10-Q 1 a14-19810_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to               .

 

Commission File Number: 1-14100

 

IMPAC MORTGAGE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

33-0675505

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

19500 Jamboree Road, Irvine, California 92612

(Address of principal executive offices)

 

(949) 475-3600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)  Yes o No x

 

There were 9,587,972 shares of common stock outstanding as of November 7, 2014.

 

 

 



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

3

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

4

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

5

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

26

 

 

 

 

Forward-Looking Statements

26

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

26

 

Market Update

26

 

Selected Financial Results for the Three and Nine Months Ended September 30, 2014

27

 

Status of Operations

27

 

Liquidity and Capital Resources

31

 

Critical Accounting Policies

32

 

Financial Condition and Results of Operations

33

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

51

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

51

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

52

 

 

 

ITEM 1A.

RISK FACTORS

52

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

52

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

53

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

53

 

 

 

ITEM 5.

OTHER INFORMATION

53

 

 

 

ITEM 6.

EXHIBITS

53

 

 

 

 

SIGNATURES

54

 

 

 

 

CERTIFICATIONS

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.                CONSOLIDATED FINANCIAL STATEMENTS

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

13,194

 

$

9,969

 

Restricted cash

 

1,863

 

1,467

 

Mortgage loans held-for-sale

 

234,530

 

129,191

 

Mortgage servicing rights

 

13,568

 

35,981

 

Securitized mortgage trust assets

 

5,368,048

 

5,513,166

 

Assets of discontinued operations

 

185

 

2,277

 

Other assets

 

29,420

 

26,274

 

Total assets

 

$

5,660,808

 

$

5,718,325

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Warehouse borrowings

 

$

221,370

 

$

119,634

 

Convertible notes

 

20,000

 

20,000

 

Long-term debt

 

18,040

 

15,871

 

Securitized mortgage trust liabilities

 

5,353,358

 

5,502,585

 

Liabilities of discontinued operations

 

2,864

 

12,883

 

Other liabilities

 

18,532

 

21,481

 

Total liabilities

 

5,634,164

 

5,692,454

 

 

 

 

 

 

 

Commitments and contingencies (See Note 12)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Series A-1 junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued or outstanding

 

 

 

Series B 9.375% redeemable preferred stock, $0.01 par value; liquidation value $16,640; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

 

7

 

7

 

Series C 9.125% redeemable preferred stock, $0.01 par value; liquidation value $35,127; 5,500,000 shares authorized; 1,405,086 noncumulative shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

 

14

 

14

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 9,586,972 and 8,988,910 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

 

96

 

90

 

Additional paid-in capital

 

1,089,025

 

1,084,173

 

Net accumulated deficit:

 

 

 

Cumulative dividends declared

 

(822,520

)

(822,520

)

Retained deficit

 

(239,978

)

(235,893

)

Net accumulated deficit

 

(1,062,498

)

(1,058,413

)

Total stockholders’ equity

 

26,644

 

25,871

 

Total liabilities and stockholders’ equity

 

$

5,660,808

 

$

5,718,325

 

 

See accompanying notes to consolidated financial statements

 

3



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Gain on sale of loans, net

 

$

9,122

 

$

11,349

 

$

20,248

 

$

49,279

 

Real estate services fees, net

 

3,243

 

4,933

 

11,282

 

14,516

 

Servicing income, net

 

913

 

989

 

3,773

 

2,929

 

(Loss) gain on mortgage servicing rights

 

(998

)

(121

)

(3,540

)

3,061

 

Other

 

195

 

(70

)

1,662

 

884

 

Total revenues

 

12,475

 

17,080

 

33,425

 

70,669

 

Expenses:

 

 

 

 

 

 

 

 

 

Personnel expense

 

9,062

 

15,270

 

27,841

 

51,923

 

General, administrative and other

 

4,410

 

6,092

 

14,337

 

19,298

 

Total expenses

 

13,472

 

21,362

 

42,178

 

71,221

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

79,631

 

74,216

 

220,613

 

240,872

 

Interest expense

 

(78,884

)

(74,418

)

(220,275

)

(240,836

)

Change in fair value of long-term debt

 

 

75

 

(424

)

(453

)

Change in fair value of net trust assets, including trust REO gains (losses)

 

92

 

(271

)

7,841

 

(2,377

)

Total other income (expense)

 

839

 

(398

)

7,755

 

(2,794

)

Loss from continuing operations before income taxes

 

(158

)

(4,680

)

(998

)

(3,346

)

Income tax expense (benefit) from continuing operations

 

307

 

(9

)

1,405

 

(1,065

)

Loss from continuing operations

 

(465

)

(4,671

)

(2,403

)

(2,281

)

Loss from discontinued operations, net of tax

 

(736

)

(277

)

(1,682

)

(2,051

)

Net loss

 

(1,201

)

(4,948

)

(4,085

)

(4,332

)

Net earnings attributable to noncontrolling interest

 

 

 

 

(136

)

Net loss attributable to common stockholders

 

$

(1,201

)

$

(4,948

)

$

(4,085

)

$

(4,468

)

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic and diluted:

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to IMH

 

$

(0.05

)

$

(0.53

)

$

(0.26

)

$

(0.28

)

Loss from discontinued operations

 

(0.08

)

(0.03

)

(0.18

)

(0.24

)

Net loss per share available to common stockholders

 

$

(0.13

)

$

(0.56

)

$

(0.44

)

$

(0.52

)

 

See accompanying notes to consolidated financial statements

 

4



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(4,085

)

$

(4,332

)

Gain on sale of MSRs

 

(1,388

)

(88

)

Change in fair value of mortgage servicing rights

 

4,928

 

(2,973

)

Gain on sale of AmeriHome

 

(1,208

)

 

Gain on sale of loans

 

(15,826

)

(53,071

)

Change in fair value of mortgage loans held-for-sale

 

(5,103

)

345

 

Change in fair value of derivatives lending, net

 

(170

)

3,630

 

Provision for repurchases

 

851

 

1,395

 

Origination of mortgage loans held-for-sale

 

(1,737,217

)

(1,983,315

)

Sale and principal reduction on mortgage loans held-for-sale

 

1,635,569

 

2,012,054

 

Gains from REO

 

(8,977

)

(9,232

)

Change in fair value of net trust assets, excluding REO

 

(2,786

)

6,641

 

Change in fair value of long-term debt

 

424

 

453

 

Accretion of interest income and expense

 

137,087

 

165,130

 

Change in REO impairment reserve

 

6,243

 

4,537

 

Amortization of debt issuance costs and discount on note payable

 

31

 

18

 

Stock-based compensation

 

1,377

 

1,345

 

Net change in restricted cash

 

(396

)

1,398

 

Net cash used in operating activities of discontinued operations

 

(7,844

)

(7,605

)

Net change in other assets and liabilities

 

2,994

 

3,736

 

Net cash provided by operating activities

 

4,504

 

140,066

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Net change in securitized mortgage collateral

 

452,046

 

583,248

 

Proceeds from the sale of mortgage servicing rights

 

28,665

 

3,076

 

Finance receivable advances to customers

 

(37,872

)

 

Repayments of finance receivables

 

33,538

 

 

Net change in mortgages held-for-investment

 

6

 

(60

)

Purchase of premises and equipment

 

(18

)

(540

)

Net principal change on investment securities available-for-sale

 

64

 

57

 

Acquisition of noncontrolling interest

 

 

(350

)

Proceeds from the sale of REO

 

27,666

 

40,332

 

Proceeds from the sale of AmeriHome

 

10,200

 

 

Net cash provided by investing activities

 

514,295

 

625,763

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of warehouse borrowings

 

(1,560,956

)

(1,883,070

)

Borrowings under warehouse agreement

 

1,662,692

 

1,889,901

 

Repayment of line of credit

 

(23,250

)

(5,500

)

Borrowings under line of credit

 

20,250

 

5,500

 

Repayment of securitized mortgage borrowings

 

(613,708

)

(785,638

)

Issuance of Convertible Notes

 

 

20,000

 

Principal payments on notes payable

 

 

(3,431

)

Principal payments on capital lease

 

(552

)

(547

)

Capitalized debt issuance costs

 

 

(267

)

Proceeds from exercise of stock options

 

33

 

151

 

Net cash used in financing activities

 

(515,491

)

(762,901

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

3,308

 

2,928

 

Cash and cash equivalents at beginning of year

 

9,969

 

12,755

 

Cash and cash equivalents at end of period - continuing operations

 

13,194

 

15,669

 

Cash and cash equivalents at end of period - discontinued operations

 

83

 

14

 

Cash and cash equivalents at end of period

 

$

13,277

 

$

15,683

 

NON-CASH TRANSACTIONS (Continuing and Discontinued Operations):

 

 

 

 

 

Transfer of securitized mortgage collateral to real estate owned

 

$

23,510

 

$

26,562

 

Mortgage servicing rights retained from loan sales and issuance of mortgage backed securities

 

17,238

 

17,169

 

Common stock issued upon legal settlement

 

3,449

 

2,135

 

Acquisition of equipment purchased through capital leases

 

573

 

1,050

 

Increase in ownership of AmeriHome

 

 

911

 

Common stock issued for acquisition of noncontrolling interest

 

 

1,100

 

 

See accompanying notes to consolidated financial statements

 

5



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share data or as otherwise indicated)

 

Note 1.—Summary of Business and Financial Statement Presentation

 

Business Summary

 

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Maryland corporation incorporated in August 1995 and has the following subsidiaries: Integrated Real Estate Service Corporation (IRES), IMH Assets Corp. (IMH Assets) and Impac Funding Corporation (IFC).

 

The Company’s continuing operations include mortgage lending and real estate services conducted by IRES and the long-term mortgage portfolio (residual interests in securitizations reflected as net trust assets and liabilities in the consolidated balance sheets). The discontinued operations include the former non-conforming mortgage operations conducted by IFC and subsidiaries.

 

The information set forth in these notes is presented on a continuing operations basis, unless otherwise stated.

 

Financial Statement Presentation

 

The accompanying unaudited consolidated financial statements of IMH and its subsidiaries (as defined above) have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These interim period condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the United States Securities and Exchange Commission (SEC).

 

All significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation.

 

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with GAAP. The items affected by such estimates and assumptions include the valuation of trust assets and trust liabilities, contingencies, the estimated obligation of repurchase liabilities related to sold loans, the valuation of long-term debt, mortgage servicing rights, mortgage loans held-for-sale and interest rate lock commitments. Actual results could differ from those estimates and assumptions.

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The Company will be required to adopt this ASU beginning with the quarter ending March 31, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, (ASU 2014-12).  The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition..  ASU 2014-12 becomes effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. A collateralized financing entity (CFE) is a variable interest entity with nominal or no equity that holds financial assets and issues beneficial interests in those financial assets. The ASU is intended to address

 

6



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diversity in practice in accounting for the measurement difference between financial assets and financial liabilities of CFEs. The ASU is effective for annual periods and interim periods with those annual periods beginning after December 15, 2015. A reporting entity may apply the ASU using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure. This update requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor.  The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. The ASU is effective for annual and interim reporting periods beginning January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

Note 2.—Mortgage Loans Held-for-Sale

 

A summary of the unpaid principal balance of mortgage loans held-for-sale by type is presented below:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Government (1)

 

$

159,765

 

$

81,292

 

Conventional (2)

 

66,066

 

44,303

 

Fair value adjustment

 

8,699

 

3,596

 

Total mortgage loans held-for-sale

 

$

234,530

 

$

129,191

 

 


(1)         Includes all government-insured loans including Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA).

 

(2)         Includes loans eligible for sale to Fannie Mae and Freddie Mac.

 

Gain on loans held-for-sale (LHFS) is comprised of the following for the three and nine months ended September 30, 2014 and 2013:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Gain on sale of mortgage loans

 

$

29,578

 

$

6,413

 

$

62,339

 

$

50,188

 

Premium from servicing retained loan sales

 

8,913

 

5,894

 

17,238

 

17,169

 

Unrealized gains (losses) from derivative financial instruments

 

84

 

(5,677

)

170

 

(3,631

)

Realized (losses) gains from derivative financial instruments

 

(2,436

)

7,109

 

(8,579

)

17,747

 

Mark to market gain (loss) on LHFS

 

2,294

 

5,326

 

5,103

 

(345

)

Direct origination expenses, net

 

(28,974

)

(7,303

)

(55,172

)

(30,454

)

Provision for repurchases

 

(337

)

(413

)

(851

)

(1,395

)

Total gain on sale of loans, net

 

$

9,122

 

$

11,349

 

$

20,248

 

$

49,279

 

 

Note 3.—Mortgage Servicing Rights

 

The Company retains mortgage servicing rights (MSRs) from its sales of certain mortgage loans. MSRs are reported at fair value based on the income derived from the net positive cash flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the unpaid principal balances (UPB) of the loans. The servicing fees are collected from the monthly payments made by the mortgagors or when the underlying real estate is foreclosed upon and liquidated. The Company may receive other remuneration from rights to various mortgagor-contracted fees such as late charges, collateral reconveyance charges, nonsufficient fund fees and the Company is generally entitled to retain the interest earned on funds held pending remittance (or float) related to its collection of mortgagor principal, interest, tax and insurance payments.

 

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The following table summarizes the activity of MSRs for the nine months ending September 30, 2014 and 2013:

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

Balance at beginning of period

 

$

35,981

 

$

10,703

 

Additions from servicing retained loan sales

 

17,238

 

17,169

 

Reductions from bulk sales

 

(27,277

)

(2,988

)

Reduction from sale of AmeriHome

 

(7,446

)

 

Changes in fair value (1)

 

(4,928

)

2,973

 

Fair value of MSRs at end of period

 

$

13,568

 

$

27,857

 

 


(1)         Changes in fair value are included within (loss) gain on mortgage servicing rights in the consolidated statements of operations.

 

At September 30, 2014 and December 31, 2013, the outstanding principal balance of the mortgage servicing portfolio was comprised of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Government

 

$

727,954

 

$

1,203,478

 

Conventional

 

1,566,726

 

1,837,475

 

2010 Acquisition of AmeriHome (1)

 

 

87,693

 

Servicing sold but not transferred

 

(1,046,948

)

 

Total loans serviced

 

$

1,247,732

 

$

3,128,646

 

 


(1)         Represents servicing portfolio acquired in the 2010 acquisition of AmeriHome and includes government and conventional loans originated by AmeriHome prior to the Company’s acquisition. During March 2014, the Company sold AmeriHome.  See Note 14. Sale of AmeriHome for more details.

 

The table below illustrates hypothetical changes in fair values of MSRs, caused by assumed immediate changes to key assumptions that are used to determine fair value.  See Note 8.—Fair Value of Financial Instruments, for a description of the key assumptions used to determine the fair value of MSRs.

 

Mortgage Servicing Rights Sensitivity Analysis

 

September 30,
 2014

 

 

 

 

 

Fair value of MSRs

 

$

13,568

 

 

 

 

 

Prepayment Speed:

 

 

 

Decrease in fair value from 100 basis point (bp) adverse change

 

(486

)

Decrease in fair value from 200 bp adverse change

 

(962

)

 

 

 

 

Discount Rate:

 

 

 

Decrease in fair value from 100 bp adverse change

 

(486

)

Decrease in fair value from 200 bp adverse change

 

(939

)

 

Sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of changes in assumptions to changes in fair value may not be linear.  Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas a change in one factor may result in changes to another.  Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.  As a result, actual future changes in MSR values may differ significantly from those displayed above.

 

8



Table of Contents

 

(Loss) gain on mortgage servicing rights are comprised of the following for the three and nine months ended September 30, 2014 and 2013:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Gain (loss) on sale of mortgage servicing rights

 

$

207

 

$

(28

)

$

1,388

 

$

88

 

Change in fair value of mortgage servicing rights

 

(1,205

)

(93

)

(4,928

)

2,973

 

(Loss) gain on mortgage servicing rights

 

$

(998

)

$

(121

)

$

(3,540

)

$

3,061

 

 

During the three and nine months ended September 30, 2014, the Company sold $1.0 billion and $2.6 billion in UPB of servicing at a gain of $207 thousand and $1.4 million.  The Company also recorded a loss of $1.2 million and $4.9 million for the change in fair value of mortgage servicing rights during the three and nine months ended September 30, 2014.

 

Note 4.—Warehouse Borrowings

 

The Company, through its subsidiaries, is a party to four Master Repurchase Agreements with lenders providing warehouse facilities. The warehouse facilities are used to fund, and are secured by, residential mortgage loans that are held for sale.

 

The following table presents certain information on warehouse borrowings and related accrued interest for the periods indicated:

 

 

 

Maximum

 

 

 

 

 

 

 

Borrowing

 

Balance Outstanding At

 

 

 

Capacity

 

September 30, 2014

 

December 31, 2013

 

Short-term borrowings:

 

 

 

 

 

 

 

Repurchase agreement 1

 

$

100,000

 

$

65,966

 

$

50,794

 

Repurchase agreement 2

 

40,000

 

38,084

 

19,493

 

Repurchase agreement 3 (1)

 

50,000

 

29,087

 

15,592

 

Repurchase agreement 4 (2)

 

125,000

 

88,233

 

33,755

 

Total short-term borrowings

 

$

315,000

 

$

221,370

 

$

119,634

 

 


(1)         In September 2014, the maturity was extended to September 2015.

 

(2)         In September 2014, the maturity was extended to September 2015.  As part of the agreement, the Company has a $40 million sublimit for re-warehousing with $4.3 million outstanding at September 30, 2014.

 

Note 5.—Convertible Notes

 

In April 2013, the Company entered into a Note Purchase Agreement with the purchasers named therein (Noteholders), whereby the Company issued $20.0 million in original aggregate principal amount of Convertible Promissory Notes Due 2018 (Convertible Notes). The Convertible Notes mature on or before April 30, 2018 and accrue interest at a rate of 7.5% per annum, to be paid quarterly.

 

Note 6.—Line of Credit Agreement

 

In June 2014, the Company, through its subsidiaries, amended the $4.0 million working capital line of credit agreement with a national bank at an interest rate of one-month LIBOR plus 3.50% extending the expiration to June 2015.  Under the terms of the agreement the Company and its subsidiaries are required to maintain various financial and other covenants.  There was no outstanding balance on the working capital line of credit as of September 30, 2014, which is included in other liabilities in the accompanying consolidated balance sheets.

