swap Agreements. Given recent dislocations in the
correlation between the prices of our Hedging Instruments and prices on our mortgage-backed securities, we have temporarily suspended our Net Effective Duration policy. We have a policy to operate with an Adjusted Equity-to-Assets Ratio, a non-GAAP
measurement, of at least 8%. See Capital Utilization and Leverage for an explanation and a calculation of our Adjusted Equity-to-Assets Ratio. At September 30, 2008, we were operating at an Adjusted Equity-to-Assets Ratio of 18.13%.
Moreover, we focus on acquiring High Quality assets to control potential credit losses and to improve our access to financing. Our operating structure has resulted in operating costs well below those of other mortgage originators and mortgage
portfolio lenders. Our corporate structure differs from most lending institutions in that we are organized for tax purposes as a REIT and, therefore, pay substantially all of our earnings in the form of dividends to shareholders.
We are an externally advised REIT and, as such, we are managed externally by the Manager under the terms of the Management Agreement, subject to the
supervision of the Board of Directors.
Portfolio Strategies
Our business strategy is to acquire, originate and retain primarily ARM Assets to hold in our portfolio, fund them using equity capital and borrowed funds, and generate earnings from the difference, or spread, between
the yield on our assets and our cost of borrowings. Our ARM Assets include investments in Hybrid ARM Assets and Traditional ARM Assets.
We
acquire Purchased ARM Assets and ARM Loans from investment banking firms, broker-dealers, mortgage bankers, mortgage brokerage firms, banks, savings and loan institutions, credit unions, home builders and other entities involved in originating,
securitizing, packaging and selling MBS and mortgage loans. We believe we have a competitive advantage in acquiring and investing in ARM Assets due to the low cost of our operations relative to traditional mortgage investors and originators. Since
we may not enter into new transactions under existing, or new, Reverse Repurchase Agreements and all principal paydowns of assets financed with Reverse Repurchase Agreements and generally 20% of the interest earned on such assets must be applied to
reduce the outstanding balance of Reverse Repurchase Agreements during the term of the Override Agreement, we do not expect to grow the balance or acquire a significant amount of Purchased ARM Assets during the term of the Override Agreement.
We acquire and originate ARM Loans for our portfolio through our correspondent lending, wholesale lending, direct retail lending and bulk
acquisition programs. Our correspondent lending program currently includes 272 approved correspondents. In the second quarter of 2006, we began originating ARM Loans through our wholesale lending channel and as of September 30, 2008, we had 563
approved mortgage brokerage firms. Our direct retail lending channel originates ARM Loans through direct contact with consumers and we are currently authorized to lend in 48 states and the District of Columbia. We believe that these diversified
sources for ARM Loans enable us to consistently find attractive opportunities to acquire or create high quality assets at attractive yields and spreads for our portfolio.
We have a focused portfolio lending investment policy designed to control credit risk and interest rate risk. Our policy requires us to have a mortgage asset portfolio with an expected Net Effective Duration of one
year or less and which may consist of Agency Securities guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, or privately issued (generally publicly registered) ARM pass-through securities, multi-class pass-through securities, Collateralized
Mortgage Debt, A quality ARM Loans that we intend to securitize, Purchased Securitized Loans or other short-term investments that either mature within one year or have an interest rate that reprices within one year. Pursuant to the terms
of the Override Agreement, we may not enter into any new Hedging Instruments or ISDA Agreements, except Cap Agreements and Swap Agreements. Given the recent dislocations in the correlation between the prices of our Hedging Instruments and prices on
our mortgage-backed securities, we have temporarily suspended our Net Effective Duration policy.
Our investment policy requires that we
invest at least 70% of our total assets in High Quality ARM Assets and short-term investments. The remainder of our ARM portfolio, comprising not more than 30% of total assets, may consist of Other Investments.
65
In 2006 and 2007, we acquired and originated Pay Option ARMs as well as Purchased Securitized Loans
collateralized by Pay Option ARMs and as of September 30, 2008, we held $1.0 billion of Pay Option ARMs in our portfolio, the majority of which were purchased through bulk loan acquisitions and Purchased Securitized Loans. Our last Traditional
Pay Option ARM purchase was in January 2007, and we are no longer acquiring or originating this type of loan for our portfolio. Pay Option ARMs have features that allow borrowers to defer making the full interest payment on their loans. Therefore,
the potential loss in the event of default could be higher than on a loan that does not provide for deferral of interest. The Pay Option ARMs have features that limit the deferred interest to 110% to 125% of the original loan balance. If the loan
balance reaches the applicable limit, additional interest may not be deferred and the monthly minimum payment is increased to an amount that would amortize the loan over its remaining term. As of September 30, 2008, accumulated deferred
interest was $75.9 million. Our Pay Option ARMs had an average original effective loan-to-value ratio of 68% and an average original FICO score of 717 at September 30, 2008.
We may invest up to 5% of total assets in fifteen year fixed-rate assets, although, as of September 30, 2008, we did not hold any fixed-rate assets. We may use Hybrid ARM Hedging Instruments
to fix, or cap, the interest rates on the short-term borrowings and floating-rate Collateralized Mortgage Debt financing our Hybrid ARM Assets. See also Hedging Strategies below.
We believe that our status as a mortgage REIT makes an investment in our equity securities attractive for tax-exempt investors, such as pension plans, profit sharing plans, 401(k) plans, Keogh
plans and IRAs. We do not invest in REMIC residuals or other CMO residuals that would result in the creation of excess inclusion income or unrelated business taxable income.
Acquisition, Securitization and Retention of Traditional ARM and Hybrid ARM Loans
We acquire and
originate A quality ARM Loans through TMHL, our wholly-owned mortgage loan origination and acquisition subsidiary, from four sources: (i) correspondent lending, (ii) wholesale lending, (iii) direct retail lending and
(iv) bulk acquisitions. Correspondent lending involves originating individual loans that we re-underwrite from lending partners which we have approved and which originate and close the individual loans using our product pricing, underwriting
criteria and guidelines, or other approved criteria and guidelines. Wholesale loan originations are loans which we underwrite and close that are sourced from approved mortgage brokerage firms. Direct retail loan originations are loans that we
originate directly to consumers via the internet or by telephone. See Loan Quality Control below for a description of quality control performed in our Correspondent, Wholesale and Retail Channels. Bulk acquisitions involve acquiring
pools of whole loans which are originated using the sellers guidelines and underwriting criteria. The loans we acquire or originate are financed through warehouse borrowing arrangements pending securitization for our portfolio.
The loans acquired or originated by TMHL are first lien, single-family residential Traditional ARM and Hybrid ARM loans with original terms to maturity
of not more than forty years and are either fully amortizing, interest-only for up to ten years and fully amortizing thereafter, or to a lesser extent negatively amortizing. We do not currently acquire or originate any negatively amortizing loans.
All ARM Loans that we acquire or originate for our portfolio bear an interest rate tied to an interest rate index. Most loans have
periodic and lifetime constraints on the amount to which the loan interest rate can change on any predetermined interest rate reset date. The interest rate on each Traditional ARM loan resets monthly, semi-annually or annually. Traditional ARM loans
generally adjust to a margin over a U.S. Treasury index, a LIBOR index or the 12-Month Treasury Average Index. Hybrid ARM loans have a fixed rate for an initial period, generally 3 to 10 years, and then convert to Traditional ARM loans for their
remaining term to maturity.
We acquire and originate ARM Loans for our portfolio with the intention of using them as collateral for
Collateralized Mortgage Debt. Alternatively, we may also securitize them to create High Quality ARM securities and retain them in our portfolio as Securitized ARM Loans. In order to facilitate the securitization or financing of our loans, we
generally create subordinate certificates, which provide a specified amount of credit enhancement and which we retain in our portfolio. Our investment policy limits the amount we may retain of below Investment Grade subordinate certificates or
classes created as a result of our loan acquisition and securitization efforts or acquired as Purchased Securitized Loans, to 17.5% of shareholders equity, measured on a historical cost basis. In January 2008, the Board of Directors authorized
the acquisition of $150.0 million of below Investment Grade assets, provided that the assets are collateralized by loans that meet our origination standards and can be financed, and which we believe we can acquire at an attractive price, to cover
expected loan losses yet still provide an above average return on our investment. Since January 2008, we have not acquired any securities under this program.
66
We believe acquiring or originating ARM Loans and then securitizing them benefits us by providing:
(i) greater control over the quality and types of ARM Assets acquired; (ii) the ability to acquire current coupon ARM Assets at lower prices; (iii) additional sources of new whole-pool ARM Assets; and (iv) better utilization of
and return on our equity capital.
Prior to recent market disruptions, we also
offered The Thornburg Mortgage Exchange Program
SM
for loans we originate and/or service. We have offered a loan exchange option since 2002, and we
believe this program promotes customer retention and reduces loan prepayments. The loan exchange option is available from the inception of the loan and allows borrowers in good standing to pay a fee to exchange their current mortgage loan to any
then-available Hybrid or Traditional ARM product. The program was suspended in the third quarter of 2007 pending an improvement in mortgage market conditions and so that the eligibility requirements could be reviewed. This program is not offered to
borrowers that have ever been delinquent and we do not capitalize arrearages. We plan to resume the program once market conditions improve.
Loan
Quality Control
We employ a number of pre- and post-funding measures to ensure the quality of our loans. In addition to our internal
pre-funding underwriting and loan documentation reviews on 100% of our wholesale and non-delegated correspondent loans, we maintain strict oversight of our retail lending third party providers. We also utilize a third party database company to
conduct pre-funding fraud audits on 100% of our wholesale loans and on at least 50% of our direct retail and correspondent loans. These checks validate loan application data via relational databases and logic to identify potentially fraudulent data.
In addition, we re-verify the accuracy of Truth in Lending disclosures on an adversely selected sample equal to roughly 45% of correspondent loans and on 100% of wholesale and retail loans.
Post-funding, TMHLs wholly-owned subsidiary, Adfitech, reviews 100% of our wholesale loans and a 15-25% sample of our correspondent and direct retail loans generally within one month of
funding. The sample of correspondent loans includes 100% of loans originated through correspondents with delegated underwriting status. In the future, it is likely we will decrease the number of reviews performed by Adfitech on wholesale loans once
we have sufficient evidence of the effectiveness of our underwriting and operating guidelines. These are extensive audits that involve a full evaluation of the underwriting decision and a re-verification of loan documentation. Our internal quality
control department reviews all findings. Significant findings are circulated within relevant departments and provided to applicable correspondents and mortgage brokerage firms. Summary reports are prepared for management and the Board of Directors.
Credit Quality
One of our strategic
focuses is high credit quality assets. We believe this strategy controls our credit losses and financing costs. As of September 30, 2008, based on the highest rating received from at least one of the Rating Agencies, approximately 96.5% of our
ARM Asset portfolio was High Quality. We remain committed to preserving strong asset quality. Actual loss and delinquency experience among other performance factors indicate that the credit quality of our entire portfolio of ARM Assets continues to
be exceptional. Nevertheless, the ratings agencies under took a broad reassessment of the structure and credit enhancement of mortgage backed securities, particularly those issued in 2006 and 2007 subsequent to the end of the second quarter. As a
result of this reassessment, a substantial number of MBS have been downgraded, including MBS in our portfolio. Actual loss and delinquency experience, among other performance factors, indicate that the credit quality of our entire portfolio of ARM
Assets continues to outperform the market in general. None of the mortgage assets in our Purchased ARM Assets portfolio are credit enhanced or credit guaranteed by any of the private sector mono-line credit insurers. Our ARM Loan portfolio has
experienced very few early payment defaults and only 324 of our 33,591 ARM Loans, or 96 BP, are more than 60 days delinquent and another 61 are REO at September 30, 2008. Further, we have no repurchase obligations on any ARM Loans that we have
originated. Nevertheless, in the third quarter the ratings agencies continued their broad reassessment of the structure and credit enhancement of mortgage backed securities, particularly those issued in 2006 and 2007. In the second quarter and
through August 22, 2008 of the third quarter, the majority of the downgrades were precipitated by Fitch Ratings. However, more recently Standard & Poors and Moodys Investors Service have reassessed MBS included in our
portfolio as well. As of September 30, 2008, as a result of this ongoing reassessment, current face of $1.9 billion and carrying value of $1.1 billion of MBS in our portfolio had been downgraded by at least one ratings agency since
June 30, 2008. Additional MBS with a current face value of $569 million and carrying value of $372 million which also serve as collateral under the Reverse Repurchase Agreements were downgraded during the period from September 30, 2008 to
November 3, 2008.
67
Our High Quality ARM Assets include A quality ARM loans that we have purchased or originated
and securitized either into ARM pass-through certificates or into Collateralized Mortgage Debt financings for our own portfolio. We retain the risk of potential credit losses on all of these loans. At September 30, 2008, our 60-plus day
delinquent loans and REO were 1.58% of our $21.4 billion portfolio of securitized and unsecuritized loans, significantly below the comparable industry conventional prime ARM loan 60-plus day delinquency of 8.25% measured as of June 30, 2008,
the most recent date for which Mortgage Bankers Association data is available. While we experienced an increase in delinquent loans and REO during the quarter to 1.58% from 0.81% at June 30, 2008, the credit performance of our loans still ranks
among the best in the industry. The following table summarizes the 324 delinquent loans out of the 33,591 loans in our $21.4 billion ARM loan portfolio as of September 30, 2008 (dollar amounts in thousands):
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency Status
|
|
Loan Count
|
|
Loan Balance of
Impaired Loans
|
|
Percent of
# of ARM
Loans
|
|
|
Percent of
ARM Loan
Portfolio
|
|
|
Percent of
Total Assets
|
|
TMHL Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 to 89 days
|
|
47
|
|
$
|
41,897
|
|
0.19
|
%
|
|
0.26
|
%
|
|
0.16
|
%
|
90 days or more
|
|
10
|
|
|
11,819
|
|
0.04
|
|
|
0.07
|
|
|
0.04
|
|
In bankruptcy and foreclosure
|
|
110
|
|
|
91,220
|
|
0.45
|
|
|
0.57
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
144,936
|
|
0.68
|
(1)
|
|
0.90
|
(1)
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 to 89 days
|
|
22
|
|
|
24,094
|
|
0.21
|
|
|
0.40
|
|
|
0.09
|
|
90 days or more
|
|
26
|
|
|
28,691
|
|
0.25
|
|
|
0.47
|
|
|
0.11
|
|
In bankruptcy and foreclosure
|
|
109
|
|
|
107,458
|
|
1.07
|
|
|
1.77
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
160,243
|
|
1.53
|
(2)
|
|
2.64
|
(2)
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
$
|
305,179
|
|
0.96
|
%
|
|
1.38
|
%
|
|
1.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated as a percent of total TMHL originations.
|
(2)
|
Calculated as a percent of total bulk acquisitions.
|
As of September 30, 2008, we owned 61 REO as a result of foreclosing on delinquent loans with original loan balances of $45.8 million and an associated valuation reserve of $15.2 million.
We realized loan losses and charge-offs to REO totaling $6.1 million in the third quarter of 2008. We believe that the impairments reflected in our
Securitized ARM Loans reflect all probable credit losses inherent in the ARM loan portfolio at September 30, 2008. We continue to monitor performance in various geographic markets and continue to believe our portfolio is geographically well
diversified and not unduly subject to any individual market stresses.
In 2006, we acquired a portfolio of Traditional Pay Option ARMs as
well as Purchased Securitized Loans collateralized by Traditional Pay Option ARMs because they represented an opportunity to earn a better investment return even after taking into account the increased potential for losses due to mortgage loan
defaults. As of September 30, 2008, we held $788.5 million of Traditional Pay Option ARMs in our ARM loan portfolio, the majority of which were purchased through bulk loan acquisitions, and $258.4 million of Traditional Pay Option ARMs in our
Purchased Securitized Loans portfolio. Our last Traditional Pay Option ARM purchase was in January 2007, and we are no longer acquiring or originating this type of loan for our portfolio. The following table summarizes the greater than 60 day
delinquency information on our Traditional Pay Option ARMs as of September 30, 2008 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Count
|
|
Loan Balance of
Impaired Loans
|
|
Percent of
ARM Loan
Portfolio
|
|
|
Percent of
Total Assets
|
|
ARM Loan Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
TMHL Originations
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Pay Option ARMs
|
|
1
|
|
$
|
1,047
|
|
0.01
|
%
|
|
0.00
|
%
|
All other delinquent loans
|
|
166
|
|
|
143,889
|
|
0.85
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
144,936
|
|
0.86
|
(1)
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Pay Option ARMs
|
|
59
|
|
|
104,385
|
|
0.62
|
|
|
0.36
|
|
All other delinquent loans
|
|
98
|
|
|
55,857
|
|
0.33
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
160,242
|
|
0.95
|
(2)
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
$
|
305,178
|
|
1.38
|
%
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Securitized Loan Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Pay Option ARMs
|
|
28
|
|
$
|
84,079
|
|
|
|
|
0.29
|
%
|
All other delinquent loans
|
|
118
|
|
|
45,487
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
$
|
129,566
|
|
|
|
|
0.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated as a percent of total TMHL originations.
|
(2)
|
Calculated as a percent of total bulk acquisitions.
|
68
Our Fixed Option ARMs and Traditional Pay Option ARMs in our ARM Loan portfolio had an average original
effective loan-to-value ratio of 68.0% and an average original FICO score of 717 at September 30, 2008. We determined that the delinquencies in our Purchased Securitized Loans suggest that eventual losses may exceed prior expectations.
Therefore, we recorded a $4.2 million impairment charge against those securities as a nonaccretable discount during the nine months ended September 30, 2008 increasing our nonaccretable discount on Purchased Securitized Loans to $22.4 million
at September 30, 2008. In the third quarter of 2008, we experienced recoveries of $10,200 and realized losses of $3.7 million with respect to those securities but additional losses are expected. Further, we are actively pursuing reselling
certain of the underlying loans back to the originator as a result of our belief that the originator breached various representations and warranties in the original purchase contract. To the extent that such repurchase obligations can be enforced,
we will further reduce our exposure to credit losses on these mortgage-backed securities. Additionally, because we sold some of the senior classes of some of our Purchased Securitized Loans and retained all of the lower rated classes of those
securities, the total outstanding balance of underlying loans for which we have credit risk in our Purchased Securitized Loan portfolio is $5.3 billion. We believe the losses inherent in our Purchased Securitized Loan portfolio at September 30,
2008 are appropriately reflected in the fair value of these assets.
Financing Strategies
We finance our ARM Assets using common and preferred equity capital, secured and unsecured debt, Collateralized Mortgage Debt and short-term borrowings such as Reverse Repurchase Agreements and
whole loan financing facilities.
Reverse Repurchase Agreements involve a simultaneous sale of pledged securities to a lender at an
agreed-upon price in return for our agreement to repurchase the same securities at a future date (the maturity of the borrowing) at a higher price. The price difference is the cost of borrowing under these agreements. These are typically short-term
borrowings that need to be rolled over at each maturity. As more fully described in Note 2 to the Condensed Consolidated Financial Statements, we entered into an Override Agreement on March 17, 2008 with five of our six remaining Reverse
Repurchase Agreement and Forward Auction Agreement counterparties. Pursuant to the terms of the Override Agreement, the maturity date of all the existing Reverse Repurchase Agreements with the five counterparties is deemed to be March 16, 2009,
the termination date of the Override Agreement, and each of the counterparties has agreed that it will not invoke margin calls or increase margin requirements beyond contractually specified levels during the term of the Override Agreement. We and
the parties to the Override Agreement have determined that the Override Agreement has some possible ambiguities as to the amount, timing, calculation methodology and limits of margin calls against the Liquidity Reserve Fund. We and the parties to
the Override Agreement are in negotiations to resolve the potential ambiguities. The interest rate on all existing Reverse Repurchase Agreements financing AAA and AA-rated mortgage-backed securities will be reset monthly and will not exceed
one-month LIBOR plus 35 basis points. Interest rates on Reverse Repurchase Agreements financing other than AAA and AA-rated mortgage-backed securities are not affected by the Override Agreement. Under the terms of the Override Agreement, prior to
March 16, 2009 or the date on which the Override Agreement is earlier terminated pursuant to its terms, we may not enter into any new transactions under existing or new Reverse Repurchase Agreements, securities lending agreements or Forward
Auction Agreements or deliver additional collateral there under other than as provided in the Override Agreement.
As of September 30,
2008, we had $4.7 billion of Reverse Repurchase Agreements outstanding with counterparties to the Override Agreement. At September 30, 2008, the outstanding Reverse Repurchase Agreements had a weighted average borrowing rate of 3.25% and a
weighted average remaining maturity of 5.6 months.
During the term of the Override Agreement, each of the counterparties will collect all
principal and interest payments on the securities collateralizing its Reverse Repurchase Agreements and will apply 100% of the principal payments and generally 20% of the interest payments to reduce the balance of the outstanding obligations under
its Reverse Repurchase Agreements payable to the respective counterparties. If the Reverse Repurchase Agreement balances are not reduced to specified levels at each month end, the portion of interest payments applied to reduce those balances will be
increased from 20% to 30% until those balances are reduced to the specified levels. Each of the counterparties is obligated to return the amounts that were not applied to reduce the outstanding obligations under such financing agreements collected
by it to us. The counterparties to the Override Agreement are not obligated to return to us any collateral if the value of the collateral securing their obligations increases during the term of the Override Agreement. Any performance-based incentive
fee earned by the Manager during the term of the Override Agreement will be accrued, but not paid to the Manager until the Override Agreement terminates. Until the Override Agreement terminates, an amount equal to the incentive fee earned will be
paid to the counterparties to the Override Agreement and will be applied by them to reduce the our obligations to the counterparties under the Reverse Repurchase Agreements.
Beginning in July 2008, the Override Agreement counterparties made a series of margin calls and have withheld funds payable to us under both the Override Agreement and whole loan financing
facilities. These actions and the positions asserted by the counterparties are in direct conflict with our understanding of certain key features of the Override Agreement. Despite ongoing negotiations to date, we have not been able to reach a
satisfactory agreement with the Override Agreement counterparties. If we fail to reach a satisfactory agreement with the counterparties to the Override Agreement, the counterparties may attempt to terminate the Override Agreement.
69
We had an Asset-backed CP facility, which until the dislocation in the credit markets beginning in August
2007 provided us with an alternative way to finance our High Quality ARM Assets portfolio. The facility was terminated on April 15, 2008. On April 14, 2008, TMCR, a bankruptcy remote subsidiary of ours, did not make payment on the final
maturity date of $300 million of notes due under the Asset-backed CP program. The failure to make such payment constituted a default under the Asset-backed CP program. The notes were collateralized by AAA-rated MBS that were liquidated by the
enforcement agent for the Asset-backed CP program. The existing commercial paper note holders credit bid $294 million of commercial paper notes for the assets in the facility. TMCR is liable for the remaining balance of $6 million in claims on
the notes. TMA is not a guarantor of the payments on these notes, and there is no contractual recourse to TMA for the nonpayment of the notes or any insufficiency after liquidation.
We have also financed the origination and purchase of ARM Assets by issuing hedged floating-rate, fixed-rate, and pass-through rate Collateralized Mortgage Debt in the capital markets. The
Collateralized Mortgage Debt is collateralized by ARM Loans that are placed in a trust. The trust pays the principal and interest payments on the debt out of the cash flows received on the collateral and related Hedging Instruments. This structure
enables us to make more efficient use of our capital because these financings are not subject to margin calls and, therefore, the capital requirement to support these financings is less than the amount our policy requires to support the same amount
of financings in the Reverse Repurchase Agreement or Asset-backed CP markets.
We utilize financing facilities, or credit lines, for whole
loans. A whole loan is the actual mortgage loan evidenced by a note and secured by a mortgage or deed of trust. We use these financing facilities to finance our acquisition and origination of whole loans while we are accumulating loans for sale or
securitization. Due to the defaults on Reverse Repurchase Agreements in March 2008, our ability to finance additional borrowings under our whole loan financing facilities was suspended. In connection with the Override Agreement, we are permitted to
obtain whole loan financing of up to $700 million. On May 7, 2008, we entered into amendments to the whole loan financing facilities that had been suspended in March 2008 with two of our warehouse lenders in order to reactivate these
facilities. The terms of each amendment are contingent upon us having at least one additional whole loan financing facility with similar terms. As a result of the amendments, we have two committed facilities that each has a committed borrowing
capacity of $200.0 million. Both lines were to expire on November 7, 2008 but have been extended to November 14, 2008 or such date that the outstanding amounts are paid off from the pending sale of whole loans scheduled to settle on
November 14, 2008. We do not expect to renew these facilities. The facilities are collateralized by ARM loan collateral as well as cash collateral of up to $10 million per facility. The interest rates on the facilities are one-month LIBOR plus
175 basis points for whole loans that have been financed for 90 days or less and one-month LIBOR plus 225 basis points for whole loans that have been financed for over 90 days. The facilities are not covered by the Override Agreement and are subject
to margin calls based on age of the loans and estimated fair values of the loans. Each of the whole loan financing facilities requires us to pay a 1% commitment fee for the term of the facility and has financial covenants limiting our leverage. The
Company is currently not in compliance with the leverage requirement and has received a waiver of this covenant through the termination date for the warehouse facilities.
We have issued Senior Notes in the amount of $305.0 million as a form of long-term capital. The Senior Notes bear interest at 8.0%, payable each May 15 and November 15, and mature on May 15, 2013. The
Senior Notes are secured and are redeemable at a declining premium, in whole or in part, beginning on May 15, 2008, and at par beginning on May 15, 2011. In conjunction with the Financing Transaction, the Senior Notes were secured by a
lien senior to the Senior Subordinated Secured Notes on the stock of certain of our subsidiaries, TMHLs MSRs and the interest payments due from the mortgage-backed securities underlying the Override Agreement after termination of the Override
Agreement and after paying interest expense. Certain of our subsidiaries have guaranteed payment on the Senior Notes on a senior basis.
Our Senior Note obligations contain both financial and nonfinancial covenants. Significant financial covenants include limitations on our ability to incur indebtedness beyond contractually specified levels, restrictions on our ability to
incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of, or payment of dividends on, our own equity securities by us. If, at the end of any quarter, our total unencumbered assets fall below 125% of
the aggregate principal amount of our unsecured indebtedness (the Minimum Unencumbered Asset Amount), we will be required to maintain the debt to net worth ratio calculated as of the end of such quarter until our total unencumbered assets exceed the
Minimum Unencumbered Asset Amount. As of September 30, 2008, the Company was in compliance with all financial covenants on its Senior Note obligations.
On March 31, 2008, we issued Senior Subordinated Secured Notes with an initial aggregate principal amount of $1.15 billion. The Senior Subordinated Secured Notes mature on March 31, 2015. The Senior
Subordinated Secured Notes have an initial annual interest rate of 18%, payable each March 31 and September 30, which will be reduced to 12% upon satisfaction of the Additional Financing Conditions. An additional $200.0 million was placed
in escrow for the purchase by investors of additional Senior Subordinated Secured Notes to be issued to partially fund the Exchange Offer and Consent Solicitation. Of the $200.0 million originally deposited in the escrow account, approximately $11.4
million was released on June 30, 2008, and because the Company was unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the escrow was terminated in accordance with its terms and, as a result,
the approximately $188.6 million remaining in escrow was released to the escrow subscribers. The additional Senior Subordinated Secured Notes that would have been issued upon the success of such conditions were not issued. In connection with the
release of the escrowed funds, on September 30, 2008 the holders of the Senior Subordinated Secured Notes became entitled
70
to receive, on a pro rata basis (based on the aggregate principal amount of Senior Subordinated Secured Notes outstanding) Escrow Warrants exercisable for
3,300,021 of Common Stock (as adjusted to reflect anti-dilution protection for the issuance of the Consent Shares but not adjusted to reflect any subsequent anti-dilution adjustments).
Due to the Companys cash constraints and the unresolved issues relating to the Override Agreement, the Company requested and received the PIK Consent of approximately 98.6% of holders of
the Senior Subordinated Secured Notes to pay the September 30, 2008 interest payment due on the Senior Subordinated Secured Notes in the form of additional Senior Subordinated Secured Notes in lieu of a cash payment. As a result, $102.0 million
principal amount of Senior Subordinated Secured Notes (PIK Notes) were issued to such noteholders as the interest payment. In addition, as consideration for their PIK Consent, consenting noteholders received a consent fee, at their election, of
either (i) 6.5217 shares of Common Stock in respect of each $1,000 principal amount of Senior Subordinated Secured Notes (Consent Shares) or (ii) additional Senor Subordinated Notes with an aggregate principal amount equal to the market
value of the total number of Consent Shares on the date of issuance to which such noteholders otherwise would have been entitled (Consent Notes). Approximately 60% of the consenting noteholders elected to receive Consent Notes in the aggregate
principal amount of $13.5 million, and approximately 40% of the consenting noteholders elected to receive 2,954,422 Consent Shares in the aggregate.
The Senior Subordinated Secured Notes are not subject to either optional redemption by us or mandatory redemption by the note holders, except that the holders of the Senior Subordinated Secured Notes have the right to
require us to repurchase the Senior Subordinated Secured Notes for 101% of the principal amount, plus accrued and unpaid interest, upon the occurrence of a Change In Control.
Our Senior Subordinated Note obligations contain both financial and nonfinancial covenants. Significant financial covenants include limitations on our ability to incur indebtedness beyond
contractually specified levels, restrictions on our ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of, or payment of dividends on, our own equity securities. As of
September 30, 2008, we were in compliance with all financial covenants on our Senior Subordinated Note obligations.
The Senior
Subordinated Secured Notes are secured by a lien junior to the lien securing the Senior Notes on, among other things, the stock of certain of TMAs subsidiaries, TMHLs MSRs and the interest payments due from the mortgage-backed securities
underlying the Override Agreement after termination of the Override Agreement and after paying interest expense. In addition, certain of TMAs subsidiaries have guaranteed payment of the Senior Subordinated Secured Notes on a senior
subordinated basis.
We have $240.0 million in Subordinated Notes outstanding at September 30, 2008 and December 31, 2007. TMA
holds $53.5 million of the Subordinated Notes at September 30, 2008, and is a guarantor of the remaining $186.5 million Subordinated Notes held by TMHL. The Subordinated Notes bear interest at a weighted average fixed rate of 7.47% per
annum through the interest payment dates between October 2015 and January 2016, and thereafter at a variable rate equal to three-month LIBOR plus a weighted average margin of 2.56% per annum, payable each
January 30, April 30, July 30 and October 30, and mature between October 30, 2035 and April 30, 2036. The Subordinated Notes are unsecured and are redeemable at par, in whole or in part, beginning on
October 30, 2010. The Subordinated Notes may also be redeemed at a premium under limited circumstances on or before October 30, 2010. The Subordinated Note obligations contain nonfinancial covenants. As of September 30, 2008, we were
in compliance with all nonfinancial covenants on our subordinate note obligations.
