Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020

or

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

IMH

NYSE American

Preferred Stock Purchase Rights

IMH

NYSE American

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  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  No 

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

There were 21,229,857 shares of common stock outstanding as of June 18, 2020.

1


Table of Contents

Explanatory Note:

Reliance on SEC Relief from Filing Requirements

 

As previously disclosed on a Form 8-K filed with the Securities and Exchange Commission on May 15, 2020, Impac Mortgage Holdings, Inc. (the “Company”) is filing this Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “Quarterly Report”) in reliance on the Securities and Exchange Commission’s (the “SEC”) Order pursuant to Section 36 (Release No. 34-88465) of the Securities Exchange Act of 1934, as amended, issued on March 25, 2020, as extended, permitting reporting companies to delay the filing of periodic reports due to circumstances related to the coronavirus (COVID-19) pandemic.

 

The Company is relying on the Order because, in light of the COVID-19 pandemic, the Company’s operations have experienced significant disruptions.  The Company’s management is devoting significant time and attention to assessing and responding to the impact of COVID-19 and related events on the Company’s operations and financial position, developing operational and financial plans focused on prioritizing liquidity, focusing on the safety and productivity of our employees, and continuing to work with our counterparties, customers and operating partners. This diverted management resources from completing all of the tasks necessary to file the Company’s Quarterly Report by the original May 15, 2020 due date.

2


Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

4

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 (unaudited)

5

Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited)

6

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)

7

Notes to Unaudited Consolidated Financial Statements

8

ITEM 2.

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

30

Forward-Looking Statements

30

The Mortgage Industry and Discussion of Relevant Fiscal Periods

30

Selected Financial Results

31

Status of Operations

31

Liquidity and Capital Resources

36

Critical Accounting Policies

38

Financial Condition and Results of Operations

39

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

53

ITEM 4.

CONTROLS AND PROCEDURES

53

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

54

ITEM 1A.

RISK FACTORS

54

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

55

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

55

ITEM 4.

MINE SAFETY DISCLOSURES

55

ITEM 5.

OTHER INFORMATION

55

ITEM 6.

EXHIBITS

55

SIGNATURES

56

CERTIFICATIONS

3


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)

    

March 31, 

    

December 31, 

 

2020

2019

 

ASSETS

Cash and cash equivalents

$

80,192

$

24,666

Restricted cash

 

11,950

 

12,466

Mortgage loans held-for-sale

 

497,605

 

782,143

Mortgage servicing rights

 

24,328

 

41,470

Securitized mortgage trust assets

 

2,253,323

 

2,634,746

Other assets

 

54,700

 

50,788

Total assets

$

2,922,098

$

3,546,279

LIABILITIES

Warehouse borrowings

$

501,086

$

701,563

MSR financings

15,000

Convertible notes, net

 

24,999

 

24,996

Long-term debt

 

39,632

 

45,434

Securitized mortgage trust liabilities

 

2,238,208

 

2,619,210

Other liabilities

 

67,736

 

50,839

Total liabilities

 

2,886,661

 

3,442,042

Commitments and contingencies (See Note 11)

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 $33,020; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of March 31, 2020 and December 31, 2019 (See Note 12)

 

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 March 31, 2020 and December 31, 2019 (See Note 12)

 

14

 

14

Common stock, $0.01 par value; 200,000,000 shares authorized; 21,264,926 and 21,255,426 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

 

213

 

212

Additional paid-in capital

 

1,236,521

 

1,236,237

Accumulated other comprehensive earnings, net of tax

21,713

24,786

Net accumulated deficit:

 

Cumulative dividends declared

 

(822,520)

 

(822,520)

Retained deficit

 

(400,511)

 

(334,499)

Net accumulated deficit

 

(1,223,031)

 

(1,157,019)

Total stockholders’ equity

 

35,437

 

104,237

Total liabilities and stockholders’ equity

$

2,922,098

$

3,546,279

See accompanying notes to unaudited consolidated financial statements

4


Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(Unaudited)

For the Three Months Ended

March 31, 

    