 

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Table of Contents

 

Note 7.—Securitized Mortgage Trusts

 

Trust Assets

 

Trust assets, which are recorded at fair value, are comprised of the following at September 30, 2014 and December 31, 2013:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Securitized mortgage collateral

 

$

5,350,474

 

$

5,494,152

 

Real estate owned

 

17,484

 

18,906

 

Investment securities available-for-sale

 

90

 

108

 

Total trust assets

 

$

5,368,048

 

$

5,513,166

 

 

Trust Liabilities

 

Trust liabilities, which are recorded at fair value, are comprised of the following at September 30, 2014 and December 31, 2013:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Securitized mortgage borrowings

 

$

5,346,791

 

$

5,492,371

 

Derivative liabilities

 

6,567

 

10,214

 

Total trust liabilities

 

$

5,353,358

 

$

5,502,585

 

 

Change in fair value of net trust assets, including trust real estate owned (REO) gains (losses)

 

Changes in fair value of net trust assets, including trust REO gains (losses) are comprised of the following for the three and nine months ended September 30, 2014 and 2013:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Change in fair value of net trust assets, excluding REO

 

$

139

 

$

(3,947

)

$

(1,136

)

$

(11,609

)

(Losses) gains from REO

 

(47

)

3,676

 

8,977

 

9,232

 

Change in fair value of net trust assets, including trust REO gains (losses)

 

$

92

 

$

(271

)

$

7,841

 

$

(2,377

)

 

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Table of Contents

 

Note 8.—Fair Value of Financial Instruments

 

The use of fair value to measure the Company’s financial instruments is fundamental to its consolidated financial statements and is a critical accounting estimate because a substantial portion of its assets and liabilities are recorded at estimated fair value.

 

The following table presents the estimated fair value of financial instruments included in the consolidated financial statements as of the dates indicated:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Carrying

 

Estimated Fair Value

 

Carrying

 

Estimated Fair Value

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,194

 

$

13,194

 

$

 

$

 

$

9,969

 

$

9,969

 

$

 

$

 

Restricted cash

 

1,863

 

1,863

 

 

 

1,467

 

1,467

 

 

 

Mortgage loans held-for-sale

 

234,530

 

 

234,530

 

 

129,191

 

 

129,191

 

 

Finance receivables

 

4,334

 

 

4,334

 

 

 

 

 

 

Mortgage servicing rights

 

13,568

 

 

 

13,568

 

35,981

 

 

 

35,981

 

Derivative assets, lending, net

 

2,316

 

 

 

2,316

 

1,992

 

 

1,079

 

913

 

Investment securities available-for-sale

 

90

 

 

 

90

 

108

 

 

 

108

 

Securitized mortgage collateral

 

5,350,474

 

 

 

5,350,474

 

5,494,152

 

 

 

5,494,152

 

Warrant

 

164

 

 

 

164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse borrowings

 

$

221,370

 

$

 

$

221,370

 

$

 

$

119,634

 

$

 

$

119,634

 

$

 

Convertible notes

 

20,000

 

 

 

20,000

 

20,000

 

 

 

20,000

 

Long-term debt

 

18,040

 

 

 

18,040

 

15,871

 

 

 

15,871

 

Securitized mortgage borrowings

 

5,346,791

 

 

 

5,346,791

 

5,492,371

 

 

 

5,492,371

 

Derivative liabilities, securitized trusts

 

6,567

 

 

 

6,567

 

10,214

 

 

 

10,214

 

Derivative liabilities, lending, net

 

165

 

 

165

 

 

 

 

 

 

Line of credit

 

 

 

 

 

3,000

 

 

3,000

 

 

 

The fair value amounts above have been estimated by management using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates of fair value in both inactive and orderly markets. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

For securitized mortgage collateral and securitized mortgage borrowings, the underlying Alt-A residential and commercial loans and mortgage-backed securities market have experienced significant declines in market activity, along with a lack of orderly transactions. The Company’s methodology to estimate fair value of these assets and liabilities include the use of internal pricing techniques such as the net present value of future expected cash flows (with observable market participant assumptions, where available) discounted at a rate of return based on the Company’s estimates of market participant requirements. The significant assumptions utilized in these internal pricing techniques, which are based on the characteristics of the underlying collateral, include estimated credit losses, estimated prepayment speeds and appropriate discount rates.

 

Refer to Recurring Fair Value Measurements below for a description of the valuation methods used to determine the fair value of investment securities available-for-sale, securitized mortgage collateral and borrowings, derivative assets and liabilities, long-term debt, mortgage servicing rights and mortgage loans held-for-sale.

 

The carrying amount of cash, cash equivalents and restricted cash approximates fair value.

 

Finance receivables carrying amounts approximate fair value due to the short-term nature of the assets and do not present unanticipated interest rate or credit concerns.

 

Warehouse borrowings carrying amounts approximate fair value due to the short-term nature of the liabilities and do not present unanticipated interest rate or credit concerns.

 

Convertible notes are recorded at amortized cost. The estimated fair value is determined using a discounted cash flow model using estimated market rates.

 

Line of credit carrying amount approximates fair value due to the short-term nature of the liability and does not present unanticipated interest rate or credit concerns.

 

11



Table of Contents

 

Fair Value Hierarchy

 

The application of fair value measurements may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value.

 

FASB ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

·                  Level 1—Quoted prices (unadjusted) in active markets for identical instruments or liabilities that an entity has the ability to assess at measurement date.

 

·                  Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for an asset or liability, including interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, loss severities, credit risks and default rates; and market-corroborated inputs.

 

·                  Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers is unobservable.

 

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when estimating fair value.

 

As a result of the lack of observable market data resulting from inactive markets, the Company has classified its investment securities available-for-sale, securitized mortgage collateral and borrowings, net derivative liabilities, securitized trusts, long-term debt, interest rate lock commitments (IRLCs), mortgage servicing rights and warrant as Level 3 fair value measurements. Level 3 assets and liabilities were 96% and 99% and 98% and 99%, respectively, of total assets and total liabilities measured at estimated fair value at September 30, 2014 and December 31, 2013.

 

Recurring Fair Value Measurements

 

The Company assesses the financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by ASC Topic 810. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the beginning of the reporting period. There were no material transfers between our Level 1 and Level 2 classified instruments during the three and nine months ended September 30, 2014.

 

12



Table of Contents

 

The following tables present the Company’s assets and liabilities that are measured at estimated fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option at September 30, 2014 and December 31, 2013, based on the fair value hierarchy:

 

 

 

Recurring Fair Value Measurements

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

$

 

$

 

$

90

 

$

 

$

 

$

108

 

Mortgage loans held-for-sale

 

 

234,530

 

 

 

129,191

 

 

Derivative assets, lending, net (1)

 

 

 

2,316

 

 

1,079

 

913

 

Mortgage servicing rights

 

 

 

13,568

 

 

 

35,981

 

Warrant

 

 

 

164

 

 

 

 

Securitized mortgage collateral

 

 

 

5,350,474

 

 

 

5,494,152

 

Total assets at fair value

 

$

 

$

234,530

 

$

5,366,612

 

$

 

$

130,270

 

$

5,531,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

 

$

 

$

5,346,791

 

$

 

$

 

$

5,492,371

 

Derivative liabilities, securitized trusts

 

 

 

6,567

 

 

 

10,214

 

Long-term debt

 

 

 

18,040

 

 

 

15,871

 

Derivative liabilities, lending, net (2)

 

 

165

 

 

 

 

 

Total liabilities at fair value

 

$

 

$

165

 

$

5,371,398

 

$

 

$

 

$

5,518,456

 

 


(1)         At September 30, 2014, derivative assets, lending, net included $2.3 million in IRLCs associated with the Company’s mortgage lending operations, and is included in other assets in the accompanying consolidated balance sheets. At December 31, 2013, derivative assets, lending, net included $913 thousand in IRLCs and $1.1 million in hedging instruments, respectively, associated with the Company’s mortgage lending operations, and is included in other assets and other liabilities in the accompanying consolidated balance sheets.

(2)         At September 30, 2014, derivative liabilities, lending, net included $165 thousand in hedging instruments associated with the Company’s mortgage lending operations and is included in other liabilities in the accompanying consolidated balance sheets.

 

The following tables present reconciliations for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the three months ended September 30, 2014

 

 

 

Investment
securities
available-for-sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing
rights

 

Interest rate lock
commitments, net

 

Long-term
debt

 

Warrant

 

Fair value, June 30, 2014

 

$

91

 

$

5,510,741

 

$

(5,507,629

)

$

(7,949

)

$

16,166

 

$

3,073

 

$

(17,555

)

$

 

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

6

 

21,312

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(64,502

)

 

 

 

(485

)

 

Change in fair value

 

11

 

(27,784

)

27,899

 

13

 

(1,205

)

(757

)

 

 

Total gains (losses) included in earnings

 

17

 

(6,472

)

(36,603

)

13

 

(1,205

)

(757

)

(485

)

 

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

8,913

 

 

 

164

 

Settlements

 

(18

)

(153,795

)

197,441

 

1,369

 

(10,306

)

 

 

 

Fair value, September 30, 2014

 

$

90

 

$

5,350,474

 

$

(5,346,791

)

$

(6,567

)

$

13,568

 

$

2,316

 

$

(18,040

)

$

164

 

Unrealized gains (losses) still held (2)

 

$

84

 

$

(1,446,463

)

$

3,581,924

 

$

(6,132

)

$

13,568

 

$

2,316

 

$

52,723

 

$

164

 

 


(1)             Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $1.8 million for the three months ended September 30, 2014.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)             Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at September 30, 2014.

 

13



Table of Contents

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the three months ended September 30, 2013

 

 

 

Investment
securities
available-for-sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing
rights

 

Interest rate lock
commitments, net

 

Call option

 

Put
option

 

Long-term
debt

 

Fair value, June 30, 2013

 

$

110

 

$

5,639,986

 

$

(5,631,749

)

$

(13,276

)

$

22,056

 

$

300

 

$

479

 

$

 

$

(14,399

)

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

8

 

5,963

 

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(58,241

)

 

 

 

 

 

(642

)

Change in fair value

 

8

 

10,525

 

(14,803

)

323

 

(93

)

3,503

 

 

 

75

 

Total gains (losses) included in earnings

 

16

 

16,488

 

(73,044

)

323

 

(93

)

3,503

 

 

 

(567

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

5,894

 

 

 

 

 

Settlements

 

(11

)

(202,032

)

260,793

 

1,552

 

 

 

(479

)

 

 

Fair value, September 30, 2013

 

$

115

 

$

5,454,442

 

$

(5,444,000

)

$

(11,401

)

$

27,857

 

$

3,803

 

$

 

$

 

$

(14,966

)

Unrealized gains (losses) still held (2)

 

$

73

 

$

(2,172,446

)

$

4,307,985

 

$

(10,785

)

$

27,857

 

$

3,803

 

$

 

$

 

$

55,797

 

 


(1)             Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $1.1 million for the three months ended September 30, 2013.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)             Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at September 30, 2013.

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the nine months ended September 30, 2014

 

 

 

Investment
securities
available-for-
sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing rights

 

Interest rate lock
commitments,
net

 

Long-term
debt

 

Warrant

 

Fair value, December 31, 2013

 

$

108

 

$

5,494,152

 

$

(5,492,371

)

$

(10,214

)

$

35,981

 

$

913

 

$

(15,871

)

$

 

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

19

 

42,268

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(177,629

)

 

 

 

(1,745

)

 

Change in fair value

 

27

 

289,610

 

(290,360

)

(413

)

(4,928

)

1,414

 

(424

)

 

Total gains (losses) included in earnings

 

46

 

331,878

 

(467,989

)

(413

)

(4,928

)

1,414

 

(2,169

)

 

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

17,238

 

 

 

164

 

Settlements

 

(64

)

(475,556

)

613,569

 

4,060

 

(34,723

)

(11

)

 

 

Fair value, September 30, 2014

 

$

90

 

$

5,350,474

 

$

(5,346,791

)

$

(6,567

)

$

13,568

 

$

2,316

 

$

(18,040

)

$

164

 

 


(1)             Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $4.0 million for the nine months ended September 30, 2014.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

 

14



Table of Contents

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the nine months ended September 30, 2013

 

 

 

Investment
securities
available-for-
sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing rights

 

Interest rate lock
commitments,
net

 

Call option

 

Put
option

 

Long-term
debt

 

Fair value, December 31, 2012

 

$

110

 

$

5,787,884

 

$

(5,777,456

)

$

(17,163

)

$

10,703

 

$

3,970

 

$

368

 

$

(1

)

$

(12,731

)

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

27

 

27,115

 

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(190,490

)

 

 

 

 

 

(1,782

)

Change in fair value

 

35

 

249,253

 

(261,602

)

705

 

2,973

 

(167

)

111

 

1

 

(453

)

Total (losses) gains included in earnings

 

62

 

276,368

 

(452,092

)

705

 

2,973

 

(167

)

111

 

1

 

(2,235

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

17,169

 

 

 

 

 

Settlements

 

(57

)

(609,810

)

785,548

 

5,057

 

(2,988

)

 

(479

)

 

 

Fair value, September 30, 2013

 

$

115

 

$

5,454,442

 

$

(5,444,000

)

$

(11,401

)

$

27,857

 

$

3,803

 

$

 

$

 

$

(14,966

)

 


(1)             Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $4.1 million for the nine months ended September 30, 2013.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

 

The following table presents quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and non-recurring basis at September 30, 2014:

 

Financial Instrument

 

Estimated Fair
Value

 

Valuation
Technique

 

Unobservable
Input

 

Range of
Inputs

 

Assets and liabilities backed by real estate

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale,

 

$

90

 

DCF

 

Discount rates

 

3.4 - 25.0%

 

Securitized mortgage collateral, and

 

5,350,474

 

 

 

Prepayment rates

 

0.8 - 29.5%

 

Securitized mortgage borrowings

 

(5,346,791

)

 

 

Default rates

 

0.6 - 12.5%

 

 

 

 

 

 

 

Loss severities

 

7.0 - 61.2%

 

Other assets and liabilities

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

13,568

 

DCF

 

Discount rate

Prepayment rates

 

10.5 - 11.5%

2.9 - 14.5%

 

Derivative liabilities, net, securitized trusts

 

(6,567

)

DCF

 

1M forward LIBOR

 

0.2 - 3.6%

 

Derivative assets - IRLCs, net

 

2,316

 

Market pricing

 

Pull -through rate

 

42.0 - 99.0%

 

Long-term debt

 

(18,040

)

DCF

 

Discount rate

 

23.5%

 

Lease liability

 

(1,705

)

DCF

 

Discount rate

 

12.0%

 

 


DCF = Discounted Cash Flow

1M = 1 Month

 

For assets and liabilities backed by real estate, a significant increase in discount rates, default rates or loss severities would result in a significantly lower estimated fair value.  The effect of changes in prepayment speeds would have differing effects depending on the seniority or other characteristics of the instrument.  For other assets and liabilities, a significant increase in discount rates would result in a significantly lower estimated fair value.  A significant increase in one-month LIBOR would result in a significantly higher estimated fair value for derivative liabilities, net, securitized trusts.  The Company believes that the imprecision of an estimate could be significant.

 

15



Table of Contents

 

The following tables present the changes in recurring fair value measurements included in net earnings (loss) for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Recurring Fair Value Measurements

 

 

 

Change in Fair Value Included in Net Loss

 

 

 

For the three months ended September 30, 2014

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other
Revenue

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

6

 

$

 

$

11

 

$

 

$

 

$

 

$

17

 

Securitized mortgage collateral

 

21,312

 

 

(27,784

)

 

 

 

(6,472

)

Securitized mortgage borrowings

 

 

(64,502

)

27,899

 

 

 

 

(36,603

)

Derivative liabilities, net, securitized trusts

 

 

 

13

(2)

 

 

 

13

 

Long-term debt

 

 

(485

)

 

 

 

 

(485

)

Mortgage servicing rights (3)

 

 

 

 

 

(1,205

)

 

(1,205

)

Mortgage loans held-for-sale

 

 

 

 

 

 

2,294

 

2,294

 

Derivative assets - IRLCs

 

 

 

 

 

 

(757

)

(757

)

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

841

 

841

 

Total

 

$

21,318

 

$

(64,987

)

$

139

 

$

 

$

(1,205

)

$

2,378

 

$

(42,357

)

 


(1)         Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)         Included in this amount is $1.3 million in changes in the fair value of derivative instruments, offset by $1.3 million in cash payments from the securitization trusts for the three months ended September 30, 2014.

(3)         Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations.

 

 

 

Recurring Fair Value Measurements

 

 

 

Change in Fair Value Included in Net Loss

 

 

 

For the three months ended September 30, 2013

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other
Revenue

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

8

 

$

 

$

8

 

$

 

$

 

$

 

$

16

 

Securitized mortgage collateral

 

5,963

 

 

10,525

 

 

 

 

16,488

 

Securitized mortgage borrowings

 

 

(58,241

)

(14,803

)

 

 

 

(73,044

)

Derivative liabilities, net, securitized trusts

 

 

 

323

(2)

 

 

 

323

 

Long-term debt

 

 

(642

)

 

75

 

 

 

(567

)

Mortgage servicing rights (3)

 

 

 

 

 

(93

)

 

(93

)

Mortgage loans held-for-sale

 

 

 

 

 

 

5,326

 

5,326

 

Derivative assets - IRLCs

 

 

 

 

 

 

3,503

 

3,503

 

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

(9,180

)

(9,180

)

Total

 

$

5,971

 

$

(58,883

)

$

(3,947

)

$

75

 

$

(93

)

$

(351

)

$

(57,228

)

 


(1)         Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)         Included in this amount is $1.8 million in change in the fair value of derivative instruments, offset by $1.5 million in cash payments from the securitization trusts for the three months ended September 30, 2013.

(3)         Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations.