On October 23, 2008, we entered into an exchange
agreement with certain holders (the Holders) of the Subordinated Notes whereby we agreed to exchange over time up to $53.5 million aggregate principal amount of the Subordinated Notes for up to a maximum of 8,333,240 shares of Common
Stock (the Shares). The exchange price for the notes equals 25% of the principal amount of Subordinated Notes exchanged plus accrued and unpaid interest, and the number of Shares to be received in exchange for Subordinated Notes equals
the exchange price of the Subordinated Notes exchanged, divided by 95% of the last sale price of the Shares immediately prior to the sale. Subject to a $5.0 million per business day limitation on exchanges (which may be waived by us), the Holders
have the discretion to choose the date on which Subordinated Notes will be exchanged and the principal amount of Subordinated Notes to be exchanged. As of November 3, 2008, we had exchanged $16.0 million aggregate principal amount of Subordinated
Notes for approximately 2.8 million shares.
Hedging Strategies
We generally attempt to manage our exposure to changing interest rates by funding our ARM Assets with a combination of short-term borrowings and Hedging Instruments with a combined Effective Duration of less than one
year. Some of our borrowings are at interest rates that are either variable or short-term (one year or less) because a portion of our ARM Assets, the Traditional ARM Assets, have interest rates that adjust within one year. We generally attempt to
finance our Hybrid ARM portfolio with borrowings hedged with Hybrid ARM Hedging Instruments that fix the interest rate on our floating-rate borrowings such that the Net Effective Duration is less than one year. As Net Effective Duration approaches
zero, a lower volatility of earnings is expected when interest rates change during future periods. Pursuant to the terms of the Override Agreement, we may not enter into any new Hedging Instruments or ISDA Agreements, except Cap Agreements and Swap
Agreements. Given recent dislocations in the correlation between the prices of our Hedging Instruments and prices on our mortgage-backed securities, we have temporarily suspended our Net Effective Duration policy. When we enter into a Swap
Agreement, we agree to pay a fixed rate of interest and to receive a variable interest rate, generally based on LIBOR. We purchase Cap Agreements by incurring a one-time fee or premium. Pursuant to the terms of the Cap Agreements, we will receive
cash payments if the interest rate index specified in any such Cap Agreement increases above contractually specified levels. Therefore, such Cap Agreements have the effect of capping the interest rate on a portion of our borrowings above a specified
level instead of fixing our cost of funds as in a swap transaction. The notional amounts of the Hybrid ARM Hedging Instruments generally decline over the life of these instruments.
At September 30, 2008, we had Swap Agreements having aggregate notional balances of $516.2 million, down from $8.0 billion at December 31, 2007 and $6.9 billion at September 30,
2007. In response to the market dislocations in the first quarter of 2008, we terminated all of our Swap Agreements in the first quarter of 2008 except for those which are held by bankruptcy-remote legal entities in connection with ARM Loans
Collateralizing Debt. We paid $241.3 million to terminate Swap Agreements with notional balances of $7.0 billion.
71
As of September 30, 2008, our Hybrid ARM Hedging Instruments had an estimated remaining average term
to maturity of 1.8 years before considering the effects of prepayments and when combined with our Hybrid ARM Assets and related borrowings had a Net Effective Duration of approximately 0.37 years, including the effects of estimated prepayments.
We may enter into Pipeline Hedging Instruments to manage interest rate risk associated with commitments to purchase ARM Loans from our
correspondent lending partners. The gain (loss) on the Pipeline Hedging Instruments is expected to offset the gain (loss) recorded for the change in fair value of the loan commitments.
We may enter into additional hedging transactions designed to protect our borrowing costs or portfolio yields from interest rate changes. We may purchase interest-only or
principal-only mortgage assets or other mortgage derivative products for purposes of mitigating risk from interest rate changes. We may also use, from time to time, futures contracts and options on futures contracts on the Eurodollar,
Federal Funds, Treasury bills and Treasury notes and similar financial instruments to mitigate risk from changing interest rates.
The
hedging transactions that we currently use are primarily designed to protect our income during periods of changing market interest rates and also may have the benefit of protecting our portfolio market value. However, as was true in the third
quarter of 2007, it is possible that during uncertain interest rate or credit markets, the value of our Hedging Instruments could decline at the same time the values of our mortgage assets are declining. We do not enter into derivative transactions
for speculative purposes. Further, no hedging strategy can completely insulate us from risk, and certain of the federal income tax requirements that we must satisfy to qualify as a REIT may limit our ability to hedge. We carefully monitor and may
have to limit our hedging strategies to ensure that we do not realize excessive hedging income or hold hedging assets having excess value in relation to total assets.
Financial Condition
Asset Quality
At September 30, 2008, we held total assets of $26.3 billion, $25.4 billion of which consisted of ARM Assets. That compares to $36.3 billion in total
assets and $35.2 billion of ARM Assets at December 31, 2007. Since commencing operations, we have purchased either Agency Securities, privately-issued MBS or ARM Loans generally originated to A quality underwriting standards. At
September 30, 2008, 96.3% of the assets we held, including cash and cash equivalents, were High Quality assets, far exceeding our investment policy minimum requirement of investing at least 70% of our total assets in High Quality ARM Assets and
cash and cash equivalents.
The following tables present schedules of ARM Assets owned at September 30, 2008 and December 31,
2007 classified by High Quality and Other Investment assets and further classified by type of issuer and by ratings categories. All Purchased ARM Assets included in the tables have been rated by the Rating Agencies. ARM Loans include Securitized ARM
Loans that have been rated by the Rating Agencies, ARM Loans Collateralizing Debt that have been stratified by credit rating based on the ratings received from the Rating Agencies on the respective Collateralized Mortgage Debt and ARM loans held for
sale or securitization that have not been rated by the Rating Agencies.
ARM Assets by Issuer and Highest Current Credit Rating
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
Value
|
|
Portfolio
Mix
|
|
|
Carrying
Value
|
|
Portfolio
Mix
|
|
High Quality Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities
|
|
$
|
221,623
|
|
0.9
|
%
|
|
$
|
2,513,026
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency ARM Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/Aaa rating
|
|
|
23,703,000
|
|
93.3
|
|
|
|
31,392,442
|
|
89.2
|
|
AA/Aa rating
|
|
|
588,384
|
|
2.3
|
|
|
|
406,299
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency ARM Assets
|
|
|
24,291,584
|
|
95.6
|
|
|
|
31,798,741
|
|
90.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total High Quality Assets
|
|
|
24,513,007
|
|
96.5
|
|
|
|
34,311,767
|
|
97.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
Value
|
|
Portfolio
Mix
|
|
|
Carrying
Value
|
|
|
Portfolio
Mix
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency ARM Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A rating
|
|
|
163,915
|
|
0.6
|
|
|
|
177,991
|
|
|
0.5
|
|
BBB/Baa rating
|
|
|
161,041
|
|
0.6
|
|
|
|
88,651
|
|
|
0.2
|
|
BB/Ba rating and below
|
|
|
12,659
|
|
0.1
|
|
|
|
67,198
|
|
|
0.2
|
|
ARM Loans held for sale or securitization
|
|
|
157,120
|
|
0.6
|
|
|
|
549,724
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Investments
|
|
|
494,735
|
|
1.9
|
|
|
|
883,564
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
(10,791
|
)
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ARM Assets (1)
|
|
$
|
25,406,124
|
|
100.0
|
%
|
|
$
|
35,184,540
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of September 30, 2008, this balance included $4.0 billion of Purchased ARM Assets and $21.4 billion of ARM Loans. As of December 31, 2007, this
balance included $10.7 billion of Purchased ARM Assets and $24.5 billion of ARM Loans.
|
During the third quarter, we
continued to experience credit downgrades from the various credit rating agencies on our ARM assets portfolio. As of September 30, 2008, and assuming the lowest current credit rating for downgraded securities, we experienced downgrades on $2.0
billion of unpaid principal balance and $1.2 billion of carrying value of our ARM assets portfolio. Since September 30, 2008, there have been additional credit downgrades announced by the credit rating agencies. As of November 3, 2008, an
additional $510.3 million of unpaid principal balance and $345.1 million of carrying value of ARM assets have been downgraded. After taking into consideration all of these downgrades, 70.3% of the carrying value of the securities collateralizing the
Reverse Repurchase Agreements remains AA or AAA rated and the majority of this portfolio continues to have substantial credit protection in the form of credit subordination. Despite the downgrades, we believe that any ultimate realization of losses
will be less than the deeply discounted carrying value of our ARM asset portfolio.
As of September 30, 2008, 324 of the 33,591 loans
in our $21.4 billion ARM loan portfolio were considered seriously delinquent (60 days or more delinquent) and had an aggregate balance of $305.2 million. At September 30, 2008, we had 61 REO as a result of foreclosing on delinquent loans with
original loan balances of $45.8 million and an associated valuation reserve of $15.2 million. We believe that the impairments reflected in our Securitized ARM Loans reflect all probable credit losses inherent in the ARM loan portfolio at
September 30, 2008.
At September 30, 2008, our Purchased Securitized Loans totaled $393.4 million. Because we purchased all
credit loss classes of these securitizations, we have credit exposure, up to the value of our securities, on the entire balance of underlying loans which totaled $5.3 billion and $5.9 billion at September 30, 2008 and December 31, 2007,
respectively. The purchase price of the classes that are less than Investment Grade generally includes a discount for probable credit losses and, based on managements judgment, the portion of the purchase discount which reflects the estimated
unrealized loss on the securities due to credit risk is treated as a nonaccretable discount. As of September 30, 2008, 171 of the underlying loans in these Purchased Securitized Loans were 60 days or more delinquent and had an aggregate balance
of $145.0 million.
We believe that the impairments totaling $631.3 million reflected in our Securitized ARM Loans include all probable
credit losses inherent in the ARM loan portfolio at September 30, 2008.
ARM Loan Portfolio Characteristics
The following tables present various characteristics of our ARM Loan portfolio as of September 30, 2008, categorized by TMHL
originations and bulk acquisitions. This information pertains to ARM loans held for sale or securitization, ARM loans held as collateral for Collateralized Mortgage Debt and ARM loans securitized for our own portfolio for which we retained credit
loss exposure. The combined unpaid principal balance of the loans included in these tables is $22.2 billion, consisting of TMHL originations of $16.1 billion and bulk acquisitions of $6.1 billion.
ARM Loan Portfolio Characteristics TMHL Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
Original loan balance
|
|
$
|
713,308
|
|
|
$
|
14,000,000
|
|
|
$
|
25,000
|
|
Unpaid principal balance
|
|
$
|
680,246
|
|
|
$
|
14,000,000
|
|
|
$
|
651
|
|
Coupon rate on loans
|
|
|
5.99
|
%
|
|
|
11.25
|
%
|
|
|
3.00
|
%
|
Pass-through rate
|
|
|
5.71
|
%
|
|
|
11.00
|
%
|
|
|
2.54
|
%
|
Pass-through margin
|
|
|
1.68
|
%
|
|
|
6.25
|
%
|
|
|
0.26
|
%
|
Lifetime cap
|
|
|
11.11
|
%
|
|
|
18.00
|
%
|
|
|
5.00
|
%
|
73
|
|
|
|
|
|
|
|
|
Average
|
|
High
|
|
Low
|
Original term (months)
|
|
361
|
|
480
|
|
120
|
Remaining term (months)
|
|
328
|
|
474
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic distribution (top 5 states):
|
|
|
|
|
Property type:
|
|
|
California
|
|
|
|
30.6
|
%
|
|
|
|
Single-family
|
|
76.5%
|
New York
|
|
|
|
10.4
|
|
|
|
|
Condominium
|
|
17.9
|
Colorado
|
|
|
|
8.7
|
|
|
|
|
Other residential
|
|
5.6
|
Florida
|
|
|
|
7.5
|
|
|
|
|
|
|
|
Georgia
|
|
|
|
5.1
|
|
|
Original ARM Loan type:
|
|
|
|
|
|
|
|
|
|
|
|
Traditional ARM loans
|
|
2.9%
|
Occupancy status:
|
|
|
|
|
|
|
Hybrid ARM loans
|
|
97.1
|
Owner occupied
|
|
|
|
69.5
|
%
|
|
|
|
|
|
|
Second home
|
|
|
|
18.9
|
|
|
ARM interest rate caps:
|
|
|
Investor
|
|
|
|
11.6
|
|
|
|
|
Initial interest rate cap on Hybrid ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
3.00% or less
|
|
0.9%
|
Documentation type:
|
|
|
|
|
|
|
3.01%-4.00%
|
|
3.3
|
Full
|
|
|
|
87.6
|
%
|
|
|
|
4.01%-5.00%
|
|
78.3
|
Stated income/no ratio
|
|
|
|
12.4
|
|
|
|
|
5.01%-6.00%
|
|
7.2
|
|
|
|
|
|
|
|
|
|
Over 6.00%
|
|
7.8
|
Loan purpose:
|
|
|
|
|
Periodic interest rate cap on ARM Loans:
|
|
|
Purchase
|
|
|
|
49.7
|
%
|
|
|
|
None
|
|
1.5%
|
Cash out refinance
|
|
|
|
30.6
|
|
|
|
|
1.00% or less
|
|
0.8
|
Rate & term refinance
|
|
|
|
19.7
|
|
|
|
|
Over 1.00%
|
|
0.2
|
|
|
|
|
Unpaid principal balance:
|
|
|
|
|
Percent of interest-only loan balances:
|
|
93.6%
|
$417,000 or less
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
$417,001 to $650,000
|
|
|
|
15.8
|
|
|
Weighted average length of remaining interest-only period:
|
|
9.6 years
|
$650,001 to $1,000,000
|
|
|
|
19.6
|
|
|
|
|
|
|
|
$1,000,001 to $2,000,000
|
|
|
|
31.9
|
|
|
FICO scores:
|
|
|
$2,000,001 to $3,000,000
|
|
|
|
8.7
|
|
|
|
|
801 and over
|
|
5.2%
|
Over $3,000,000
|
|
|
|
8.9
|
|
|
|
|
751 to 800
|
|
45.6
|
|
|
|
|
|
|
|
|
|
701 to 750
|
|
31.6
|
Original effective loan-to-value:
|
|
|
|
|
|
|
651 to 700
|
|
15.8
|
80.01% and over
|
|
|
|
1.0
|
%
|
|
|
|
650 or less
|
|
1.8
|
70.01%-80.00%
|
|
|
|
48.6
|
|
|
|
|
|
|
|
60.01%-70.00%
|
|
|
|
24.0
|
|
|
Weighted average FICO score:
|
|
744
|
50.01%-60.00%
|
|
|
|
12.8
|
|
|
|
|
|
|
|
50.00% or less
|
|
|
|
13.6
|
|
|
Weighted average effective original loan-to-value:
|
|
67.2%
|
74
ARM Loan Portfolio Characteristics Bulk Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
Original loan balance
|
|
$
|
634,167
|
|
|
$
|
10,016,162
|
|
|
$
|
13,190
|
|
Unpaid principal balance
|
|
$
|
612,991
|
|
|
$
|
10,473,648
|
|
|
$
|
446
|
|
Coupon rate on loans
|
|
|
5.86
|
%
|
|
|
9.13
|
%
|
|
|
2.75
|
%
|
Pass-through rate
|
|
|
5.56
|
%
|
|
|
8.42
|
%
|
|
|
2.42
|
%
|
Pass-through margin
|
|
|
2.28
|
%
|
|
|
4.89
|
%
|
|
|
0.67
|
%
|
Lifetime cap
|
|
|
10.75
|
%
|
|
|
15.13
|
%
|
|
|
7.25
|
%
|
Original term (months)
|
|
|
360
|
|
|
|
480
|
|
|
|
180
|
|
Remaining term (months)
|
|
|
328
|
|
|
|
458
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic distribution (top 5 states):
|
|
|
|
|
Property type:
|
|
|
|
California
|
|
|
|
43.5
|
%
|
|
Single-family
|
|
|
|
83.2
|
%
|
New York
|
|
|
|
7.4
|
|
|
Condominium
|
|
|
|
15.8
|
|
Florida
|
|
|
|
7.2
|
|
|
Other residential
|
|
|
|
1.0
|
|
New Jersey
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
Virginia
|
|
|
|
3.9
|
|
|
Original ARM Loan type:
|
|
|
|
|
|
|
|
|
|
|
Traditional ARM loans
|
|
|
|
0.6
|
%
|
Occupancy status:
|
|
|
|
|
Hybrid ARM loans
|
|
|
|
99.4
|
|
Owner occupied
|
|
|
|
88.7
|
%
|
|
|
|
|
|
|
|
Second home
|
|
|
|
9.0
|
|
|
ARM interest rate caps:
|
|
|
|
Investor
|
|
|
|
2.3
|
|
|
Initial interest rate cap on Hybrid ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00% or less
|
|
|
|
2.7
|
%
|
Documentation type:
|
|
|
|
|
3.01%-4.00%
|
|
|
|
0.0
|
|
Full
|
|
|
|
59.3
|
%
|
|
4.01%-5.00%
|
|
|
|
81.9
|
|
Stated income/no ratio
|
|
|
|
40.7
|
|
|
5.01%-6.00%
|
|
|
|
2.7
|
|
|
|
|
|
Loan purpose:
|
|
|
|
|
Periodic interest rate cap on ARM Loans:
|
|
|
|
Purchase
|
|
|
|
53.5
|
%
|
|
None
|
|
|
|
12.6
|
%
|
Cash out refinance
|
|
|
|
27.1
|
|
|
1.00% or less
|
|
|
|
0.0
|
|
Rate & term refinance
|
|
|
|
19.4
|
|
|
Over 1.00%
|
|
|
|
0.1
|
|
|
|
|
|
Unpaid principal balance:
|
|
|
|
|
Percent of interest-only loan balances:
|
|
69.2
|
%
|
$417,000 or less
|
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
$417,001 to $650,000
|
|
|
|
38.0
|
|
|
Weighted average length of remaining interest-only period:
|
|
9.1 years
|
|
$650,001 to $1,000,000
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
$1,000,001 to $2,000,000
|
|
|
|
13.5
|
|
|
FICO scores:
|
|
|
|
|
|
$2,000,001 to $3,000,000
|
|
|
|
4.8
|
|
|
801 and over
|
|
|
|
4.4
|
%
|
Over $3,000,000
|
|
|
|
6.3
|
|
|
751 to 800
|
|
|
|
42.6
|
|
|
|
|
|
|
|
|
701 to 750
|
|
|
|
35.3
|
|
Original effective loan-to-value:
|
|
|
|
|
651 to 700
|
|
|
|
16.5
|
|
80.01% and over
|
|
|
|
0.6
|
%
|
|
650 or less
|
|
|
|
1.2
|
|
70.01%-80.00%
|
|
|
|
48.7
|
|
|
|
|
|
|
|
|
60.01%-70.00%
|
|
|
|
26.0
|
|
|
Weighted average FICO score:
|
|
743
|
|
50.01%-60.00%
|
|
|
|
12.0
|
|
|
|
|
|
|
|
|
50.00% or less
|
|
|
|
12.7
|
|
|
Weighted average effective original loan-to-value:
|
|
68.2
|
%
|
As of September 30, 2008 and December 31, 2007, we serviced $13.3 billion and $14.7
billion of our loans, respectively, and had 20,314 and 22,264 customer relationships, respectively. We hold all of the loans that we service in our portfolio in the form of Securitized ARM Loans, Arm Loans Collateralizing Debt or ARM loans held for
sale or securitization.
75
Asset Repricing Characteristics
The following table classifies our ARM portfolio by type of interest rate index and frequency of repricing.
ARM Assets by Index and Repricing Frequency
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
Value
|
|
Portfolio
Mix
|
|
|
Carrying
Value
|
|
|
Portfolio
Mix
|
|
Traditional ARM Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-month LIBOR
|
|
$
|
2,288,450
|
|
9.0
|
%
|
|
$
|
1,912,144
|
|
|
5.4
|
%
|
Six-month LIBOR
|
|
|
647,710
|
|
2.5
|
|
|
|
2,025,261
|
|
|
5.8
|
|
MTA
|
|
|
503,742
|
|
2.0
|
|
|
|
1,094,778
|
|
|
3.1
|
|
Other
|
|
|
432,960
|
|
1.7
|
|
|
|
988,741
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,872,862
|
|
15.2
|
|
|
|
6,020,924
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid ARM Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining fixed period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 years or less
|
|
|
2,875,145
|
|
11.3
|
|
|
|
4,474,228
|
|
|
12.7
|
|
Over 3 years 5 years
|
|
|
3,554,087
|
|
14.0
|
|
|
|
3,751,137
|
|
|
10.7
|
|
Over 5 years
|
|
|
15,104,030
|
|
59.5
|
|
|
|
20,949,042
|
|
|
59.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,533,262
|
|
84.8
|
|
|
|
29,174,407
|
|
|
82.9
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
(10,791
|
)
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,406,124
|
|
100.0
|
%
|
|
$
|
35,184,540
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe that the impairments totaling $631.3 million reflected in its Securitized ARM Loans
included all probable credit losses inherent in the ARM loan portfolio at September 30, 2008.
The ARM portfolio had a weighted
average coupon of 5.68% at September 30, 2008. This consisted of a weighted average coupon of 5.69% on the Hybrid ARM Assets and a weighted average coupon of 5.17% on the Traditional ARM Assets. If the portfolio had been Fully Indexed, the
weighted average coupon of the portfolio would have been 5.68%, based upon the composition of the portfolio and the applicable indices at September 30, 2008. Additionally, if the Traditional ARM portion of the portfolio had been Fully Indexed,
the weighted average coupon of that portion of the portfolio would have been 5.49%, also based upon the composition of the portfolio and the applicable indices at that time.
As of December 31, 2007, the ARM portfolio had a weighted average coupon of 5.82%. This consisted of a weighted average coupon of 5.58% on the Hybrid ARM Assets and a weighted average coupon
of 5.92% on the Traditional ARM assets. If the portfolio had been Fully Indexed, the weighted average coupon of the portfolio would have been 6.01%, based upon the composition of the portfolio and the applicable indices at December 31, 2007.
Additionally, if the Traditional ARM portion of the portfolio had been Fully Indexed, the weighted average coupon of that portion of the portfolio would have been 6.20%, also based upon the composition of the portfolio and the applicable indices at
that time.
At September 30, 2008, the current yield of the ARM Assets portfolio was 7.24% up from 5.77% as of December 31, 2007.
The increase in the yield of 147 BPs as of September 30, 2008, compared to December 31, 2007, is primarily due to the accretion of the net discount on our portfolio.
76
Interest Rate Risk Management
The Hybrid ARM portfolio comprised 84.8% of the total ARM portfolio, or $21.5 billion at September 30, 2008, compared to 82.9%, or $29.2 billion as
of December 31, 2007. We attempt to mitigate our interest rate risk by funding our ARM portfolio with borrowings and Hedging Instruments whose combined Effective Duration is less than one year. Some of our borrowings bear variable or short-term
(one year or less) fixed interest rates because our Traditional ARM Assets have interest rates that adjust within one year. Our Hybrid ARM Assets are financed with fixed-rate financing and with short-term borrowings and floating-rate financings that
are hedged with Hybrid ARM Hedging Instruments that fix the interest rate on those borrowings such that the combined Net Effective Duration is less than one year. By maintaining a Net Effective Duration of less than one year, which is our maximum
Effective Duration policy limit, the combined price change of our Hybrid ARM Assets, associated Hybrid ARM Hedging Instruments and other borrowings is expected to be a maximum of 1% for a 1% parallel shift in interest rates. An Effective Duration
closer to zero indicates a lower expected volatility of earnings given future changes in interest rates. Pursuant to the terms of the Override Agreement, we may not enter into any new Hedging Instruments or ISDA Agreements, except Cap Agreements and
Swap Agreements. Given recent dislocations in the correlation between the prices of our Hedging Instruments and prices on our mortgage-backed securities, we have temporarily suspended our Net Effective Duration policy and curtailed some of our
hedging activities. As of September 30, 2008, our Net Effective Duration was approximately 0.37 years.
As of September 30, 2008
and December 31, 2007, we were counterparty to Swap Agreements having aggregate notional balances of $516.2 million and $8.0 billion, respectively. As of September 30, 2008, our Swap Agreements had a weighted average maturity of 1.9 years.
In accordance with the Swap Agreements, we will pay a fixed rate of interest during the term of these Swap Agreements and receive a payment that varies monthly with the one-month LIBOR rate. The combined weighted average fixed rate payable of the
Swap Agreements was 3.21% and 4.76% at September 30, 2008 and December 31, 2007, respectively.
In response to the market
dislocations in the first quarter of 2008, we terminated all of our Swap Agreements in the first quarter of 2008 except for those which are held by bankruptcy-remote legal entities in connection with ARM Loans Collateralizing Debt. We paid $241.3
million, including accrued interest of $29.7 million, to terminate Swap Agreements with notional balances of $7.0 billion. At September 30, 2008, the net unrealized loss recorded in OCI relating to these terminations totaled $139.6 million. For
these terminations, the reclassification of OCI to the Condensed Consolidated Income Statements will be recognized as the original hedged transactions that are still probable of occurring impact the Condensed Consolidated Income Statements. This
reclassification totaled $82.3 million and $38.1 million in the nine months and three months ended September 30, 2008, respectively, and were recorded in interest expense on borrowed funds.
In the nine months ended September 30, 2008, we reclassified $27.4 million of net OCI to the Condensed Consolidated Income Statements, recorded in
Gain (loss) on Derivatives, net, because the original forecasted transactions for certain Swap Agreements that were terminated in a previous period are now probable of not occurring within the original period or an additional two month period. We
also reclassified $28.9 million of OCI to the Condensed Consolidated Income Statements, recorded in interest expense on borrowed funds, related to Swap Agreements that were terminated in a previous period for which the original forecasted
transactions continue to be probable of occurring.
As of September 30, 2008, the net unrealized loss recorded in OCI related to all
terminated Swap Agreements totaled $179.6 million. In the twelve month period following September 30, 2008 based on the current level of interest rates, $176.0 million of net unrealized losses related to terminated Swap Agreements are expected
to be reclassified into the Condensed Consolidated Income Statements as interest expense.
The net unrealized loss on the remaining active
Swap Agreements at September 30, 2008 of $6.0 million included Swap Agreements with gross unrealized losses of $6.0 million and is included in Hedging Instruments on the Condensed Consolidated Balance Sheets. As of December 31, 2007, the
net unrealized loss on active Swap Agreements of $108.2 million included Swap Agreements with gross unrealized losses of $111.9 million and gross unrealized gains of $3.7 million. As of September 30, 2008, the net unrealized loss on active Swap
Agreements recorded in OCI totaled $6.0 million. In the twelve month period following September 30, 2008 based on the current level of interest rates, $2.9 million of these net unrealized losses are expected to be realized through interest
expense.
As of September 30, 2008 and December 31, 2007, our Cap Agreements used to manage the interest rate risk exposure on
the financing of Hybrid ARM Loans Collateralizing Debt had remaining net notional balances of $467.7 million and $630.9 million, respectively. We also entered into Cap Agreements that have start dates ranging from 2008 to 2010. The notional balance
at the start date will be the lesser of the scheduled amount of $197.5 million or the balance of Hybrid ARM loans associated with these Cap Agreements. The fair value of all of these Cap Agreements at September 30, 2008 and December 31,
2007 was $538,000 and $1.6 million, respectively, and is included in Hedging Instruments on the Condensed Consolidated Balance Sheets. The unrealized losses on these Cap Agreements of $3.8 million and $6.9 million as of September 30, 2008 and
December 31, 2007, respectively, are included in OCI. In the twelve month period following September 30, 2008, $1.6 million of net unrealized losses are expected to be realized. Pursuant to the terms of these Cap Agreements and subject to
future prepayment behavior, the notional amount of the Cap Agreements declines such that it is expected to equal the balance of the Hybrid ARM Loans Collateralizing Debt hedged with these
77
Cap Agreements. Under these Cap Agreements, we will receive cash payments should the one-month LIBOR increase above the contract rates of these Hedging
Instruments, which range from 3.61% to 9.67% and average 6.47%. The Cap Agreements had an average maturity of 2.9 years as of September 30, 2008 and will expire between 2009 and 2013.
The following table presents the outstanding notional balance of our Hybrid ARM Hedging Instruments as of September 30, 2008 and the balance of these same Hybrid ARM Hedging Instruments as
of September 30 for each of the following five years (assuming that no additional Hybrid ARM Hedging Instruments are added to the portfolio in the future periods) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
Swap Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-guaranteed (1)
|
|
$
|
516,229
|
|
$
|
159,199
|
|
$
|
127,359
|
|
$
|
52,117
|
|
$
|
41,693
|
|
$
|
33,355
|
Cap Agreements (1)
|
|
|
467,712
|
|
|
179,560
|
|
|
108,089
|
|
|
177,136
|
|
|
124,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
983,941
|
|
$
|
338,759
|
|
$
|
235,448
|
|
$
|
229,253
|
|
$
|
166,109
|
|
$
|
33,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These Swap Agreements and Cap Agreements have been entered into in connection with our Collateralized Mortgage Debt transactions. The notional balances of these
agreements are guaranteed to match the balance of the Hybrid ARM collateral in the respective Collateralized Mortgage Debt transactions, subject to a maximum notional balance over the term of those agreements. The notional balances presented in the
table above for these balance-guaranteed agreements represent forward-looking statements which are calculated based on a CPR assumption of 20%. The actual balances will likely be different based on the actual prepayment performance of the applicable
Hybrid ARM collateral. The final maturity of these agreements is 2015.
|
The following table presents the maximum
outstanding notional balance of our balance-guaranteed Hybrid ARM Hedging Instruments as of September 30, 2008 and as of September 30 for each of the following five years (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
Swap Agreements
|
|
$
|
516,229
|
|
$
|
149,786
|
|
$
|
122,825
|
|
$
|
51,937
|
|
$
|
42,589
|
|
$
|
34,923
|
Cap Agreements
|
|
|
467,712
|
|
|
319,453
|
|
|
231,096
|
|
|
229,921
|
|
|
175,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
983,941
|
|
$
|
469,239
|
|
$
|
353,921
|
|
$
|
281,858
|
|
$
|
218,214
|
|
$
|
34,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a net loss of $45.9 million on Derivatives during the nine months ended
September 30, 2008. This loss consisted of a net loss of $18.0 million on commitments to purchase loans from correspondent lenders and bulk sellers, a net loss on terminated Swap Agreements of $27.4 million and a net loss of $160,000 on other
Derivative transactions. We recorded a net loss of $17.0 million on Derivatives during the same period in 2007. This loss included a net loss of $12.0 million on commitments to purchase loans from correspondent lenders and bulk sellers, partially
offset by a net gain of $3.3 million on Pipeline Hedging Instruments. We also recognized a net gain of $5.5 million on Swap Agreement terminations and a $13.8 million unrealized loss on Swap Agreements which were originally intended to qualify as
cash flow hedges but did not due to the reduction in borrowings in August 2007. The net loss on Derivatives is driven by several factors including: the size of the loan pipeline, the expected and actual fallout rates, changes in interest rates,
changes in the shape of the yield curve, changes in mortgage spreads, and our pipeline hedging long or short bias. These factors work together or in opposition to increase or decrease respectively the net gain or loss on Derivatives in a particular
reporting period.
