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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(
(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 |
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.
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).
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 ☐ | |
| 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
There were
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| June 30, |
| December 31, |
| |||
2022 | 2021 |
| |||||
ASSETS | |||||||
Cash and cash equivalents | $ | | $ | | |||
Restricted cash |
| |
| | |||
Mortgage loans held-for-sale |
| |
| | |||
Mortgage servicing rights |
| |
| | |||
Securitized mortgage trust assets |
| — |
| | |||
Other assets |
| |
| | |||
Total assets | $ | | $ | | |||
LIABILITIES | |||||||
Warehouse borrowings | $ | | $ | | |||
Convertible notes |
| |
| | |||
Long-term debt |
| |
| | |||
Securitized mortgage trust liabilities |
| — |
| | |||
Other liabilities |
| |
| | |||
Total liabilities |
| |
| | |||
Commitments and contingencies (See Note 11) | |||||||
STOCKHOLDERS’ EQUITY | |||||||
Series A-1 junior participating preferred stock, $ |
|
| |||||
Series B |
| |
| | |||
Series C |
| |
| | |||
Common stock, $ |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Accumulated other comprehensive earnings, net of tax | | | |||||
Total accumulated deficit: |
| ||||||
Cumulative dividends declared |
| ( |
| ( | |||
Accumulated deficit |
| ( |
| ( | |||
Total accumulated deficit |
| ( |
| ( | |||
Total stockholders’ equity |
| |
| | |||
Total liabilities and stockholders’ equity | $ | | $ | | |||
See accompanying notes to unaudited consolidated financial statements
2
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 | For the Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Revenues |
|
|
|
| |||||||||
Gain on sale of loans, net | $ | | $ | | $ | | $ | | |||||
Real estate services fees, net |
| |
| |
| |
| | |||||
Gain (loss) on mortgage servicing rights, net | | ( | | | |||||||||
Servicing fees (expense), net |
| |
| ( |
| ( |
| ( | |||||
Other |
| |
| ( |
| |
| | |||||
Total revenues, net |
| |
| |
| |
| | |||||
Expenses | |||||||||||||
Personnel |
| |
| |
| |
| | |||||
General, administrative and other |
| |
| |
| |
| | |||||
Business promotion | | | | | |||||||||
Total expenses |
| |
| |
| |
| | |||||
Operating loss | ( | ( | ( | ( | |||||||||
Other income (expense) | |||||||||||||
Interest income |
| |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Change in fair value of long-term debt | | | | | |||||||||
Change in fair value of net trust assets, including trust REO gains (losses) |
| — |
| ( |
| |
| ( | |||||
Total other income (expense), net |
| |
| ( |
| |
| ( | |||||
Loss before income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Income tax expense |
| |
| |
| |
| | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive loss | |||||||||||||
Change in fair value of instrument specific credit risk of long-term debt | | ( | | ( | |||||||||
Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per common share: | |||||||||||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
See accompanying notes to unaudited consolidated financial statements
3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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 | Accumulated | Comprehensive | Stockholders’ |
| |||||||||||||||||
Outstanding | Stock | Outstanding | Stock | Capital | Declared | Deficit | Earnings, net of tax | Equity |
| |||||||||||||||||
Balance, December 31, 2021 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Stock based compensation |
| — |
| — |
| — | — |
| |
| — |
| — |
| — |
| | |||||||||
Issuance of restricted stock units | — | — | | | — | — | — | — | | |||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Balance, March 31, 2022 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Stock based compensation | — | — | — | — | | — | — | — | | |||||||||||||||||
Issuance of restricted stock units |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| — | |||||||||
Issuance of deferred stock units | — | — | | — | — | — | — | — | ||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | | | |||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Balance, June 30, 2022 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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 | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||
Outstanding | Stock | Outstanding | Stock | Capital | Declared | Deficit | Earnings, net of tax | Equity | ||||||||||||||||||
Balance, December 31, 2020 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Stock based compensation |
| — |
| — |
| — | — |
| |
| — |
| — |
| — |
| | |||||||||
Issuance of restricted stock units | — | — | | | — | — | — | — | | |||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Balance, March 31, 2021 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Stock based compensation |
| — |
| — |
| — | — |
| |
| — |
| — |
| — |
| | |||||||||
Issuance of restricted stock units | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Balance, June 30, 2021 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
See accompanying notes to unaudited consolidated financial statements
5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Six Months Ended | |||||||
June 30, | |||||||
2022 | 2021 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
| |||
Net loss | $ | ( | $ | ( | |||
Gain on sale of mortgage servicing rights | ( | — | |||||
Change in fair value of mortgage servicing rights |
| ( |
| ( | |||
Gain on sale of mortgage loans |
| ( |
| ( | |||
Change in fair value of mortgage loans held-for-sale |
| |
| | |||
Change in fair value of derivatives lending, net |
| |
| | |||
Change in provision for repurchases |
| |
| ( | |||
Origination of mortgage loans held-for-sale |
| ( |
| ( | |||
Sale and principal reduction on mortgage loans held-for-sale |
| |
| | |||
Gain from trust REO |
| — |
| ( | |||
Change in fair value of net trust assets, excluding trust REO |
| ( |
| | |||
Change in fair value of long-term debt |
| ( |
| ( | |||
Accretion of interest income and expense |
| |
| | |||
Stock-based compensation |
| |
| | |||
Impairment of ROU asset | | — | |||||
Loss on disposal of premises and equipment | — | | |||||
Net change in other assets | | | |||||
Net change in other liabilities |
| ( |
| ( | |||
Net cash provided by operating activities |
| |
| | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Net change in securitized mortgage collateral |
| |
| | |||
Proceeds from transfer of trust assets and liabilities |
| |
| — | |||
Investment in corporate-owned life insurance |
| |
| ( | |||
Purchase of premises and equipment |
| ( |
| ( | |||
Proceeds from the sale of trust REO |
| — |
| | |||
Net cash provided by investing activities |
| |
| | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Repayment of warehouse borrowings |
| ( |
| ( | |||
Borrowings under warehouse agreements |
| |
| | |||
Repayment of securitized mortgage borrowings |
| ( |
| ( | |||
Net change in liabilities related to corporate-owned life insurance | | | |||||
Repayment of convertible notes | ( | — | |||||
Issuance of restricted stock | | | |||||
Net cash used in financing activities |
| ( |
| ( | |||
Net change in cash, cash equivalents and restricted cash |
| |
| ( | |||
Cash, cash equivalents and restricted cash at beginning of year |
| |
| | |||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
NON-CASH TRANSACTIONS | |||||||
Transfer of securitized mortgage collateral to trust REO | $ | | $ | | |||
Transfer and deconsolidation of trust assets | | — | |||||
Transfer and deconsolidation of trust liabilities | ( | — | |||||
Mortgage servicing rights retained from issuance of mortgage-backed securities and loan sales |
| |
| | |||
See accompanying notes to unaudited consolidated financial statements
6
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 operating subsidiaries: Integrated Real Estate Service Corp. (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), Impac Funding Corporation (IFC) and Copperfield Capital Corporation (CCC). The Company’s operations include the mortgage lending operations and real estate services conducted by IRES, IMC and CCC and the long-term mortgage portfolio (residual interests in securitizations reflected as securitized mortgage trust assets and liabilities in the consolidated balance sheets) conducted by IMH prior to the sale in the first quarter of 2022. The long-term mortgage portfolio was deconsolidated in March 2022 as the Company sold its residual interests in the consolidated securitized mortgage trusts (see Note. 6—Securitized Mortgage Trusts). IMC’s mortgage lending operations include the activities of its division, CashCall Mortgage.
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 six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021, filed with the United States Securities and Exchange Commission.
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 prior to the sale in March 2022, contingencies, the estimated obligation of repurchase reserves 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.
Recent Accounting Pronouncements Not Yet Effective
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and footnote disclosures, from those disclosed in the 2021 Annual Report on Form 10-K, except for the following:
In March 2020 and January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04 and ASU 2021-01, “Reference Rate Reform (Topic 848)”. Together, the ASUs provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company
7
is currently evaluating the impact the adoption of this ASU would have on the Company’s consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this ASU on January 1, 2022 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Note 2.—Mortgage Loans Held-for-Sale
A summary of the unpaid principal balance (UPB) of mortgage LHFS by type is presented below:
June 30, | December 31, | ||||||
2022 | 2021 |
| |||||
Government (1) |
| $ | |
| $ | | |
Conventional (2) |
| |
| | |||
Jumbo Non-qualified mortgages (NonQM) | | | |||||
Fair value adjustment (3) |
| |
| | |||
Total mortgage loans held-for-sale | $ | | $ | | |||
| (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 gain on sale of loans, net in the accompanying consolidated statements of operations and comprehensive loss. |
At June 30, 2022 and December 31, 2021, the Company had
Gain on sale of loans, net in the consolidated statements of operations and comprehensive loss, is comprised of the following for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Gain on sale of mortgage loans |
| $ | |
| $ | |
| $ | |
| $ | |
Premium from servicing retained loan sales |
| — |
| |
| |
| | ||||
Unrealized loss from derivative financial instruments |
| ( |
| ( |
| ( |
| ( | ||||
Gain (loss) from derivative financial instruments |
| |
| ( |
| |
| | ||||
Mark to market (loss) gain on LHFS |
| ( |
| | ( |
| ( | |||||
Direct origination expenses, net |
| ( |
| ( |
| ( |
| ( | ||||
Change in provision for repurchases |
| ( |
| ( |
| ( |
| | ||||
Gain on sale of loans, net | $ | | $ | | $ | | $ | | ||||
Note 3.—Mortgage Servicing Rights
The Company selectively 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
8
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.
The following table summarizes the activity of MSRs for the six months ended June 30, 2022 and year ended December 31, 2021:
June 30, | December 31, | |||||
2022 | 2021 | |||||
Balance at beginning of year |
| $ | |
| $ | |
Additions from servicing retained loan sales |
| |
| | ||
Changes in fair value (1) |
| |
| ( | ||
Fair value of MSRs at end of period | $ | | $ | | ||
| (1) | Changes in fair value are included within gain on mortgage servicing rights, net in the accompanying consolidated statements of operations and comprehensive loss. |
At June 30, 2022 and December 31, 2021, the UPB of the mortgage servicing portfolio was comprised of the following:
June 30, | December 31, | ||||||
2022 | 2021 |
| |||||
Government insured |
| $ | |
| $ | | |
Conventional |
| — |
| — | |||
Total loans serviced | $ | | $ | | |||
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.
June 30, | December 31, | |||||
Mortgage Servicing Rights Sensitivity Analysis | 2022 |
| 2021 | |||
Fair value of MSRs |
| $ | | $ | | |
Prepayment Speed: | ||||||
Decrease in fair value from 10% adverse change |
| ( |
| ( | ||
Decrease in fair value from 20% adverse change | ( | ( | ||||
Decrease in fair value from 30% adverse change |
| ( |
| ( | ||
Discount Rate: | ||||||
Decrease in fair value from 10% adverse change |
| ( |
| ( | ||
Decrease in fair value from 20% adverse change | ( | ( | ||||
Decrease in fair value from 30% adverse change |
| ( |
| ( | ||
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.
9
Gain (loss) on mortgage servicing rights, net is comprised of the following for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Change in fair value of mortgage servicing rights | $ | ( | $ | ( | $ | | $ | | ||||
Gain on sale of mortgage servicing rights | | — | | — | ||||||||
Gain (loss) on mortgage servicing rights, net | $ | | $ | ( | $ | | $ | | ||||
Servicing fees (expense), net is comprised of the following for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
|
| 2021 |
| 2022 |
| 2021 | ||||
Contractual servicing fees | $ | | $ | | $ | | $ | | ||||
Subservicing and other costs | ( | ( | ( | ( | ||||||||
Servicing fees (expense), net | $ | | $ | ( | $ | ( | $ | ( | ||||
Loans Eligible for Repurchase from Government National Mortgage Association (GNMA or Ginnie Mae)
The Company sells loans in Ginnie Mae guaranteed mortgage-backed securities (MBS) by pooling eligible loans through a pool custodian and assigning rights to the loans to Ginnie Mae. When these Ginnie Mae loans are initially pooled and securitized, the Company meets the criteria for sale treatment and de-recognizes the loans. The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase mortgage loans when the borrower has made no payments for three consecutive months. When the Company has the unconditional right, as servicer, to repurchase Ginnie Mae pool loans it has previously sold and are more than 90 days past due, and the repurchase will provide a “more than trivial benefit”, the Company then re-recognizes the loans on its consolidated balance sheets in other assets, at their UPB and records a corresponding liability in other liabilities in the consolidated balance sheets. At June 30, 2022 and December 31, 2021, loans eligible for repurchase from GNMA totaled $
Note 4.—Leases
The Company has
10
The following table presents the operating and finance lease balances within the consolidated balance sheets, weighted average remaining lease term, and weighted average discount rates related to the Company’s operating and finance leases as of June 30, 2022:
June 30, | |||||
Lease Assets and Liabilities | Classification | 2022 | |||
Assets | |||||
Lease ROU assets | Other assets | $ | |||
Liabilities | |||||
Lease liabilities | Other liabilities | $ | |||
Weighted average remaining lease term (in years) | |||||
Weighted average discount rate | % |
The following table presents the maturity of the Company’s operating and financing lease liabilities as of June 30, 2022:
Year remaining 2022 | $ | | |
Year 2023 | | ||
Year 2024 | | ||
Total lease commitments | $ | | |
Less: imputed interest | ( | ||
Total lease liability | $ | |
Note 5.—Debt
Warehouse Borrowings
The Company, through its subsidiaries, enters into 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 warehouse and revolving lines of credit are repaid using proceeds from the sale of loans. The base interest rates on the Company’s warehouse lines bear interest at 1-month LIBOR plus a margin or note rate minus a margin. Some of the lines carry additional fees in the form of annual facility fees charged on the total line amount, commitment fees charged on the committed portion of the line and non-usage fees charged when monthly usage falls below a certain utilization percentage.
The base interest rates for all warehouse lines of credit are subject to increase based upon the characteristics of the underlying loans collateralizing the lines of credit, including, but not limited to product type and number of days held for sale. Certain of the warehouse line lenders require the Company, at all times, to maintain cash accounts with minimum required balances.
11
Under the terms of these warehouse lines, the Company is required to maintain various financial and other covenants. At June 30, 2022, the Company was not in compliance with certain financial covenants from its lenders and received the necessary waivers. The following table presents certain information on warehouse borrowings for the periods indicated:
Maximum | Balance Outstanding at | ||||||||||
Borrowing | June 30, | December 31, | |||||||||
Capacity | 2022 | 2021 | Maturity Date | ||||||||
Short-term borrowings: |
|
|
|
|
|
|
| ||||
Repurchase agreement 1 (1) | $ | — | $ | — | $ | | May 24, 2022 | ||||
Repurchase agreement 2 (2) |
| |
| |
| | September 13, 2022 | ||||
Repurchase agreement 3 | | | | September 23, 2022 | |||||||
Repurchase agreement 4 | | | | March 31, 2023 | |||||||
Total warehouse borrowings | $ | | $ | | $ | | |||||
___________________________
| (1) | Repurchase agreement 1 was not renewed. |
| (2) | In July 2022, the maximum borrowing capacity was reduced to $ |
Convertible Notes
In May 2015, the Company issued $
Noteholders may convert all or a portion of the outstanding principal amount of the Notes into shares of the Company’s common stock (Conversion Shares) at a rate of $
On April 15, 2020, the Company and the noteholders agreed to extend the outstanding Notes in the principal amount of $
On October 28, 2020, the Company and certain holders of its Notes due November 9, 2020 in the aggregate principal amount of $
On April 29, 2022, the Company and holders of its Notes agreed to extend the maturity date of the Notes upon conclusion of the term on May 9, 2022. The Company decreased the aggregate principal amount of the new Notes to
12
$
Long-term Debt
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 June 30, 2022 and December 31, 2021:
June 30, | December 31, |
| |||||
2022 | 2021 |
| |||||
Junior Subordinated Notes (1) |
| $ | |
| $ | | |
Fair value adjustment |
| ( |
| ( | |||
Total Junior Subordinated Notes | $ | | $ | | |||
| (1) | Stated maturity of March 2034; requires quarterly interest payments at a variable rate of 3-month LIBOR plus |
Note 6.—Securitized Mortgage Trusts
In March 2022, the Company and its subsidiaries (the Sellers), entered into a Purchase, Sale and Assignment Agreement (Sale Agreement) pursuant to which the Sellers sold certain residual interest certificates, and assigned certain optional termination and loan purchase rights, owned by the Sellers relating to
As a result of the sale, in accordance with FASB ASC 810-10-25, the Company deconsolidated the securitized mortgage trust assets totaling approximately $
13
Securitized Mortgage Trust Assets
Securitized mortgage trust assets, which are recorded at their estimated fair value, were comprised of the following at June 30, 2022 and December 31, 2021:
June 30, | December 31, | |||||||||||
2022 | 2021 | |||||||||||
Securitized mortgage collateral, at fair value | $ | — | $ | | ||||||||
REO, at net realizable value (NRV) |
| — |
| | ||||||||
Total securitized mortgage trust assets | $ | — | $ | | ||||||||
Securitized Mortgage Trust Liabilities
Securitized mortgage trust liabilities, which are recorded at their estimated fair value, were comprised of the following at June 30, 2022 and December 31, 2021:
June 30, | December 31, | |||||||||||
2022 | 2021 | |||||||||||
Securitized mortgage borrowings |
| $ | — |
| $ | | ||||||
Changes in fair value of net trust assets, including trust REO gains (losses), were comprised of the following for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Change in fair value of net trust assets, excluding REO | $ | — |
| $ | ( |
| $ | |
| $ | ( | |
(Losses) gains from trust REO |
| — |
| ( |
| — |
| | ||||
Change in fair value of net trust assets, including trust REO gains (losses) | $ | — | $ | ( | $ | | $ | ( | ||||
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:
14
June 30, 2022 | December 31, 2021 |
| |||||||||||||||||||||||
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 | $ | | $ | | $ | — | $ | — | $ | | $ | | $ | — | $ | — | |||||||||
Restricted cash |
| |
| |
| — |
| — |
| |
| |
| — |
| — | |||||||||
Mortgage loans held-for-sale |
| |
| — |
| |
| — |
| |
| — |
| |
| — | |||||||||
Mortgage servicing rights |
| |
| — |
| — |
| |
| |
| — |
| — |
| | |||||||||
Derivative assets, lending, net (1) |
| |
| — |
| |
| |
| |
| — |
| — |
| | |||||||||
Securitized mortgage collateral |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||||
Liabilities | |||||||||||||||||||||||||
Warehouse borrowings | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | |||||||||
Convertible notes | | — | — | | | — | — | | |||||||||||||||||
Long-term debt |
| |
| — |
| — |
| |
| |
| — |
| — |
| | |||||||||
Securitized mortgage borrowings |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||||
Derivative liabilities, lending, net (2) |
| |
| — |
| |
| — |
| |
| — |
| |
| — | |||||||||
| (1) | Represents IRLCs and Hedging Instruments 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 were collateralized by Alt-A (non-conforming) residential and commercial loans and had limited or no market activity. The Company’s methodology to estimate fair value of these assets and liabilities included 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 were based on the characteristics of the underlying collateral, include estimated credit losses, estimated prepayment speeds and appropriate discount rates.
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:
15
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 MSRs, securitized mortgage collateral and borrowings, derivative assets and liabilities (IRLCs), Notes 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
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 into Level 3 classified instruments during the six months ended June 30, 2022.
