Aug. 30 (Bloomberg) -- Thornburg Mortgage Inc., the jumbo- mortgage specialist forced to stop making new loans, sold $500 million of preferred stock to alleviate a cash shortage.

Proceeds from the sale will help the Santa Fe, New Mexico- based company start making new loans and buy mortgage-backed securities, Thornburg said in a statement. The sale was completed four hours after it was announced, spurring a rally of almost 6 percent in the company's shares.

``This should help Thornburg stave off some of the concerns about the viability of its business,'' said Jason Arnold, a San Francisco-based analyst at RBC Capital Markets. ``I don't know if all concerns are averted given that there is a lot of turmoil in the market, but it is certainly a plus.''

Mortgage lenders are turning to costlier financing after being shut out of the short-term debt market. Countrywide Financial Corp. last week sold $2 billion of similar securities to Bank of America Corp. Thornburg, whose shares are down more than 50 percent this year, sold more than a third of its mortgage assets this month to pay obligations it couldn't refinance.

While Countrywide sold its convertible preferred stock at a discount to market value, Thornburg set its conversion price at a 3 percent premium. The stock gained 65 cents to $11.81 at 4 p.m. in New York Stock Exchange composite trading, after climbing as high as $13.09.

10% Dividend

The preferred shares will pay a dividend of at least 10 percent and be convertible into common stock at $11.50 apiece. Proceeds from the sale after fees were about $473 million, Thornburg said. Friedman, Billings, Ramsey Group Inc., the underwriter, has the option to add another 3 million shares to the 20 million sold.

The cost of the dividend, as well as issuing new shares if the preferred stock is converted, will erode earnings per share, said RBC's Arnold, who has an ``underperform'' rating on the Thornburg.

``It could be something that winds up eating into the company's earnings stream,'' he said. ``But I honestly don't think that this is sizable enough to result in some material negative implications.''

Thornburg specializes in ``jumbo'' loans, so called because they exceed the $417,000 limit to qualify for purchase by government-sponsored mortgage buyers Fannie Mae and Freddie Mac.

The market for so-called non-conforming mortgages mostly shut down during the past three months as rising defaults on subprime loans alarmed investors. Banks and commercial-paper buyers refused to accept the loans as collateral, starving lenders of cash.

`Unfairly Punished'

``What we're facing is simply the fact that the psychology of investors in the mortgage space is riddled with fear,'' said Thornburg President Larry Goldstone. ``We've been somewhat unfairly punished in the market environment today relative to the quality of our credit portfolio.''

The company has started funding loans that had been previously approved and hopes to resume taking new mortgage applications next week, Goldstone said.

``We're anxious to try to get our mortgage origination business up and running again,'' he said. ``We took a variety of steps over the last two or three weeks to address this liquidity crisis that we're facing, and try to make sure that we survive this environment.''

Thornburg earlier this month sold $20.5 billion of mortgage- backed securities at a discount. Today it cut the estimated loss on that emergency sale to $863 million from $930 million.

The company is also negotiating the securitization of $1.4 billion of adjustable-rate mortgages and will reduce its borrowing under so-called warehouse lines of credit, typically provided by banks, by a similar amount.

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: August 30, 2007 16:19 EDT