Thornburg Mortgage Inc. swung to a third-quarter profit after cutting projected liabilities on warrants and outstanding debt as the struggling real estate investment trust keeps seeking support for a securities exchange seen as crucial to its survival.

The mortgage lender reported net income of $140 million, or $1.23 a share, compared with a net loss of $1.1 billion, or $89.41 a share, a year earlier.

The latest quarter included a net $91.9 million gain as the reduced liabilities on warrants and its so-called principal participation agreement more than offset a $654.7 million writedown of its portfolio of mortgage-backed securities and adjustable-rate mortgages, which was par. Last year's results included a $1.1 billion writedown.

The principal participation agreement would be ended if Thornburg completes the securities-exchange offer. The agreement calls for giving each investor who also bought senior subordinated secured notes an interest in then-unpaid principal of a portfolio of mortgage-backed securities, along with other rights. Killing that deal is "integral" to the company's being able to maintain its REIT status, which provides tax savings and higher returns during profitable periods. Net interest income more than doubled, to $80.1 million, during the quarter.

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