78
Asset Acquisitions and Originations
During the quarter ended September 30, 2008, we did not purchase any Purchased ARM Assets or purchase or originate any ARM Loans. The following table compares our ARM asset acquisition and origination activity
for the three and nine months ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
ARM securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities
|
|
$
|
|
|
0.0
|
%
|
|
$
|
|
|
0.0
|
%
|
High Quality, privately issued
|
|
|
|
|
0.0
|
|
|
|
1,062,225
|
|
45.6
|
|
Other privately issued
|
|
|
|
|
0.0
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
|
|
|
1,062,225
|
|
45.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk acquisitions
|
|
|
|
|
0.0
|
|
|
|
|
|
0.0
|
|
Correspondent originations
|
|
|
|
|
0.0
|
|
|
|
960,925
|
|
40.8
|
|
Wholesale origination
|
|
|
|
|
0.0
|
|
|
|
288,510
|
|
12.3
|
|
Direct retail originations
|
|
|
|
|
0.0
|
|
|
|
29,311
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
|
|
|
1,278,746
|
|
54.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions
|
|
$
|
|
|
0.0
|
%
|
|
$
|
2,340,971
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
ARM securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities
|
|
$
|
|
|
0.0
|
%
|
|
$
|
2,403,039
|
|
17.0
|
%
|
High Quality, privately issued
|
|
|
1,264,171
|
|
61.4
|
|
|
|
6,892,337
|
|
48.8
|
|
Other privately issued
|
|
|
2,255
|
|
0.1
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,266,426
|
|
61.5
|
|
|
|
9,295,376
|
|
65.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk acquisitions
|
|
|
|
|
0.0
|
|
|
|
107,307
|
|
0.8
|
|
Correspondent originations
|
|
|
396,004
|
|
19.2
|
|
|
|
3,764,889
|
|
26.5
|
|
Wholesale origination
|
|
|
380,952
|
|
18.5
|
|
|
|
894,634
|
|
6.3
|
|
Direct retail originations
|
|
|
15,339
|
|
0.8
|
|
|
|
83,959
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
792,295
|
|
38.5
|
|
|
|
4,850,789
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions
|
|
$
|
2,058,721
|
|
100.0
|
%
|
|
$
|
14,146,165
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, we had commitments to purchase $3.5 million of ARM Loans, net of
estimated fallout of 39.7%.
ARM Loan Sale and Securitization Activity
Consistent with broader market conditions and a lack of liquidity for securitized loans at reasonable prices, we did not complete a securitization in the
second or third quarters of 2008. We completed a sale of $111.2 million in ARM loans at a loss of $13.2 million during the third quarter of 2008 due to the need to reduce our warehouse financing and the inaccessibility of the securitization market.
We will continue to pursue loan sale opportunities in the fourth quarter of 2008.
Prepayment Experience
For the quarter ended September 30, 2008, our mortgage assets paid down at an approximate average CPR of 12%, down from 16% for the quarter ended
June 30, 2008 and 14% for the quarter ended September 30, 2007. When prepayment expectations over the remaining life of the assets increase, and all other interest rate variables are held constant, we accrete our net discount over a
shorter time period, resulting in an increased yield to maturity on our ARM Assets. Conversely, if prepayment expectations decrease, we would accrete the net discount over a longer time period, resulting in a lower yield to maturity. We monitor our
prepayment experience and future expectations on a periodic basis and adjust the accretion of the net discount, as appropriate.
79
Liquidity, Capital Resources and Going Concern
As described in Note 1 to the Condensed Consolidated Financial Statements, we have substantial doubt as to our ability to continue as a going concern as of September 30, 2008. The
realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, our available liquidity and the continued availability of financing for our ARM Assets.
As a result of the liquidity crisis we faced due to significant margin calls during the first quarter of 2008, we entered into the Override Agreement on
March 17, 2008, pursuant to which we were required to raise at least $1 billion in new capital and on March 31, 2008 we entered into the Financing Transaction in order to satisfy the $1 billion new capital raise pursuant to the Override
Agreement. Under the terms of the Override Agreement, prior to March 16, 2009 or the date on which the Override Agreement is earlier terminated pursuant to its terms, we may not enter into any new transactions under existing or new Reverse
Repurchase Agreements, securities lending agreements or Forward Auction Agreements or deliver additional collateral thereunder other than as provided in the Override Agreement.
Pursuant to the terms of the Financing Transaction, we must also satisfy the Additional Financing Conditions, which includes a successful Exchange Offer and Consent Solicitation, by
December 31, 2008 in order to terminate the Principal Participation Agreement. We believe that satisfaction of the Additional Financing Conditions prior to December 31, 2008 is vital to allow us to continue as a going concern. The
uncertainty as to the outcome of these events, the available sources of liquidity and the availability of financing for certain of our ARM Assets subsequent to the term of the Override Agreement raise substantial doubt about our ability to continue
as a going concern for the foreseeable future.
Beginning in July 2008, the Override Agreement counterparties began to make a series of
margin calls as a result of a series of Rating Agency downgrades of mortgage-backed securities owned by us and financed by the Override Agreement counterparties. In the context of those downgrades and their associated margin calls, some ambiguities
arose with regard to the interpretations of the Override Agreement as it related to margin calls on downgraded securities and other matters. In trying to resolve these issues, we and the Override Agreement counterparties entered into a series of
negotiations to attempt to resolve the interpretative issues. And, as negotiations continued and downgrades continued to be announced, the counterparties to the Override Agreement began to withhold funds payable to us under both the Override
Agreement and the whole loan financing facility. On August 21, 2008, and in consideration of ongoing negotiations with the Override Agreement counterparties continuing in good faith, we used amounts in the Liquidity Reserve Fund to pay margin
calls totaling approximately $219.0 million based on our interpretation of the Override Agreement, which was less than the amount owing based on downgrades under the counterparties interpretation of the Override Agreement. As of
September 30, 2008, we had identified additional downgrades in its portfolio with a current face of $631.0 million and a carrying value of $352.2 million which would have resulted in an additional margin call of $56.7 million under our
interpretation. Since September 30, 2008, and up to November 3, 2008, we have received additional downgrades on mortgage-backed securities held in our portfolio and financed under the Override Agreement. Those downgrades had a current face
of $ 510.3 million and a carrying value of $345.1 million and could result in additional margin calls under our interpretation of the Override Agreement of $138.6 million. In total, we believe an additional $195.3 million in margin calls could
result from downgrades subsequent to August 21, 2008. We have not paid any amounts on these potential additional margin calls to the counterparties to the Override Agreement.
There can be no assurance that active negotiations with the counterparties to the Override Agreement will continue or that an agreement will be reached. And, if we are unable reach a final
agreement on these interpretative issues, the counterparties to the Override Agreement may attempt to terminate the Override Agreement prior to March 16, 2009, in which case certain of our obligations under our Reverse Repurchase Agreements,
securities lending and Forward Auction Agreements will become immediately due and payable, which would have a material adverse effect on us as we are not in a position to pay any shortfalls resulting from the liquidation or sale of the underlying
collateral.
On September 30, 2008, we had readily available liquidity of approximately $130.1 million, including the Liquidity
Reserve Fund of $113.5 million. As of September 30, 2008, our portfolio, including ARM Loans Collateralizing Debt, consisted of 96.2% Agency and
80
assets rated AAA by either Moodys Investors Service or Standard & Poors rating agencies, and 3.8% below AAA-rated assets. While those
portfolio assets continue to perform extremely well from a credit performance perspective, we have yet to see financing terms, market prices or liquidity materially improve for these asset classes since the disruption in the mortgage financing
markets began in August 2007.
Sources of Funds
Our primary sources of new funds for the nine months ended September 30, 2008 were the proceeds from the Financing Transaction including the exercise of the initial Warrants and Override
Warrants, principal and interest payments from ARM Assets, as well as proceeds from the sale of ARM Assets net of the payoff of financings of those assets.
As of September 30, 2008, we had $4.7 billion, excluding unamortized discounts of $22.3 million, of Reverse Repurchase Agreements outstanding with counterparties to the Override Agreement. At September 30,
2008, the outstanding Reverse Repurchase Agreements had a weighted average borrowing rate of 3.25% and a weighted average remaining maturity of 5.6 months.
During the term of the Override Agreement, each of the counterparties will collect all principal and interest payments on the securities collateralizing its Reverse Repurchase Agreements and will apply 100% of the
principal payments and generally 20% of the interest payments to reduce the balance of the outstanding obligations under its Reverse Repurchase Agreements payable to the respective counterparties. If the Reverse Repurchase Agreement balances are not
reduced to specified levels at each month end, the portion of interest payments applied to reduce those balances will be increased from 20% to 30% until those balances are reduced to the specified levels. Each of the counterparties is obligated to
return the amounts that were not applied to reduce the outstanding obligations under such agreements collected by it to us. The counterparties to the Override Agreement are not obligated to return to us any collateral if the value of the collateral
securing their obligations increases during the term of the Override Agreement.
Beginning in July 2008, the Override Agreement
counterparties began to make a series of margin calls as a result of a series of Rating Agency downgrades of mortgage-backed securities owned by us and financed by the Override Agreement counterparties. In the context of those downgrades and their
associated margin calls, some ambiguities arose with regard to the interpretations of the Override Agreement as it related to margin calls on downgraded securities and other matters. In trying to resolve these issues, we and the Override Agreement
counterparties entered into a series of negotiations to attempt to resolve the interpretative issues. And, as negotiations continued and downgrades continued to be announced, the counterparties to the Override Agreement began to withhold funds
payable to us under both the Override Agreement and the whole loan financing facility.
We had an Asset-backed CP facility, which until the
dislocation in the credit markets beginning in August 2007 provided us with an alternative way to finance our High Quality ARM Assets portfolio. The facility was terminated on April 15, 2008. On April 14, 2008, TMCR, a bankruptcy remote
subsidiary of ours, did not make payment on the final maturity date of $300 million of notes due under the Asset-backed CP program. The failure to make such payment constituted a default under the Asset-backed CP program. The notes were
collateralized by AAA-rated MBS that were liquidated by the enforcement agent for the Asset-backed CP program. The existing commercial paper note holders credit bid $294 million of commercial paper notes for the assets in the facility. TMCR is
liable for the remaining balance of $6 million in claims on the notes. TMA is not a guarantor of the payments on these notes, and there is no contractual recourse to TMA for the nonpayment of the notes or any insufficiency after liquidation.
All of our Collateralized Mortgage Debt is secured by ARM Loans. For financial reporting purposes, the ARM Loans Collateralizing Debt are
recorded as our assets and the Collateralized Mortgage Debt is recorded as our debt. In some transactions, Hedging Instruments are held by the trusts and are recorded as our assets or liabilities. The Hedging Instruments either fix the interest
rates of the pass-through certificates or cap the interest rate exposure on these transactions. The effective interest rate of the Collateralized Mortgage Debt including the impact of issuance costs and Hedging Instruments was 4.13% at
September 30, 2008.
As of September 30, 2008, the Collateralized Mortgage Debt was collateralized by ARM Loans with a principal
balance of $20.5 billion. The debt matures between 2033 and 2048 and is callable at our option at par once the total balance of the loans collateralizing the debt is reduced to 20% of their original balance. The balance of this debt is reduced as
the underlying loan collateral is paid down and is expected to have an average life of approximately 3.5 years.
In connection with the
Collateralized Mortgage Debt, we structured certain securitization transactions with expected final distribution dates that preceded the final maturity dates of the underlying collateral. Accordingly we are obligated to refinance or reissue the
Collateralized Mortgage Debt associated with any residual underlying collateral for the remaining life of the collateral at current interest rates. In order to achieve this, we issued securities that contained an auction process. Through the auction
process, we agreed to purchase or cause the purchase of any securities that remained outstanding on the auction date at an amount equal to the certificates outstanding principal balance or par. In order to ensure a AAA rating on the highest
rated classes of these securities, we facilitated an auction agreement between the respective trust and a AAA/AA counterparty, and entered into an offsetting auction agreement between the AAA/AA counterparty and us.
81
With respect to the former, we arranged and paid a fee on behalf of certain trusts holding the ARM Loans
Collateralizing Mortgage Debt to enter into Forward Auction Agreements with AAA/AA rated counterparties that obligated the Forward Auction Agreement counterparty to pay the shortfall, if any, between the outstanding certificates principal
balance and the amount realized upon the auction of those certificates on specified auction dates to the trusts. The excess, if any, of any amount realized upon the auction of the certificates over the outstanding principal balance of the
certificates on the specified auction dates is paid to the Forward Auction Agreement counterparty. Neither the trusts nor the Forward Auction Agreement counterparties are required to post any margin to collateralize these future obligations. The
purpose of these agreements is to ensure to the degree sufficient to obtain a AAA rating on the most senior classes of the securitization that the certificate holders of our Collateralized Mortgage Debt will be paid in full at the auction date.
In the respective offsetting agreements, we received a fee to enter into Forward Auction Agreements with the same Forward Auction
Agreement counterparties that have identical terms to the Forward Auction Agreements described above between the trusts and the Forward Auction Agreement counterparties whereby we are obligated to pay the shortfall, if any, between the outstanding
certificates principal balance and the amount realized upon the auction of those certificates on specified auction dates to the Forward Auction Agreement counterparties. The excess, if any, of any amount realized upon the auction of the
certificates over the outstanding principal balance of the certificates on the specified auction dates is paid to us. We are required to post margin with the Forward Auction Agreement counterparties to collateralize these future obligations and had
posted cash collateral totaling $336.0 million at September 30, 2008. The purpose of these offsetting agreements is to ensure that the Forward Auction Agreement counterparties do not take on undue market risks and to ensure that we bear the
risk of any shortfall between the auction proceeds and the outstanding certificate balance at the auction dates. Our obligation is covered by the Override Agreement and, accordingly, we are not exposed to additional requests for collateral on the
Forward Auction Agreements during its term. The collateral posted on the Forward Auction Agreements as of September 30, 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Auction Date
|
|
Current Certificate
Balance
|
|
Certificate Balance at
Auction Date at Current
1 mo CPR
|
|
Collateral Held by
Forward
Auction
Agreement Counterparties*
|
2008
|
|
$
|
1,080,300
|
|
$
|
1,061,812
|
|
$
|
27,981
|
2009
|
|
|
3,634,831
|
|
|
3,446,104
|
|
|
135,911
|
2010
|
|
|
244,073
|
|
|
244,073
|
|
|
35,040
|
2011
|
|
|
3,773,433
|
|
|
2,695,676
|
|
|
72,161
|
2012
|
|
|
2,994,651
|
|
|
2,366,132
|
|
|
64,878
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,727,288
|
|
$
|
9,813,797
|
|
$
|
335,971
|
|
|
|
|
|
|
|
|
|
|
*
|
Collateral held was allocated pro-rata to Forward Auction Agreements based on estimated future payment requirements.
|
The excess or shortfall on the respective certificates is dictated by the interplay of future interest rates, prepayment speeds, mortgage spreads and
credit risk. All of these collateral characteristics are highly variable and impossible to predict with certainty. The table below sets forth the expected excesses or shortfalls at September 30, 2008 based on certain CPR and MBS spread
assumptions which are within the range of recent historical experience (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generic 10 Year Hybrid ARM Pricing Spread Over Swaps*
|
|
Product CPR
|
|
150
|
|
200
|
|
|
250
|
|
|
300
|
|
|
350
|
|
|
450
|
|
|
500
|
|
Actual 1 Month
|
|
$
|
54.6
|
|
$
|
14.2
|
|
|
$
|
(112.0
|
)
|
|
$
|
(284.2
|
)
|
|
$
|
(456.9
|
)
|
|
$
|
(629.5
|
)
|
|
$
|
(802.1
|
)
|
15%
|
|
|
52.3
|
|
|
17.8
|
|
|
|
(92.3
|
)
|
|
|
(241.8
|
)
|
|
|
(391.6
|
)
|
|
|
(541.5
|
)
|
|
|
(691.3
|
)
|
20%
|
|
|
40.8
|
|
|
9.3
|
|
|
|
(90.6
|
)
|
|
|
(224.5
|
)
|
|
|
(358.7
|
)
|
|
|
(492.9
|
)
|
|
|
(627.1
|
)
|
25%
|
|
|
31.5
|
|
|
2.7
|
|
|
|
(88.1
|
)
|
|
|
(208.1
|
)
|
|
|
(328.4
|
)
|
|
|
(448.6
|
)
|
|
|
(568.9
|
)
|
30%
|
|
|
24.2
|
|
|
(2.2
|
)
|
|
|
(84.8
|
)
|
|
|
(192.5
|
)
|
|
|
(300.4
|
)
|
|
|
(408.3
|
)
|
|
|
(516.3
|
)
|
35%
|
|
|
18.7
|
|
|
(5.5
|
)
|
|
|
(80.9
|
)
|
|
|
(177.7
|
)
|
|
|
(274.6
|
)
|
|
|
(371.6
|
)
|
|
|
(468.6
|
)
|
*
|
Every certificate priced has unique characteristics that required different nominal pricing spreads. Only 10 year Hybrid ARM nominal pricing spreads are shown in
the above table but appropriate pricing spreads for other products were used depending on the specific attributes of the respective certificate marked.
|
82
The average portfolio lifetime CPR estimated on September 30, 2008 was 14.5%. The spreads on prime
collateral backed, AAA-rated MBS at September 30, 2008 were at the extreme high end of historical observations and ranged from 280 to 800 BPs, with an average for the Companys portfolio of 450 BPs versus a 390 BP average at June 30, 2008.
The fees paid by us on behalf of the trusts exceed the fees received by us from the Forward Auction Agreement counterparties by an amount
approximating 6 BPs. The fees paid on behalf of the trusts are amortized as a yield adjustment and the fees received by us are accreted into income on a scheduled basis that results in income and expense recognition that is not consistently
offsetting. In the nine months ending September 30, 2008 income recognized on the Forward Auction Agreements totaled $10.6 million and the associated expense totaled $18.6 million.
We utilize financing facilities, as discussed in the Financing Strategies section above, to finance our acquisition and origination of whole loans.
Due to the defaults on Reverse Repurchase Agreements in March 2008 described above, our ability to finance additional borrowings under our whole loan
financing facilities was suspended. In connection with the Override Agreement, we are permitted to obtain whole loan financing of up to $700 million. On May 7, 2008, we entered into amendments to the whole loan financing facilities that had
been suspended in March 2008 with two of our warehouse lenders in order to reactivate these facilities. The terms of each amendment are contingent upon us having at least one additional whole loan financing facility with similar terms. As a result
of the amendments, we have two committed facilities that each has a committed borrowing capacity of $200.0 million. Both facilities were to expire on November 7, 2008 but have been extended to November 14, 2008 or such date that the
outstanding amounts are paid off from the pending sale of whole loans scheduled to settle on November 14, 2008. We do not expect to renew these facilities. The facilities are collateralized by ARM loan collateral as well as cash collateral of
up to $10 million per facility. The interest rates on the facilities are one-month LIBOR plus 175 basis points for whole loans that have been financed for 90 days or less and one-month LIBOR plus 225 basis points for whole loans that have been
financed for over 90 days. The facilities are not covered by the Override Agreement and are subject to margin calls. Each of the whole loan financing facilities requires us to pay a 1% commitment fee for the term of the facility and has financial
covenants limiting our leverage. The Company is currently not in compliance with the leverage requirement and has received a waiver of this covenant through the termination date of the facilities.
Mortgage security market valuations remain volatile, mortgage-backed securities trading remains limited and mortgage-backed securities financing markets
remain challenging as the industry continues to report negative news. As a result, we expect to continue to operate with a historically low level of leverage and to continue to take actions that would support higher levels of liquidity and available
cash.
Capital Utilization and Leverage
The Board of Directors has approved a policy that limits our capacity to borrow funds to finance ARM Assets based on our long-term capital. We monitor the relationship between our ARM Assets,
borrowings and long-term capital using a variety of different measures. However, the primary operating policy that limits our borrowings and leverage is a requirement to maintain our Adjusted Equity-to-Assets Ratio, a non-GAAP measurement, at a
minimum of 8%. At September 30, 2008, we were operating at an Adjusted Equity-to-Assets Ratio of 18.13%. Broadly speaking, this ratio reflects the relationship between those ARM Assets financed with borrowings that are subject to margin calls
and our long-term capital position. For purposes of this calculation, we have treated Reverse Repurchase Agreements as if they were subject to margin calls pursuant to the terms of the Reverse Repurchase Agreement without giving effect to the
Override Agreement, even though they are subject to such margin calls only if a security is downgraded by a Rating Agency, for the term of the Override Agreement because we believe it is prudent to do so. Since we may not enter into new Reverse
Repurchase Agreements during the term of the Override Agreement, we expect to operate at lower levels of leverage during the term of the Override Agreement than we have historically experienced because we expect our asset growth during that period
to result primarily from loan originations which we generally expect to securitize in Collateralized Mortgage Debt transactions which represent long-term non-recourse financing.
Recourse or marginable debt generally consists of Reverse Repurchase Agreements and whole loan financing facilities. These borrowings are generally based on the current market value of our ARM
Assets, are short-term in nature, mature on a frequent basis, need to be rolled over at each maturity date and are subject to margin calls based on collateral value changes or changes in margin requirements. Pursuant to the terms of the Override
Agreement, the maturity date of all the existing Reverse Repurchase Agreements with the five counterparties is deemed to be March 16, 2009 and each of the counterparties has agreed that it will not invoke margin calls or increase margin
requirements beyond contractually specified levels during the term of the Override Agreement. We and the parties to the Override Agreement have determined that the Override Agreement has some possible ambiguities as to the amount, timing,
calculation methodology and limits of margin calls against the Liquidity Reserve Fund. We and the parties to the Override Agreement are in negotiations to resolve the potential ambiguities. Our policy requires that we maintain an Adjusted
Equity-to-Assets Ratio of at least 8% against the financing of these ARM Assets.
83
We use the Adjusted Equity-to-Assets Ratio as a way to measure our capital cushion relative to those
recourse borrowings subject to margin call. While we are subject to margin calls during the term of the Override Agreement only if a security is downgraded by a Rating Agency, if market values of ARM Assets decline significantly, particularly after
March 16, 2009, resulting in margin requirements greater than our then readily available liquidity, we could be forced to liquidate ARM Assets, potentially at a loss.
The potential limitation that may result from the use of the non-GAAP measurement is that, in an economic environment where the market value of the investment portfolio is increasing, the amount
of capital that we can invest will be less than the amount then available for investment under a comparable GAAP measurement. Although we acknowledge this limitation, we believe that it is not prudent to factor these market gains into the
calculation of leveragable capital because the gains may be short-term in nature. The potential volatility in market prices could result in subsequent reversal of the gains that would require subsequent disposition of ARM Assets in unfavorable
market conditions.
As we increase our use of Collateralized Mortgage Debt, the risk of margin calls, changes in margin requirements and
potential refinancing risk is reduced because Collateralized Mortgage Debt represents long-term non-recourse financing whose terms are established at the time of the financing and are not subject to change. As a result, the need to maintain a
capital cushion comparable to what we maintain on our recourse borrowings is eliminated. For purposes of maintaining an adequate capital cushion, our policy allows us to eliminate all assets (and the associated long-term equity capital) associated
with Collateralized Mortgage Debt from our operating capital ratio. Our Collateralized Mortgage Debt only requires approximately 2% to 7% of equity capital to support these financings, versus our 8% minimum capital requirement on our recourse
borrowings. As we enter into additional Collateralized Mortgage Debt Financing Transactions, they have the effect of increasing our Adjusted Equity-to-Assets Ratio. Therefore, we could retain and carry an increased amount of assets in the future as
a percentage of our equity capital base. Additionally, we eliminate from our Adjusted Equity-to-Assets Ratio any unrealized market value adjustments, recorded as OCI, from our equity accounts and we include our Senior Notes, Senior Subordinated
Secured Notes and Subordinated Notes as forms of long-term capital as if the notes were equity capital. We also include the PPA and Additional Warrant Liability, which when the Additional Financing Conditions occur, will be reclassified into equity
capital.
The following table presents the calculation of our Adjusted Equity-to-Assets ratio, a non-GAAP measurement (dollar amount in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
Assets
|
|
$
|
26,285,322
|
|
|
$
|
36,272,361
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Net unrealized gain on Purchased ARM Assets recorded in accumulated other comprehensive loss
|
|
|
(92,210
|
)
|
|
|
(22,903
|
)
|
Net unrealized loss on Hedging Instruments
|
|
|
28,583
|
|
|
|
49,891
|
|
ARM Loans Collateralizing Debt
|
|
|
(20,433,846
|
)
|
|
|
(21,383,177
|
)
|
Cap Agreements
|
|
|
(34,722
|
)
|
|
|
(67,032
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted assets
|
|
$
|
5,753,127
|
|
|
$
|
14,849,140
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
$
|
(323,335
|
)
|
|
$
|
1,759,734
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
97,160
|
|
|
|
172,432
|
|
Equity supporting Collateralized Mortgage Debt:
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Debt
|
|
|
20,362,739
|
|
|
|
21,246,086
|
|
ARM Loans Collateralizing Debt
|
|
|
(20,433,846
|
)
|
|
|
(21,383,177
|
)
|
Cap Agreements
|
|
|
(34,722
|
)
|
|
|
(67,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,829
|
)
|
|
|
(204,123
|
)
|
Senior Notes
|
|
|
305,000
|
|
|
|
305,000
|
|
Senior Subordinated Secured Notes
|
|
|
406,964
|
|
|
|
|
|
Subordinated Notes
|
|
|
240,000
|
|
|
|
240,000
|
|
PPA and Additional Warrant Liability
|
|
|
423,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted shareholders equity
|
|
$
|
1,043,315
|
|
|
$
|
2,273,043
|
|
|
|
|
|
|
|
|
|
|
Adjusted Equity-to-Assets Ratio
|
|
|
18.13
|
%
|
|
|
15.31
|
%
|
|
|
|
|
|
|
|
|
|
GAAP equity-to-assets ratio
|
|
|
(1.23
|
)%
|
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of historical equity-to-historical assets
|
|
|
(3.60
|
)%
|
|
|
4.09
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of long-term capital-to-historical assets
|
|
|
4.38
|
%
|
|
|
6.82
|
%
|
|
|
|
|
|
|
|
|
|
Total risk-based capital /risk-weighted assets
|
|
|
(2.40
|
)%
|
|
|
16.57
|
%
|
|
|
|
|
|
|
|
|
|
84
The above table also presents four alternative capital utilization measurements to our Adjusted
Equity-to-Assets ratio. The first alternative capital utilization measurement is the GAAP equity-to-assets ratio, a calculation that simply divides total GAAP equity by total assets. While the simplest of all equity-to-assets calculations, it is not
used by management to manage our balance sheet because it excludes Senior Notes, Senior Subordinated Secured Notes, Subordinated Notes and the PPA and Additional Warrant Liability from our equity calculation. We are able to carry additional assets
by financing a portion of our ARM Assets with Collateralized Mortgage Debt financings, which have initial fixed capital requirements of approximately 2% to 7% of the assets financed in this way. The GAAP measurement ignores changes in the level of
equity required to support various forms of financing as the mix of our financing of ARM Assets changes between financing subject to margin requirements and Collateralized Mortgage Debt financings which are not subject to margin requirements. This
is another reason why we do not use the GAAP measurement to make leverage or capital utilization decisions.
The second alternative capital
utilization measurement is the ratio of historical equity to historical assets. This is a non-GAAP measurement that eliminates the market value adjustment of our assets and Hedging Instruments included in OCI. This measurement is calculated by
dividing the sum of the assets, net unrealized gain (loss) on Purchased ARM Assets and net unrealized gain (loss) on Hedging Instruments in the table above by the sum of shareholders equity and OCI. Our historical equity-to-assets ratio of
negative 3.60% is below the regulatory well-capitalized threshold of 5% required of banks and savings and loan institutions for the Tier I Core Capital Ratio due to the liquidity problems we experienced this year and the losses reflected
in the Condensed Consolidated Income Statements.
The third alternative capital utilization measurement is the ratio of long-term capital
to historical assets. This is a non-GAAP measurement that eliminates the market value adjustment of our assets and Hedging Instruments included in OCI, and includes Senior Notes, Senior Subordinated Secured Notes, Subordinated Notes and the PPA and
Additional Warrant Liability as a component of our long-term capital base. This measurement is calculated by dividing the sum of the assets, net unrealized gain (loss) on Purchased ARM Assets and net unrealized gain (loss) on Hedging Instruments in
the table above by long-term capital. We monitor these ratios in order to have a complete picture of the relationship between our total assets and long-term equity position.
The fourth alternative capital utilization measurement is a calculation of our total risk-based capital ratio, a regulatory calculation required to be made by banks and savings and loan
institutions that comply with Federal Reserve Board capital requirements. The ratio results from dividing the sum of our historical and supplementary capital by total risk weighted assets as presented in the Thrift Financial Report instructions.
Risk-based capital measures capital requirements for assets based on their credit exposure as defined by the regulation, with lower credit risk assets requiring less capital and higher credit risk assets requiring more capital. Although we are not
subject to these regulatory requirements, we focus our efforts on only high quality assets. Our risk-based capital ratio of negative 2.40% is below the regulatory minimum of 10% required for banks and savings and loan institutions to qualify as
well-capitalized due to the liquidity problems we experienced this year and the losses reflected in the Condensed Consolidated Income Statements.
Equity Transactions
During the three months ended September 30, 2008, we
issued 29,602 shares of Common Stock under the DRSPP and received net proceeds of $91,000.
On January 4, 2008, we declared a
quarterly dividend of $0.63723 per share of Series F Preferred Stock, which was paid on February 15, 2008 to shareholders of record on January 31, 2008. On March 24, 2008, our Board of Directors determined that we did not have
sufficient liquidity to make our next scheduled payments of dividends on Preferred Stock and indefinitely suspended the payment of dividends on all series of Preferred Stock. Therefore, dividends were neither declared nor paid on the Series C, D and
E Preferred Stock on April 15, 2008 and we have not declared or paid dividends on the Series F Preferred Stock since February 15, 2008. Dividends on Preferred Stock accumulate whether or not we have earnings, whether or not there are funds
legally available for their payment and whether or not such dividends have been declared. We have not accrued the cumulative unpaid dividends because they have not been declared as of September 30, 2008. Cumulative unpaid dividends on Preferred
Stock totaled $67.3 million at September 30, 2008. However, at our annual meeting of shareholders held on June 12, 2008, shareholders approved amendments to our charter to increase the number of authorized shares of capital stock from
500 million to 4 billion shares and to modify the terms of each existing series of Preferred Stock to, among other things, remove restrictive covenants that currently prohibit us from purchasing Preferred Stock when all cumulative dividends on
the related series of Preferred Stock have not been paid in full, make the dividend payments on the Preferred Stock noncumulative, eliminate all accrued but unpaid dividends and eliminate substantially all voting rights of the preferred
shareholders. We must still obtain the requisite consents from the holders of each series of Preferred Stock to the modification of the terms of the Preferred Stock before those modifications can become effective. We are seeking such consents in
connection with the Exchange Offer and Consent Solicitation.
In connection with the Financing Transaction, we have commenced the Exchange
Offer and Consent Solicitation for all our outstanding shares of Preferred Stock (See Managements Discussion and Analysis of Financial Condition and Results of Operations Executive Overview Financing Transaction
Exchange Offer and Consent Solicitation).
