Aug. 20 (Bloomberg) -- Thornburg Mortgage Inc., the jumbo- mortgage specialist that stopped taking loan applications last week because of a cash crunch, sold $20.5 billion of securities at a discount to pay down debt it couldn't refinance.

The Santa Fe, New Mexico-based company will record a $930 million loss in the third quarter on the sale of the mortgage- backed bonds, resulting in a probable net loss for the year, President Larry Goldstone said in an interview. Thornburg's shares, which gyrated between $7.49 and $18.35 last week, dropped as much as 13 percent today.

Thornburg curtailed new mortgages after investors in the $2.2 trillion U.S. commercial-paper market refused to buy the short-term debt that it used to finance home loans. The company said in a statement that it now expects ``to resume normal operations over the next two weeks'' instead of today as planned.

``We want to try to resume our lending operations this week and next week, but I can't tell you whether it's going to be today or tomorrow or Wednesday,'' Goldstone said in the interview. ``We've still got some things we need to work on before we can get that opened up.''

While Thornburg ``appears likely to survive its liquidity crisis, we believe future earnings power has been materially damaged,'' said Jefferies Group Inc. analyst Richard Shane Jr. in a note to investors today. He rates the shares ``underperform.''

Market Reaction

Thornburg's stock fell $1.54, or 10 percent, to $13.50 in 4:02 p.m. composite trading on the New York Stock Exchange, bringing the decline this year to 46 percent.

The company's bonds rose, reflecting an increased likelihood of repayment. Thornburg's $305 million of 8 percent notes due in 2013 added 4.25 cents to 79.5 cents on the dollar as of 3:29 p.m. in New York, according to the NASD bond-price reporting system Trace. The bonds yield 13.2 percent, or about 9 percentage points more than similar-maturity Treasuries, Trace data show.

Fitch Ratings today cut the company's corporate bond rating to CCC, or the fourth-lowest of 11 ``junk'' ratings, which are assigned to companies that fall below investment-grade. The New York-based ratings service cited ``concern for Thornburg's ability to generate and maintain adequate liquidity under current market conditions.''

Companies that specialize in home loans are scrambling to line up new credit, pay down debt or raise cash as investors shun mortgages and banks cut off credit. Luminent Mortgage Capital Inc., a San Francisco investor in mortgage securities, said today it arranged about $125 million from Arco Capital Corp. Delta Financial Corp., a subprime residential lender based in Woodbury, New York, found investors last week to provide $70 million.

Search for Financing

Countrywide Financial Corp., the biggest U.S. mortgage company, had to tap an $11.5 billion credit line last week to stave off a cash shortage, which analysts at KBW Inc. said today has spread to the company's own banking operation.

Solent Capital Partners LLP, the U.K. manager of $8.8 billion in hedge funds, may be forced to sell assets in a unit that buys mortgage-backed securities after lenders refused to provide short-term funding.

Goldstone said Thornburg was forced to accept bids of about 95 cents on the dollar for mortgage-backed securities with AAA ratings. The company's ``book value,'' or assets minus liabilities, fell by 13 percent in just four days, according to the statement.

Book Value Falls

As of Aug. 17, book value stood at $12.40, compared with $14.28 on Aug. 13 and $19.38 on June 30, the statement said. The sales cut the company's portfolio of mortgage assets to $36.4 billion from $56.4 billion.

The company's losses show how concerns over a surge in defaults on mortgages to ``subprime'' borrowers with blemished payment histories are undermining the market for loans to people with the highest incomes and credit scores. Debt investors, many of whom already have been burned on losses from bonds containing subprime loans, are avoiding almost all mortgage-backed securities that aren't guaranteed by the government-sponsored agencies Fannie Mae and Freddie Mac.

Their reluctance prompted Capital One Financial Corp. to shut its GreenPoint Mortgage unit today, saying that weak demand from investors is making it too hard to turn a profit. About 1,900 jobs will be lost.

Jumbo Loans

Thornburg specializes in adjustable-rate ``jumbo'' loans of more than $417,000. Those mortgages are made to people with good credit, though because of the loans' size, they don't qualify for purchase by Fannie Mae or Freddie Mac.

``Through no actions of ours and through minimal risk-taking on the part of the company, we had to incur a $930 million loss in order to be sure that the company survives,'' Goldstone said in the interview. ``We don't have bad loans, we don't have a bad credit portfolio, we spent 14 years building a reputation as a premier, high-quality mortgage company, and in one week the market has destroyed a lot of that value and a lot of that hard work.''

About 94 percent of the real-estate securities Thornburg now owns are rated AA or higher, and about 0.23 percent of its loans are delinquent, compared with a national average of 2.3 percent, according to the statement.

`Unreasonable' Terms

Thornburg used proceeds from the asset sales to pay down about $8.4 billion of commercial paper outstanding as of June 30 after buyers of the short-term debt last week demanded ``unreasonable'' terms to refinance it, Goldstone said. The company also had to pay back about half of the $24.7 billion borrowed on credit lines because it didn't have enough cash to meet lenders' demands for more collateral.

The sales rid Thornburg of most of its lowest-yielding and unprofitable assets, and the company now believes it can earn 1.25 percentage points in interest over its cost of funding, according to the statement. Thornburg said it expects to be profitable on an ``operating basis'' in the third quarter. It also terminated $41.1 billion of interest rate hedges, resulting in a $40 million gain to be realized over time.

Thornburg is now trying to ``figure out just exactly what we can do from a cash, liquidity and financing perspective in order to move our operations back to some semblance of normalcy,'' Goldstone said. ``The mortgage-finance market is still in a distressed or non-functional'' state.

The company affirmed that the second-quarter dividend of 68 cents a share, which was delayed a month until Sept. 17, will be paid on schedule. Thornburg won't provide any guidance on earnings or the size of future dividends beyond that date.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: August 20, 2007 17:03 EDT