The unrest in the credit markets is intensifying worries about Countrywide (CFC). Shares of the mortgage company dropped 9% in Thursday’s marketwide selloff, amid fears that steep declines in mortgage-related securities will lead to more losses at big lenders. Particularly hard hit Thursday were mortgage companies such as Countrywide, Fannie Mae (FNM) and Freddie Mac (FRE), along with mortgage real estate investment trusts like Annaly (NLY). Less affected were big banks such as Bank of America (BAC), which agreed in January to buy Countrywide in an all-stock deal then valued at $4 billion.

As a result, Countrywide shares now trade at a 22% discount to their value as implied in the merger agreement. That spread is up from just 9% last Wednesday - suggesting investors are increasingly concerned the deal won’t get done - even though Bank of America said this week the combination is on track to close in the third quarter.

Meanwhile, Countrywide chief Angelo Mozilo is due to appear Friday morning before the House Committee on Oversight and Government Reform, which is holding a hearing on CEO pay. Mozilo will surely focus on his success in building Countrywide from scratch over 39 years, and his decision earlier this year to relinquish some change-of-control pay tied to the merger. But Democrats on the committee will no doubt be asking how Mozilo can justify taking home millions of dollars in stock-sale gains over the past decade while Countrywide and the rest of the industry careened toward a damaging housing bust. Don’t hold your breath waiting for an answer.

The cost-cutting never stops at Citi (C). The bank said it will cut back its U.S. mortgage business in a bid to save $200 million annually. Citi said it will reduce residential mortgage assets by $45 billion over the next 12 months, marking a 20% decrease from December 2007 levels, and will cut the amount of new loans to be held in portfolio by more than 50% in the next year. Citi also intends to boost the number of mortgages it underwrites that are eligible to be sold to Fannie Mae (FNM) and Freddie Mac (FRE) to 90% of originations from 65% last year - just as the market is worrying about the government-sponsored lenders’ capacity to shoulder a heavier burden. All of these changes will come under a newly combined consumer lending operation called CitiMortgage. “This end-to-end realignment will create a simplified and streamlined organization that is more sharply focused on clients and able to direct resources to the business lines and customer segments with the highest growth potential,” said Bill Beckmann, president of CitiMortgage. “At the same time, these changes will enable us to manage the business unit’s capital for enhanced returns.”

Time seems to be running out for Thornburg Mortgage (TMA). The jumbo mortgage lender’s shares lost half their value in premarket trading Thursday after the company got a notice of default following Thornburg’s failure to meet a margin call. The disclosure, made in a Securities and Exchange Commission filing Wednesday afternoon, caps off a hectic and depressing week for Thornburg investors. The stock was still above $11 a share before the company admitted last Thursday that a decline in the market value of its mortgage portfolios had led to $300 million in calls for additional collateral from its lenders. Then, on Monday, Santa Fe, N.M-based Thornburg said it got additional margin calls - some of which it wasn’t able to meet, raising the prospect of a fire sale of assets. The company sought to soothe the markets by doing a financing transaction later that day, but Thornburg shares continued to fall.

Now, Thornburg is saying that its failure to meet a $28 million margin call from JPMorgan has led to an event of default on $320 million in loans from JPMorgan, as well as cross-defaults on other loans. “The company’s obligations under those agreements are material,” Thornburg warns. CEO Larry Goldstone has been adamant that Thornburg will weather the tough conditions in the markets and remain independent. He said during a previous liquidity squeeze in August that Thornburg wouldn’t consider filing for Chapter 11 bankruptcy protection. His resolve will surely be tested now. The stock, which fetched $28 a share a year ago, was last quoted at $1.65 in early action Thursday.

The mortgage market meltdown continues to singe UBS (UBS). Shares fell to a five-year low in Zurich after an analyst wrote that the Swiss bank had probably sold $24 billion worth of mortgage-related securities in a “fire sale,” Bloomberg reports. JP Morgan analyst Kian Abouhossein says UBS could have sold its portfolio of so-called Alt-A mortgage bonds for as little as 70 cents on the dollar, nearly 20% below recent market prices, Marketwatch reports. Abouhossein says UBS is headed for $18 billion in writedowns this year, on top of $19 billion last year.

The report comes just days after a Merrill Lynch analyst boosted his estimate of mortgage-related writedowns at another struggling financial company, Citi (C), to $18 billion. JPMorgan isn’t the only firm expecting huge writedowns at UBS, Bloomberg notes: the expected toll runs as high as $25 billion at Morgan Stanley and $21 billion at Merrill Lynch. Suffice it to say that UBS shares could see some more selling pressure Thursday when trading opens in New York.

Thornburg Mortgage (TMA) is still standing. The Santa Fe, N.M., mortgage lender raised cash Monday afternoon via a financing transaction involving nearly $1 billion of prime hybrid adjustable-rate mortgage loans. Thornburg, which earlier warned that it hadn’t been able to meet a recent round of margin calls that came about following the latest plunge in the market for mortgage-backed securities, said it used the proceeds to reduce borrowings under its loan warehouse financing lines. The move comes on the same day analysts at Citi said the margin calls raised the prospect that “a more dire turn in the market could lead to bankruptcy” at the jumbo mortgage lender.

Thornburg, stung by some $570 million in margin calls over the past three weeks, said it now “anticipates an increased use of collateralized mortgage debt financing and reduced reliance on reverse repurchase financing.” The news eased the sharp selloff in Thornburg shares, though they were still down 47% at $4.75 apiece after earlier trading as low as $3.53.

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.

