UPDATE 3-Thornburg Mortgage to seek bankruptcy, close down

* One of largest casualties of U.S. housing crisis

* Creditors to seize collateral

* CEO: Falling mortgage debt prices too much to overcome (Adds lawyer's comment, updates shares)

By Jonathan Stempel

NEW YORK, April 1 (Reuters) - Thornburg Mortgage Inc THMR.PK said it plans to file for Chapter 11 bankruptcy protection and go out of business, making the provider of "jumbo" mortgage loans one of the largest casualties of the nation's housing slump and credit crisis.

The Santa Fe, New Mexico-based company had specialized in making mortgages larger than $417,000 to borrowers with good credit. Thornburg has struggled with liquidity problems since the summer of 2007, when the value of mortgages on its balance sheet began to fall, and later suffered a series of margin calls from its creditors.

"It was caught up in the credit crisis like everyone else," said Christine Myatt, a partner and bankruptcy specialist at the law firm Nexsen Pruet in Greensboro, North Carolina. "It is better to go through Chapter 11 liquidation rater than Chapter 7 because it allows asset sales over a period of time rather than a forced sale right now."

Thornburg said creditors including Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.VX), JPMorgan Chase & Co (JPM.N), Royal Bank of Scotland Group Plc (RBS.L) and UBS AG (UBSN.VX) plan this month to seize and sell their collateral, using proceeds to reduce amounts Thornburg owes. It also plans to transfer its mortgage servicing rights to these creditors.

In addition, Thornburg intends to sell its other assets, with the help of the restructuring firm Houlihan Lokey Howard & Zukin Capital Inc. It will also not make an interest payment due March 31 on senior subordinated notes maturing in 2015.

"Our dissolution was created by one issue, the inability to support the equity (margin) requirements for financing our mortgage securities portfolio, given the continued decline in mortgage-backed securities prices," Chief Executive Larry Goldstone said in a statement.

In a November regulatory filing, Thornburg said it lost $2.75 billion, or $85.71 per share, in the first nine months of 2008. It ended September with $25.4 billion of adjustable-rate mortgage assets on its balance sheet.

ASSET BUYERS SOUGHT

Ronald Silverman, a partner and restructuring specialist at the law firm Bingham McCutchen LLP in New York, said Thornburg might get little in asset sales after paying off lenders.

"The bulk of the value is in the pledged collateral and servicing rights," he said. "Potential purchasers could be other players in the industry, to the extent they want to increase capacity, which is unlikely right now."

Myatt said an Obama administration plan to provide financing for private investors to buy assets, where the government shoulders much of the risk, could produce buyers.

"Any competitor, including large banks, could come in," she said. "We're not seeing a lot of play in private equity and hedge funds, but when we see asset values bottom, we could see them start to come back in."