85
Off-Balance Sheet Commitments
As of September 30, 2008, we had commitments to purchase or originate the following amounts of ARM loans, net of estimated fallout of 39.7% (in
thousands):
|
|
|
|
ARM loans correspondent originations
|
|
$
|
3,500
|
ARM loans wholesale originations
|
|
|
|
ARM loans direct originations
|
|
|
|
|
|
|
|
|
|
$
|
3,500
|
|
|
|
|
Contractual Obligations
As of September 30, 2008, we had the following contractual obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Total
|
|
Less than 1
year
|
|
1 3 years
|
|
3 5 years
|
|
More than
5 years
|
Reverse Repurchase Agreements
|
|
$
|
4,638,927
|
|
$
|
4,638,927
|
|
$
|
|
|
$
|
|
|
$
|
|
Collateralized Mortgage Debt (1)
|
|
|
20,362,739
|
|
|
35,609
|
|
|
91,243
|
|
|
155,109
|
|
|
20,080,778
|
Whole loan financing facilities
|
|
|
72,777
|
|
|
72,777
|
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
|
305,000
|
|
|
|
|
|
|
|
|
305,000
|
|
|
|
Senior Subordinated Secured Notes (face value)
|
|
|
1,265,579
|
|
|
|
|
|
|
|
|
|
|
|
1,265,579
|
Subordinated Notes
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (2)
|
|
$
|
26,885,022
|
|
$
|
4,747,313
|
|
$
|
91,243
|
|
$
|
460,109
|
|
$
|
21,586,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Maturities of our Collateralized Mortgage Debt are dependent upon cash flows received from the underlying loans receivable. Our estimate of their repayment is
based on scheduled principal payments on the underlying loans receivable. This estimate will differ from actual amounts to the extent we experience prepayments and/or loan losses.
|
(2)
|
Our Condensed Consolidated Balance Sheets include a liability for Hedging Instruments with negative market values, which are not reflected in this table.
|
86
Results of Operations For the Three Months Ended September 30, 2008
For the quarter ended September 30, 2008, our net income was $140.0 million, or $1.23 Diluted EPS, based on weighted average shares of Common Stock
and penny warrants outstanding of 41,681,000. That compares to net loss of $1.1 billion, or $(89.41) per share for the quarter ended September 30, 2007, based on weighted average shares of Common Stock outstanding of 12,396,800.
Gain (loss) on ARM Assets, net for the quarters ended September 30, 2008 and 2007 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Gain (loss) on sale of ARM Assets:
|
|
|
|
|
|
|
|
|
ARM securities
|
|
$
|
|
|
|
$
|
(727,580
|
)
|
Purchased Securitized Loans
|
|
|
|
|
|
|
(329,641
|
)
|
Securitized ARM Loans
|
|
|
|
|
|
|
(35,857
|
)
|
ARM loans held for sale or securitization
|
|
|
(13,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,179
|
)
|
|
|
(1,093,078
|
)
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment and lower of cost or fair value charges:
|
|
|
|
|
|
|
|
|
ARM securities
|
|
|
(577,379
|
)
|
|
|
|
|
Purchased Securitized Loans
|
|
|
(13,898
|
)
|
|
|
(6,020
|
)
|
Securitized ARM Loans
|
|
|
(64,627
|
)
|
|
|
|
|
ARM loans held for sale or securitization
|
|
|
1,229
|
|
|
|
|
|
Gain (loss) on sale of REO
|
|
|
4,950
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(649,725
|
)
|
|
|
(6,168
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(662,904
|
)
|
|
$
|
(1,099,246
|
)
|
|
|
|
|
|
|
|
|
|
We completed a sale of $111.2 million of ARM loans at a loss of $13.2 million during the third
quarter of 2008 due to the need to reduce our warehouse financing and the inaccessibility of the securitization market. We also recognized losses of $577.4 million and $13.9 million at September 30, 2008, in other-than-temporary impairment
charges on our ARM Securities and Purchased Securitized Loans, respectively. Losses of $64.6 million and a recovery of $1.2 million were recognized in the quarter ended September 30, 2008 on our Securitized ARM Loans and ARM loans held for sale
or securitization, respectively, to record those assets at the lower of cost or fair value. There is substantial doubt about our ability to continue as a going concern. In addition, we may not have the ability to hold our Purchased ARM Assets,
Securitized ARM Loans and ARM loans held for sale or securitization to maturity and, accordingly, have recognized the losses enumerated above totaling $662.9 million in gain (loss) on ARM Assets in the Condensed Consolidated Income Statements for
the three months ended September 30, 2008.
We recorded noninterest income of $594.6 million related to the Senior Subordinated
Secured Notes fair value change and $160.2 million related to the PPA and Additional Warrant Liability fair value change, reflecting decreases in their respective fair values.
The table below highlights the historical trend in the components of return on average common equity (annualized) during each respective quarter:
Components of Return on Average Common Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter
Ended
|
|
Net
Interest
Income/
Equity
|
|
|
G & A
Expense,
net (1)/
Equity
|
|
|
Mgmt
Fee/
Equity
|
|
|
Performance
Fee/ Equity
|
|
|
Other (2)/
Equity
|
|
|
Preferred
Dividend/
Equity
|
|
|
Net
Income/
Equity
(ROE)
|
|
Sep 30, 2006
|
|
15.08
|
%
|
|
0.34
|
%
|
|
1.11
|
%
|
|
1.50
|
%
|
|
(0.91
|
)%
|
|
0.43
|
%
|
|
12.61
|
%
|
Dec 31, 2006
|
|
16.63
|
%
|
|
1.02
|
%
|
|
1.18
|
%
|
|
1.81
|
%
|
|
(2.10
|
)%
|
|
0.64
|
%
|
|
14.08
|
%
|
Mar 31, 2007
|
|
16.98
|
%
|
|
1.59
|
%
|
|
1.24
|
%
|
|
1.55
|
%
|
|
(1.45
|
)%
|
|
0.91
|
%
|
|
13.14
|
%
|
June 30, 2007
|
|
18.19
|
%
|
|
0.52
|
%
|
|
1.24
|
%
|
|
1.68
|
%
|
|
(0.09
|
)%
|
|
0.95
|
%
|
|
13.89
|
%
|
Sep 30, 2007
|
|
7.64
|
%
|
|
(2.32
|
)%
|
|
1.31
|
%
|
|
0.00
|
%
|
|
240.77
|
%
|
|
2.16
|
%
|
|
(234.28
|
)%
|
Dec 31, 2007
|
|
20.52
|
%
|
|
0.21
|
%
|
|
1.38
|
%
|
|
0.00
|
%
|
|
161.52
|
%
|
|
4.72
|
%
|
|
(147.32
|
)%
|
Mar 31, 2008
|
|
16.94
|
%
|
|
(0.11
|
)%
|
|
2.42
|
%
|
|
0.00
|
%
|
|
1,348.41
|
%
|
|
11.68
|
%
|
|
(1,345.46
|
)%
|
June 30, 2008
|
|
(13.70
|
)%
|
|
(3.02
|
)%
|
|
(1.54
|
)%
|
|
0.00
|
%
|
|
96.89
|
%
|
|
(6.70
|
)%
|
|
(99.33
|
)%
|
Sep 30, 2008
|
|
(37.73
|
)%
|
|
(6.35
|
)%
|
|
(2.83
|
)%
|
|
0.00
|
%
|
|
31.79
|
%
|
|
(12.27
|
)%
|
|
(53.72
|
)%
|
(1)
|
G & A expense excludes management and performance fees and is net of servicing income.
|
(2)
|
Other includes gain (loss) on ARM assets and Hedging Instruments, hedging expense and provision for credit losses.
|
87
The following table presents the components of our net interest income for the quarters ended
September 30, 2008 and 2007:
Comparative Net Interest Income Components
(in thousands)
|
|
|
|
|
|
|
|
|
|
For the quarters ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Coupon interest income on ARM assets
|
|
$
|
415,872
|
|
$
|
653,804
|
|
Accretion (amortization) of discount/premium, net
|
|
|
81,679
|
|
|
(36,276
|
)
|
Cash and cash equivalents
|
|
|
1,088
|
|
|
4,452
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
498,639
|
|
|
621,980
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements and Asset-backed CP
|
|
|
49,810
|
|
|
313,292
|
|
Collateralized Mortgage Debt
|
|
|
244,866
|
|
|
292,123
|
|
Whole loan financing facilities
|
|
|
3,042
|
|
|
23,184
|
|
Senior, Senior Subordinated Secured and Subordinated Notes
|
|
|
67,820
|
|
|
10,685
|
|
Hedging Instruments
|
|
|
53,032
|
|
|
(53,455
|
)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
418,570
|
|
|
585,829
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
80,069
|
|
$
|
36,151
|
|
|
|
|
|
|
|
|
|
88
The following table presents the average balances for each category of our interest-earning assets as
well as our interest-bearing liabilities, with the corresponding annualized effective rate of interest and the related interest income or expense:
Average Balance, Rate and Interest Income/Expense Table
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
|
Effective
Rate
|
|
|
Interest
Income and
Expense
|
|
Average
Balance
|
|
Effective
Rate
|
|
|
Interest
Income and
Expense
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM assets (1)
|
|
$
|
26,742,943
|
|
|
7.44
|
%
|
|
$
|
497,551
|
|
$
|
45,780,270
|
|
5.40
|
%
|
|
$
|
617,528
|
|
Cash and cash equivalents
|
|
|
1,079,332
|
|
|
0.40
|
|
|
|
1,088
|
|
|
812,456
|
|
2.19
|
|
|
|
4,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,822,275
|
|
|
7.17
|
|
|
|
498,639
|
|
|
46,592,726
|
|
5.34
|
|
|
|
621,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements and Asset-backed CP
|
|
|
5,271,217
|
|
|
3.78
|
|
|
|
49,810
|
|
|
22,420,040
|
|
5.59
|
|
|
|
313,292
|
|
Plus: (Benefit) cost of Hedging Instruments (2)
|
|
|
|
|
|
3.92
|
|
|
|
51,708
|
|
|
|
|
(1.23
|
)
|
|
|
(69,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Reverse Repurchase Agreements and Asset-backed CP
|
|
|
|
|
|
7.70
|
|
|
|
101,518
|
|
|
|
|
4.36
|
|
|
|
244,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Debt
|
|
|
20,946,403
|
|
|
4.68
|
|
|
|
244,866
|
|
|
20,287,138
|
|
5.76
|
|
|
|
292,123
|
|
Plus: (Benefit) cost of Hedging Instruments (2)
|
|
|
|
|
|
0.03
|
|
|
|
1,324
|
|
|
|
|
0.31
|
|
|
|
15,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Collateralized Mortgage Debt
|
|
|
|
|
|
4.71
|
|
|
|
246,190
|
|
|
|
|
6.07
|
|
|
|
307,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loan financing facilities
|
|
|
178,662
|
|
|
6.81
|
|
|
|
3,042
|
|
|
1,317,242
|
|
7.04
|
|
|
|
23,184
|
|
Senior, Senior Subordinated Secured and Subordinated Notes
|
|
|
1,440,984
|
|
|
18.83
|
|
|
|
67,820
|
|
|
545,000
|
|
7.84
|
|
|
|
10,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,837,266
|
|
|
6.01
|
|
|
|
418,570
|
|
|
44,569,420
|
|
5.26
|
|
|
|
585,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets and spread
|
|
$
|
(14,991
|
)
|
|
1.16
|
%
|
|
$
|
80,069
|
|
$
|
2,023,306
|
|
0.08
|
%
|
|
$
|
36,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Margin (3)
|
|
|
|
|
|
1.16
|
%
|
|
|
|
|
|
|
|
0.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Effective rate includes impact of amortizing/accreting ARM assets net premium/discount.
|
(2)
|
Includes Swap Agreements with notional balances of $516.2 million and $6.9 billion as of September 30, 2008 and 2007, respectively, and Cap Agreements with
net notional balances of $467.7 million and $673.3 million as of September 30, 2008 and 2007, respectively.
|
(3)
|
Portfolio Margin is computed by dividing annualized net interest income by the average daily balance of interest earning assets.
|
89
The following table presents the total amount of change in interest income/expense from the table above
and presents the amount of change due to changes in interest rates versus the amount of change due to changes in volume (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume Variance
|
|
|
|
Three Months ended September 30,
2008 versus
2007
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM assets
|
|
$
|
234,212
|
|
|
$
|
(354,189
|
)
|
|
$
|
(119,977
|
)
|
Cash and cash equivalents
|
|
|
(3,633
|
)
|
|
|
269
|
|
|
|
(3,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,579
|
|
|
|
(353,920
|
)
|
|
|
(123,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements and Asset-backed CP
|
|
|
187,606
|
|
|
|
(330,267
|
)
|
|
|
(142,661
|
)
|
Collateralized Mortgage Debt
|
|
|
(69,341
|
)
|
|
|
7,749
|
|
|
|
(61,592
|
)
|
Whole loan financing facilities
|
|
|
(757
|
)
|
|
|
(19,385
|
)
|
|
|
(20,142
|
)
|
Senior, Senior Subordinated Secured and Subordinated Notes
|
|
|
14,966
|
|
|
|
42,170
|
|
|
|
57,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,474
|
|
|
|
(299,733
|
)
|
|
|
(167,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
98,105
|
|
|
$
|
(54,187
|
)
|
|
$
|
43,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income increased $43.9 million in the third quarter of 2008, from the same quarter of
the prior year. This increase in net interest income is composed of a favorable rate variance and an unfavorable volume variance. The decreased average size of our portfolio during the third quarter of 2008 compared to the same period of 2007
decreased interest income in the amount of $353.9 million and interest expense in the amount of $299.7 million, for a net decrease in interest income of $54.2 million. The average balance of our interest-earning assets was $27.8 billion during the
quarter ended September 30, 2008, compared to $46.6 billion during the same period of 2007 a decrease of 40.3%. As a result of the yield on our interest-earning assets increasing to 7.17% during the third quarter of 2008 from 5.34%
during the same quarter of 2007, an increase of 183BPs, and our cost of funds increasing to 6.01% from 5.26% during the same period, an increase of 75 BPs, there was a net favorable rate variance of $98.1 million.
The following table highlights the components of net interest spread and the annualized yield on net interest-earning assets as of each applicable
quarter:
Components of Net Interest Spread and Yield on Net Interest-Earning Assets (1)
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter
Ended
|
|
Average
Interest-
Earning
Assets
|
|
Historical
Weighted
Average
Coupon
|
|
|
Yield
Adjustment (2)
|
|
|
Yield on
Interest
Earning
Assets
|
|
|
Cost of
Funds
|
|
|
Net
Interest
Spread
|
|
|
Portfolio
Margin
|
|
Sep 30, 2006
|
|
$
|
50,448
|
|
5.36
|
%
|
|
0.07
|
%
|
|
5.29
|
%
|
|
4.76
|
%
|
|
0.53
|
%
|
|
0.69
|
%
|
Dec 31, 2006
|
|
$
|
51,710
|
|
5.51
|
%
|
|
0.06
|
%
|
|
5.45
|
%
|
|
4.88
|
%
|
|
0.57
|
%
|
|
0.70
|
%
|
Mar 31, 2007
|
|
$
|
53,356
|
|
5.52
|
%
|
|
0.09
|
%
|
|
5.43
|
%
|
|
4.93
|
%
|
|
0.50
|
%
|
|
0.68
|
%
|
Jun 30, 2007
|
|
$
|
54,359
|
|
5.55
|
%
|
|
(0.02
|
)%
|
|
5.57
|
%
|
|
5.00
|
%
|
|
0.57
|
%
|
|
0.75
|
%
|
Sep 30, 2007
|
|
$
|
46,593
|
|
5.72
|
%
|
|
0.38
|
%
|
|
5.34
|
%
|
|
5.26
|
%
|
|
0.08
|
%
|
|
0.31
|
%
|
Dec 31, 2007
|
|
$
|
36,297
|
|
5.82
|
%
|
|
0.09
|
%
|
|
5.73
|
%
|
|
5.04
|
%
|
|
0.69
|
%
|
|
0.96
|
%
|
Mar 31, 2008
|
|
$
|
34,560
|
|
6.03
|
%
|
|
(0.14
|
)%
|
|
6.17
|
%
|
|
5.93
|
%
|
|
0.24
|
%
|
|
0.49
|
%
|
Jun 30, 2008
|
|
$
|
29,327
|
|
5.86
|
%
|
|
(1.09
|
)%
|
|
6.95
|
%
|
|
6.19
|
%
|
|
0.76
|
%
|
|
0.73
|
%
|
Sep 30, 2008
|
|
$
|
27,822
|
|
5.80
|
%
|
|
(1.37
|
)%
|
|
7.17
|
%
|
|
6.01
|
%
|
|
1.15
|
%
|
|
1.16
|
%
|
(1)
|
Portfolio Margin is computed by dividing net interest income by the average daily balance of interest-earning assets during the quarter.
|
(2)
|
Yield adjustments include the impact of amortizing/accreting premiums and discounts, the impact of principal payment receivables and the impact of
interest-earning non-ARM assets.
|
The following table presents these components of the yield adjustments for the dates
presented in the table above.
90
Components of the Yield Adjustments on ARM Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter
Ended
|
|
Premium/
Discount
Amortization
|
|
|
Impact of
Principal
Payments
Receivable
|
|
|
Other (1)
|
|
|
Total Yield
Adjustment
|
|
Sep 30, 2006
|
|
0.10
|
%
|
|
0.04
|
%
|
|
(0.07
|
)%
|
|
0.07
|
%
|
Dec 31, 2006
|
|
0.08
|
%
|
|
0.03
|
%
|
|
(0.05
|
)%
|
|
0.06
|
%
|
Mar 31, 2007
|
|
0.11
|
%
|
|
0.03
|
%
|
|
(0.05
|
)%
|
|
0.09
|
%
|
Jun 30, 2007
|
|
(0.01
|
)%
|
|
0.03
|
%
|
|
(0.04
|
)%
|
|
(0.02
|
)%
|
Sep 30, 2007
|
|
0.31
|
%
|
|
0.03
|
%
|
|
0.04
|
%
|
|
0.38
|
%
|
Dec 31, 2007
|
|
0.06
|
%
|
|
0.02
|
%
|
|
0.01
|
%
|
|
0.09
|
%
|
Mar 31, 2008
|
|
(0.15
|
)%
|
|
0.03
|
%
|
|
(0.02
|
)%
|
|
(0.14
|
)%
|
Jun 30, 2008
|
|
(0.89
|
)%
|
|
0.02
|
%
|
|
(0.22
|
)%
|
|
(1.09
|
)%
|
Sep 30, 2008
|
|
(1.19
|
)%
|
|
0.02
|
%
|
|
(0.20
|
)%
|
|
(1.37
|
)%
|
(1)
|
Other includes the impact of interest-earning cash and cash equivalents, restricted cash and cash equivalents and mark-to-market adjustments.
|
We recorded a net loss of $12.7 million on Derivatives during the third quarter of 2008. This loss consisted of a net
gain of $1.2 million on commitments to purchase loans from correspondent lenders and bulk sellers and a net loss on terminated Swap Agreements of $13.9 million. We recorded a net loss of $25.3 million on Derivatives during the same period in 2007,
which consisted of a net loss of $12.4 million on commitments to purchase loans from correspondent lenders and bulk sellers, a net loss of $3.7 million on Pipeline Hedging Instruments and a net loss of $9.2 million on the termination of Swap
Agreements and other Derivative transactions.
The following table highlights the quarterly trend of operating expenses as a percent of
average assets:
Annualized Operating Expense Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter
Ended
|
|
Management Fee/
Average Assets
|
|
|
Performance Fee/
Average Assets
|
|
|
Other Expenses/
Average Assets
|
|
|
Total Operating
Expenses/
Average Assets
|
|
Sep 30, 2006
|
|
0.05
|
%
|
|
0.07
|
%
|
|
0.05
|
%
|
|
0.17
|
%
|
Dec 31, 2006
|
|
0.05
|
%
|
|
0.07
|
%
|
|
0.08
|
%
|
|
0.20
|
%
|
Mar 31, 2007
|
|
0.05
|
%
|
|
0.06
|
%
|
|
0.09
|
%
|
|
0.20
|
%
|
Jun 30, 2007
|
|
0.05
|
%
|
|
0.07
|
%
|
|
0.07
|
%
|
|
0.19
|
%
|
Sep 30, 2007
|
|
0.05
|
%
|
|
0.00
|
%
|
|
(0.05
|
)%
|
|
0.00
|
%
|
Dec 31, 2007
|
|
0.06
|
%
|
|
0.00
|
%
|
|
0.05
|
%
|
|
0.11
|
%
|
Mar 31, 2008
|
|
0.07
|
%
|
|
0.00
|
%
|
|
0.04
|
%
|
|
0.11
|
%
|
Jun 30, 2008
|
|
0.08
|
%
|
|
0.00
|
%
|
|
0.20
|
%
|
|
0.28
|
%
|
Sep 30, 2008
|
|
0.09
|
%
|
|
0.00
|
%
|
|
0.23
|
%
|
|
0.32
|
%
|
The most significant changes in our operating expenses for the quarter ended September 30,
2008 compared to September 30, 2007 were the $15.8 million change in long-term incentive award expense due to the decrease in our stock price in the third quarter of 2007 and increased shareholder relations, accounting and legal fees as well as
increased expenses related to the operations of TMHL due to decreased loan production and resultant capitalized loan origination costs.
The benefit for income taxes for the quarter ended September 30, 2008 was $290,000, based on a combined federal and state effective tax rate of 39.6% on estimated current taxable income of $2.1 million and deferred taxable loss of $3.0
million. The provision related to certain Cap Agreements owned by TMHS that were entered into in conjunction with certain securitization transactions. The provision for income taxes for the nine months ended September 30, 2007 was $12.0
million, based on a combined federal and state effective tax rate of 39.2% on estimated deferred taxable income of $37.0 million.
Results of Operations
for the Nine Months Ended September 30, 2008
For the nine months ended September 30, 2008, our net loss was $2.8 billion, or
$(85.71) Basic EPS and Diluted EPS, based on weighted average basic and diluted shares of Common Stock outstanding of 33,079,000. That compares to net loss of $939.8 million, or $(80.65) Basic EPS and Diluted EPS for the nine months ended
September 30, 2007, based on weighted average shares of Common Stock outstanding of 11,905,400.
91
Gain (Loss) on ARM Assets, net, for the nine months ended September 30, 2008 and 2007 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Gain (loss) on sale of ARM Assets:
|
|
|
|
|
|
|
|
|
ARM securities
|
|
$
|
(636,783
|
)
|
|
$
|
(725,424
|
)
|
Purchased Securitized Loans
|
|
|
(1,124
|
)
|
|
|
(329,641
|
)
|
Securitized ARM Loans
|
|
|
(123,624
|
)
|
|
|
(35,857
|
)
|
ARM loans held for sale or securitization
|
|
|
(13,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(774,710
|
)
|
|
|
(1,090,922
|
)
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment and lower of cost or fair value charges:
|
|
|
|
|
|
|
|
|
ARM securities
|
|
|
(1,847,589
|
)
|
|
|
|
|
Purchased Securitized Loans
|
|
|
(117,714
|
)
|
|
|
(6,020
|
)
|
Securitized ARM Loans
|
|
|
(413,805
|
)
|
|
|
|
|
ARM loans held for sale or securitization
|
|
|
(27,161
|
)
|
|
|
|
|
Gain (loss) on sale of REO
|
|
|
2,405
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,403,864
|
)
|
|
|
(6,168
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,178,574
|
)
|
|
$
|
(1,097,090
|
)
|
|
|
|
|
|
|
|
|
|
We realized a loss of $637.9 million on the sale and liquidation of $4.9 billion of Purchased ARM
Assets during the nine months ended September 30, 2008 and a loss of $123.6 million on the permanent financing of $1.8 billion of Securitized ARM Loans, for a total realized loss of $761.5 million. We also recognized losses of $1.8 billion and
$117.7 million during the nine months ended September 30, 2008, in other-than-temporary impairment charges on its ARM Securities and Purchased Securitized Loans, respectively. Losses of $413.8 million and $27.2 million were recognized during
the nine months ended September 30, 2008 on our Securitized ARM Loans and ARM loans held for sale or securitization, respectively, to record those assets at the lower of cost or fair value. There is substantial doubt about our ability to
continue as a going concern. In addition, we may not have the ability to hold our Purchased ARM Assets, Securitized ARM Loans and ARM loans held for sale or securitization to maturity and, accordingly, have recognized the losses enumerated above
totaling $2.4 billion in gain (loss) on ARM Assets in the Condensed Consolidated Income Statements for the nine months ended September 30, 2008.
For the nine months ended September 30, 2008, we recorded Senior Subordinated Secured Notes fair value changes of $162.4 million. We recorded net noninterest gain on the PPA and Additional Warrant Liability fair
value changes of $144.5 million.
The following table presents the components of our net interest income for the nine months ended
September 30, 2008 and 2007:
Comparative Net Interest Income Components
(in thousands)
|
|
|
|
|
|
|
|
|
|
For the nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Coupon interest income on ARM assets
|
|
$
|
1,379,182
|
|
$
|
2,129,510
|
|
Amortization of net premium
|
|
|
151,784
|
|
|
(36,920
|
)
|
Cash and cash equivalents
|
|
|
10,047
|
|
|
10,964
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,541,013
|
|
|
2,103,554
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements and Asset-backed CP
|
|
|
309,364
|
|
|
1,140,291
|
|
Collateralized Mortgage Debt
|
|
|
780,767
|
|
|
833,786
|
|
Whole loan financing facilities
|
|
|
12,761
|
|
|
63,702
|
|
Senior Notes, Senior Subordinated Secured Notes and Subordinated Notes
|
|
|
143,505
|
|
|
32,093
|
|
Hedging Instruments
|
|
|
119,285
|
|
|
(195,412
|
)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,365,682
|
|
|
1,874,460
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
175,331
|
|
$
|
229,094
|
|
|
|
|
|
|
|
|
|
92
The following table presents the average balances for each category of our interest-earning assets as
well as our interest-bearing liabilities, with the corresponding annualized effective rate of interest and the related interest income or expense:
Average Balance, Rate and Interest Income/Expense Table
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Effective
Rate
|
|
|
Interest
Income and
Expense
|
|
Average
Balance
|
|
Effective
Rate
|
|
|
Interest
Income and
Expense
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM assets (1)
|
|
$
|
29,595,180
|
|
6.90
|
%
|
|
$
|
1,530,966
|
|
$
|
50,990,661
|
|
5.47
|
%
|
|
$
|
2,092,590
|
|
Cash and cash equivalents
|
|
|
974,570
|
|
1.37
|
|
|
|
10,047
|
|
|
445,349
|
|
3.28
|
|
|
|
10,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,569,750
|
|
6.72
|
|
|
|
1,541,013
|
|
|
51,436,010
|
|
5.45
|
|
|
|
2,103,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements and Asset-backed CP
|
|
|
7,266,343
|
|
5.67
|
|
|
|
309,364
|
|
|
28,033,418
|
|
5.42
|
|
|
|
1,140,291
|
|
|
|
|
|
|
|
|
Plus: (Benefit) cost of Hedging Instruments (2)
|
|
|
|
|
1.98
|
|
|
|
107,749
|
|
|
|
|
(0.89
|
)
|
|
|
(187,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Reverse Repurchase Agreements and Asset-backed CP
|
|
|
|
|
7.65
|
|
|
|
417,113
|
|
|
|
|
4.53
|
|
|
|
952,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Debt
|
|
|
21,438,263
|
|
4.86
|
|
|
|
780,767
|
|
|
19,569,606
|
|
5.68
|
|
|
|
833,786
|
|
Plus: (Benefit) cost of Hedging Instruments (2)
|
|
|
|
|
0.07
|
|
|
|
11,536
|
|
|
|
|
(0.05
|
)
|
|
|
(7,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Collateralized Mortgage Debt
|
|
|
|
|
4.93
|
|
|
|
792,303
|
|
|
|
|
5.63
|
|
|
|
826,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loan financing facilities
|
|
|
282,820
|
|
6.02
|
|
|
|
12,761
|
|
|
1,333,189
|
|
6.37
|
|
|
|
63,702
|
|
Senior, Senior Subordinated Secured and Subordinated Notes
|
|
|
1,156,445
|
|
16.55
|
|
|
|
143,505
|
|
|
545,000
|
|
7.85
|
|
|
|
32,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,143,871
|
|
6.04
|
|
|
|
1,365,682
|
|
|
49,481,213
|
|
5.05
|
|
|
|
1,874,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets and spread
|
|
$
|
425,879
|
|
0.68
|
%
|
|
$
|
175,331
|
|
$
|
1,954,797
|
|
0.40
|
%
|
|
$
|
229,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Margin (3)
|
|
|
|
|
0.76
|
%
|
|
|
|
|
|
|
|
0.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Effective rate includes impact of amortizing ARM Assets net premium.
|
(2)
|
Includes Swap Agreements with notional balances of $516.2 million and $6.9 billion as of September 30, 2008 and 2007, respectively, and Cap Agreements with
net notional balances of $467.7 million and $673.3 million as of September 30, 2008 and 2007, respectively.
|
(3)
|
Portfolio Margin is computed by dividing annualized net interest income by the average daily balance of interest earning assets.
|
The following table presents the total amount of change in interest income/expense from the table above and presents the amount of change due to changes
in interest rates versus the amount of change due to changes in volume (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume Variance
|
|
|
|
Nine Months Ended September 30,
2008 versus
2007
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
ARM assets
|
|
$
|
545,169
|
|
|
$
|
(1,106,793
|
)
|
|
$
|
(561,624
|
)
|
Cash and cash equivalents
|
|
|
(6,374
|
)
|
|
|
5,457
|
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538,795
|
|
|
|
(1,101,336
|
)
|
|
|
(562,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements and Asset-backed CP
|
|
|
656,700
|
|
|
|
(1,192,099
|
)
|
|
|
(535,399
|
)
|
Collateralized Mortgage Debt
|
|
|
(102,910
|
)
|
|
|
69,060
|
|
|
|
(33,850
|
)
|
Whole loan financing facilities
|
|
|
(3,550
|
)
|
|
|
(47,391
|
)
|
|
|
(50,941
|
)
|
Senior, Senior Subordinated Secured and Subordinated Notes
|
|
|
35,536
|
|
|
|
75,876
|
|
|
|
111,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585,776
|
|
|
|
(1,094,554
|
)
|
|
|
(508,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(46,981
|
)
|
|
$
|
(6,782
|
)
|
|
$
|
(53,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income decreased by $53.8 million in the nine months ended September 30, 2008,
over the same period of the prior year. This decrease in net interest income is composed of an unfavorable rate variance and an unfavorable volume variance. The decreased
93
average size of our portfolio during the first nine months of 2008 compared to the same period of 2007 decreased net interest income in the amount of $6.8
million. The average balance of our interest-earning assets was $30.6 billion during the nine months ended September 30, 2008, compared to $51.4 billion during the same period of 2007 a decrease of 40.5%. As a result of the yield on our
interest-earning assets increasing to 6.72% during the first nine months of 2008 from 5.45% during the same 2007 period, an increase of 127 BPs, and our cost of funds increasing to 6.04% from 5.05% during the same 2007 period, an increase of 99 BPs,
there was a net unfavorable rate variance of $47.0 million.