 

16



Table of Contents

 

 

 

Recurring Fair Value Measurements

 

 

 

Changes in Fair Value Included in Net Loss

 

 

 

For the nine months ended September 30, 2014

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other
Revenue

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

19

 

$

 

$

27

 

$

 

$

 

$

 

$

46

 

Securitized mortgage collateral

 

42,268

 

 

289,610

 

 

 

 

331,878

 

Securitized mortgage borrowings

 

 

(177,629

)

(290,360

)

 

 

 

(467,989

)

Derivative liabilities, net, securitized trusts

 

 

 

(413

)(2)

 

 

 

(413

)

Long-term debt

 

 

(1,745

)

 

(424

)

 

 

(2,169

)

Mortgage servicing rights (3)

 

 

 

 

 

(4,928

)

 

(4,928

)

Mortgage loans held-for-sale

 

 

 

 

 

 

5,103

 

5,103

 

Derivative assets - IRLCs

 

 

 

 

 

 

1,414

 

1,414

 

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

(1,244

)

(1,244

)

Total

 

$

42,287

 

$

(179,374

)

$

(1,136

)(4)

$

(424

)

$

(4,928

)

$

5,273

 

$

(138,302

)

 


(1)         Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)         Included in this amount is $3.5 million in changes in the fair value of derivative instruments, offset by $3.9 million in cash payments from the securitization trusts for the nine months ended September 30, 2014.

(3)         Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations.

(4)         For the nine months ended September 30, 2014, change in the fair value of net trust assets, excluding REO was $1.1 million.  Excluded from the $(2.8) million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statements of cash flows is $3.9 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

 

 

 

Recurring Fair Value Measurements

 

 

 

Changes in Fair Value Included in Net Loss

 

 

 

For the nine months ended September 30, 2013

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other
Revenue

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

27

 

$

 

$

35

 

$

 

$

 

$

 

$

62

 

Securitized mortgage collateral

 

27,115

 

 

249,253

 

 

 

 

276,368

 

Securitized mortgage borrowings

 

 

(190,490

)

(261,602

)

 

 

 

(452,092

)

Derivative liabilities, net, securitized trusts

 

 

 

705

(2)

 

 

 

705

 

Long-term debt

 

 

(1,782

)

 

(453

)

 

 

(2,235

)

Mortgage servicing rights (3)

 

 

 

 

 

2,973

 

 

2,973

 

Call option

 

 

 

 

 

111

 

 

111

 

Put option

 

 

 

 

 

1

 

 

1

 

Mortgage loans held-for-sale

 

 

 

 

 

 

(345

)

(345

)

Derivative assets - IRLCs

 

 

 

 

 

 

(167

)

(167

)

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

(3,464

)

(3,464

)

Total

 

$

27,142

 

$

(192,272

)

$

(11,609

)(4)

$

(453

)

$

3,085

 

$

(3,976

)

$

(178,083

)

 


(1)         Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)         Included in this amount is $5.7 million in changes in the fair value of derivative instruments, offset by $5.0 million in cash payments from the securitization trusts for the nine months ended September 30, 2013.

(3)         Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations.

(4)         For the nine months ended September 30, 2013, change in the fair value of net trust assets, excluding REO was $11.6 million.  Excluded from the $6.6 million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statements of cash flows is $5.0 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

 

The following is a description of the measurement techniques for items recorded at estimated fair value on a recurring basis.

 

17



Table of Contents

 

Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value. The investment securities consist primarily of non-investment grade mortgage-backed securities. The fair value of the investment securities is measured based upon the Company’s expectation of inputs that other market participants would use. Such assumptions include judgments about the underlying collateral, prepayment speeds, future credit losses, forward interest rates and certain other factors. Given the lack of observable market data as of September 30, 2014 and December 31, 2013 relating to these securities, the estimated fair value of the investment securities available-for-sale was measured using significant internal expectations of market participants’ assumptions. Investment securities available-for-sale is considered a Level 3 measurement at September 30, 2014.

 

Mortgage servicing rights—The Company elected to carry its entire mortgage servicing rights arising from its mortgage loan origination operation at estimated fair value. The fair value of mortgage servicing rights is based upon market prices for similar instruments and a discounted cash flow model. The valuation model incorporates assumptions that market participants would use in estimating the fair value of servicing. These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Mortgage servicing rights are considered a Level 3 measurement at September 30, 2014.

 

Mortgage loans held-for-sale—The Company elected to carry its mortgage loans held-for-sale originated or acquired at estimated fair value. Fair value is based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. Given the meaningful level of secondary market activity for mortgage loans, active pricing is available for similar assets and accordingly, the Company classifies its mortgage loans held-for-sale as a Level 2 measurement at September 30, 2014.

 

Securitized mortgage collateral—The Company elected to carry all of its securitized mortgage collateral at fair value. These assets consist primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value measurements are based on the Company’s internal models used to compute the net present value of future expected cash flows with observable market participant assumptions, where available. The Company’s assumptions include its expectations of inputs that other market participants would use in pricing these assets. These assumptions include judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of September 30, 2014, securitized mortgage collateral had an unpaid principal balance of $6.8 billion, compared to an estimated fair value on the Company’s balance sheet of $5.4 billion. The aggregate unpaid principal balance exceeds the fair value by $1.4 billion at September 30, 2014. As of September 30, 2014, the unpaid principal balance of loans 90 days or more past due was $1.1 billion compared to an estimated fair value of $0.4 billion. The aggregate unpaid principal balances of loans 90 days or more past due exceed the fair value by $0.7 billion at September 30, 2014. Securitized mortgage collateral is considered a Level 3 measurement at September 30, 2014.

 

Securitized mortgage borrowings—The Company elected to carry all of its securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by non-conforming mortgage loans. Fair value measurements include the Company’s judgments about the underlying collateral and assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of September 30, 2014, securitized mortgage borrowings had an outstanding principal balance of $6.8 billion, net of $2.2 billion in bond losses, compared to an estimated fair value of $5.3 billion. The aggregate outstanding principal balance exceeds the fair value by $1.5 billion at September 30, 2014. Securitized mortgage borrowings are considered a Level 3 measurement at September 30, 2014.

 

Long-term debt—The Company elected to carry all of its long-term debt (consisting of trust preferred securities and junior subordinated notes) at fair value. These securities are measured based upon an analysis prepared by management, which considered the Company’s own credit risk, including settlements with trust preferred debt holders and discounted cash flow analysis. As of September 30, 2014, long-term debt had an unpaid principal balance of $70.5 million compared to an estimated fair value of $18.0 million. The aggregate unpaid principal balance exceeds the fair value by $52.5 million at September 30, 2014. The long-term debt is considered a Level 3 measurement at September 30, 2014.

 

Derivative assets and liabilities, Securitized trusts—For non-exchange traded contracts, fair value is based on the amounts that would be required to settle the positions with the related counterparties as of the valuation date. Valuations of derivative assets and liabilities are based on observable market inputs, if available. To the extent observable market inputs are not available, fair values measurements include the Company’s judgments about future cash flows, forward interest rates and certain other factors, including counterparty risk. Additionally, these values also take into account the Company’s own credit standing, to the extent applicable; thus, the valuation of the derivative instrument includes the estimated value of the net credit differential between the counterparties to the derivative contract. As of September 30, 2014, the notional balance of derivative assets and liabilities, securitized trusts was $102.8 million. These derivatives are included in the consolidated securitization trusts, which are nonrecourse to the Company, and thus the economic risk from these derivatives is limited to the Company’s residual interests in the securitization trusts. Derivative assets and liabilities, securitized trusts are considered a Level 3 measurement at September 30, 2014.

 

18



Table of Contents

 

Derivative assets and liabilities, Lending—The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as free standing derivatives. IRLCs and hedging instruments can be either assets or liabilities depending on interest rate fluctuations subsequent to entering into the commitments.  IRLCs are entered into with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked in that interest rate. These commitments are determined to be derivative instruments in accordance with GAAP. Hedging instruments (typically TBA MBS) are used to hedge the fair value changes associated with changes in interest rates relating to its mortgage lending operations. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date the loan is committed for sale. The estimated fair value of IRLCs are based on underlying loan types with similar characteristics using the TBA MBS market, which is actively quoted and easily validated through external sources. The data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan, adjusted for current market conditions. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs, the base value is then adjusted for the anticipated Pull-through Rate. The anticipated Pull-through Rate is an unobservable input based on historical experience, which results in classification of IRLCs as a Level 3 measurement at September 30, 2014.

 

The fair value of the hedging instruments is based on the actively quoted TBA MBS market using observable inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date. Therefore, the hedging instruments are classified as a Level 2 measurement at September 30, 2014.

 

The following table includes information for the derivative assets and liabilities, lending for the periods presented:

 

 

 

 

 

 

 

Total Gains (Losses) (1)

 

 

 

Notional Balance

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

September 30,
2014

 

September 30,
2013

 

2014

 

2013

 

2014

 

2013

 

Derivative - IRLC’s

 

$

208,433

 

$

200,484

 

$

(757

)

$

3,503

 

$

1,414

 

$

(167

)

Derivative - TBA’s

 

285,797

 

210,192

 

(1,595

)

(2,071

)

(9,823

)

14,282

 

 


(1)         Amounts included in gain on sale of loans, net within the accompanying consolidated statements of operations.

 

Warrant— Upon entering an arrangement to facilitate the Company’s ability to offer Non-QM mortgage products, a warrant to purchase up to 9.9% of Impac Mortgage Corp. was issued.  The warrant can only be exercised if the Company chooses not to continue with the agreement to facilitate Non-QM mortgage products and has a 60 day expiration window after the termination of the agreement.  The exercise price of the warrant is an agreed upon multiple times the book value of the subsidiary Impac Mortgage Corp. at the time of exercise plus up to an additional .2 times the book value at the exercise date based off of the net income of Impac Mortgage Corp. for the following 12 months.  Additionally, if upon exercise of the warrant, the Company does not receive regulatory approval for the sale of the 9.9% as a result of actions of the Company, the Company will have to pay the holder of the warrant a redemption price, equal to the value of the warrant, in cash within 30 days.  The estimated fair value of the warrant was based on a model incorporating various assumptions including expected future book value of Impac Mortgage Corp., the probability of the warrant being exercised, volatility, expected term and certain other factors.

 

Call/Put option—As part of the initial acquisition of AmeriHome, the purchase agreement included a call option to purchase an additional 39% of AmeriHome and a put option which allows the noncontrolling interest holder to sell his then remaining 49% of AmeriHome to the Company in the event the Company does not exercise the call option. In June 2012 and January 2013, the Company and the noncontrolling interest holder entered into agreements to transfer an additional 27.5% and 1.5% ownership, respectively, of AmeriHome to the Company in exchange for the settlement of balances owed from the noncontrolling interest holder related to the Company for capital contributions made by the Company to AmeriHome and indemnification provisions included in the purchase agreement. In July 2013, the Company acquired the remaining 20% ownership of AmeriHome from the noncontrolling interest holder for $350 thousand in cash and $1.1 million in IMH common stock. As of December 31, 2013, the Company owned 100% of AmeriHome. The estimated fair values of the call and put options were based on models incorporating various assumptions including expected future book value of AmeriHome, the probability of the option being exercised, volatility, expected term and certain other factors.  AmeriHome was sold in March 2014.  See Note 14. Sale of AmeriHome for more details.

 

Nonrecurring Fair Value Measurements

 

The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.

 

19



Table of Contents

 

The following tables present financial and non-financial assets and liabilities measured using nonrecurring fair value measurements at September 30, 2014 and 2013, respectively:

 

 

 

Nonrecurring Fair Value
Measurements

 

Total Gains (Losses) (3)

 

 

 

September 30, 2014

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2014

 

September 30, 2014

 

REO (1)

 

$

 

$

1,686

 

$

 

$

(47

)

$

8,977

 

Lease liability (2)

 

 

 

(1,705

)

11

 

(617

)

 


(1)         Balance represents REO at September 30, 2014 which has been impaired subsequent to foreclosure. Amounts are included in continuing operations.  For the three months ended September 30, 2014, the $47 thousand loss represents additional impairment write-downs attributable to higher expected loss severities on properties held during the period which resulted in a decrease to the net realizable value (NRV).  For the nine months ended September 30, 2014, $9.0 million gain represents recovery of the NRV attributable to an improvement in state specific loss severities on properties held during the period which resulted in an increase to NRV.

(2)         For the three and nine months ended September 30, 2014, the Company recorded an $11 thousand recovery and $617 thousand in impairment, resulting from changes in lease liabilities as a result of changes in our expected minimum future lease payments.

(3)         Total gains (losses) reflect gains and losses from all nonrecurring measurements during the period.

 

 

 

Non-recurring Fair Value
Measurements

 

Total Gains (Losses) (3)

 

 

 

September 30, 2013

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2013

 

September 30, 2013

 

REO (1)

 

$

 

$

4,398

 

$

 

$

3,645

 

$

9,175

 

Lease liability (2)

 

 

 

(1,723

)

(54

)

(130

)

 


(1)         Balance represents REO at September 30, 2013 which has been impaired subsequent to foreclosure. Amounts are included in continuing operations.  For the three and nine months ended September 30, 2013, the $3.6 million and $9.2 million gain represents recovery of the net realizable value (NRV) attributable to an improvement in state specific loss severities on properties held during the period which resulted in an increase to NRV.

(2)         For the three and nine months ended September 30, 2013, the Company recorded $54 thousand and $130 thousand in impairment, resulting from changes in lease liabilities as a result of changes in our expected minimum future lease payments.

(3)         Total gains (losses) reflect gains and losses from all nonrecurring measurements during the period.

 

Real estate owned—REO consists of residential real estate acquired in satisfaction of loans. Upon foreclosure, REO is adjusted to the estimated fair value of the residential real estate less estimated selling and holding costs, offset by expected contractual mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of carrying value or estimated fair value less costs to sell. REO balance representing REOs which have been impaired subsequent to foreclosure are subject to nonrecurring fair value measurement and included in the nonrecurring fair value measurements tables. Fair values of REO are generally based on observable market inputs, and considered Level 2 measurements at September 30, 2014.

 

Lease liability—In connection with the discontinuation of our non-conforming lending and commercial operations, a significant amount of office space that was previously occupied is no longer being used by the Company. The Company has subleased a significant amount of this office space. Additionally, the Company has office space that is no longer occupied by the Company and we intend to sublease it.  The Company has recorded a liability representing the present value of the minimum lease payments over the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space. This liability is based on present value techniques that incorporate the Company’s judgments about estimated sublet revenue and discount rates. Therefore, this liability is considered a Level 3 measurement at September 30, 2014.

 

Note 9.—Income Taxes

 

For the three and nine months ended September 30, 2014, the Company recorded an expense of $307 thousand and $1.4 million, respectively, primarily related to alternative minimum taxes associated with taxable income generated from the sale of AmeriHome and mortgage servicing rights.  The Company cannot utilize its NOL carryforward on a small portion of its taxable income because statutory limits on the use of NOL’s generates an alternative minimum tax liability.

 

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Table of Contents

 

In January 2013, the Company acquired additional ownership of its AmeriHome subsidiary bringing the Company’s controlling interest to 80%.  The increase in ownership allowed the Company to include AmeriHome in the IMH federal consolidated tax returns for 2013.  During the first quarter of 2013, the Company recorded a $1.2 million tax benefit resulting from the use of net operating losses (NOL) to offset AmeriHome deferred tax liabilities.  Additionally, for the three and nine months ended September 30, 2013 the Company recorded a benefit of $9 thousand and an expense of $131 thousand, respectively, in state income tax expense primarily related to states where the Company does not have NOL carryforwards.

 

Note 10.—Reconciliation of Loss Per Share

 

Basic net loss per share is computed by dividing net loss available to common stockholders (numerator) by the weighted average number of vested, common shares outstanding during the period (denominator). Diluted net loss per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the if-converted method. Dilutive potential common shares include shares issuable upon conversion of Convertible Notes, dilutive effect of outstanding stock options and deferred stock units (DSUs).

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator for basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(465

)

$

(4,671

)

$

(2,403

)

$

(2,281

)

Net earnings attributable to noncontrolling interest

 

 

 

 

(136

)

Loss from continuing operations attributable to IMH

 

(465

)

(4,671

)

(2,403

)

(2,417

)

Loss from discontinued operations

 

(736

)

(277

)

(1,682

)

(2,051

)

Net loss attributable to IMH common stockholders

 

$

(1,201

)

$

(4,948

)

$

(4,085

)

$

(4,468

)

 

 

 

 

 

 

 

 

 

 

Numerator for diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to IMH

 

$

(465

)

$

(4,671

)

$

(2,403

)

$

(2,417

)

Interest expense attributable to convertible notes

 

 

 

 

 

Loss from continuing operations attributable to IMH plus interest expense attributable to convertible notes

 

(465

)

(4,671

)

(2,403

)

(2,417

)

Loss from discontinued operations

 

(736

)

(277

)

(1,682

)

(2,051

)

Net loss attributable to IMH common stockholders plus interest expense attributable to convertible notes

 

$

(1,201

)

$

(4,948

)

$

(4,085

)

$

(4,468

)

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings (loss) per share (1):

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding during the year

 

9,466

 

8,829

 

9,262

 

8,701

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings (loss) per share (1):

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding during the year

 

9,466

 

8,829

 

9,262

 

8,701

 

Net effect of dilutive convertible notes

 

 

 

 

 

Net effect of dilutive stock options and DSU’s

 

 

 

 

 

Diluted weighted average common shares

 

9,466

 

8,829

 

9,262

 

8,701

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic and diluted:

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to IMH

 

$

(0.05

)

$

(0.53

)

$

(0.26

)

$

(0.28

)

Loss from discontinued operations

 

$

(0.08

)

(0.03

)

$

(0.18

)

$

(0.24

)

Net loss per share available to common stockholders

 

$

(0.13

)

$

(0.56

)

$

(0.44

)

$

(0.52

)

 


(1)         Number of shares presented in thousands.

 

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Table of Contents

 

The anti-dilutive stock options outstanding for the three and nine months ended September 30, 2014 were 2.9 million. The anti-dilutive stock options outstanding for the three and nine months ended September 30, 2013 were 816 thousand shares. Included in the anti-dilutive shares for the three and nine months ended September 30, 2014 was 1.8 million shares attributable to the Convertible Notes.

 

Note 11.—Segment Reporting

 

The Company has three primary reporting segments within continuing operations which include mortgage lending, real estate services and long-term mortgage portfolio. Unallocated corporate and other administrative costs, including the costs associated with being a public company, are presented in Corporate and other.

