UPDATE 5-Maguire Properties says not considering bankruptcy

* Two subsidiaries default on mortgage payments

* Board OK's plan to dispose of several properties

* Stock jumps 17 percent (Adds New Century as former tenant)

By Nick Zieminski and Al Yoon

NEW YORK, Aug 10 (Reuters) - Maguire Properties Inc (MPG.N), one of the largest owners of office buildings in Southern California, said on Monday it would avoid bankruptcy even as two subsidiaries defaulted on mortgage payments and it plans to walk away from several properties.

The announcement is the latest example of the toll taken by the commercial mortgage crisis, which to Federal Reserve officials is a major threat to the economy as it tries to extricate itself from recession.

"We are not considering bankruptcy," Chief Executive Nelson Rising told analysts on a conference call, adding the company was comfortable with its cash position and optimistic about attracting investment either in its properties or in the company itself.

Maguire's stock fell as the company announced the defaults and said that it would "dispose" of seven properties, but turned higher after the CEO's call. The stock rose 15 cents to end at $1.04 on the New York Stock Exchange, after earlier falling as low as 71 cents.

By abandoning properties, Maguire may be setting a bad precedent for the $700 billion commercial mortgage-backed securities market that financed a massive run-up in the sector through 2007. The trend could mean increased losses on deals in the market at a time when the Fed is calling on investors to participate in a program aimed at restarting lending to companies like Maguire.

"They basically said that they are giving back buildings that are worth less than what they paid for them," said Thomas Fink, a managing director at Trepp, which aggregates commercial mortgage data. "We would anticipate that there will be some write-downs on some transactions."

Maguire said in a regulatory filing that the two subsidiaries failed to make debt service payments on mortgage loans associated with properties in Orange County and Los Angeles. It said its board had approved the disposal of the seven buildings to shore up its cash position.

TAKING A WALK

Maguire said it will no longer fund the cash shortfall on the properties' mortgages.

Six of the loans were financed in the CMBS market at its peak from 2005 to 2007, and cash flow from the properties depended on fates of some tenants tied to the residential mortgage meltdown, including subprime lender Ameriquest Mortgage Co.

The notice by Maguire highlights "a trend in borrower behavior to increasingly walk away from loans that are not covering their debt service, a trend which we expect to continue," Aaron Bryson, an analyst at Barclays Capital in New York, said in a research note.

Maguire recorded a noncash impairment charge of $345 million associated with the assets, which include Park Place I and II properties in Irvine, part of a residential and office building complex the company bills as an architectural gem. Falling revenue from Park Place II is related to the exit and 2007 bankruptcy of another leading subprime lender, New Century Financial Corp, according to Realpoint LLC.

The real estate investment trust (REIT) said second-quarter funds from operations were negative $339.7 million, or $7.10 per share, compared with negative $56.4 million, or $1.18 per share, a year earlier.

Excluding one-time items, FFO was $3.7 million, or 8 cents per share -- 3 cents higher than analysts' average forecast, according to Reuters Estimates.

The weak U.S. economy has depressed demand for commercial real estate and pushed down rents and sale prices, while the credit crunch makes it hard -- if not impossible -- to fund deals.

Tight credit markets over the past year have led borrowers to seek extensions of loans, hoping the availability of funding and property prices will improve. In the meantime, prices remain at distressed levels, especially for large loans that relied heavily on the CMBS market, analysts said.

"This is illustrative of the fact that we are at the beginning of the commercial real estate cycle, which can lag the rest of the economy by 12 to 18 months," Fink said.

Maguire's stock has plunged from $30 at the end of 2007 as many of its mortgage lending and financial tenants went out of business, pushing up vacancies and lowering the value of properties to less than the company owes on their mortgages.

The Los Angeles-based company has worked to boost occupancy and rental rates, while trying to refinance property loans, sell assets and seek joint ventures. It suspended its dividend last year.

(Editing by Phil Berlowitz)