2020

    

2019

Revenues:

    

    

(Loss) gain on sale of loans, net

$

(28,162)

$

12,214

Servicing fees, net

 

2,507

 

2,969

Real estate services fees, net

 

393

 

806

Loss on mortgage servicing rights, net

(18,310)

(5,623)

Other

 

63

 

Total revenues, net

 

(43,509)

 

10,366

Expenses:

Personnel expense

 

20,664

 

14,121

General, administrative and other

 

6,975

 

5,226

Business promotion

3,128

2,923

Total expenses

 

30,767

 

22,270

Operating loss

(74,276)

(11,904)

Other income (expense):

Interest income

 

36,095

 

45,254

Interest expense

 

(33,167)

 

(43,458)

Change in fair value of long-term debt

9,036

265

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

 

(2,383)

 

(2,683)

Total other income (expense), net

 

9,581

 

(622)

Loss before income taxes

 

(64,695)

 

(12,526)

Income tax expense

 

36

 

86

Net loss

$

(64,731)

$

(12,612)

Other comprehensive loss:

Change in fair value of mortgage-backed securities

21

Change in fair value of instrument specific credit risk of long-term debt

(3,073)

96

Total comprehensive loss

$

(67,804)

$

(12,495)

Net loss per common share:

Basic

$

(3.05)

$

(0.60)

Diluted

(3.05)

(0.60)

See accompanying notes to unaudited consolidated financial statements

5


Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(Unaudited)

    

Preferred

    

    

Common

    

    

Additional

    

Cumulative

    

Accumulated Other

    

Total

 

Shares

Preferred

Shares

Common

Paid-In

Dividends

Retained

Comprehensive

Stockholders’

 

Outstanding

Stock

Outstanding

Stock

Capital

Declared

Deficit

Earnings, net of tax

Equity

 

Balance, January 1, 2020

 

2,070,678

$

21

 

21,255,426

$

212

$

1,236,237

$

(822,520)

$

(334,499)

$

24,786

$

104,237

Proceeds from exercise of stock options

 

 

 

9,500

1

 

46

 

 

 

 

47

Stock based compensation

 

 

 

 

238

 

 

 

 

238

Other comprehensive loss

(3,073)

(3,073)

Consolidation of corporate-owned life insurance trusts

(1,281)

(1,281)

Net loss

 

 

 

 

 

 

 

(64,731)

 

 

(64,731)

Balance, March 31, 2020

 

2,070,678

$

21

 

21,264,926

$

213

$

1,236,521

$

(822,520)

$

(400,511)

$

21,713

$

35,437

    

Preferred

    

    

Common

    

    

Additional

    

Cumulative

    

Accumulated Other

    

Total

Shares

Preferred

Shares

Common

Paid-In

Dividends

Retained

Comprehensive

Stockholders’

Outstanding

Stock

Outstanding

Stock

Capital

Declared

Deficit

Earnings, net of tax

Equity

Balance, January 1, 2019

 

2,070,678

$

21

 

21,117,006

$

211

$

1,235,108

$

(822,520)

$

(326,522)

$

23,877

$

110,175

Proceeds and tax benefit from exercise of stock options

 

 

 

64,351

1

 

162

 

 

 

 

163

Stock based compensation

 

 

 

 

107

 

 

 

 

107

Other comprehensive earnings

117

117

Net loss

 

 

 

 

 

 

 

(12,612)

 

 

(12,612)

Balance, March 31, 2019

 

2,070,678

$

21

 

21,181,357

$

212

$

1,235,377

$

(822,520)

$

(339,134)

$

23,994

$

97,950

See accompanying notes to unaudited consolidated financial statements

6


Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

For the Three Months Ended

March 31, 

2020

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

    

    

    

    

Net loss

$

(64,731)

$

(12,612)

Gain on sale of mortgage servicing rights

(521)

(865)

Change in fair value of mortgage servicing rights

 

18,831

 

6,488

Gain on sale of mortgage loans

 

(29,003)

 

(10,984)