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

three months ended September 30, 2014:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

9,122

 

$

 

$

 

$

 

$

9,122

 

Real estate services fees, net

 

 

3,243

 

 

 

3,243

 

Servicing income, net

 

913

 

 

 

 

913

 

Loss on mortgage servicing rights

 

(998

)

 

 

 

(998

)

Other revenue

 

109

 

 

86

 

 

195

 

Other income (expense)

 

403

 

(6

)

847

 

(405

)

839

 

Total expense

 

(8,746

)

(1,386

)

(214

)

(3,126

)

(13,472

)

Earnings (loss) from continuing operations before income taxes

 

$

803

 

$

1,851

 

$

719

 

$

(3,531

)

(158

)

Income tax expense from continuing operations

 

 

 

 

 

 

 

 

 

307

 

Loss from continuing operations

 

 

 

 

 

 

 

 

 

(465

)

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

(736

)

Net loss

 

 

 

 

 

 

 

 

 

(1,201

)

Net earnings attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

 

 

 

 

 

 

 

 

$

(1,201

)

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

three months ended September 30, 2013:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

11,349

 

$

 

$

 

$

 

$

11,349

 

Real estate services fees, net

 

 

4,933

 

 

 

4,933

 

Servicing income, net

 

989

 

 

 

 

989

 

Loss on mortgage servicing rights

 

(121

)

 

 

 

(121

)

Other revenue

 

4

 

 

(66

)

(8

)

(70

)

Other income (expense)

 

144

 

5

 

(142

)

(405

)

(398

)

Total expense

 

(16,554

)

(986

)

(380

)

(3,442

)

(21,362

)

(Loss) earnings from continuing operations before income taxes

 

$

(4,189

)

$

3,952

 

$

(588

)

$

(3,855

)

(4,680

)

Income tax benefit from continuing operations

 

 

 

 

 

 

 

 

 

(9

)

Loss from continuing operations

 

 

 

 

 

 

 

 

 

(4,671

)

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

(277

)

Net loss

 

 

 

 

 

 

 

 

 

(4,948

)

Net earnings attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

 

 

 

 

 

 

 

 

$

(4,948

)

 

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Table of Contents

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

nine months ended September 30, 2014:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

20,248

 

$

 

$

 

$

 

$

20,248

 

Real estate services fees, net

 

 

11,282

 

 

 

11,282

 

Servicing income, net

 

3,773

 

 

 

 

3,773

 

Loss on mortgage servicing rights

 

(3,540

)

 

 

 

(3,540

)

Other revenue

 

1,366

 

 

296

 

 

1,662

 

Other income (expense)

 

774

 

(5

)

8,198

 

(1,212

)

7,755

 

Total expense

 

(26,320

)

(4,443

)

(720

)

(10,695

)

(42,178

)

(Loss) earnings from continuing operations before income taxes

 

$

(3,699

)

$

6,834

 

$

7,774

 

$

(11,907

)

(998

)

Income tax expense from continuing operations

 

 

 

 

 

 

 

 

 

1,405

 

Loss from continuing operations

 

 

 

 

 

 

 

 

 

(2,403

)

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

(1,682

)

Net loss

 

 

 

 

 

 

 

 

 

(4,085

)

Net earnings attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

 

 

 

 

 

 

 

 

$

(4,085

)

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

nine months ended September 30, 2013:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

49,279

 

$

 

$

 

$

 

$

49,279

 

Real estate services fees, net

 

 

14,516

 

 

 

14,516

 

Servicing income, net

 

2,929

 

 

 

 

2,929

 

Gain on mortgage servicing rights

 

3,061

 

 

 

 

3,061

 

Other revenue

 

117

 

 

787

 

(20

)

884

 

Other income (expense)

 

(161

)

16

 

(1,949

)

(700

)

(2,794

)

Total expense

 

(55,945

)

(5,017

)

(1,314

)

(8,945

)

(71,221

)

(Loss) earnings from continuing operations before income taxes

 

$

(720

)

$

9,515

 

$

(2,476

)

$

(9,665

)

(3,346

)

Income tax benefit from continuing operations

 

 

 

 

 

 

 

 

 

(1,065

)

Loss from continuing operations

 

 

 

 

 

 

 

 

 

(2,281

)

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

(2,051

)

Net loss

 

 

 

 

 

 

 

 

 

(4,332

)

Net earnings attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

(136

)

Net loss attributable to common stockholders

 

 

 

 

 

 

 

 

 

$

(4,468

)

 

 

 

Mortgage

 

Real Estate

 

Long-term
Mortgage

 

Corporate

 

Discontinued

 

 

 

Balance Sheet Items as of:

 

Lending

 

Services

 

Portfolio

 

and other

 

Operations

 

Consolidated

 

Total Assets at September 30, 2014 (1)

 

$

273,655

 

$

2,983

 

$

5,380,253

 

$

3,732

 

$

185

 

$

5,660,808

 

Total Assets at December 31, 2013 (1)

 

$

183,929

 

$

1,278

 

$

5,525,197

 

$

5,644

 

$

2,277

 

$

5,718,325

 

 


(1)         All segment asset balances exclude intercompany balances.

 

Note 12.—Commitments and Contingencies

 

Legal Proceedings

 

On October 28, 2014 an action was filed in the Superior Court of the State of California in Orange County entitled Mallory Hill vs. Impac Mortgage Holdings, Inc., Impac Mortgage Corporation et al.  In the action Mr. Hill seeks compensatory damages, general damages, treble damages, exemplary damages, an accounting, injunctive relief, attorney’s fees and costs for claims based upon a consulting agreement entered into with Mr. Hill, a purported employment relationship entered into with Mr. Hill and other purported claims.

 

We are a party to other litigation and claims which are normal in the course of our operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations. The Company believes that it has meritorious defenses to the above claims

 

23



Table of Contents

 

and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and results of operations.

 

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2013 and subsequent Form 10-Q filings for a description of litigation and claims.

 

Repurchase Reserve

 

When the Company sells mortgage loans, it makes customary representations and warranties to the purchasers about various characteristics of each loan such as the origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. The Company’s whole loan sale agreements generally required it to repurchase loans if the Company breached a representation or warranty given to the loan purchaser.

 

During the nine months ended September 30, 2014, the Company paid approximately $5.3 million to settle previous repurchase claims related to the discontinued operations. At September 30, 2014, the repurchase reserve within discontinued operations was $901 thousand as compared to $5.5 million at December 31, 2013.  Additionally, the Company had approximately $4.2 million at September 30, 2014 and $4.0 million at December 31, 2013, in repurchase reserves related to the loans sold since early 2011 by the continuing mortgage lending operation.

 

Short-Term Loan Commitments

 

The Company uses a portion of the excess warehouse borrowing capacity to provide secured short-term revolving financing to small and medium-size mortgage originators to finance mortgage loans from the closing of the mortgage loans until sold to investors (Finance Receivables). As of September 30, 2014, the warehouse lending operations had committed warehouse lines to non-affiliated customers totaling $43 million and an outstanding balance of $4.3 million in finance receivables and none as of December 31, 2013. The finance receivables are secured by residential mortgage loans as well as personal guarantees and are included in other assets on the accompanying consolidated balance sheets.

 

Note 13.—Share Based Payments

 

The fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant with the following weighted average assumptions:

 

 

 

September 30,

 

 

2014

Risk-free interest rate

 

1.08-1.79 %

Expected lives (in years)

 

3.48-5.73

Expected volatility (1)

 

70.47-75.93 %

Expected dividend yield

 

0.00%

Fair value per share

 

$2.69 - $4.46

 


(1)         Expected volatilities are based on the volatility of the Company’s stock over the expected option term, adjusted for expected mean reversion.

 

24



Table of Contents

 

The following table summarizes activity, pricing and other information for the Company’s stock options for the nine months ended September 30, 2014:

 

 

 

For the year ended September 30,

 

 

 

2014

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Exercise

 

 

 

Shares

 

Price

 

Options outstanding at beginning of year

 

787,132

 

$

9.07

 

Options granted

 

409,250

 

5.41

 

Options exercised

 

(13,062

)

2.56

 

Options forfeited / cancelled

 

(81,523

)

20.84

 

Options outstanding at end of period

 

1,101,797

 

$

6.92

 

Options exercisable at end of period

 

464,308

 

$

5.45

 

 

As of September 30, 2014, there was approximately $2.3 million of total unrecognized compensation cost related to stock option compensation arrangements granted under the plan, net of estimated forfeitures. That cost is expected to be recognized over the remaining weighted average period of 2.0 years.

 

There were 409,250 and 255,000 options granted during the nine months ended September 30, 2014 and 2013, respectively.  For the nine months ended September 30, 2014 and 2013, the aggregate grant-date fair value of stock options granted was approximately $1.4 million and $1.8 million, respectively.

 

The following table summarizes activity, pricing and other information for the Company’s DSU’s, also referred to as deferred stock units as the issuance of the stock is deferred until termination of service, for the nine months ended September 30, 2014:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

DSU’s outstanding at beginning of year

 

72,000

 

$

8.80

 

DSU’s granted

 

3,750

 

5.39

 

DSU’s exercised

 

 

 

DSU’s forfeited/cancelled

 

 

 

DSU’s outstanding at end of period

 

75,750

 

$

8.63

 

 

As of September 30, 2014, there was approximately $229 thousand of total unrecognized compensation cost related to the DSU compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of 1.6 years.

 

Note 14.—Sale of AmeriHome

 

In March 2014, the Company sold AmeriHome for $10.2 million in cash, recording a gain of approximately $1.2 million, net of a deferred tax adjustment within other revenues in the consolidated statements of operations. In conjunction with the transaction, as required by Fannie Mae, the Company used $3.0 million of the proceeds to reduce the legacy repurchase liability with Fannie Mae.

 

Note 15.—Subsequent Events

 

Subsequent events have been evaluated through the date of this filing.

 

25



Table of Contents

 

ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(dollars in thousands, except per share data or as otherwise indicated)

 

Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, Integrated Real Estate Service Corporation (IRES), IMH Assets Corp. (IMH Assets), and Impac Funding Corporation (IFC).

 

Forward-Looking Statements

 

This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,” “should,” “could,” “seem to,” “anticipate,” “plan,” “intend,” “project,” “assume,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: our ability to manage effectively our mortgage lending operations and increase mortgage originations; successful development, marketing, sale and financing of new mortgage products, including the non-Qualified Mortgage and conventional and government loan programs; ability to increase our market share in the various residential mortgage businesses; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing, through lending and repurchase facilities, strategic relationships or otherwise; the terms of any financing that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions.

 

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2013, and other reports we file under the Securities Exchange Act of 1934. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

 

The mortgage industry is subject to current events that occur in the financial services industry including changes to regulations and compliance requirements that result in uncertainty surrounding the actions of states, municipalities and new government agencies, including the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA). These events can also include changes in economic indicators, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, and customer perception, as well as others. The factors that affect the industry change rapidly and can be unforeseeable making it difficult to predict and manage an operation in the financial services industry.

 

Current events can diminish the relevance of “quarter over quarter” and “year-to-date over year-to-date” comparisons of financial information. In such instances, the Company attempts to present financial information in its Management’s Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to its financial information.

 

Market Update

 

The U.S. economy continued its gradual recovery during the first nine months of 2014. In September, consumer confidence rose to its highest level in more than a year, buoyed by continued healthy job growth, improved income expectations, gains in wealth and a decline in energy prices.  Labor market conditions, household and business spending continue their modest improvement. Despite stronger economic data in various regions, credit market volatility, emerging market and geopolitical concerns continue to weigh on investor sentiment.

 

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Housing markets in the U.S. continue to recover with the strength of recovery varying by market. Housing inventories reached their highest levels in over a year during the second quarter of 2014, which has helped slow price gains in many regions during the third quarter of 2014.  The backlog of properties in foreclosure will continue to play a role in the housing recovery.

 

In the U.S., both economic data and corporate earnings were mixed.  The Federal Reserve Board announced further reductions in its bond buying stimulus program, which concluded in October.  Additionally, the Federal Reserve Board updated its guidance on short-term interest rates, putting less weight on the unemployment rate and indicating that it would look at ‘a broad range of economic indicators’ in deciding when to start raising short-term interest rates and announced that short-term interest rates would remain low for a considerable time after the bond buying program ends.

 

Selected Financial Results for the Three and Nine Months Ended September 30, 2014 and 2013

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,
2014

 

June 30,
2014

 

September 30,
2013

 

September 30,
2014

 

September 30,
2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of loans, net

 

$

9,122

 

$

6,534

 

$

11,349

 

$

20,248

 

$

49,279

 

Real estate services fees, net

 

3,243

 

4,360

 

4,933

 

11,282

 

14,516

 

Servicing income, net

 

913

 

1,291

 

989

 

3,773

 

2,929

 

Mark-to-market mortgage servicing rights

 

(998

)

(1,564

)

(121

)

(3,540

)

3,061

 

Other

 

195

 

84

 

(70

)

1,662

 

884

 

Total revenues

 

12,475

 

10,705

 

17,080

 

33,425

 

70,669

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

9,062

 

9,319

 

15,270

 

27,841

 

51,923

 

General, administrative and other

 

4,410

 

4,555

 

6,092

 

14,337

 

19,298

 

Total expenses

 

13,472

 

13,874

 

21,362

 

42,178

 

71,221

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

747

 

(96

)

(202

)

338

 

36

 

Change in fair value of long-term debt

 

 

226

 

75

 

(424

)

(453

)

Change in fair value of net trust assets

 

92

 

4,711

 

(271

)

7,841

 

(2,377

)

Total other income (expense)

 

839

 

4,841

 

(398

)

7,755

 

(2,794

)

Loss from continuing operations before income taxes

 

(158

)

1,672

 

(4,680

)

(998

)

(3,346

)

Income tax expense (benefit) from continuing operations

 

307

 

756

 

(9

)

1,405

 

(1,065

)

Loss from continuing operations

 

(465

)

916

 

(4,671

)

(2,403

)

(2,281

)

Loss from discontinued operations, net of tax

 

(736

)

(834

)

(277

)

(1,682

)

(2,051

)

Net loss

 

(1,201

)

82

 

(4,948

)

(4,085

)

(4,332

)

Net earnings attributable to noncontrolling interest

 

 

 

 

 

(136

)

Net loss attributable to common stockholders

 

$

(1,201

)

$

82

 

$

(4,948

)

$

(4,085

)

$

(4,468

)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share

 

$

(0.13

)

$

0.01

 

$

(0.56

)

$

(0.44

)

$

(0.52

)

 

Status of Operations

 

We reported a net loss of $(1.2) million for the third quarter of 2014, as compared to net earnings of $82 thousand for the second quarter of 2014 and net loss of $(4.9) million for the third quarter of 2013.  Although we had a net loss for the quarter ended September 30, 2014, with the exception of last quarter’s significant fluctuation in the mark to market adjustment of the net trust assets, we continued to see a positive quarterly trend of improving net results before tax for the continuing operations.

 

The change in net results in the third quarter of 2014 as compared to the second quarter of 2014 was due to a positive impact from the growth of mortgage lending, the expected decline in real estate services revenue and a significant fluctuation in the estimated fair value of the residual interests portfolio.  In the third quarter of 2014, gain on sale of loans increased 40% over the second quarter of 2014 driven by a 98% increase in originations volume.  Also, as a result of the anticipated ongoing runoff of our long-term mortgage portfolio, real estate services revenue declined 26% from the second quarter. Finally, the estimated fair value of the net trust assets (residual interests in the securitized mortgage portfolio) increased to $92,000 in the third quarter of 2014 as compared to the $4.7 million increase in the second quarter of 2014.

 

The $3.7 million improvement in the net results in the third quarter of 2014 over the third quarter of 2013 was primarily associated with a 37% decrease in expenses while we saw a 61% increase in mortgage originations volume.  The decline in expenses was primarily due to the sale of a costly retail brick and mortar lending channel, at the end of 2013 as we have shifted to focus on

 

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more correspondent and wholesale lending channels in 2014.  Offsetting the expense reduction was a $1.7 million decline in real estate services revenues to $3.2 million in the third quarter of 2014 as compared to the same period in the prior year, mainly associated with the improvement and runoff of our long-term mortgage portfolio.

 

Summary Highlights

 

·                  Mortgage lending volumes increased in the third quarter of 2014 to $923.6 million from $465.2 million in the second quarter of 2014 and $576.2 million in the third quarter of 2013, primarily due to bulk purchases from one correspondent seller.

·                  Mortgage lending revenues increased in the third quarter of 2014 to $9.1 million as compared to $6.5 million in the second quarter of 2014, but decreased as compared to $11.3 million in the third quarter of 2013.

·                  Gain on sale margins decreased in the third quarter of 2014 to 99 bps, as compared to 141 bps in the second quarter of 2014, and 197 bps, in the third quarter of 2013 primarily associated with a shift in focus to correspondent lending, including bulk purchases of mortgage loans, which generates a greater volume of originations but at a lower cost.

·                  Mortgage servicing income decreased in the third quarter of 2014 to $913 thousand from $1.3 million in the second quarter of 2014 and remained relatively flat compared to $989 thousand in the third quarter of 2013.  The decline from the 2014 second quarter was due to the servicing sale completed in the second quarter generating $12.2 million in cash.

·                  Mortgage servicing rights decreased to $13.6 million at September 30, 2014 as compared to $36.0 million at December 31, 2013. The decrease is due to bulk sales of servicing rights totaling $2.6 billion in unpaid principal balance (UPB) and the sale of AmeriHome, including its servicing rights totaling $702.1 million in UPB during 2014.

·                  Real estate services revenue decreased to $3.2 million in the third quarter of 2014 as compared to $4.4 million in the second quarter of 2014 and $4.9 million in the third quarter of 2013 due to the anticipated runoff of the long-term mortgage portfolio.

·                  In our long-term mortgage portfolio, the residuals continue to generate better than expected cash flows of $2.0 million in the third quarter of 2014 and $7.6 million for the nine months ended September 30, 2014, as compared to $1.7 million in the third quarter of 2013 and $5.0 million for the nine months ended September 30, 2013.

·                  Expenses decreased 3% in the third quarter of 2014 to $13.5 million from $13.9 million in the second quarter of 2014, and decreased 37% as compared to $21.4 million in the third quarter of 2013.