The company’s CEO, Larry Goldstone, blamed a quirk of fair value accounting for Thornburg’s plight. “The turmoil in the mortgage financing market that began last summer continues to be exacerbated by the mark-to-market accounting rules which are forcing companies to take unrealized write-downs on assets they have no intention of selling,” he said Monday. “In this environment, the current market price of assets has become disconnected from their underlying recoverable value, resulting in increased volatility and imprecise quarter-to-quarter comparisons of asset valuations.”

Goldstone isn’t the first to make this claim, but he remains upbeat about the prospect that Thornburg will muddle through the mortgage mess and realize higher profits. “These difficult market conditions have also created increased profit opportunities as lower-priced mortgage assets will translate into wider mortgage spreads and improved portfolio margins going forward,” Goldstone said. “We remain committed to manage through these challenging and volatile markets and remain focused on building long-term value for shareholders.”

Valentine’s Day was anything but sweet for jumbo lender Thornburg Mortgage (TMA). Shares of the New Mexico company slid 20% Thursday after Thornburg said weakness in the bond market resulted in more than $300 million in margin calls on its mortgage securities portfolio, starting on Feb. 14. The company said it doesn’t believe it will have to take any losses on the securities, but a sharp decline in demand for the paper has pushed market prices down, triggering calls from Thornburg’s brokers for additional collateral.

So far, the company has met the margin calls, but it now worries that it may have to sell assets into a weak market to raise cash if values continue to drop. “In the short term, the sudden decline in the valuation of these securities has left us with reduced readily available liquidity to meet future margin calls, relative to our cash and unpledged securities position of December 31, 2007,” Thornburg said in an 10-K filing with the Securities and Exchange Commission. “In the event that we cannot meet future margin calls from our available cash position, we might need to selectively sell assets in order to raise cash.”

Thornburg’s disclosure shows why federal regulators are eager to lift limits on the size of the mortgage portfolios at government-sponsored lenders Fannie Mae (FNM) and Freddie Mac (FRE). Wednesday’s cap-lifting decision isn’t likely to be of any immediate help to Thornburg, which specializes in loans bigger than Fannie and Freddie have been handling, though there’s hope that legislation passed earlier this year will eventually lead the GSEs into the so-called nonconforming market. In the meantime, Thornburg is left hoping the market doesn’t melt down further.

Morgan Stanley (MS) is cutting 1,000 jobs as it scales back its residential mortgage business. The move comes as no surprise, given the sharp pullback in the housing market over the past year. Morgan Stanley rivals such as Bear Stearns (BSC) made deep cuts in their own mortgage businesses last year as the mortgage market ground to a halt.

The mortgage crisis has already had a lasting impact on Morgan Stanley: In December, the firm took a $9.4 billion writedown of mortgage-related securities and bid adieu to Zoe Cruz, the executive who had been seen as the heir apparent to CEO John Mack. Morgan Stanley also raised $5 billion from Chinese investors to rebuild its capital base. Now, acknowledging the “continued dislocation in the mortgage markets,” the firm says it has “restructured our residential mortgage business to ensure we are appropriately positioned for the environment going forward.” That is, a much less forgiving environment.

Mortgage insurer MGIC Investment (MTG) is the latest financial guarantor to find itself trying to raise new capital. The Milwaukee-based company took a big hit in the fourth quarter as its business of reimbursing lenders when borrowers miss mortgage payments turned into a giant money pit. MGIC lost $1.47 billion, or $18.17 a share, for the quarter ended Dec. 31, reversing the year-ago profit of $122 million, or $1.47 a share. The latest quarter was hit by a pretax premium deficiency reserve of $1.2 billion tied to MGIC’s guarantees of securitized home equity loan deals - a sign that the company now expects to pay out more in claims than it has received in premiums or reserved against future losses. MGIC said that it doesn’t expect to make money in 2008 and hired an adviser to help it raise capital.

MGIC will have plenty of company in that regard: The bond insurers MBIA (MBI) and Ambac (ABK) have been on the capital-raising circuit for the last two months, with MBIA having raised more than $2 billion from sources including private equity firm Warburg Pincus. For its part, MGIC stresses it  “has adequate capital to meet its claim obligations” and adds that “there have been significant improvements to the company’s business fundamentals,” including tighter credit standards and higher premiums in some segments. Investors better hope those trends hold up, because in the meantime MGIC has a big hole to dig itself out of.

One bright spot in Tuesday’s stock-market swoon was Thornburg Mortgage Associates (TMA), the jumbo mortgage lender that like a number of other housing-finance firms endured a brush with insolvency when the mortgage securities market collapsed this past summer. Unlike rival Countrywide (CFC) - which promised a return to profit but posted a big loss instead - Thornburg returned to profitability in its fourth quarter, after reporting a billion-dollar third-quarter loss following a fire sale of part of its mortgage portfolio. Thornburg made $65 million, or 34 cents a share, down from the year-ago $80 million, or 68 cents a share.

 The company also said it could be a beneficiary of the push to boost the size of loans eligible for purchase by government-sponsored investors Fannie Mae (FNM) and Freddie Mac (FRE). Measures being considered in Congress would raise the so-called conforming loan limit to $625,000 or more from the current $417,000 - a move that could allow Thornburg to sell loans that until recently have had no buyers.

“With the potential for expanded agency guidelines raising the conforming loan limit, the company would expect to benefit from this market change as a notable percentage of its pipeline and existing unsecuritized loan portfolio would qualify under the increased loan limit,” Thornburg said Tuesday. “The company would then be able to create agency securities as well as the private label securities in order to further diversify its portfolio financing strategies.” Thornburg’s experience over the past year shows why investment advisers are always advocating a more diversified portfolio.