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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K





Maryland(State or other jurisdiction of
incorporation or organization)

33-0675505(I.R.S. Employer
Identification No.)


19500 Jamboree Road, Irvine, California 92612(Address of principal executive offices) (949) 475-3600(Registrant's telephone
number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $0.01 par value

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o

Smaller reporting company o


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

As of June 30, 2008, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $56.6 million, based on
the closing sales price of common stock on the New York Stock Exchange on that date. For purposes of the calculation only, all directors and executive officers of the registrant have been deemed
affiliates. There were 7,618,146 shares of common stock outstanding as of March 6, 2009.

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC.2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS



PART IITEM 1.

BUSINESS

1Forward-Looking Statements

2Available Information

2Market Conditions

3Continuing Operations

4Discontinued Operations

7Regulation

7Competition

7Employees

8Revisions in Policies and Strategies

8ITEM 1A.

RISK FACTORS

8ITEM 1B.

UNRESOLVED STAFF COMMENTS

19ITEM 2.

PROPERTIES

19ITEM 3.

LEGAL PROCEEDINGS

20ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

21PART IIITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND PURCHASES OF EQUITY SECURITIES

22ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

23ITEM 7.

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

25Selected Financial Results for 2008

25Market Conditions

25Status of Operations

25Critical Accounting Policies

29Taxable Income

34Financial Condition and Results of Operations

35Liquidity and Capital Resources

50Off Balance Sheet Arrangements

54Contractual Obligations

54ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

55General Overview

55Changes in Interest Rates

55


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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC.2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PART IIITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

58ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

58ITEM 9A.

CONTROLS AND PROCEDURES

59ITEM 9B.

OTHER INFORMATION

62PART IIIITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE

62ITEM 11.

EXECUTIVE COMPENSATION

62ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

62ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE AND RELATED STOCKHOLDER
MATTERS

62ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

62PART IVITEM 15.

EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES

62SIGNATURES

63


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PART I

ITEM 1. BUSINESS

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Maryland corporation incorporated in August 1995 and has the following
subsidiaries: IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets
Corp. (ISAC), Impac Commercial Capital Corporation (ICCC).

Through
June 2007, the Company accumulated more than $1.6 billion of residential and commercial mortgages in the ordinary course of business, which it intended to sell or
securitize to third-party investors. The Company had historically completed securitizations of mortgages on a regular basis. However, in early July 2007, wholesale and securitization markets for
mortgages were virtually eliminated and the Company was unable to permanently finance the accumulated mortgages through securitization.

The
Company had financed the accumulation of these mortgages through the use of reverse repurchase financings with various lenders. Beginning in July 2007, when the wholesale and
securitization markets for these mortgages ceased to exist, the Company received a significant amount of margin calls from its lenders. Through December 2007 the Company settled all but one of these
reverse repurchase financings at substantial losses. In September 2008, the Company entered into an agreement to restructure its remaining reverse repurchase financing (Restructured Financing). See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources" for a more detailed discussion of this agreement.

During
late 2007, as a result of the disruption in the mortgage market and the Company's inability to sell or securitize mortgages, the Company's Board of Directors elected to
discontinue the mortgage and retail operations conducted by IFC, the commercial operations conducted by ICCC, and the warehouse lending operations conducted by IWLG (collectively, the discontinued
operations).

At
December 31, 2008, discontinued operations primarily include the management of our loans held-for-sale portfolio to liquidate the loans in a manner to
maximize proceeds to pay back the related Restructured Financing and minimize or settle repurchase liability exposure. At December 31, 2008, the outstanding balance of the Restructured
Financing was approximately $189 million and was principally secured by mortgages with unpaid principal balances of approximately $216 million and restricted cash of $19 million.
When the Company sold loans through whole loan sales it was required to make normal and customary representations and warranties about the loans to the purchaser. The Company's whole loan sale
agreements generally required it to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. In addition, the Company may be required to repurchase loans as a
result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. At December 31, 2008 and 2007, the Company had a liability for losses on loans sold with
representations and warranties totaling $13.9 million and $25.7 million, respectively, included in liabilities from discontinued operations in the Company's consolidated balance sheets.

During
2008, the Company's continuing operations included the long-term mortgage portfolio (principally consolidated and non-consolidated securitizations with
$14.8 billion in principal balance of mortgage loans), the master servicing portfolio and real estate advisory fees from the Company's advisory services agreement with a real estate marketing
company. During the fourth quarter of 2008, the Company and the real estate marketing company agreed to terminate the advisory services agreement for a fee of $27 million.

The
severe national recession and more particularly the very depressed real estate and mortgage markets, along with the Company's adoption of fair value accounting for a significant
percentage of its balance sheet, have caused negative fair value adjustments of $8.2 billion through 2008 to a balance of $5.9 billion at December 31, 2008 for the securitized
mortgage collateral. Offsetting the adjustments to securitized mortgage collateral were positive fair value adjustments of $9.1 billion through 2008 to the related
non-recourse securitized mortgage borrowings, to a balance of $6.2 billion at December 31, 2008. At December 31, 2008, after the reduction in the fair value of net
trust assets, the estimated fair value of the Company's net trust assets (residual interests in securitizations) was $28 million, which represents our estimated maximum exposure to additional
market related losses for these net assets. Total trust assets and total trust liabilities in these securitizations represent 96.7 and 96.4 percent of our total assets and liabilities at
December 31, 2008, respectively.

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During
late 2008 and into 2009, the Company has begun to initiate new mortgage-related fee based businesses, which are all in the early stages of formation and as such we are unable to
comment on their viability or success. In order to initiate these new business opportunities, the Company has maintained certain personnel.

The
Company intends to revoke its REIT election, effective January 1, 2009, and become taxable as a regular corporation. The Company believes that maintaining our continuing
qualification as a REIT will not be a benefit to our stockholders.

In
December 2008, the Company amended it charter to affect a ten-for-one reverse split of its outstanding shares of common stock. All share and per share amounts
have been restated to reflect this reverse split. There was no change in the number of authorized shares as a result of the reverse stock split.

The
information contained throughout this document is presented on a continuing basis, unless otherwise stated.

Forward-Looking Statements

This report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our
control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "likely," "should," "could,"
"anticipate," 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: the ongoing volatility in the mortgage industry; our ability to successfully manage through the current market
environment; our ability to meet liquidity needs from current cash flows or generate new sources of revenue; management's ability to successfully initiate mortgage-related
fee-based business strategies; the ability to make interest and dividend payments; our ability to reduce dividend and interest payments on preferred stock and trust preferred securities;
increases in default rates and mortgage related losses; potential difficulties in satisfying conditions (payment and covenants) in the Restructured Financing; our ability to obtain additional
financing and the terms of any financing that we do obtain; inability to effectively liquidate properties to mitigate losses; increase in loan repurchase requests and ability to adequately settle
repurchase obligations; decreases in value of our residual interests that differ from our assumptions; the ability of our common stock and preferred stock to continue trading in an active market; the
outcome 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 Item 1.A "Risk
Factors" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. This document speaks only as of its date and we do not undertake,
and specifically disclaim any obligation, to publicly release 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.

Available Information

Our Internet website address is www.impaccompanies.com. We make available our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements for our annual stockholders' meetings, as well as
any amendments to those reports, free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission, or "SEC." You can learn more about us by reviewing our SEC filings on our website by clicking on "Stockholder Relations" located on our home page and proceeding to "Financial Reports." We
also make available on our website, under "Corporate Governance," charters for the audit, compensation, and governance and nominating committees of our board of directors, our Code of Business Conduct
and Ethics, our Corporate Governance Guidelines and other company information, including amendments to such documents and waivers, if any to our Code of Business Conduct and Ethics. These documents
will also be furnished, free of charge, upon written request to Impac Mortgage Holdings, Inc., Attention: Stockholder Relations, 19500 Jamboree Road, Irvine,

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California
92612. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including the Company.

Market Conditions

During 2007 and 2008, the Company has been significantly affected by concerns over credit quality, declining home prices and the
general economic environment. These concerns have led to deterioration in the value and quality of the Company's loans held-for-sale and long-term mortgage
portfolio, as evidenced by the significant increases in delinquencies, foreclosures and credit losses. Existing conditions are unprecedented and inherently involve significant risks and uncertainty to
the Company. In response to the overall market conditions beginning in 2007, the Company discontinued several businesses and continues to adjust its business strategies to adapt to the current
business environment.

The
mortgage market has faced continued adversity as the broad repricing of mortgage credit risk continued to cause the severe contraction in market liquidity. Market conditions were
particularly acute with respect to securities backed by non-conforming (including Alt-A loans, which were the Company's primary single-family loan product) where market
participants were setting price levels based on widely varied opinions about investor yield requirements, future loan performance and loan loss severity. Furthermore, the market has continued to try
to quantify the ultimate loss rates that are going to be experienced in the underlying assets in asset backed securities.

Conditions
in the secondary markets (the markets in which we historically sold or securitized mortgage loans), which dramatically worsened during the third quarter of 2007 and
throughout 2008, continue to be depressed with investor concerns over credit quality and a deteriorating United States economy and housing market. As a result, the capital markets remain very volatile
and illiquid and have effectively been unavailable to the Company.

The
deteriorating market for subprime residential real estate loans is illustrated in the ABX 2007-1 Index shown below by initial rating. The index shows market prices for
designated groups of subprime securities by credit rating. The chart is shown here as an illustration of the price volatility in the general non-conforming mortgage market since the
beginning of 2007 and does not reflect actual pricing on IMH bonds, which are backed by Alt-A loans rather than subprime loans. The index, which does not include any IMH bonds, is being
used for illustrative purposes only because it is a non-conforming single-family mortgage index that has traded consistently in recent years. We believe there is currently no comparable
index for Alt-A mortgage product, but the general direction and magnitude of price movement in the index is reflective of the general price movement experienced by the Company's
securities. As shown below, the ABX 2007-1 Index displays dramatic declines in the value of such securities.

GRAPHIC

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Effects of Recent Market Activity

As a result of the Company's inability to sell or securitize non-conforming loans during the second half of 2007, the
Company discontinued funding loans. As a result, the Company discontinued substantially all of its mortgage (non-conforming single-family loans and commercial loans, which consist
primarily of multi-family loans) and warehouse lending operations. Based on current market conditions, the Company's investment in securitized non-conforming loans (residual interests) has
deteriorated in value primarily from increased investor yield requirements and estimated losses. As a result of continued deterioration in the real estate market in 2008, the Company increased its
loss estimates primarily due to increased delinquencies in the loans underlying the residual interests and increased loss severities related to the sale and liquidation of real estate owned
properties. The decline in single-family home prices can be seen in the chart below.

GRAPHIC

As
depicted in the chart above, average home prices peaked in June 2006 at 226.29 and continued their dramatic decline through December 2008. The Standard & Poor's
Case-Shiller 10-City Composite Home Price Index (the Index) for December 2008 was 162.17 (with the base of 100.00 for January 2000) and hasn't been this low since December 2003
when the Index was 161.27. Beginning in the third quarter of 2007, the Company believes there is a correlation between the borrowers' perceived equity in their homes and defaults. The original
loan-to-value (defined as loan amount as a percentage of collateral value, "LTV") and original combined loan-to-value (defined as first lien plus total
subordinate liens to collateral value, "CLTV") ratios of single-family mortgages remaining in the Company's securitized mortgage collateral as of December 31, 2008 was 73 percent and
84 percent, respectively. The current LTV and CLTV ratios likely increased from origination date as a result of the deterioration in the real estate market. We believe that home prices that
have declined below the borrower's original purchase price have a higher risk of default within our portfolio. Based on the Index, home prices have declined 28 percent through December 2008
from the 2006 peak. Further, we believe the home prices in California and Florida, the states with the highest concentration of our mortgages, have declined even further than the Index. As a result,
we have dramatically increased our loss estimates, which are a primary assumption used in the valuation of securitized mortgage collateral and borrowings.

Continuing Operations

During 2008, the Company's continuing operations included the long-term mortgage portfolio (principally residual interests
in securitizations), the master servicing portfolio and real estate advisory fees from the Company's

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advisory
services agreement with a real estate marketing company. During the fourth quarter of 2008, the Company and the real estate marketing company agreed to terminate the advisory services
agreement for a fee of $27 million.

Long-Term Mortgage Portfolio

The long-term mortgage portfolio includes adjustable rate and, to a lesser extent, fixed rate Alt-A
single-family residential mortgages and commercial (primarily multi-family) mortgages that were acquired and originated by the Company. Alt-A mortgages are primarily first lien mortgages
made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but have loan characteristics that make them non-conforming under those guidelines.

For
instance, Alt-A mortgages frequently may have had loan balances in excess of maximum Fannie Mae and Freddie Mac lending limits and may not have certain documentation or
verifications that are required by Fannie Mae and Freddie Mac and, therefore, in making our credit decisions, we were more reliant upon the borrower's credit score and the adequacy of the underlying
collateral.

Commercial
mortgages (consisting primarily of multi-family residential loans) were primarily adjustable rate mortgages with initial fixed interest rate periods of two-,
three-, five-, seven- and ten-years that subsequently converted to adjustable rate mortgages, or (hybrid ARMs.) Commercial mortgages have interest rate floors, which are the
initial start rate, in some circumstances, lock out periods and prepayment penalty periods of three-, five- seven- and ten-years. Commercial mortgages have provided greater
asset diversification on our balance sheet as borrowers of commercial mortgages typically have higher credit scores and commercial mortgages typically have a lower LTV.

Previously,
the Company had securitized mortgages in the form of collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMICs). The typical CMO and
REMIC securitizations were designed so that the transferee (securitization trust) is not a qualifying special purpose entity (QSPE) and we
are the residual interest holder in these CMO's and REMICs. To the extent that our CMO and REMIC securitization trusts do not meet the QSPE criteria, consolidation is assessed pursuant to Financial
Accounting Standards Board (FASB) Interpretation No 46 (revised December 2003), "Consolidation of Variable Interest Entities" (FIN 46R). Amounts consolidated are classified as securitized
mortgage collateral and securitized mortgage borrowings in the consolidated balance sheets. Occasionally, the Company's REMIC securitizations had qualified for sale accounting treatment and the
securitization trust is a QSPE and thus not consolidated by the Company.

The
non-conforming single-family residential and commercial mortgages that we retained were primarily adjustable rate mortgages, or "ARMs," hybrid ARMs and fixed rate
mortgages, or "FRMs." The interest rate on ARMs are typically tied to an index, usually the six-month London Interbank Offered Rate, or "LIBOR," plus a spread and adjust
periodically (typically semi-annually), subject to lifetime interest rate caps and periodic interest rate and payment caps. The initial interest rates on ARMs are typically lower
than average comparable FRMs but may be higher than average comparable FRMs over the life of the mortgage. Hybrid ARMs are mortgages with maturity periods ranging from 15 to
30 years with initial fixed interest rate periods generally ranging from two to ten years, which subsequently adjust to ARMs. The majority of mortgages retained by the
long-term investment operations have prepayment penalty features with prepayment penalty periods ranging from six months to seven years. Prepayment penalties may be assessed to the
borrower if the borrower refinances or, in some cases, sells the home.

During
2008, the long-term investment operations did not retain any mortgages as the Company did not acquire, originate or securitize any loans in 2008.

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The
following table presents selected information on the characteristics of the mortgages remaining in our securitized mortgage collateral, for the periods indicated:

Residential
As of December 31,

Commercial
As of December 31,2008

2007

2006

2008

2007

2006Percent of Alt-A mortgages

99%

99%

99%

N/A

N/A

N/APercent of option ARMs (1)

0%

0%

0%

N/A

N/A

N/APercent of non-hybrid ARMs

4%

4%

7%

1%

2%

2%Percent of two year hybrids ARMs

13%

15%

26%

0%

0%

0%Percent of three year hybrids ARMs

9%

10%

13%

0%

0%

0%Percent of all other hybrid ARMs

48%

46%

34%

98%

98%

98%Percent of FRMs

26%

25%

20%

1%

1%

0%Percent of interest-only

72%

72%

72%

15%

16%

14%Weighted average coupon

7%

7%

7%

6%

6%

6%Weighted average margin

3%

3%

4%

3%

3%

3%Weighted average original LTV

73%

73%

74%

66%

66%

66%Weighted average original CLTV (1)

84%

84%

85%

66%

66%

66%Weighted average original credit score

701

699

697

732

732

730Percent with original prepayment penalty

65%

66%

68%

100%

100%

100%Prior 3-month constant prepayment rate

10%

18%

39%

9%

12%

6%Prior 12-month prepayment rate

11%

25%

38%

10%

9%

8%Lifetime prepayment rate

26%

28%

29%

7%

6%

6%Weighted average debt service coverage ratio

N/A

N/A

N/A

1.30

1.30

1.27Percent of mortgages in California

51%

51%

51%

60%

61%

63%Percent of purchase transactions

52%

54%

58%

49%

49%

51%Percent of owner occupied

77%

77%

78%

N/A

N/A

N/APercent of first lien

98%

98%

99%

100%

100%

100%N/A = Not Applicable


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For additional information regarding the long-term mortgage portfolio refer to Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations," Note D"Securitized Mortgage Collateral and Allowance for Loan Losses," and Note P"Securitized Mortgage
Collateral and Loans Held-for-Investment" in the notes to the consolidated financial statements.

Master Servicing

We have retained master servicing rights on substantially all of our non-conforming single-family residential and
commercial mortgage acquisitions and originations that we retained or sold through REMIC securitizations. Our function as master servicer includes collecting loan payments from loan servicers and
remitting loan payments, less master servicing fees receivable and other fees, to a trustee or other purchaser for each series of mortgage-backed securities or mortgages master serviced. In addition,
as master servicer, we monitor compliance with our servicing guidelines and are required to perform, or to contract with a third party to perform, all obligations not adequately performed by any loan
servicer. We may also be required to advance funds or we may cause our loan servicers to advance funds to cover principal and interest payments not received from borrowers depending on the status of
their mortgages. We also earn income or incur expense on principal and interest payments we receive from our borrowers until those payments are remitted to the investors in those mortgages. Master
servicing fees are generally 0.03 percent per annum on the declining principal balances of the mortgages serviced. Cash flows from master servicing began to decline significantly as interest
rates declined toward the end of 2008 and the amount we earn on balances held has reduced. At December 31, 2008, we were the master servicer for approximately 65,400 mortgages with a principal
balance of approximately $18.3 billion. At December 31, 2008, the Company's master servicing solely for unconsolidated securitizations included approximately $2.6 billion in
servicing of which $0.8 billion of those loans were more than 60 days past due from the previous remittance date.

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Real Estate Advisory Agreement

During 2008, the Company entered into an agreement with a real estate marketing company to generate advisory fees. The real estate
marketing company specialized in the marketing of foreclosed properties. During the year, the Company earned $18.4 million in real estate advisory fees plus a $27.0 million fee for
agreeing to terminate this relationship in the fourth quarter of 2008.

Discontinued Operations

Discontinued operations primarily include the management of our loans held-for-sale portfolio to liquidate the
loans in a manner to maximize proceeds to pay back the related Restructured Financing and minimize or settle repurchase liability exposure.

Regulation

Prior to the discontinuation of our mortgage and commercial operations, we established underwriting guidelines that included
provisions for inspections and appraisals, required credit reports on prospective borrowers and determined maximum loan amounts. Our mortgage acquisition and origination activities were subject to,
among other laws, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Credit Reporting Act, Fair and Accurate Credit Transaction Act, Fair Housing Act,
Gramm-Leach, Bliley Act, Telephone Consumer Protection Act, Can Spam Act, Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act and the regulations promulgated thereunder. These laws
and regulations, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs, prohibit the payment of
kickbacks for the referral of business incident to a real estate settlement service, limit payment for settlement services to the reasonable value of the services rendered and goods furnished,
restrict the marketing practices we used to find customers, require us to safeguard non-public information about our customers and require the maintenance and disclosure of information
regarding the disposition of mortgage applications based on race, gender, geographical distribution, price and income level. Our mortgage acquisition and origination activities were also subject to
state and local laws and regulations, including state licensing laws, anti-predatory lending laws, and may also be subject to applicable state usury statutes. IFC was an approved Fannie
Mae seller/servicer, an approved servicer of Freddie Mac, and an approved Housing and Urban Development "HUD" lender. In addition, IFC was required annually to submit to Fannie Mae, Freddie Mac, and
HUD audited financial statements, or the equivalent, according to the financial reporting requirements of each regulatory entity for its sellers/ servicers. IFC's affairs were also subject to
examination by Fannie Mae and Freddie Mac at any time to assure compliance with applicable regulations, policies and procedures. Also refer to "Regulatory Risks" under Item 1A. Risk Factors for
a further discussion of regulations that may affect our Company.

Competition

The mortgage industry is dominated by large, sophisticated financial institutions. To compete effectively, we must have a very high
level of operational, technological, and managerial expertise as well as access to capital at a competitive cost. As a result of reduced access to capital, general housing trends, rising delinquencies
and defaults and other factors, many mortgage lenders have recently experienced
severe financial difficulty, with some exiting the business or filing for bankruptcy protection. Primarily because of these factors, the industry continues its consolidation trend.

The
continuing operations derive the majority of its cash flows from the long term mortgage portfolio, which is sensitive to credit losses recognized at the disposition of the
foreclosed loans. The Company's losses are a result of supply and demand in the real estate market, and as the supply of real estate continues to grow from builders and other banks trying to dispose
of their real estate holdings. The Company could experience increased loss severities, which could diminish the cash flows from the long term mortgage portfolio. Additionally the lack of competition
in the mortgage market has created an environment where lending has become scarce resulting in less realized demand for real estate, which may exacerbate loss severities even further.

Risk
factors, as outlined below, provide additional information related to risks associated with competition in the mortgage banking industry.

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Employees

As of December 31, 2008 and 2007, we had a total of 127 and 827 full-time and part-time employees,
respectively. Management believes that relations with its employees are good. We are not a party to any collective bargaining agreements.

Revisions in Policies and Strategies

Developments in the market, which affect the policies and strategies mentioned herein or which change our assessment of the market,
may and has caused our board of directors to revise our policies and financing strategies. As previously mentioned, the Company has had to make strategic adjustments to adapt to the current market
conditions. These adjustments include discontinuing the majority of the Company's operations, the reduction of personnel and the elimination of facilities. The Company continues to evaluate strategic
alternatives that will be in the best interest of the Company's stakeholders. Any of our policies, strategies and activities may be modified or waived by our board of directors without stockholder
consent.

ITEM 1A. RISK FACTORS

Some of the following risk factors relate to a discussion of our assets. For additional information on our asset categories refer to
Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the accompanying notes to the consolidated financial statements.

Risks Related To Our Businesses

If we are unable to generate sufficient liquidity we may be unable to conduct our operations as planned.

In 2008, management continued to be seriously challenged by the unprecedented turmoil in the mortgage market, including: significant
increases in delinquencies and foreclosures and significant increases in credit-related losses. In response to the deteriorating market conditions in 2007, the Company discontinued certain operations,
resolved and terminated all but one of the Company's reverse repurchase financings, which has been restructured (Restructured Financing), and settled a significant portion of its outstanding loan
repurchase claims. These conditions have caused a reduction in our cash flows and overall liquidity. Our ability to meet our long-term liquidity requirements is subject to several factors,
such as satisfying the terms of the Restructured Financing, decreasing our preferred stock dividend and trust preferred payment obligations and possibly raising additional capital. We can not assure
you that we
will successfully accomplish these objectives. Our business will be materially affected if we are unable able to generate sufficient liquidity to conduct our operations as planned.

If we are forced to liquidate, we may have few unpledged assets for distribution to unsecured creditors or equity holders.

In the event we are forced to liquidate, the majority of our assets are either collateral for specific borrowings or pledged as
collateral for secured liabilities. We may have few remaining assets available for unsecured creditors and equity holders.

We have restructured our reverse repurchase financing which requires monthly payments and other payment obligations.

In September 2008, we entered into an agreement to restructure our remaining reverse repurchase financing. The balance of this
Restructured Financing was $188.7 million at December 31, 2008 and collateralized by loans held-for-sale within discontinued operations. The Restructured
Financing removes all technical defaults from financial covenant noncompliance and any associated margin calls for the term of the agreement. The Restructured Financing calls for certain targets
including a reduction of the borrowings balance to $100 million in 18 months (from September 2008), with an advance rate of no more than 65 percent of the unpaid principal
balance, and $50 million in 24 months, with an advance rate of no more than 55 percent of the unpaid principal balance. By meeting these targets, the agreement term can extend to
30 months. At December 31, 2008, the advance rate was 79 percent. The agreement also calls for monthly principal paydowns of $1.5 million until the earlier of the Company
raising capital

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or
the end of the agreement term. If the Company is successful in raising capital, approximately 10 percent of the gross proceeds will be required to be paid as an additional principal paydown
and the monthly principal paydown is reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be paid to the
lender. We may not have the funds available to make the required paydowns, which could result in default and we may not have adequate assets to use as collateral. In the event we do not have
sufficient liquidity to meet the payment requirements, the lender can accelerate our indebtedness and increase interest rates. Furthermore, upon an event of default, the Company is responsible for any
shortfall if the value of the mortgage loans securing the financing is insufficient to repay the outstanding balance. Such a situation would likely result in a rapid deterioration of our financial
condition.

If we default under our Restructured Financing, we may be forced to liquidate collateral at less than favorable prices.

If we default under our Restructured Financing, our lender could force us to liquidate the collateral. If the value of the collateral
is less than the amount borrowed, we could be required to pay the difference in cash. If we were to declare bankruptcy, our lender may obtain special treatment and would then be allowed to liquidate
the collateral without any delay. On the other hand, if our lender declares bankruptcy, we might experience difficulty repurchasing our collateral, or enforcing our claim for damages, and it is
possible that our claim could be repudiated and we could be treated as an unsecured creditor. If this occurs, our claims would be subject to significant delay and we may receive substantially less
than our actual damages or nothing at all.

We do not plan to make dividend payments on our preferred stock or payments on our trust preferred debt obligations in the foreseeable future.

At December 31, 2008, we had $88.3 million in obligations related to junior subordinated debentures related to the
outstanding trust preferred securities. We are required to make quarterly payments on these debt obligations. In order to preserve cash, the Board approved the deferral of interest payments on the
trust preferred securities due in December 2008 and January 2009 and the Company did not pay a fourth quarter 2008 dividend on the preferred stock. Although the Company may defer quarterly interest
payments on the trust preferred securities for a limited period of time, it may not pay dividends on its capital stock, including the preferred stock, during such period. All unpaid dividends on the
preferred stock will accumulate. Until such time as we pay all cumulative dividends on the preferred stock, we may not pay dividends on, nor redeem, repurchase or make any distribution on, shares of
common stock. If we do not pay dividends on the preferred stock for six or more quarterly periods (whether or not consecutive), holders of preferred stock will be entitled to elect two additional
directors to the Board to serve until all dividends are paid.

In
December 2008 and January 2009, we fully satisfied an aggregate of $32 million of our trust preferred securities for $4.95 million, and we have agreed to restructure
$51.3 million in trust preferred securities to reduce our payment obligations. The Company has the option to defer interest for up to five years for the remaining $12 million in
outstanding trust preferred securities that have not been fully satisfied or restructured.

Deteriorating mortgage market conditions have had and may continue to have a material adverse effect on our earnings and financial condition.

Beginning in the second quarter of 2007, the mortgage industry and the single-family residential housing markets, and to a lesser
extent multi-family residential, were adversely affected as home prices declined and delinquencies and defaults increased. Borrowers have found it difficult to refinance due to home price depreciation
and lenders tightening their underwriting guidelines, which has led to further
increases in defaults and credit losses. As a result, non-conforming mortgage loans have not performed up to historical expectations, and the fair value of non-conforming
mortgage loans has deteriorated.

The
adverse market conditions have negatively affected the Company's delinquencies and real estate owned (REO). At December 31, 2008, the Company's mortgage portfolio had
22.7 percent or $3.5 billion of loans that were 60 days or more delinquent, included in continuing and discontinued operations. As a result of increased foreclosures, REO
increased 47 percent to $599.8 million at December 31, 2008 as compared to $405.6 million at December 31, 2007. These conditions, which increase the cost and reduce
the availability of debt, may continue or worsen in the future.

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The
disruption in the capital markets and secondary mortgage markets has reduced liquidity and investor demand for mortgage loans and mortgage backed securities, while yield
requirements for these products has increased. The increased defaults on residential mortgage loans, increases in the number of ratings downgrades with respect to bonds issued in connection with
securitized loans, lack of liquidity in the bond market and the financial condition of many companies that typically participate in this market have negatively affected our ability to operate our
business. These unprecedented disruptions and deterioration of the mortgage market, have had, and may continue to have, an adverse effect on the Company's earnings and financial condition.

A material difference between the assumptions used in the determination of the value of our residual interests and our actual experience would cause us to write down the
value of these securities and could harm our financial position.

Investments in residual interest and subordinated securities are much riskier than investments in senior mortgage-backed securities
because these subordinated securities bear all credit losses prior to the related senior securities. The risk associated with holding residual interest and subordinated securities is greater than
holding the underlying mortgage loans directly due to the concentration of losses attributed to the subordinated securities. The value of residual interests represents the present value of future cash
flows expected to be received by us from the excess cash flows created in the securitization transaction. In general, future cash flows are estimated by taking the coupon rate of the loans underlying
the transaction less the interest rate paid to the bond holders, less contractually specified servicing and trustee fees, and after giving effect to estimated prepayments, credit losses and
overcollateralization requirements. We estimate future cash flows from these securities and value them utilizing assumptions based in part on projected interest rates, delinquency, mortgage loan
prepayment speeds and credit losses. It is extremely difficult to validate the assumptions we use in valuing our residual interests. Even if the general accuracy of the valuation model is validated,
valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships which drive the results of the model. Such assumptions are complex as we must
make judgments about the effect of matters that are inherently uncertain. If our actual experience differs from our assumptions, we could be required to reduce the value of these securities.
Furthermore, if our actual experience differs materially from these assumptions, our cash flow, financial condition, results of operations
and business prospects may be harmed, including an adverse affect on the amount of dividend payments that are made on and the value of our common stock.

The Company's mortgage portfolio contains significant interest rate risks that are not currently hedged by the Company.

Residual interests in certain securitization trusts are expected to generate cash flows to the Company. These cash flows are
contingent upon maintaining required overcollateralization levels and can be reduced or eliminated by realized losses from the disposition of loans or REO. Assuming realized losses have not reduced
overcollateralization levels below required levels, excess cash flows are distributed to the residual interest holder after the required bond interest and principal payments are made to investors.
Interest rates on the loans in the securitization trusts generally adjust bi-annually. Interest rates on the bonds usually adjust monthly with changes partially offset by derivatives
instruments (primarily interest rate swap agreements) inside the securitization trusts. Since bond interest rates adjust more frequently than the related loans, increases in LIBOR rates could
significantly reduce the future cash flows we receive from these securitization trusts. The amount of the derivatives instruments is not sufficient to fully protect the residual cash flows from
increases in LIBOR. The Company does not have the ability to change the derivatives instruments inside the trusts and does not currently hedge this interest rate risk with derivatives instruments
outside the securitization trusts. As a result of not fully hedging interest rate risks, the Company's future residual cash flows could be significantly affected by rising LIBOR rates.

Recent decreases to interest rates could reduce our future cash flows.

As a result of the recent cuts to the federal funds rate by the federal reserve, the rate charged by other lenders on mortgages could
decrease, causing higher quality borrowers' to refinance, leaving the Company with a higher percentage of delinquent borrowers, and reduced net interest income and cash flows from the mortgage
portfolio.

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We may experience reduced net earnings or losses if our liabilities re-price at different rates than our assets.

Our principal source of revenue is net interest income or net interest spread from our long-term mortgage portfolio, which
is the difference between the interest we earn on our
interest earning assets and the interest we pay on our interest bearing liabilities. The rates we pay on our borrowings are independent of the rates we earn on our assets and may be subject to more
frequent periodic rate adjustments. Therefore, we could experience a decrease in net earnings or a loss because the interest rates on our borrowings could increase faster than the interest rates on
our assets, if the increased borrowing costs are not offset by reduced cash payments on derivatives recorded in other non-interest income. If our net interest spread becomes negative, we
will be paying more interest on our borrowings than we will be earning on our assets and we will be exposed to a risk of loss.

The
rates paid on our borrowings and the rates received on our assets may be based upon different indices. Our long-term mortgage portfolio includes mortgages that are
one-, three- and six-month LIBOR and one-year LIBOR hybrid ARMs. These are mortgages with fixed interest rates for an initial period of time, after which
they begin bearing interest based upon short-term interest rate indices and adjust periodically. We generally funded mortgages with adjustable interest rate borrowings having interest
rates that are indexed to short-term interest rates, typically one-month LIBOR, and adjust periodically at various intervals. To the extent that there is an increase in the
interest rate index used to determine our adjustable interest rate borrowings and it increases faster than the indices used to determine the rates on our assets
(i.e., the increase is not offset by a corresponding increase in the rates at which interest accrues on our assets) or is not offset by various cash
payments on interest rate derivatives that we have in place at any given time, our net earnings will decrease or we will have net losses. Additionally, the Company has commenced a policy to modify
loans by either reducing the interest rates, waiving accrued and unpaid interest or deferring accrued interest to help minimize delinquencies and maximize recoveries on loans. Although we believe in
the long run this is beneficial to the Company, the modification of loans to defer the re-pricing will cause the Company to experience a reduction in expected cash flows.

ARMs typically
have interest rate caps, which limit interest rates charged to the borrower during any given period. Our borrowings are not subject to similar restrictions. As a
result, in a period of rapidly increasing interest rates, the interest rates we pay on our borrowings could increase without limitation, while the interest rates we earn on our ARMs would be
capped. If this occurs, our net interest spread could be significantly reduced or we could suffer a net interest loss if not offset by a decrease in the cash payments on interest rate derivatives that
we have in place at any given time.

In
discontinued operations, the Company earns interest income from its loan held-for-sale, some of which are six-month LIBOR adjustable loans. We
also pay interest expense on our Restructured Financing, which adjusts monthly, indexed to LIBOR. Since the interest rate on the Restructured Financing adjusts more frequently than the related loans
held-for-sale, increases in LIBOR rates could significantly negatively affect the Company's cash flows within discontinued operations. This interest rate risk is not currently
being hedged.

If we fail to initiate our new mortgage-related fee-based businesses or generate other new sources of revenue successfully, our business, financial condition and
results of operations could be materially and adversely affected.

In light of the continuing turmoil in the mortgage market, our ability to continue our operations is dependent upon our ability to
successfully initiate our new mortgage-related fee-based business strategies or generate other new sources of revenue, which may include
acquiring new operations that contribute sufficient additional cash flow to enable us to generate net revenue 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 acquire new businesses is significantly constrained by our limited liquidity and our likely inability to obtain financing or to issue equity securities as a result of our
current financial condition and current market conditions, as well as other uncertainties and risks. There can be no assurances that we will be able to acquire new business operations. We may not be
able to implement our new business strategies successfully or achieve the anticipated benefits of their implementation. If we are unable to do so, we may be unable to satisfy our future operating
costs and liabilities, including repayment of the Restructured Financing, payments on the remaining trust preferred securities and payment of preferred stock dividends.

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We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to implement or operate our business as planned.

We have historically been dependent on warehouse lines, repurchase agreements, credit facilities, securitizations and other structured
financings. We currently have only one Restructured Financing, under which we may not borrow additional funds. Any new financing could subject us to recourse indebtedness and the risk that debt
service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for operations. If we are not able to arrange for new financing on terms
acceptable to us, or if we default on our covenants, we may not have funds available for operations as well as for future business opportunities, which would have a material adverse effect on our
business, financial condition, liquidity and results of operations.

Second trust deed mortgages in our long term investment portfolio expose us to greater credit risks.

Our security interest in the property securing second mortgages in our portfolio is subordinated to the interest of the first mortgage
holder. Typically, the second mortgages have a higher combined loan to value (CLTV) ratio than do our first mortgages. If the borrower experiences difficulties in making senior lien payments or if the
value of the property is equal to or less than the amount needed to repay the borrower's obligation to the first mortgage holder upon foreclosure, our second mortgage loan may not be repaid.

Also,
our senior security interests may be affected if there are junior liens on the same properties resulting in a higher CLTV which borrowers may perceive have no equity. This could
result in our senior liens defaulting at a higher rate than senior liens without a junior lien.

We may be subject to losses on mortgages for which we did not obtain mortgage insurance.

We did not obtain credit enhancements such as mortgage pool or special hazard insurance for all of our mortgages and mortgage
investments. Generally, we required mortgage insurance on any first mortgage with an LTV ratio greater than 80 percent. During the time we hold mortgages for investment, we are subject to risks
of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance. If a borrower defaults on a mortgage that we hold, we bear the risk of loss of
principal to the extent there is any deficiency between the value of the related mortgaged property and the amount owing on the mortgage loan and any insurance proceeds available to us through the
mortgage insurer. Also, to the extent we have insurance coverage, we bear the risk of the insurance carriers not being able to make the required payments.

Loans to non-conforming borrowers may expose us to a higher risk of delinquencies, foreclosures and losses.

We were an acquirer and originator of non-conforming single family and multi-family mortgage loans. These are mortgages
that generally may not qualify for purchase by government-sponsored agencies such as Fannie Mae and Freddie Mac. Our operations have been negatively affected due to our investments in these mortgages.
Credit risks associated with these mortgages may be greater than those associated with conforming mortgages. Mortgages made to such borrowers generally entail a higher risk of delinquency and higher
losses than mortgages made to borrowers who utilize conventional mortgage sources. Delinquency, foreclosures and losses generally increase during economic slowdowns or recessions. The actual risk of
delinquencies, foreclosures and losses on mortgages made to our borrowers are higher under current economic conditions than those in the past. Additionally, the combination of different underwriting
criteria and higher rates of interest leads to greater risk, including higher prepayment rates and higher delinquency rates and /or credit losses. We also have loans that are interest only and
option-ARM loans that allow a borrower to pay only the stated interest or less than the stated interest, respectively, attributable to their loan for a set period of time. If there is a
decline in real estate values borrowers may default on these types of loans since they have not reduced their principal balances, which, therefore, could exceed the value of their property. In
addition, a reduction in property values would also cause an increase in the CLTV or LTV ratio for that loan which could have the effect of reducing the value of the property collateralized by that
loan, reducing the borrowers' equity in their homes to a level that would increase the risk of default.

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Our commercial and multifamily mortgages may expose us to increased lending risks.

Our commercial and multifamily mortgages have risks because repayment of the mortgages often depends on the successful operations and
the income stream of the borrowers. Furthermore, commercial mortgages typically involve larger mortgage balances to single borrowers or groups of related borrowers compared to one- to
four-family residential mortgages.

The geographic concentration of our mortgages increases our exposure to risks in those areas.

We do not set limitations on the percentage of our long-term mortgage portfolio composed of properties located in any one
area (whether by state, zip code or other geographic measure). Concentration in any one area increases our exposure to the economic and natural hazard risks associated with that area. A majority of
our mortgage acquisitions and originations, long-term mortgage portfolio and finance receivables are secured by properties in California and, to a lesser extent, Florida. California and
Florida have experienced, and may experience in the future, an economic downturn in past years and they have also suffered the effects of certain natural hazards. As a result of the economic downturn,
real estate values in California and Florida have decreased drastically and may continue to decrease in the future, which could have a material adverse effect on our results of operations.

Furthermore,
if borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property
or may stop paying their mortgages if the property is damaged. This would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters. This would
have a material adverse effect on our results of operations or financial condition.

Representations and warranties made by us in our loan sales and securitizations may subject us to liability.

In connection with our loan sales to third parties and our prior securitizations, we transferred mortgages acquired and originated by
us to the third parties or into a trust in exchange for cash and, in the case of a securitized mortgage, residual certificates issued by the trust. The trustee, purchaser, bondholder, or other
entities involved in the issuance of the securities (which may include bond insurers) may have recourse to us with respect to the breach of the representations, and warranties made by us at the time
such mortgages are transferred or when the securities are sold. While we may have recourse to our customers for any such breaches, there can be no assurance of our customers' abilities to honor their
respective obligations. Also, we previously engaged in bulk whole loan sales pursuant to agreements that generally
provide for recourse by the purchaser against us in the event of a breach of one of our representations or warranties, any fraud or misrepresentation during the mortgage origination process, or upon
early default on such mortgage. We attempted to limit the potential remedies of such purchasers to the potential remedies we received from the customers from whom we acquired or originated the
mortgages. However, in some cases, the remedies available to a purchaser of mortgages from us may be broader or extend longer than those available to us against the sellers of the mortgages and should
a purchaser enforce its remedies against us, we are not always able to enforce whatever remedies we have against our customers. Furthermore, if we discover, prior to the sale or transfer of a loan,
that there is any fraud or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may not be able to sell the mortgage or we may have to sell the
mortgage at a discount.

Our delinquency ratios and our performance may be adversely affected by the performance of parties who service or sub-service our mortgage loans.

We sell or contract with third-parties for the servicing of all our mortgage loans, including those in our securitizations. Our
operations are subject to risks associated with inadequate or untimely servicing. Poor performance by a servicer may result in greater than expected delinquencies and losses on our mortgage loans. A
substantial increase in our delinquency or foreclosure rate could adversely affect our ability to access the capital and secondary markets for our financing needs. Also, with respect to mortgage loans
subject to a securitization, greater delinquencies would adversely affect the value of our residual interest, if any, we hold in connection with that securitization.

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In
a securitization, relevant agreements permit us to be terminated as servicer or master servicer under specific conditions described in these agreements. If, as a result of a servicer
or sub-servicer's failure to perform adequately, we were terminated as master servicer of a securitization, the value of any master servicing rights held by us would be adversely affected.

We are a defendant in purported class action lawsuits and may not prevail in these matters.

Class action lawsuits and regulatory actions alleging improper marketing practices, abusive loan terms and fees, disclosure
violations, improper yield spread premiums and other matters are risks faced by all mortgage originators, particularly those in the Alt-A and subprime market. We are a defendant in
purported class actions pending in different states. Some of the class actions allege generally that the loan originator improperly charged fees in violation of various state lending or consumer
protection laws in connection with mortgages that we acquired while others allege that our lending practice was a statutory violation, an unlawful business practice, an unfair business practice or a
breach of a
contract. Although the suits are not identical, they generally seek unspecified compensatory damages, punitive damages, pre- and post-judgment interest, costs and expenses and
rescission of the mortgages, as well as a return of any improperly collected fees. Other purported class actions which have been brought on behalf of persons who acquired Common Stock through the open
market or through the Company 401(k) plan, generally allege violations of the federal securities laws due to allegedly false and misleading statements or omissions, related to the Company's financial
condition and future prospects. We may incur defense costs and other expenses in connection with the class action lawsuits, and we cannot assure you that the ultimate outcome of these or other actions
will not have a material adverse effect on our financial condition or results of operations. In addition to the expense and burden incurred in defending this litigation and any damages that we may
suffer, our management's efforts and attention may be diverted from the ordinary business operations in order to address these claims. If the final resolution of this litigation is unfavorable to us,
our financial condition, results of operations and cash flows might be materially adversely affected if our existing insurance coverage is unavailable or inadequate to resolve the matters. We believe
we have meritorious defenses to the actions and intend to defend against them vigorously; however, an adverse judgment in any of these matters could have a material adverse effect on us.

We are exposed to environmental liabilities, with respect to properties that we take title to upon foreclosure, that could increase our costs of doing business and harm our
results of operations.

In the course of our activities, we may foreclose and take title to residential properties and become subject to environmental or mold
liabilities with respect to those properties. The laws and regulations related to mold or environmental contamination often impose liability without regard to responsibility for the contamination. We
may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with mold or
environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation
activities could be substantial. Moreover, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based upon damages and costs resulting from mold
or environmental contamination emanating from the property. If we ever become subject to significant mold or environmental liabilities, our business, financial condition, liquidity and results of
operations could be significantly harmed.

We are subject to risks of operational failure that are beyond our control.

Substantially all of our operations are located in Irvine, California. Our systems and operations are vulnerable to damage and
interruption from fire, flood, telecommunications failure, break-ins, earthquake and similar events. Our operations may also be interrupted by power disruptions, including rolling
black-outs implemented in California due to power shortages. Furthermore, our security mechanisms may be inadequate to prevent security breaches to our computer systems, including from
computer viruses, electronic break-ins and similar disruptions. Such security breaches or operational failures could expose us to liability, impair our operations, result in losses, and
harm our reputation.

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Loss of our current executive officers or other key management could significantly harm our business.

We depend on the diligence, skill and experience of our senior executives, including our chief executive officer and president. We
believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management. We seek to compensate our executive officers, as well as other
employees, through competitive salaries, bonuses and other incentive plans, but there can be no assurance that these programs will allow us to retain key management executives or hire new key
employees. The loss of our chief executive officer, president, or other senior executive officers and key management could have a material adverse affect on our operations because other officers may
not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining
such personnel. Furthermore, in light of our present financial condition, no assurance can be given that we will retain these and other executive officers and key management personnel. To the extent
that one or more of our top executives or other key management personnel are no longer employed by us, our operations and business prospects may be adversely affected. The loss of, and changes in, key
personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.

If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and procedures, we may not be able to report our financial
results accurately or prevent fraud, which could cause current and potential stockholders to lose confidence in our financial reporting, adversely affect the trading price of our securities or harm
our operating results.

Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable
financial reports and effectively prevent fraud and operate successfully as a public company. Any failure to develop or maintain effective internal control over financial reporting and disclosure
controls and procedures could harm our reputation or operating results, or cause us to fail to meet our reporting obligations. We cannot be certain that our efforts to improve or maintain our internal
control over financial reporting and disclosure controls and procedures will be successful or that we will be able to maintain adequate controls over our financial processes and reporting in the
future. Any failure to develop or maintain effective controls or difficulties encountered in their implementation or other effective improvement of our internal control over financial reporting and
disclosure controls and procedures could harm our operating results, or cause us to fail to meet our reporting obligations. If we are unable to adequately establish or maintain our internal control
over financial reporting, our external auditors will not be able to issue an unqualified opinion on the effectiveness of our internal control over financial reporting. In the past, we have reported,
and may discover in the future, material weaknesses in our internal control over financial reporting.

Ineffective
internal control over financial reporting and disclosure controls and procedures could cause investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our securities or affect our ability to access the capital markets and could result in regulatory proceedings against us by, among others, the SEC. In
addition, a material weakness in internal control over financial reporting, which may lead to deficiencies in the preparation of financial statements, could lead to litigation claims against us. The
defense of any such claims may cause the diversion of management's attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any
litigation, even if resolved in our favor, could cause us to incur significant legal and other expenses or cause delays in our public reporting. Such events could harm our business, affect our ability
to raise capital and adversely affect the trading price of our securities.

Our ability to utilize our net operating losses and certain other tax attributes may be limited.

At the end of our 2008 taxable year, we had net operating loss (NOL) carryforwards of approximately $406.8 million for federal
income tax purposes and approximately $532.2 million for state income tax purposes. Although, under existing tax rules, we are generally allowed to use those NOL carryforwards to offset taxable
income in subsequent taxable years, our ability to use those NOL carryforwards to offset income may be severely limited to the extent that we have experienced or do experience an ownership change
within the meaning of Section 382 of the Internal Revenue Code. These provisions could also limit our ability to deduct certain losses (built-in losses) we recognize after the
ownership change with respect to assets we own at the time of the

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ownership
change. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain Stockholders or public groups in the stock of the
corporation by more than 50 percentage points over a three-year period. We believe that the conversion of the preferred stock to common stock would result in an ownership change as
defined under Section 382 of the Internal Revenue Code which is expected to create annual limitations on the Company's ability to utilize NOL carryovers and built-in losses. Any
limitation on our NOL carryforwards that could be used to offset post-ownership change taxable income would adversely affect our liquidity and cash flow, as and when we become profitable.
However, even if no ownership change occurs, we do not expect to generate sufficient taxable income in future periods to be able to realize fully the tax benefits of our NOL carryforwards.

Regulatory Risks

If we revoke our REIT election or if we fail to satisfy the requirements for qualification as a REIT, we will not be able to elect to be a REIT for a period of five years.

If we do not qualify for taxation as a REIT for 2009, we will be subject to tax as a regular corporation, including alternative
minimum tax. We will not be allowed a deduction for dividends paid to our stockholders. We will not be subject to the requirement that we distribute dividends to our stockholders equal to at least
90 percent of our taxable income (other than net capital gains). Once we revoke our REIT election, we will not be allowed to elect to be taxed as a REIT until 2014.

Violation of various federal, state and local laws may result in losses on our loans.

To the extent we originated and purchased mortgage loans, applicable state and local laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of the mortgage broker, lender and purchaser. In addition, other state and local laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of our loans. Mortgage loans are also
subject to federal laws, including:



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Violations
of certain provisions of these federal and state laws may limit our ability to collect all or part of the principal of or interest on the loans and in addition could subject
us to damages and could result in the mortgagors rescinding the loans whether held by us or subsequent holders of the loans. In addition, such
violations could cause us to be in default under our credit and repurchase lines and could result in the loss of licenses held by us.

Similarly,
it is possible borrowers may assert that the loan forms we used or acquired, including forms for "interest-only" and "option-ARM" loans for which
there is little standardization or uniformity, fail to properly describe the transactions they intended, or that our forms failed to comply with applicable consumer protection statutes or other
federal and state laws. This could result in liability for violations of certain provisions of federal and state consumer protection laws and our inability to sell the loans and our obligation to
repurchase the loans or indemnify the purchasers.

New regulatory laws affecting the mortgage industry may affect our ability to re enter the mortgage markets.

The regulatory environments in which we previously operated, and continue to operate on a limited basis, have an effect on the
activities in which we may engage. Changes to the laws, regulations or regulatory policies can affect whether and to what extent we may be able to reenter the mortgage markets and whether it can be
done profitably. Some states and local governments and the Federal Government have enacted, or may enact laws, or regulations that restrict or prohibit some provisions in mortgages or some loan
programs that we have previously participated in. As such we cannot be sure that in the future we will be able to engage in lending or mortgage activities that were similar to those we engaged or
participated in the past and we might be at a competitive disadvantage which would affect our operations.

We may become subject to certain California corporate laws if certain conditions are satisfied.

Due to our delisting from the New York Stock Exchange ("NYSE"), we may become subject to Section 2115 of the California
Corporations Code. Section 2115 provides that regardless of a corporation's legal domicile, certain provisions of California corporation law will apply to that corporation if it meets certain
requirements related to its property, payroll and sales in California and if more than one-half of its outstanding voting securities are held of record by persons having addresses in
California, and such corporation is not listed on certain national securities exchanges or on the NASDAQ National Market. If we become subject to Section 2115, (i) our stockholders will
be entitled to cumulative voting, and (ii) we may be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters' rights in connection with certain
strategic transactions. Cumulative voting is a voting scheme which allows minority stockholders a greater opportunity to have board representation by allowing those stockholders to have a number of
votes equal to the number of directors to be elected multiplied by the number of votes to which the stockholder's shares are entitled and to "cumulate" those votes for one or more director nominees.
Generally, cumulative voting allows minority stockholders the possibility of board representation on a percentage basis equal to their stock holding, where under straight voting those stockholders may
receive less or no board representation. Some of the changes that result from the application of Section 2115 may affect any possible transaction involving a change of control, which could
negatively affect your investment.

Our operations may be adversely affected if we are subject to the Investment Company Act.

We intend to conduct our business at all times so as not to become regulated as an investment company under the Investment Company
Act. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.

In
order to qualify for this exemption we must maintain at least 55 percent of our assets directly in mortgages, qualifying pass-through certificates and certain
other qualifying interests in real estate. Our ownership of certain mortgage assets may be limited by the provisions of the Investment Company Act, should we ever be subject to the Act. If the SEC
adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exception, we could be required to restructure our activities or sell certain of our
assets. To insure that we continue to qualify for the exemption we may be required at times to adopt less efficient methods of

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financing
certain of our mortgage assets and we may be precluded from acquiring certain types of higher-yielding mortgage assets. The net effect of these factors will be to lower our net interest
income. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as
described. Our business will be materially and adversely affected if we fail to qualify for this exemption.

Limitations on acquisition and change in control ownership limit.

Our Charter and bylaws, and Maryland corporate law contain a number of provisions that could delay, defer, or prevent a transaction or
a change of control of us that might involve a premium price for holders of our capital stock or otherwise be in their best interests by increasing the associated costs and timeframe necessary to make
an acquisition, making the process for acquiring a sufficient number of shares of our capital stock to effectuate or accomplish such a change of control longer and more costly. In addition, investors
may refrain from attempting to cause a change in control because of the difficulty associated with such a venture because of the limitations.

Risks Related to Ownership of Our Securities

A limited market for our common stock and preferred stock, and "Penny Stock" rules may make buying or selling our securities difficult.

Our common stock and preferred stock presently trade on the pink sheets. As a result, an investor may find it difficult to dispose of,
or to obtain accurate quotations as to the price of, our securities. In addition, our common stock and preferred stock are subject to the penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. The SEC regulations generally define a penny stock to be an equity
security that has a market price of less than $5.00 per share, subject to certain exceptions. Unless an exception is available, those regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors (generally institutions). In addition, the broker-dealer must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's
account. Moreover, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to transactions prior to sale. Regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and preferred
stock and thus the ability of purchasers of our common stock and preferred stock to sell their shares in the secondary market.

Our share prices have been and may continue to be volatile and the trading of our shares may be limited.

Historically and recently, the market price of our securities has been volatile. Our common stock and preferred stock was previously
listed for trading on the NYSE until November 20, 2008 at which time we were delisted. Our common stock and preferred stock is now quoted on the pink sheets. We cannot guarantee that a
consistently active trading market for our securities will continue, especially while we remain on the pink sheets. Other consequences of our quotation on the pink sheets may include a reduction in
analyst coverage and the loss of certain state securities law exemptions available to us while our securities were traded on NYSE, which may affect our ability to provide for future issuances of our
securities, among other consequences. Holders of our securities may, therefore, have difficulty selling their shares, should they decide to do so. In addition, there can be no assurances that such
markets will continue or that any shares which may be purchased may be sold without incurring a loss. Any such market price of our shares may not necessarily bear any relationship to our book value,
assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the shares in the future. The market price of our
securities is likely to continue to be highly volatile and could be significantly affected by factors including:



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During
2008, our common stock reached an intra-day high sales price of $19.80 on February 4, and an intra-day low sales price of $0.20 on
November 21. As of March 5, 2009, our stock price closed at $0.27 per share. In addition, significant price and volume fluctuations in the stock market have particularly affected the
market prices for the securities of mortgage companies such as ours. Furthermore, general conditions in the mortgage industry may adversely affect the market price of our securities. These broad
market fluctuations have adversely affected and may continue to adversely affect the market price of our securities. If our results of operations fail to meet the expectations of securities analysts
or investors in a future quarter, the market price of our securities could also be materially adversely affected and we may experience difficulty in raising capital.

Should we decide to relist our securities on a stock exchange, the criteria for listing may be difficult for us to achieve.

The market price of our securities has been lower than the required minimum bid price for listing on a national stock exchange, and
the reduced trading volumes that we currently experience may prevent our stock from reaching the required minimum price for listing. Additionally, our history of net losses may make it difficult for
us to list on an exchange at any point in the near future, if at all. We may be required to restructure our capital structure and issue additional securities in order to list on an exchange. There is
no guarantee that we would be able to effect such restructuring under terms as favorable as our current equity and debt, if at all.

Issuances of additional shares of our common stock may adversely affect its market price and significantly dilute stockholders.

In order to support our business objectives, we may raise capital through the sale of equity. We may also issue additional shares of
common stock if we consummate an exchange offer of our Series B Preferred Stock and Series C Preferred Stock and we may also issue shares of common stock to settle outstanding
obligations and liabilities. The issuance or sale, or the proposed sale, of substantial amounts of our common stock in the public market could materially adversely affect the market price of our
common stock or other outstanding securities. We do not know the actual or perceived effect of these issuances, the timing of any offerings or issuances of securities, the potential dilution of the
book value or earnings per share of our securities then outstanding and the effect on the market price of our securities then outstanding.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our primary executive and administrative offices are located at 19500 Jamboree, California where we have a premises lease expiring in
November 2016. We have two options to extend the term for five-year periods for each option. The premises consist of a seven-story building containing approximately 210,000 square feet
with an initial

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annual
rental rate of $31.80 per square foot, which amount increases every 30 months since commencement of the lease in October 2006. As of December 31, 2008, the Company has subleased
approximately 117,000 square feet of our corporate headquarters.

ITEM 3. LEGAL PROCEEDINGS

Mortgage-related Litigation

On
June 27, 2000, a complaint captioned Michael P. and Shellie Gilmor v. Preferred Credit Corporation and Impac Funding Corporation, et
al. was filed in the Circuit Court for Clay County, Missouri, as a purported class action lawsuit alleging that the defendants violated Missouri's Second Loans Act and Merchandising
Practices Act. In July 2001, the Missouri complaint was amended to include IMH and other Impac-related entities. A plaintiffs class was certified on January 2, 2003. On January 27, 2006
the Company filed pleadings in response to the Sixth Amended Complaint, including motions to dismiss. No opposition has yet been filed by the Plaintiffs.

On
February 3, 2004, a complaint captioned James and Jill Baker v. Century Financial Group, Inc, et al was filed in the Circuit Court of Clay County,
Missouri, as a purported class action lawsuit alleging that the defendants violated Missouri's Second Loan Act and Merchandising Practices Act. An Answer was filed on March 7, 2005 and limited
discovery has taken place since then.

On
October 2, 2001, a complaint captioned Deborah Searcy, Shirley Walker, et al. v. Impac Funding Corporation, Impac Mortgage Holdings, Inc. et.
al. was filed in the Wayne County Circuit Court, State of
Michigan, as a purported class action lawsuit alleging that the defendants violated Michigan's Secondary Mortgage Loan Act, Credit Reform Act and Consumer Protection Act. A motion to dismiss an
amended complaint has been filed, but not yet ruled upon.

All
of the above purported class action lawsuits are similar in nature in that they allege that the mortgage loan originators violated the respective state's statutes by charging
excessive fees and costs when making second mortgage loans on residential real estate. The complaints allege that IFC was a purchaser, and is a holder, along with other affiliated entities, of second
mortgage loans originated by other lenders. The plaintiffs in the lawsuits are seeking damages that include disgorgement of interest paid, restitution, rescission, actual damages, statutory damages,
exemplary damages, pre-judgment interest and punitive damages. No specific dollar amount of damages is specified in the complaints.

On
November 9, 2007, and separately on August 25, 2008, two matters were filed against IFC in Orange County in the Superior Court of California, as case
nos. 07CC11612 and 00110553, respectively, by Citimortgage, Inc., alleging claims for breach of contract and damages based upon representations and warranties made in conjunction with
whole loan sales. These actions seek combined damages in excess of $4.2 million.

On
June 28, 2008 a matter was filed against IFC in the Circuit Court of the Eighteenth Judicial District, Dupage County in Illinois, as case no. 2008L000721, by TR Mid
America Plaza Corp., seeking damages for breach of contract (a lease agreement) in excess of $0.6 million plus such amount as determined through the date of judgment and payment of attorneys
fees and costs.