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

 

45,493

 

(3,469)

Change in fair value of derivatives lending, net

 

6,277

 

609

Provision for repurchases

 

5,395

 

1,630

Origination of mortgage loans held-for-sale

 

(1,516,315)

 

(581,509)

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

 

1,782,674

 

487,207

Gains from trust REO

 

(1,713)

 

(3,473)

Change in fair value of net trust assets, excluding trust REO

 

4,096

 

6,156

Change in fair value of long-term debt

 

(9,036)

 

(265)

Accretion of interest income and expense

 

14,894

 

7,412

Amortization of intangible and other assets

143

Amortization of debt issuance costs and discount on note payable

 

3

 

8

Stock-based compensation

 

238

 

107

Net change in other assets

796

3,241

Net change in other liabilities

 

145

 

(7,553)

Net cash provided by (used in) operating activities

 

257,523

 

(107,729)

CASH FLOWS FROM INVESTING ACTIVITIES:

Net change in securitized mortgage collateral

 

121,173

 

123,865

Purchase of premises and equipment

 

(385)

 

(134)

Purchase of mortgage-backed securities

 

 

(5,347)

Proceeds from the sale of trust REO

 

7,775

 

5,587

Net cash provided by investing activities

 

128,563

 

123,971

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under MSR financing

 

15,000

 

Repayment of warehouse borrowings

 

(1,651,513)

 

(405,840)

Borrowings under warehouse agreements

 

1,451,036

 

526,466

Repayment of securitized mortgage borrowings

 

(145,644)

 

(137,272)

Principal payments on capital lease

 

 

(49)

Tax payments on stock based compensation awards

(2)

(39)

Proceeds from exercise of stock options

 

47

 

163

Net cash used in financing activities

 

(331,076)

 

(16,571)

Net change in cash, cash equivalents and restricted cash

 

55,010

 

(329)

Cash, cash equivalents and restricted cash at beginning of year

 

37,132

 

30,189

Cash, cash equivalents and restricted cash at end of period

$

92,142

$

29,860

NON-CASH TRANSACTIONS:

Transfer of securitized mortgage collateral to trust REO

$

3,891

$

5,825

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

 

1,689

 

1,583

Recognition of corporate-owned life insurance cash surrender value (included in Other assets)

9,476

Recognition of corporate-owned life insurance trusts (included in Other liabilities)

10,757

Recognition of operating lease right of use assets (net of $3.8 million of deferred rent)

 

 

19,694

Recognition of operating lease liabilities

23,447

See accompanying notes to unaudited consolidated financial statements

7


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 financial services company incorporated in Maryland with the following direct and indirect wholly-owned subsidiaries: Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), Impac Funding Corporation (IFC) and Copperfield Capital Corporation, which was created in the second quarter of 2020 to, among other activities, assist with managing mortgage loans held-for-sale, provide origination and servicing solutions focusing on loss mitigation strategies, including loan modifications and restructurings to assist borrowers.  The Company’s operations include the mortgage lending operations and real estate services conducted by IRES and IMC and the long-term mortgage portfolio (residual interests in securitizations reflected as net trust assets and liabilities in the consolidated balance sheets) conducted by IMH.  IMC’s mortgage lending operations include the activities of its division, CashCall Mortgage (CCM).

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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019, filed with the United States Securities and Exchange Commission (SEC).

All significant intercompany 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 material 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.  Additionally, other 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 (MSR), mortgage loans held-for-sale (LHFS) and derivative instruments, including interest rate lock commitments (IRLC). Actual results could differ from those estimates and assumptions.

Risks and Uncertainties

As the novel coronavirus (COVID-19) pandemic and its effects on the economy escalated in the United States in early March 2020, the financial markets destabilized resulting in economic disruption and substantial market volatility. The widening of nominal spreads resulted in a sudden and severe decline in the mark-to-market values of residential mortgage-backed securities (RMBS) assets. The crisis in the RMBS market was closely followed by a substantial widening of spreads on credit assets and a reduction in available liquidity to finance credit assets, including the sizable non-qualified mortgage (NonQM) position within the Company’s LHFS portfolio, causing a severe decline in the mark-to-market values assigned by counterparties.

