Thornburg, the American mortgage lender, was teetering on the brink of bankruptcy last night as a key creditor demanded that it liquidate assets after failing to put up $28 million (£13.9 million) in extra collateral.

Thornburg’s escalating credit crisis coincided with new data showing that foreclosures on American properties hit a record in the fourth quarter of 2007.

The Dow Jones industrial average closed at 12,040.4, down 214.60, and the S&P 500 index fell by 29.35 points to finish at 1,304.35 as investors were forced to accept that the credit crunch was far from over.

The fall in US shares to their lowest for 18 months looks set to continue when the markets reopen today after Citigroup announced late last night that it planned to cut the value of mortgages it has on American properties by $45 billion, or 20 per cent, over the next year.

The bank plans to reduce its exposure primarily by parcelling up a greater portion of its mortgage book into bonds to be sold on. The resulting flood of new bonds is expected to exacerbate the credit crunch by further forcing down the price of securities.

JPMorgan issued Thornburg with a “default notice” after the lender was unable to meet a $28 million margin call, which the bank demanded after a significant decline in the value of its assets.

Thornburg, which specialises in mortgages of more than $417,000, also holds bonds backed by home loans on its balance sheet as investments. The value of both the mortgages and the bonds have plummeted in recent weeks as investors shy away from most forms of debt. Creditors such as JPMorgan, already reeling from huge writedowns and increasingly nervous about the prospect of further losses, have been demanding increasing amounts of collateral as the assets owned by debtors, such as Thornburg, decline in value.

JPMorgan, which has loaned Thornburg $320 million, said that it planned to force the mortgage group to liquidate some of its assets. The move is expected to trigger similar action from other creditors, which could push Thornburg into bankruptcy. Shares in Thornburg fell by 51.5 per cent to close at $1.65.

Jason Arnold, an RBC Capital Markets analyst, said: “Thornburg appears to be on the ropes and, barring a sizeable capital injection, which is possible but seems very unlikely at this point, in our view, we see little in the form of upside.

“Cross-default provisions will likely lead other lenders to follow suit in laying claim to assets, leaving little value remaining. With limited options, we now think a bankruptcy filing is a more likely outcome.” Thornburg is the latest in a fast-growing list of borrowers that face being forced to liquidate assets by their creditors because they cannot meet the calls for additional collateral.

Peloton Partners last week became the biggest margin-call victim in the UK as the hedge fund was forced by its bankers, led by Goldman Sachs and UBS, to sell assets at a 30 per cent discount to meet their cash calls. The fund saw about $2 billion of its equity wiped out as a result.

Analysts said that they expected many more forced asset liquidations in the coming months as new data showed that US housing foreclosures, a key source of the credit crunch, hit a record high in the final quarter of last year. Foreclosures jumped to 0.83 per cent in the fourth quarter, from 0.54 per cent the year before, partly because borrowers with variable-rate mortgages walked away from their properties before their payments rose, according to the Mortgage Bankers Association.

A foreclosure is a legal process typically set in motion when a borrower falls 90 days behind on mortgage repayments. About 40 per cent end in a forced sale or repossession of the house. In the remaining cases, the bank and borrower reach an alternative repayment schedule.

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