 

Originations

(in millions)

 

For the three months ended

 

September 30,
2014

 

June 30,
2014

 

%
Change

 

September 30,
2013

 

%
Change

 

$

923.6

 

$

465.2

 

99

%

$

576.2

 

60

%

 

The increase in lending volume was predominately due to increases in correspondent lending to $747.3 million in the third quarter of 2014 compared to $271.4 million in the second quarter of 2014 and $212.0 million in the third quarter of 2013.  The increase is primarily due to the expansion of bulk acquisitions in the quarter which increased to $546.0 million in the third quarter of 2014. Mortgage lending margins declined associated with a higher concentration of bulk correspondent volume which earns a lower margin but which also has a much lower cost to generate.  Increased origination volume and reduced expenses resulted in mortgage lending returning to profitability in the third quarter of 2014.

 

Mortgage rates have remained relatively flat to a small decline in the third quarter of 2014 as compared to the second quarter of 2014.  Our refinance activity increased as a percentage of overall originations in the third quarter of 2014 to 68% of originations, as compared to 47% in the second quarter of 2014.

 

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Table of Contents

 

Originations by Channel:

 

 

 

For the three months ended September 30,

 

(in millions)

 

2014

 

%

 

2013

 

%

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

159.1

 

17

%

$

197.8

 

34

%

Correspondent

 

747.3

 

81

%

212.0

 

37

%

Retail

 

17.2

 

2

%

166.4

 

29

%

Total originations

 

$

923.6

 

100

%

$

576.2

 

100

%

 

Originations by Channel:

 

 

 

For the nine months ended September 30,

 

(in millions) 

 

2014

 

%

 

2013

 

%

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

440.0

 

25

%

$

832.5

 

41

%

Correspondent

 

1,246.2

 

72

%

590.9

 

29

%

Retail

 

55.7

 

3

%

606.7

 

30

%

Total originations

 

$

1,741.9

 

100

%

$

2,030.1

 

100

%

 

During the third quarter of 2014, our correspondent channel contributed 81% of originations, the wholesale channel contributed 17%, with the remaining 2% coming from the retail channel, as compared to 58%, 39%, and 3%, respectively, in the second quarter of 2014.  Although we have been successful in increasing our correspondent volumes, the wholesale volumes have declined 12% in the third quarter from the second quarter.  With the transition to a new loan origination system, we have not been able to increase our pull-through rates as expected which depressed funded volumes.  In October 2014, we have made significant management changes in our wholesale sales and operations groups that are expected to improve pull-through and wholesale volumes for the remainder of the year and into the first quarter of 2015.  In addition, we are beginning to ramp up our non-qualified mortgage originations which currently are predominately originated through our wholesale channel and expect these originations to continue to grow as we enhance our marketing and training efforts.

 

Mortgage servicing portfolio

(in millions)

 

For the three months ended

 

September 30,
2014

 

December 31,
2013

 

%
Change

 

September 30,
2013

 

%
Change

 

$

1,247.7

 

$

3,128.6

 

-60

%

$

2,689.2

 

-54

%

 

The mortgage servicing portfolio declined in the third quarter of 2014 to $1.2 billion at September 30, 2014 from $3.1 billion at December 31, 2013.  This decline was due to servicing sales of $2.6 billion in the first nine months of 2014.

 

As a result of monetizing some of our mortgage servicing rights through the aforementioned servicing sales, the value of our mortgage servicing rights decreased to $13.6 million at September 30, 2014, as compared to $36.0 million at December 31, 2013.  We will continue to selectively sell servicing to maintain adequate liquidity and capital to grow and expand our mortgage lending and warehouse businesses.

 

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Table of Contents

 

The following table includes information about our mortgage servicing portfolio:

 

 

 

At September 30,

 

% 60+ days

 

At December 31,

 

% 60+ days

 

(in millions)

 

2014

 

delinquent (1)

 

2013

 

delinquent (1)

 

Fannie Mae

 

$

212.5

 

1.34

%

$

1,520.2

 

0.19

%

Freddie Mac

 

307.2

 

0.36

%

317.2

 

0.28

%

Ginnie Mae

 

728.0

 

1.28

%

1,203.5

 

1.28

%

Total owned servicing portfolio

 

$

1,247.7

 

1.11

%

$

3,040.9

 

0.65

%

 

 

 

 

 

 

 

 

 

 

Acquired Portfolio (2) 

 

 

0.00

%

87.7

 

9.86

%

Total servicing portfolio

 

$

1,247.7

 

1.11

%

$

3,128.6

 

1.57

%

 


(1)         Based on loan count.

(2)         Represents servicing portfolio acquired in 2010 acquisition of AmeriHome.  AmeriHome was sold during the first quarter of 2014.

 

Our loan products primarily include conventional loans eligible for sale to Fannie Mae and Freddie Mac and loans eligible for government insurance (government loan) by FHA, VA and USDA.

 

Originations by Loan Type:

 

 

 

For the three months ended

 

(in millions)

 

September 30, 2014

 

%

 

June 30, 2014

 

%

 

September 30,
2013

 

%

 

Government

 

265.7

 

29

%

$

191.7

 

41

%

$

188.6

 

33

%

Conventional

 

636.8

 

69

%

254.4

 

55

%

376.1

 

65

%

Other

 

21.1

 

2

%

19.1

 

4

%

11.5

 

2

%

Total originations

 

$

923.6

 

100

%

$

465.2

 

100

%

$

576.2

 

100

%

 

 

 

For the nine months ended

 

(in millions)

 

September 30, 2014

 

%

 

September 30,
2013

 

%

 

Government

 

$

575.2

 

33

%

$

582.5

 

29

%

Conventional

 

1,118.6

 

64

%

1,420.6

 

70

%

Other

 

48.1

 

3

%

27.0

 

1

%

Total originations

 

$

1,741.9

 

100

%

$

2,030.1

 

100

%

 

Originations by Purpose:

 

 

 

For the three months ended September 30,

 

(in millions)

 

2014

 

%

 

2013

 

%

 

 

 

 

 

 

 

 

 

 

 

Refinance

 

$

630.1

 

68

%

$

260.6

 

45

%

Purchase

 

293.5

 

32

%

315.6

 

55

%

Total originations

 

$

923.6

 

100

%

$

576.2

 

100

%

 

 

 

For the nine months ended September 30,

 

(in millions) 

 

2014

 

%

 

2013

 

%

 

 

 

 

 

 

 

 

 

 

 

Refinance

 

$

1,054.5

 

61

%

$

1,225.7

 

60

%

Purchase

 

687.4

 

39

%

804.4

 

40

%

Total originations

 

$

1,741.9

 

100

%

$

2,030.1

 

100

%

 

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Table of Contents

 

During the third quarter of 2014, we rolled out and began originating non-qualified mortgage (non-QM) loans, marketed under our ‘AltQM’ label.  The predominant amount of the early originations came through our wholesale lending channel.  However, we expect our correspondent customers to begin delivering loans that meet our AltQM program guidelines during the fourth quarter of 2014 and first quarter of 2015.  In conjunction with launching these new AltQM products, we established a strategic investor relationship which provides balance sheet capacity to fund these non-conforming loans.

 

We believe there is an underserved mortgage market for borrowers with good credit who may not meet the new QM guidelines set out by the Consumer Financial Protection Bureau (CFPB).  In our opinion, as the demand by consumers for a non-QM product grows and the investor appetite increases, non-QM mortgages will be in more demand.  We have established strict lending guidelines, including determining the prospective borrowers’ ability to repay the mortgage, which we believe will keep delinquencies and foreclosures at acceptable levels.

 

Furthermore, with our existing warehouse borrowing capacity, we are seeking ways to utilize the excess borrowing capacity by making re-warehousing available to our current wholesale brokers and existing correspondent sellers to expand volumes and better serve customers and the borrowers.  We presently use a portion of our excess capacity to provide re-warehouse facilities to customers.  During the first nine months of 2014, we increased our outstanding commitments to customers to $43.0 million.  The average outstanding balance of the re-warehouse facilities was approximately $3.6 million in the third quarter of 2014. By leveraging our re-warehousing division, we hope to increase the capture rate of our approved correspondent sellers business as well as expand our active customer base to include new customers seeking warehouse lines.

 

For the third quarter of 2014, real estate services fees were $3.2 million, as compared to $4.4 million in the second quarter of 2014.  While the Company continues to generate real estate service fees, the decrease in fees was due to the anticipated runoff of the long-term mortgage portfolio.

 

The long-term mortgage portfolio primarily includes the residual interests in securitizations, master servicing rights from the securitizations and long-term debt. Our residual interests in securitizations (represented by the difference between total trust assets and total trust liabilities), have recently performed better than expected.  Additionally, estimated bond prices continued to improve and corresponding yields have decreased.  There was a small adjustment to the fair value of the residual interests in third quarter as the fair value assumptions have remained about the same at September 30, 2014 as compare to June 30, 2014.  The residual interests portfolio continued to generate better than expected cash flow of $2.0 million in the quarter and $7.6 million in the first nine months of 2014, as compared to $1.7 million in the third quarter of 2013 and $5.0 million in the first nine months of 2013.

 

This resulted in an increase in estimated fair value of residual interests during the nine months ended September 30, 2014.

 

For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of Operations below.

 

Liquidity and Capital Resources

 

During the nine months ended September 30, 2014, we funded our operations primarily from mortgage lending revenues and real estate services fees, net, which include gains on sale of loans, net, and other mortgage related income, portfolio loss mitigation and real estate services fees, net, primarily generated from our long-term mortgage portfolio, and cash flows from our residual interests in securitizations.  Additionally, we funded mortgage loan originations using warehouse facilities which are repaid once the loan is sold.  Furthermore, we utilized the proceeds from the sale of AmeriHome, the sale of mortgage servicing rights and borrowings under the $4.0 million line of credit as additional sources of liquidity.

 

As previously announced, in March 2014 we generated additional liquidity with the sale of AmeriHome for $10.2 million in cash. In conjunction with the transaction, as required by Fannie Mae, we used $3.0 million of the proceeds to reduce our legacy repurchase liability with Fannie Mae.  Additionally, during the nine months ended September 30, 2014, we sold $2.6 billion in UPB of mortgage servicing generating $26.6 million in cash and a $2.8 million receivable.

 

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Table of Contents

 

Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, as well as the broader financial markets and the general economy. Concerns over (i) economic recession, (ii) geopolitical issues, (iii) unemployment, (iv) the availability and cost of financing and (v) the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and financial markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing.

 

We believe that current cash balances, cash flows from our mortgage lending operations, real estate services fees generated from our long-term mortgage portfolio, and residual interest cash flows from our long-term mortgage portfolio are adequate for our current operating needs. However, we believe the mortgage and real estate services market is volatile, highly competitive and subject to increased regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions, mortgage REITs and other finance companies which have offices in our market area as well as operations throughout the United States. We compete for loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of services we provide to borrowers. Additionally, competition for loss mitigation servicing, loan modification services and other portfolio services has increased due to the difficult mortgage environment, credit tightening and a recovering economy. Our competitors include mega mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and recovery collections business. Efforts to market our ability to provide mortgage and real estate services for others is more difficult than for many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a rated primary or special servicer of residential mortgage loans as designated by a rating agency. Additionally, performance of the long-term mortgage portfolio is subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio.

 

While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-term obligations is dependent upon many factors, particularly our ability to successfully operate our mortgage lending segment, real estate services segment and realizing cash flows from the long-term mortgage portfolio. Our future financial performance and success are dependent in large part upon the ability to expand our mortgage lending platform and profitability.

 

Critical Accounting Policies

 

We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include those issues included in Management’s Discussion and Analysis of Results of Operations in IMH’s report on Form 10-K for the year ended December 31, 2013.  Such policies have not changed during 2014.

 

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Table of Contents

 

Financial Condition and Results of Operations

 

Financial Condition

 

As of September 30, 2014 compared to December 31, 2013

 

The following table shows the condensed consolidated balance sheets for the following periods:

 

 

 

September 30,

 

December 31,

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Cash

 

$

13,194

 

$

9,969

 

$

3,225

 

32

%

Restricted cash

 

1,863

 

1,467

 

396

 

27

 

Mortgage loans held-for-sale

 

234,530

 

129,191

 

105,339

 

82

 

Mortgage servicing rights

 

13,568

 

35,981

 

(22,413

)

(62

)

Securitized mortgage trust assets

 

5,368,048

 

5,513,166

 

(145,118

)

(3

)

Other assets (2)

 

29,605

 

28,551

 

1,054

 

4

 

Total assets

 

$

5,660,808

 

$

5,718,325

 

$

(57,517

)

(1

)%

 

 

 

 

 

 

 

 

 

 

Warehouse borrowings

 

$

221,370

 

$

119,634

 

$

101,736

 

85

%

Convertible notes

 

20,000

 

20,000

 

 

n/a

 

Long-term debt ($71,120 par)

 

18,040

 

15,871

 

2,169

 

14

 

Repurchase reserve (1)

 

5,088

 

9,478

 

(4,390

)

(46

)

Securitized mortgage trust liabilities

 

5,353,358

 

5,502,585

 

(149,227

)

(3

)

Other liabilities (2)

 

16,308

 

24,886

 

(8,578

)

(34

)

Total liabilities

 

5,634,164

 

5,692,454

 

(58,290

)

(1

)

Total equity

 

26,644

 

25,871

 

773

 

3

 

Total liabilities and stockholders’ equity

 

$

5,660,808

 

$

5,718,325

 

$

(57,517

)

(1

)%

 


(1)         $0.9 million and $5.5 million of the repurchase reserve was within discontinued operations at September 30, 2014 and December 31, 2013.

(2)         Included within other assets and liabilities are the assets and liabilities of discontinued operations.

 

At September 30, 2014, cash increased to $13.2 million from $10.0 million at December 31, 2013. The primary sources of cash between periods were $26.6 million from the sale of mortgage servicing rights, $16.2 million in fees generated from the mortgage lending operations and real estate services (net of non-cash fair value adjustments), $10.2 million from the sale of AmeriHome and $7.6 million from residual interests in securitizations. Offsetting the sources of cash were continuing operating expenses totaling $39.9 million (net of non-cash depreciation expense), $4.4 million in interest payments on the Convertible Notes and long-term debt, settlements of repurchase requests associated with loans sold by the discontinued non-conforming mortgage operations of approximately $5.3 million and $3.0 million in repayments on the line of credit.

 

Mortgage loans held-for-sale increased $105.3 million to $234.5 million at September 30, 2014 as compared to $129.2 million at December 31, 2013. The increase was due to $1.7 billion in originations offset by $1.6 billion in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months.

 

Mortgage servicing rights decreased $22.4 million to $13.6 million at September 30, 2014 as compared to $36.0 million at December 31, 2013. The decrease was due to bulk sales of servicing rights totaling $2.6 billion in UPB, the sale of AmeriHome, which had servicing rights totaling $702.1 million in UPB and a mark-to-market reduction in fair value of $4.9 million.  Partially offsetting the decrease was servicing retained loan sales of $1.6 billion. At September 30, 2014, we serviced $1.2 billion in UPB for others as compared to $3.1 billion at December 31, 2013.

 

Warehouse borrowings increased $101.7 million to $221.4 million at September 30, 2014 as compared to $119.6 million at December 31, 2013. The increase was due to an increase in mortgage loans held-for-sale and finance receivables at September 30, 2014. During the nine months of 2014, we increased our total borrowing capacity to $315.0 million as compared to $265.0 million at December 31, 2013.

 

Repurchase reserve liability decreased to $5.1 million at September 30, 2014 as compared to $9.5 million at December 31, 2013. During the nine months ended September 30, 2014, we paid approximately $5.3 million to settle previous repurchase claims related to our discontinued operations. At September 30, 2014, the repurchase reserve within discontinued operations was $0.9 million as compared to $5.5 million at December 31, 2013. Additionally, we have approximately $4.2 million in repurchase reserves related to the loans sold by the continuing mortgage lending operation since early 2011. We have received a minimal amount of repurchase requests for loans sold by the continuing mortgage lending operation.

 

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Table of Contents

 

The changes in total assets and liabilities, at fair market value, are primarily attributable to decreases in our trust assets and trust liabilities as summarized below.

 

 

 

September 30,

 

December 31,

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Securitized mortgage collateral

 

$

5,350,474

 

$

5,494,152

 

$

(143,678

)

(3

)%

Other trust assets

 

17,574

 

19,014

 

(1,440

)

(8

)

Total trust assets

 

5,368,048

 

5,513,166

 

(145,118

)

(3

)

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

5,346,791

 

$

5,492,371

 

$

(145,580

)

(3

)%

Other trust liabilities

 

6,567

 

10,214

 

(3,647

)

(36

)

Total trust liabilities

 

5,353,358

 

5,502,585

 

(149,227

)

(3

)

Residual interests in securitizations

 

$

14,690

 

$

10,581

 

$

4,109

 

39

%

 

Since the consolidated and unconsolidated securitization trusts are nonrecourse to the Company, trust assets and liabilities have been netted to present our interest in these trusts more simply, which are considered the residual interests in securitizations. For unconsolidated securitizations the residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, the residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities, was $14.7 million at September 30, 2014, compared to $10.6 million at December 31, 2013.

 

We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on information derived from market participants. During the nine months ended September 30, 2014, actual and forecasted losses have continued to decrease during the third quarter of 2014.  During the nine months ended September 30, 2014, we decreased the investor yield requirements for certain securitized mortgage collateral and borrowings as estimated bond prices have continued to improve and corresponding yields have decreased. Additionally, during the nine months of 2014, we lowered the discount rate on certain residual interest vintages.  The decrease in loss and loss assumptions, decrease in investor yield assumptions on securitized mortgage collateral and securitized mortgage borrowings as well as decreased discount rates resulted in an increase in the value of these trust assets and liabilities resulting in an increase in the value of our residual interests. However, offsetting the increase was principal payments and liquidations of securitized mortgage collateral and securitized mortgage borrowings.

 

·                  The estimated fair value of securitized mortgage collateral decreased $143.7 million during the first nine months of 2014, primarily due to reductions in principal from borrower payments and transfers of loans to REO for single-family and multi-family collateral, partially offset by reductions in loss and severity assumptions and a decrease in investor yield requirements. Additionally, other trust assets decreased $1.4 million during the first nine months of 2014, primarily due to decreases in REO from liquidations of $27.7 million. Partially offsetting the decrease was $23.5 million in REO foreclosures and a $9.0 million increase in the net realizable value (NRV) of REO.