For the nine months ended September 30, 2008, our ratio of operating
expenses to average assets was 0.23%, compared to 0.13% for the same period in 2007. The most significant changes in our operating expenses for the nine months September 30, 2008 compared to September 30, 2007 were the $1.8 million
decrease in base management fees paid to the Manager and the $17.7 million decrease in performance-based compensation paid to the Manager. These decreases in expense were partially offset by a $12.3 million increase in expenses related to the
operations of TMHL due to decreased loan production and resultant capitalized loan origination costs and a $6.7 million increase in legal and accounting expenses.
The Company had negative equity at September 30, 2008, and as such did not incur a performance based fee for the nine months ended September 30, 2008.
Market Risks
The market risk management discussion
and the amounts estimated from the analysis that follows are forward-looking statements that assume that certain market conditions will occur. Actual results may differ materially from these projected results due to changes in our ARM portfolio and
borrowings mix and due to developments in the domestic and global financial and real estate markets. Developments in the financial markets include the likelihood of changes in interest rates and in the relationship of various interest rates and
their impact on our ARM portfolio yield, cost of funds and cash flows.
As a financial institution that has only U.S.-dollar denominated
assets, liabilities and Hedging Instruments, we are not subject to foreign currency exchange or commodity price risk. Our market risk encompasses liquidity risk and interest rate risk, both of which arise in the normal course of business of a
financial institution. Liquidity risk is the risk that an entity may be unable to meet a financial commitment to a customer, creditor, or investor when due. Liquidity risk is discussed in the Liquidity, Capital Resources and Going
Concern section. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in repricing intervals between our assets and liabilities and
the effect that interest rates may have on our cash flows, especially ARM portfolio prepayments. Interest rate risk impacts our interest income and interest expense. Interest rate risk also includes the risk that changes in interest rates will
result in changes in the market value of our assets and liabilities. The management of interest rate risk attempts to maximize earnings and to preserve capital by minimizing the negative impacts of changing interest rates, asset and liability mix,
and prepayment activity.
The table below presents an approximation of the sensitivity of the market value of our ARM portfolio, including
purchase commitments, using a discounted cash flow simulation model. Application of this method results in an estimation of the percentage change in the market value of our assets, liabilities and Hedging Instruments per 100 and 200 BP shifts in
interest rates expressed in years a measure commonly referred to as Effective Duration. Positive portfolio Effective Duration indicates that the market value of the total portfolio will decline if interest rates rise and increase if interest
rates decline. Negative portfolio Effective Duration indicates that the market value of the total portfolio will decline if interest rates decline and increase if interest rates rise. The closer Effective Duration is to zero, the less interest rate
changes are expected to affect earnings. Included in the table is a base case Effective Duration calculation for an interest rate scenario that assumes future rates are those implied by the yield curve as of September 30, 2008. The other four
scenarios assume interest rates are instantaneously 100 and 200 BPs lower and 100 and 200 BPs higher than those implied by interest rates as of September 30, 2008.
94
The effects of Hybrid ARM Hedging Instruments on the market value of the portfolio are reflected in the
models output. This analysis also takes into consideration the value of options embedded in our ARM Assets including constraints on the repricing of the interest rates of ARM Assets resulting from periodic and lifetime cap features, as well as
prepayment options. Assets and liabilities that are not interest rate-sensitive, such as cash, payment receivables, prepaid expenses, payables and accrued expenses are excluded. The Effective Duration calculated from this model is a key measure of
the effectiveness of our interest rate risk management strategies. As of September 30, 2008, the Base Case in the table below used the following rates: 1 month LIBOR of 3.93%, 5 year Treasury of 2.98%, and 10 year Treasury of 3.85%.
Net Portfolio Effective Duration
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Case
|
|
|
Parallel minus
100 BPs
|
|
|
Parallel plus
100 BPs
|
|
|
Parallel minus
200 BPs
|
|
|
Parallel plus
200 BPs
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional ARMs
|
|
0.40 Years
|
|
|
0.37 Years
|
|
|
0.45 Years
|
|
|
0.40 Years
|
|
|
0.54 Years
|
|
Hybrid ARMs
|
|
2.39
|
|
|
2.41
|
|
|
2.38
|
|
|
2.47
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ARM Assets
|
|
2.07
|
|
|
2.08
|
|
|
2.07
|
|
|
2.14
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings and hedges
|
|
(1.04
|
)
|
|
(1.06
|
)
|
|
(1.01
|
)
|
|
(1.08
|
)
|
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Effective Duration
|
|
0.37 Years
|
|
|
0.36 Years
|
|
|
0.38 Years
|
|
|
0.38 Years
|
|
|
0.39 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the assumptions used, the model output suggests a very low degree of portfolio price
change given decreases and increases in interest rates, which implies that our cash flow and earning characteristics should be relatively stable for comparable changes in interest rates. As a comparison, the approximate base case Effective Durations
of a 10 year U.S. treasury, a conforming 30-year fixed mortgage and a conforming 5/1 Hybrid ARM are 8.1, 3.5 and 2.4 years respectively.
Changes in assumptions including, but not limited to, volatility, mortgage and financing spreads, prepayment behavior and defaults, changes in the shape of the yield curve, as well as the timing and level of interest rate changes, will
affect the results of the model. Therefore, actual results are likely to vary from modeled results.
Although market value sensitivity
analysis is widely accepted in identifying interest rate risk, it does not take into consideration changes that may occur such as, but not limited to, changes in investment and financing strategies, changes in market spreads, and changes in business
volumes. Accordingly, we make extensive use of an earnings simulation model to further analyze our level of interest rate risk.
There are
a number of key assumptions in our earnings simulation model. These key assumptions include changes in market conditions that affect interest rates, the shape of the yield curve, the pricing of ARM products, the availability of ARM products, and the
availability and the cost of financing for ARM products. Other key assumptions made in using the simulation model include prepayment speeds and managements investment, financing and hedging strategies, and the issuance of new equity. We
typically run the simulation model under a variety of hypothetical business scenarios that may include different interest rate scenarios, different investment strategies, different prepayment possibilities and other scenarios that provide us with a
range of possible earnings outcomes in order to assess potential interest rate risk. The assumptions used represent our estimate of the likely effect of changes in interest rates and do not necessarily reflect actual results. The earnings simulation
model takes into account periodic and lifetime caps embedded in our ARM Assets in determining the earnings at risk.
Our earnings model
base case at September 30, 2008 reflects the forward interest rate swap yield curve. Based on the earnings simulation model, our potential earnings increase (decrease) from our base case earnings forecast for a parallel 100 and 200 BP decline
and 100 and 200 BP rise in market interest rates over the next twelve months which could include an adjustment in interest rate management strategies as interest rates change, was 22.1%, 44.1%, (22.1)% and (44.1)%, respectively, of projected net
income for the twelve months ended September 30, 2009. The assumptions used in the earnings simulation model are inherently uncertain and, as a result, the analysis cannot precisely predict the impact of higher or lower interest rates on net
income. Actual results could differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in prepayment speed and changes in other market conditions and management strategies, other than what was assumed in
the model, to offset our potential exposure, among other factors. This measure of risk represents our exposure to higher or lower interest rates at a particular point in time. Our actual risk is always changing. We continuously monitor our risk
profile and alter our strategies as appropriate based on our view of interest rates and other developments in our business.
95
Effects of Interest Rate Changes
Changes in interest rates impact our earnings in various ways. While we invest primarily in ARM Assets, rising short-term interest rates may temporarily negatively affect our earnings, and, conversely, falling
short-term interest rates may temporarily increase our earnings. This impact can occur for several reasons and may be mitigated by portfolio prepayment activity and portfolio funding and hedging strategies. For example, our borrowings may react to
changes in interest rates sooner than our ARM Assets because the weighted average next repricing date of our borrowings may be sooner than that of our ARM Assets. Additionally, interest rates on Traditional ARM Assets may be limited to an increase
of either 1% or 2% per adjustment period (commonly referred to as the periodic cap), or indices may be based on weighted averages rather than current rates, while our borrowings do not have similar limitations. Our ARM Assets also typically lag
changes in the applicable interest rate indices by 45 days, due to the notice period provided to ARM borrowers when the interest rates on their loans are scheduled to change.
Interest rates can also affect our net return on Hybrid ARM Assets (net of the cost of financing Hybrid ARM Assets). We estimate the Effective Duration of our Hybrid ARM Assets and have a policy
to hedge the financing of the Hybrid ARM Assets such that the Net Effective Duration is less than one year. Pursuant to the terms of the Override Agreement, we may not enter into any new Hedging Instruments or ISDA Agreements, except Cap Agreements
and Swap Agreements. Given recent dislocations in the correlation between the prices of our Hedging Instruments and prices on our mortgage-backed securities, we have temporarily suspended our Net Effective Duration policy. During a declining
interest rate environment, the prepayment of Hybrid ARM Assets may accelerate causing the amount of fixed-rate financing to increase relative to the amount of Hybrid ARM Assets, possibly resulting in a decline in our net return on Hybrid ARM Assets
as replacement Hybrid ARM Assets may have lower yields than the ones paying off. In contrast, during a rising interest rate environment, Hybrid ARM Assets may prepay slower than expected, requiring us to finance more Hybrid ARM Assets with more
costly funds than was originally anticipated, resulting in a decline in our net return on Hybrid ARM Assets. In order to manage our exposure to changes in the prepayment speed of Hybrid ARM Assets, we regularly monitor the balance of Hybrid ARM
Assets and make adjustments to the amounts anticipated to be outstanding in future periods and, on a regular basis, make adjustments to the amount of our fixed-rate borrowing obligations in future periods.
Interest rate changes can also affect the availability and pricing of ARM Assets, which affects our investment opportunities. During a rising interest
rate environment, there may be less total loan origination and refinance activity, but a larger percentage of ARM products being originated, mitigating the impact of lower overall loan origination and refinance activity. Conversely, during a
declining interest rate environment, consumers, in general, may favor fixed-rate mortgage products, but because there will likely be above average loan origination and refinancing volume in the industry, even a small percentage of ARM product volume
may provide sufficient investment opportunities. Additionally, a flat or inverted yield curve may be an adverse environment for ARM products because there may be little incentive for a consumer to choose an ARM product over a 30 year fixed-rate
mortgage loan. Conversely, in a steep yield curve environment, ARM products may enjoy an above average advantage over 30-year fixed-rate mortgage loans, increasing our investment opportunities. The volume of ARM Loans being originated industry-wide
can also affect their investment yield. During periods when there is a shortage of ARM products, yields may decline due to market forces and conversely, when there is an above average supply of ARM products, yields may improve due to the same market
forces.
The prepayment rate on our ARM Assets may increase if interest rates decline or if the difference between long-term and short-term
interest rates diminishes. An increase in prepayments would cause us to accrete the net discount on our ARM Assets faster, resulting in a higher yield on our ARM Assets. Additionally, if prepayment proceeds cannot be reinvested in ARM Assets having
similar yields to those being replaced, our earnings may be adversely affected. Conversely, the prepayment rate on our ARM Assets may decrease if interest rates rise or if the difference between long-term and short-term interest rates increases.
Decreased prepayments would cause us to accrete the net discount paid for our ARM Assets over a longer time period, resulting in a reduced yield on our ARM Assets. Therefore, in rising interest rate environments where prepayments are declining, not
only would the interest rate on the ARM portfolio reset to reflect higher interest rates, but the yield would also decline due to slower prepayments. In periods of market dislocation as is the case today, the pricing of new mortgage loans and
securitization economics may become disassociated from their historical relationships to interest rate indices. In such periods changes in market interest rates may have little or no effect on prepayments.
Because we invest primarily in ARM Assets, and a portion of such assets are purchased with shareholders equity, our earnings, over time, will tend
to increase, after an initial short-term decline, following periods when short-term interest rates have risen, and decrease after an initial short-term increase, following periods when short-term interest rates have declined. This is because the
financed portion of our ARM portfolio will, over time, reprice to a spread over our cost of funds, while the portion of our ARM portfolio purchased with shareholders equity will generally have a higher yield in a higher interest rate
environment and a lower yield in a lower interest rate environment.
We also elected to record the Senior Subordinated Secured Notes at
fair value. Changes in their fair value are recognized in earnings apart from operating interest income and expense activity. Thus, changes in interest rates impact earnings as either a gain or a loss. Increases in interest rates act to decrease the
value of the Senior Subordinated Secured Notes and result in a gain. Decreases in interest rates act to increase fair value and result in a loss. Gains or losses can vary widely impacting Net (loss) income. The stated interest rate in effect on the
Senior Subordinated Secured Notes is not impacted nor is the discount that is being amortized as an adjustment to yield.
96
Taxable income per share
As a REIT, we pay substantially all of our taxable earnings in the form of dividends to shareholders. Therefore, taxable (loss) income per share, a non-GAAP financial measurement, is a meaningful measurement for both
management and investors. A reconciliation of our REIT taxable income per common share to GAAP EPS follows:
Reconciliation of REIT
Taxable Income Per Share to GAAP EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
REIT Taxable income per share
|
|
$
|
0.45
|
|
|
$
|
(0.81
|
)
|
|
$
|
1.77
|
|
|
$
|
12.26
|
|
Dividend on Preferred Stock
|
|
|
(0.63
|
)
|
|
|
(0.37
|
)
|
|
|
(1.87
|
)
|
|
|
(0.49
|
)
|
Hedging Instruments, net
|
|
|
(0.65
|
)
|
|
|
(0.39
|
)
|
|
|
(0.42
|
)
|
|
|
(0.09
|
)
|
Taxable REIT subsidiary income (loss)
|
|
|
(0.31
|
)
|
|
|
(2.26
|
)
|
|
|
(2.66
|
)
|
|
|
(2.99
|
)
|
Provision for credit losses, net
|
|
|
(0.06
|
)
|
|
|
(0.63
|
)
|
|
|
0.06
|
|
|
|
(0.84
|
)
|
Securitization-related transactions
|
|
|
|
|
|
|
2.63
|
|
|
|
|
|
|
|
2.74
|
|
Other-than-temporary impairment losses
|
|
|
(13.37
|
)
|
|
|
|
|
|
|
(66.56
|
)
|
|
|
|
|
Payments under long-term incentive plan
|
|
|
|
|
|
|
0.15
|
|
|
|
|
|
|
|
0.27
|
|
Non-deductible change in FV of Derivative Financing Liability
|
|
|
3.85
|
|
|
|
|
|
|
|
4.37
|
|
|
|
|
|
Non-deductible change in FV of Senior Subordinated Secured Notes
|
|
|
14.28
|
|
|
|
|
|
|
|
4.91
|
|
|
|
|
|
Long-term incentive plan expense
|
|
|
0.26
|
|
|
|
0.62
|
|
|
|
0.16
|
|
|
|
0.39
|
|
Issuance of Collateralized Mortgage Debt
|
|
|
|
|
|
|
(0.22
|
)
|
|
|
|
|
|
|
(0.22
|
)
|
Non-deductible capital losses
|
|
|
(0.65
|
)
|
|
|
(88.17
|
)
|
|
|
(24.21
|
)
|
|
|
(91.81
|
)
|
Other non-deductible losses
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
(1.04
|
)
|
|
|
|
|
Other
|
|
|
(0.02
|
)
|
|
|
0.04
|
|
|
|
(0.22
|
)
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Basic EPS
|
|
$
|
2.74
|
|
|
$
|
(89.41
|
)
|
|
$
|
(85.71
|
)
|
|
$
|
(80.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We estimate that our undistributed taxable income was $77.5 million or $2.34 per share for the
nine months ended September 30, 2008. We continue to analyze tax considerations associated with the Financing Transaction as well as the recent issuance of PIK Notes, as previously discussed. Variances in the actual taxable income from the
above estimated amounts will have a corresponding impact on the amount of cash and/or non-cash distributions we will be required to make to retain our REIT status.
Other Matters
We have, excluding TMHL, Adfitech and TMHS, elected to be taxed as a REIT. Accordingly, we will not be
subject to federal income tax on that portion of our income that is distributed to shareholders in cash, common stock or a combination thereof as long as certain asset, income, stock ownership and distribution tests are met. We must
(1) distribute at least 85% of our taxable income by the end of each calendar year (or declare the distribution in October, November or December of the calendar year and pay it in January of the succeeding year) and (2) declare dividends
of at least 90% of our income by the time we file our tax return for such year, and pay such dividends no later than the date of the first regular dividend payment after such declaration. The rules allow several options for both timing and method of
qualifying dividend payments over the course of years. We expect to utilize the ones we deem best fit our business needs.
TMHL,
TMHLs wholly owned subsidiary Adfitech, and TMHS are taxable REIT subsidiaries and, as such, are subject to both federal and state corporate income taxes.
Under FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, a tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of the tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the more likely
than not test, no tax benefit is recorded.
97
The common three year statute of limitation on additional tax assessments used for most federal and state
income tax matters means we are no longer subject to assessment for years before 2004. We believe we have filed, and will continue to file, all required tax returns, and maintain compliance with the tax reporting requirements of each jurisdiction we
are subject to, on a timely and accurate basis. At September 30, 2008, we did not have any unrecognized tax benefits. We do not expect the total amount of unrecognized tax benefits to increase significantly during the year ending
December 31, 2008. We recognize interest related to income tax matters in other interest expense and penalties related to income tax matters in other noninterest expense. We do not have any amount accrued for interest and penalties.
In the third quarter of 2007, market conditions forced us to dispose of a significant portion of our portfolio of mortgage-backed securities, which,
until the time they were disposed of, were a source of significant amounts of gross income that qualified for purposes of both the REIT annual 75% gross income test and the REIT annual 95% gross income test. Also in the third quarter of 2007, we
were compelled to dispose of or otherwise terminate associated Swap Agreements and thereby recognize a gain. The treatment of gains from the disposition or termination of such Swap Agreements for purposes of the 95% gross income test is not clear.
However, based on the amount of gross income we recognized for 2007, even if gross income from the Swap Agreements is not qualifying for the 95% gross income test, we believe that we are in compliance with the 95% gross income test for the 2007 tax
year.
In January 2008, our special tax counsel rendered an opinion concluding (i) we had qualified to be taxed as a REIT beginning with
the taxable year ended December 31, 1993, through the taxable year ended December 31, 2007, and (ii) our organization and current and proposed method of operation will enable us to meet the requirement for qualification and taxation as a
REIT in subsequent years. After this opinion was rendered we entered into the Financing Transaction in March of 2008. As described below, if we fail to satisfy the Additional Financing Conditions this failure will adversely affect our ability to
continue to qualify as a REIT.
Our taxable REIT subsidiaries provide for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the
period the change occurs. Subject to our judgment, a valuation allowance is established if realization of deferred tax assets is not more likely than not.
The benefit for income taxes for the nine months ended September 30, 2008 was $1.0 million, based on a combined federal and state effective tax rate of 39.6% on estimated current taxable income of $8.9 million
and deferred taxable income of $12.2 million. The provision related to certain Cap Agreements owned by TMHS that were entered into in conjunction with certain securitization transactions. The provision for income taxes for the nine months ended
September 30, 2007 was $12.0 million, based on a combined federal and state effective tax rate of 39.2% on estimated deferred taxable income of $37.0 million. The significant differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases relate to MSRs capitalized for financial statement purposes, REMIC transactions accounted for as financings for financial statement purposes and as sales for tax purposes, unrealized
gains on Hedging Instruments and TMHLs net operating loss from 2004 through 2007. As of December 31, 2007, TMHLs net operating loss approximates $289.0 million. We have established a valuation allowance against the entire balance of
TMHLs net deferred tax assets at September 30, 2008 as it is more likely than not that the deferred tax assets will not be realized.
Terms of the Financing Transaction are dependent upon our ability to satisfy the Additional Financing Conditions. Characterization of our rights, on the one hand, and the participants, on the other hand, under the Principal Participation
Agreement is not clear for federal income tax purposes. If the Additional Financing Conditions do not occur, then, under the terms of the Principal Participation Agreement, our rights to certain principal collections on assets owned by us that are
subject to the Override Agreement would be viewed as having been transferred by us to the participants in the Principal Participation Agreement. Our failure to satisfy the Additional Financing Conditions would adversely affect our ability to comply
with the REIT quarterly asset tests and annual gross income tests because the participants in the Principal Participation Agreement would be considered to have acquired ownership interests in the principal payments on the assets subject to the
Override Agreement for tax purposes. If that were to occur, it is likely that it could result in termination of our REIT status.
If its
REIT status is terminated, we would be taxed as a C-Corporation for the entire 2008 calendar year and would be eligible to file a consolidated income tax return with TMHS, TMHL and Adfitech. As a C-Corporation, we, in addition to TMHS, TMHL and
Adfitech, would be subject to federal and state income taxes and would be required to record current and deferred income tax expense as of and for the period ended September 30, 2008. If we elected to file a consolidated income tax return, our
income tax provision would include the operations of TMHS, TMHL and Adfitech. The consolidated income tax provision would be based on income before tax, adjusted for certain permanent items, at an estimated annual effective tax rate of 39%. In
addition, it is likely that any deferred tax asset, mainly capital loss carryovers, would be subject to a 100% valuation allowance as it is more likely than not that the tax benefits would not be realized. We estimate that if required to be taxed as
a C-Corporation in 2008, there could potentially be a $36 million net deferred tax expense provision required for the nine months ended September 30, 2008 because deferred tax assets would exceed current and deferred tax liabilities, but the
deferred tax assets would be subject to a valuation allowance. This estimate could change significantly based on fourth quarter results. Also, as a C-Corporation, we would not be subject to the REIT distribution requirement or the related deductions
from taxable income. As such, we would be prohibited from making dividend distributions pursuant to the terms of the Override Agreement.
98
We suspended our dividend on Common Stock for the term of the Override Agreement. However, we may declare
a dividend in December 2008 for payment in January 2009 of up to 87% of our taxable income for 2008. Applicable tax rules permit distributions paid in 2009 to qualify towards satisfaction of the 2008 90% REIT distribution requirement. We have
performed a projection of our 2008 taxable income and have determined that we should have the wherewithal to satisfy both (1) the January 2009 distribution as allowed by the Override Agreement and (2) an incremental distribution to be
declared by the time we file our 2008 tax return and paid no later than the date of the first regular dividend payment after the declaration.
We are in compliance with the annual 75% and 95% gross income test for our 2008 taxable year based on operations through September 30, 2008 and expect to maintain compliance through December 31, 2008. We believe it is more likely
than not that the Additional Financing Conditions will be satisfied and that the Principal Participation Agreement will be terminated. As a result of satisfying the Additional Financing Conditions and our annual asset, income, distribution and stock
ownership tests, we believe that it is more likely than not that we will qualify to be taxed as a REIT for the year ending December 31, 2008.
We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we were to become regulated as an investment company, our use of leverage would be substantially reduced. The
Investment Company Act exempts from regulation entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. In order to maintain our
exempt status under the Investment Company Act, current SEC staff interpretations require that at least 55% of our assets must consist of Qualifying Interests, as such term has been defined by the SEC staff. In addition, unless certain
mortgage-backed securities represent all the certificates issued with respect to an underlying pool of mortgages, such mortgage-backed securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. We calculated that we are in compliance with this requirement.
Item 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information called for by Item 3 is incorporated by reference from the information in Part I, Item 2 under the captions GeneralHedging Strategies, Interest Rate Risk Management and Market
Risks.
Item 4.
|
CONTROLS AND PROCEDURES
|
Our Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms. In addition, during the quarter ended September 30, 2008, there has been no significant change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
99
PART II OTHER INFORMATION
Item 1.
|
LEGAL PROCEEDINGS
|
Roney v.
Thornburg, et al., filed October 27, 2008
United States District Court, District of New Mexico
On October 27, 2008, a purported class action complaint, or the Class Action Complaint, entitled
Roney v. Thornburg,
et. al.
was filed in the United States District Court, District of New Mexico. The Class Action Complaint alleges that the Company, certain of our officers, all of our current directors and certain of our former directors violated federal
securities laws by issuing false and misleading statements regarding the Companys tender offer for its outstanding Preferred Stock in proxy statements filed with the SEC in April and July 2008; alleges that these defendants, as well as two of
the Companys largest shareholders, breached their fiduciary duty to the Companys shareholders by entering into the Financing Transaction on March 31, 2008; and petitions for the dissolution of the Company. The Class Action Complaint
seeks declaratory and injunctive relief, rescission of the tender offer to the extent implemented, recovery of the costs and expenses of the action and other relief that may be granted by the court. The Company believes the allegations are without
merit, and intends to defend against them vigorously.
In re Thornburg Mortgage Inc., Securities Litigation
, filed
May 27, 2008 United States District Court, District of New Mexico
This consolidated proceeding encompasses the actions
previously reported as
Slater v. Thornburg
,
Gonsalves v. Thornburg
,
Smith v. Thornburg Mortgage, Inc.
, S
edlmyer v. Thornburg Mortgage, Inc
., and
Snydman v. Thornburg Mortgage, Inc
. On May 27, 2008, counsel for
the lead plaintiffs filed a consolidated amended complaint (CAC) against the Company, certain of the Companys officers and directors, and the underwriters of some of the Companys securities offerings. The CAC alleges that the
Company and certain individual defendants violated federal securities laws by issuing false and misleading statements in financial reports filed with the SEC, press releases and other public statements, which resulted in artificially inflated market
prices of the Companys Common Stock, and that the named plaintiffs and the members of the putative class purchased Common Stock at these artificially inflated market prices between April 19, 2007 and March 19, 2008. The CAC also
alleges that all defendants are liable under federal securities laws for materially false and misleading statements in the registration statements and prospectuses for the Companys May 2007, June 2007, September 2007, and January
2008 securities offerings. The CAC seeks unspecified money damages in favor of the putative class of purchasers of the Companys securities, injunctive relief, restitution, the costs and expenses of the action, and other relief that may be
granted by the court. The Company believes the allegations are without merit, and intends to defend against them vigorously.
Donio v. Thornburg, et al.,
filed August 24, 2007
First Judicial District Court (Santa Fe County, New
Mexico)
On August 24, 2007, a shareholder derivative complaint, or the Derivative Complaint, entitled
Donio v. Thornburg, et al.
was filed in the First Judicial District Court (Santa Fe County, New Mexico). The Derivative Complaint alleges that certain of our officers and all of our directors violated state law, breached their fiduciary
duties, and were unjustly enriched, during the period between October 2005 and the date of filing of the complaint, resulting in substantial monetary losses and other damages to the Company. The Derivative Complaint seeks unspecified money damages,
along with changes in corporate governance and internal procedures. The Company believes the allegations are without merit, and intends to defend against them vigorously. All parties to this action have stipulated to an indefinite stay of all
proceedings, and have asked the court to enter an order accordingly.
By letter dated April 4, 2008, the Company
received a notice from the SEC that it is conducting an investigation relating to the restatement of the Companys Consolidated Financial Statements for fiscal year 2007, margin calls that the Company received (or which were threatened)
pursuant to its Reverse Repurchase Agreements and related disclosures, and the valuation, impairment and/or disclosures concerning the accounting treatment for the Companys mortgage-backed securities addressed in the restatement. The
SECs notice states that it has not determined that any violations of the securities laws have occurred. The SEC subsequently served the Company with subpoenas on April 24, 2008 and May 23, 2008 for documents related to the
investigation described in the April 4, 2008 letter. The Company has provided the SEC with documents responsive to the April 24 and May 23 subpoenas and continues to supplement those document productions. The Company is cooperating
with the SEC on a voluntary basis in its investigation.
By letter dated March 6, 2008, the Company received notice
from the NYSE that the NYSE is reviewing transactions in the Companys Common Stock prior to the Companys January 9, 2008 disclosure of the impact of recent market events in the mortgage industry on the Companys GAAP book
value. The Company timely responded to the NYSEs requests on May 1, 2008, and has had no further communications with the NYSE on this issue.
Pursuant to Section 6707A(e) of the Code, we must disclose if we have been required to pay a penalty to the Service for failing to make required disclosures with respect to certain transactions that have been
identified by the Service as abusive or that have a significant tax avoidance purpose. Through May 31, 2008, we have not entered into any such transactions and have not been required to pay a penalty to the Service for failing to make the
required disclosures
100
The reader should
carefully consider, in connection with the other information in this report, the factors discussed in Part I, Item 1A Risk Factors on pages 20 through 23 of the Companys 2007 Annual Report on Form 10-K/A and in Part I,
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements of this report. These factors could cause our actual results to differ materially from those
stated in forward-looking statements contained in this document and elsewhere. In addition to the factors referenced above, the reader should also consider the following risk factors:
Risks Related to Us and Our Business
|
|
|
The occurrence of recent adverse developments in the mortgage finance and credit markets has adversely affected our business, our liquidity and our stock
price and has raised substantial doubt about our ability to continue as a going concern.
|
In recent
months, the mortgage industry has come under enormous pressure due to numerous economic and other industry-related factors. Many companies operating in the mortgage sector have failed and others are facing serious operating and financial challenges.
At the same time, many mortgage-backed securities have been downgraded and delinquencies and credit performance of mortgage loans in the industry have deteriorated. We faced significant challenges during the second half of 2007 and in 2008 due to
these adverse conditions in the mortgage industry and the difficulties we experienced in pricing and financing our mortgage assets, and expect to continue to face these challenges in 2008. These conditions may not stabilize or they may worsen for
the foreseeable future.
The residential mortgage market has continued to encounter difficulties, which has adversely
affected our performance. In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase. In addition, in recent months residential property values in many states have
declined or remained stable, after extended periods during which those values appreciated. A sustained decline or a lack of increase in those values may result in additional increases in delinquencies and losses on residential mortgage loans
generally, especially with respect to any residential mortgage loans where the aggregate loan amounts (including any subordinate loans) are close to or greater than the related property values. Another factor that may have contributed to, and may in
the future result in, higher delinquency rates is the increase in monthly payments on adjustable rate mortgage loans. Any increase in prevailing market interest rates may result in increased payments for borrowers who have adjustable rate mortgage
loans. Moreover, with respect to option ARM mortgage loans with a negative amortization feature which reach their negative amortization cap, borrowers may experience a substantial increase in their monthly payment even without an increase in
prevailing market interest rates. Compounding this issue, the adoption of tighter underwriting standards throughout the mortgage loan industry may adversely affect the ability of borrowers to refinance these loans and avoid default, particularly
borrowers facing a reset of the monthly payment to a higher amount. To the extent that delinquencies or losses continue to increase for these or other reasons, the value of our mortgage-backed securities and the remaining mortgage loans held in our
portfolio will be further reduced. These conditions may not be stabilized and may continue to worsen for the foreseeable future.
