Thornburg Mortgage Inc said on Thursday it raised $500 million by selling convertible preferred stock, a move that will boost funding and allow it to resume making new loans after getting hit by a credit squeeze.

Thornburg common shares, down 57 percent from their year-high on May 1, surged 8 percent in early trading.

The stock sale will likely hurt Thornburg's earnings per share but give the jumbo mortgage specialist time to stabilize its funding. Thornburg priced 20 million shares of preferred stock at $25 each.

The dividend rate will be the higher of 10 percent or the dividend yield on Thornburg common stock. The preferred shares are convertible into common shares at any time at $11.50 per common share, the company said.

Net proceeds from the preferred sale were about $473 million. Underwriters have an option to purchase up to 3 million additional shares.

Thornburg also said its estimated capital loss on a $20.5 billion asset sale earlier this month will be $863 million, less than the previous estimate of $930 million. A credit squeeze forced the lender to sell the assets and delay a dividend payment.

Santa Fe, New Mexico-based Thornburg has struggled because investors have lost their appetite for many kinds of residential loans. If lenders can't sell the loans they make, their funding for new loans becomes doubtful as banks tighten credit.

Thornburg's loans are considered high quality, but investors have punished lenders across the board amid rising defaults on risky subprime mortgages.

The company resumed funding existing loans in its pipeline this week while it negotiates a $1.4 billion securitization transaction. If the securitization deal goes through, Thornburg would be able to reduce its adjustable-rate mortgage warehouse financing lines by an equal amount.

The company reaffirmed plans to pay its second-quarter dividend on September 17. Originally, it was supposed to pay 68 cents a share on August 15.

Thornburg shares were up 93 cents to $12.09 in early trade on the New York Stock Exchange.

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