 

·                  The estimated fair value of securitized mortgage borrowings decreased $145.6 million during the first nine months of 2014, primarily due to reductions in principal balances from principal payments during the period for single-family and multi-family collateral, partially offset by a decrease in loss and severity assumptions and a decrease in investor yield requirements. The $3.6 million reduction in other trust liabilities during the first nine months of 2014 was primarily due to $3.9 million in derivative cash payments from the securitization trusts, and a $413 thousand increase in derivative fair value resulting from changes in forward LIBOR interest rates.

 

In previous years, we securitized mortgage loans by transferring originated and acquired residential single-family mortgage loans and multi-family commercial loans (the “transferred assets”) into non-recourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing function. A trustee and sub-servicer, unrelated to us, was utilized for each securitization. Cash flows from the loans (the loan payments as well as liquidation of foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders

 

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Table of Contents

 

(investors). The sub-servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO. Our real estate services segment also performs mitigation activities for loans within the portfolio.

 

To estimate fair value of the assets and liabilities within the securitization trusts each reporting period, management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes referred to as “curves,” for defaults, loss severity, interest rates (LIBOR) and prepayments are inputted into the valuation model for each securitization trust. We hire third-party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations. Before inputting this information into the model, management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using other information gathered from the mortgage and real estate market (i.e., third party home price indices, published industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default and foreclosure information for each trust from the respective trustees.

 

We use the valuation model to generate the expected cash flows to be collected from the trust assets and the expected required bondholder distribution (trust liabilities). To the extent that the trusts are over collateralized, we may receive the excess interest as the holder of the residual interest. The information above provides us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings, derivative assets/liabilities, and the residual interests.

 

To determine the discount rates to apply to these cash flows, we gather information from the bond pricing services and other market participants regarding estimated investor required yields for each bond tranche. Based on that information and the collateral type and vintage, we determine an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We use the blended yield of the bond tranches together with the residual interests to determine an appropriate yield for the securitized mortgage collateral in each securitization (after taking into consideration any derivatives in the securitization). As previously discussed, during the nine months of 2014, we adjusted the acceptable range of expected yields and discount rates for some of our earlier vintage securitizations.  Based on improving bond prices and declining yields in the Company’s securitization trusts and better than expected residual cash flows as well as conversations with market participants, the Company lowered certain residual discount rates during the first nine months of 2014.

 

The following table presents changes in the trust assets and trust liabilities for the nine months ended September 30, 2014:

 

 

 

TRUST ASSETS

 

TRUST LIABILITIES

 

 

 

 

 

Level 3 Recurring Fair Value
Measurements

 

NRV (1)

 

 

 

Level 3 Recurring Fair Value
Measurements

 

 

 

 

 

Investment
securities
available-for-
sale

 

Securitized
mortgage
collateral

 

Real estate
owned

 

Total trust
assets

 

Securitized
mortgage
borrowings

 

Derivative
liabilities

 

Total trust
liabilities

 

Net trust
assets

 

Recorded book value at 12/31/2013

 

$

108

 

$

5,494,152

 

$

18,906

 

$

5,513,166

 

$

(5,492,371

)

$

(10,214

)

$

(5,502,585

)

$

10,581

 

Total gains/(losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

19

 

42,268

 

 

42,287

 

 

 

 

42,287

 

Interest expense

 

 

 

 

 

(177,629

)

 

(177,629

)

(177,629

)

Change in FV of net trust assets, excluding REO

 

27

 

289,610

 

 

289,637

(2)

(290,360

)

(413

)

(290,773

)(2)

(1,136

)

Gains from REO - not at FV but at NRV

 

 

 

8,977

 

8,977

(2)

 

 

 

8,977

 

Total gains (losses) included in earnings

 

46

 

331,878

 

8,977

 

340,901

 

(467,989

)

(413

)

(468,402

)

(127,501

)

Transfers in and/or out of level 3

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements

 

(64

)

(475,556

)

(10,399

)

(486,019

)

613,569

 

4,060

 

617,629

 

131,610

 

Recorded book value at 9/30/2014

 

$

90

 

$

5,350,474

 

$

17,484

 

$

5,368,048

 

$

(5,346,791

)

$

(6,567

)

$

(5,353,358

)

$

14,690

 

 


(1)          Accounted for at net realizable value.

(2)          Represents non-interest income-net trust assets in the consolidated statements of operations for the nine months ended September 30, 2014.

 

Inclusive of gains from REO, total trust assets above reflect a net gain of $298.6 million as a result of an increase in fair value of securitized mortgage collateral of $289.6 million, gains from REO of $9.0 million and increases from other trust assets of $27 thousand. Net losses on trust liabilities were $290.8 million as a result of $290.4 million in losses from the increase in fair value of securitized mortgage borrowings and losses from derivative liabilities of $413 thousand. As a result, non-interest income—net trust assets totaled a gain of $7.8 million for the nine months ended September 30, 2014.

 

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Table of Contents

 

The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Net trust assets

 

$

14,690

 

$

10,581

 

Total trust assets

 

5,368,048

 

5,513,166

 

Net trust assets as a percentage of total trust assets

 

0.27

%

0.19

%

 

For the nine months ended September 30, 2014, the estimated fair value of the net trust assets increased as a percentage of total trust assets. The increase was primarily due to the reduction in loss assumptions as well as the decrease in discount rate assumptions for residual interests as discussed above.

 

Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities.

 

The following tables present the estimated fair value of our residual interests, including investment securities available for sale, by securitization vintage year and other related assumptions used to derive these values at September 30, 2014 and December 31, 2013:

 

Origination 

 

 

 

Estimated Fair Value of Residual
Interests by Vintage Year at
September 30, 2014

 

Estimated Fair Value of Residual
Interests by Vintage Year at December 31,
2013

 

Year

 

 

 

SF

 

MF

 

Total

 

SF

 

MF

 

Total

 

2002-2003 (1)

 

 

 

$

8,859

 

$

2,058

 

$

10,917

 

$

5,761

 

$

2,184

 

$

7,945

 

2004

 

 

 

1,699

 

1,584

 

3,283

 

462

 

2,099

 

2,561

 

2005 (2)

 

 

 

 

252

 

252

 

 

75

 

75

 

2006 (2)

 

 

 

 

238

 

238

 

 

 

 

2007 (2)

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

10,558

 

$

4,132

 

$

14,690

 

$

6,223

 

$

4,358

 

$

10,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted avg. prepayment rate

 

 

 

3.6

%

11.8

%

4.3

%

2.7

%

12.6

%

3.6

%

Weighted avg. discount rate

 

 

 

19.1

%

15.6

%

18.1

%

25.4

%

20.2

%

23.2

%

 


(1)         2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period.

(2)         The estimated fair values of residual interests in vintage years 2005 through 2007 is reflective of higher estimated future losses and investor yield requirements compared to earlier vintage years.

 

We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we use different investor yield (discount rate) assumptions for securitized mortgage collateral and securitized mortgage borrowings and the discount rate used for residual interests based on underlying collateral characteristics, vintage year, assumed risk and market participant assumptions.  As previously discussed, based on recent better than expected performance, during the first nine months of 2014, residual interest discount rates for the single-family (SF) vintages were lowered to a range of 18% to 35% (19.1% weighted average) from 25% to 40% (25.4% weighted average) and the multi-family (MF) vintages were lowered to a range of 10% to 20% (15.6% weighted average) from 20% to 35% (20.2% weighted average).  The combined SF and MF weighted average discount rate at September 30, 2014 dropped to 18.1% from 23.2% at December 31, 2013.

 

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Table of Contents

 

The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage at September 30, 2014:

 

 

 

Estimated Future Losses
(1)

 

Investor Yield Requirement
(2)

 

 

 

SF

 

MF

 

SF

 

MF

 

2002-2003

 

8

%

*

(3)

5

%

8

%

2004

 

10

%

*

(3)

5

%

4

%

2005

 

17

%

2

%

5

%

4

%

2006

 

24

%

6

%

7

%

5

%

2007

 

28

%

2

%

7

%

4

%

 


(1)         Estimated future losses derived by dividing future projected losses by unpaid principal balances at September 30, 2014.

(2)         Investor yield requirements represent our estimate of the yield third-party market participants would require to price our trust assets and liabilities given our prepayment, credit loss and forward interest rate assumptions.

(3)         Represents less than 1%.

 

Despite the increase in housing prices from December 2012 through September 2014, housing prices in many parts of the country are still at levels which have significantly reduced or eliminated equity for loans originated after 2003. Future loss estimates are significantly higher for mortgage loans included in securitization vintages after 2004 which reflect severe home price deterioration and defaults experienced with mortgages originated during these periods.

 

Long-Term Mortgage Portfolio Credit Quality

 

We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days delinquent or greater, foreclosures and delinquent bankruptcies were $1.5 billion or 20.9% of the long-term mortgage portfolio as of September 30, 2014.

 

The following table summarizes the gross UPB of loans in our mortgage portfolio, included in securitized mortgage collateral, for continuing that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated:

 

 

 

 

 

Total

 

 

 

Total

 

 

 

September 30,

 

Collateral

 

December 31,

 

Collateral

 

 

 

2014

 

%

 

2013

 

%

 

Securitized mortgage collateral

 

 

 

 

 

 

 

 

 

60 - 89 days delinquent

 

$

146,889

 

2.1

%

$

180,002

 

2.4

%

90 or more days delinquent

 

490,174

 

7.0

%

580,318

 

7.6

%

Foreclosures (1)

 

508,658

 

7.3

%

605,201

 

7.9

%

Delinquent bankruptcies (2)

 

314,815

 

4.5

%

340,102

 

4.5

%

Total 60+ days delinquent long-term mortgage portfolio

 

1,460,536

 

20.9

%

1,705,623

 

22.4

%

Total 60 or more days delinquent

 

$

1,460,536

 

20.9

%

$

1,705,623

 

22.4

%

Total collateral

 

$

6,976,775

 

100

%

$

7,610,999

 

100

%

 


(1)       Represents properties in the process of foreclosure.

(2)       Represents bankruptcies that are 30 days or more delinquent.

 

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Table of Contents

 

The following table summarizes the gross securitized mortgage collateral and REO (at NRV), that were non-performing for continuing operations as of the dates indicated (excludes 60-89 days delinquent):

 

 

 

 

 

Total

 

 

 

Total

 

 

 

September 30,

 

Collateral

 

December 31,

 

Collateral

 

 

 

2014

 

%

 

2013

 

%

 

90 or more days delinquent, foreclosures and delinquent bankruptcies

 

$

1,313,647

 

18.8

%

$

1,525,621

 

20.0

%

Real estate owned

 

17,484

 

0.3

%

18,921

 

0.3

%

Total non-performing assets

 

$

1,331,131

 

19.1

%

$

1,544,542

 

20.3

%

 

Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including loans in foreclosure and delinquent bankruptcies) plus REO. It is the Company’s policy to place a mortgage on nonaccrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages. As of September 30, 2014, non-performing assets (unpaid principal balance of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total collateral was 19.1%. At December 31, 2013, non-performing assets to total collateral was 20.3%. Non-performing assets decreased by approximately $213.4 million at September 30, 2014 as compared to December 31, 2013. At September 30, 2014, the estimated fair value of non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) was $406.7 million or 7.5% of total assets. At December 31, 2013, the estimated fair value of non-performing assets was $536.8 million or 9.4% of total assets.

 

REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in the consolidated statements of operations. REO, for continuing and discontinued operations, at September 30, 2014 decreased $1.4 million or 8% to $17.5 million from $18.9 million at December 31, 2013, as a result of an increase of the net realizable value of the REO.

 

For the three and nine months ended September 30, 2014, we recorded a decrease and increase in net realizable value of the REO in the amount of $47 thousand and $9.0 million, respectively, compared to an increase of $3.7 million and $9.2 million for the comparable 2013 period. Increases in net realizable value reflect increases in value of the REO subsequent to foreclosure date, but prior to the date of sale.

 

The following table presents the balances of REO for continuing operations:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

REO

 

$

19,430

 

$

23,601

 

Impairment (1)

 

(1,946

)

(4,680

)

Ending balance

 

$

17,484

 

$

18,921

 

 

 

 

 

 

 

REO inside trusts

 

$

17,484

 

$

18,906

 

REO outside trusts

 

 

15

 

Total

 

$

17,484

 

$

18,921

 

 


(1)         Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.

 

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Table of Contents

 

In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the loans based on their attributes (e.g., original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the future loan losses.

 

Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The assessment for losses is based on delinquency trends and prior loss experience and management’s judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent losses.

 

Results of Operations

 

For the Three and Nine Months Ended September 30, 2014 compared to the Three and Nine Months Ended September 30, 2013

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Revenues

 

$

12,475

 

$

17,080

 

$

(4,605

)

(27

)%

Expenses

 

(13,472

)

(21,362

)

(7,890

)

(37

)

Net interest income (expense)

 

747

 

(202

)

949

 

470

 

Change in fair value of long-term debt

 

 

75

 

(75

)

(100

)

Change in fair value of net trust assets, including trust REO gains (losses)

 

92

 

(271

)

363

 

134

 

Income tax (expense) benefit from continuing operations

 

(307

)

9

 

(316

)

(3,511

)

Loss from continuing operations

 

(465

)

(4,671

)

4,206

 

90

 

Loss from discontinued operations, net

 

(736

)

(277

)

(459

)

(166

)

Net loss

 

(1,201

)

(4,948

)

3,747

 

76

 

Net earnings attributable to noncontrolling interest

 

 

 

 

 

Net loss attributable to IMH

 

$

(1,201

)

$

(4,948

)

$

3,747

 

76

 

 

 

 

 

 

 

 

 

 

 

Loss per share available to common stockholders - basic

 

$

(0.13

)

$

(0.56

)

$

0.43

 

77

%

 

 

 

 

 

 

 

 

 

 

Loss per share available to common stockholders - diluted

 

$

(0.13

)

$

(0.56

)

$

0.43

 

77

%

 

39



Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Revenues

 

$

33,425

 

$

70,669

 

$

(37,244

)

(53

)%

Expenses

 

(42,178

)

(71,221

)

(29,043

)

(41

)

Net interest income

 

338

 

36

 

302

 

839

 

Change in fair value of long-term debt

 

(424

)

(453

)

29

 

6

 

Change in fair value of net trust assets, including trust REO gains (losses)

 

7,841

 

(2,377

)

10,218

 

430

 

Income tax (expense) benefit from continuing operations

 

(1,405

)

1,065

 

(2,470

)

(232

)

Loss from continuing operations

 

(2,403

)

(2,281

)

(122

)

(5

)

Loss from discontinued operations, net

 

(1,682

)

(2,051

)

369

 

18

 

Net loss

 

(4,085

)

(4,332

)

247

 

6

 

Net earnings attributable to noncontrolling interest

 

 

(136

)

136

 

100

 

Net loss attributable to IMH

 

$

(4,085

)

$

(4,468

)

$

383

 

9

%

 

 

 

 

 

 

 

 

 

 

Loss per share available to common stockholders - basic

 

$

(0.44

)

$

(0.52

)

$

0.08

 

15

%

 

 

 

 

 

 

 

 

 

 

Loss per share available to common stockholders - diluted

 

$

(0.44

)

$

(0.52

)

$

0.08

 

15

%

 

Revenues

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

9,122

 

$

11,349

 

$

(2,227

)

(20

)%

Real estate services fees, net

 

3,243

 

4,933

 

(1,690

)

(34

)

Servicing income, net

 

913

 

989

 

(76

)

(8

)

Loss on mortgage servicing rights

 

(998

)

(121

)

(877

)

(725

)

Other revenues

 

195

 

(70

)

265

 

379

 

Total revenues

 

$

12,475

 

$

17,080

 

$

(4,605

)

(27

)%

 

Gain on sale of loans, net.  For the three months ended September 30, 2014, gain on sale of loans, net were $9.1 million compared to $11.3 million in the comparable 2013 period. The $2.2 million decrease is primarily related to a $21.7 million increase in net direct loan origination expenses, a $3.8 million increase in realized and unrealized losses on derivative financial instruments and a $3.0 million decrease in mark-to-market gains, partially offset by a $23.2 million increase in premiums received from the sale of mortgage loans and a $3.0 million increase in premiums from servicing retained loan sales.  The overall decrease in gain on sale of loans, net was due to tighter lending spreads and gain on sale margins associated with $923.6 million and $813.5 million of loans originated and sold, respectively, during the three months ended September 30, 2014, as compared to $576.2 million and $626.3 million of loans originated and sold, respectively, during the same period in 2013.  Margins fell to 0.99% for the three months ended September 30, 2014 as compared to 1.97% for the same period in 2013.

 

Real estate services fees, net.  For the three months ended September 30, 2014, real estate services fees, net were $3.2 million compared to $4.9 million in the comparable 2013 period. The $1.7 million decrease was primarily the result of a decrease in transactions related to the decline in loans and the balance of the long-term mortgage portfolio.

 

Servicing income, net.  For the three months ended September 30, 2014, servicing income, net was $913 thousand compared to $989 thousand in the comparable 2013 period.  The decrease in servicing income, net was the result of the servicing portfolio decreasing 32% to an average balance of $1.7 billion for the three months ended September 30, 2014 as compared to an average balance of $2.5 billion for the three months ended September 30, 2013.

 

Loss on mortgage servicing rights.  For the three months ended September 30, 2014, loss on mortgage servicing rights was $998 thousand compared to $121 thousand in the comparable 2013 period. For the three months ended September 30, 2014, loss on mortgage servicing rights was primarily the result of a ($1.2) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to ($93) thousand for the same period in 2013.  Partially offsetting the change in fair value was a $207 thousand gain on the sale of mortgage servicing rights during the three months ended September 30, 2014, as compared to a $28 thousand loss during the same period in 2013.

 

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Table of Contents

 

Other revenues.  For the three months ended September 30, 2014, other revenue was $195 thousand compared to an expense of $70 thousand for the comparable 2013 period.  The increase in other revenue was primarily due to a $164 thousand increase from the issuance of a warrant in our subsidiary Impac Mortgage Corp to facilitate our ability to offer Non-QM mortgage products.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

20,248

 

$

49,279

 

$

(29,031

)

(59

)%

Real estate services fees, net

 

11,282

 

14,516

 

(3,234

)

(22

)

Servicing income, net

 

3,773

 

2,929

 

844

 

29

 

(Loss) gain on mortgage servicing rights

 

(3,540

)

3,061

 

(6,601

)

(216

)

Other revenues

 

1,662

 

884

 

778

 

88

 

Total revenues

 

$

33,425

 

$

70,669

 

$

(37,244

)

(53

)%

 

Gain on sale of loans, net.  For the nine months ended September 30, 2014, gain on sale of loans, net was $20.2 million compared to $49.3 million in the comparable 2013 period. The $29.0 million decrease is primarily related to a $24.7 million increase in net direct loan origination expenses and a $22.5 million decrease in realized and unrealized losses on derivative financial instruments, partially offset by a $12.2 million increase in premiums received from the sale of mortgage loans, a $5.4 million increase in mark-to-market gains and a $69 thousand increase in premiums from servicing retained loan sales.  The overall decrease in gain on sale of loans, net was due to a reduction in mortgage loan origination and sale volumes as well as tighter lending spreads and gain on sale margins associated with $1.7 billion and $1.6 billion of loans originated and sold, respectively, during the nine months ended September 30, 2014, as compared to $2.0 billion and $2.0 billion of loans originated and sold, respectively, during the same period in 2013.  Margins fell to 1.16% for the nine months ended September 30, 2014 as compared to 2.42% for the same period in 2013.

 

Real estate services fees, net.  For the nine months ended September 30, 2014, real estate services fees, net were $11.3 million compared to $14.5 million in the comparable 2013 period. The $3.2 million decrease was primarily the result of a decrease in transactions related to the decline in loans and the balance of the long-term mortgage portfolio.

 

Servicing income, net.  For the nine months ended September 30, 2014, servicing income, net was $3.8 million compared to $2.9 million in the comparable 2013 period.  The increase in servicing income, net was the result of the servicing portfolio increasing 20% to an average balance of $2.4 billion for the nine months ended September 30, 2014 as compared to an average balance of $2.0 billion for the nine months ended September 30, 2013.  During 2014, we sold $2.6 billion in UPB of servicing rights and sold AmeriHome, which had servicing rights of $702.1 million in UPB.  Additionally, during the first nine months of 2014, we retained servicing rights on $1.6 billion in loans sales.

 

(Loss) gain on mortgage servicing rights.  For the nine months ended September 30, 2014, (loss) gain on mortgage servicing rights was an expense of $3.5 million compared to revenue of $3.1 million in the comparable 2013 period. For the nine months ended September 30, 2014, (loss) gain on mortgage servicing rights was primarily the result of a ($4.9) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $3.0 million for the same period in 2013.  Partially offsetting the change in fair value was a $1.4 million gain on the sale of mortgage servicing rights during the nine months ended September 30, 2014, as compared to $88 thousand during the same period in 2013.

 

Other revenues.  For the nine months ended September 30, 2014, other revenue was $1.7 million compared to $884 thousand for the comparable 2013 period.  The increase in other revenue was due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain, partially offset by a $600 thousand reduction in investment income.  Additionally, during the nine months ended September 30, 2014, there was a $164 thousand increase from the issuance of a warrant in our subsidiary Impac Mortgage Corp to facilitate our ability to offer Non-QM mortgage products during September 2014.

 

41



Table of Contents

 

Expenses

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Personnel expense

 

$

9,062

 

$

15,270

 

$

(6,208

)

(41

)%

General, administrative and other

 

4,410

 

6,092

 

(1,682

)

(28

)

Total expenses

 

$

13,472

 

$

21,362

 

$

(7,890

)

(37

)%

 

Total expenses were $13.5 million for the three months ended September 30, 2014, compared to $21.4 million for the comparable period of 2013. Personnel expense decreased $6.2 million to $9.1 million for the three months ended September 30, 2014.  The decrease is primarily due to a reduction in personnel related costs due to a decrease in employees and a decrease in commission expense due to a shift to correspondent and wholesale lending.  In the fourth quarter of 2013, we sold our retail branch offices and consolidated our lending fulfillment centers reducing staffing to a level appropriate for our lending volumes.  The average number of employees declined to 297 during the three months ended September 30, 2014 as compared to 571 for the three months ended September 30, 2013.

 

General, administrative and other expenses decreased to $4.4 million for the three months ended September 30, 2014, compared to $6.1 million for the same period in 2013. The decrease was primarily related to a $526 thousand decline in marketing and other expenses, a $313 thousand reduction in legal and professional fees and a $401 thousand reduction in occupancy expense attributable to the closure of the retail branches in the fourth quarter of 2013.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Personnel expense

 

$

27,841

 

$

51,923

 

$

(24,082

)

(46

)%

General, administrative and other

 

14,337

 

19,298

 

(4,961

)

(26

)

Total expenses

 

$

42,178

 

$

71,221

 

$

(29,043

)

(41

)%

 

Total expenses were $42.2 million for the nine months ended September 30, 2014, compared to $71.2 million for the comparable period of 2013. Personnel expense decreased $24.1 million to $27.8 million for the nine months ended September 30, 2014.  The decrease is primarily due to a reduction in personnel related costs due to a decrease in employees and a decrease in commission expense due to a reduction in loan origination volumes and a shift to correspondent and wholesale lending resulting in lower commission expense.  In the fourth quarter of 2013, we sold our retail branch offices and consolidated our lending fulfillment centers reducing staffing to a level appropriate for our lending volumes.  The average number of employees declined to 296 during the nine months ended September 30, 2014 as compared to 615 for the nine months ended September 30, 2013.

 

General, administrative and other expenses decreased to $14.3 million for the nine months ended September 30, 2014, compared to $19.3 million for the same period in 2013.  The decrease was primarily related to a $1.5 million decline in marketing and other expenses, a $1.2 million reduction in legal and professional fees and a $564 thousand decrease in occupancy expense attributable to reduced lending volumes as well as the closure of the retail branches in the fourth quarter of 2013.  The reduction in legal and professional fees is primarily due to a non-operational $700 thousand legal settlement expense recorded during the first quarter of 2013.

 

Net Interest (Expense) Income

 

We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, loans held-for-sale and investment securities available-for-sale, or collectively, “mortgage assets,” and, to a lesser extent, interest income earned on cash and cash equivalents. Interest expense is primarily interest paid on borrowings secured by mortgage assets, which include securitized mortgage borrowings and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes, notes payable and line of credit. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities.

 

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Table of Contents

 

The following tables summarize average balance, interest and weighted average yield on interest-earning assets and interest-bearing liabilities, included within continuing operations, for the periods indicated. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. These cash receipts and payments are included as a component of the change in fair value of net trust assets.

 

 

 

For the Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage collateral

 

$

5,430,608

 

$

77,719

 

5.72

%

$

5,547,214

 

$

73,012

 

5.26

%

Mortgage loans held-for-sale

 

176,789

 

1,865

 

4.22

%

112,728

 

1,186

 

4.21

%

Other

 

14,852

 

47

 

1.27

%

17,328

 

18

 

0.42

%

Total interest-earning assets

 

$

5,622,249

 

$

79,631

 

5.67

%

$

5,677,270

 

$

74,216

 

5.23

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

5,427,210

 

$

75,931

 

5.60

%

$

5,537,916

 

$

71,926

 

5.20

%

Warehouse borrowings

 

171,458

 

1,491

 

3.48

%

107,284

 

1,046

 

3.90

%

Long-term debt

 

17,720

 

1,039

 

23.45

%

14,683

 

1,041

 

28.36

%

Convertible Notes

 

20,000

 

387

 

7.74

%

20,000

 

386

 

7.72

%

Other

 

3,804

 

36

 

3.79

%

959

 

19

 

7.92

%

Total interest-bearing liabilities

 

$

5,640,192

 

$

78,884

 

5.59

%

$

5,680,842

 

$

74,418

 

5.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Spread (1)

 

 

 

$

747

 

0.08

%

 

 

$

(202

)

-0.01

%

Net Interest Margin (2)

 

 

 

 

 

0.05

%

 

 

 

 

-0.01

%

 


(1)       Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(2)         Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

 

Net interest spread increased $949 thousand for the quarter ended September 30, 2014 primarily attributable to an increase in the net interest spread on the long-term mortgage portfolio due to increases in yields between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio as well as an increase in the net interest spread between loans held-for-sale and warehouse borrowings.  Interest expense associated with the long-term debt and issuance of the Convertible Notes was flat during the third quarter of 2014 and 2013. As a result, net interest margin increased to 0.05% for the three months ended September 30, 2014 from (0.01%) for the three months ended September 30, 2013.

 

During the quarter ended September 30, 2014, the yield on interest-earning assets increased to 5.67% from 5.23% in the comparable 2013 period. The yield on interest-bearing liabilities increased to 5.59% for the quarter ended September 30, 2014 from 5.24% for the comparable 2013 period. In connection with the fair value accounting for investment securities available-for-sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The increase in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to slight deterioration in the 2006 and 2007 vintage. The decrease in prices for these vintages caused the overall yields to increase.  Partially offsetting the increase in overall yields was improved pricing and lower yields on the earlier vintages.  The result was an improvement in net interest income and cash flows in the earlier vintage trusts which include our residual interests.

 

43



Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage collateral

 

$

5,453,971

 

$

216,586

 

5.29

%

$

5,676,606

 

$

237,545

 

5.58

%

Mortgage loans held-for-sale

 

124,493

 

3,929

 

4.21

%

118,400

 

3,269

 

3.68

%

Other

 

12,958

 

98

 

1.01

%

13,135

 

58

 

0.59

%

Total interest-earning assets

 

$

5,591,422

 

$

220,613

 

5.26

%

$

5,808,141

 

$

240,872

 

5.53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

5,451,962

 

$

212,601

 

5.20

%

$

5,668,166

 

$

233,408

 

5.49

%

Warehouse borrowings

 

119,867

 

3,190

 

3.55

%

113,033

 

3,436

 

4.05

%

Long-term debt

 

17,097

 

3,224

 

25.14

%

13,858

 

2,980

 

28.67

%

Convertible notes

 

20,000

 

1,161

 

7.74

%

11,355

 

648

 

7.61

%

Note payable

 

 

 

 

1,184

 

314

 

35.36

%

Other

 

3,495

 

99

 

3.78

%

919

 

50

 

7.25

%

Total interest-bearing liabilities

 

$

5,612,421

 

$

220,275

 

5.23

%

$

5,808,515

 

$

240,836

 

5.53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Spread (1)

 

 

 

$

338

 

0.03

%

 

 

$

36

 

0.00

%

Net Interest Margin (2)

 

 

 

 

 

0.01

%

 

 

 

 

0.00

%

 


(1)       Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(2)         Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

 

Net interest spread increased $302 thousand for the nine months ended September 30, 2014 primarily attributable to an increase in the net interest spread between loans held-for-sale and warehouse borrowings and a decrease in interest expense on notes payable.  The increase was partially offset by a decrease in net interest spread on the long-term mortgage portfolio due to increases in pricing and the corresponding reduction in investor yield requirements between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio, an increase in interest expense associated with the long-term debt and an increase in interest expense associated with the issuance of the Convertible Notes during the second quarter of 2013. As a result, net interest margin increased slightly from 0.00% for the nine months ended September 30, 2013 to 0.01% for the nine months ended September 30, 2014.

 

During the nine months ended September 30, 2014, the yield on interest-earning assets decreased to 5.26% from 5.53% in the comparable 2013 period. The yield on interest-bearing liabilities decreased to 5.23% for the nine months ended September 30, 2014 from 5.53% for the comparable 2013 period. In connection with the fair value accounting for investment securities available-for-sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield. Bond prices received from pricing services and other market participants have increased during the nine months ended September 30, 2014 as investor’s demand for mortgage-backed securities has increased. This has resulted in an increase in fair value for both securitized mortgage collateral and securitized mortgage borrowings. These increases in fair value have decreased the effective yields used for purposes of recognizing interest income and interest expense on these instruments.

 

Change in the fair value of long-term debt.

 

There was no change in the fair value of long-term debt for the quarter ended September 30, 2014, compared to a gain of $75 thousand for the comparable 2013 period. Long-term debt (consisting of trust preferred securities and junior subordinated notes) is measured based upon an analysis prepared by us, which considers the Company’s own credit risk, including consideration of settlements with trust preferred debt holders and discounted cash flow analyses.

 

44



Table of Contents

 

Change in the fair value of long-term debt was a loss of $424 thousand for the nine months ended September 30, 2014, compared to a loss of $453 thousand for the comparable 2013 period. The increase in the estimated fair value of long-term debt was primarily the result of a reduction in discount rate during the first quarter of 2014 as well as an increase in forward LIBOR interest rates as compared to the same period in the prior year.

 

Change in fair value of net trust assets, including trust REO gains (losses)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Change in fair value of net trust assets, excluding REO

 

$

139

 

$

(3,947

)

$

(1,136

)

$

(11,609

)

(Losses) gains from REO

 

(47

)

3,676

 

8,977

 

9,232

 

Change in fair value of net trust assets, including trust REO gains (losses)

 

$

92

 

$

(271

)

$

7,841

 

$

(2,377

)

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $92 thousand for the quarter ended September 30, 2014, compared to a loss of $271 thousand in the comparable 2013 period. The change in fair value of net trust assets, including REO was due to $139 thousand in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of decreased severities in the future and lower interest rates. Additionally, the NRV of REO decreased $47 thousand during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

For the quarter ended September 30, 2013, the $271 thousand loss from change in fair value of net trust assets, including REO was due to $3.9 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses in the future and higher interest rates. Partially offsetting the loss was a $3.7 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

The change in fair value related to our net trust assets was a gain of $7.8 million for the nine months ended September 30, 2014, compared to a loss of $2.4 million in the comparable 2013 period. For the nine months ended September 30, 2014, the change in fair value of net trust assets, including REO was due to a $9.0 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Partially offsetting the gain was $1.1 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses and severities in the future and higher interest rates

 

For the nine months ended September 30, 2013, the $2.4 million loss from change in fair value of net trust assets, including REO was due to $11.6 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses in the future and higher interest rates. Partially offsetting the loss was a $9.2 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

Income Taxes

 

We recorded income tax expense of $307 thousand and $1.4 million for the three and nine months ended September 30, 2014, respectively. We recorded income tax benefit of $9 thousand and $1.1 million for the three and nine months ended September 30, 2013, respectively. The tax expense in 2014 is primarily related to alternative minimum taxes associated with taxable income generated from sale of AmeriHome and mortgage servicing rights.  The income tax benefit for 2013 is the result of the inclusion of AmeriHome in the IMH federal and California consolidated tax returns as a result of the Company increasing its ownership in AmeriHome to 80% during the first quarter of 2013.

 

As of December 31, 2013, the Company had estimated federal and California net operating loss (NOL) carryforwards of approximately $518.9 million and $442.4 million, respectively, of which approximately $161.7 million (federal) related to discontinued operations. Federal and state net operating loss carryforwards begin to expire in 2027 and 2018, respectively.

 

We have significant NOL carry-forwards from prior years. If there is an improvement in earnings from our continuing operations, we may be able to generate sufficient taxable income in future years to utilize these loss carry-forwards, however, at September 30, 2014; we have recognized a full valuation allowance against our net deferred tax assets.  As of September 30, 2014, we have no material uncertain tax positions.

 

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Results of Operations by Business Segment

 

Today, we have three primary operating segments: Mortgage Lending, Real Estate Services and Long-Term Mortgage Portfolio. Unallocated corporate and other administrative costs, including the cost associated with being a public company, are presented in Corporate. Segment operating results are as follows:

 

Mortgage Lending

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

9,122

 

$

11,349

 

$

(2,227

)

(20

)%

Servicing income, net

 

913

 

989

 

(76

)

(8

)

Loss on mortgage servicing rights

 

(998

)

(121

)

(877

)

(725

)

Other

 

109

 

4

 

105

 

2,625

 

Total revenues

 

9,146

 

12,221

 

(3,075

)

(25

)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

403

 

144

 

259

 

180

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(6,941

)

(13,204

)

(6,263

)

(47

)

General, administrative and other

 

(1,805

)

(3,350

)

(1,545

)

(46

)

Net earnings (loss) before income taxes

 

$

803

 

$

(4,189

)

$

4,992

 

119

%

 

For the quarter ended September 30, 2014, gain on sale of loans, net were $9.1 million or 0.99% compared to $11.3 million or 1.97% in the comparable 2013 period. The $2.2 million decrease was due to tighter lending spreads and gain on sale margins associated with $923.6 million and $813.5 million of loans originated and sold, respectively, during the three months ended September 30, 2014, as compared to $576.2 million and $626.3 million of loans originated and sold, respectively, during the same period in 2013.

 

For the quarter ended September 30, 2014, servicing income, net was $913 thousand compared to $989 thousand in the comparable 2013 period.  The decrease in servicing income, net was the result of the servicing portfolio decreasing 32% to an average balance of $1.7 billion for the three months ended September 30, 2014 as compared to an average balance of $2.5 billion for the three months ended September 30, 2013.  During the third quarter of 2014, we sold $1.0 billion in UPB of servicing rights and retained servicing rights on $793.1 million in loans sales.

 

For the three months ended September 30, 2014, loss on mortgage servicing rights was $998 thousand compared to $121 thousand in the comparable 2013 period. For the three months ended September 30, 2014, loss on mortgage servicing rights was primarily the result of a ($1.2) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to ($93) thousand for the same period in 2013.  Partially offsetting the change in fair value was a $207 thousand gain on the sale of mortgage servicing rights during the three months ended September 30, 2014, as compared to a $28 thousand loss during the same period in 2013.

 

Personnel expense decreased $6.3 million to $6.9 million for the three months ended September, 2014.  The decrease is primarily due to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013, reducing staffing to a level appropriate for our lending volumes.  The average number of mortgage lending employees declined to 204 in the third quarter of 2014 as compared to 467 during the same period in 2013.

 

The $1.5 million decrease in general, administrative and other expense is primarily related to reductions in occupancy, legal and professional fees and other marketing costs primarily attributable to the sale of our retail branches during the fourth quarter of 2013

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

20,248

 

$

49,279

 

$

(29,031

)

(59

)%

Servicing income, net

 

3,773

 

2,929

 

844

 

29

 

(Loss) gain on mortgage servicing rights

 

(3,540

)

3,061

 

(6,601

)

(216

)

Other

 

1,366

 

117

 

1,249

 

1,068

 

Total revenues

 

21,847

 

55,386

 

(33,539

)

(61

)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

774

 

(161

)

935

 

581

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(20,483

)

(44,643

)

(24,160

)

(54

)

General, administrative and other

 

(5,837

)

(11,302

)

(5,465

)

(48

)

Net loss before income taxes

 

$

(3,699

)

$

(720

)

$

(2,979

)

(414

)%

 

For the nine months ended September 30, 2014, gain on sale of loans, net was $20.2 million or 1.16% compared to $49.3 million or 2.42% in the comparable 2013 period. The $29.0 million decrease was due to a reduction in mortgage loan origination and sales volumes as well as tighter lending spreads and gain on sale margins associated with $1.7 billion and $1.6 billion of loans originated and sold, respectively, during the nine months ended September 30, 2014, as compared to $2.0 billion and $2.0 billion of loans originated and sold, respectively, during the same period in 2013.