In order to preserve liquidity, on March 30, 2020, the Company instituted a temporary suspension of all lending activities.  The Company satisfied all margin calls received, while also increasing unrestricted cash to $80.2 million at March 31, 2020.  Subsequent to March 31, 2020, the Company has continued to prioritize liquidity and de-risking the

8


Table of Contents

balance sheet by materially reducing its exposure on the consolidated balance sheet through asset sales and debt repayments.

The reduction in LHFS and locked pipeline, reduction in MSRs and greater retention of uninvested cash to address the volatility in the market, is likely to result in diminished earning capacity for the Company for at least the next few quarters as the Company re-engages in lending activities.

Accounting Pronouncements Adopted in 2020

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820).” The ASU eliminates disclosures such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company adopted this guidance on January 1, 2020, and the adoption of this ASU had no impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40).” This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance on January 1, 2020, and the adoption of this ASU had no impact on the Company’s consolidated financial statements.

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for public business entities for fiscal years and interim periods beginning after December 15, 2020, with early adoption permitted.  The Company early adopted ASU 2019-12 on a prospective basis on January 1, 2020 and the adoption of this ASU had no impact on the Company's consolidated financial statements.

Recent Accounting Pronouncements Not Yet Effective

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-04), which provided certain improvements to ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) and ASU 2016-13. As the Company adopted ASU 2016-01 on January 1, 2018, the improvements in ASU 2019-04 are effective in the first quarter of 2020. Early adoption is permitted. The Company expects to adopt ASU 2016-13 in the first quarter of 2023, as described above, and the improvements in ASU 2019-04 will be adopted concurrently. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the benefits of) reference rate reform on financial reporting. The amendments in ASU 2020-04 are elective and apply to all entities, subject to meeting certain criteria, that have contract, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact the adoption of this ASU would have on our consolidated financial statements.

9


Table of Contents

Note 2.—Mortgage Loans Held-for-Sale

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

March 31, 

December 31, 

2020

2019

 

Government (1)

    

$

12,188

    

$

51,019

Conventional (2)

 

245,878

 

436,040

Non-qualified mortgages (NonQM)

264,782

274,834

Fair value adjustment (3)

 

(25,243)

 

20,250

Total mortgage loans held-for-sale

$

497,605

$

782,143


(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 Federal National Mortgage Association (Fannie Mae or FNMA) and Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC).
(3)Changes in fair value are included in (loss) gain on sale of loans, net in the accompanying consolidated statements of operations and comprehensive loss.

At March 31, 2020 and December 31, 2019, the Company had $2.9 million and $4.5 million, respectively, in UPB of mortgage loans held-for-sale that were in nonaccrual status as the loans were 90 days or more delinquent.  The carrying value of these nonaccrual loans at March 31, 2020 and December 31, 2019 were $2.3 million and $4.2 million, respectively.  

(Loss) gain on sale of loans, net in the consolidated statements of operations and comprehensive loss, is comprised of the following for the three months ended March 31, 2020 and 2019:

For the Three Months Ended

March 31, 

2020

2019

Gain on sale of mortgage loans

    

$

47,491

    

$

13,608

Premium from servicing retained loan sales

 

1,689

 

1,583

Unrealized losses from derivative financial instruments

 

(6,277)

 

(609)

Losses from derivative financial instruments

 

(10,922)

 

(1,054)

Mark to market (loss) gain on LHFS

 

(45,493)

 

3,469

Direct origination expenses, net

 

(9,255)

 

(3,153)

Provision for repurchases

 

(5,395)

 

(1,630)

(Loss) gain on sale of loans, net

$

(28,162)

$

12,214

Note 3.—Mortgage Servicing Rights

The Company retains MSRs from its sales and securitization of certain mortgage loans or as a result of purchase transactions. MSRs are reported at fair value based on the expected income derived from the net projected cash flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the UPB of the underlying mortgage loans. The servicing fees are collected from the monthly payments made by the mortgagors, or if delinquent, 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 and 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.