Our ability to meet our long-term liquidity requirements is subject to the renewal of our credit and repurchase facilities and/or obtaining other sources of financing, including additional debt or equity from time to time. Recent adverse
changes in the mortgage finance and credit markets have eliminated or reduced the availability, or increased the cost, of significant sources of funding for us. We may not be able to access sources of funding or, if available to us, we may not be
able to negotiate favorable terms. Any decision by our lenders and/or investors to make additional funds available to us in the future will depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements,
our financial performance, industry and market trends in our various businesses, the lenders and/or investors own resources and policies concerning loans and investments, and the relative attractiveness of alternative investment or
lending opportunities. If we cannot raise cash by selling debt or equity securities, we may be forced to sell more of our assets at unfavorable prices or discontinue various business activities. Consistent with the broader market decline in the
issuance of mortgage-backed securities, we did not complete a securitization in the third quarter of 2008. We completed a sale of $111.2 million of ARM loans at a loss of $13.2 million during the third quarter of 2008 due to the need to reduce our
warehouse financing and the inaccessibility of the securitization market. Our mortgage warehouse facilities were set to expire on November 7, 2008 but have been extended to November 14, 2008 or such date that the outstanding amounts are
paid off from the pending sale of whole loans scheduled to settle on November 14, 2008. We do not expect to renew these facilities.
We may be required to sell loans on a whole loan basis and liquidate our assets to repay short-term borrowings. Margin calls may result when our lenders evaluate the market value of the collateral securing our
financing arrangements and require us to provide them with additional equity or collateral to secure our borrowings. Beginning in August 2007 and continuing through the current date, the fair value of our ARM Assets as well as our hedging
instruments declined, our margin requirements on our financing increased and in the second half of 2007 and the first half of 2008, we sold a significant amount of assets and terminated interest rate swap agreements in order to reduce our exposure
to further margin calls on recourse borrowings and hedging transactions. In March 2008, we received a significant amount of
101
margin calls, which significantly exceeded our available liquidity, and we were unable to meet a portion of these margin calls. Although we have entered into
the Override Agreement which freezes additional margin calls through March 16, 2009, unless a security is downgraded by a rating agency, there is no assurance that we will be able to obtain sufficient liquidity in order to satisfy our
liabilities, that the value of our purchased ARM Assets and hedging instruments will not decline further, that we will be able to meet the margin calls if securities securing our obligations under the Reverse Repurchase Agreements are downgraded by
a rating agency, that the Override Agreement will not be terminated by the counterparties if we do not meet certain conditions, that we will obtain new financing for the assets subject to the Override Agreement when it terminates, and that, if the
Override Agreement is terminated, the counterparties will not make additional margin calls or that we will be able to satisfy additional margin calls, if any, or that we will be able to continue as a going concern.
Beginning in July 2008, the Override Agreement counterparties began to make a series of margin calls as a result of a series of Rating
Agency downgrades of mortgage-backed securities owned by the Company and financed by the Override Agreement counterparties. In the context of those downgrades and their associated margin calls, some ambiguities arose with regard to the
interpretations of the Override Agreement as it related to margin calls on downgraded securities and other matters. In trying to resolve these issues, the Company and the Override Agreement counterparties entered into a series of negotiations to
attempt to resolve the interpretative issues. And, as negotiations continued and downgrades continued to be announced, the counterparties to the Override Agreement began to withhold funds payable to the Company under both the Override Agreement and
the whole loan financing facility. On August 21, 2008, and in consideration of ongoing negotiations with the Override Agreement counterparties continuing in good faith, the Company used amounts in the Liquidity Reserve Fund to pay margin calls
totaling approximately $219.0 million based on its interpretation of the Override Agreement, which was less than the amount owing based on downgrades under the counterparties interpretation of the Override Agreement. As of September 30,
2008, the Company had identified additional downgrades in its portfolio with a current face of $631.0 million and a carrying value of $352.2 million which would have resulted in an additional margin call of $56.7 million under the Companys
interpretation. Since September 30, 2008, and up to November 3, 2008, the Company has received additional downgrades on mortgage-backed securities held in its portfolio and financed under the Override Agreement. Those downgrades had a
current face of $510.3 million and a carrying value of $345.1 million and could result in additional margin calls under the Companys interpretation of the Override Agreement of $138.6 million. In total, the Company believes an additional
$195.3 million in margin calls could result from downgrades subsequent to August 21, 2008. The Company has not paid any amounts on these potential additional margin calls to the counterparties to the Override Agreement.
The price of our Common Stock declined significantly as a result of these events and the impact on our results of operations. There is no
assurance that our stock price will not continue to experience significant volatility as mortgage-backed security prices continue to decline.
|
|
|
We will suffer significant adverse consequences if the Additional Financing Conditions are not satisfied.
|
We believe that there will be several significant adverse consequences to the Company if the Additional Financing Conditions are not
satisfied prior to December 31, 2008 or such date to which the deadline may be extended. If the Additional Financing Conditions are not satisfied, absent subsequent modification of the Principal Participation Agreement, the Principal
Participation Agreement will not terminate and the investors that hold the interest in the Principal Participation Agreement will be entitled to receive, generally commencing on March 19, 2009, monthly principal payments that are received on
the mortgage-backed securities collateralizing our Reverse Repurchase Agreements under the Override Agreement, after deducting payments due under those Reverse Repurchase Agreements. Investors in the Principal Participation Agreement must also
consent to any refinancing of our mortgage-backed securities subject to the Override Agreement, which gives them the ability to cause the sale of these assets upon the maturity of the Reverse Repurchase Agreements and to receive the net proceeds of
such sales after payment of the reverse repurchase counter parties. If any of the mortgage-backed securities have been sold prior to March 31, 2015, the participants would also be entitled to a payment on that date equal to the fair market
value of such assets in excess of any financing related to those assets. The payments owed to the investors under the Principal Participation Agreement would represent a significant reduction in the Companys monthly cash flow through
March 31, 2015, making it highly unlikely that we would be able to reinvest its monthly cash flows into higher yielding assets or to support growth in our loan origination volumes to allow us to resume normalized business operations.
Additionally, any future appreciation in the fair market value of these assets would be recovered by investors in the Principal Participation Agreement, as opposed to being recovered by the Company for the benefit of its shareholders.
In the event the Additional Financing Conditions are not satisfied, our ability to extend the Override Agreement or to find alternative
financing for those mortgage assets will be extremely difficult and uncertain. As a result, if alternative financing cannot be secured, it is likely that all of the mortgage assets will be sold by the Company or liquidated by the Override Agreement
counterparties at the termination of the Override Agreement, effectively eliminating any chance for recovery of value for our common or preferred shareholders and significantly impacting our ability to make payments on our other indebtedness absent
a substantial improvement in mortgage securities prices between now and March 2009.
102
In addition, if the Additional Financing Conditions are not satisfied, the interest rate
we must pay on the Senior Subordinated Secured Notes will remain at 18% per annum and will not be reduced to 12% per annum, resulting in an additional annual interest payment of approximately $75.9 million until maturity or until the
Senior Subordinated Secured Notes are earlier redeemed or repurchased.
Until our ability to satisfy the Additional
Financing Conditions is known, characterization of our rights, on the one hand, and the participants under the Principal Participation Agreement, on the other hand, is not clear for federal income tax purposes. If the Additional Financing Conditions
are not satisfied, then, absent subsequent modification of the Principal Participation Agreement, our rights to certain principal collections on assets owned by us that are subject to the Override Agreement would be viewed as having been transferred
by us to the participants in the Principal Participation Agreement. Our failure to satisfy the Additional Financing Conditions could adversely affect our ability to comply with the REIT quarterly asset tests and annual gross income tests because the
participants in the Principal Participation Agreement would be considered to have acquired ownership interests in the principal payments on the assets subject to the Override Agreement for tax purposes. If that were to occur, it is likely that it
could result in termination of our REIT status.
|
|
|
The Override Agreement may be terminated by the counterparties prior to March 2009 in certain circumstances, in which case certain of our obligations under
our Reverse Repurchase, securities lending and Forward Auction Agreements will become immediately due and payable.
|
The counterparties may terminate the Override Agreement if we do not comply with certain covenants and restrictions. For example, they may terminate if we do not pay them all of the principal and 20% (or 30% in
certain circumstances) of the interest payments received with respect to the collateral securing the Reverse Repurchase, securities lending and Forward Auction Agreements, if we fail to comply with certain obligations under the Override Agreement,
if we fail to maintain the Liquidity Reserve Fund, if we fail to take certain other actions as specified therein, or if we voluntarily or involuntarily become a debtor in a bankruptcy proceeding. In the event the Override Agreement is terminated
under these circumstances, certain of our obligations under those Reverse Repurchase, securities lending and Forward Auction Agreements may become immediately due and payable.
In addition, beginning in July 2008, the Override Agreement counterparties made a series of margin calls and have withheld funds payable to us under both the Override Agreement and warehouse
lines. These actions and the positions asserted by the counterparties are in direct conflict with our understanding of certain key features of the Override Agreement. Despite ongoing negotiations to date, we have not been able to reach a
satisfactory agreement with the Override Agreement counterparties. If we fail to reach a satisfactory agreement with the counterparties to the Override Agreement, the counterparties may attempt to terminate the Override Agreement.
|
|
|
We may not have sufficient liquidity to service our debt, particularly if the Principal Participation Agreement is not terminated.
|
We have significant indebtedness on which we must make periodic interest payments. We generally fund
the interest payments required on our indebtedness with the interest payments we receive on our mortgage-backed securities and mortgage loan assets. As a result of the issuance of the Senior Subordinated Secured Notes and the PIK Notes, our total
interest expense is significantly higher than it has historically been. Since we failed to complete the Exchange Offer and Consent Solicitation on September 30, 2008, the interest rate on the Senior Subordinated Secured Notes remains at
18% per annum, which will result in additional annual interest payments of $75.9 million on the Senior Subordinated Secured Notes until their maturity or until the Senior Subordinated Secured Notes are earlier redeemed or repurchased. Our
reverse repurchase agreements, the Senior Notes, the Senior Subordinated Secured Notes, and the Subordinated Notes are our most substantial indebtedness. The instruments governing these debts generally include cross-default features, whereby a
default under any one of our debt instruments can trigger a default on each of the other debt instruments and permit our lenders and our reverse repurchase agreement counterparties to exercise their rights against us under the related indenture,
reverse repurchase agreement, or other similar agreement. If the PPA is not terminated, the participants under that agreement will control when the mortgage-backed securities subject to reverse repurchase agreements are sold and will receive all of
the net proceeds of such sale. Without the interest income provided by those assets, it will be difficult for us to meet the interest payments due on our outstanding indebtedness. Most recently, due to our cash constraints, we requested and received
the consent of approximately 98.6% of the holders of our Senior Subordinated Secured Notes to pay the September 30, 2008 interest on these notes to them in the form of additional Senior Subordinated Secured Notes in lieu of a cash payment.
103
|
|
|
We have a substantial amount of debt and various contractual agreements that are secured by substantially all of our assets, which may limit our ability to
react to economic changes or repay our debt.
|
In connection with the Financing Transaction, we issued
$1.15 billion in aggregate principal amount of Senior Subordinated Secured Notes. In 2008, we issued additional Senior Subordinated Secured Notes in the aggregate principal amount of $102.0 million and $13.5 million, as PIK Notes and Consent Notes,
respectively, for the September 30, 2008 interest payment. We also have $305 million in aggregate principal amount of Senior Notes and approximately $224 million in aggregate principal amount of Subordinated Notes. Furthermore, our interest in
the unpaid principal amount of a substantial amount of mortgage-backed securities and our rights under any repurchase agreement, Reverse Repurchase Agreements, Swap Agreements, loan agreements and other agreements to which we are a party relating to
the foregoing were granted to the participants under the Principal Participation Agreement.
Our ability to pay our expenses
and satisfy our debt obligations, to refinance our debt obligations and to fund planned capital expenditures will depend on our future performance, which will be affected by general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt, we may be required to sell assets, refinance all or a portion of our existing debt or
obtain additional financing. We may not be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, if at all.
The Senior Subordinated Secured Notes are secured by a subordinated lien on certain of the Companys assets, including, among other things, the interest payments due from assets covered by the Override Agreement,
and guaranteed by certain of our subsidiaries. The Senior Notes are also secured by the same assets and guaranteed by the same significant subsidiaries of the Company. The security interests securing the Senior Subordinated Secured Notes and the
Senior Notes, along with our obligations under the Override Agreement and the rights granted under the Principal Participation Agreement, leave us with almost no assets that are not subject to a lien, the Override Agreement or the Principal
Participation Agreement. The resulting absence of any significant assets not subject to a lien, the Override Agreement or the Principal Participation Agreement for the foreseeable future may limit our ability to react to economic changes or obtain
additional funding if necessary. Additionally, we may be unable to refinance the Senior Notes or the Senior Subordinated Secured Notes if the Principal Participation Agreement is still in effect at the time such notes become due. If we are unable to
make timely interest, principal or other payments under these agreements, our lenders could proceed against the collateral granted to them to secure their indebtedness.
|
|
|
Our debt instruments impose restrictions on us that may adversely affect our ability to operate our business.
|
Our ability to comply with the financial covenants under the indentures governing the Senior Notes and the Senior Subordinated Secured
Notes as they currently exist or as they may be amended, may be affected by many events beyond our control and our future operating results may not allow us to comply with the covenants, or in the event of a default, to remedy that default. Our
failure to comply with those financial covenants, certain nonfinancial covenants or to comply with the other restrictions contained in indentures governing the Senior Notes or the Senior Subordinated Secured Notes could result in a default, which
could cause that indebtedness (and by reason of cross-default provisions, other indebtedness) to become immediately due and payable. If those lenders, or the lenders under our other debt agreements, accelerate the payment of such indebtedness or our
counterparties under our Reverse Purchase Agreements make margin calls, we may not be able to make payments immediately and continue to operate our business.
The indentures relating to the Senior Notes and/or the Senior Subordinated Secured Notes contain restrictive covenants that require us to maintain a specified financial ratio. In addition, the
indentures contain restrictive covenants, such as limitations on our subsidiaries ability to incur, assume or guarantee indebtedness, issue redeemable stock and preferred stock, pay dividends or distributions or redeem or repurchase capital
stock, prepay, redeem or repurchase debt that is junior in right of payment to such notes, make loans, investments and capital expenditures, incur liens, layer indebtedness, restrict dividends, loans or asset transfers from our subsidiaries, sell or
otherwise dispose of assets, including capital stock of subsidiaries, consolidate or merge with or into, or sell substantially all of our assets to, another person, enter into transactions with affiliates or enter into new lines of business. The
indenture governing the Senior Subordinated Secured Notes also prohibits us from issuing additional debt that is senior to such notes, with limited exceptions.
|
|
|
We have negative shareholders equity, which could adversely affect our financial condition and otherwise adversely impact our business and growth
prospects.
|
As of September 30, 2008, we had a Shareholders Deficit of $323.3 million,
which means our total liabilities exceeded our total assets. The existence of a Shareholders Deficit may limit our ability to obtain future debt or equity financing and cause regulatory issues as it could affect our state mortgage licenses. If
we are unable to obtain financing in the future, it could have a negative effect on our operations and our liquidity.
104
|
|
|
We face increasing competition in our market from banks and other financial institutions.
|
We may not be able to compete effectively in originating or acquiring ARM Assets, which could adversely affect our results of operations.
Our lending markets are highly competitive. The increasingly competitive environment is a result of changes in the availability and terms of credit in the mortgage finance market. Banks have access to alternative sources of mortgage financing such
as FDIC-insured deposits and Federal Home Loan Bank products which are not available to us. We also compete with government-sponsored entities such as Fannie Mae and Freddie Mac in purchasing and originating ARM Assets. These institutions that are
larger than we are may have greater access to capital markets, may be able to offer products similar to ours at lower costs and may offer a broader array of services. We also face intense competition from internet-based lending companies where entry
barriers are low. Increased competition may result in a decrease in our loan originations or a higher cost to originate loans.
Recently, the federal government has enacted several measures to stem the deterioration of the economy, including the adoption of legislation that could comparatively benefit our competitors. See Risk FactorsRisks Related to
Government RegulationNew regulatory laws affecting the mortgage industry may increase our costs and decrease our mortgage origination and acquisition.
|
|
|
We face difficulties in originating and financing jumbo loans.
|
Currently, the jumbo loan origination business is experiencing serious difficulties and we may not begin to originate mortgage loans until market conditions improve. At present, warehouse
financing is difficult to obtain and expensive to maintain, and the secondary market where we sell our securitized mortgage loans remains inactive and highly illiquid.
|
|
|
We have experienced mortgage securities downgrades from rating agencies.
|
Mortgage securities are being subjected to substantial credit evaluation by rating agencies and we have seen a significant number of our
mortgage securities get downgraded as a result of these rating agency reviews.
|
|
|
Shares of Common Stock eligible for future sale may cause the market price of the Common Stock to drop significantly, even if we return to normalized business
operations.
|
The market price of the Common Stock could decline as a result of sales or issuances of a
large number of shares of the Common Stock in the market after the Exchange Offer and Consent Solicitation or the perception that these sales could occur. Assuming 100% participation in the Exchange Offer and Consent Solicitation, the holders of the
Preferred Stock will receive approximately 132 million shares of Common Stock upon the successful completion of the Exchange Offer and Consent Solicitation. Furthermore, Additional Warrants exercisable for approximately 252 million shares
of Common Stock will be issued to the investors in the Financing Transaction upon the satisfaction of the Additional Financing Conditions. These sales or issuances, or the perception that these sales or issuances may occur, also might make it more
difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
After the
satisfaction of the Additional Financing Conditions, shareholders that collectively own or have the right to acquire upon the exercise of warrants approximately 252 million shares of Common Stock, or approximately 64% of the fully diluted
shares of Common Stock after giving effect to the issuance of Common Stock in the Exchange Offer and Consent Solicitation, assuming 100% participation in the Exchange Offer and Consent Solicitation, will have registration rights with respect to
their outstanding shares of Common Stock and shares of Common Stock issuable upon exercise of their warrants. We have filed prospectuses to allow the resale of the Common Stock issued upon the exercise of the Initial Warrants and the Override
Warrants, the Consent Shares and the shares issuable upon the exercise of the Escrow Warrants. In addition, we expect to file a prospectus for the resale of the Common Stock issuable upon the exercise of the Additional Warrants after the issuance of
such warrants. Sales of a substantial number of these shares of Common Stock, or the perception that such sales may occur, could cause our share price to fall.
|
|
|
If the Exchange Offer and Consent Solicitation is completed, we will be obligated to issue a significant number of shares of Common Stock, which will dilute
the value of our Common Stock.
|
As of November 7, 2008 we have issued and outstanding approximately
47.5 million shares of Common Stock. On March 31, 2008 we issued Initial Warrants exercisable for approximately 16.9 million shares of Common Stock which have all been exercised and on October 27, 2008 we issued Escrow Warrants for
approximately 3.16 million shares of Common Stock, all with an exercise price of $0.01 per share. Furthermore, we would issue up to 132 million shares of Common Stock in the Exchange Offer and Consent Solicitation if 100% of Preferred
Stock is tendered. Upon satisfaction of the Additional Financing Conditions we will issue Additional Warrants exercisable for approximately 252 million shares of Common
105
Stock, also with an exercise price of $0.01 per share. Upon completion of the Financing Transaction, including issuance of the Additional Warrants and
completion of a successful Exchange Offer and Consent Solicitation, we will have approximately 426 million shares of Common Stock outstanding on a fully diluted basis. This large increase in the number of outstanding shares of Common Stock
issued at a price significantly below the current market value of the Common Stock may negatively affect the market price of the Common Stock.
|
|
|
Shares of Common Stock issued in the future may cause significant further dilution to holders of Common Stock.
|
The Company is currently authorized to issue up to four billion shares of Common Stock. Upon completion of the Exchange Offer and Consent
Solicitation, and assuming 100% participation in the Exchange Offer and Consent Solicitation and the issuance of the Additional Warrants, the Company will have approximately 426 million shares of Common Stock outstanding or reserved and
approximately 3.6 billion authorized but unissued or unreserved shares of Common Stock. These currently authorized but unissued shares may be issued in the future with or without shareholder approval, subject to applicable laws and regulations.
Further, the Company may issue additional shares of Common Stock or other equity securities or Derivatives from time to time, as it seeks to reduce its debt and become more reliant on equity capital to fund its balance sheet, through
recapitalization transactions or other transactions that raise additional funds to continue or enhance its operations or otherwise. For example, the Company recently entered into an exchange agreement with certain holders of the Subordinated Notes
to exchange up to $53.5 million aggregate principal amount of such notes for up to a maximum of less than 20% of the outstanding Common Stock, or approximately 8.3 million shares of Common Stock. The exchange price for the notes is equal to 25%
of the principal amount of debt exchanged plus accrued and unpaid interest, and the number of shares received in exchange for Subordinated Notes is equal to the exchange price of the Subordinated Notes exchanged, divided by 95% of the last sale
price of Common Stock immediately prior to the exchange. Holders of Common Stock may experience significant further dilution as a result of such additional issuances.
|
|
|
The trading price of our Common Stock may be subject to significant fluctuations and volatility.
|
The stock markets have recently experienced high levels of volatility. These market fluctuations may adversely affect the trading price of
our Common Stock. In addition, the trading price of our Common Stock has been subject to significant fluctuations and may continue to fluctuate or decline. Factors that could cause fluctuations in the trading price of our Common Stock include the
following:
|
|
|
changes in our business, operations or prospects;
|
|
|
|
actual or anticipated developments in our competitors businesses or the competitive landscape generally;
|
|
|
|
catastrophic events, both natural and man-made;
|
|
|
|
governmental litigation and/or regulatory developments or considerations;
|
|
|
|
general market and economic conditions or market and economic conditions affecting our industry generally;
|
|
|
|
publication of unfavorable research reports about us or our industry or withdrawal of research reports by research analysts;
|
|
|
|
the departure of key personnel;
|
|
|
|
market assessments of the Financing Transaction and the likelihood of us returning to normalized business operations;
|
|
|
|
market assessments as to whether and when the Exchange Offer and Consent Solicitation will be consummated and market assessments of the condition, results or
prospects of our business; and
|
|
|
|
governmental actions or legislative developments affecting the mortgage industry generally.
|
|
|
|
Some of our shareholders will continue to exert significant influence over us and their interests may conflict with the interests of our other shareholders.
|
If the Additional Financing Conditions are satisfied and the Additional Warrants issued and to be
issued to the investors in the Financing Transaction and to our Reverse Repurchase Agreement counterparties are all exercised, our largest shareholders will be MatlinPatterson, which will own approximately 21.4% of our outstanding Common Stock,
assuming 100% participation in the Exchange Offer and Consent Solicitation. If the Additional Financing Conditions are not satisfied, MatlinPatterson will still be our largest single shareholder and will own approximately 15.7% of our
106
outstanding Common Stock (assuming all Warrants issued and to be issued by us to the investors and our Reverse Repurchase Agreement counterparties are
exercised). In addition, as part of the Financing Transaction, MatlinPatterson was given the right to designate up to three directors depending on its level of stock ownership, and the other new investors were given rights to designate two
directors. MatlinPatterson has currently exercised such rights for two directors, David J. Matlin and Mark R. Patterson, who were elected by the Board on April 22, 2008 to fill vacancies on the Board resulting from the resignation of two of our
former Class II directors. Messrs. Matlin and Patterson were elected to the Board of Directors for three year terms at the 2008 Annual Meeting. MatlinPatterson retains the right to designate a third director at any time during which it meets the
relevant stock ownership requirement. As a result, MatlinPatterson and the other investors will be able to exert significant influence over all matters presented to the Board or shareholders for approval.
Effective July 14, 2008, Stuart C. Sherman, a Class III director, resigned from the Board and effective July 17, 2008 Thomas F.
Cooley was elected by the Board to fill the resulting vacancy. Mr. Cooley will serve as a Class III director for a term ending at the annual meeting of shareholders to be held in 2009. Mr. Cooley was also appointed to the Audit Committee
of the Board. Mr. Cooley was recommended to the Nominating/Corporate Governance Committee by one of the investors in the Financing Transaction other than MatlinPatterson and represents one of the two directors that such other investors may
designate. The interests of the investors in the Financing Transaction may not coincide with the interests of the other holders of our Common Stock with respect to our operations or strategy. To the extent that conflicts of interest may arise, the
MatlinPatterson and the other investors and their respective affiliates may resolve those conflicts in a manner adverse to us or to you. Accordingly, this concentration of ownership may harm the market price of the Common Stock by delaying,
deferring, preventing or discouraging a change in control or a merger, consolidation, takeover or other business combination involving us.
Some of our significant shareholders may have significant investments in mortgage companies other than us. MatlinPatterson and the other investors may in the future invest in other entities that compete with us. In
addition, our directors affiliated with MatlinPatterson and the other investors may also serve as directors of other mortgage companies. These individuals may have conflicting fiduciary obligations to our shareholders and the shareholders of other
companies for which they serve as directors or in a similar capacity.
Pursuant to the TMAC Participation Agreement, MP TMAC
LLC, an affiliate of MatlinPatterson, agreed to acquire a 75% participation in certain fees and other compensation paid to the Manager by us under the Management Agreement. MP TMAC LLC (or any other participant in the TMAC Participation Agreement)
and its affiliates will exert significant control over the Manager so long as they collectively hold 30% of the TMAC Participation Agreement. See Note 12 to the Condensed Consolidated Financial Statements. We are in preliminary negotiations to
restructure the TMAC Participation Agreement, however we have not determined what the terms of an alternative arrangement would be and no assurance can be given that the TMAC Participation Agreement will be restructured.
|
|
|
Some of our directors, officers and shareholders have ownership interests in the Manager, which may create conflicts of interest.
|
The Manager is entitled to receive performance-based compensation based on our annualized return on
equity. Undue emphasis placed on maximization of our short-term return on equity at the expense of other criteria could result in increased risk to our long-term return on equity. Under the terms of the Override Agreement, this compensation can be
accrued but cannot be paid during the term of the Override Agreement.
MP TMAC LLC, an affiliate of MatlinPatterson, or any
other participant in the TMAC Participation Agreement, will exert significant control over the Manager, which may lead to conflicts of interest. See also Risks Related to Us and Our Business
Some of our shareholders will continue to
exert significant influence over us and their interests may conflict with the interests of our other shareholders
.
|
|
|
Our Common Stock may be delisted from the New York Stock Exchange.
|
Our Common Stock is currently listed on the New York Stock Exchange (the NYSE). We must satisfy certain minimum listing
maintenance requirements to maintain such listing, including maintaining a minimum bid price of $1.00 per share for the Common Stock.
On May 29, 2008, we received a letter from the New York Stock Exchange (the NYSE), stating that the we are not in compliance with the NYSEs continued listing criteria under Section 802.01C
of the NYSE Listed Company Manual because the average closing price of our Common Stock has been less than $1.00 for 30 consecutive trading days. To cure this deficiency we implemented the Reverse Split. While our Common Stock is currently trading
above $1.00, there can be no guarantee that it will continue to do so for 30 consecutive trading days. Our Common Stock may be delisted from the NYSE if we are unable to maintain a minimum bid price of $1.00 per share of Common Stock or if we fail
to satisfy any other requirement under the NYSEs continued listing requirements.
107
If our Common Stock is delisted from the NYSE, then our Common Stock may trade on the
Over-the-Counter-Bulletin Board, which is viewed by most investors as a less desirable and less liquid market place. Delisting from the NYSE could make trading our Common Stock more difficult for our investors, leading to declines in share price.
Delisting of our Common Stock would also make it more difficult and expensive for us to raise additional capital.
|
|
|
We are a defendant in purported class action lawsuits and are subject to investigations by governmental and other agencies. We may incur significant costs in
the process and ultimately may not prevail in these matters.
|
Since August 2007, several purported
class action complaints have been filed against us and our executive officers and certain directors. A number of complaints allege that we and the other named defendants violated federal securities laws by issuing false and misleading statements in
financial reports filed with the SEC, press releases and other public statements, which resulted in artificially inflated market prices of the Common Stock, and that the named plaintiff and members of the putative class purchased common stock at
these artificially inflated market prices. In addition, we are the subject of a shareholder derivative claim which alleges that certain of our officers and all of our directors violated state law, breached their fiduciary duties and were unjustly
enriched. Furthermore, we have received a notice from the SEC that it is investigating the restatement of our 2007 financial statements and other recent events and related disclosure and a notice from the NYSE that it is reviewing transactions in
our Common Stock prior to our January 9, 2008 disclosure of the impact of recent market events in the mortgage industry based on our GAAP book value. Furthermore, in October 2008, a purported class action complaint, or the Class Action
Complaint, entitled
Roney v. Thornburg, et. al.
was filed in the United States District Court, District of New Mexico. The Class Action Complaint alleges that the Company, certain of its officers, all of its current directors and
certain of its former directors violated federal securities laws by issuing false and misleading statements regarding the Companys tender offer for its outstanding Preferred Stock in proxy statements filed with the SEC in April and July 2008;
alleges that these defendants, as well as two of the Companys largest shareholders, breached their fiduciary duty to the Companys shareholders by entering into the Financing Transaction on March 31, 2008; and petitions for the
dissolution of the Company. The Class Action Complaint seeks declaratory and injunctive relief, rescission of the tender offer to the extent implemented, recovery of the costs and expenses of the action and other relief that may be granted by the
court. See Part II, Item 1 Legal Proceedings for more information on these pending litigation matters. See Part II, Item 1 Legal Proceedings for more information on these pending litigation matters.
We may incur defense costs and other expenses in connection with the class action lawsuits and investigations, and we cannot assure you
that the ultimate outcome of these or other actions or proceedings will not have a material adverse effect on our financial condition or results of operations. In addition to the expense and burden incurred in connection with these proceedings and
investigations and any damages or fines that we may suffer, our managements efforts and attention may be diverted from the ordinary business operations in order to address these claims. If the final resolution of any of these matters is
unfavorable to us and if our existing insurance coverage is unavailable or inadequate to resolve the matters, our financial condition, results of operations and cash flows might be materially and adversely affected.
|
|
|
Certain provisions of our articles of incorporation and bylaws and Maryland law may prevent a change of control of us that would result in a premium paid to
our shareholders.
|
Our articles of incorporation and bylaws, and the Maryland General Corporation Law
contain provisions that could delay, defer, or prevent a transaction or a change of control of us that might involve a premium price for holders of our capital stock or otherwise be in their best interests by increasing the associated costs and time
necessary to make an acquisition, making the process for acquiring a sufficient number of shares of our capital stock to effectuate or accomplish such a change of control longer and more costly. Furthermore, our articles of incorporation prohibits
any person or persons acting as a group from owning, directly or indirectly, a number of shares of our capital stock aggregating in excess of 9.8% of the outstanding shares of our capital stock, absent a waiver approved by our Board.
In addition, investors may refrain from attempting to cause a change in control because of the difficulty associated with such a venture
because of these limitations.
|
|
|
Interest rate changes and other factors may significantly impact our book value.
|
Increases in interest rates may result in a decline in the fair value of our ARM Assets that may not be fully offset by the value of our
hedging instruments. A decrease in the fair value of our ARM securities may result in a significant reduction of our book value due to the accounting standards that we are required to follow.