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 June 30, 2022 and December 31, 2021, based on the fair value hierarchy:
Recurring Fair Value Measurements |
| ||||||||||||||||||
June 30, 2022 | December 31, 2021 |
| |||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Mortgage loans held-for-sale | $ | — | $ | | $ | — | $ | — | $ | | $ | — | |||||||
Derivative assets, lending, net (1) |
| — |
| |
| |
| — |
| — |
| | |||||||
Mortgage servicing rights |
| — |
| — |
| |
| — |
| — |
| | |||||||
Securitized mortgage collateral |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Total assets at fair value | $ | — | $ | | $ | | $ | — | $ | | $ | | |||||||
Liabilities | |||||||||||||||||||
Securitized mortgage borrowings | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | |||||||
Long-term debt |
| — |
| — |
| |
| — |
| — |
| | |||||||
Derivative liabilities, lending, net (2) |
| — |
| |
| — |
| — |
| |
| — | |||||||
Total liabilities at fair value | $ | — | $ | | $ | | $ | — | $ | | $ | | |||||||
| (1) | At June 30, 2022, derivative assets, lending, net included $ |
| (2) | At December 31, 2021, derivative liabilities, lending, net are included in other liabilities in the accompanying consolidated balance sheets. |
16
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 June 30, 2022 and 2021:
Level 3 Recurring Fair Value Measurements | ||||||||||||||||
For the Three Months Ended June 30, 2022 | ||||||||||||||||
Interest | ||||||||||||||||
Securitized | Securitized | Mortgage | rate lock | Long- | ||||||||||||
mortgage | mortgage | servicing | commitments, | term | ||||||||||||
collateral | borrowings | debt | ||||||||||||||
Fair value, March 31, 2022 |
| $ | — |
| $ | — |
| $ | |
| $ | |
| $ | ( |
|
Total gains (losses) included in earnings: | ||||||||||||||||
Interest income |
| — |
| — |
| — |
| — |
| — | ||||||
Interest expense |
| — |
| — |
| — |
| — |
| ( | ||||||
Change in fair value |
| — |
| — |
| (6) |
| (348) |
| | ||||||
Change in instrument specific credit risk | — | — | — | — | | (1) | ||||||||||
Total gains (losses) included in earnings |
| — |
| — |
| ( |
| ( |
| | ||||||
Transfers in and/or out of Level 3 |
| — |
| — | — | — | — | |||||||||
Purchases, issuances and settlements: | ||||||||||||||||
Purchases |
| — |
| — |
| — |
| — |
| — | ||||||
Issuances |
| — |
| — |
| — |
| — |
| — | ||||||
Settlements |
| — |
| — |
| — |
| — |
| — | ||||||
Fair value, June 30, 2022 | $ | — | $ | — | $ | | $ | | $ | ( | ||||||
| (1) | Amount represents the change in instrument specific credit risk in other comprehensive gain (loss) in the consolidated statements of operations and comprehensive loss. |
Level 3 Recurring Fair Value Measurements | ||||||||||||||||
For the Three Months Ended June 30, 2021 | ||||||||||||||||
| ||||||||||||||||
Interest | ||||||||||||||||
Securitized | Securitized | Mortgage | rate lock | Long- |
| |||||||||||
mortgage | mortgage | servicing | commitments, | term |
| |||||||||||
collateral | borrowings | debt |
| |||||||||||||
Fair value, March 31, 2021 |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
|
Total gains (losses) included in earnings: | ||||||||||||||||
Interest income (1) |
| ( |
| — |
| — |
| — |
| — | ||||||
Interest expense (1) |
| — |
| ( |
| — |
| — |
| ( | ||||||
Change in fair value | ( | | ( | ( | | |||||||||||
Change in instrument specific credit risk |
| — |
| — |
| — |
| — |
| ( | (2) | |||||
Total gains (losses) included in earnings |
| ( |
| ( |
| ( |
| ( |
| | ||||||
Transfers in and/or out of Level 3 |
| — |
| — | — | — |
| — | ||||||||
Purchases, issuances and settlements: | ||||||||||||||||
Purchases |
| — |
| — |
| — |
| — |
| — | ||||||
Issuances |
| — |
| — |
| |
| — |
| — | ||||||
Settlements |
| ( |
| |
| — |
| — |
| — | ||||||
Fair value, June 30, 2021 | $ | | $ | ( | $ | | $ | | $ | ( | ||||||
| (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. Net interest income, including cash received and paid, was $ |
| (2) | Amount represents the change in instrument specific credit risk in other comprehensive gain (loss) in the consolidated statements of operations and comprehensive loss. |
17
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 six months ended June 30, 2022 and 2021:
Level 3 Recurring Fair Value Measurements | ||||||||||||||||
For the Six Months Ended June 30, 2022 | ||||||||||||||||
Interest | ||||||||||||||||
Securitized | Securitized | Mortgage | rate lock | Long- | ||||||||||||
mortgage | mortgage | servicing | commitments, | term | ||||||||||||
| collateral |
|
|
|
| debt |
| |||||||||
Fair value, December 31, 2021 |
| $ | | $ | ( | $ | | $ | | $ | ( | |||||
Total gains (losses) included in earnings: | ||||||||||||||||
Interest income (1) |
| |
| — |
| — |
| — |
| — | ||||||
Interest expense (1) |
| — |
| ( |
| — |
| — |
| ( | ||||||
Change in fair value |
| |
| — |
| |
| ( |
| | ||||||
Change in instrument specific credit risk | — | — | — | — | | (2) | ||||||||||
Total gains (losses) included in earnings |
| |
| ( |
| |
| ( |
| | ||||||
Transfers in and/or out of Level 3 |
| — |
| — | — | — | — | |||||||||
Purchases, issuances and settlements: | ||||||||||||||||
Purchases |
| — |
| — |
| — |
| — |
| — | ||||||
Issuances |
| — |
| — |
| |
| — |
| — | ||||||
Settlements |
| ( |
| |
| — |
| — |
| — | ||||||
Fair value, June 30, 2022 | $ | — | $ | — | $ | | $ | | $ | ( | ||||||
Unrealized gains (losses) still held (3) | $ | — | $ | — | $ | | $ | | $ | | ||||||
| (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 prior to the sale in March 2022. Net interest income, including cash received and paid, was $ |
| (2) | Amount represents the change in instrument specific credit risk in other comprehensive gain (loss) in the consolidated statements of operations and comprehensive loss. |
| (3) | Represents the amount of unrealized gains relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at June 30, 2022. |
18
Level 3 Recurring Fair Value Measurements | ||||||||||||||||
For the Six Months Ended June 30, 2021 | ||||||||||||||||
| ||||||||||||||||
Interest | ||||||||||||||||
Securitized | Securitized | Mortgage | rate lock | Long- |
| |||||||||||
mortgage | mortgage | servicing | commitments, | term |
| |||||||||||
| collateral |
| borrowings |
|
|
| debt |
| ||||||||
Fair value, December 31, 2020 |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
|
Total (losses) gains included in earnings: | ||||||||||||||||
Interest income (1) |
| ( |
| — |
| — |
| — |
| — | ||||||
Interest expense (1) |
| — |
| ( |
| — |
| — |
| ( | ||||||
Change in fair value | | ( | | ( | | |||||||||||
Change in instrument specific credit risk |
| — |
| — |
| — |
| — |
| ( | (2) | |||||
Total gains (losses) included in earnings |
| |
| ( |
| |
| ( |
| ( | ||||||
Transfers in and/or out of Level 3 |
| — |
| — | — | — |
| — | ||||||||
Purchases, issuances and settlements: | ||||||||||||||||
Purchases |
| — |
| — |
| — |
| — |
| — | ||||||
Issuances |
| — |
| — |
| |
| — |
| — | ||||||
Settlements |
| ( |
| |
| — |
| — |
| — | ||||||
Fair value, June 30, 2021 | $ | | $ | ( | $ | | $ | | $ | ( | ||||||
Unrealized (losses) gains still held (3) | $ | ( | $ | | $ | | $ | | $ | | ||||||
| (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. Net interest income, including cash received and paid, was $ |
| (2) | Amount represents the change in instrument specific credit risk in other comprehensive loss in the consolidated statements of operations and comprehensive loss. |
| (3) | Represents the amount of unrealized (losses) gains relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at June 30, 2021 |
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 nonrecurring basis at June 30, 2022 and December 31, 2021:
June 30, 2022 | December 31, 2021 | |||||||||||
Unobservable | Range of | Weighted | Range of | Weighted | ||||||||
Financial Instrument |
| Input |
| Inputs |
| Average |
|
| Inputs |
| Average |
|
Assets and liabilities backed by real estate |
|
|
| |||||||||
Securitized mortgage collateral, and | Prepayment rates |
| - | % | - | % |
| % | | % | ||
Securitized mortgage borrowings | Default rates |
| - | % | - | % |
| % | | % | ||
Loss severities |
| - | % | - | % |
| % | | % | |||
Discount rates |
| - | % | - | % |
| % | | % | |||
Other assets and liabilities | ||||||||||||
Mortgage servicing rights | Discount rates |
| % | | % |
| % | | % | |||
Prepayment rates | % | | % | % | | % | ||||||
Derivative assets - IRLCs, net | Pull-through rates |
| % | | % |
| % | | % | |||
Long-term debt | Discount rates |
| | % | | % |
| | % | | % | |
For other assets and liabilities, a significant increase in discount rates would result in a significantly lower estimated fair value. A significant increase or decrease in pull-through rate assumptions would result in a significant increase or decrease, respectively, in the fair value of IRLCs. The Company believes that the imprecision of an estimate could be significant.
The following tables present the changes in recurring fair value measurements included in net loss for the three months ended June 30, 2022 and 2021:
19
Recurring Fair Value Measurements |
| |||||||||||||||||||||
Changes in Fair Value Included in Net Loss |
| |||||||||||||||||||||
For the Three Months Ended June 30, 2022 |
| |||||||||||||||||||||
Change in Fair Value of |
| |||||||||||||||||||||
Interest | Interest | Net Trust | Long-term | Other Revenue | Gain on Sale |
| ||||||||||||||||
Income (1) | Expense (1) | Assets | Debt | and Expense | of Loans, net | Total |
| |||||||||||||||
Securitized mortgage collateral | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Securitized mortgage borrowings |
| — |
| — |
| — |
| — |
| — |
| — |
| — | ||||||||
Long-term debt |
| — |
| ( |
| — |
| |
| — |
| — |
| | ||||||||
Mortgage servicing rights (2) |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Mortgage loans held-for-sale |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative assets — IRLCs |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative liabilities — Hedging Instruments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Total | $ | — | $ | ( | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
| (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 gain (loss) on MSRs, net in the consolidated statements of operations and comprehensive loss. |
Recurring Fair Value Measurements | ||||||||||||||||||||||
Changes in Fair Value Included in Net Loss | ||||||||||||||||||||||
For the Three Months Ended June 30, 2021 | ||||||||||||||||||||||
Change in Fair Value of | ||||||||||||||||||||||
Interest | Interest | Net Trust | Long-term | Other Revenue | Gain on Sale | |||||||||||||||||
Income (1) | Expense (1) | Assets | Debt | and Expense | of Loans, net | Total | ||||||||||||||||
Securitized mortgage collateral | $ | ( | $ | — | $ | ( | $ | — | $ | — | $ | — | $ | ( | ||||||||
Securitized mortgage borrowings |
| — |
| ( |
| |
| — |
| — |
| — |
| ( | ||||||||
Long-term debt |
| — |
| ( |
| — |
| |
| — |
| — |
| | ||||||||
Mortgage servicing rights (2) |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Mortgage loans held-for-sale |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||||
Derivative assets — IRLCs |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative liabilities — Hedging Instruments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Total | $ | ( | $ | ( | $ | ( | (3) | $ | | $ | ( | $ | ( | $ | ( | |||||||
| (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 gain (loss) on MSRs, net in the consolidated statements of operations and comprehensive loss. |
| (3) | For the three months ended June 30, 2021, change in the fair value of net trust assets, excluding REO was $ |
20
The following tables present the changes in recurring fair value measurements included in net earnings (loss) for the six months ended June 30, 2022 and 2021:
Recurring Fair Value Measurements |
| |||||||||||||||||||||
Changes in Fair Value Included in Net Loss |
| |||||||||||||||||||||
For the Six Months Ended June 30, 2022 |
| |||||||||||||||||||||
Change in Fair Value of |
| |||||||||||||||||||||
Interest | Interest | Net Trust | Long-term | Other Income | Gain on Sale |
| ||||||||||||||||
Income (1) | Expense (1) | Assets | Debt | and Expense | of Loans, net | Total |
| |||||||||||||||
Securitized mortgage collateral | $ | | $ | — | $ | | $ | — | $ | — | $ | — | $ | | ||||||||
Securitized mortgage borrowings |
| — |
| ( |
| — |
| — |
| — |
| — |
| ( | ||||||||
Long-term debt |
| — |
| ( |
| — |
| |
| — |
| — |
| | ||||||||
Mortgage servicing rights (2) |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||||
Mortgage loans held-for-sale |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative assets — IRLCs |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative liabilities — Hedging Instruments |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||||
Total | $ | | $ | ( | $ | | (3) | $ | | $ | | $ | ( | $ | ( | |||||||
| (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 gain (loss) on MSRs, net in the consolidated statements of operations and comprehensive loss. |
| (3) | For the six months ended June 30, 2022, change in the fair value of net trust assets, excluding REO was $ |
Recurring Fair Value Measurements |
| |||||||||||||||||||||
Changes in Fair Value Included in Net Loss |
| |||||||||||||||||||||
For the Six Months Ended June 30, 2021 |
| |||||||||||||||||||||
Change in Fair Value of |
| |||||||||||||||||||||
Interest | Interest | Net Trust | Long-term | Other Income | Gain on Sale |
| ||||||||||||||||
Income (1) | Expense (1) | Assets | Debt | and Expense | of Loans, net | Total |
| |||||||||||||||
Securitized mortgage collateral | $ | ( | $ | — | | $ | — | $ | — | $ | — | $ | | |||||||||
Securitized mortgage borrowings |
| — |
| ( |
| ( |
| — |
| — |
| — |
| ( | ||||||||
Long-term debt |
| — |
| ( |
| — |
| |
| — |
| — |
| | ||||||||
Mortgage servicing rights (2) |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||||
Mortgage loans held-for-sale |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative assets — IRLCs |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Derivative liabilities — Hedging Instruments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Total | $ | ( | $ | ( | $ | ( | (3) | $ | | $ | | $ | ( | $ | ( | |||||||
| (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 gain (loss) on MSRs, net in the consolidated statements of operations and comprehensive loss. |
| (3) | For the six months ended June 30, 2021, change in the fair value of net trust assets, excluding REO was $ |
The following is a description of the measurement techniques for items recorded at estimated fair value on a recurring basis.
Mortgage servicing rights—The Company elected to carry its MSRs arising from its mortgage loan origination operations at estimated fair value. The fair value of MSRs is based upon 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. MSRs are considered a Level 3 measurement at June 30, 2022 and December 31, 2021.
Mortgage loans held-for-sale—The Company elected to carry its mortgage LHFS 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
21
accordingly, the Company classifies its mortgage LHFS as a Level 2 measurement at June 30, 2022 and December 31, 2021.
Securitized mortgage collateral—The Company elected to carry its securitized mortgage collateral at fair value. These assets consisted primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value measurements were 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 included its expectations of inputs that other market participants would use in pricing these assets. These assumptions included judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As previously discussed, in March 2022, the Company sold certain certificates, and assigned certain optional termination and loan purchase rights associated with the consolidated securitization trusts for $
Securitized mortgage borrowings—The Company elected to carry its securitized mortgage borrowings at fair value. These borrowings consisted of individual tranches of bonds issued by securitization trusts and were primarily backed by non-conforming mortgage loans. Fair value measurements included 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 previously discussed, in March 2022, the Company sold certain certificates, and assigned certain optional termination and loan purchase rights associated with the consolidated securitization trusts for $
Long-term debt—The Company elected to carry its 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 previous settlements with trust preferred debt holders and discounted cash flow analysis. As of June 30, 2022, long-term debt had UPB of $
Derivative assets and liabilities, lending— Derivative assets and liabilities, lending are carried at fair value and are accounted for as free standing derivatives. All derivative financial instruments are recognized on the consolidated balance sheets at fair value with changes in the fair values being reported in current period earnings. The derivatives include IRLCs 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. The derivatives also include hedging instruments (typically to-be-announced mortgage-backed securities (TBA MBS), forward loan commitments and interest rate swap futures) used to hedge the fair value changes associated with changes in interest rates relating to its mortgage lending originations. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date of the loan 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 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 June 30, 2022 and December 31, 2021. 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 June 30, 2022 and December 31, 2021. The Company also utilizes swap futures to hedge interest rate risk. These instruments are actively traded in a liquid market and classified as Level 1 inputs.
22
The following table includes information for the derivative assets and liabilities related to lending for the periods presented:
Total Gains (Losses) | Total Gains (Losses) | |||||||||||||||||
Notional Amount | For the Three Months Ended | For the Six Months Ended | ||||||||||||||||
June 30, | December 31, | June 30, | June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||
Derivative – IRLC's (1) |
| $ | |
| $ | | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Derivative – TBA MBS (1) |
| |
| | |
| ( |
| |
| | |||||||
Derivative – Swap Futures (1) | |
| — | ( |
| — |
| |
| — | ||||||||
| (1) | Amounts included in gain on sale of loans, net within the accompanying consolidated statements of operations and comprehensive loss. |
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.
There were no financial or non-financial assets measured using nonrecurring fair value measurements at June 30, 2022.
The following tables present financial and non-financial assets measured using nonrecurring fair value measurements at June 30, 2022 and 2021, and total (losses) gains for the three and six months ended June 30, 2022 and 2021, respectively:
Nonrecurring Fair Value Measurements | Total Losses (1) | ||||||||||||||
June 30, 2022 | For the Three Months Ended | For the Six Months Ended | |||||||||||||
Level 1 | Level 2 | Level 3 | June 30, 2022 | June 30, 2022 | |||||||||||
ROU asset impairment | — | — | | ( | ( | ||||||||||
| (1) | Total losses reflect losses from all nonrecurring measurements during the period. |
Nonrecurring Fair Value Measurements | Total (Losses) Gains (1) | ||||||||||||||
June 30, 2021 | For the Three Months Ended | For the Six Months Ended | |||||||||||||
Level 1 | Level 2 | Level 3 | June 30, 2021 | June 30, 2021 | |||||||||||
REO (2) |
| $ | — |
| $ | |
| $ | — |
| $ | ( |
| $ | |
| (1) | Total gains (losses) reflect gains (losses) from all nonrecurring measurements during the period. |
| (2) | For the three and six months ended June 30, 2021, the Company recorded $( |
Real estate owned—REO consists of residential real estate (within securitized mortgage trust assets) 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 are included in the nonrecurring fair value measurements tables. Fair values of REO are generally based on observable market inputs, and are considered Level 2 measurements at December 31, 2021.
23
ROU asset impairment—The Company performs reviews of its ROU assets for impairment when evidence exists that the carrying value of an asset may not be recoverable. During the first quarter of 2022, the Company recorded a $
Note 8.—Income Taxes
The Company calculates its quarterly tax provision pursuant to the guidelines in ASC 740 Income Taxes. ASC 740 requires companies to estimate the annual effective tax rate for current year ordinary income. In calculating the effective tax rate, permanent differences between financial reporting and taxable income are factored into the calculation, and temporary differences are not. The estimated annual effective tax rate represents the Company’s estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision.
For the three and six months ended June 30, 2022, the Company recorded income tax expense was approximately $
As of December 31, 2021, the Company had estimated NOL carryforwards of approximately $
24
Note 9.—Reconciliation of Loss Per Common Share
The following table presents the computation of basic and diluted loss per common share, including the dilutive
effect of stock options, restricted stock awards (RSAs), restricted stock units (RSUs) and deferred stock units (DSUs),
For the Three Months Ended | For the Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 |
| |||||||||
Numerator for basic loss per share: |
|
|
|
| |||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Less: cumulative non-declared dividends on preferred stock (1) | ( | — | ( | — | |||||||||
Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Numerator for diluted loss per share: | |||||||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Interest expense attributable to convertible notes (2) |
| — |
| — |
| — |
| — | |||||
Net loss plus interest expense attributable to convertible notes | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Denominator for basic loss per share (3): | |||||||||||||
Basic weighted average common shares outstanding during the period |
| |
| |
| |
| | |||||
Denominator for diluted loss per share (3): | |||||||||||||
Basic weighted average common shares outstanding during the period |
| |
| |
| |
| | |||||
Net effect of dilutive convertible notes and warrants (2) |
| — |
| — |
| — |
| — | |||||
Net effect of dilutive stock options, DSU’s, RSA's and RSU's (2) |
| — |
| — |
| — |
| — | |||||
Diluted weighted average common shares |
| |
| |
| |
| | |||||
Net loss per common share: | |||||||||||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
| (1) | Cumulative non-declared dividends in arrears are included beginning July 15, 2021, which was the date the Maryland Court of Appeals affirmed the decision in granting summary judgment in favor of the plaintiffs on the Preferred B voting rights (see Note 12. – Equity and Share Based Payments). |
| (2) | Adjustments to diluted loss per share for the three and six months ended June 30, 2022 and 2021, were excluded from the calculation, as they were anti-dilutive. |
| (3) | Number of shares presented in thousands. |
At June 30, 2022 and 2021, there were
In addition to the potential dilutive effects of stock options, RSAs, RSUs, DSUs, warrants and Notes listed above, see Note 12.—Equity and Share Based Payments, Redeemable Preferred Stock, for a description of cumulative undeclared dividends in arrears.