10


Table of Contents

The following table summarizes the activity of MSRs for the three months ended March 31, 2020 and year ended December 31, 2019:

March 31, 

December 31, 

2020

2019

Balance at beginning of year

    

$

41,470

    

$

64,728

Additions from servicing retained loan sales

 

1,689

 

2,491

Other

22

Changes in fair value (1)

 

(18,831)

 

(25,771)

Fair value of MSRs at end of period

$

24,328

$

41,470


(1)Changes in fair value are included within loss on mortgage servicing rights, net in the accompanying consolidated statements of operations and comprehensive loss.

At March 31, 2020 and December 31, 2019, the UPB of the mortgage servicing portfolio was comprised of the following:

March 31, 

December 31, 

2020

2019

 

Government insured

    

$

155,821

    

$

105,442

Conventional (1)

 

4,541,150

 

4,826,407

Total loans serviced (2)

$

4,696,971

$

4,931,849


(1)In May 2020, the Company sold all of the conventional mortgage servicing for approximately $20.1 million, receiving approximately 74% of the proceeds upon sale, 6% of the proceeds upon transfer of the servicing and the final 20% upon transfer of all trailing documents. The Company used the proceeds from the MSR sale to pay off the MSR financing. (See Note 5.—Debt– MSR Financings)
(2)At March 31, 2020, $4.5 billion of Freddie Mac servicing was pledged as collateral as part of the MSR Financing. Pledged collateral was approximately 95% of the fair value of MSRs in the consolidated balance sheets at March 31, 2020. No collateral was pledged as part of the MSR Financing at December 31, 2019. (See Note 5.—Debt– MSR Financings)

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 7.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.

March 31, 

December 31, 

Mortgage Servicing Rights Sensitivity Analysis

2020

 

2019

Fair value of MSRs

    

$

24,328

$

41,470

Prepayment Speed:

Decrease in fair value from 10% adverse change

 

(1,951)

 

(1,850)

Decrease in fair value from 20% adverse change

(3,709)

(3,631)

Decrease in fair value from 30% adverse change

 

(5,305)

 

(5,325)

Discount Rate:

Decrease in fair value from 10% adverse change

 

(649)

 

(1,330)

Decrease in fair value from 20% adverse change

(1,266)

(2,579)

Decrease in fair value from 30% adverse change

 

(1,853)

 

(3,753)

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.

11


Table of Contents

Loss on mortgage servicing rights, net is comprised of the following for the three months ended March 31, 2020 and 2019:

For the Three Months Ended

March 31, 

    

2020

    

2019

Change in fair value of mortgage servicing rights

$

(18,831)

$

(6,488)

Gain on sale of mortgage servicing rights

521

865

Loss on mortgage servicing rights, net

$

(18,310)

$

(5,623)

Servicing fees, net is comprised of the following for the three months ended March 31, 2020 and 2019:

For the Three Months Ended

March 31, 

    

2020

    

2019

Contractual servicing fees

$

3,049

$

4,189

Late and ancillary fees

 

39

 

55

Subservicing and other costs

(581)

(1,275)

Servicing fees, net

$

2,507

$

2,969

Note 4.—Leases

The Company has four operating leases for office space and certain office equipment under long-term leases expiring at various dates through 2024.  During the three months ended March 31, 2020, cash paid for operating leases was $1.3 million while total operating lease expense was $1.6 million.  Operating lease expense includes short-term leases and sublease income, both of which are immaterial.  Additionally, during the three months ended March 31, 2020, we recognized right of use (ROU) asset impairment of $393 thousand related to the consolidation of one floor of our corporate office, reducing the carrying value of the lease asset to its estimated fair value.  The impairment charge is included in general, administrative and other expense in the consolidated statements of operations and comprehensive loss.  As of March 31, 2020, the Company had no additional operating or finance leases that had not yet commenced.