108
The fair value of the Hedging Instruments we use to manage our interest rate risk may
decline during periods of declining interest rates and may not be fully offset by increases in the value of our ARM Assets, materially and adversely affecting our book value because of the accounting standards that we are required to follow.
Our calculation of Effective Duration and Net Effective Duration are estimates based on assumptions about the expected
behavior of our assets, liabilities and hedging instruments that may prove to be empirically incorrect, and our effective duration and net effective duration change with every change in interest rates. As a result, our actual exposure to changes in
interest rates could be different than that implied by our effective duration calculation.
A further decline in the market
value of our ARM Assets or other assets may require us to recognize an other-than-temporary impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have
the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize further unrealized losses through
earnings and write down the amortized cost of such assets to a new cost basis, based on the fair market value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at
the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of
sale.
|
|
|
We leverage our long term capital, which consists of equity and unsecured debt, with borrowed money to fund the purchase of additional ARM Assets. A
significant contributor to our earnings is the interest spread between the yield on our ARM Assets and the cost of our borrowings.
|
Like traditional banking institutions, our income is generated primarily from the net spread or difference between the interest income we earn on our ARM Assets and the cost of our borrowings. Our strategy is to
maximize the long-term sustainable difference between the yield on our ARM Assets and the cost of financing these assets, and to maintain that difference through interest rate and credit cycles.
All of the risks highlighted herein could be magnified because we use borrowed funds to acquire additional ARM Assets for our portfolio.
We have a policy to operate with an Adjusted Equity-to-Assets Ratio of at least 8%. At September 30, 2008, we were operating at an Adjusted Equity-to-Assets Ratio of 18.13%. If we fall below this ratio, the adverse impact on our financial
condition and results of operations from the types of risks described in this section would likely be more severe.
Future
increases in the amount by which the collateral value is required to contractually exceed the repurchase agreement loan amount, decreases in the market value of our assets, increases in interest rate volatility and changes in the availability of
adequate financing could cause us to be unable to achieve the degree of leverage we believe to be optimal. Our ability to borrow and our cost of borrowing could be further adversely affected by deterioration in the quality or fair value of our ARM
Assets or by the general availability of credit in the mortgage finance market.
We borrow funds in the Reverse Repurchase
Agreement market and through whole loan financing facilities, based on the fair value of our ARM Assets less a margin amount. If the fair value of our ARM Assets declines, our lenders opinion about the fair value of our ARM Assets changes or
our margin requirements increase, we could be subject to margin calls that would require us to either pledge additional ARM Assets as collateral or reduce our borrowings. If we did not have sufficient unpledged assets or liquidity to meet these
requirements, we may need to sell assets again under adverse market conditions or at losses to satisfy our lenders. Alternatively, lenders may terminate their lending agreements and sell the pledged assets without our knowledge should we default
under any of these lending agreements. Additionally, in the event of our bankruptcy, our borrowings under repurchase agreements may qualify for special treatment under the Bankruptcy Code. This special treatment would allow the lenders under these
agreements to avoid the automatic stay provisions of the Bankruptcy Code and to liquidate the collateral under these agreements without delay.
The interest rate adjustment or repricing characteristics of our ARM Assets and borrowings may not be perfectly matched. Our borrowings are tied primarily to the LIBOR interest rates, while our assets may be indexed
either to LIBOR or to various other interest rate indices. In general, the interest rates on our borrowings adjust more frequently than the interest rates on our ARM Assets. If the interest rates on our borrowings increase relative to the interest
rate on our assets, our earnings or book value could be adversely affected to the extent of the difference. Rising interest rates could adversely affect our operations and dividends if the interest payments that we must make on our borrowings rise
faster than the interest income we earn on our ARM Assets. Declining interest rates could adversely affect our operations and dividends if the interest income we receive on our ARM Assets declines more quickly than the interest payments that we must
make on our borrowings.
If we are unable to re-finance our Reverse Repurchase Agreements and whole loan financing
facilities, on favorable terms or at all, our liquidity and capital resources could be materially and adversely affected. Furthermore, the Override Agreement limits us from entering into any new transactions under existing, or entering into any new,
Reverse Repurchase Agreements, secured lending agreements or auction swap agreements or delivering additional collateral there under.
Some of our ARM Assets have caps that limit the amount that the interest rate can change for a given change in an underlying index. Our borrowings do not have similar limitations. If the interest rate change on our
ARM Assets is limited while the interest rates on our borrowings increase, our portfolio margins and operations may be adversely affected.
109
|
|
|
Our hedging strategy may expose us to risks.
|
We employ various hedging and funding strategies to minimize the adverse impact that changing interest rates might have on our operations, but our strategies may prove to be less effective in
practice than we anticipate, or our ability to use such strategies may be limited due to our need to comply with federal income tax requirements that are necessary to preserve our REIT status.
During periods of economic or interest rate uncertainty, the value of our hedging instruments may not move in the opposite direction as
the value of our mortgage assets, counteracting potential negative consequences. Because we must collateralize the market value change in our mortgage assets and our hedging instruments, if these values do not offset each other, we could experience
further negative pressure on liquidity and cash flow.
We enter into interest rate swap and cap agreements to hedge risks
associated with movements in interest rates. If a swap counterparty cannot perform under the terms of an interest rate swap, we would not receive payments due under that agreement, we may lose any unrealized gain associated with the interest rate
swap, and the hedged liability would cease to be hedged by the interest rate swap. We may also be at risk for any collateral we have pledged to secure our obligations under the interest rate swap if the counterparty becomes insolvent or files for
bankruptcy. Similarly, if a cap counterparty fails to perform under the terms of the cap agreement, in addition to not receiving payments due under that agreement that would off-set our interest expense, we would also incur a loss for all remaining
unamortized premium paid for that agreement.
|
|
|
Our mortgage assets may be prepaid at any time at the borrowers option.
|
Mortgage prepayment rates typically rise during falling interest rate environments. If our mortgages are prepaid, the prepayment proceeds
may be invested in lower yielding assets, thus reducing our income from operations.
Mortgage prepayment rates typically
fall during rising interest rate environments. If our mortgages are not prepaid, we would have less cash flow to use to purchase new mortgage assets in a higher interest rate environment, potentially adversely affecting operations.
We purchase and originate ARM Assets at prices greater than par. In accordance with GAAP, we amortize the premiums over the expected life
of the ARM Asset. If the mortgage loans securing our ARM Assets prepay at a rapid rate, we will have to expense the unamortized premiums at the time of prepayment which may adversely affect our profitability. To the extent that we have purchased
such assets, our yields, spreads and operations could be adversely affected if mortgage prepayment rates are greater than anticipated at the time of acquisition or if the index upon which the floating rate period interest rate is calculated declines
because we would have to amortize the premiums at a faster rate.
|
|
|
Representations and warranties made by us in our loan sales and securitizations may subject us to liability.
|
In connection with our loan sales to third parties and our securitizations, we transfer mortgages acquired and originated by us to the
third parties or into a trust in exchange for cash and, in the case of a securitized mortgage, residual certificates issued by the trust. The trustee or purchaser will have recourse to us with respect to the breach of the standard representations
and warranties made by us at the time such mortgages are transferred. While we may have recourse to our customers for any such breaches, our customers may not have the ability to honor their respective obligations. Also, we engage in bulk whole loan
sales pursuant to agreements that generally provide for recourse by the purchaser against us in the event of a breach of one of our representations or warranties, any fraud or misrepresentation during the mortgage origination process, or upon early
default on such mortgage. We attempt to limit the potential remedies of such purchasers to the potential remedies we receive from the customers from whom we acquired or originated the mortgages. However, in some cases, the remedies available to a
purchaser of mortgages from us may be broader or extend longer than those available to us against the sellers of the mortgages and should a purchaser enforce its remedies against us, we are not always able to enforce whatever remedies we have
against our customers. Furthermore, if we discover, prior to the sale or transfer of a loan, that there is any fraud or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may not be able to
sell the mortgage or we may have to sell the mortgage at a discount.
In the ordinary course of our business, we may be
subject to claims made against us by borrowers, purchasers of our loans, and trustees in our securitizations arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations,
misrepresentations, errors and omissions of our employees, officers and agents (including appraisers), incomplete documentation and our failure to comply with various laws and regulations applicable to our business. Any claims asserted against us
may result in legal expenses or liabilities that could have a material adverse effect on our results of operations or financial condition.
110
|
|
|
Our mortgage loan originations are dependent on external factors.
|
We utilize third-party providers who specialize in the underwriting, processing, servicing, closing and warehousing of mortgage loans. We
are dependent upon the availability and quality of the performance of such providers. Such providers may not successfully perform the services for which we engage them.
As a mortgage lender, we are subject to changes in consumer and real estate-related laws and regulations that could subject us to lawsuits or adversely affect our profitability or ability to
remain competitive.
We must comply with the applicable licensing and other regulatory requirements of each jurisdiction in
which we are authorized to lend and at the federal level. We are subject to examination by federal, state and local authorities, and if it is determined that we are not in compliance with the applicable requirements, we may be fined, our license to
lend may be suspended or revoked and/or we may be required to change the way we conduct our business.
We are competing for
mortgage loans against much larger, better-known mortgage originators that could affect our ability to acquire or originate ARM Assets at attractive yields and spreads.
ARM Assets may not always be readily available for purchase or origination in the marketplace at attractive yields because their availability is somewhat dependent on the relationship between
30-year fixed-rate mortgage rates and ARM rates.
During the third quarter of 2008, we did not originate any loans due to
our limited liquidity. We do not know whether these originations will increase in the future.
|
|
|
Our REIT qualification creates certain risks.
|
The requirements to qualify as a REIT for U.S. federal income tax purposes are complex and technical and we may not be able to qualify for reasons beyond our control. A failure to qualify as a
REIT could subject our earnings to taxation at regular corporate rates, thereby reducing the amount of money available for distributions to our shareholders and for payment of principal and interest on our borrowings.
The REIT tax rules require that we distribute at least 90% of our earnings as dividends, leaving us limited ability to maintain our future
dividend payments if our earnings decline.
Because we must distribute at least 90% of our earnings to shareholders in the
form of dividends, we have a limited amount of capital available to internally fund our growth.
Additionally, because we
cannot retain significant earnings to grow, we must issue additional shares of stock or borrow funds to grow, which could result in the dilution of our outstanding stock and an accompanying decrease in its market price.
Changes in tax laws related to REIT qualifications or taxation of dividends could adversely affect us.
If we are compelled to liquidate our investment securities, we may be unable to comply with these requirements, ultimately jeopardizing
our status as a REIT and our failure to qualify as a REIT will have adverse tax consequences.
Risks Related to
Government Regulation
|
|
|
Violation of various federal, state and local laws may result in losses on our loans.
|
Applicable state and local laws generally regulate interest rates and other charges, require certain disclosure, and require licensing of
the mortgage broker, lender and purchaser. In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of our loans. Mortgage loans are also subject to federal laws, including:
|
|
|
the Federal Truth-in-Lending Act and Regulation Z promulgated there under, which require certain disclosures to the borrowers regarding the terms of the loans;
|
|
|
|
the Equal Credit Opportunity Act and Regulation B promulgated there under, which prohibit discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit;
|
|
|
|
the Fair Housing Act, which prohibits discrimination in housing on the basis of race, color, national origin, religion, sex, familial status, or handicap, in
housing-related transactions;
|
|
|
|
the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrowers credit experience;
|
|
|
|
the Fair and Accurate Credit Transaction Act, which regulates credit reporting and use of credit information in making unsolicited offers of credit;
|
|
|
|
the Gramm-Leach-Bliley Act, which imposes requirements on all lenders with respect to their collection and use of nonpublic financial information and requires
them to maintain the security of that information;
|
111
|
|
|
the Real Estate Settlement Procedures Act, which requires that consumers receive disclosures at various times and outlaws kickbacks that increase the cost of
settlement services;
|
|
|
|
the Home Mortgage Disclosure Act, which requires the reporting of public loan data;
|
|
|
|
the Telephone Consumer Protection Act and the Can Spam Act, which regulate commercial solicitations via telephone, fax, and the Internet;
|
|
|
|
the Depository Institutions Deregulation and Monetary Control Act of 1980, which preempts certain state usury laws; and
|
|
|
|
the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws which regulate alternative mortgage transactions.
|
Violations of certain provisions of these federal and state laws may limit our ability to collect all or
part of the principal of or interest on the loans and in addition could subject us to damages and could result in the mortgagors rescinding the loans whether held by us or subsequent holders of the loans. In addition, such violations may cause us to
be in default under our credit and repurchase facilities and could result in the loss of licenses held by us. Similarly, it is possible borrowers may assert that the loan forms we use or acquire, including forms for interest-only and
option-ARM loans for which there is little standardization or uniformity, fail to properly describe the transactions they intended, or that our forms fail to comply with applicable consumer protection statutes or other federal and state
laws. This could result in liability for violations of certain provisions of federal and state consumer protection laws and our inability to sell the loans and our obligation to repurchase the loans or indemnify the purchasers.
|
|
|
New regulatory laws affecting the mortgage industry may increase our costs and decrease our mortgage origination and acquisition.
|
The regulatory environments in which we operate have an impact on the activities in which we may
engage, how the activities may be carried out, and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, in
December 2007 the Federal Reserve proposed amendments to Regulation Z, which would (1) prohibit lenders from paying mortgage brokers yield spread premiums that exceed the amount the consumer had agreed in advance the broker would
receive; (2) prohibit certain servicing practices, such as failing to credit a payment to a consumers account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and
pyramiding late fees; (3) prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home; prohibit seven misleading or deceptive advertising practices for closed-end loans; for example,
using the term fixed to describe a rate that is not truly fixed and (4) require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or teaser rates.
Similarly, recently enacted and proposed local, state and federal privacy laws and laws prohibiting or limiting marketing by telephone, facsimile, email and the Internet may limit our ability to market and our ability to access potential loan
applicants. For example, the Can Spam Act of 2003 establishes the first national standards for the sending of commercial email allowing, among other things, unsolicited commercial email provided it contains certain information and an opt-out
mechanism. We cannot provide any assurance that the proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future. Adoption of these laws and regulations could have a material adverse impact on
our business by substantially increasing the costs of compliance with a variety of inconsistent federal, state and local rules, or by restricting our ability to charge rates and fees adequate to compensate us for the risk associated with certain
loans.
Some states and local governments and the federal government have enacted, or may enact, laws or regulations that
prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. Our
failure to comply with these laws could subject us to monetary penalties and could result in the borrowers rescinding the mortgage loans, whether held by us or subsequent holders. Lawsuits have been brought in various states making claims against
assignees of these loans for violations of state law. Compliance with some of these restrictions requires lenders to make subjective judgments, such as whether a loan will provide a net tangible benefit to the borrower. These
restrictions expose a lender to risks of litigation and regulatory sanction no matter how carefully a loan is underwritten and impact the way in which a loan is underwritten. The remedies for violations of these laws are not based solely on actual
harm to the consumer and can result in damages that exceed the loan balance. Liability for violations of Home Ownership and Equity Protection Act, as well as violations of many of the state and local equivalents, could extend not only to us, but to
our secured warehouse lenders, institutional purchasers of our loans, securitization trusts that hold our loans and other assignees, regardless of whether such assignee knew of or participated in the violation.
Recently, the federal government has enacted several measures to stem the deterioration of the economy, including the adoption of
legislation that directly or indirectly could affect our business. Certain of these measures, such as the Emergency Economic Stabilization Act of 2008, contain provisions that could be utilized by certain financial institutions that may be our
competitors, but are not available to us at the current time. As such, we may not benefit from such measures to the same degree as certain of our competitors. Furthermore, the full impact of the recent legislation is unknown at the current time and
there may be further changes to the regulatory landscape in which we operate that may have a negative impact on us.
112
Some states and local governments and the federal government have enacted, or may enact,
laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such
mortgage loans. Our failure to comply with these laws could subject us to monetary penalties and could result in the borrowers rescinding the mortgage loans, whether held by us or subsequent holders. Lawsuits have been brought in various states
making claims against assignees of these loans for violations of state law. Compliance with some of these restrictions requires lenders to make subjective judgments, such as whether a loan will provide a net tangible benefit to the
borrower. These restrictions expose a lender to risks of litigation and regulatory sanction no matter how carefully a loan is underwritten and impact the way in which a loan is underwritten. The remedies for violations of these laws are not based
solely on actual harm to the consumer and can result in damages that exceed the loan balance. Liability for violations of the Home Ownership and Equity Protection Act, as well as violations of many of the state and local equivalents, could extend
not only to us, but to our secured warehouse lenders, institutional purchasers of our loans, securitization trusts that hold our loans and other assignees, regardless of whether such assignee knew of or participated in the violation.
Furthermore, various federal and state laws impose significant privacy or customer information security obligations which may subject us
to additional costs and legal risks and we cannot assure you that we will not be subject to lawsuits or compliance actions under such requirements. Similarly, various state and federal laws have been enacted to restrict unsolicited advertising using
telephones, facsimile machines and electronic means of transmission. These laws and regulations could have a material adverse impact on our business by substantially increasing the costs of compliance or by subjecting us to lawsuits or compliance
actions.
In addition to changes to legal requirements contained in statutes, regulations, case law, and other sources of
law, changes in the investigation or enforcement policies of federal and state regulatory agencies could impact the activities in which we may engage, how the activities may be carried out, and the profitability of those activities. For example,
state and federal agencies have initiated regulatory enforcement proceedings against mortgage companies for engaging in business practices that were not specifically or clearly proscribed by law, but which in the judgment of the regulatory agencies
were unfair or deceptive to consumers. Federal and state regulatory agencies might also determine in the future that certain of our business practices not presently proscribed by any law and not the subject of previous enforcement actions are unfair
or deceptive to consumers. If this happens, it could impact the activities in which we may engage, how we carry out those activities, and our profitability. We might also be required to pay fines, make reimbursements, and make other payments to
third parties for past business practices.
|
|
|
We may be subject to fines or other penalties based upon the conduct of our independent brokers or correspondents.
|
The mortgage brokers and correspondents from which we obtain mortgages have parallel and separate legal obligations to which they are
subject. While these laws may not explicitly hold the originating lenders or an acquirer of the loan responsible for the legal violations of mortgage bankers and brokers, increasingly federal and state agencies have sought to impose such liability.
Previously, for example, the United States Federal Trade Commission (the FTC) entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its loan production with a single lender
as the agent of the lender; the FTC imposed a fine on the lender in part because, as principal, the lender was legally responsible for the mortgage brokers unfair and deceptive acts and practices. The United States
Department of Justice, various state attorney generals, and other state officials have sought to hold certain mortgage lenders responsible for the pricing practices of their mortgage bankers and brokers, alleging that the mortgage lender was
directly responsible for the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage banker could charge nor kept the money for its own account. Accordingly, we may be subject to
fines or other penalties based upon the conduct of our independent mortgage bankers, brokers or correspondents.
|
|
|
Our operations may be adversely affected if we are subject to the Investment Company Act.
|
We conduct our business so as not to become regulated as an investment company under the Investment Company Act of 1940, as amended (the
Investment Company Act). The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. If we were to become
regulated as an investment company, our use of leverage would be substantially reduced and we would not be able to operate as we currently do. Our business will be materially and adversely affected if we fail to qualify for this exemption.
113
Item 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
Item 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
On
January 4, 2008, the Company declared a quarterly dividend of $0.63723 per share of Series F Preferred Stock, which was paid on February 15, 2008 to shareholders of record on January 31, 2008. On March 24, 2008, the Board of
Directors of the Company determined that the Company did not have sufficient liquidity to make its next scheduled payments of dividends on Preferred Stock and indefinitely suspended the payment of dividends on all series of Preferred Stock.
Therefore, dividends were neither declared nor paid on the Series C, D or E Preferred Stock on April 15, 2008 and the Company has not declared or paid dividends on the Series F Preferred Stock since February 15, 2008. Dividends on
Preferred Stock accumulate whether or not the Company has earnings, whether or not there are funds legally available for their payment and whether or not such dividends have been declared. Therefore, the Company had unpaid cumulative unpaid
dividends which were not yet declared as of September 30, 2008. Cumulative unpaid dividends on Preferred Stock totaled $67.3 million at September 30, 2008. However, at the Companys annual meeting of shareholders held on June 12,
2008, shareholders approved amendments to the Companys charter to increase the number of authorized shares of capital stock from 500 million to 4 billion shares and to modify the terms of each of the Companys existing series of
Preferred Stock to, among other things, remove restrictive covenants that currently prohibit the Company from purchasing Preferred Stock when all cumulative dividends on the related series of Preferred Stock have not been paid in full, make the
dividend payments on the Preferred Stock noncumulative, eliminate all accrued but unpaid dividends and eliminate substantially all voting rights of the preferred shareholders. The Company must still obtain the requisite consents from the holders of
each series of Preferred Stock to the modification of the terms of the Preferred Stock before those modifications can become effective. The Company is seeking such consents in connection with the Exchange Offer and Consent Solicitation.
Item 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None
Item 5.
|
OTHER INFORMATION
|
None
See Exhibit
Index
114
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
THORNBURG MORTGAGE, INC.
|
|
|
(Registrant)
|
|
|
Dated: November 12, 2008
|
|
/s/ Larry A. Goldstone
|
|
|
Larry A. Goldstone
|
|
|
President and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
Dated: November 12, 2008
|
|
/s/ Clarence G. Simmons, III
|
|
|
Clarence G. Simmons, III
|
|
|
Senior Executive Vice President and Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
115
Exhibit Index
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
3.1
|
|
Articles of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 filed with the registrants registration statement on Form S-11, which
went effective on June 18, 1993)
|
|
|
3.1.1
|
|
Articles of Amendment to Articles of Incorporation dated June 29, 1995 (incorporated herein by reference to Exhibit 3.1 filed with the registrants quarterly report
on Form 10-Q for the quarter ended September 30, 1995)
|
|
|
3.1.2
|
|
Articles of Amendment to Articles of Incorporation dated April 26, 2000 (incorporated herein by reference to Exhibit 3.1.3 filed on May 8, 2000 with the registrants
quarterly report on Form 10-Q for the quarter ended March 31, 2000)
|
|
|
3.1.3
|
|
Articles of Amendment to Articles of Incorporation dated April 29, 2002 (incorporated herein by reference to Exhibit 3.1.5 filed on May 14, 2002 with the registrants
quarterly report on Form 10-Q for the quarter ended March 31, 2002)
|
|
|
3.1.4
|
|
Articles Supplementary for 8% Series C Cumulative Redeemable Preferred Stock dated March 18, 2005 (incorporated herein by reference to Exhibit 3.1.6 filed on March 21,
2005 with the registrants registration statement on Form 8-A)
|
|
|
3.1.5
|
|
Articles Supplementary for 8% Series C Cumulative Redeemable Preferred Stock dated May 27, 2005 (incorporated herein by reference to Exhibit 3.1.7 filed on May 31, 2005
with the registrants current report on Form 8-K)
|
|
|
3.1.6
|
|
Articles Supplementary for Series D Adjusting Rate Cumulative Redeemable Preferred Stock dated November 17, 2006 (incorporated herein by reference to Exhibit 3.1.8 filed
on November 20, 2006 with the registrants registration statement on Form 8-A)
|
|
|
3.1.7
|
|
Articles Supplementary for 7.50% Series E Cumulative Convertible Redeemable Preferred Stock dated June 18, 2007 (incorporated herein by reference to Exhibit 3.1.9 filed on
June 19, 2007 with the registrants registration statement on Form 8-A)
|
|
|
3.1.8
|
|
Articles Supplementary for 10% Series F Cumulative Convertible Redeemable Preferred Stock dated September 4, 2007 (incorporated herein by reference to Exhibit 3.1.10 filed
on September 5, 2007 with the registrants registration statement on Form 8-A)
|
|
|
3.1.9
|
|
Articles Supplementary for 10% Series F Cumulative Convertible Redeemable Preferred Stock dated January 15, 2008 (incorporated herein by reference to Exhibit 3.1.11 filed
on January 16, 2008 with the registrants current report on Form 8-K)
|
|
|
3.1.10
|
|
Articles Supplementary Relating to the Reclassification dated March 28, 2008 (incorporated herein by reference to Exhibit 3.1 filed on April 2, 2008 with the
registrants current report on Form 8-K)
|
|
|
3.1.11
|
|
Articles of Amendment to Articles of Incorporation, dated June 13, 2008 (incorporated herein by reference to Exhibit 3.1 filed on June 13, 2008 with the registrants
current report on Form 8-K).
|
|
|
3.1.12
|
|
Articles of Amendment to Articles of Incorporation, dated September 26, 2008 (incorporated herein by reference to Exhibit 3.1 filed on September 26, 2008 with the
registrants current report on Form 8-K).
|
|
|
3.2
|
|
Amended and Restated Bylaws dated April 22, 2008 (incorporated herein by reference to Exhibit 3.2 filed with the registrants current report on Form 8-K on April 28,
2008)
|
116
|
|
|
|
|
4.1
|
|
Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.3 filed on March 28, 2001 with the registrants annual report on Form 10-K for the
year ended December 31, 2000)
|
|
|
4.2
|
|
Form of Preferred Stock Certificate for 8% Series C Cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit 4.7 filed on March 21, 2005 with the
registrants registration statement on Form 8-A)
|
|
|
4.3
|
|
Form of Preferred Stock Certificate for Series D Adjusting Rate Cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit 4.12 filed on November
20, 2006 with the registrants registration statement on Form 8-A)
|
|
|
4.4
|
|
Form of Preferred Stock Certificate for 7.50% Series E Cumulative Convertible Redeemable Preferred Stock (incorporated herein by reference to Exhibit 4.13 filed on June
19, 2007 with the registrants registration statement on Form 8-A)
|
|
|
4.5
|
|
Form of Preferred Stock Certificate for 10% Series F Cumulative Convertible Redeemable Preferred Stock (incorporated herein by reference to Exhibit 4.14 filed on September
5, 2007 with the registrants registration statement on Form 8-A)
|
|
|
4.6
|
|
Indenture between the Registrant and Deutsche Bank Trust Company Americas, dated as of May 15, 2003 (incorporated herein by reference to Exhibit 10.11 filed on May 28,
2003 with the registrants current report on Form 8-K)
|
|
|
4.6.1
|
|
First Supplemental Indenture between the Registrant and Deutsche Bank Trust Company Americas, dated as of May 15, 2003 (incorporated herein by reference to Exhibit 10.11.1
filed on May 28, 2003 with the registrants current report on Form 8-K)
|
|
|
4.6.2
|
|
Second Supplemental Indenture to Senior Note Indenture dated as of March 31, 2008 by and between Thornburg Mortgage, Inc., the Guarantors signatories thereto, and Deutsche
Bank Trust Company Americas as Trustee (incorporated herein by reference to Exhibit 4.2 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
4.7
|
|
Form of Exchange Global Note (incorporated herein by reference to Exhibit 4.4 filed on December 19, 2003 with the registrants registration statement on Form S-4)
|
|
|
4.8
|
|
Form of Global Note (incorporated herein by reference to Exhibit 4.8 filed on November 24, 2004 with the registrants current report on Form 8-K)
|
|
|
4.9
|
|
Junior Subordinated Indenture between the registrant, Thornburg Mortgage Home Loans, Inc. and Wells Fargo Bank, N.A., dated as of September 28, 2005 (incorporated herein
by reference to Exhibit 4.7 filed on October 3, 2005 with the registrants current report on Form 8-K)
|
|
|
4.10
|
|
Form of Junior Subordinated Note (incorporated herein by reference to Section 2.1 of Exhibit 4.7 filed on October 3, 2005 with the registrants current report on Form
8-K)
|
|
|
4.11
|
|
Junior Subordinated Indenture between the registrant, Thornburg Mortgage Home Loans, Inc. and Wells Fargo Bank, N.A., dated as of December 22, 2005 (incorporated herein by
reference to Exhibit 4.8 filed on December 28, 2005 with the registrants current report on Form 8-K)
|
|
|
4.12
|
|
Form of Junior Subordinated Note (incorporated herein by reference to Section 2.1 of Exhibit 4.8 filed on December 28, 2005 with the registrants current report on
Form 8-K)
|
|
|
4.13
|
|
Senior Subordinated Secured Note Indenture dated as of March 31, 2008 between Thornburg Mortgage, Inc., the Note Guarantors signatories thereto and Wilmington Trust
Company as Trustee (incorporated herein by reference to Exhibit 4.1 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
4.13.1
|
|
First Supplemental Indenture dated as of September 30, 2008 between Thornburg Mortgage, Inc., the Note Guarantors signatories thereto and Wilmington Trust Company as
Trustee (incorporated by reference to Exhibit 4.1 filed on October 6, 2008 with the registrants current report on Form 8-K).
|
|
|
4.14
|
|
Form of Senior Subordinated Secured Note (included in Exhibit 4.13)
|
|
|
4.15
|
|
Amendment to Shareholder Rights Agreement dated as of April 1, 2008 between Thornburg Mortgage, Inc. and American Stock Transfer and Trust Company (incorporated herein by
reference to Exhibit 4.1 filed on April 2, 2008 with the registrants current report on Form 8-K)
|
|
|
10.1
|
|
Amendment No. 1 to Amended and Restated Management Agreement dated as of March 31, 2008 between Thornburg Mortgage, Inc. and Thornburg Mortgage Advisory Corporation
(incorporated herein by reference to Exhibit 10.1 filed on April 2, 2008 with the registrants current report on Form 8-K)
|
117
|
|
|
|
|
10.1.1
|
|
Amendment No. 2 to Amended and Restated Management Agreement dated as of April 22, 2008 between Thornburg Mortgage, Inc. and Thornburg Mortgage Advisory Corporation
(incorporated herein by reference to Exhibit 10.1 filed on April 28, 2008 with the registrants current report on Form 8-K)
|
|
|
10.2
|
|
Override Agreement dated as of March 17, 2008 by and among Thornburg Mortgage, Inc., Thornburg Mortgage Hedging Strategies, Inc. and Greenwich Capital Markets, Inc., Royal
Bank of Scotland PLC, Greenwich Capital Derivatives Inc., Bear Stearns Investment Products Inc., Citigroup Global Markets Limited, Credit Suisse Securities (USA) LLC, UBS Securities LLC and Credit Suisse International (incorporated herein by
reference to Exhibit 10.1 filed on March 19, 2008 with the registrants current report on Form 8-K)
|
|
|
10.3
|
|
Amendment No. 1 to Override Agreement dated as of March 27, 2008 by and among Thornburg Mortgage Inc., Thornburg Mortgage Hedging Strategies, Inc. and Greenwich Capital
Markets, Inc., Royal Bank of Scotland PLC, Greenwich Capital Derivatives Inc., Bear Stearns Investment Products Inc., Citigroup Global Markets Limited, Credit Suisse Securities (USA) LLC, UBS Securities LLC and Credit Suisse International
(incorporated herein by reference to Exhibit 10.1 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
10.4
|
|
Security Agreement relating to Override Agreement dated as of April 1, 2008 among Thornburg Mortgage, Inc., each other Lien Grantor Party thereto, each Counterparty
thereto and Credit Suisse Securities (USA) LLC as Collateral Agent (incorporated herein by reference to Exhibit 10.2 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
10.5
|
|
Purchase Agreement dated as of March 31, 2008 by and among Thornburg Mortgage, Inc. and the Subscriber signatories thereto (incorporated herein by reference to Exhibit
10.3 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
118
|
|
|
|
|
10.6
|
|
Form of Amendment No. 1 to Purchase Agreement and Consent of Majority Participants dated September 30, 2008 (incorporated herein by reference to Exhibit 10.1 filed
with the Companys Current Report on Form 8-K on July 3, 2008).
|
|
|
10.7
|
|
Registration Rights Agreement related to the Senior Subordinated Secured Notes dated March 31, 2008 by and among Thornburg Mortgage, Inc., the Guarantors signatories
thereto and the Purchasers signatories thereto (incorporated herein by reference to Exhibit 10.4 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
10.8
|
|
Warrant Agreement dated as of March 31, 2008 among Thornburg Mortgage, Inc. and the Warrant Holders signatories thereto (incorporated herein by reference to Exhibit 10.5
filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
10.9
|
|
Form of Warrant (included in Exhibit 10.7)
|
|
|
10.10
|
|
Principal Participation Agreement dated as of March 31, 2008 among Thornburg Mortgage, Inc. and the Participants signatories thereto (incorporated herein by reference to
Exhibit 10.6 filed on April 4, 2008 with the registrants current report on Form 8-K)
|
|
|
10.11
|
|
Warrant Agreement dated as of April 1, 2008 among Thornburg Mortgage, Inc. and the Warrant Holders signatories thereto.(incorporated herein by reference to Exhibit 10.11
filed on August 25, 2008 with the registrants quarterly report on Form 10-Q for the quarter ended June 30, 2008).
|
|
|
10.12
|
|
Form of Warrant (included in Exhibit 10.11)
|
|
|
10.13
|
|
Form of Amendment No. 1 to Principal Participation Agreement dated September 30, 2008 (incorporated herein by reference to Exhibit 10.1 filed with the Companys
Current Report on Form 8-K on July 3, 2008).
|
|
|
10.14
|
|
Form of Amendment No. 1 to Escrow Agreement dated September 30, 2008 (incorporated herein by reference to Exhibit 10.1 filed with the Companys Current Report on Form
8-K on July 3, 2008).
|
|
|
10.15
|
|
Consent of Majority Participants dated April 30, 2008 (incorporated herein by reference to Exhibit 10.1 filed with the Companys Current Report on Form 8-K on July 3,
2008).
|
|
|
10.16
|
|
Consent of Majority Participants dated July 10, 2008 (incorporated herein by reference to Exhibit 10.1 filed with the Companys Current Report on Form 8-K on July 10,
2008).
|
|
|
10.17
|
|
Consent of Majority Participants dated September 30, 2008 (incorporated herein by reference to Exhibit 10.1 filed with the Companys Current Report on Form 8-K on
October 6, 2008).
|
|
|
31.1
|
|
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934*
|
|
|
31.2
|
|
Certification of Senior Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934*
|
|
|
32.1
|
|
Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
|
|
32.2
|
|
Certification of Senior Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
|
119
GLOSSARY
There follows a definition of certain capitalized and other terms and abbreviations used in this Quarterly Report on Form 10-Q.