 

For the nine months ended September 30, 2014, servicing income, net was $3.8 million compared to $2.9 million in the comparable 2013 period.  The increase in servicing income, net was the result of the servicing portfolio increasing 20% to an average balance of $2.4 billion for the nine months ended September 30, 2014 as compared to an average balance of $2.0 billion for the nine months ended September 30, 2013.  During 2014, we sold $2.6 billion in UPB of servicing rights and sold AmeriHome, which had servicing rights of $702.1 million in UPB.  Additionally, during the first nine months of 2014, we retained servicing rights on $1.6 billion in loans sales.

 

For the nine months ended September 30, 2014, (loss) gain on mortgage servicing rights was an expense of $3.5 million compared to revenue of $3.1 million in the comparable 2013 period. For the nine months ended September 30, 2014, (loss) gain on mortgage servicing rights was primarily the result of a ($4.9) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $3.0 million for the same period in 2013.  Partially offsetting the change in fair value was a $1.4 million gain on the sale of mortgage servicing rights during the nine months ended September 30, 2014, as compared to $88 thousand during the same period in 2013.

 

For the nine months ended September 30, 2014, other revenue was $1.4 million compared to $117 thousand for the comparable 2013 period.  The increase in other revenue was due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain.  Additionally, during the quarter ended September 30, 2014, there was a $164 thousand increase from the issuance of a warrant in our subsidiary Impac Mortgage Corp to facilitate our ability to offer Non-QM mortgage products.

 

Personnel expense decreased $24.2 million to $20.5 million for the nine months ended September 30, 2014.  The decrease is primarily due to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013, reducing staffing to a level appropriate for our lending volumes.  The average number of mortgage lending employees declined to 201for the first nine months of 2014 as compared to 514 during the same period in 2013.  Additionally, the decrease is also related to a reduction in loan origination volumes and a shift to correspondent and wholesale lending resulting in a decrease in commission expense.

 

The $5.5 million decrease in general, administrative and other expense is primarily related to reductions in occupancy, legal and professional fees and other marketing costs primarily attributable to the reduction in lending volumes as well as the sale of our retail branches during the fourth quarter of 2013. The reduction in legal and professional fees is primarily due to a non-operational $700 thousand legal settlement expense recorded during the first quarter of 2013.

 

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Table of Contents

 

Real Estate Services

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Real estate services fees, net

 

$

3,243

 

$

4,933

 

$

(1,690

)

(34

)%

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(6

)

5

 

(11

)

(220

)

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(1,225

)

(916

)

309

 

34

 

General, administrative and other

 

(161

)

(70

)

91

 

130

 

Net earnings before income taxes

 

$

1,851

 

$

3,952

 

$

(2,101

)

(53

)%

 

For the quarter ended September 30, 2014, real estate services fees, net were $3.2 million compared to $4.9 million in the comparable 2013 period. The $1.7 million decrease in real estate services fees, net was the result of an $803 thousand decrease in real estate and recovery fees real estate services, $527 thousand decrease in loss mitigation fees and a $360 thousand decrease in real estate services.

 

For the quarter ended September 30, 2014, personnel expense increased to $1.2 million as compared to $916 thousand for the comparable 2013 period. The $309 thousand increase is primarily related to a reversal of incentive compensation during the third quarter of 2013.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Real estate services fees, net

 

$

11,282

 

$

14,516

 

$

(3,234

)

(22

)%

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(5

)

16

 

(21

)

(131

)

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(3,800

)

(4,368

)

(568

)

(13

)

General, administrative and other

 

(643

)

(649

)

(6

)

(1

)

Net earnings before income taxes

 

$

6,834

 

$

9,515

 

$

(2,681

)

(28

)%

 

For the nine months ended September 30, 2014, real estate services fees, net were $11.3 million compared to $14.5 million in the comparable 2013 period. The $3.2 million decrease in real estate services fees, net was the result of a $2.1 million decrease in real estate and recovery fees real estate services and a $1.2 million decrease in loss mitigation fees and a $15 thousand decrease in real estate services.

 

For the nine months ended September 30, 2014, personnel expense decreased to $3.8 million compared to $4.4 million for the comparable 2013 period. The $568 thousand decrease is primarily related to a reduction in personnel as well as a reduction in commissions associated with reduced transactions and the decline in loans and balance of the long-term mortgage portfolio slightly offset by a reversal of incentive compensation during the third quarter of 2013.

 

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Table of Contents

 

Long-term Mortgage Portfolio

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Other revenue

 

$

86

 

$

(66

)

152

 

(230

)%

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(111

)

(255

)

(144

)

(56

)

General, administrative and other

 

(103

)

(125

)

(22

)

(18

)

Total expenses

 

(214

)

(380

)

166

 

44

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

755

 

54

 

701

 

1298

 

Change in fair value of long-term debt

 

 

75

 

(75

)

(100

)

Change in fair value of net trust assets, including trust REO gains (losses)

 

92

 

(271

)

363

 

134

 

Total other income (expense)

 

847

 

(142

)

989

 

696

 

Net earnings (loss) before income taxes

 

$

719

 

$

(588

)

$

1,307

 

222

%

 

For the quarter ended September 30, 2014, personnel expense was $111 thousand as compared to $255 thousand for the comparable 2013 period. The decrease in personnel expense was primarily due to a decrease in allocated personnel expenses associated with ongoing activities in the long-term mortgage portfolio associated with a decline in loans and balances of the long-term mortgage portfolio.

 

For the quarter ended September 30, 2014, net interest income totaled $755 thousand as compared to $54 thousand for the comparable 2013 period. Net interest income increased $701 thousand for the quarter ended September 30, 2014 primarily attributable to a $700 thousand increase in net interest spread on the long-term mortgage portfolio due to decreases in pricing on 2006 and 2007 vintage. The decrease in prices for these vintages caused the overall yields to increase.  Partially offsetting the increase in overall yields was improved pricing and lower yields on the earlier vintages.  The result was an improvement in net interest income and cash flows in the earlier vintage trusts which include our residual interests. Additionally, interest expense on the long-term debt and note payable was flat quarter over quarter at $1.0 million and $387 thousand, respectively.

 

Change in the fair value of long-term debt decreased to $0 for the quarter ended September 30, 2014, compared to a gain of $75 thousand for the comparable 2013 period. The decrease in the estimated fair value of long-term debt was primarily the result of a decrease in forward LIBOR interest rates.

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $92 thousand for the quarter ended September 30, 2014, compared to a loss of $271 thousand in the comparable 2013 period. The change in fair value of net trust assets, including REO was due to $139 thousand in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of decreased severities in the future and lower interest rates. Additionally, the NRV of REO decreased $47 thousand during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Other revenue

 

$

296

 

$

787

 

(491

)

(62

)%

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(266

)

(762

)

(496

)

(65

)

General, administrative and other

 

(454

)

(552

)

(98

)

(18

)

Total expenses

 

(720

)

(1,314

)

594

 

45

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

781

 

881

 

(100

)

(11

)

Change in fair value of long-term debt

 

(424

)

(453

)

29

 

6

 

Change in fair value of net trust assets, including trust REO gains (losses)

 

7,841

 

(2,377

)

10,218

 

430

 

Total other income (expense)

 

8,198

 

(1,949

)

10,147

 

521

 

Net earnings (loss) before income taxes

 

$

7,774

 

$

(2,476

)

$

10,250

 

414

%

 

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Table of Contents

 

For the nine months ended September 30, 2014, other revenue totaled $296 thousand as compared to $787 thousand for the comparable 2013 period. The decrease is primarily due to a $600 thousand decrease in investment earnings.

 

For the nine months ended September 30, 2014, personnel expense was $266 thousand as compared to $762 thousand for the comparable 2013 period. The decrease in personnel expense was primarily due to a decrease in allocated personnel expenses associated with ongoing activities in the long-term mortgage portfolio associated with a decline in loans and balances of the long-term mortgage portfolio.

 

For the nine months ended September 30, 2014, net interest income totaled $781 thousand as compared to $881 thousand for the comparable 2013 period. The decreased was primarily attributable to a $152 thousand decrease in net interest spread on the long-term mortgage portfolio due to increases in pricing and the corresponding reduction in investor yield requirements between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio. Additionally, interest expense on the long-term debt increased $243 thousand due to an increase in interest rates.  Partially offsetting the decrease in net interest income was a $303 thousand decrease in interest expense on the note payable due to the repayment of the note in April 2013.

 

Change in the fair value of long-term debt was a loss of $424 thousand for the nine months ended September 30, 2014, compared to a loss of $453 thousand for the comparable 2013 period. The increase in the estimated fair value of long-term debt was primarily the result of a reduction in discount rate during the first quarter of 2014, partially offset by a decrease in forward LIBOR interest rates at September 30, 2014.

 

The change in fair value related to our net trust assets was a gain of $7.8 million for the nine months ended September 30, 2014, compared to a loss of $2.4 million in the comparable 2013 period. For the nine months ended September 30, 2014, the change in fair value of net trust assets, including REO was due to a $9.0 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Partially offsetting the gain was $1.1 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses and severities in the future and higher interest rates

 

Corporate

 

The corporate segment includes all compensation applicable to the corporate services groups, public company costs, unused office space as well as debt expense related to the Convertible Notes and capital leases. This corporate services group supports all operating segments. A portion of the corporate services costs is allocated to the operating segments. The costs associated with being a public company, unused space as well as the interest expense related to the Convertible Notes and capital leases are not allocated to our other segments and remain in this segment.

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Interest expense

 

$

(405

)

$

(405

)

 

0

 

Other expenses

 

(3,126

)

(3,450

)

(324

)

(9

)

Net loss before income taxes

 

$

(3,531

)

$

(3,855

)

$

324

 

8

%

 

For the quarter ended September 30, 2014, expenses decreased to $3.1 million as compared to $3.5 million for the comparable 2013 period. The decrease was due to a net reduction in allocated corporate expenses.  The reduction in corporate expenses is due to a $110 thousand reduction in personnel expense during the third quarter of 2014 as well as a reduction of general corporate expenses.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Interest expense

 

$

(1,212

)

$

(700

)

(512

)

(73

)

Other expenses

 

(10,695

)

(8,965

)

(1,730

)

(19

)

Net loss before income taxes

 

$

(11,907

)

$

(9,665

)

$

(2,242

)

(23

)%

 

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Table of Contents

 

For the nine months ended September 30, 2014, interest expense increased as compared to the comparable 2013 period primarily due to a $501 thousand increase in interest expense on the $20.0 million Convertible Notes issued in April 2013.

 

For the nine months ended September 30, 2014, expenses increased to $10.7 million as compared to $9.0 million for the comparable 2013 period. The increase was primarily due to non-cash lease impairment charge and a net reduction in allocated corporate expenses.  With the further consolidation of the mortgage lending and real estate services operations in the first quarter of 2014, the Company recorded a non-cash lease impairment charge of $548 thousand for the space that we no longer used and expect to sublease in the future. Additionally, the sale of the retail branch network and closure of the lending fulfillment center at the end of 2013 resulted in a reduced allocation of certain fixed corporate costs due to reduced headcount primarily in mortgage lending and the associated reductions in business operations.  The combination of the two resulted in a net increase in expenses recorded in the corporate segment.

 

Discontinued Operations

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Provision for repurchases

 

$

(520

)

$

 

$

520

 

%

General, administrative and other

 

(216

)

(277

)

(61

)

(22

)

Net loss after income taxes

 

$

(736

)

$

(277

)

$

(459

)

(166

)%

 

We recorded approximately $520 thousand in provision for repurchases during the quarter ended September 30, 2014 as compared to none for the comparable 2013 period.  The increase is the result of an increase in estimated repurchase losses attributable to our former non-conforming mortgage loan originations.

 

For the quarter ended September 30, 2014, general, administrative and other expense decreased to $216 thousand as compared to $277 thousand for the comparable 2013 period. The decrease of $61 thousand between periods is primarily due to reduced legal expenses for various matters pertaining to loans originated by the discontinued mortgage operations.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2014

 

2013

 

(Decrease)

 

Change

 

Provision for repurchases

 

$

(751

)

$

(1,311

)

$

(560

)

(43

)%

General, administrative and other

 

(931

)

(740

)

(1,671

)

(226

)

Net loss after income taxes

 

$

(1,682

)

$

(2,051

)

$

369

 

18

%

 

We recorded approximately $751 thousand in provision for repurchases during the nine months ended September 30, 2014 as compared to $1.3 million for the comparable 2013 period.  During the nine months ended September 30, 2014, we paid approximately $5.3 million to settle previous repurchase claims related to our previously discontinued operations and such amount was charged against the reserve on our consolidated balance sheets.

 

For the nine months ended September 30, 2014, general, administrative and other expense increased to $931 thousand compared to $740 thousand for the comparable 2013 period. During 2014, we incurred approximately $1.5 million in legal expenses and $368 thousand in occupancy expense for various matters pertaining to the discontinued non-conforming mortgage operations. Partially offsetting the legal expenses was a $950 thousand recovery from a settlement associated with previous litigation settlements.

 

ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, the Company is not required to provide the information required by this Item.

 

ITEM 4:  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted under the Securities

 

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Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1:  LEGAL PROCEEDINGS

 

On October 28, 2014 an action was filed in the Superior Court of the State of California in Orange County entitled Mallory Hill vs. Impac Mortgage Holdings, Inc., Impac Mortgage Corporation et al.  In the action Mr. Hill seeks compensatory damages, general damages, treble damages, exemplary damages, an accounting, injunctive relief, attorney’s fees and costs for claims based upon a consulting agreement entered into with Mr. Hill, a purported employment relationship entered into with Mr. Hill and other purported claims.

 

We are a party to other litigation and claims which are normal in the course of our operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations.

 

The Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and results of operations. Please refer to IMH’s report on Form 10-K for the year ended December 31, 2013 and subsequent Form 10-Q filings for a description of litigation and claims.

 

ITEM 1A:  RISK FACTORS

 

Our Annual Report on Form 10-K for the year ended December 31, 2013 and our quarterly report on Form 10-Q for the period ended June 30, 2014, include a detailed discussion of our risk factors.

 

ITEM 2:  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sale of Unregistered Securities

 

On July 24, and September 2, 2014, the Company issued an additional 80,000 and 10,000 shares of common stock, respectively, pursuant to the terms of a Settlement and Release Agreement dated January 10, 2014 with Wilmington Trust Company whereby the Company agreed to pay Wilmington an aggregate of $1.05 million.  The issuance of the shares satisfied the Company’s payment obligations.  The issuance was made in reliance upon the exemption from registration under Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”).  As previously reported, the Company has also issued to Wilmington an aggregate of 95,000 shares of common stock.

 

On August 19, 2014, the Company issued 175,000 shares of common stock to Richard H. Pickup, Trustee of the RHP Trust, dated May 31, 2011 for an aggregate purchase price of $857,500.  The proceeds were used by the Company to pay the remaining and final obligation under the Settlement and Release Agreement dated March 11, 2014 with Deutsche Bank National Trust Company whereby the Company agreed to pay Deutsche Bank an aggregate of $1.65 million in installments by December 31, 2014.  The shares were issued pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder (“Regulation D”) since, among other things, the transaction did not involve a public offering, the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof and the offer and sale were made solely to an “accredited investor” (as such term is defined by Rule 501 of Regulation D).

 

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ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4:  MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5:  OTHER INFORMATION

 

On September 23, 2014, the warehouse facility under the Master Repurchase Agreement with Everbank was amended extending the expiration date to September 22, 2015.

 

On September 17, 2014, the Company entered into amendments to the Master Repurchase Agreements and Pricing Side Letters to the Warehouse and rewarehouse facilities with Credit Suisse extending the expiration date of each to September 16, 2015.

 

The information set forth above is included herewith for the purpose of providing the disclosure required under “Item 1.01-Entry into a Material Definitive Agreement,” “Item 1.02 — Termination of a Material Definitive Agreement” and/or “Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant” of Form 8-K.

 

On November 10, 2014, Todd Taylor, Chief Financial Officer, and Ron Morrison, Executive Vice President and General Counsel, each entered into an amendment to their respective employment agreements extending the term to December 31, 2015.  The employment agreements are described in the Company’s Form 10-K for the year ended December 31, 2014.

 

As previously reported, in March 2014, Joseph Tomkinson, Chief Executive Officer, agreed to waive $150,000 of his 2012 annual incentive bonus. On October 23, 2014, the Company agreed to pay Mr. Tomkinson $60,000 of the previously waived 2012 bonus amount.

 

The information set forth above is included herewith for the purpose of providing disclosure required under “Item 5.02(e) - Compensatory Arrangements of Certain Officers” of Form 8-K.

 

ITEM 6: EXHIBITS

 

(a)

 

Exhibits:

10.1

 

Eleventh Amendment dated September 23, 2014 to Master Repurchase Agreement with Everbank.

10.2

 

Amendment No. 5 to Master Repurchase Agreement and Amendment No. 8 to Pricing Side Letter dated September 17, 2014 between Excel Mortgage Servicing, Inc. and Credit Suisse First Boston Mortgage Capital LLC

10.3

 

Amendment No. 2 to Master Repurchase Agreement (Repledge Facility) and Pricing Side Letter dated September 17, 2014 between Excel Mortgage Servicing, Inc. and Credit Suisse First Boston Mortgage Capital LLC

31.1

 

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

 

The following materials from Impac Mortgage Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Cash Flows, and (4) Notes to Consolidated Financial Statements, tagged as blocks of text.

 


*                                         This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

IMPAC MORTGAGE HOLDINGS, INC.

 

 

 

/s/ TODD R. TAYLOR

 

Todd R. Taylor

 

Chief Financial Officer

 

(authorized officer of registrant and principal financial officer)

 

 

 

November 12, 2014

 

 

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