The following table presents the operating lease balances within the consolidated balance sheets, weighted average remaining lease term, and weighted average discount rates related to the Company’s operating leases as of March 31, 2020:

 March 31, 

Lease Assets and Liabilities

Classification

2020

Assets

Operating lease ROU assets

Other assets

$ 15,803

Liabilities

Operating lease liabilities

Other liabilities

$ 19,503

Weighted average remaining lease term (in years)

4.4

Weighted average discount rate

4.8

%

12


Table of Contents

The following table presents the maturity of the Company’s operating lease liabilities as of March 31, 2020:

Year remaining 2020

$

3,812

Year 2021

 

4,592

Year 2022

 

4,721

Year 2023

 

4,867

Year 2024

3,729

Total lease commitments

21,721

Less: imputed interest

 

(2,218)

Total operating lease liability

$

19,503

Note 5.—Debt

Warehouse Borrowings

The Company, through its subsidiaries, enters into Master Repurchase Agreements with lenders providing warehouse facilities. The warehouse facilities are uncommitted facilities used to fund, and are secured by, residential mortgage loans from the time of funding until the time of settlement when sold to the investor.  In accordance with the terms of the Master Repurchase Agreements, the Company’s subsidiaries are required to maintain cash balances with the lender as additional collateral for the borrowings, which are included in restricted cash in the accompanying consolidated balance sheets.  At March 31, 2020, the Company was not in compliance with certain financial covenants and received the necessary waivers.  

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

Maximum

Balance Outstanding at

 

Borrowing

 March 31, 

December 31, 

 

Capacity

2020

2019

Maturity Date

 

Short-term borrowings:

    

    

    

    

    

    

    

Repurchase agreement 1 (1)

$

75,000

$

18,979

$

25,953

May 29, 2020

Repurchase agreement 2 (2)

 

100,000

 

87,408

 

72,971

May 28, 2020

Repurchase agreement 3 (1)

 

425,000

 

68,997

 

250,722

May 29, 2020

Repurchase agreement 4

 

200,000

 

142,423

 

119,838

July 30, 2020

Repurchase agreement 5 (3)

300,000

103,447

72,666

May 31, 2020

Repurchase agreement 6 (1)

600,000

79,832

159,413

June 25, 2020

Total warehouse borrowings

$

1,700,000

$

501,086

$

701,563


(1)In May 2020, we settled all of the loans on repurchase agreements 1, 3 and 6 and closed the lines.
(2)In May 2020, the line was extended 60 days pending the renewal process.
(3)In May 2020, the line was extended 30 days pending the renewal process.

MSR Financings

In February 2018, IMC (Borrower) amended the Line of Credit Promissory Note (FHLMC and GNMA Financing) originally entered into in August 2017, increasing the maximum borrowing capacity of the revolving line of credit to $50.0 million and extending the term to January 31, 2019. In May 2018, the agreement was amended increasing the maximum borrowing capacity of the revolving line of credit to $60.0 million, increasing the borrowing capacity up to 60% of the fair market value of the pledged mortgage servicing rights and reducing the interest rate per annum to one-month LIBOR plus 3.0%.  As part of the May 2018 amendment, the obligations under the Line of Credit were secured by FHLMC and GNMA pledged mortgage servicing rights (subject to an acknowledgement agreement) and was guaranteed by IRES.  In April 2019, the maturity of the line was extended until January 31, 2020. In January 2020, the maturity of the line was extended to March 31, 2020. At March 31, 2020, the Company $15.0 million under the FHLMC and GNMA Financing and had no additional available capacity for borrowing.  In April 2020, the maturity of the line was extended to May 31, 2020. In May 2020, the line was repaid with the proceeds from the MSR sale.

13


Table of Contents

Convertible Notes

In May 2015, the Company issued $25.0 million Convertible Promissory Notes (2015 Convertible Notes) to purchasers, some of which are related parties. The 2015 Convertible Notes were originally due to mature on or before May 9, 2020 and accrued interest at a rate of 7.5% per annum, to be paid quarterly. Transaction costs of approximately $50 thousand are being deferred and amortized over the life of the 2015 Convertible Notes.