25
Common and preferred dividends are included in the reconciliation of earnings per share beginning July 15, 2021, which was the date the Maryland Court of Appeals affirmed the decision in granting summary judgment in favor of the plaintiffs on the Preferred B voting rights. Cumulative preferred dividends, whether or not declared, are reflected in basic and diluted earnings per share in accordance with ASC 260-10-45-11, despite not being accrued for on the consolidated balance sheets.
Note 10.—Segment Reporting
The Company has
Statement of Operations Items for the | Mortgage | Real Estate | Long-term | Corporate | ||||||||||||
Three Months Ended June 30, 2022: | Lending | Services | Portfolio | and other | Consolidated | |||||||||||
Gain on sale of loans, net |
| $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | | |
Servicing income, net |
| |
| — |
| — |
| — |
| | ||||||
Gain on mortgage servicing rights, net | | — | — | — | | |||||||||||
Real estate services fees, net |
| — |
| |
| — |
| — |
| | ||||||
Other revenue (expense) |
| |
| — | |
| ( |
| | |||||||
Other operating expense | ( | ( | ( | ( | ( | |||||||||||
Other income (expense) |
| |
| — |
| |
| ( |
| | ||||||
Net (loss) earnings before income tax expense | $ | ( | $ | ( | $ | | $ | ( | ( | |||||||
Income tax expense |
| | ||||||||||||||
Net loss | $ | ( | ||||||||||||||
Statement of Operations Items for the |
| Mortgage |
| Real Estate |
| Long-term |
| Corporate |
| |||||||
Three Months Ended June 30, 2021: | Lending | Services | Portfolio | and other | Consolidated | |||||||||||
Gain on sale of loans, net | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | | ||
Servicing expenses, net |
| ( |
| — |
| — |
| — |
| ( | ||||||
Loss on mortgage servicing rights, net | ( | — | — | — | ( | |||||||||||
Real estate services fees, net |
| — |
| |
| — |
| — |
| | ||||||
Other revenue (expense) |
| — |
| — |
| | ( |
| ( | |||||||
Other operating expense |
| ( | ( | ( | ( |
| ( | |||||||||
Other (expense) income |
| ( |
| — |
| |
| ( |
| ( | ||||||
Net (loss) earnings before income tax expense | $ | ( | $ | | $ | | $ | ( | $ | ( | ||||||
Income tax expense |
| | ||||||||||||||
Net loss | $ | ( | ||||||||||||||
Statement of Operations Items for the | Mortgage | Real Estate | Long-term | Corporate |
| |||||||||||
Six Months Ended June 30, 2022: | Lending | Services | Portfolio | and other | Consolidated |
| ||||||||||
Gain on sale of loans, net |
| $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | | |
Servicing expense, net |
| ( |
| — |
| — |
| — |
| ( | ||||||
Gain on mortgage servicing rights, net | | — | — | — | | |||||||||||
Real estate services fees, net |
| — |
| |
| — |
| — |
| | ||||||
Other revenue |
| |
| — | |
| |
| | |||||||
Other operating expense | ( | ( | ( | ( | ( | |||||||||||
Other income (expense) |
| |
| — |
| |
| ( |
| | ||||||
Net (loss) earnings before income tax expense | $ | ( | $ | ( | $ | | $ | ( | ( | |||||||
Income tax expense |
| | ||||||||||||||
Net loss | $ | ( | ||||||||||||||
26
Statement of Operations Items for the |
| Mortgage |
| Real Estate |
| Long-term |
| Corporate |
| |||||||
Six Months Ended June 30, 2021: | Lending | Services | Portfolio | and other | Consolidated | |||||||||||
Gain on sale of loans, net | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | | ||
Servicing expense, net |
| ( |
| — |
| — |
| — |
| ( | ||||||
Gain on mortgage servicing rights, net | | — | — | — | | |||||||||||
Real estate services fees, net |
| — |
| |
| — |
| — |
| | ||||||
Other revenue |
| |
| — |
| |
| |
| | ||||||
Other operating expense | ( | ( | ( | ( | ( | |||||||||||
Other (expense) income |
| ( |
| — |
| |
| ( |
| ( | ||||||
Net (loss) earnings before income tax expense | $ | ( | $ | ( | $ | | $ | ( | $ | ( | ||||||
Income tax expense |
| | ||||||||||||||
Net loss | $ | ( | ||||||||||||||
Mortgage | Real Estate | Long-term | Corporate | |||||||||||||
Balance Sheet Items as of: | Lending | Services | Portfolio | and other | Consolidated | |||||||||||
Total Assets at June 30, 2022 (1) |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
Total Assets at December 31, 2021 (1) |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
| (1) | All segment asset balances exclude intercompany balances. |
Note 11.—Commitments and Contingencies
Legal Proceedings
The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In any case, there may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.
Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
The legal matter updates summarized below are ongoing and may have an effect on the Company’s business and future financial condition and results of operations:
27
Timm, et al v. Impac Mortgage Holdings, Inc., et al.
On December 7, 2011, a purported class action was filed in the Circuit Court of Baltimore City (Circuit Court) entitled Timm, et al v. Impac Mortgage Holdings, Inc., et al. (Maryland Action) on behalf of holders of the Company’s
The Maryland Action sought a judicial declaration that the Article Amendments related to the 2009 Offer (the 2009 Article Amendments) were ineffective, reinstatement of cumulative dividends on the Preferred B and Preferred C, payment of additional dividends that would have been required if the 2004 Articles Supplementary had remained in effect after June 29, 2009 (due to the Company’s purchase of certain Preferred Stock before year end 2009), the election of
In 2013, the Company and the individual defendants in the Maryland Action prevailed on a motion to dismiss all claims, except the claim that the Company had failed to receive the requisite number of votes to amend the 2004 Series B Articles Supplementary and related remedies. All claims made on behalf of the holders of Preferred C and all claims against individual defendants were dismissed. The case proceeded to discovery and cross-motions for summary judgment on the remaining primary dispute as to whether the 2004 Series B Articles Supplementary required the approval of the holders of (2/3rds) of the Preferred B, voting as a separate class, in order to make the 2009 Article Amendments to the 2004 Series B Articles Supplementary, which was the plaintiff’s position, or required the approval of the holders of (2/3rds) of the Preferred B and Preferred C, voting together as a single class, which was the Company’s position.
The Circuit Court entered a Judgment Order (Judgment Order) on July 16, 2018 (amended on July 24, 2018), whereby it entered a partial final judgment: (1) in favor of the Company and all other defendants on all claims on behalf of the holders of Preferred C and all claims against all individual defendants, thereby affirming the validity of the 2009 Article Amendments to the 2004 Series C Articles Supplementary; (2) declaring its interpretation of the voting provision language in the 2004 Series B Articles Supplementary to mean that consent of the holders of (2/3rds) of the Preferred B, voting as a separate class, was required to approve and amend the 2009 Article Amendments to the 2004 Series B Articles Supplementary, which was not obtained, thus rendering the amendments invalid and leaving the 2004 Series B Articles Supplementary continuously in effect; (3) ordering the Company to hold a special election within (60) days for the holders of Preferred B to elect
The Company appealed from the Judgment Order and
The Company filed a petition for a writ of certiorari to the Maryland Court of Appeals (Court of Appeals) seeking review of the voting rights decision, which was granted. Neither of the
28
On August 17, 2021, the Court of Appeals issued its mandate returning the case to the Circuit Court for final proceedings on certain open issues, discussed below. On October 25, 2021, the case was assigned to a judge of the Circuit Court to oversee final disposition of outstanding issues.
On remand, the Circuit Court directed the parties to submit briefs on any outstanding issues. The
On July 22, 2022, the Circuit Court issued an Order Certifying Class and Providing for Class Notice and Final Hearing, accompanied by a Memorandum Opinion explaining the Circuit Court’s rulings on the matters under submission. The Circuit Court denied plaintiff Curtis Timm’s Motion for Class Certification and Other Relief and granted plaintiff Camac Fund LP’s Motion to Certify Class, Appoint Class Representative and Lead Counsel, Preliminarily Determine Right to Receive Dividends, and Set Final Judgment Hearing. The Circuit Court certified a non-opt out class of owners of Preferred B stock from the close of the tender offer on June 29, 2009 to the date of the class certification order, appointed plaintiff Camac Fund as Lead Class Plaintiff and its counsel, Tydings Rosenberg LLP, as Lead Class Counsel, ordered the co-plaintiffs to file any petitions for award of attorneys’ fees and expenses or other form of monetary award no later than August 12, 2022, and directed Impac to provide shareholder information to the parties’ class notice administrator by August 12, 2022.
In addition, the Circuit Court made a preliminary determination that the Outstanding 2009 Dividends should be paid to current Preferred B stockholders, as of a record date to be established. The Circuit Court stated that it anticipates entering final injunctive relief, prior to a final class hearing date, directing the Company to declare a record date for payment to then current Preferred B stockholders of the dividends previously determined to be due for
The Circuit Court held a further conference on July 27, 2022, during which the parties discussed proposed revisions to the Class definition to include all Preferred B stockholders through the date of finality of final orders to be issued in the case, the method for the establishing a record date for the Company’s satisfaction of its obligations to distribute the adjudicated amount of the Outstanding 2009 Dividends, the final hearing date and other matters. The Circuit Court took the matters under further submission. On August 8, 2022, the Circuit Court issued an Amended Class Certification Order, which amends the definition of the class to include all Preferred B stockholders through the date of finality of final orders to be issued in the case, directs the Company to establish a record date of August 15, 2022 for distribution of the Outstanding 2009 Dividends in the amount of $
McNair v Impac Mortgage Corp.
On September 18, 2018, a purported class action was filed in the Superior Court of California, Orange County, entitled McNair v. Impac Mortgage Corp. dba CashCall Mortgage. The plaintiff contends the defendant did not pay the plaintiff and purported class members overtime compensation, provide required meal and rest breaks, or provide accurate wage statements. The action seeks damages, restitution, penalties, interest, attorney’s fees, and all other appropriate injunctive, declaratory, and equitable relief. On March 8, 2019, a First Amended Complaint was filed, which added a claim alleging PAGA violations. On March 12, 2019, the parties filed a stipulation with the court stating (1) the plaintiff’s
29
individual claims should be arbitrated pursuant to the parties’ arbitration agreement, (2) the class claims should be struck from the First Amended Complaint, and (3) the plaintiff will proceed solely with regard to her PAGA claims. This case was consolidated with the Batres v. Impac Mortgage Corp. dba CashCall Mortgage case discussed below with a rescheduled trial date of January 18, 2022. On October 28, 2021, the Company entered into a settlement agreement, which was amended and restated on February 17, 2022. On March 14, 2022, the court issued an order granting preliminary approval of the settlement. No assurances can be given that such settlement will receive final approval by the court.
Batres v. Impac Mortgage Corp.
On December 27, 2018, a purported class action was filed in the Superior Court of California, Orange County, entitled Batres v. Impac Mortgage Corp. dba CashCall Mortgage. The plaintiff contends the defendant did not pay the plaintiff and purported class members overtime compensation, provide required meal and rest breaks, or provide accurate wage statements. The action seeks damages, restitution, penalties, interest, attorney’s fees, and all other appropriate injunctive, declaratory, and equitable relief. On March 14, 2019, the plaintiff filed an amended complaint alleging only PAGA violations and seeking penalties, attorneys’ fees, and such other appropriate relief. This case was consolidated with the McNair v. Impac Mortgage Corp. dba CashCall Mortgage discussed above with a rescheduled trial date of January 18, 2022. On October 28, 2021, the Company entered into a settlement agreement, which was amended and restated on February 17, 2022. On March 14, 2022, the court issued an order granting preliminary approval of the settlement. No assurances can be given that such settlement will receive final approval by the court.
UBS Americas Inc., et al. v. Impac Funding Corporation et al.
On December 17, 2021, a summons with notice was filed in the Supreme Court of the State of New York, County of New York (NY Court), initiating a lawsuit entitled UBS Americas Inc., et al. v. Impac Funding Corporation et al. The plaintiffs contend that the defendants are required to indemnify payments that plaintiffs made to resolve claims asserted by the Federal Home Loan Bank of San Francisco and HSH Nordbank AG related to certain residential mortgage-backed securities (RMBS). Plaintiffs contend that the RMBS included loans that the defendants allegedly sold to certain UBS entities in breach of contractual representations and warranties. Plaintiffs further contend that they settled the cases for which plaintiffs are demanding indemnification in December 2015 and March 2016. On April 18, 2022, the Company accepted service of the summons with notice on behalf of Impac Funding Corp. and Impac Mortgage Holdings, Inc. On June 2, 2022, a complaint was filed with the NY Court related to the summons with notice, however Impac Mortgage Holdings, Inc. was no longer listed as a defendant in the matter. On July 25, 2022, Impac Funding Corporation filed a motion to dismiss the complaint. The Company believes the claims are without merit and intends to defend itself vigorously.
CrossCountry Mortgage, LLC v Impac Mortgage Holdings, Inc. and Impac Mortgage Corp.
On August 4, 2022, a complaint was filed in the United States District Court for the Northern District of Ohio – Eastern Division by CrossCountry Mortgage, LLC (Plaintiff) against the Company and its wholly-owned subsidiary Impac Mortgage Corp. dba CashCall Mortgage (IMC). The Plaintiff alleges infringement of Plaintiff’s federally-registered trademark, unfair competition and false designation of origin and for substantial and related claims of deceptive trade practice under the statutory and common laws of the State of Ohio. Plaintiff is seeking injunctive and monetary relief. The Company and IMC were served with the complaint on August 8, 2022. The Company and IMC believe the claims are without merit and we intend to defend ourselves vigorously.
The Company is a party to other litigation and claims which are in the course of the Company’s operations. While the results of such other litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on the Company’s financial condition or results of operations. The Company believes that it has meritorious defenses to the 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, 2021 for additional information regarding litigation and claims.
30
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 require it to repurchase loans if the Company breached a representation or warranty given to the loan purchaser as well as refunds of premiums to investors for early payoffs on loans sold.
The following table summarizes the repurchase reserve activity, within other liabilities on the consolidated balance sheets, related to previously sold loans as of and for the six months ended June 30, 2022 and year ended December 31, 2021:
June 30, | December 31, | |||||
2022 | 2021 | |||||
Beginning balance |
| $ | |
| $ | |
Provision for repurchases (1) |
| |
| | ||
Settlements |
| ( |
| ( | ||
Total repurchase reserve | $ | | $ | | ||
| (1) | The provision for repurchases is included in gain on sale of loans, net in the accompanying consolidated statements of operations and comprehensive loss. |
Corporate-owned Life Insurance Trusts
During the first quarter of 2020, there was a triggering event that caused the Company to reevaluate the consolidation of certain corporate-owned life insurance trusts. As a result, the Company has consolidated life insurance trusts for
At June 30, 2022 | ||||||||||||
Corporate-owned life insurance trusts: | Trust #1 | Trust #2 | Trust #3 | Total | ||||||||
Corporate-owned life insurance cash surrender value |
| $ | | $ | | $ | | $ | | |||
Corporate-owned life insurance liability |
| |
| |
| |
| | ||||
Corporate-owned life insurance shortfall (1) | $ | ( | $ | ( | $ | ( | $ | ( | ||||
| (1) | The initial $ |
Commitments to Extend Credit
The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. These loan commitments are treated as derivatives and are carried at fair value. See Note 7. — Fair Value of Financial Instruments for more information.
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Note 12.—Equity and Share Based Payments
Redeemable Preferred Stock
As discussed within Note 11.—Commitments and Contingencies, on July 15, 2021, the Maryland Court of Appeals issued its decision affirming the decisions of the Maryland Circuit Court and the Court of Special Appeals granting summary judgment in favor of the plaintiffs on the Preferred B voting rights language interpretation. Accordingly, the 2009 Article Amendments to the 2004 Series B Articles Supplementary were not validly adopted and the 2004 Series B Articles Supplementary remained in effect.
As a result, as of June 30, 2022, the Company has cumulative undeclared dividends in arrears of approximately $
At June 30, 2022, the Company had $
On April 29, 2022, the Company entered into voting agreements (the Voting Agreements), with certain holders of outstanding shares of Preferred B stock, Preferred C stock and common stock, which were subsequently amended on or after June 21, 2022, requiring parties to the Voting Agreements to vote in favor of proposed amendments to the provisions of the Company’s charter setting forth the terms of the Preferred B stock and Preferred C stock (the Proposed Amendments) to (1) permit closing of a proposed exchange offer, described below (the Exchange Offer), without payment of any accrued or accumulated dividends on any outstanding shares of Preferred B stock or Preferred C stock, and (2) provide that, following the effectiveness of the Proposed Amendments and the Exchange Offer, the remaining outstanding shares of Preferred B stock and Preferred C stock would be subject to redemption at the election of the Company or the holders of any outstanding shares of Preferred B stock or Preferred C stock, as the case may be, for the following redemption consideration: (i) for each outstanding share of Preferred B stock, subject to potential reduction as a result of any attorneys’ fees or costs that are the subject of any petition therefor filed by any attorneys representing holders of Preferred B stock or any order entered by a court in respect of any such petition, (a) cash in the amount of $
32
share of New Preferred Stock; (b)
A violation of the Cash Consideration Restrictions will occur if the occurrence of an action would cause (i) the Company to violate the restrictions on payment of distributions to stockholders under section 2-311 of the Maryland General Corporation Law (the MGCL), (ii) any material breach of or default under the terms and conditions of any obligation of the Company, including any agreement relating to its indebtedness, or (iii) the Company to violate any restriction or prohibition of any law rule or regulation applicable to the Company or of any order, judgment or decree of any court or administrative agency.
The New Preferred Stock will rank senior to the Preferred B stock and the Preferred C stock as to dividends and upon liquidation; be non-participating, and bear cumulative cash dividends from and including the original issue date at a fixed rate equal to
In the proposed Exchange Offer, the Company currently intends to offer to repurchase each outstanding share of Preferred B stock and each outstanding share of Preferred C stock in exchange for the corresponding redemption consideration described above, subject to potential reduction as a result of any attorneys’ fees or costs ordered or that may be ordered to be paid to the attorneys representing holders of Preferred B stock or any order entered by a court in respect of such petition. Closing of the Exchange Offer, if effected by the Company, is expected to be contingent upon, among other conditions, the approval of the Proposed Amendments by the stockholders of the Company, which will require the affirmative vote of holders of at least each of of the outstanding shares of Preferred B stock, of the outstanding shares of Preferred C stock and shares of Common Stock entitled to cast a majority of votes entitled to be cast, and acceptance for record of the Proposed Amendments by the State Department of Assessments and Taxation of Maryland. The Voting Agreements also limit transferability of the shares of Preferred B stock, Preferred C stock and Common Stock during the term of the Voting Agreement and certain holders of Preferred B stock and Preferred C stock have also agreed, as part of the Voting Agreements, to trading limitations in connection with any Common Stock they receive in the Exchange Offer or as part of the redemption.
Common and preferred dividends are included in the reconciliation of earnings per share beginning July 15, 2021, which was the date the Maryland Court of Appeals affirmed the decision in granting summary judgment in favor of the plaintiffs on the Preferred B voting rights. Cumulative preferred dividends, whether or not declared, are reflected in
33
basic and diluted earnings per share in accordance with FASB ASC 260-10-45-11, despite not being accrued for on the consolidated balance sheets.
