As many of you may or may not be aware, the next big thing that is pushing mortgage lenders and financials into the ground is margin calls. What is occurring in the market is companies leveraged to the heavens, are now realizing the stark difference between liquid and illiquid assets. Take a look at Thornburg Mortgage:

“The news keeps getting worse for Thornburg Mortgage (TMA). The Santa Fe, N.M., jumbo mortgage lender saw its shares plunge 23% in premarket trading Monday after the company said it received more margin calls as the market value of its mortgage securities holdings continued to fall. Thornburg, whose shares fell sharply late last week after the company said it received $300 million in calls for more collateral, said Monday morning that it has gotten an added $270 million in margin calls since then - and that it hasn’t been able to meet most of them. The company said it “is working to meet all of its outstanding margin calls within a time frame acceptable to its lenders by either selling portfolio securities or raising additional debt or equity capital.” With Thornburg’s shares having lost three-quarters of their value over the past year, any capital-raising will come at a steep price to existing shareholders.”

What makes this significant is that Thornburg Mortgage did relatively well last year even in the face of many other lenders having problems after the credit crunch. These issues are not new and don’t only impact Thornburg. What is happening is the margin calls, occurring now when the secondary market is now defunct, are forcing these lenders to pony up money and if they do not have it, are forced to liquidate assets in a market that is quickly deteriorating. In essence, companies are being forced to mark-to-market and sell at the worst time possible. This again is why leveraging yourself massively on both sides can yield major gains but also put a suffocating clamp around your neck of growth.

It is important to understand that Thornburg was known for the quality of their assets and the mortgages they held in their portfolio. That is why the significant declines and inability to meet margin calls is sending further shockwaves in the market. That is, even quality mortgages, not only subprime, are now facing problems in the current retracting economy.

This also applies to many families right now. Many are now realizing that credit and liquidity are not the same. Having $50,000 in cash is very different from having $50,000 in a home equity line. Many are realizing that treating a credit line as money is a mistake:

“In one brief phone call, Nancy Corazzi’s lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago. The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth. “I got off the phone and I was shaking,” said Corazzi, who was using the money to pay preschool tuition for her twins .”I was near tears. We needed this credit line to get us through some tough times.”

And so many lenders thought the same thing. The secondary market on Wall Street served as a backup Mastercard. Now that the credit card has been cut in half with scissors, any market mishaps is enough to put a company in serious problems. As you are surely aware, the U.S. economy is having more than slight problems so the evaporation of the secondary market is forcing people to show their cards at the worst time.

Relying on a home equity line such as the family above, is a symptomatic problem of the U.S. economy. Many people started relying on these “good time” products and started treating them like cash. They worked like cash. Felt liquid like cash. Bought stuff like cash. Yet now with credit being taken away have no resemblance to cash. Don’t make the mistake of treating credit like cash.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!

You know I once asked a very wealthy VP of a Fortune 500 company what inspired him to be wealthy and his answer shocked me. “Money is a game and the man with the most notches on his belt wins.” This threw me back. I was in my late teens and wanted to become financially free because I never grew up with much to begin with. And when I mean nothing much, I mean zero. Yet after hearing this person tell me his response to his wealth plan, I looked deeper at him and frankly, he didn’t seem all that happy and the sense of incongruence in his life was apparent. He was out of shape and had a look in his eyes of anger. I could tell that he had crawled over many bodies to get to where he got. At that moment, I thought being financially wealthy took putting yourself first and tramping over people. It also meant that being wealthy meant putting the love of money ahead of everything. It was a conflicting time and made me reevaluate my views on money.

A few years later, I met a very wealthy businessperson who gave back to her community, had a large circle of friends, and always seemed to be abundant in so many other ways. I sat down and asked her the same question and what she told me has stuck with me ever since. “Wealth is simply a vehicle to magnify your deeper personality traits. If you are a good person, access to resources will only make you a better one. If your nature is negative, it will also magnify your unhealthy attributes on the downside. Wealth has the ultimate power of leverage.” Nothing is truer about becoming and deciding to become wealthy. It is a magnifying glass into your soul. I have tried to model myself after this philosophy and never forgetting that money is simply a means to achieving larger and greater things in life. After all, if the only reason you are pursuing buckets of money is to swim in it like Uncle Scrooge, you may find yourself the richest man in the graveyard.

In my own personal journey toward financial freedom, I dug deep into my soul and realized that having an abundant life in all regards was going to be important to me. Making sure that I workout and eat right to ensure that I keep myself in the best shape possible. Push myself each and everyday to learn and grow. Seek for ways to ensure that financial prosperity is a must in my life. That is key. You must make it a must to be financially prosperous but you must also find a deeper reason to do it or you will give up when the times get tough. Maybe you want to ensure that your family is well provided for even should you lose your job or become ill. Maybe you want to give back to your community. Maybe it is the sense of security that will come once you decide to become financially free. Ultimately, your mission for financial success must have a strong enough “why” or you won’t find the means to achieve it.

You aren’t rich when you hit a certain savings point. You are rich the day you decide to be rich. Being wealthy is a state of mind. Those that figure out deep down the reason for being financially secure and if it is a compelling enough reason, will find every method to become wealthy. I remember reading in The Millionaire Next Door, a fantastic book that profiles America’s millionaires that 80 percent of those surveyed where first-generation affluent. In other words, they are the first people in their family to become financially independent. Most do not own BMWs or Porsches of the current year, they do not wear $5,000 watches, and they don’t live in overly priced McMansions. They aren’t misers either. They wear $500 watches, nice suits that don’t go over $1,000, and have an average net worth of $3.7 million. The average age is 57. They live below their means. The idea of the millionaire that the media portrays is contrary to the actual statistics since it is more exciting to see the .01 percent of the population that are entertainers, athletes, or CEOs. These people make well in excess of $2 to $10 million a year and are in a different ball game. Yet many of the millionaires in the U.S. make somewhere from $75,000 to $200,000 a year. The way to become wealthy is to live within your means, invest wisely, and make it a must to become financially independent. The media would like you to believe that everyone that drives a foreign car, wears an expensive suit, and has 10 different credit cards is the picture of financial prosperity when in reality they are simply spending tomorrow’s fortune on today’s instant gratification. It is a cultural problem that is rather pervasive.

You must find it deep inside yourself the reason to be wealthy and you can achieve it. Becoming financially independent is not impossible but with hard work, hope, and a desire for this freedom, you can do it. Your mindset is just as important as your investments.

If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!