Noteholders could convert all or a portion of the outstanding principal amount of the 2015 Convertible Notes into shares of the Company’s common stock (Conversion Shares) at a rate of $21.50 per share, subject to adjustment for stock splits and dividends (Conversion Price). The Company has the right to convert the entire outstanding principal of the 2015 Convertible Notes into Conversion Shares at the Conversion Price if the market price per share of the common stock, as measured by the average volume-weighted closing stock price per share of the common stock on the NYSE AMERICAN (or any other U.S. national securities exchange then serving as the principal such exchange on which the shares of common stock are listed), reaches the level of $30.10 for any twenty (20) trading days in any period of thirty (30) consecutive trading days after the Closing Date. Upon conversion of the 2015 Convertible Notes by the Company, the entire amount of accrued and unpaid interest (and all other amounts owing) under the 2015 Convertible Notes are immediately due and payable. To the extent the Company pays any cash dividends on its shares of common stock prior to conversion of the 2015 Convertible Notes, upon conversion of the 2015 Convertible Notes, the Noteholders will also receive such dividends on an as-converted basis of the 2015 Convertible Notes less the amount of interest paid by the Company prior to such dividend.  

On April 15, 2020, the Company amended and restated the outstanding 2015 Convertible Notes in the principal amount of $25 million originally issued on May 8, 2015 pursuant to the terms of the Note Purchase Agreement between the Company and the noteholders of the 2015 Convertible Notes. The 2015 Convertible Notes have been amended to extend the maturity date by six months (until November 9, 2020) and to reduce the interest rate on such notes to 7.0% per annum (Amended Notes).  In connection with the issuance of the Amended Notes, the Company issued to the noteholders of the Amended Notes, warrants to purchase up to an aggregate of 212,649 shares of the Company’s common stock at a cash exercise price of $2.97 per share. The warrants are exercisable commencing on October 16, 2020 and expire on April 15, 2025.

Long-term Debt

Junior Subordinated Notes

The Company carries its Junior Subordinated Notes at estimated fair value as more fully described in Note 7.—Fair Value of Financial Instruments. The following table shows the remaining principal balance and fair value of Junior Subordinated Notes issued as of March 31, 2020 and December 31, 2019:

March 31, 

December 31, 

 

2020

2019

 

Junior Subordinated Notes (1)

    

$

62,000

    

$

62,000

Fair value adjustment

 

(22,368)

 

(16,566)

Total Junior Subordinated Notes

$

39,632

$

45,434


(1)Stated maturity of March 2034; requires quarterly interest payments at a variable rate of 3-month LIBOR plus 3.75% per annum.

During the three months ended March 31, 2020, the change in fair value of the long-term debt was the result of a decrease in the 3-month LIBOR forward curve, which reduced the undiscounted cash flows used in this calculation.

14


Table of Contents

Note 6.—Securitized Mortgage Trusts

Securitized Mortgage Trust Assets

Securitized mortgage trust assets, which are recorded at their estimated fair value, are comprised of the following at March 31, 2020 and December 31, 2019:

March 31, 

December 31, 

2020

2019

Securitized mortgage collateral, at fair value

$

2,248,813

$

2,628,064

REO, at net realizable value (NRV)

 

4,510

 

6,682

Total securitized mortgage trust assets

$

2,253,323

$

2,634,746

Securitized Mortgage Trust Liabilities

Securitized mortgage trust liabilities, which are recorded at their estimated fair value, are comprised of the following at March 31, 2020 and December 31, 2019:

March 31, 

December 31, 

2020

2019

Securitized mortgage borrowings

    

$

2,238,208

    

$

2,619,210

Changes in fair value of net trust assets, including trust REO gains, are comprised of the following for the three months ended March 31, 2020 and 2019:

For the Three Months Ended

March 31, 

2020

2019

Change in fair value of net trust assets, excluding REO

    

$

(4,096)

    

$

(6,156)