Share Based Payments
The following table summarizes activity, pricing and other information for the Company’s stock options for the six months ended June 30, 2022:
Weighted- | ||||||
Average | ||||||
Number of | Exercise | |||||
Shares | Price | |||||
Options outstanding at the beginning of the year |
| |
| $ | |
|
Options granted |
| — |
| — |
| |
Options exercised |
| — |
| — |
| |
Options forfeited/cancelled |
| ( |
| |
| |
Options outstanding at the end of the period |
| | |
| ||
Options exercisable at the end of the period |
| | $ | |
| |
As of June 30, 2022, there was approximately $
The following table summarizes activity, pricing and other information for the Company’s RSU’s for the six months ended June 30, 2022:
Weighted- | |||||
Average | |||||
Number of | Grant Date | ||||
Shares | Fair Value | ||||
RSUs outstanding at beginning of the year |
| |
| $ | |
RSUs granted |
| — | — | ||
RSUs issued |
| ( |
| | |
RSUs forfeited/cancelled |
| ( |
| | |
RSUs outstanding at end of the period |
| | $ | | |
As of June 30, 2022, there was approximately $
The following table summarizes activity, pricing and other information for the Company’s DSU’s for the six months ended June 30, 2022:
Weighted- | ||||||
Average | ||||||
Number of | Grant Date | |||||
Shares | Fair Value | |||||
DSUs outstanding at the beginning of the year |
| |
| $ | |
|
DSUs granted |
| — |
| — |
| |
DSUs issued |
| ( |
| |
| |
DSUs forfeited/cancelled |
| — |
| — |
| |
DSUs outstanding at the end of the period |
| | $ | |
| |
As of June 30, 2022, there was
34
Note 13.—Subsequent Events
Subsequent events have been evaluated through the date of this filing.
35
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 direct and indirect wholly-owned operating subsidiaries, Integrated Real Estate Service Corp. (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), Copperfield Capital Corporation (CCC) 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,” “projected,” “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: ongoing impact on the U.S. economy and financial markets due to the outbreak of the novel coronavirus, and any adverse impact or disruption to the Company’s operations; our ability to complete the contemplated Exchange Offer with the holders of Series B Preferred Stock and Series C Preferred Stock; unemployment rates; successful development, marketing, sale and financing of new and existing financial products, ability to successfully re-engage in lending activities; interest rate levels; inability to successfully reduce prepayment on our mortgage loans; ability to successfully diversify our loan products; decrease in our mortgage servicing portfolio or its market value; ability to increase our market share and geographic footprint in the various residential mortgage businesses; ability to manage and sell MSRs as needed; ability to successfully sell loans to third-party investors; 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 and satisfy financial covenants; our ability to maintain compliance with the continued listing requirements of the NYSE American for our common stock; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology including cyber risk and data security risk; ability to successfully create cost and product efficiencies through new 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, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, 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, 2021, this Quarterly Report on Form 10-Q and other subsequent 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 except as required by law.
The Mortgage Industry and Discussion of Relevant Fiscal Periods
The second quarter of 2022 saw trends which began in the fourth quarter of 2021, accelerate with a dramatic rise in forward interest rates and a widening of credit spreads. Due to significant inflationary pressures, the U.S. Federal Reserve raised the federal funds rate by 225 basis points through July 2022, representing the fastest pace of credit tightening since the 1980’s, and is expected to continue to raise interest rates into 2023 as well as reduce the federal government’s overall portfolio of Treasury and mortgage-backed securities. As a result, the Mortgage Bankers Association
36
is forecasting mortgage originations for purchases to grow 1% in 2022 to $1.7 trillion and are predicting refinance originations to slow in 2022, decreasing by 70% to $0.7 trillion from $2.3 trillion in 2021. The sharp decline in originations reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and increasing affordability issues. We expect the housing inventory, affordability and intense competition in the mortgage market to continue to put pressure on originations, gain on sale margins and profitability going forward. We have and expect to continue to reduce business expenses to align with the lower projected originations for the remainder of the year.
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 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, environmental conditions, such as hurricanes, fires and floods, 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, we attempt to present financial information in Management’s Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to our financial information.
Selected Financial Results
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, |
| March 31, |
| June 30, |
| June 30, |
| June 30, | |||||||
(in thousands, except per share data) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||
Revenues: | ||||||||||||||||
Gain on sale of loans, net | $ | 179 | $ | 5,955 | $ | 10,693 | $ | 6,134 | $ | 30,824 | ||||||
Servicing income (expense), net |
| 7 |
| (12) |
| (150) |
| (5) |
| (269) | ||||||
Gain (loss) on mortgage servicing rights, net |
| 45 |
| 111 |
| (37) |
| 155 |
| 1 | ||||||
Real estate services fees, net |
| 257 |
| 185 |
| 478 |
| 442 |
| 688 | ||||||
Other |
| 7 |
| 951 |
| (4) |
| 959 |
| 320 | ||||||
Total revenues, net |
| 495 |
| 7,190 |
| 10,980 |
| 7,685 |
| 31,564 | ||||||
Expenses: | ||||||||||||||||
Personnel expense |
| 8,024 |
| 11,921 |
| 11,964 |
| 19,945 |
| 26,888 | ||||||
Business promotion |
| 1,319 |
| 2,301 |
| 1,770 |
| 3,620 |
| 2,963 | ||||||
General, administrative and other |
| 5,323 |
| 5,135 |
| 5,882 |
| 10,458 |
| 11,063 | ||||||
Total expenses |
| 14,666 |
| 19,357 |
| 19,616 |
| 34,023 |
| 40,914 | ||||||
Operating loss: |
| (14,171) |
| (12,167) |
| (8,636) |
| (26,338) |
| (9,350) | ||||||
Other income (expense): | ||||||||||||||||
Net interest (expense) income |
| (1,260) |
| 116 |
| 558 |
| (1,144) |
| 1,218 | ||||||
Change in fair value of long-term debt |
| 1,980 | 1,642 | 1,417 | 3,622 | 2,442 | ||||||||||
Change in fair value of net trust assets |
| — |
| 9,248 |
| (2,141) |
| 9,248 |
| (3,814) | ||||||
Total other income (loss), net |
| 720 |
| 11,006 |
| (166) |
| 11,726 |
| (154) | ||||||
Loss before income taxes |
| (13,451) |
| (1,161) |
| (8,802) |
| (14,612) |
| (9,504) | ||||||
Income tax expense |
| 16 |
| 23 |
| 62 |
| 39 |
| 43 | ||||||
Net loss | $ | (13,467) | $ | (1,184) | $ | (8,864) | $ | (14,651) | $ | (9,547) | ||||||
Other comprehensive loss: | ||||||||||||||||
Change in fair value of instrument specific credit risk | 10,037 | (2,269) | (538) | 7,768 | (2,205) | |||||||||||
Total comprehensive loss | $ | (3,430) | $ | (3,453) | $ | (9,402) | $ | (6,883) | $ | (11,752) | ||||||
Diluted weighted average common shares |
| 21,509 |
| 21,417 |
| 21,344 |
| 21,463 |
| 21,319 | ||||||
Diluted loss per share | $ | (0.64) | $ | (0.07) | $ | (0.42) | $ | (0.72) | $ | (0.45) | ||||||
37
Status of Operations
Key Metrics – Second quarter 2022
| ● | At June 30, 2022, unrestricted cash was $61.2 million as compared to $29.6 million at December 31, 2021. |
| ● | For the three months ended June 30, 2022, total originations were $128.1 million as compared to $482.1 million for the three months ended March 31, 2022 and $611.5 million for the three months ended June 30, 2021. |
| ● | For the three months ended June 30, 2022, non-qualified mortgage (NonQM) origination volumes were $80.2 million as compared to $314.3 million for the three months ended March 31, 2022 and $100.6 million for the three months ended June 30, 2021. |
| ● | Gain on sale of loans, net was $179 thousand for the three months ended June 30, 2022 as compared to $6.0 million for the three months ended March 31, 2022 and $10.7 million for the three months ended June 30, 2021. |
| ● | Operating expenses (personnel, business promotion and general, administrative and other) for the three months ended June 30, 2022 decreased to $14.7 million from $19.4 million for the three months ended March 31, 2022 and $19.6 million for the three months ended June 30, 2021. |
For the three months ended June 30, 2022, we reported a net loss of $13.5 million, or $0.64 per diluted common share, as compared to a net loss of $8.9 million, or $0.42 per diluted common share, for the three months ended June 30, 2021. For the three months ended June 30, 2022, adjusted loss before tax (as defined below in Non-GAAP Financial Measures) was $15.4 million, or $0.71 per diluted common share, as compared to an adjusted loss before tax of $6.9 million, or $0.32 per diluted common share, for the three months ended June 30, 2021.
For the six months ended June 30, 2022, we reported a net loss of $14.7 million, or $0.72 per diluted common share, as compared to a net loss of $9.5 million, or $0.45 per diluted common share, for the six months ended June 30, 2021. For the six months ended June 30, 2022, adjusted loss before tax (as defined below in Non-GAAP Financial Measures) was $28.4 million, or $1.32 per diluted common share, as compared to an adjusted loss before tax of $7.2 million, or $0.34 per diluted common share, for the six months ended June 30, 2021.
Net loss for the three months ended June 30, 2022, increased to $13.5 million as compared to $8.9 million for the three months ended June 30, 2021. The quarter over quarter increase in net loss was primarily due to a $10.5 million decrease in gain on sale of loans, net, partially offset by a $5.0 million decrease in operating expenses and an $886 thousand increase in other income. The sharp and unexpected decline in gain on sale of loans, net reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in customer affordability issues. As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads, which accelerated into the second quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the second quarter of 2022. For the three months ended June 30, 2022, we originated and sold $128.1 million and $248.2 million of mortgage loans, respectively, as compared to $611.5 million and $667.8 million of loans originated and sold, respectively, during the same period in 2021. During the three months ended June 30, 2022, margins were 14 bps as compared to 175 bps during the same period in 2021.
Offsetting the increase in net loss was an increase in other income of $886 thousand as a result of a $2.1 million reduction in trust losses as a result of the sale of the legacy securitization portfolio during the first quarter of 2022 and a $563 thousand increase in fair value of our long-term debt partially offset by a $1.8 million reduction in net interest income as a result of the aforementioned sale of the legacy securitization portfolio during the first quarter of 2022. Additionally,
38
operating expenses were lower during the second quarter of 2022 due to a reduction in variable compensation commensurate with reduced originations as well as a reduction in headcount to support reduced volume.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States (GAAP), we use the following non-GAAP financial measures: adjusted loss before tax and diluted adjusted loss per common share before tax. Adjusted loss and diluted adjusted loss per common share are financial measurements calculated by adjusting GAAP net loss before tax to exclude certain non-cash items, such as fair value adjustments and mark-to-market of mortgage servicing rights (MSRs), and legacy non-recurring expenses. We believe adjusted loss provides useful information to investors regarding our results of operations as it assists both investors and management in analyzing and benchmarking the performance and value of our core business of mortgage lending over multiple periods. Adjusted loss facilitates company-to-company operating performance comparisons by backing out potential non-cash differences caused by variations in hedging strategies and changes in valuations for long-term debt and net trust assets, which may vary for different companies for reasons unrelated to operating performance, as well as certain historical cost (benefit) items which may vary for different companies for reasons unrelated to operating performance. These non-GAAP financial measures are not intended to be considered in isolation and should not be a substitute for net (loss) earnings before income taxes, net (loss) earnings or diluted (loss) earnings per common share (EPS) or any other operating performance measure calculated in accordance with GAAP, and may not be comparable to a similarly titled measure reported by other companies. The tables below provide a reconciliation of net loss before tax and diluted loss per common share to non-GAAP adjusted loss before tax and non-GAAP diluted adjusted loss per common share before tax:
For the Three Months Ended | For the Six Months Ended | ||||||||||||||
| June 30, |
| March 31, |
| June 30, |
| June 30, |
| June 30, | ||||||
(in thousands, except per share data) | 2022 | 2022 | 2021 | 2022 | 2021 | ||||||||||
Loss before income taxes: | $ | (13,451) | $ | (1,161) | $ | (8,802) | $ | (14,612) | $ | (9,504) | |||||
Change in fair value of mortgage servicing rights | (89) | (143) | 11 | (231) | (39) | ||||||||||
Change in fair value of long-term debt | (1,980) | (1,642) | (1,417) | (3,622) | (2,442) | ||||||||||
Change in fair value of net trust assets, including trust REO gains (losses) | — | (9,248) | 2,141 | (9,248) | 3,814 | ||||||||||
Legal settlements and professional fees, for legacy matters (1) | — | — | 1,000 | — | 1,000 | ||||||||||
Legacy corporate-owned life insurance (2) | 157 | (816) | 160 | (659) | 2 | ||||||||||
Adjusted loss before tax | $ | (15,363) | $ | (13,010) | $ | (6,907) | $ | (28,372) | $ | (7,169) | |||||
Diluted weighted average common shares | 21,509 | 21,417 | 21,344 | 21,463 | 21,319 | ||||||||||
Diluted adjusted loss per common share before tax | $ | (0.71) | $ | (0.61) | $ | (0.32) | $ | (1.32) | $ | (0.34) | |||||
Diluted loss per common share | $ | (0.64) | $ | (0.07) | $ | (0.42) | $ | (0.72) | $ | (0.45) | |||||
Adjustments: | |||||||||||||||
Cumulative non-declared dividends on preferred stock | 0.02 | 0.02 | — | 0.04 | — | ||||||||||
Change in fair value of mortgage servicing rights | (0.01) | (0.01) | — | (0.01) | — | ||||||||||
Change in fair value of long-term debt | (0.09) | (0.08) | (0.07) | (0.17) | (0.11) | ||||||||||
Change in fair value of net trust assets, including trust REO gains (losses) | — | (0.43) | 0.11 | (0.43) | 0.17 | ||||||||||
Legal settlements and professional fees, for legacy matters | — | — | 0.05 | — | 0.05 | ||||||||||
Legacy corporate-owned life insurance | 0.01 | (0.04) | 0.01 | (0.03) | — | ||||||||||
Diluted adjusted loss per common share before tax | $ | (0.71) | $ | (0.61) | $ | (0.32) | $ | (1.32) | $ | (0.34) | |||||
| (1) | Included in general, administrative and other expense in the accompanying consolidated statements of operations and comprehensive loss. |
39
| (2) | Amounts included in other revenues, general, administrative and other expense and net interest income for amounts associated with the cash surrender value of corporate-owned life insurance trusts, premiums associated with the corporate-owned life insurance trusts liabilities, and interest expense on the corporate-owned life insurance trusts, respectively, in the accompanying consolidated statements of operations and comprehensive loss. |
Originations by Channel:
For the Three Months Ended | ||||||||||||||
June 30, | March 31, | % | June 30, | % | ||||||||||
(in millions) |
| 2022 |
| 2022 |
| Change |
| 2021 |
| Change |
| |||
Retail | $ | 93.0 | $ | 288.9 |
| (68) | % | $ | 514.2 | (82) | % | |||
Wholesale |
| 35.1 |
| 193.2 |
| (82) |
| 97.3 | (64) | |||||
Total originations | $ | 128.1 | $ | 482.1 |
| (73) | % | $ | 611.5 | (79) | % | |||
During the second quarter of 2022, total originations were $128.1 million as compared to $482.1 million in the first quarter of 2022 and $611.5 million in the second quarter of 2021. The decrease in originations as compared to the first quarter of 2022, was due to the significant increase in interest rates which began in the fourth quarter of 2021, resulting in a reduction in purchase loans due to a decrease in home purchase affordability and in refinance volume due to the number of loans that had previously refinanced during the preceding historically low interest rate environment. While we began to shift our origination focus away from more rate and margin sensitive conventional originations during the first quarter of 2021, the increase in interest rates which began in the fourth quarter of 2021 and has accelerated through the second quarter of 2022, caused a significant increase in credit spreads, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminished capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022, which significantly reduced our origination volumes during the second quarter of 2022 as compared to the second quarter of 2021. We continue to manage our headcount, pipeline and capacity to balance the risks inherent in an aggregation execution model.
Our loan products primarily include conventional loans eligible for sale to Fannie Mae and Freddie Mac, NonQM mortgages and loans eligible for government insurance (government loans) by the Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA).
Originations by Loan Type:
For the Three Months Ended June 30, |
| For the Six Months Ended June 30, | ||||||||||||||||
(in millions) | 2022 |
| 2021 |
| % Change |
|
| 2022 |
| 2021 |
| % Change | ||||||
Conventional | $ | 40.6 | $ | 500.1 | (92) | % | $ | 198.7 | $ | 1,279.1 | (84) | % | ||||||
NonQM | 80.2 | 100.6 | (20) | 394.5 | 115.3 | 242 | ||||||||||||
Jumbo | 0.9 | 3.8 | (76) | 5.5 | 51.2 | (89) | ||||||||||||
Government (1) | 6.4 | 7.0 | (9) | 11.5 | 15.8 | (27) | ||||||||||||
Total originations | $ | 128.1 | $ | 611.5 | (79) | % | $ | 610.2 | $ | 1,461.4 | (58) | % | ||||||
| (1) | Includes all government-insured loans including FHA, VA and USDA. |
We continue to believe there is an underserved mortgage market for borrowers with strong credit who may not meet the qualified mortgage (QM) guidelines set out by the Consumer Financial Protection Bureau. During the fourth quarter of 2021, we originated $382.1 million in NonQM loans and were on pace to exceed our fourth quarter 2021 NonQM originations during the first quarter of 2022, prior to the recent dislocation in NonQM pricing as a result of widening credit spreads. As described above, as a result of the market dislocation we have further backed off NonQM production during the second quarter of 2022 with NonQM originations decreasing to $80.2 million from $314.3 million during the first quarter of 2022, and down from $100.6 million during the second quarter of 2021. During the second quarter of 2022, NonQM originations represented 63% of our total originations, which was a decrease over the first quarter of 2022 which represented 65% of our total originations but up from only 16% of our total originations during the second quarter of 2021.
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In the second quarter of 2022, our NonQM originations had a weighted average Fair Isaac Company credit score (FICO) of 735 and a weighted average LTV ratio of 67%. For the year ended December 31, 2021, our NonQM originations had a weighted average FICO of 747 and a weighted average LTV of 65%.
Originations by Purpose:
For the Three Months Ended June 30, |
| For the Six Months Ended June 30, | ||||||||||||||||||||
(in millions) |
| 2022 |
| % |
| 2021 |
| % |
|
| 2022 |
| % |
| 2021 |
| % |
| ||||
Refinance | $ | 78.4 |
| 61 | % | $ | 559.7 |
| 92 | % | $ | 456.4 |
| 75 | % | $ | 1,385.6 |
| 95 | % | ||
Purchase |
| 49.7 |
| 39 |
| 51.8 |
| 8 |
| 153.8 |
| 25 |
| 75.8 |
| 5 | ||||||
Total originations | $ | 128.1 |
| 100 | % | $ | 611.5 |
| 100 | % | $ | 610.2 |
| 100 | % | $ | 1,461.4 |
| 100 | % | ||
During the second quarter of 2022, refinance volume decreased 92% to $78.4 million as compared to $559.7 million in the second quarter of 2021. The decrease in originations was due to the aforementioned significant increase in interest rates as compared to the second quarter of 2021. We continue to manage our headcount, pipeline and capacity to balance the risks inherent in an aggregation execution model.
Mortgage Servicing Portfolio:
| June 30, | December 31, | % |
| June 30, |
| % |
| ||||||
(Unpaid principal balance (UPB), in millions) | 2022 |
| 2021 |
| Change |
| 2021 |
| Change |
| ||||
Mortgage servicing portfolio |
| $ | 71.4 | $ | 71.8 | (0.6) | % | $ | 48.6 |
| 47 | % | ||
The mortgage servicing portfolio decreased to $71.4 million at June 30, 2022 as compared to $71.8 million at December 31, 2021 and $48.6 million at June 30, 2021. We continue to sell whole loans on a servicing released basis to investors and selectively retain GNMA mortgage servicing. The servicing portfolio generated net servicing income of $7 thousand in the second quarter of 2022, as compared to net servicing expense of $150 thousand in the second quarter of 2021. We will continue to recognize an immaterial amount of net servicing fees or a net servicing expense related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio.
The following table includes information about our mortgage servicing portfolio:
At June 30, | % 60+ days | At December 31, | % 60+ days |
| |||||||
(in millions) |
| 2022 |
| delinquent (1) |
| 2021 |
| delinquent (1) |
| ||
Ginnie Mae | $ | 71.4 | 1.49 | % | $ | 71.8 | 2.00 | % | |||
Freddie Mac | — | — | — | — | |||||||
Fannie Mae | — | — | — | — | |||||||
Total servicing portfolio | $ | 71.4 | 1.49 | % | $ | 71.8 | 2.00 | % | |||
| (1) | Based on loan count. |
For the second quarter of 2022, real estate services fees, net were $257 thousand as compared to $185 thousand in the first quarter of 2022 and $478 thousand in the second quarter of 2021. Real estate services fees, net is generated from our former long-term mortgage portfolio which continued to decline in size. Additionally, as previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entails the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees, net generated from the long-term mortgage portfolio will decline in future periods as the securitizations are called or collapsed by the purchaser.
As previously noted, in the first quarter of 2022, we sold the legacy securitization portfolio which, in accordance with FASB ASC 810-10-25, resulted in deconsolidation of the securitized mortgage trust assets totaling approximately $1.6 billion and trust liabilities of $1.6 billion as of the sale date as we were no longer the primary beneficiary of the consolidated securitization trusts. We will remain as the master servicer with respect to all of the securitizations until such time that the deals are collapsed or payoff. Prior to the aforementioned sale and transfer of the legacy securitization
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portfolio in March 2022, the residual interests generated cash flows of $1.1 million in the first quarter of 2022 as compared to $1.9 million for the first six months of 2021.
For additional information regarding the long-term mortgage portfolio, refer to Financial Condition and Results of Operations below.
Liquidity and Capital Resources
During the six months ended June 30, 2022, we funded our operations primarily from the sale of our legacy securitization portfolio, mortgage lending revenues and, to a lesser extent, real estate services fees and cash flows from our residual interests in securitizations. Mortgage lending revenues include gain on sale of loans, net and other mortgage related income. We funded mortgage loan originations using warehouse facilities, which are repaid once the loan is sold. We may also seek to raise capital by issuing debt or equity securities.
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 economic recession, geopolitical issues, inflation and interest rates, unemployment, the availability and cost of financing, the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing or raise capital on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing and profitable and stable capital market distribution exits.
As previously discussed, the sharp and unexpected decline in gain on sale of loans, net reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and a significant increase in mortgage interest rates resulting in customer home purchase affordability issues. The increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which accelerated into the second quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022.
During the six months ended June 30, 2022, we have reduced our warehouse lending capacity to $550.0 million from $615.0 at December 31, 2021 as we did not renew the facility that expired in May 2022. In July, 2022 we further reduced our warehouse lending capacity to $400.0 million, reducing the $200.0 million funding facility to $50.0 million and do not anticipate renewing the facility in September 2022 upon expiration of the line. As of June 30, 2022, we were not in compliance with certain warehouse lending related covenants, and received the necessary waivers.
In March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights relating to 37 securitizations that closed between 2000 and 2007, which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. Pursuant to the terms of the Sale Agreement, the purchaser paid the Company an aggregate cash purchase price of $37.5 million. In March 2022, we recorded a $9.2 million increase in fair value, net of $277 thousand in transaction costs related to the transfer of the legacy securitization portfolio.
On April 29, 2022, we entered into an agreement to repay $5.0 million of our outstanding convertible promissory notes (the Notes) on May 9, 2022, the date of maturity of such Notes, and extend the maturity date of the Notes upon conclusion of the term on May 9, 2022. We decreased the aggregate principal amount of the new Notes to $15.0 million, following the pay-down of $5.0 million in principal of the Notes on May 9, 2022 (Third Amendment). The new Notes shall be due and payable in three equal installments of $5.0 million on each of May 9, 2023, May 9, 2024 and the Stated Maturity Date of May 9, 2025, provided we complete the contemplated Exchange Offer and provide notice of redemption of our remaining outstanding Series B Preferred Stock and Series C Preferred Stock by October 31, 2022, as described below. If we are not able to complete the Exchange Offer, then the Stated Maturity Date of the Notes shall mean November 9, 2022. The interest rate on the Notes remains at 7.0% per annum.
42
We originate loans which are intended to be eligible for sale to Fannie Mae, Freddie Mac, (together, the GSEs), government insured or guaranteed loans, such as FHA, VA and USDA loans, and loans eligible for Ginnie Mae securities issuance (collectively, the Agencies), in addition to other investors and counterparties (collectively, the Counterparties). It is important for us to sell or securitize the loans we originate and, when doing so, maintain the option to also sell the related MSRs associated with these loans. Prepayment speeds on loans generated through our retail direct channel have been a concern for some investors dating back to 2016 which has resulted and could further result in adverse pricing or delays in our ability to sell or securitize loans and related MSRs on a timely and profitable basis. During the fourth quarter of 2017, Fannie Mae sufficiently limited the manner and volume for our deliveries of eligible loans such that we elected to cease deliveries to them and we expanded our whole loan investor base for these loans. In 2019, with the creation of the uniform mortgage-backed securities (UMBS) market, which was intended to improve liquidity and align prepayment speeds across Fannie Mae and Freddie Mac securities, Freddie Mac raised concerns about the high prepayment speeds of our loans generated through our retail direct channel. We have continued to expand our investor base and complete servicing released loan sales to non-GSE whole loan investors and expect to continue to utilize these alternative exit strategies for Fannie Mae and Freddie Mac eligible loans. In July 2020, we received notification from Freddie Mac that our eligibility to sell whole loans to Freddie Mac was suspended, without cause. While we believe that the overall volume delivered under purchase commitments to the GSEs was immaterial prior to the notification, we are committed to operating actively and in good standing with our broad range of capital markets counterparties. We continue to take steps to manage our prepayment speeds to be more consistent with our industry peers and to reestablish the full confidence and delivery mechanisms to our investor base. We seek to satisfy the requirements as outlined by Freddie Mac to achieve reinstatement, while we continue to satisfy our obligations on a timely basis to our other counterparties, as we have done without exception. Despite being in a suspended status with Freddie Mac, we remain an approved originator and/or seller/servicer with the GSEs, Agencies and Counterparties for agency, non-agency, and government insured or guaranteed loan programs.
As discussed within Note 11.—Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, on July 15, 2021, the Maryland Court of Appeals issued its decision affirming the decisions of the Maryland Circuit Court and the Court of Special Appeals granting summary judgment in favor of the plaintiffs on the Preferred B voting rights language interpretation. Accordingly, the 2009 Article Amendments to the 2004 Series B Articles Supplementary were not validly adopted and the 2004 Series B Articles Supplementary remained in effect.
As a result, as of June 30, 2022, the Company has cumulative undeclared dividends in arrears of approximately $19.9 million, or approximately $29.88 per outstanding share of Preferred B, thereby increasing the liquidation value to approximately $54.88 per share. Additionally, every quarter the cumulative undeclared dividends in arrears will increase by $0.5859 per Preferred B share, or approximately $390 thousand. The accrued and unpaid dividends on the Preferred B are payable only upon declaration by the Board of Directors, and the liquidation preference, inclusive of Preferred B cumulative undeclared dividends in arrears, is only payable upon voluntary or involuntary liquidation, dissolution or winding up of the Company’s affairs. In addition, once the Circuit Court determines basis for an appropriate record date, the Company will be required to pay an amount equal to three quarters of dividends on the Preferred B stock under the 2004 Preferred B Articles Supplementary (approximately $1.2 million, which had been previously accrued for).
At June 30, 2022, the Company had $71.7 million in outstanding liquidation preference of Preferred B and Preferred C stock (including cumulative unpaid dividends in the case of the Preferred B stock). The holders of each series of Preferred Stock, which carry limited voting rights and are redeemable at the option of the Company, retain the right to a $25.00 per share liquidation preference (plus cumulative unpaid dividends in the case of the Preferred B stock) in the event of a liquidation of the Company and the right to receive dividends on the Preferred Stock if any such dividends are declared (and, in the case of the Preferred B stock, before any dividends or other distributions are made to holders of junior stock, including the Company’s common stock).
On April 29, 2022, the Company entered into voting agreements (the Voting Agreements), with certain holders of outstanding shares of Preferred B stock, Preferred C stock and common stock, which were subsequently amended on or after June 21, 2022, requiring parties to the Voting Agreements to vote in favor of proposed amendments to the provisions of the Company’s charter setting forth the terms of the Preferred B stock and Preferred C stock (the Proposed Amendments) to (1) permit closing of a proposed exchange offer, described below (the Exchange Offer), without payment of any accrued or accumulated dividends on any outstanding shares of Preferred B stock or Preferred C stock, and (2) provide that, following the effectiveness of the Proposed Amendments and the Exchange Offer, the remaining outstanding
43
shares of Preferred B stock and Preferred C stock would be subject to redemption at the election of the Company or the holders of any outstanding shares of Preferred B stock or Preferred C stock, as the case may be, for the following redemption consideration: (i) for each outstanding share of Preferred B stock, subject to potential reduction as a result of any attorneys’ fees or costs that are the subject of any petition therefore filed by any attorneys representing holders of Preferred B stock or any order entered by a court in respect of any such petition, (a) cash in the amount of $5.00 or, if the payment of cash in the Exchange Offer would cause the Company to violate the Cash Consideration Restrictions described below, fifty (50) shares of a new series of Preferred Stock (the New Preferred Stock) and (b) twenty (20) shares of Common Stock and (ii) for each outstanding share of Preferred C stock, (a) cash in the amount of $0.10 or, if the payment of cash in the Exchange Offer would cause the Company to violate the Cash Consideration Restrictions, one (1) share of New Preferred Stock; (b) 1.25 shares of Common Stock and (c) a warrant to purchase 1.5 shares of Common Stock at a purchase price of $5.00 per share of Common Stock.
A violation of the “Cash Consideration Restrictions” will occur if the occurrence of an action would cause (i) the Company to violate the restrictions on payment of distributions to stockholders under section 2-311 of the Maryland General Corporation Law (the MGCL), (ii) any material breach of or default under the terms and conditions of any obligation of the Company, including any agreement relating to its indebtedness, or (iii) the Company to violate any restriction or prohibition of any law rule or regulation applicable to the Company or of any order, judgment or decree of any court or administrative agency.
The New Preferred Stock will (w) rank senior to the Preferred B stock and the Preferred C stock as to dividends and upon liquidation; (x) be non-participating, and bear cumulative cash dividends from and including the original issue date at a fixed rate equal to 8.25% per annum (equivalent to a fixed annual amount of $.00825 per share of New Preferred Stock); (y) bear a liquidation preference of $0.10 per share; and (z) be mandatorily redeemable by the Company on (A) the 60th day, or such earlier date as the Company may fix, after the date of any public announcement by the Company of annual or quarterly financial statements that indicate that payment of the redemption price would not cause the Company to violate the restrictions on payment of distributions to stockholders under section 2-311 of the MGCL unless, before such redemption date, the Company’s Board of Directors determines in good faith that the payment by the Company of the redemption price for the New Preferred Stock and for any stock ranking on parity with the New Preferred Stock with respect to redemption and which have become redeemable as of the applicable redemption date would cause the Company to violate the Cash Consideration Restrictions, or (B) any date fixed by the Company not more than sixty (60) days after any determination by the Company’s Board of Directors (which the Board, or a committee thereof, is obligated to undertake after the release of annual and quarterly financial statements and upon any capital raise) in good faith that the payment by the Company of the redemption price for the New Preferred Stock and any stock ranking on parity with the New Preferred Stock with respect to redemption rights which have become redeemable as of such redemption date would not cause us to violate the Cash Consideration Restrictions. The Company currently intends to redeem the New Preferred Stock for cash promptly when it is legally and contractually permitted to do so, but if the Company is unable to raise additional capital, it may be unable to redeem the New Preferred Stock.
In the proposed Exchange Offer, the Company currently intends to offer to repurchase each outstanding share of Preferred B stock and each outstanding share of Preferred C stock in exchange for the corresponding redemption consideration described above, subject to potential reduction as a result of any attorneys’ fees or costs ordered or that may be ordered to be paid to the attorneys representing holders of Preferred B stock or any order entered by a court in respect of such petition. Closing of the Exchange Offer, if effected by the Company, is expected to be contingent upon, among other conditions, the approval of the Proposed Amendments by the stockholders of the Company, which will require the affirmative vote of holders of at least each of 66 2/3% of the outstanding shares of Preferred B stock, 66 2/3% of the outstanding shares of Preferred C stock and shares of Common Stock entitled to cast a majority of votes entitled to be cast, and acceptance for record of the Proposed Amendments by the State Department of Assessments and Taxation of Maryland. The Voting Agreements also limit transferability of the shares of Preferred B stock, Preferred C stock and Common Stock during the term of the Voting Agreement and certain holders of Preferred B stock and Preferred C stock have also agreed, as part of the Voting Agreements, to trading limitations in connection with any Common Stock they receive in the Exchange Offer or as part of the redemption.
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 and other finance companies which operate in our market area as well as throughout the United States. We compete for
44
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, brokers and sellers.
We believe that current cash balances, cash flows from our mortgage lending operations, real estate services fees generated from our former long-term mortgage portfolio and availability on our warehouse lines of credit are adequate for our current operating needs based on the current operating environment. 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 our ability to successfully operate our mortgage lending and real estate services segment. Our future financial performance and profitability are dependent in large part upon the ability to expand our mortgage lending platform successfully.
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, 2021. There have been no material changes to the information on critical accounting estimates described in our Annual Report on Form 10-K for the year ended December 31, 2021, except those described below.
Variable Interest Entities and Transfers of Financial Assets and Liabilities
Historically, we securitized mortgages in the form of collateralized mortgage obligations (CMO) and real estate mortgage investment conduits (REMICs), (collectively, securitizations), which were either consolidated or unconsolidated depending on the design of the securitization structure. These securitizations were evaluated for consolidation in accordance with the variable interest model of FASB ASC 810-10-25. A variable interest entity (VIE) is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We consolidated certain VIEs where we are both the primary beneficiary of the residual interests in the securitization trusts as well as the master servicer. Being the master servicer provides control over the collateral through the ability to direct the servicers to take specific loss mitigation efforts. As noted below, in the first quarter of 2022, we sold the legacy securitization portfolio. Prior to the sale of the legacy securitization portfolio, the assets and liabilities that were included in the consolidated VIEs included the mortgage loans and real estate owned collateralizing the debt securities which were included in securitized mortgage trust assets on our consolidated balance sheets and the debt securities payable to investors which were included in securitized mortgage trust liabilities on our accompanying consolidated balance sheets.
In March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result of the sale, in accordance with FASB ASC 810-10-25, we deconsolidated the securitized mortgage trust assets totaling approximately $1.6 billion and trust liabilities of $1.6 billion as of the sale date as the Company was no longer the primary beneficiary of the consolidated securitization trusts. The Company shall remain the master servicer with respect to all of the securitizations until such time that the securitization trusts are collapsed or payoff.
45
Financial Condition and Results of Operations
Financial Condition
As of June 30, 2022 compared to December 31, 2021
The following table shows the condensed consolidated balance sheets for the following periods:
(in thousands, except per share data) |
| June 30, |
| December 31, |
| $ |
| % |
| |||
2022 | 2021 | Change | Change |
| ||||||||
ASSETS | ||||||||||||
Cash | $ | 61,173 | $ | 29,555 | $ | 31,618 |
| 107 | % | |||
Restricted cash |
| 5,196 |
| 5,657 |
| (461) |
| (8) | ||||
Mortgage loans held-for-sale |
| 37,035 |
| 308,477 |
| (271,442) |
| (88) | ||||
Mortgage servicing rights |
| 850 |
| 749 |
| 101 |
| 13 | ||||
Securitized mortgage trust assets |
| — |
| 1,642,730 |
| (1,642,730) |
| (100) | ||||
Other assets |
| 29,404 |
| 35,603 |
| (6,199) |
| (17) | ||||
Total assets | $ | 133,658 | $ | 2,022,771 | $ | (1,889,113) |
| (93) | % | |||
LIABILITIES EQUITY | ||||||||||||
Warehouse borrowings | $ | 37,795 | $ | 285,539 | $ | (247,744) |
| (87) | % | |||
Convertible notes |
| 15,000 |
| 20,000 |
| (5,000) |
| (25) | ||||
Long-term debt (Par value; $62,000) |
| 35,889 |
| 46,536 |
| (10,647) |
| (23) | ||||
Securitized mortgage trust liabilities |
| — |
| 1,614,862 |
| (1,614,862) |
| (100) | ||||
Repurchase reserve |
| 5,999 |
| 4,744 |
| 1,255 |
| 26 | ||||
Other liabilities |
| 35,523 |
| 41,154 |
| (5,631) |
| (14) | ||||
Total liabilities |
| 130,206 |
| 2,012,835 |
| (1,882,629) |
| (94) | ||||
Total equity |
| 3,452 |
| 9,936 |
| (6,484) |
| (65) | ||||
Total liabilities and stockholders’ equity | $ | 133,658 | $ | 2,022,771 | $ | (1,889,113) |
| (93) | % | |||
Book and tangible book value per share | $ | 0.16 | $ | 0.47 | $ | (0.31) | (66) | % | ||||
At June 30, 2022, cash increased $31.6 million to $61.2 million from $29.6 million at December 31, 2021. Cash balances increased primarily due to the aforementioned $37.5 million sale and transfer of the legacy securitization portfolio during the first quarter of 2022.
LHFS decreased $271.5 million to $37.0 million at June 30, 2022 as compared to $308.5 million at December 31, 2021. During the six months ended June 30, 2022, we had originations of $610.2 million offset by $867.7 million 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 increased to $850 thousand at June 30, 2022 as compared to $749 thousand at December 31, 2021. The increase was due to additions of $46 thousand from servicing retained loan sales of $4.5 million in UPB as well as a mark-to-market increase in fair value of $55 thousand. At June 30, 2022 and December 31, 2021, we serviced $71.4 million and $71.8 million, respectively, in UPB for others.
Warehouse borrowings decreased $247.7 million to $37.8 million at June 30, 2022 as compared to $285.5 million at December 31, 2021. The decrease was due to a $271.5 million decreased in LHFS at June 30, 2022. As of June 30, 2022, our total warehouse lending capacity was $550.0 million spread amongst three warehouse counterparties. In July, 2022 we further reduced our warehouse lending capacity to $400.0 million, reducing a $200.0 million funding facility to $50.0 million and do not anticipate renewing the facility in September 2022 upon expiration of the line. As of June 30, 2022, we were not in compliance with certain warehouse lending related covenants, and received the necessary waivers.
46
Repurchase reserve increased $1.3 million to $6.0 million at June 30, 2022 as compared to $4.7 million at December 31, 2021. The increase was due to a $2.4 million provision for repurchases as a result of an increase in expected future losses on repurchase requests during the second quarter of 2022 partially offset by $1.2 million in settlements primarily related to repurchased loans as well as refunds of premiums to investors for early payoffs on loans sold.
Book value per share decreased 66%, or $0.31, to $0.16 at June 30, 2022 as compared to $0.47 at December 31, 2021. Book value per common share decreased 15% to ($2.25) as of June 30, 2022, as compared to ($1.96) as of December 31, 2021 (inclusive of the remaining $51.8 million of liquidation preference on our preferred stock). Inclusive of the Preferred B stock cumulative undeclared dividends in arrears of $19.9 million (as discussed further in Note 11 – Commitments and Contingencies of the “Notes to Unaudited Consolidated Financial Statements”), book value per common share was ($3.17) at June 30, 2022.
As previously disclosed, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights relating to 37 securitizations that closed between 2000 and 2007, which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result of the sale, in accordance with FASB ASC 810-10-25, we deconsolidated the securitized mortgage trust assets totaling approximately $1.6 billion and trust liabilities of $1.6 billion as of the sale date as the Company was no longer the primary beneficiary of the consolidated securitization trusts. We will remain as the master servicer with respect to all of the securitizations until such time that the deals are collapsed or payoff.
The change in our trust assets and trust liabilities is summarized below.
| June 30, | December 31, | $ | % | ||||||||
2022 | 2021 | Change | Change | |||||||||
Securitized mortgage collateral | $ | — | $ | 1,639,251 | $ | (1,639,251) |
| (100) | % | |||
Real estate owned (REO) |
| — |
| 3,479 |
| (3,479) |
| (100) | ||||
Total trust assets (1) |
| — |
| 1,642,730 |
| (1,642,730) |
| (100) | ||||
Securitized mortgage borrowings | $ | — | $ | 1,614,862 | $ | (1,614,862) |
| (100) | % | |||
Total trust liabilities (1) |
| — |
| 1,614,862 |
| (1,614,862) |
| (100) | ||||
Residual interests in securitizations | $ | — | $ | 27,868 | $ | (27,868) |
| (100) | % | |||
| (1) | At December 31, 2021, the UPB of trust assets and trust liabilities was approximately $1.8 billion and $1.7 billion, respectively. |
Prior to the sale of the legacy securitization trusts, we estimated fair value of the assets and liabilities within the securitization trusts each reporting period, management used an industry standard valuation and analytical model that was updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employed an internal process to validate the accuracy of the model as well as the data within this model. We used 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 were over collateralized, we may have received the excess interest as the holder of the residual interest. The information above provided us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings and the residual interests.
To determine the discount rates applied to these cash flows, we gathered 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 determined an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We used 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.
47
The following table presents changes in the trust assets and trust liabilities for the six months ended June 30, 2022:
TRUST ASSETS | TRUST LIABILITIES |
| ||||||||||||||
Level 3 Recurring Fair |
| |||||||||||||||
Value Measurement | Level 3 Recurring Fair |
| ||||||||||||||
NRV | Value Measurement |
| ||||||||||||||
| Securitized |
| Real |
|
| Securitized |
| Net |
| |||||||
mortgage | estate | Total trust | mortgage | trust |
| |||||||||||
collateral | owned | assets | borrowings | assets |
| |||||||||||
Recorded fair value at December 31, 2021 | $ | 1,639,251 | $ | 3,479 | $ | 1,642,730 | $ | (1,614,862) | $ | 27,868 | ||||||
Total gains/(losses) included in earnings: | ||||||||||||||||
Interest income |
| 2,019 |
| — |
| 2,019 |
| — |
| 2,019 | ||||||
Interest expense |
| — |
| — |
| — |
| (7,564) |
| (7,564) | ||||||
Change in FV of net trust assets, excluding REO (1) |
| 9,248 |
| — |
| 9,248 |
| — |
| 9,248 | ||||||
Total gains (losses) included in earnings |
| 11,267 |
| — |
| 11,267 |
| (7,564) |
| 3,703 | ||||||
Transfers in and/or out of level 3 |
| — |
| — |
| — |
| — |
| — | ||||||
Purchases, issuances and settlements |
| (1,650,518) |
| (3,479) |
| (1,653,997) |
| 1,622,426 |
| (31,571) | ||||||
Recorded fair value at June 30, 2022 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||
| (1) | Represents change in fair value of net trust assets, including trust REO gains in the consolidated statements of operations and comprehensive loss for the six months ended June 30, 2022. |
Total trust assets above reflect a net gain of $9.2 million as a result of an increase in fair value related to the sale of our legacy securitization portfolio for the six months ended June 30, 2022.
The table below reflects the net trust assets for the periods indicated as a percentage of total trust assets (residual interests in securitizations):
June 30, | December 31, | ||||||
| 2022 | 2021 |
| ||||
Net trust assets | $ | — | $ | 27,868 | |||
Total trust assets |
| — |
| 1,642,730 | |||
Net trust assets as a percentage of total trust assets |
| — | % |
| 1.70 | % | |
The following tables present the estimated fair value of our residual interests, by securitization vintage year, and other related assumptions used to derive these values at June 30, 2022 and December 31, 2021:
Estimated Fair Value of Residual | Estimated Fair Value of Residual |
| |||||||||||||||||
Interests by Vintage Year at | Interests by Vintage Year at |
| |||||||||||||||||
June 30, 2022 | December 31, 2021 |
| |||||||||||||||||
Origination Year |
| SF |
| MF |
| Total |
| SF |
| MF |
| Total |
| ||||||
2002-2003 (1) | $ | — | $ | — | $ | — | $ | 13,167 | $ | 722 | $ | 13,889 | |||||||
2004 |
| — |
| — |
| — |
| 7,661 |
| 736 |
| 8,397 | |||||||
2005 |
| — |
| — |
| — |
| 851 |
| 442 |
| 1,293 | |||||||
2006 |
| — |
| — |
| — |
| — |
| 4,289 |
| 4,289 | |||||||
Total | $ | — | $ | — | $ | — | $ | 21,679 | $ | 6,189 | $ | 27,868 | |||||||
Weighted avg. prepayment rate |
| — | % | — | % | — | % | 15.4 | % | 15.3 | % | 15.4 | % | ||||||
Weighted avg. discount rate |
| — | % | — | % | — | % | 11.8 | % | 11.6 | % | 11.7 | % | ||||||
| (1) | 2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period. |
Prior to the sale of the legacy securitization trusts, we utilized a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions included estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We used the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions to determine collateral cash flows which were used to pay interest and
48
principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we used 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.
Long-Term Mortgage Portfolio Credit Quality
Despite the sale of the legacy securitization portfolio in March 2022, we will remain as the master servicer with respect to all of the securitizations until such time that the deals are collapsed or payoff.
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, delinquent bankruptcies and REO were $306.0 million, or 19.3%, of the long-term mortgage portfolio, at June 30, 2022 as compared to $310.5 million or 17.3% at December 31, 2021.
The following table summarizes the gross UPB of loans in our master servicing portfolio, that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated:
| June 30, |
| Total | December 31, |
| Total | |||||
Securitized mortgage collateral | 2022 | Collateral | 2021 | Collateral |
| ||||||
60 - 89 days delinquent | $ | 26,057 |
| 1.6 | % | $ | 21,086 |
| 1.2 | % | |
90 or more days delinquent |
| 104,335 |
| 6.6 |
| 147,387 |
| 8.2 | |||
Foreclosures (1) |
| 99,873 |
| 6.3 |
| 89,181 |
| 5.0 | |||
Delinquent bankruptcies (2) |
| 50,053 |
| 3.2 |
| 52,854 |
| 2.9 | |||
REO (3) | 25,696 | 1.6 | — | — | |||||||
Total 60 or more days delinquent and REO | $ | 306,014 |
| 19.3 | % | $ | 310,508 |
| 17.3 | % | |
Total collateral | $ | 1,584,438 |
| 100.0 | % | $ | 1,798,079 |
| 100.0 | % | |
| (1) | Represents properties in the process of foreclosure. |
| (2) | Represents bankruptcies that are 30 days or more delinquent. |
| (3) | Prior to the sale of the legacy securitization trusts in March 2022, REO was included in the consolidated trusts and was accounted for at NRV on the consolidated balance sheets. |
At June 30, 2022, mortgage loans 60 or more days delinquent, including REO at June 30, 2022, (whether or not subject to forbearance) decreased $4.5 million as compared to December 31, 2021. As a result of the sale of the legacy securitization trusts and related deconsolidation of the trusts, including REO, we disclosed the REO within the master servicing portfolio at its UPB at June 30, 2022.
49
The following table summarizes the master servicing portfolio and REO at NRV (prior to the sale), that were non-performing as of the dates indicated (excludes 60-89 days delinquent):
|
| Total |
| Total |
| ||||||
June 30, | Collateral |
| December 31, | Collateral |
| ||||||
2022 |
| % | 2021 |
| % | ||||||
90 or more days delinquent (including forbearances), | $ | 279,957 |
| 17.7 | % | $ | 289,422 |
| 16.1 | % | |
Real estate owned inside trusts at NRV |
| — |
| — |
| 3,479 |
| 0.2 | |||
Total non-performing assets | $ | 279,957 |
| 17.7 | % | $ | 292,901 |
| 16.3 | % | |
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 our policy to place a mortgage loan 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.
Prior to the sale of the legacy securitization trusts, REO, which consisted of residential real estate acquired in satisfaction of loans, was 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 were included in the change in the fair value of net trust assets prior to the sale of the portfolio. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition were recorded as change in fair value of net trust assets including trust REO gains in the consolidated statements of operations and comprehensive loss prior to the sale of the portfolio.
For the three months ended June 30, 2022, no REO entries were recorded as the REO was a component of the sale of the legacy portfolio in March 2022. For the three and six months ended June 30, 2021, we recorded a decrease of $313 thousand and an increase of $1.6 million in net realizable value of REO, respectively. Increases and decrease of the net realizable value reflect the change in value of the REO subsequent to foreclosure date, but prior to the date of sale.
The following table presents the balances of REO:
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
REO | $ | — | $ | 10,335 | |||
Impairment (1) |
| — |
| (6,856) | |||
Ending balance | $ | — | $ | 3,479 | |||
REO inside trusts | $ | — | $ | 3,479 | |||
REO outside trusts |
| — |
| — | |||
Total | $ | — | $ | 3,479 | |||
| (1) | Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure. |
Prior to the sale of the legacy securitization trusts, we calculated the cash flows to assess the fair value of the securitized mortgage collateral, we estimated the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management took many factors into consideration. For instance, a detailed analysis of historical loan performance data was accumulated and reviewed. This data was analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data was also broken down by collection status. Our estimated losses for these loans was 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 was 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
50
of default was based on analysis of migration of loans from each aging category. The loss severity was determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis were then applied to the current mortgage portfolio and an estimate was created. We believe that pooling of mortgages with similar characteristics was 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 was 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 evaluated these assumptions and various relevant factors affecting credit quality and inherent losses.
Results of Operations
For the Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
For the Three Months Ended June 30, |
| ||||||||||||
|
| $ |
| % |
| ||||||||
2022 | 2021 |
| Change |
| Change | ||||||||
Revenues | $ | 495 | $ | 10,980 | $ | (10,485) |
| (95) | % | ||||
Expenses |
| (14,666) |
| (19,616) |
| 4,950 |
| 25 | |||||
Net interest (expense) income |
| (1,260) |
| 558 |
| (1,818) |
| (326) | |||||
Change in fair value of long-term debt |
| 1,980 |
| 1,417 |
| 563 |
| 40 | |||||
Change in fair value of net trust assets, including trust REO losses |
| — |
| (2,141) |
| 2,141 |
| 100 | |||||
Income tax expense |
| (16) |
| (62) |
| 46 |
| 74 | |||||
Net loss | $ | (13,467) | $ | (8,864) | $ | (4,603) |
| (52) | % | ||||
Loss per share available to common stockholders—basic | $ | (0.64) | $ | (0.42) | $ | (0.23) |
| (55) | % | ||||
Loss per share available to common stockholders—diluted | $ | (0.64) | $ | (0.42) | $ | (0.23) |
| (55) | % | ||||
For the Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
For the Six Months Ended June 30, |
| ||||||||||||
|
|
| $ |
| % |
| |||||||
2022 | 2021 |
| Change |
| Change | ||||||||
Revenues | $ | 7,685 | $ | 31,564 | $ | (23,879) |
| (76) | % | ||||
Expenses |
| (34,023) |
| (40,914) |
| 6,891 |
| 17 | |||||
Net interest (expense) income |
| (1,144) |
| 1,218 |
| (2,362) |
| (194) | |||||
Change in fair value of long-term debt | 3,622 | 2,442 | 1,180 |
| 48 | ||||||||
Change in fair value of net trust assets, including trust REO losses |
| 9,248 |
| (3,814) |
| 13,062 |
| 342 | |||||
Income tax expense |
| (39) |
| (43) |
| 4 |
| 9 | |||||
Net loss | $ | (14,651) | $ | (9,547) | $ | (5,104) |
| (53) | % | ||||
Loss per share available to common stockholders—basic | $ | (0.72) | $ | (0.45) | $ | (0.27) |
| (61) | % | ||||
Loss per share available to common stockholders—diluted | $ | (0.72) | $ | (0.45) | $ | (0.27) |
| (61) | % | ||||
51
Revenues
For the Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
For the Three Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Gain on sale of loans, net | $ | 179 | $ | 10,693 | $ | (10,514) |
| (98) | % | |||
Servicing fees (expense), net |
| 7 |
| (150) |
| 157 |
| 105 | ||||
Real estate services fees, net |
| 257 |
| 478 |
| (221) |
| (46) | ||||
Gain (loss) on mortgage servicing rights, net |
| 45 |
| (37) |
| 82 |
| 222 | ||||
Other revenues (expenses) |
| 7 |
| (4) |
| 11 |
| 275 | ||||
Total revenues | $ | 495 | $ | 10,980 | $ | (10,485) |
| (95) | % | |||
Gain on sale of loans, net. For the three months ended June 30, 2022, gain on sale of loans, net was a gain of $179 thousand compared to a gain of $10.7 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a $15.3 million decrease in gain on sale of loans, a $1.3 million increase in provision for repurchases, a $488 thousand decrease in mark-to-market gains on LHFS and a $92 thousand decrease in premiums from servicing retained loan sales. Partially offsetting these decreases was a $3.8 million increase in realized and unrealized net gains on derivative financial instruments, a $2.8 million decrease in direct origination expenses.
The sharp and unexpected decline in gain on sale reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and a significant increase in mortgage interest rates resulting in customer home purchase affordability issues. As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which accelerated into the second quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the second quarter of 2022. For the three months ended June 30, 2022, we originated and sold $128.1 million and $248.2 million of mortgage loans, respectively, as compared to $611.5 million and $667.8 million of loans originated and sold, respectively, during the same period in 2021. During the three months ended June 30, 2022, margins were 14 bps as compared to 175 bps during the same period in 2021.
Servicing fees (expenses), net. For the three months ended June 30, 2022, servicing fees (expenses), net were fees of $7 thousand compared to an expense of $150 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the second quarter of 2021. The servicing portfolio average balance increased 58% to $72.1 million for the three months ended June 30, 2022 as compared to an average balance of $45.7 million for the comparable period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize an immaterial amount of servicing fees, net or servicing expenses, net related to the small UPB of remaining servicing portfolio at June 30, 2022. During the three months ended June 30, 2022, we had no servicing retained loan sales.
52
Gain (loss) on mortgage servicing rights, net
For the Three Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Gain on sale of mortgage servicing rights | $ | 51 | $ | — | $ | 51 | n/a | % | ||||
Changes in fair value: |
| |||||||||||
Due to changes in valuation market rates, inputs or assumptions | 38 | (11) |
| 49 | 445 | |||||||
Other changes in fair value: | ||||||||||||
Scheduled principal prepayments | (15) | (13) | (2) | (15) | ||||||||
Voluntary prepayments |
| (29) |
| (13) | (16) | (123) | ||||||
Total changes in fair value | $ | (6) | $ | (37) | $ | 31 | 84 | |||||
Gain (loss) on mortgage servicing rights, net | $ | 45 | $ | (37) | $ | 82 | 222 | % | ||||
For the three months ended June 30, 2022, gain (loss) on MSRs, net was a net gain of $45 thousand compared to a net loss of $37 thousand in the comparable 2021 period. For the three months ended June 30, 2022, we recorded a $6 thousand loss from change in fair value of MSRs primarily due to changes in fair value associated with scheduled and voluntary prepayments partially offset by changes in market interest rates, inputs and assumptions. For the three months ended June 30, 2021, we recorded a $37 thousand loss from a change in fair value of MSRs primarily due to changes in scheduled and voluntary prepayments. Additionally, during the three months ended June 30, 2022, we recorded $51 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales.
Real estate services fees, net. For the three months ended June 30, 2022, real estate services fees, net were $257 thousand as compared to $478 thousand in the comparable 2021 period. The real estate service fees decreased for the three months ended June 30, 2022 as compared to the same period in 2021, and will decline over time as a result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio. Additionally, as previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within the long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the purchaser.
Other revenues. For the three months ended June 30, 2022, other revenues were $7 thousand as compared to a loss of $4 thousand in the comparable 2021 period. The $11 thousand increase in other revenues was primarily the result of a decrease in the mark-to-market adjustment of the cash surrender value associated with the corporate-owned life insurance trusts during the second quarter of 2022 as compared to the adjustment during the second quarter of 2021.
For the Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Gain on sale of loans, net | $ | 6,134 | $ | 30,824 | $ | (24,690) |
| (80) | % | |||
Servicing expense, net |
| (5) |
| (269) |
| 264 |
| 98 | ||||
Real estate services fees, net |
| 442 |
| 688 |
| (246) |
| (36) | ||||
Gain on mortgage servicing rights, net |
| 155 |
| 1 |
| 154 |
| 15400 | ||||
Other revenues |
| 959 |
| 320 |
| 639 |
| 200 | ||||
Total revenues | $ | 7,685 | $ | 31,564 | $ | (23,879) |
| (76) | % | |||
53
Gain on sale of loans, net. For the six months ended June 30, 2022, gain on sale of loans, net was a gain of $6.1 million compared to a gain of $30.8 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a $22.5 million decrease in gain on sale of loans, a $6.9 million increase in mark-to-market losses on LHFS, a $2.6 million increase in provision for repurchases and a $167 thousand decrease in premiums from servicing retained loan sales. Partially offsetting these decreases in gain on sale of loans, net was a $3.9 million decrease in direct origination expenses and a $3.6 million increase in realized and unrealized net gains on derivative financial instruments.
As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which accelerated into the second quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the first six months of 2022. For the six months ended June 30, 2022, we originated and sold $610.2 million and $867.7 million of mortgage loans, respectively, as compared to $1.5 billion and $1.5 billion of loans originated and sold, respectively, during the same period in 2021. During the six months ended June 30, 2022, margins were 101 bps as compared to 211 bps during the same period in 2021.
Servicing expenses, net. For the six months ended June 30, 2022, servicing expenses, net were $5 thousand compared to $269 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the same period in 2021. As a result, the servicing portfolio average balance increased 76% to $73.7 million for the six months ended June 30, 2022 as compared to an average balance of $41.8 million for the comparable period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize servicing expense related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio. During the six months ended June 30, 2022, we had $4.5 million in servicing retained loan sales.
Gain on mortgage servicing rights, net
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Gain on sale of mortgage servicing rights | $ | 100 | $ | — | $ | 100 |
| n/a | % | |||
Changes in fair value: |
|
| ||||||||||
Due to changes in valuation market rates, inputs or assumptions | 131 | 39 |
| 92 |
| 236 | ||||||
Other changes in fair value: |
| |||||||||||
Scheduled principal prepayments | (26) | (25) | (1) | (4) | ||||||||
Voluntary prepayments |
| (50) |
| (13) | (37) | (285) | ||||||
Total changes in fair value | $ | 55 | $ | 1 | $ | 54 | 5400 | |||||
Gain on mortgage servicing rights, net | $ | 155 | $ | 1 | $ | 154 | 15400 | % | ||||
For the six months ended June 30, 2022, gain on MSRs, net was a net gain of $155 thousand compared to a net gain of $1 thousand in the comparable 2021 period. For the six months ended June 30, 2022, we recorded a $131 thousand gain from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market rates, inputs and assumptions partially offset by scheduled and voluntary prepayments. For the six months ended June 30, 2021, we recorded a $39 thousand gain from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market interest rates, inputs and assumptions partially offset by voluntary and scheduled prepayments. Additionally, during the six months ended June 30, 2022, we recorded $100 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales.
54
Real estate services fees, net. For the six months ended June 30, 2022, real estate services fees, net were $442 thousand as compared to $688 thousand in the comparable 2021 period. The real estate service fees decreased for the six months ended June 30, 2022 as compared to the same period in 2021, and will decline over time as a result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio. Additionally, as previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the purchaser.
Other revenues. For the six months ended June 30, 2022, other revenues were $959 thousand as compared to $320 thousand in the comparable 2021 period. The $639 thousand increase was primarily the result of an increase in the cash surrender value of the corporate-owned life insurance trusts during the first quarter of 2022, as a result of the application of prior year investment gains which get applied at the annual renewal date in the first quarter of each fiscal year.
Expenses
For the three months ended June 30, 2022 as compared to the three months ended June 30, 2021
For the Three Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Personnel expense | $ | 8,024 | $ | 11,964 | $ | (3,940) |
| (33) | % | |||
General, administrative and other |
| 5,323 |
| 5,882 |
| (559) |
| (10) | ||||
Business promotion |
| 1,319 |
| 1,770 |
| (451) |
| (25) | ||||
Total expenses | $ | 14,666 | $ | 19,616 | $ | (4,950) |
| (25) | % | |||
Total expenses decreased by $5.0 million, or 25%, to $14.7 million for the three months ended June 30, 2022, compared to $19.6 million for the comparable period in 2021. Personnel expense decreased $3.9 million to $8.0 million for the three months ended June 30, 2022 as compared to the same period in 2021. The decrease in personnel expense was primarily related to a reduction in variable compensation commensurate with reduced originations during the second quarter of 2022 as well as reductions in headcount to support reduced volume as compared to 2021. As a result, average headcount decreased 30% for the three months ended June 30, 2022 as compared to the same period in 2021. Although personnel expense decreased in the mortgage lending segment during the second quarter of 2022, it increased to 626 bps of fundings as compared to 196 bps for the comparable 2021 period, as a result of our pull back in originations.
General, administrative and other expenses decreased $559 thousand to $5.3 million for the three months ended June 30, 2022, as compared to $5.9 million for the comparable period in 2021. The $559 thousand decrease in general, administrative and other expenses was the result of a $363 thousand decrease in professional fees, data processing, and general administrative and other expense all related to a reduction in fundings during the period. Additionally, legal fees decreased $310 thousand associated with a decrease in litigation and related expenses. Partially offsetting the decline in general, administrative and other expenses was a $114 thousand increase in occupancy expense as we recognized right of use (ROU) asset impairment of $123 thousand related to the sublease of approximately 29,000 square feet of a floor within our corporate office.
55
Business promotion expense decreased $451 thousand to $1.3 million for the three months ended June 30, 2022 as compared to $1.8 million for the same period in the prior year. Business promotion previously remained relatively low as a result of the favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside of California and maintain our lead volume as competition increased. As a result of the recent dislocation within the NonQM market as a result of the significant increase in interest rates, in the second quarter of 2022, we reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment. Although we continue to source leads through digital campaigns, which allows for a more cost effective approach, the recent competitiveness among other lenders for NonQM production within the California market has driven up advertising costs.
For the six months ended June 30, 2022 compared to the six months ended June 30, 2021
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Personnel expense | $ | 19,945 | $ | 26,888 | $ | (6,943) |
| (26) | % | |||
General, administrative and other |
| 10,458 |
| 11,063 |
| (605) |
| (5) | ||||
Business promotion |
| 3,620 |
| 2,963 |
| 657 |
| 22 | ||||
Total expenses | $ | 34,023 | $ | 40,914 | $ | (6,891) |
| (17) | % | |||
Total expenses decreased by $6.9 million, or 17%, to $34.0 million for the six months ended June 30, 2022, compared to $40.9 million for the comparable period in 2021. Personnel expense decreased $6.9 to $19.9 million for the six months ended June 30, 2022 as compared to the same period in 2021. The decrease in personnel expense was primarily related to a reduction in variable compensation commensurate with reduced originations for the six months ended June 30, 2022 as well as a reduction in headcount to support reduced volume as compared to the same period in 2021. As a result, average headcount decreased 20% for the six months ended June 30, 2022 as compared to the same period in 2021.
General, administrative and other expenses decreased $605 thousand to $10.5 million for the six months ended June 30, 2022, as compared to $11.1 million for the same period in 2021. The $605 thousand decrease in general, administrative and other expenses was the result of a $577 thousand decrease in data processing, and general administrative and other expense all related to a reduction in fundings during the period. Additionally, legal fees decreased $382 thousand associated with a decrease in litigation and related expenses. Partially offsetting the decline in general, administrative and other expenses was a $159 thousand increase in CAM expense related to a true up of prior and current year maintenance for the corporate headquarters, $123 thousand increase within occupancy expense as we recognized right of use (ROU) asset impairment related to the sublease of approximately 29,000 square feet of a floor within our corporate office.
Business promotion expense increased $657 thousand to $3.6 million for the six months ended June 30, 2022 as compared to $3.0 million for the same period in the prior year. Business promotion previously remained low as a result of prior quarters’ more favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside of California and maintain our lead volume as competition increased. As a result of the recent dislocation within the NonQM market as a result of the significant increase in interest rates, starting in the second quarter of 2022, we reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment. Although we continue to source leads through digital campaigns, which allows for a more cost effective approach, the recent competitiveness among other lenders for NonQM production within the California market has driven up advertising costs.
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Net Interest (Expense) Income
We earn net interest income primarily from mortgage assets, which include securitized mortgage collateral (prior to the sale in March 2022) and loans held-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 (prior to the sale in March 2022) and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes and corporate-owned life insurance trusts. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities.
The following table summarizes average balance, interest and weighted average yield on interest-earning assets and interest-bearing liabilities, for the periods indicated.
For the Three Months Ended June 30, |
| ||||||||||||||||
2022 | 2021 |
| |||||||||||||||
| Average |
|
|
| Average |
|
|
| |||||||||
Balance | Interest | Yield | Balance | Interest | Yield |
| |||||||||||
ASSETS | |||||||||||||||||
Securitized mortgage collateral | $ | — | $ | — |
| — | % | $ | 1,948,484 | $ | 14,516 |
| 2.98 | % | |||
Mortgage loans held-for-sale |
| 61,702 |
| 863 |
| 5.59 |
| 146,127 |
| 1,188 |
| 3.25 | |||||
Other (1) |
| 65,031 |
| 80 |
| 0.49 |
| 49,884 |
| 3 |
| 0.02 | |||||
Total interest-earning assets | $ | 126,733 | $ | 943 |
| 2.98 | % | $ | 2,144,495 | $ | 15,707 |
| 2.93 | % | |||
LIABILITIES | |||||||||||||||||
Securitized mortgage borrowings | $ | — | $ | — |
| — | $ | 1,937,717 | $ | 12,439 |
| 2.57 | % | ||||
Warehouse borrowings |
| 55,809 |
| 680 |
| 4.87 |
| 140,298 |
| 1,206 |
| 3.44 | |||||
Long-term debt |
| 41,719 |
| 1,103 |
| 10.58 |
| 45,131 |
| 1,040 |
| 9.22 | |||||
Convertible notes |
| 17,088 |
| 300 |
| 7.02 |
| 20,000 |
| 350 |
| 7.00 | |||||
Other (2) |
| 13,183 |
| 120 |
| 3.64 |
| 12,719 |
| 114 |
| 3.59 | |||||
Total interest-bearing liabilities | $ | 127,799 | $ | 2,203 |
| 6.90 | % | $ | 2,155,865 | $ | 15,149 |
| 2.81 | % | |||
Net interest spread (3) | $ | (1,260) |
| (3.92) | % | $ | 558 |
| 0.12 | % | |||||||
Net interest margin (4) |
| (3.98) | % |
| 0.10 | % | |||||||||||
| (1) | Included in other assets is cash and cash equivalents. |
| (2) | Included in other liabilities is the corporate owned life insurance trust liability. |
| (3) | Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets. |
| (4) | Net interest margin is calculated by dividing net interest spread by total average interest-earning assets. |
Net interest spread income decreased $1.8 million for the three months ended June 30, 2022 primarily attributable to a decrease in the net interest spread income on the securitized mortgage collateral and securitized mortgage borrowings as a result of aforementioned sale during the first quarter of 2022, an increase in interest expense on the long-term debt and an increase in interest expense on the corporate-owned life insurance trusts (within other liabilities). Offsetting the decrease in net interest spread income was an increase in the net interest spread income between loans held-for-sale and their related warehouse borrowings (a positive spread of 72 bps for the three months ended June 30, 2022 as compared to a negative spread of 19 bps for the same period in the prior year), a reduction in interest expense on the convertible notes as well as an increase in interest income on cash deposits. As a result, the net interest margin decreased to (3.98)% for the three months ended June 30, 2022 from 0.10% for the three months ended June 30, 2021.
Due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022, we deconsolidated the securitized mortgage trust assets and liabilities as of the sale date as we were no longer the primary beneficiary of the residual interests in the securitization trusts. As a result, we no longer recognize interest income or expense related to the legacy securitization portfolio. The sale and transfer of the legacy securitization portfolio resulted in a $2.0 million reduction in net interest income during the second quarter of 2022 as compared to the second quarter of 2021. During the three months ended June 30, 2022, the yield on interest-earning assets increased to 2.98% from 2.93% in the comparable 2021 period. The yield on interest-bearing liabilities increased to 6.90% for the three months ended June 30, 2022 from 2.81% for the comparable 2021 period. In connection with the fair value accounting for securitized
57
mortgage collateral and borrowings (in prior periods) and long-term debt, interest income and interest expense are recognized using effective yields based on estimated fair values for these instruments.
For the Six Months Ended June 30, | |||||||||||||||||
2022 | 2021 |
| |||||||||||||||
| Average |
|
|
| Average |
|
|
| |||||||||
Balance | Interest | Yield | Balance | Interest | Yield |
| |||||||||||
ASSETS | |||||||||||||||||
Securitized mortgage collateral | $ | 686,343 | $ | 10,772 |
| 3.14 | % | $ | 1,999,048 | $ | 29,700 |
| 2.97 | % | |||
Mortgage loans held-for-sale |
| 142,989 |
| 3,192 |
| 4.46 |
| 168,589 |
| 2,526 |
| 3.00 | |||||
Other (1) |
| 51,273 |
| 84 |
| 0.33 |
| 51,983 |
| 5 |
| 0.02 | |||||
Total interest-earning assets | $ | 880,605 | $ | 14,048 |
| 3.19 | % | $ | 2,219,620 | $ | 32,231 |
| 2.90 | % | |||
LIABILITIES | |||||||||||||||||
Securitized mortgage borrowings | $ | 676,011 | $ | 9,575 |
| 2.83 | % | $ | 1,987,330 | $ | 25,394 |
| 2.56 | % | |||
Warehouse borrowings |
| 135,151 |
| 2,624 |
| 3.88 |
| 162,638 |
| 2,729 |
| 3.36 | |||||
Long-term debt |
| 43,325 |
| 2,108 |
| 9.73 |
| 44,892 |
| 1,965 |
| 8.75 | |||||
Convertible notes |
| 18,536 |
| 650 |
| 7.01 |
| 20,000 |
| 700 |
| 7.00 | |||||
Other (2) |
| 13,125 |
| 235 |
| 3.58 |
| 12,663 |
| 225 |
| 3.55 | |||||
Total interest-bearing liabilities | $ | 886,148 | $ | 15,192 |
| 3.43 | % | $ | 2,227,523 | $ | 31,013 |
| 2.78 | % | |||
Net interest spread (3) | $ | (1,144) |
| (0.24) | % | $ | 1,218 |
| 0.12 | % | |||||||
Net interest margin (4) |
| (0.26) | % |
| 0.11 | % | |||||||||||
| (1) | Included in other assets is cash and cash equivalents. |
| (2) | Included in other liabilities is the corporate owned life insurance trust liability. |
| (3) | Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets. |
| (4) | Net interest margin is calculated by dividing net interest spread by total average interest-earning assets. |
Net interest spread income decreased $2.4 million for the six months ended June 30, 2022 primarily attributable to a decrease in the net interest spread income on the securitized mortgage collateral and securitized mortgage borrowings, an increase in interest expense on the long-term debt and an increase in interest expense on the corporate-owned life insurance trusts (within other liabilities). Offsetting the decrease in net interest spread income was an increase in the net interest spread income between loans held-for-sale and their related warehouse borrowings (a positive spread of 58 bps for the six months ended June 30, 2022 as compared to a negative spread of 36 bps for the same period in the prior year), a reduction in interest expense on the convertible notes as well as an increase in interest income on cash deposits. As a result, the net interest margin decreased to (0.26)% for the six months ended June 30, 2022 from 0.11% for the six months ended June 30, 2021.
Due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022, we deconsolidated the securitized mortgage trust assets and liabilities as of the sale date as we were no longer the primary beneficiary of the residual interests in the securitization trusts. As a result, we will no longer recognize interest income or expense related to the legacy securitization portfolio. The sale and transfer of the legacy securitization portfolio resulted in a $3.1 million reduction in net interest income for the six months ended 2022 as compared to the same period in 2021. During the six months ended June 30, 2022, the yield on interest-earning assets increased to 3.19% from 2.90% in the comparable 2021 period. The yield on interest-bearing liabilities increased to 3.43% for the six months ended June 30, 2022 from 2.78% for the comparable 2021 period. In connection with the fair value accounting for securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense are recognized using effective yields based on estimated fair values for these instruments.
Change in the fair value of long-term debt.
Long-term debt (consisting of junior subordinated notes) is measured based upon an internal analysis, which considers our own credit risk and discounted cash flow analyses. Improvements in our financial results and financial condition in the future could result in additional increases in the estimated fair value of the long-term debt, while deterioration in financial results and financial condition could result in a decrease in the estimated fair value of the long-term debt.
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During the three months ended June 30, 2022, the fair value of long-term debt decreased by $11.6 million to $35.9 million from $47.5 million at March 31, 2022. The decrease in estimated fair value was the result of a $10.0 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company’s risk profile, a $2.0 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve as compared to the first quarter of 2022, partially offset by a $357 thousand increase due to accretion. During the six months ended June 30, 2022, the fair value of long-term debt decreased by $10.6 million to $35.9 million from $46.5 million at December 31, 2021. The decrease in estimated fair value was the result of a $7.8 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company’s risk profile, a $3.6 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve during 2022, partially offset by a $743 thousand increase due to accretion.
During the three months ended June 30, 2021, the fair value of long-term debt decreased by $461 thousand to $44.9 million from $45.4 million at March 31, 2021. The decrease in estimated fair value was the result of a $1.4 million change in the market specific credit risk as a result of a decrease in the forward LIBOR curve as compared to the first quarter of 2021, partially offset by a $538 thousand change in the instrument specific credit risk and a $418 thousand increase due to accretion. During the six months ended June 30, 2021, the fair value of long-term debt increased by $487 thousand to $44.9 million from $44.4 million at December 31, 2020. The increase in estimated fair value was the result of a $2.2 million change in the instrument specific credit risk and a $724 thousand increase due to accretion, partially offset by a $2.4 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve as compared to the fourth quarter of 2020.
Change in fair value of net trust assets, including trust REO gains (losses)
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 | ||||||
Change in fair value of net trust assets, excluding REO | $ | — | $ | (1,828) | $ | 9,248 |
| $ | (5,373) | |||
Gains (losses) from REO |
| — |
| (313) |
| — |
| 1,559 | ||||
Change in fair value of net trust assets, including trust REO gains (losses) | $ | — | $ | (2,141) | $ | 9,248 | $ | (3,814) | ||||
The decrease in change in fair value of net trust assets, including trust REO (residual interests in securitizations) for the three months ended June 30, 2022 was due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022.
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $9.2 million for the six months ended June 30, 2022. As previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entails the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, in March 2022, we recorded a $9.2 million increase in fair value, net of $277 thousand in transaction costs related to the transfer of the legacy securitization portfolio.
The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $2.1 million for the three months ended June 30, 2021. The change in fair value of net trust assets, excluding REO was due to $1.8 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of cash received in excess of projections during the quarter and an increase in prepayments on certain trusts which resulted in a reduction in future residual cashflows, partially offset by a decrease in forward LIBOR. Additionally, the NRV of REO decreased $313 thousand during the period attributed to higher expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.
The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $3.8 million for the six months ended June 30, 2021. The change in fair value of net trust assets, excluding REO was due to $5.4 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of cash received during the period and an increase in forward LIBOR offset by a decrease in loss assumptions for certain trusts. The NRV of REO increased $1.6 million during the period which partially offset the change in fair value
59
of the net trust assets, excluding REO. The increase in NRV of REO was attributed to lower expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.
Income Taxes
For the three and six months ended June 30, 2022, we recorded income tax expense of approximately $16 thousand and $39 thousand, respectively, which was the result of state income taxes from states where the Company does not have net operating loss (NOL) carryforwards or state minimum taxes. For the three and six months ended June 30, 2021, the Company recorded income tax expense of approximately $62 thousand and $43 thousand, respectively, which was the result of applying 1) the calculated annual effective tax rate (ETR) against the year to date net loss, and 2) the discrete method in jurisdictions where the Company meets an exception to using ETR. The net deferred tax assets (DTA) were fully reserved for at June 30, 2022, consistent with December 31, 2021.
As of December 31, 2021, we had estimated NOL carryforwards of approximately $623.5 million. Federal NOL carryforwards begin to expire in 2027. Included in the estimated NOL carryforward is $65.9 million of NOLs with an indefinite carryover period. As of December 31, 2021, we had estimated California NOL carryforwards of approximately $435.2 million, which begin to expire in 2028. We may not be able to realize the maximum benefit due to the nature and tax entities that hold the NOL.
Results of Operations by Business Segment
We have three primary operating segments: Mortgage Lending, Long-Term Mortgage Portfolio and Real Estate Services. 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 June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Gain on sale of loans, net | $ | 179 | $ | 10,693 | $ | (10,514) |
| (98) | % | |||
Servicing income (expense), net | 7 | (150) | 157 | 105 | ||||||||
Gain (loss) on mortgage servicing rights, net | 45 | (37) | 82 | 222 | ||||||||
Total revenues |
| 231 |
| 10,506 |
| (10,275) |
| (98) | ||||
Other income (expense) |
| 262 |
| (16) |
| 278 |
| 1738 | ||||
Personnel expense |
| (6,552) |
| (10,612) |
| 4,060 |
| 38 | ||||
Business promotion |
| (1,319) |
| (1,766) |
| 447 |
| 25 | ||||
General, administrative and other |
| (1,507) |
| (2,910) |
| 1,403 |
| 48 | ||||
Loss before income taxes | $ | (8,885) | $ | (4,798) | $ | (4,087) |
| 85 | % | |||
For the three months ended June 30, 2022, gain on sale of loans, net was a gain of $179 thousand compared to a gain of $10.7 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a $15.3 million decrease in gain on sale of loans, a $1.3 million increase in provision for repurchases, a $488 thousand decrease in mark-to-market gains on LHFS and a $92 thousand decrease in premiums from servicing retained loan sales. Partially offsetting the decrease in gain on sale of loans, net was a $3.8 million increase in realized and unrealized net losses on derivative financial instruments, a $2.8 million decrease in direct origination expenses.
The sharp and unexpected decline in gain on sale reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and a significant increase in mortgage interest rates resulting in customer home purchase affordability issues. As previously discussed, the increase in interest rates which began in the fourth quarter of 2021,
60
caused a significant increase in credit spreads which accelerated into the second quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the second quarter of 2022. For the three months ended June 30, 2022, we originated and sold $128.1 million and $248.2 million of mortgage loans, respectively, as compared to $611.5 million and $667.8 million of loans originated and sold, respectively, during the same period in 2021. During the three months ended June 30, 2022, margins were 14 bps as compared to 175 bps during the same period in 2021.
For the three months ended June 30, 2022, servicing fees (expenses), net were fees of $7 thousand compared to an expense of $150 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the second quarter of 2021, as a result of sale of servicing retained loan sales of $36.9 million since the end of the second quarter of 2021. As a result, the servicing portfolio average balance increased 58% to $72.1 million for the three months ended June 30, 2022 as compared to an average balance of $45.7 million for the comparable period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize an immaterial amount of servicing fees, net or a servicing expense, net related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio as of June 30, 2022. During the three months ended June 30, 2022, we had no servicing retained loan sales.
For the three months ended June 30, 2022, gain (loss) on MSRs, net was a net gain of $45 thousand compared to a net loss of $37 thousand in the comparable 2021 period. For the three months ended June 30, 2022, we recorded a $6 thousand loss from change in fair value of MSRs primarily due to changes in fair value associated with scheduled and voluntary prepayments partially offset by changes in market rates, inputs and assumptions. For the three months ended June 30, 2021, we recorded a $37 thousand loss from a change in fair value of MSRs primarily due to changes in scheduled and voluntary prepayments. Additionally, during the three months ended June 30, 2022, we recorded $51 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales.
For the three months ended June 30, 2022, other income (expense) increased to income of $262 thousand as compared to expense of $16 thousand in the comparable 2021 period. The $278 thousand increase in other income was primarily due to a $201 thousand increase net interest spread between loans held-for-sale and their related warehouse borrowings during the three months ended June 30, 2022 as compared to the comparable period in 2021. As a result of the increase in interest rates which began in the fourth quarter of 2021, as well as our efforts to increase the weighted average coupon on our production, we have positive net interest carry on our originations as the note rates on the underlying mortgage loans financed in most instances is greater than the financing rates on our warehouse lines of credit financing the originations. Additionally, for the three months ended June 30, 2022, interest income on cash deposits increased $77 thousand as compared to the same period in the prior year, due to the recent increases in interest rates.
Personnel expense decreased $4.1 million to $6.6 million for the three months ended June 30, 2022 as compared to the same period in 2021. The decrease in personnel expense is primarily related to a reduction in variable compensation commensurate with reduced originations during the second quarter of 2022 as well as a reduction in headcount to support reduced volume as compared to 2021. As a result, average headcount decreased 38% in the mortgage lending segment for the three months ended June 30, 2022 as compared to the same period in 2021. Although personnel expense decreased in the mortgage lending segment during the second quarter of 2022, it increased to 511 bps of fundings as compared to 174 bps for the comparable 2021 period, as a result of our pull back in originations.
61
Business promotion expense decreased $447 thousand to $1.3 million for the three months ended June 30, 2022 as compared to $1.8 million for the same period in the prior year. Business promotion previously remained low as a result of the favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside of California and maintain our lead volume as competition increased. As a result of the recent dislocation within the NonQM market as a result of the significant increase in interest rates, in the second quarter of 2022, we reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment. Although we continue to source leads through digital campaigns, which allows for a more cost effective approach, the recent competitiveness among other lenders for NonQM production within the California market has driven up advertising costs.
General, administrative and other expenses decreased $1.4 million to $1.5 million for the three months ended June 30, 2022, as compared to $2.9 million for the same period in 2021. During the three months ended June 30, 2022, general, administrative and other expenses decreased by $1.4 million primarily due to a $1.0 million decrease in legal fees associated with a decrease in litigation and related expenses. Additionally, general, administrative and other expenses decreased $397 thousand due to a decrease in occupancy, professional fees, data processing, and other expense all related to a reduction in fundings during the period.
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Gain on sale of loans, net | $ | 6,134 | $ | 30,824 | $ | (24,690) |
| (80) | % | |||
Servicing expenses, net |
| (5) |
| (269) |
| 264 |
| 98 | ||||
Gain on mortgage servicing rights, net |
| 155 |
| 1 |
| 154 |
| 15400 | ||||
Total revenues |
| 6,284 |
| 30,556 |
| (24,272) |
| (79) | ||||
Other income (expense) |
| 652 |
| (175) |
| 827 |
| 473 | ||||
Personnel expense |
| (16,763) |
| (23,662) |
| 6,899 |
| 29 | ||||
Business promotion |
| (3,617) |
| (2,957) |
| (660) |
| (22) | ||||
General, administrative and other |
| (3,499) |
| (4,898) |
| 1,399 |
| 29 | ||||
Loss before income taxes | $ | (16,943) | $ | (1,136) | $ | (15,807) |
| 1,391 | % | |||
For the six months ended June 30, 2022, gain on sale of loans, net was a gain of $6.1 million compared to a gain of $30.8 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a $22.5 million decrease in gain on sale of loans, a $6.9 million increase in mark-to-market losses on LHFS, a $2.6 million increase in provision for repurchases and a $167 thousand decrease in premiums from servicing retained loan sales. Partially offsetting the decrease in gain on sale of loans, net was a $3.9 million decrease in direct origination expenses and a $3.6 million increase in realized and unrealized net losses on derivative financial instruments.
As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which accelerated into the second quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the first six months of 2022. For the six months ended June 30, 2022, we originated and sold $610.2 million and $867.7 million of mortgage loans, respectively, as compared to $1.5 billion and $1.5 billion of loans originated and sold, respectively, during the same period in 2021. During the six months ended June 30, 2022, margins were 101 bps as compared to 211 bps during the same period in 2021.
For the six months ended June 30, 2022, servicing expenses, net were $5 thousand compared to $269 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the same period in 2021, as a result of sale of servicing retained loan sales of $36.9 million since the end of the second quarter of 2021. As a result, the servicing
62
portfolio average balance increased 76% to $73.7 million for the six months ended June 30, 2022 as compared to an average balance of $41.8 million for the comparable period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize servicing expense related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio as of June 30, 2022. During the six months ended June 30, 2022, we had $4.5 million in servicing retained loan sales.
For the six months ended June 30, 2022, gain on MSRs, net was a net gain of $155 thousand compared to a net gain of $1 thousand in the comparable 2021 period. For the six months ended June 30, 2022, we recorded a $131 thousand gain from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market interest rates, inputs and assumptions partially offset by scheduled and voluntary prepayments. For the six months ended June 30, 2021, we recorded a $39 thousand gain from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market rates, inputs and assumptions partially offset by voluntary and scheduled prepayments. Additionally, during the six months ended June 30, 2022, we recorded $100 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales.
For the six months ended June 30, 2022, other income (expense) increased to income of $652 thousand as compared to expense of $175 thousand in the comparable 2021 period. The $827 thousand increase in other income was primarily due to a $771 thousand increase net interest spread between loans held-for-sale and their related warehouse borrowings during the six months ended June 30, 2022 as compared to the comparable period in 2021. As a result of the increase in interest rates which began in the fourth quarter of 2021, as well as our efforts to increase the weighted average coupon on our production, we have positive net interest carry on our originations as the note rates on the underlying mortgage loans financed in most instances is greater than the financing rates on our warehouse lines of credit financing the originations. Additionally, for the six months ended June 30, 2022, interest income on cash deposits increased $79 thousand as compared to the same period in the prior year, due to the recent increases in interest rates.
Personnel expense decreased $6.9 million to $16.8 million for the six months ended June 30, 2022 as compared to the same period in 2021. The decrease in personnel expense is primarily related to a reduction in variable compensation commensurate with reduced originations during the first six months of 2022 as well as a reduction in headcount to support reduced origination volume as compared to 2021. As a result, average headcount decreased 25% in the mortgage lending segment for the six months ended June 30, 2022 as compared to the same period in 2021. Although personnel expense decreased in the mortgage lending segment during the first months of 2022, it increased to 275 bps of fundings as compared to 162 bps for the comparable 2021 period.
Business promotion expense increased $660 thousand to $3.6 million for the six months ended June 30, 2022 as compared to $3.0 million for the same period in the prior year. Business promotion previously remained low as a result of prior quarters’ more favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside of California and maintain our lead volume as competition increased. As a result of the recent dislocation within the NonQM market as a result of the significant increase in interest rates, starting in the second quarter of 2022, we reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment. Although we continue to source leads through digital campaigns, which allows for a more cost effective approach, the recent competitiveness among other lenders for NonQM production within the California market has driven up advertising costs.
General, administrative and other expenses decreased $1.4 million to $3.5 million for the six months ended June 30, 2022, as compared to $4.9 million for the same period in 2021. During the six months ended June 30, 2022, general, administrative and other expenses decreased by $1.4 million primarily due to a $978 thousand decrease in legal fees associated with a decrease in litigation and related expenses. Additionally, general, administrative and other expenses decreased $743 thousand due to a decrease in occupancy, data processing, and other expense all related to a reduction in loan fundings during the period. Partially offsetting the reduction in general, administrative and other expenses was a $323 thousand increase in professional fees associated with preparation and planning for a loan origination system consolidation and implementation during the first quarter of 2022.
63
Long-Term Mortgage Portfolio
As previously noted above, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights relating to 37 securitizations that closed between 2000 and 2007, which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result of the sale, in accordance with FASB ASC 810-10-25, we deconsolidated the securitized mortgage trust assets totaling approximately $1.6 billion and trust liabilities of $1.6 billion as of the sale date as the Company was no longer the primary beneficiary of the consolidated securitization trusts. We will remain as the master servicer with respect to all of the securitizations until such time that the securitization trusts are collapsed or payoff.
For the Three Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Other revenue | $ | 28 | $ | 42 |
| $ | (14) |
| (33) | % | ||
Personnel expense | (20) | (27) |
| 7 |
| 26 | ||||||
General, administrative and other |
| (109) |
| (108) |
| (1) |
| (1) | ||||
Total expenses |
| (129) |
| (135) |
| 6 |
| 4 | ||||
Net interest (expense) income |
| (1,103) |
| 1,038 |
| (2,141) |
| (206) | ||||
Change in fair value of long-term debt |
| 1,980 |
| 1,417 |
| 563 |
| 40 | ||||
Change in fair value of net trust assets, including trust REO gains (losses) |
| — |
| (2,141) |
| 2,141 |
| 100 | ||||
Total other income |
| 877 |
| 314 |
| 563 |
| 179 | ||||
Earnings before income taxes | $ | 776 | $ | 221 | $ | 555 |
| 251 | % | |||
For the three months ended June 30, 2022, net interest (expense) income was an expense of $1.1 million as compared to income of $1.0 million for the same period in 2021. Net interest income decreased $2.1 million for the three months ended June 30, 2022 primarily attributable to a $2.1 million decrease as a result of the sale of the legacy portfolio in March 2022. Additionally, interest expense on the long-term debt increased $63 thousand as a result of an increase in 3-month LIBOR as compared to the first quarter of 2022.
During the three months ended June 30, 2022, the fair value of long-term debt decreased by $11.6 million to $35.9 million from $47.5 million at March 31, 2022. The decrease in estimated fair value was the result of a $10.0 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company’s risk profile, a $2.0 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve as compared to the first quarter of 2022, partially offset by a $357 thousand increase due to accretion.
The decrease in change in fair value of net trust assets, including trust REO (residual interests in securitizations) for the three months ended June 30, 2022 was due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022.
64
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Other revenue | $ | 43 | $ | 69 |
| $ | (26) |
| (38) | % | ||
Personnel expense | (50) | (55) |
| 5 |
| 9 | ||||||
General, administrative and other |
| (91) |
| (201) |
| 110 |
| 55 | ||||
Total expenses |
| (141) |
| (256) |
| 115 |
| 45 | ||||
Net interest (expense) income |
| (911) |
| 2,341 |
| (3,252) |
| (139) | ||||
Change in fair value of long-term debt |
| 3,622 |
| 2,442 |
| 1,180 |
| 48 | ||||
Change in fair value of net trust assets, including trust REO gains (losses) |
| 9,248 |
| (3,814) |
| 13,062 |
| 342 | ||||
Total other income |
| 11,959 |
| 969 |
| 10,990 |
| 1134 | ||||
Earnings before income taxes | $ | 11,861 | $ | 782 | $ | 11,079 |
| 1417 | % | |||
For the six months ended June 30, 2022, net interest (expense) income was an expense of $911 thousand as compared to income of $2.3 million for the same period in 2021. Net interest income decreased $3.3 million for the six months ended June 30, 2022 primarily attributable to a $3.1 million decrease as a result of the sale of the legacy portfolio in March 2022 as well as a reduction in net interest spread on the long-term mortgage portfolio prior to the sale. Additionally, interest expense on the long-term debt increased $143 thousand as a result of an increase in 3-month LIBOR as well as an increase in accretion.
During the six months ended June 30, 2022, the fair value of long-term debt decreased by $10.6 million to $35.9 million from $46.5 million at December 31, 2021. The decrease in estimated fair value was the result of a $7.8 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company’s risk profile, a $3.6 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve during 2022, partially offset by a $743 thousand increase due to accretion.
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $9.2 million for the six months ended June 30, 2022. As previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, in March 2022, we recorded a $9.2 million increase in fair value, net of $277 thousand in transaction costs related to the transfer of the legacy securitization portfolio.
Real Estate Services
For the Three Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Real estate services fees, net | $ | 257 | $ | 478 | $ | (221) |
| (46) | % | |||
Personnel expense |
| (304) |
| (292) |
| (12) |
| (4) | ||||
General, administrative and other |
| (55) |
| (64) |
| 9 |
| 14 | ||||
(Loss) earnings before income taxes | $ | (102) | $ | 122 | $ | (224) |
| (184) | % | |||
For the three months ended June 30, 2022, real estate services fees, net were $257 thousand compared to $478 thousand in the comparable 2021 period. The $221 thousand decrease in real estate services fees, net was primarily the result of a $138 thousand decrease in loss mitigation fees and an $83 thousand decrease in real estate service fees. Additionally, as previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within the long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the purchaser.
65
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Real estate services fees, net | $ | 442 | $ | 688 | $ | (246) |
| (36) | % | |||
Personnel expense |
| (609) |
| (597) |
| (12) |
| (2) | ||||
General, administrative and other |
| (109) |
| (128) |
| 19 |
| 15 | ||||
Loss before income taxes | $ | (276) | $ | (37) | $ | (239) |
| (646) | % | |||
For the six months ended June 30, 2022, real estate services fees, net were $442 thousand compared to $688 thousand in the comparable 2021 period. The $246 thousand decrease in real estate services fees, net was primarily the result of a $139 thousand decrease in loss mitigation fees and a $107 thousand decrease in real estate service fees. Additionally, as previously noted, in March 2022, we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within the long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the purchaser.
Corporate
The corporate segment includes all compensation applicable to the corporate services groups, public company costs 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 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 June 30, |
| |||||||||||
|
| $ |
| % |
| |||||||
2022 | 2021 | Change | Change |
| ||||||||
Interest expense | $ | (418) | $ | (464) |
| $ | 46 |
| 10 | % | ||
Other expenses |
| (4,822) |
| (3,883) |
| (939) |
| (24) | ||||
Loss before income taxes | $ | (5,240) | $ | (4,347) | $ | (893) |
| (21) | % | |||
For the three months ended June 30, 2022, interest expense decreased to $418 thousand as compared to $464 thousand in the comparable 2021 period. The decrease was primarily due to a $50 thousand decrease in interest expense attributable to the $5.0 million pay down of the convertible notes in May 2022, partially offset by a $4 thousand increase in interest expense associated with the premium financing associated with the corporate-owned life insurance trusts liability.
For the three months ended June 30, 2022, other expenses increased to $4.8 million as compared to $3.9 million for the comparable 2021 period. During the three months ended June 30, 2022, the primary increase in other expense was a $595 thousand increase in legal and professional fees associated with the aforementioned preferred equity exchange offer, a $256 thousand increase in occupancy expense primarily attributable to ROU asset impairment of $123 thousand related to the sublease of approximately 29,000 square feet of a floor within our corporate office and a $143 thousand increase in CAM expense related to a true up of prior and current year maintenance for the building.
66
For the Six Months Ended June 30, |
| |||||||||||
|
|
| $ |
| % |
| ||||||
2022 | 2021 | Change | Change |
| ||||||||
Interest expense | $ | (882) | $ | (924) |
| $ | 42 |
| 5 | % | ||
Other expenses |
| (8,372) |
| (8,189) |
| (183) |
| (2) | ||||
Loss before income taxes | $ | (9,254) | $ | (9,113) | $ | (141) |
| (2) | % | |||
For the six months ended June 30, 2022, interest expense decreased to $882 thousand as compared to $924 thousand in the comparable 2021 period. The decrease was primarily due to a $50 thousand decrease in interest expense attributable to the $5.0 million pay down of the convertible notes in May 2022, partially offset by an $8 thousand increase in interest expense associated with the premium financing associated with the corporate-owned life insurance trusts liability.
For the six months ended June 30, 2022, other expenses increased to $8.4 million as compared to $8.2 million for the comparable 2021 period. During the six months ended June 30, 2022, the primary increase in other expense was a $474 thousand increase in legal and professional fees associated with the aforementioned preferred equity exchange offer, a $367 thousand increase in occupancy expense primarily attributable to ROU asset impairment of $123 thousand related to the sublease of approximately 29,000 square feet of a floor within our corporate office and a $142 thousand increase in CAM expense related to a true up of prior and current year maintenance for the building. Partially offsetting the increase in other expenses was a $662 thousand increase in the cash surrender value of the corporate-owned life insurance trusts for the six months ended June 30, 2022, as a result of the application of prior year investment gains which get applied at the annual renewal date in the first quarter of each fiscal year, as well as a $117 decrease in general, administrative and other expenses.
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 at a reasonable assurance level to ensure that information required to be disclosed in reports filed or submitted under the Securities 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 chief executive officer and interim principal financial officer, 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 interim principal financial officer concluded that, as of June 30, 2022, 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 June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
67
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Legal Proceedings
Information with respect to this item may be found in Note 11 – Commitments and Contingencies of the “Notes to Unaudited Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 1A: RISK FACTORS
If we are unable to consummate the exchange offers and the related special redemption of our outstanding preferred stock, we may need to consider other restructuring alternatives available to us at that time, which could materially adversely affect our business and financial position.
As previously disclosed, we are currently contemplating exchange offers (the Exchange Offers) and special redemption (Special Redemptions) of our outstanding Series B Preferred Stock and Series C Preferred Stock (collectively, the Preferred Stock) for cash or shares of a new series of preferred stock, shares of common stock, and in the case of our Series C Preferred Stock, warrants to purchase common stock. We believe that there could be significant adverse consequences to the Company if the contemplated Exchange Offers and the related Special Redemptions of our Series B Preferred Stock and Series C Preferred Stock are not successfully completed. If the required approvals from holders of both the Series B Preferred Stock and Series C Preferred Stock, as well as the Common Stock, are not received, and/or we are not able to otherwise complete the Exchange Offers and the related Special Redemptions, then we may not be able to meet our financial or business objectives. This could result in a material adverse effect on the Company. In light of the continuing turmoil in the mortgage market and rising interest rates, our ability to continue our operations is dependent upon our ability to raise capital, successfully implement our strategic initiatives and engage in operations that contribute sufficient additional cash flow to enable us to meet our current and future expenses. Our future financial performance and success are dependent in large part upon our ability to implement our contemplated strategies successfully. Our ability to raise future capital may be dependent on third parties who, in the past, have either been hesitant to lend or invest in the Company due to the capital structure of the Company, including the Series B Preferred Stock and Series C Preferred Stock, or have offered terms which our Board of Directors has determined are not in our best interests. To the extent the Exchange Offers and the related Special Redemptions are not successful in eliminating our outstanding Series B Preferred Stock and Series C Preferred Stock, we may be unable to raise the additional capital required to permit us to implement our strategic initiatives and continue our operations as planned, thereby requiring us to further reduce our operating costs and expenses so that our income can cover those costs and expenses. This could result in a material adverse effect on the Company. If we are not able to complete the Exchange Offers and the related Special Redemptions and improve our near-term liquidity, we also will need to consider other restructuring alternatives available to us at that time. Those alternatives may include, but are not limited to, (i) the transfer of certain of our assets to our lenders to fulfill our obligations, (ii) the sale of profitable assets or of the Company, (iii) a distribution or spin-off of profitable assets, (iv) liquidation or distribution of our assets, (v) alternative offers to exchange our outstanding securities and debt obligations, (vi) the incurrence of additional debt, (vii) obtaining additional equity capital on terms that may be onerous or highly dilutive and/or (viii) joint ventures.
In addition, the holders of our outstanding $15 million in Convertible Debt have extended the maturity date of the Convertible Debt until May 9, 2025 (with three principal payments of $5 million on each of May 9, 2023, May 9, 2024 and May 9, 2025), conditioned on our completing the Exchange Offers and providing notice of redemption of the remaining Preferred Stock by October 31, 2022. If we do not complete the Exchange Offers and provide such notice, the Convertible Debt will be due on November 9, 2022, which also could have a material adverse effect on our business and financial position.
If we do not continue to satisfy the NYSE American continued listing requirements, our Common Stock could be delisted from the NYSE American.
The listing of our Common Stock on the NYSE American is contingent on our compliance with the NYSE American’s conditions for continued listing, including requirements relating to maintaining minimum stockholders’
68
equity. We cannot assure you that we will be able to meet those listing conditions and anticipate receiving a notice of noncompliance from the NYSE American following the reporting of our financial results for the quarter ended June 30, 2022 which will require us to timely submit an acceptable compliance plan with the NYSE American in order to maintain the continued listing of our Common Stock. If the NYSE American delists our Common Stock from trading on its exchange due to our failure to meet the NYSE American’s listing conditions, we and our security holders could face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; |
| ● | a reduced level of trading activity in the secondary trading market for our securities; |
| ● | a limited amount of analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Information with respect to this item and the Company's Series B Preferred Stock may be found in Note 12--Equity and Share Based Payments of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
See also, Part II, Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources.
ITEM 4: MINE SAFETY DISCLOSURES
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
(a) |
| Exhibits: |
3.1 | ||
3.1(a) | ||
3.1(b) | ||
3.1(c) | ||
3.1(d) | ||
3.1(e) |
69
3.1(f) | ||
3.1(g) | ||
3.1(h) | ||
3.1(i) | ||
3.1(j) | ||
3.1(k) | ||
3.1(l) | ||
3.1(m) | ||
10.1 | ||
10.2 | ||
10.3 | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | ||
32.1* | ||
101 | The following materials from Impac Mortgage Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline eXtensible Business Reporting Language (XBRL): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations and Comprehensive earnings (loss), (3) the Condensed Consolidated Statements of Cash Flows, and (4) Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* 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/ GEORGE MANGIARACINA | |
George Mangiaracina | |
Chief Executive Officer | |
August 12, 2022 | |
/s/ JON GLOECKNER | |
Jon Gloeckner | |
SVP, Treasury Financial Reporting | |
(Interim Principal Financial Officer and Principal Accounting Officer) | |
August 12, 2022 | |
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