Fitch Rates Thornburg Mortgage's Unsec. Sub 'BB-'; Lowers Preferred Stock to 'B+'; Outlook Negative.

NEW YORK -- Fitch Ratings has affirmed the 'BB' ratings for Thornburg Mortgage, Inc.'s (TMA or Thornburg) Issuer Default Rating (IDR) and senior unsecured notes. Fitch has also assigned a 'BB-' rating to Thornburg's unsecured subordinate notes and downgraded the preferred stock to 'B+' from 'BB-'. In addition, the Outlook for the following ratings, including Thornburg's recent offering of Series D Adjusting Rate Cumulative Redeemable Preferred Stock, was revised to Negative from Positive:

--Issuer Default Rating (IDR) 'BB';

--Senior unsecured notes 'BB';

--Unsecured Subordinate notes 'BB-';

--Preferred stock 'B+'.

Fitch's affirmation of the IDR and senior unsecured debt rating takes into account the substantial unencumbered assets of $1,332 million as of Sept. 30, 2006 which includes $502 million in net ARM Assets. Also, the unencumbered assets coverage remains adequate at 2.44 times (x) and provides ample cushion between the 1.25x covenant minimum despite the decline from 2.68x in fiscal 2005. In addition, Thornburg expanded the total capacity of its diverse funding sources, further lessening its dependency on the reverse repurchase agreements, by doubling the size of its asset-back commercial paper facility to $10 billion. Fitch also takes into considerations that as of Sept. 30, 2006 approximately 97% of the ARM Asset portfolio was 'AAA'/'AA' quality.

Fitch's rating of the unsecured subordinate notes reflects its junior position to the senior unsecured notes.

Fitch's downgrade of the preferred stock by one notch reflects the priority position of the subordinate debt in relation to the preferred stock in the event of default and the widening gap between the first dollar of rated senior unsecured debt and the last dollar of preferred stock resulting from the recent $100 million offering of Series D preferred stock.

Fitch revised the company's Outlook to Negative from Positive based on management's aggressive use of leverage as evidenced by the minimal cushion between the 12.0x maximum covenant for the adjusted debt to adjusted equity calculation which has trended higher, reaching 11.5x as of Sept. 30, 2006 from 9.3x in fiscal 2003. Leverage as measured by total debt to total equity has steadily increased to 20.9x as of Sept. 30, 2006 from 11.1x in fiscal 2002. The revised Outlook also takes in account declining coverage metrics as EBITDA to total interest coverage and fixed charge coverage, which Fitch considers to be lean, has continued to decline, reaching 1.1x as of Sept. 30, 2006 from 1.5x in fiscal 2002. Lastly, Thornburg, similar to other mortgage companies, has experience spread compression. For nearly five fiscal periods, interest rate spreads/yields have declined to 0.53%/0.69% as of Sept. 30, 2006 from 1.43%/1.88% in fiscal 2002.

In order to move the Outlook to Stable, Fitch's expectations would comprise of less aggressive use of leverage and improved coverage metrics.

Based in Santa Fe, New Mexico, Thornburg Mortgage, Inc. is a lender to the single-family residential mortgage housing market and is focused principally on the jumbo segment. Thornburg originates, acquires and retains investments in adjustable rate mortgage (ARM) assets. The company's ARM Assets are comprised of Purchased ARM Assets and ARM Loans. All of Thornburg's ARM Assets are either Traditional ARMs, which includes Pay Option ARMs, or Hybrid ARMs. For tax purposes, Thornburg is organized as a real estate investment trust (REIT) and is managed externally by Thornburg Mortgage Advisory Corporation.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.