Gains from REO

 

1,713

 

3,473

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

$

(2,383)

$

(2,683)

Note 7.—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:

15


Table of Contents

March 31, 2020

December 31, 2019

 

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

$

80,192

$

80,192

$

$

$

24,666

$

24,666

$

$

Restricted cash

 

11,950

 

11,950

 

 

 

12,466

 

12,466

 

 

Mortgage loans held-for-sale

 

497,605

 

 

497,605

 

 

782,143

 

 

782,143

 

Mortgage servicing rights

 

24,328

 

 

 

24,328

 

41,470

 

 

 

41,470

Derivative assets, lending, net (1)

 

863

 

 

 

863

 

7,791

 

 

 

7,791

Securitized mortgage collateral

 

2,248,813

 

 

 

2,248,813

 

2,628,064

 

 

 

2,628,064

Liabilities

Warehouse borrowings

$

501,086

$

$

501,086

$

$

701,563

$

$

701,563

$

MSR financings

 

15,000

 

 

 

15,000

 

 

 

 

Convertible notes

24,999

24,999

24,996

24,996

Long-term debt

 

39,632

 

 

 

39,632

 

45,434

 

 

 

45,434

Securitized mortgage borrowings

 

2,238,208

 

 

 

2,238,208

 

2,619,210

 

 

 

2,619,210

Derivative liabilities, lending, net (2)

 

 

 

 

 

651

 

 

651

 


(1)Represents IRLCs and are included in other assets in the accompanying consolidated balance sheets.
(2)Represents Hedging Instruments and are included in other liabilities in the accompanying consolidated balance sheets.

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 bonds are collateralized by Alt-A (non-conforming) residential and commercial loans and have limited or no market activity. 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 mortgage servicing rights, mortgage loans held-for-sale, securitized mortgage collateral and borrowings, long-term debt and derivative assets and liabilities.

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

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, which approximates fair value due to the short duration to maturity.

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,

16


Table of Contents

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 mortgage servicing rights, securitized mortgage collateral and borrowings, derivative assets and liabilities (IRLCs), and long-term debt as Level 3 fair value measurements. Level 3 assets and liabilities measured at fair value on a recurring basis were approximately 82% and 99% and 77% and 99%, respectively, of total assets and total liabilities measured at estimated fair value at March 31, 2020 and December 31, 2019.

Recurring Fair Value Measurements

The Company assesses its 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 Level 1, Level 2 or Level 3 classified instruments during the three months ended March 31, 2020.

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 March 31, 2020 and December 31, 2019, based on the fair value hierarchy:

Recurring Fair Value Measurements

 

March 31, 2020

December 31, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

Assets

   

    

   

    

   

    

   

    

   

    

   

    

Mortgage loans held-for-sale

$

$

497,605

$

$

$

782,143

$

Derivative assets, lending, net (1)

 

 

 

863

 

 

 

7,791

Mortgage servicing rights

 

 

 

24,328

 

 

 

41,470

Securitized mortgage collateral

 

 

 

2,248,813

 

 

 

2,628,064

Total assets at fair value

$

$

497,605

$

2,274,004

$

$

782,143

$

2,677,325

Liabilities

Securitized mortgage borrowings

$

$

$

2,238,208

$

$

$

2,619,210

Long-term debt

 

 

 

39,632

 

 

 

45,434

Derivative liabilities, lending, net (2)

 

 

 

 

 

651

 

Total liabilities at fair value

$

$

$

2,277,840

$

$

651

$

2,664,644


(1)At March 31, 2020, derivative assets, lending, net included $863 thousand in IRLCs and is included in other assets in the accompanying consolidated balance sheets. At December 31, 2019, derivative assets, lending, net included $7.8 million in IRLCs and is included in other assets in the accompanying consolidated balance sheets.
(2)At March 31, 2020 and December 31, 2019, derivative liabilities, lending, net are included in other liabilities in the accompanying consolidated balance sheets.

17


Table of Contents

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 months ended March 31, 2020 and 2019: