Aug. 30 (Bloomberg) -- Thornburg Mortgage Inc., the jumbo- mortgage specialist that was forced to stop making new loans, plans to help relieve a cash crunch by selling $500 million of convertible preferred stock.

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

``Thornburg Mortgage believes it is positioned to capitalize on what it expects will be a more profitable mortgage market,'' the Santa Fe, New Mexico-based company said in a statement.

The preferred shares will pay a dividend of at least 10 percent and be convertible into common stock at $11.50 apiece. Thornburg said proceeds from the sale will ``improve its liquidity position'' and enable the company to start making new loans and buy mortgage-backed securities.

While Countrywide sold its convertible preferred stock to Bank of America at a discount to market value, Thornburg set its conversion price at a 3 percent premium. The stock rose as much as 9.7 percent to $12.25 at the New York Stock Exchange before trading was halted at 9:39 a.m., pending a company announcement.

Potential Dilution

A $500 million sale at the terms outlined in Thornburg's statement would require the company to increase its share count by about 43.5 million, or 35 percent. Earnings per share may be diluted by a similar percentage. Friedman, Billings, Ramsey Group Inc., the underwriter, has the option to boost the size of the sale by 15 percent.

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 such as Thornburg's 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 mortgage lenders including Thornburg of cash and triggering a freefall in its shares.

The market for loans is ``slowly reverting back to normal'' wrote A.G. Edwards analyst Greg Mason in a note to investors yesterday, citing a conversation with Thornburg President and Chief Operating Officer Larry Goldstone. ``It appears the bleeding in mortgage pricing has stopped for now,'' wrote Mason, who has a ``hold'' rating on the stock.

Smaller Estimated Loss

Thornburg was forced to stop accepting new loan applications earlier this month and sell $20.5 billion of mortgage-backed securities at a discount. In today's statement, Thornburg said it reduced the estimated loss on that emergency sale to $863 million from $930 million and was able to resume funding of existing loans this week.

The company said it's now negotiating the securitization of $1.4 billion of adjustable-rate mortgages and would reduce its borrowing under so-called warehouse lines of credit, typically provided by banks, by a similar amount.

Last Updated: August 30, 2007 10:37 EDT