Additional Warrants means the warrants, issuable in connection with the Financing Transaction, upon
satisfaction of the Additional Financing Conditions, to the holders of the interest in the terminated Principal Participation Agreement to purchase that number of shares of Common Stock which, when added to the shares of Common Stock issuable upon
the exercise of the Initial Warrants and Escrow Warrants previously issued to investors, will constitute 90% of the shares of Common Stock (or approximately 252 million shares of Common Stock) outstanding on a fully diluted basis after giving
effect to such issuance and all anti-dilution adjustments in all existing instruments and agreements of the Company and will constitute 63.8% of the fully diluted shares of Common Stock after giving effect to the issuance of Common Stock in the
Exchange Offer and Consent Solicitation, assuming 100% participation in the Exchange Offer and Consent Solicitation. The Additional Warrants will expire on March 31, 2015, and are exercisable at a price of $0.01 per share.
Additional Financing Conditions means
(1) shareholder approval of an increase in the number of authorized shares of capital stock from 500 million to 4 billion shares by June 15, 2008, (2) completion of a successful Exchange Offer and Consent Solicitation for at
least 66
2
/
3
% of the outstanding shares of each series of Preferred Stock (which is equivalent to at least 66
2
/
3
% of the aggregate liquidation preference of the outstanding shares of each series of Preferred Stock) by December 31, 2008,
and (3) issuance of Additional Warrants to the investors under the Principal Participation Agreement. Completion of a successful Exchange Offer and Consent Solicitation requires approval from the holders of the Companys voting stock and
each series of Preferred Stock of an amendment to the Companys charter to modify the terms of each series of Preferred Stock to eliminate certain rights of the Preferred Stock.
At the Companys annual meeting of shareholders held on June 12, 2008, shareholders approved amendments to the Companys
charter to increase the number of authorized shares of capital stock from 500 million to 4 billion shares and to modify the terms of each of the Companys existing series of Preferred Stock to, among other things, remove restrictive
covenants that currently prohibit the Company from purchasing Preferred Stock when all cumulative dividends on the related series of Preferred Stock have not been paid in full, make the dividend payments on the Preferred Stock noncumulative and
eliminate all accrued but unpaid dividends, and eliminate substantially all voting rights of the preferred shareholders. The Company must still obtain the requisite consents from the holders of each series of Preferred Stock to the modification of
the terms of the Preferred Stock before those modifications can become effective. The Company is seeking such consents in connection with the Exchange Offer and Consent Solicitation which was commenced on July 23, 2008.
Adfitech means ADFITECH, Inc., a wholly-owned mortgage services taxable REIT subsidiary of TMHL.
Adjusted Equity-to-Assets Ratio means a ratio that reflects the relationship between assets financed with
recourse debt that is subject to margin calls and our long-term capital. The ratio is a non-GAAP measurement that we have adopted and that the Board of Directors has approved as an internal policy. Our policy requires us to maintain this ratio at a
minimum of 8%.
Agency Securities means Purchased ARM Assets that are guaranteed by Ginnie
Mae, Fannie Mae or Freddie Mac.
ARM means adjustable-rate and variable-rate mortgage, which
signifies that adjustments of the underlying interest rate are made at predetermined times based on an agreed margin to an established index.
ARM Assets means all of our ARM Loans and Purchased ARM Assets comprised of Traditional ARM Assets and Hybrid ARM Assets.
ARM Loans means Securitized ARM Loans, ARM Loans Collateralizing Debt and ARM loans held for sale or
securitization.
ARM Loans Collateralizing Debt means first lien prime quality ARM loans
originated or acquired by us and financed in their entirety on our balance sheet through securitization by us into sequentially rated classes. In general, we retain the classes that are not AAA-rated which provide credit support for higher rated
classes issued to third-party investors in structured financing arrangements.
Asset-backed CP
means asset-backed commercial paper, which provides an alternative way to finance our High Quality ARM Assets portfolio. We issue Asset-backed CP to investors in the form of secured liquidity notes that are recorded as borrowings on our Condensed
Consolidated Balance Sheets.
Average Historical Equity means for any period the difference
between our total assets and total liabilities calculated on a consolidated basis in accordance with GAAP, excluding (i) OCI, (ii) goodwill and (iii) other intangibles, computed by taking the average of such values at the end of each
month during such period, adjusted for equity sold during the period on a pro rata basis.
120
Average Net Worth means the sum of the gross proceeds from
any offering of equity securities by the Company before deducting any underwriting discounts and commissions and other expenses and costs relating to the offering plus the Companys retained earnings (without taking in account any losses
incurred in prior periods) computed by taking the average of such values at the end of each month during such period, and shall be reduced by any amount that the Company pays for the repurchase of its common stock.
Basic EPS means basic earnings (loss) per share, calculated by dividing net income (loss) available to
common shareholders by the average common shares outstanding during the period.
Board of
Directors means the board of directors of TMA.
BP means basis point, a hundredth of a
percent.
Cap Agreements means interest rate cap agreements, pursuant to which we receive cash
payments if the interest rate index specified in any such agreement increases above contractually specified levels, thus effectively capping the interest rate on a specified amount of borrowings at a level specified by the agreement.
Change In Control means a change in control as defined in the Override Agreement and the Senior Subordinated
Secured Notes indenture and generally includes the (1) sale, lease, exchange or transfer of substantially all of the assets of the Company, (2) shareholder approval of a plan of liquidation or dissolution, (3) any person or group
becoming the owner of more than 50% of the aggregate voting stock of the Company, or (4) the replacement of a majority of the Board of directors over a two-year period from the directors who constituted the Board of Directors at the beginning
of such period without approval by a majority of the Board of Directors who were directors of the Board of Directors at the beginning of such period.
CMOs means collateralized mortgage obligations which are debt obligations ordinarily issued in series and backed by a pool of fixed-rate mortgage loans, Hybrid ARM loans, Traditional
ARM loans or ARM securities, each of which consists of several serially maturing classes. Generally, principal and interest payments received on the underlying mortgage-related assets securing a series of CMOs are applied to principal and interest
due on one or more classes of the CMOs of such series.
Code means the Internal Revenue Code
of 1986, as amended.
Code of Conduct means the Code of Business Conduct and Ethics adopted by
TMA.
Collateralized Mortgage Debt, which was previously referred to as collateralized debt
obligations or CDOs in our prior SEC filings, means collateralized debt obligations, which can be either floating-rate or fixed-rate non-recourse financing, all of which are issued by trusts and secured by prime quality ARM loans originated or
purchased by us, and may also include Hedging Instruments. Collateralized Mortgage Debt represents long-term financing.
Common Stock means shares of TMAs common stock, $.01 par value per share.
Consent Notes means Senior Subordinated Secured Notes consenting holders received as consideration for their PIK Consent, at their election, of either (i) 6.5217 shares of Common Stock in respect of
each $1,000 principal amount of the Senior Subordinated Secured Notes or (ii) additional Senior Subordinated Secured Notes with an aggregate principal amount equal to the market value of the total number of Consent Shares on the date of
issuance to which such holders otherwise would have been entitled. The Consent Notes were issued as of October 1, 2008.
Consent Shares means Common Stock consenting holders received as consideration for their PIK Consent, at their election, of either (i) 6.5217 shares of Common Stock in respect of each $1,000 principal
amount of the Senior Subordinated Secured Notes or (ii) additional Senior Subordinated Secured Notes with an aggregate principal amount equal to the market value of the total number of Consent Shares on the date of issuance to which such
holders otherwise would have been entitled. The Consent Shares were issued as of October 1, 2008.
Company means TMA and its subsidiaries, unless specifically stated otherwise or the context indicates otherwise.
Consumer Price Index means an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The Consumer
Price Index is published monthly.
Corporate Governance Guidelines means the Corporate
Governance Guidelines adopted by TMA.
CPR means constant prepayment rate, which refers to the
annualized rate at which the mortgage assets in our portfolio are prepaid. The CPR typically increases as interest rates decrease and, conversely, the CPR typically decreases as interest rates increase.
121
Derivative means a contract or agreement whose value is
derived from changes in interest rates, prices of securities or commodities, or financial or commodity indices. Our Derivatives include commitments to purchase loans from correspondent and bulk sellers, Pipeline Hedging Instruments and Hybrid ARM
Hedging Instruments.
DERs means dividend equivalent rights, which may be granted under the
Plan. A DER consists of the right to receive either cash or PSRs in an amount equal to the value of the cash dividends paid on a share of Common Stock.
DRSPP means the Dividend Reinvestment and Stock Purchase Plan adopted by TMA.
Effective Duration is a calculation expressed in months or years that is a measure of the expected price change of financial instruments based on changes in interest rates. For
example, a duration of 4.4 months implies that a 1% change in interest rates would cause a .37% change in the opposite direction in the value of our portfolio (i.e., 4.4 months equals 37% of twelve months.)
EPS means basic income (loss) per share calculated by dividing net income (loss) available to common
shareholders by the average common shares outstanding during the period.
Escrow Warrants
means the warrants, issuable in connection with the Financing Transaction, to purchase 3,300,021 shares of Common Stock (as adjusted for anti-dilution protection), which were placed in escrow until the earlier of the satisfaction of the Additional
Financing Conditions or September 30, 2008. Because the Company was unable to complete the Exchange Offer and Consent Solicitation on or prior to September 30, 2008, the Escrow Warrants were released pro rata to the investors in the
Financing Transaction according to their aggregate principal amount of the Senior Subordinated Secured Notes. The Escrow Warrants will expire on March 31, 2015, and are exercisable at a price of $0.01 per share.
Eurodollar Transactions means Eurodollar futures contracts, which are three month contracts with a price
that represents the forecasted three-month LIBOR rate. The sale of these contracts locks in a future interest rate.
Exchange Offer and Consent Solicitation means the tender offer that the Financing Transaction requires the Company use its best efforts to successfully complete by December 31, 2008, or as may be
extended. On July 23, 2008, the Company commenced the Exchange Offer and Consent Solicitation for all of its outstanding Preferred Stock. Pursuant to the Exchange Offer and Consent Solicitation, as amended, the Company is offering three shares
of Common Stock for each share of Preferred Stock tendered and approximately 132 million shares of Common Stock in the aggregate.
Fannie Mae means the Federal National Mortgage Association, a government-sponsored private corporation that operates under a federal charter.
FASB means the Financial Accounting Standards Board.
Federal Funds means the overnight intrabank lending rate.
Federal Reserve means one of twelve regional banks established to maintain reserves, issue bank notes, and
lend money to member banks. The Federal Reserve Banks are also responsible for supervising member banks in their areas, and are involved in the setting of national monetary policy.
FICO means a credit score, ranging from 300 to 850, with 850 being the best score, based upon the credit
evaluation methodology developed by Fair, Isaac and Company, a consulting firm specializing in creating credit evaluation models.
Financing Transaction means the transaction which closed on March 31, 2008 in which the Company raised an aggregate of up to $1.35 billion from the sale of Senior Subordinated Secured Notes, Initial
Warrants, Escrow Warrants and Additional Warrants to purchase Common Stock and interests in a Principal Participation Agreement in a private placement to qualified institutional buyers under Section 4(2) of the Securities Act of 1933.
Fixed Option ARM means a Hybrid ARM Asset that has a fixed interest rate for an initial
period of three to ten years after which it converts to a Traditional ARM Asset. The loan product offers four payment options during the fixed rate period with the understanding that if a payment option is selected that is less than the
interest-only option, the shortfall will be added to the principal balance of the loan until the loan balance increases to a maximum of 110% to 118% of the original loan balance. When the negative amortization limit is reached, the loans
payment option is converted to at least meet interest only payments until the fixed rate period expires and the loan is recast to fully amortize over the remaining term of the loan. The Fixed Option ARM has an original maturity of 40 years, an
initial interest rate change cap of 4% or 5% after the fixed rate period, a 2% interest rate change cap in subsequent years and a lifetime interest rate change cap of 5% over the original note rate.
Forward Auction Agreement means agreements that provide for the distribution of the outstanding principal
balance on certain certificates at a predetermined auction date. To the extent that proceeds received at auction are insufficient to cover distributions due to the certificate holders on the auction date, the Company will pay the excess of the
outstanding principal balance of the certificates over the amounts received through the auction. In the event that amounts received through the auction are greater than the principal balance of the outstanding certificates, the Company will receive
the excess.
122
Freddie Mac means the Federal Home Loan Mortgage
Corporation, a federally-chartered private corporation.
Fully Indexed means an ARM Asset that
has an interest rate currently equal to its applicable index plus a margin to the index that is specified by the terms of the ARM Asset.
G & A means general and administrative.
GAAP means generally accepted accounting principles set forth in the statements, opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and the FASB or in such
other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States.
Ginnie Mae means the Government National Mortgage Association, a government-owned corporation within the United States Department of Housing and Urban Development.
Guarantor Subsidiaries means TMHL, Adfitech, TMHS and Thornburg Acquisition Subsidiary, Inc., all of which
are directly or indirectly wholly-owned subsidiaries of the Parent, that have guaranteed fully and unconditionally, on a joint and several basis, the obligations of the Parent to pay principal and interest under the Senior Notes and the Senior
Subordinated Secured Notes.
Hedging Instruments means Cap Agreements and Swap Agreements
which are Derivatives that we use to manage our interest rate exposure when financing the purchase of ARM Assets.
High Quality means (i) Agency Securities, (ii) Purchased ARM Assets and Securitized ARM Loans which are rated within one of the two highest rating categories by at least one of the Rating Agencies, (iii) Purchased
ARM Assets and Securitized ARM Loans that are unrated or whose ratings have not been updated but are determined to be of comparable quality (by the rating standards of at least one of the Rating Agencies) to a High Quality-rated mortgage security,
as determined by the Manager and approved by the Board of Directors, or (iv) the portion of ARM loans that have been deposited into a trust and have received a credit rating of AA or better from at least one Rating Agency. Our investment policy
requires that we invest at least 70% of total assets in High Quality ARM Assets and short-term investments.
Hybrid ARM Hedging Instruments means Hedging Instruments, including Swap Agreements and Cap Agreements that we use to manage our interest rate exposure when financing the purchase of Hybrid ARMs.
Hybrid ARMs or Hybrid ARM Assets means ARM Loans and Purchased ARM Assets that have a fixed
interest rate for an initial period of three to ten years, after which they convert to Traditional ARM Assets for their remaining terms to maturity.
Initial Warrants means the warrants, issued on March 31, 2008, in connection with the Financing Transaction to purchase 16,860,655 shares of Common Stock. The Initial Warrants
were exercisable at a price of $0.01 per share and all of the Initial Warrants have been exercised.
Insider Trading Policy means the Insider Trading Policy adopted by TMA.
Investment Company Act means the Investment Company Act of 1940, as amended.
Investment Grade generally means a security rating of BBB- or better by Standard & Poors Corporation or Baa3 or better by Moodys Investors Service, Inc.
IRA means Individual Retirement Account.
ISDA Agreement means a standardized contract created by the International Swap and Derivatives Association
which contains general terms, conditions, and provisions governing derivative transactions.
LIBOR means the London InterBank Offer Rate, which is fixed each morning at 11 a.m. London time, by the British Bankers Association. The rate is an average derived from sixteen quotations provided by banks determined by
the British Bankers Association, the four highest and lowest are then eliminated and an average of the remaining eight is calculated to arrive at the fixed rate.
Liquidity Maintenance Amount means a portion of the Liquidity Reserve Fund equal to 5% of the principal
balance of Reverse Repurchase Agreements subject to the Override Agreement which must be invested in cash, treasuries or agency pass-through securities and up to $200.0 million in market value of mortgage-backed securities issued in connection with
the Companys securitizations, provided that the market value of such securities that are rated below Investment Grade shall not exceed one-third of 5% of the principal balance of the Reverse Repurchase Agreements subject to the Override
Agreement.
123
Liquidity Reserve Fund means the liquidity reserve fund
established pursuant to the Override Agreement.
Major Participant means a holder of at least
30% of the TMAC Participation Agreement.
Management Agreement means the management agreement
by and between TMA and the Manager whereby the Manager performs certain services for TMA in exchange for certain fees.
Manager means Thornburg Mortgage Advisory Corporation, a Delaware corporation.
Market Price Equivalent means if quoted market prices are not available, fair value is determined using current market-based or independently sourced market parameters, such as quotes from broker-dealers
that make markets in similar financial instruments, interest rates, product type, credit rating, seasoning, duration, prepayment expectations, option volatilities, discounted cash flows and other relevant inputs.
MatlinPatterson means MP TMA LLC, MP TMA (Cayman) LLC and their affiliates, the lead investors in the
Financing Transaction.
MBS means mortgage-backed securities, which are pools of mortgages
used as collateral for the issuance of securities in the secondary market. MBS are commonly referred to as pass-through certificates because the principal and interest of the underlying loans is passed through to investors.
The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees.
Minimum Unencumbered Asset Amount means 125% of the aggregate principal amount of unsecured indebtedness of the Company as defined in the Senior Notes indenture.
MP TMAC LLC means an entity formed by and affiliated with MatlinPatterson for purposes of their investment
in the Manager.
MSRs means mortgage servicing rights.
MTA means the Monthly Treasury Average. This index is the 12 month average of the monthly average yields of
U.S. Treasury securities adjusted to a constant maturity of one year.
Net Effective Duration
means the Effective Duration of assets minus the Effective Duration of borrowings and Hedging Instruments.
Non-Guarantor Subsidiaries means the directly or indirectly wholly-owned subsidiaries of the Parent that have not guaranteed the obligations of the Parent to pay principal and interest under the Senior Notes and the Senior
Subordinated Secured Notes.
OCI means our accumulated other comprehensive income or loss
calculated on a consolidated basis in accordance with GAAP.
Override Agreement means the
override agreement dated March 17, 2008, as amended, entered into by and among the Company and certain Reverse Repurchase Agreement and Forward Auction Agreement counterparties.
Override Warrants means the warrants, issuable pursuant to the Override Agreement, to purchase such number
of shares of its Common Stock that after the satisfaction of the Additional Financing Conditions will constitute at least 4.04% of Common Stock outstanding on a fully diluted basis (4,696,000 of such Warrants to be issued no later than
April 11, 2008). The Override Warrants will expire on April 1, 2013, and are exercisable at a price of $0.01 per share.
Other Investments means assets that are (i) adjustable or variable rate pass-through certificates, multi-class pass-through certificates or CMOs backed by loans that are rated at least Investment
Grade at the time of purchase, (ii) ARM loans collateralized by first liens on single-family residential properties, generally underwritten to A quality standards and acquired for the purpose of future securitization or sale,
(iii) fixed-rate mortgage loans collateralized by first liens on single-family residential properties originated for sale to third parties, (iv) real estate properties acquired as a result of foreclosing on our ARM Loans, or (v) as
authorized by the Board of Directors, ARM Assets rated less than Investment Grade that are created as a result of our loan acquisition and securitization efforts or are acquired as Purchased Securitized Loans, and that equal an amount no greater
than 17.5% of shareholders equity, measured on a historical cost basis. Other Investments may not comprise more than 30% of our total assets.
Pay Option ARM means a Traditional ARM Asset that typically has an initial payment based on a below market interest rate, has no interest rate change cap, offers an annual maximum
payment cap of 7.5% and offers borrowers the ability to select a payment
124
amount with the understanding that if a payment is selected that is less than a fully indexed rate the shortfall will be added to the principal balance of
the loan until the loan balance increases to a maximum of 110% to 125% of the original loan balance, at which time the loan is recast to fully amortize over the remaining term of the loan.
PIK Consent (Payment in Kind Consent) means the consent provided, effective September 30, 2008, by
holders holding approximately 98.6% of the aggregate principal amount of the outstanding Senior Subordinated Secured Notes to receive the September 30, 2008 interest payment due on the Senior Subordinated Secured Notes in additional Senior
Subordinated Secured Notes in lieu of cash.
PIK Notes (Payment in Kind Notes) means the
additional Senior Subordinated Secured Notes issued effective September 30, 2008 as a result of the PIK Consent.
Pipeline Hedging Instruments means Eurodollar Transactions that we use to limit interest rate risk associated with commitments to purchase ARM loans.
Plan means TMAs Amended and Restated 2002 Long-Term Incentive Plan, as amended.
Portfolio Margin means yield on net interest earning assets.
PPA means Principal Participation Agreement.
PPA and Additional Warrant Liability means a liability recorded in connection with the Financing Transaction
which represents (1) the liability for the subsequent issuance of the Additional Warrants to the participants in the Principal Participation Agreement and the investors contributing escrowed funds upon the satisfaction of the Additional
Financing Conditions or, (2) the liability for the Principal Participation Agreement in the event that the Additional Financing Conditions are not satisfied. The likelihood of each of those events has been estimated by the Company and the
liability reflects the probability adjusted fair value of the two alternatives. The PPA and Additional Warrant Liability is carried at its fair value on the Condensed Consolidated Balance Sheets and marked to fair value at the end of each period
with the change in fair value reflected as PPA and Additional Warrant Liability fair value changes in the Condensed Consolidated Income Statements.
Preferred Stock means the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock, issued by TMA.
Principal Participation Agreement means the principal participation agreement by and between the Company and
participants to the agreement entered into on March 31, 2008.
PSRs means phantom stock
rights, which may be granted under the Plan. A PSR consists of (i) the unfunded deferred obligation of TMA to pay the recipient of a PSR, upon exercise, an amount of cash equal to the fair market value of a share of Common Stock at the time of
exercise, and (ii) the recipients right to receive distributions, either in the form of cash or additional PSRs, in an amount equal to the value of the cash dividends that are paid on a share of Common Stock.
Purchased ARM Assets means ARM securities and Purchased Securitized Loans.
Purchased Securitized Loans means loans securitized by third parties and purchased by us. We own all credit
loss classes of the securitizations.
QSPE means qualifying SPE.
Qualified REIT Assets means real estate assets as defined by the REIT provisions of the Code. Substantially
all of the tax assets that we have acquired and will acquire for investment are expected to be Qualified REIT Assets.
Qualifying Interests means mortgages and other liens on and interests in real estate, as such term has been defined by SEC staff. Under current SEC staff interpretations, we must maintain at
least 55% of our assets directly in Qualifying Interests.
Rating Agencies means
Standard & Poors Corporation and Moodys Investors Service, Inc.
REIT
means real estate investment trust as defined in the Code.
REMIC means real estate mortgage
investment conduit which is an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors as defined in the Code.
REO means real estate properties owned by the Company.
125
Return on Equity or ROE means the quotient
obtained by dividing our annualized net income by our Average Net Worth.
Reverse Repurchase
Agreement means an agreement between two parties whereby one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price.
Reverse Split means the 1-for-10 reverse stock split of the Common Stock effected on September 26,
2008. As a result of the Reverse Split, every 10 shares of (old) Common Stock, par value $0.01 per share, which were outstanding as of September 26, 2008, the effective date, were combined into one share of (new) Common Stock, par value of
$0.01 per share.
SARs means stock appreciation rights, which may be granted under the Plan.
An SAR consists of the right to receive the value of the appreciation of our Common Stock that occurs from the date the right is granted up to the date of exercise.
SEC means the United States Securities and Exchange Commission.
Securitized ARM Loans means loans originated or acquired and securitized by us, in which we retain 100% of
the beneficial ownership interests.
Senior Notes means the 8% senior notes due May 15,
2013, issued by TMA. Prior to March 31, 2008, the Senior Notes were unsecured. In connection with the Financing Transaction, TMA entered into a second supplemental indenture for the Senior Notes to provide that the Senior Notes were secured as
senior to the lien provided for the Senior Subordinated Secured Notes. In addition, certain of TMAs subsidiaries have guaranteed payment of the Senior Notes.
Senior Subordinated Secured Notes means the senior subordinated secured notes due March 31, 2015,
issued by TMA. The Senior Subordinated Secured Notes are secured by a lien junior to the lien securing the Senior Notes on, among other things, the stock of certain of TMAs subsidiaries, TMHLs MSRs and the interest payments due from the
mortgage-backed securities underlying the Override Agreement after termination of the Override Agreement and after paying interest expense. In addition, certain of TMAs subsidiaries have guaranteed payment of the Senior Subordinated Secured
Notes.
Series C Preferred Stock means the 8% Series C Cumulative Redeemable Preferred Stock,
$0.01 par value per share, issued by TMA.
Series D Preferred Stock means the Series D
Adjusting Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, issued by TMA.
Series E Preferred Stock means the 7.50% Series E Cumulative Convertible Redeemable Preferred Stock, $0.01 par value per share, issued by TMA.
Series F Preferred Stock means the 10% Series F Cumulative Convertible Redeemable Preferred Stock, $0.01 par
value per share, issued by TMA.
Service means the Internal Revenue Service.
SFAS means Statement of Financial Accounting Standards which is an authoritative GAAP pronouncement issued
by the FASB.
Shareholder Rights Agreement means the shareholder rights agreement adopted by
TMA.
SPE means special purpose entity.
Subordinated Notes means the floating rate junior subordinated notes, issued by TMHL and guaranteed by TMA.
Swap Agreements means interest rate swap agreements, pursuant to which we agree to pay a
fixed rate of interest and to receive a variable interest rate, thus effectively fixing the cost of funds.
Ten Year U.S. Treasury Rate means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government that we select. If we determine in good faith that
the Ten Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each
actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter
in New York City by at least three recognized dealers in U.S. Government securities that we select.
126
The
Thornburg Mortgage Exchange Program
SM
means the program where borrowers can choose to take equity out of their homes, select another ARM loan
product, extend the fixed-rate period of their loan, modify to a current interest rate or change to an interest-only payment option by paying a small flat fee.
TMA means Thornburg Mortgage, Inc., a Maryland corporation.
TMAC Participation Agreement means the Participation Agreement, dated as of March 31, 2008, among the Manager, certain shareholders of the Manager and MP TMAC LLC, an affiliate of MatlinPatterson, MP
TMAC LLC agreed to acquire a 75% participation interest in the base management fee, net of reasonable expenses, and gross proceeds of the performance-based incentive fee and in consideration, MP TMAC LLC granted the Manager the option to acquire an
aggregate of 2.5264% of the fully diluted authorized and issued shares of Common Stock (not to exceed 7,811,379 shares of Common Stock) for an exercise price of $0.01 per share. This option will be exercisable upon and from time to time after the
satisfaction of the Additional Financing Conditions. The Manager has transferred this option to the counterparties to the Override Agreement.
TMCR means Thornburg Mortgage Capital Resources, LLC, a wholly-owned special purpose finance subsidiary of TMD.
TMD means Thornburg Mortgage Depositor, LLC, a wholly-owned special purpose finance subsidiary of TMA.
TMF means Thornburg Mortgage Finance, LLC, a wholly-owned subsidiary of TMA.
TMFI means Thornburg Mortgage Funding, Inc., a wholly-owned subsidiary of TMA.
TMHL means Thornburg Mortgage Home Loans, Inc., a wholly-owned mortgage loan origination and acquisition
taxable REIT subsidiary of TMA.
TMHS means Thornburg Mortgage Hedging Strategies, Inc., a
wholly-owned taxable REIT subsidiary of TMA.
Traditional ARMs or Traditional ARM
Assets means ARM Loans and Purchased ARM Assets that have interest rates that reprice in a year or less.
Traditional Pay Option ARM means a floating rate Traditional ARM Asset that typically is indexed to a short term market rate and has no interest rate change cap despite monthly or quarterly resets, offers an annual maximum
payment cap of 7.5% and offers borrowers the ability to select a payment amount with the understanding that if a payment is selected that is less than a fully indexed rate the shortfall will be added to the principal balance of the loan until the
loan balance increases to a maximum of 110% to 125% of the original loan balance, at which time the loan is recast to fully amortize over the remaining term of the loan.
Warrants means any of Initial Warrants, Escrow Warrants, Additional Warrants and/or Override Warrants, as
the context indicates, in each case to purchase shares of Common Stock of the Company.
127
Thornburg (NYSE:TMA)
과거 데이터 주식 차트
부터 5월(5) 2024 으로 6월(6) 2024
Thornburg (NYSE:TMA)
과거 데이터 주식 차트
부터 6월(6) 2023 으로 6월(6) 2024