On
October 4, 2007, a purported class action matter was filed in the United States District Court, Central District of California against Impac Funding Corporation and Impac
Mortgage Holdings, Inc. entitled Vincent Marshell v. Impac Funding Corporation, et al. as Case no. EDCV07-1290SGL, the action alleges violations of
Truth in Lending Act, violation of California Business and Professional Code Section 17200, et seq, breach of contract, and an additional claim under Business and Professional Code
Section 17200. The complaint alleges that the defendants failed to disclose pertinent information in a clear conspicuous manner as called for in the Truth in Lending Act, and that they misled
the plaintiff. The action seeks to recover actual damages, compensatory damages, consequential damages, punitive damages, rescission, reasonable attorneys fees and costs, statutory damages, a
disgorgement of all profits obtained as a result of the unfair competition, equitable relief including restitution and such other relief as is just and proper.

The
Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously. Nevertheless, litigation is uncertain and the Company may not
prevail in the lawsuits and can

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express
no opinion as to its ultimate outcome. An adverse judgment in any of these matters could have a material adverse affect on us; however, no judgment in any matter is probable to occur nor is
any amount of any loss from such judgment reasonably estimable at this time.

Securities Litigation

On
August 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and
several of its senior officers entitled Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al. The action alleges against all defendants violations of
Section 10(b) and 10b-5 of the Securities Exchange Act of 1934 (the "Exchange Act") and against the individual defendants violations of Section 20(a) of the Exchange Act.
Plaintiffs contend that the defendants caused the Company's stock to trade at artificially inflated prices through false and misleading statements and intentional or reckless disregard of basic
accounting principles. The complaint seeks compensatory damages for all damages sustained as a result of the defendants' actions, including reasonable costs and expenses and other relief as the court
may deem proper. On October 3, 2007, a similar case was filed in the same Court entitled Richard Abrams v. Impac Mortgage Holdings, Inc., et al. This action
makes allegations similar to those in the Pittleman action and also seeks similar recovery. These matters were consolidated with lead counsel appointed by the Court. A Consolidated Complaint captioned
Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al was filed on January 8, 2008. A motion to dismiss was filed by the defendants on March 10,
2008 and that motion was granted. On October 27, 2008 a Third Amended Complaint was filed. A motion to dismiss was filed by the defendants on December 15, 2008. On March 10, 2009,
the court sustained the defendants' motion to dismiss without leave to amend.

On
December 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and several of its senior
officers entitled Sharon Page v. Impac Mortgage Holdings, Inc., et al. The action is a complaint for violations of the Employee Retirement Income Security
Act in relation to the Company's 401(k) plan. The complaint alleges breach of fiduciary duties, breach of duty to avoid conflicts of interest, allegations of co-fiduciary liability and
knowing participation in a breach of fiduciary duty by IMH. Plaintiffs contend that the defendants breached their fiduciary duties in violation of ERISA by failing to prudently and loyally manage the
plan's investment in IMH stock by continuing to offer IMH stock as an investment option and to make contributions in stock, provide complete and accurate information to participants, and monitor
appointed plan fiduciaries and provide them with accurate information. The complaint seeks monetary payment to the plan for the losses in an amount to be proven, injunctive and other appropriate
equitable relief, a constructive trust on amounts by which any defendant was unjustly enriched, an appointment of one or more independent fiduciaries, actual damages, reasonable attorney fees and
expenses, taxable costs, interests on these amounts and other legal or equitable relief as may be just and proper.

The
Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously. Nevertheless, litigation is uncertain and the Company may not
prevail in the lawsuits and can express no opinion as to its ultimate outcome. An adverse judgment in any of these matters could have a material adverse affect on us; however, no judgment in any
matter is probable to occur nor is any amount of any loss from such judgment reasonably estimable at this time.

Other Litigation

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the security holders to be voted on during the fourth quarter of 2008.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

Until November 20, 2008, our Common Stock was listed on the NYSE under the symbol "IMH." The Common Stock is currently quoted
on the pink sheets under the symbol "IMPM."

The
following table summarizes the high, low and closing sales prices for our common stock for the periods indicated:

2008

2007High

Low

Close

High

Low

CloseFirst Quarter

$
19.80

$
5.30

$
12.70

$
91.10

$
40.30

$
50.00Second Quarter


16.00


6.90


7.50


67.50


42.50


46.10Third Quarter


10.00


1.60


2.50


46.00


9.50


15.40Fourth Quarter


3.70


0.20


0.60


16.50


2.00


5.60


On
March 5, 2009, the last quoted price of our common stock on the pink sheets was $0.27 per share. As of March 5, 2009, there were 434 holders of record, including
holders who are nominees for an undetermined number of beneficial owners, of our common stock.

Common stock dividend distributions.If we continue our qualification as a REIT, we expect to make annual
distributions to stockholders at an amount
that maintains our REIT status in accordance with the Internal Revenue Code, which may not necessarily equal net earnings as calculated in accordance with GAAP. Our dividend policy is subject to
revision at the discretion of the board of directors. All distributions in excess of those required to maintain our REIT status will be made at the discretion of the board of directors and will depend
on our taxable income, financial condition and other factors as the board of directors deems relevant. The board of directors has not established a minimum distribution level. Distributions to
stockholders will generally be taxable as ordinary income or qualified income, which is subject to a 15 percent tax rate, although a portion of such distributions may be designated by us as a
capital gain or may constitute a tax-free return of capital. We annually furnish to each of our stockholders a statement setting forth distributions paid during the preceding year and
their characterization as ordinary income, qualified income, capital gain or return of capital.

We
declared a dividend of $1.00 per share for the quarter ended March 31, 2007 for stockholders of record as of April 7, 2007. We did not declare any common stock
dividends for the quarters ended June 30, September 30, and December 31, 2007, or any quarter in 2008. We do not expect to declare or pay any cash dividends on our common stock in
the foreseeable future. Pursuant to the terms of our outstanding preferred stock, until all accumulated dividends on our preferred stock are paid, we are prohibited from paying common stock dividends.
Under the terms of our trust preferred securities, we are also prohibited from paying dividends on our capital stock while we are in an extension period where we are not making interest payments.
Furthermore, pursuant to the terms of our restructured reverse repurchase agreement, to the extent we are in default, we are not allowed to pay dividends.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations data for each of the years in the five-year period ended
December 31, 2008 and the consolidated balance sheet data as of the year-end for each of the years in the five-year period ended December 31, 2008 were derived
from the audited consolidated financial statements. Such selected financial data should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial
statements starting on page F-1 and with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."

IMPAC MORTGAGE HOLDINGS, INC.
(dollars in thousands, except per share data)

For the year ended December 31,2008

2007

2006

2005

2004Statement of Operations Data:Net interest income:Interest income

$
1,476,972

$
1,224,821

$
1,134,002

$
1,096,415

$
665,146Interest expense


1,463,239


1,179,015


1,196,199


964,427


388,201Net interest income (expense)


13,733


45,806


(62,197
)

131,988


276,945Provision for loan losses


-


1,390,008


34,600


30,828


24,852Net interest income (expense) after provision for loan losses


13,733


(1,344,202
)

(96,797
)

101,160


252,093Non-interest income:Change in fair value of derivative instruments


-


(140,827
)

93,498


178,290


11,843Change in fair value of net trust assets, excluding REO


24,281


-


-


-


-(Losses) gains from real estate owned


(52,011
)

(105,865
)

(9,659
)

2,025


4,275Change in fair value of trust preferred securities


24,879


-


-


-


-Real estate advisory fees


45,388


-


-


-


-Other (expense) income


(93
)

(22,861
)

29,727


8,456


(115,932
)Total non-interest income (expense)


42,444


(269,553
)

113,566


188,771


(99,814
)Non-interest expense:General, administrative and other


18,818


19,594


18,985


2,928


3,186Personnel expense


10,320


5,502


3,333


15,194


9,155Total non-interest expense


29,138


25,096


22,318


18,122


12,341Net earnings (loss) from continuing operations before income taxes


27,039


(1,638,851
)

(5,549
)

270,365


138,187Income tax expense (benefit) from continuing operations


22,270


14,861


(13,597
)

806


(18,182
)Net earnings (loss) from continuing operations


4,769


(1,653,712
)

8,048


269,559


156,369(Loss) earnings from discontinued operations, net of tax


(49,492
)

(393,378
)

(83,321
)

699


101,268Net (loss) earnings

$
(44,723
)
$
(2,047,090
)
$
(75,273
)
$
270,258

$
257,637Net (loss) earnings per common share  Basic:(Loss) earnings from continuing operations

$
(0.84
)
$
(219.28
)
$
(0.87
)
$
3.37

$
2.34(Loss) earnings from discontinued operations

$
(6.50
)
$
(51.69
)
$
(10.95
)
$
0.01

$
1.51Net (loss) earnings per share

$
(7.34
)
$
(270.97
)
$
(11.82
)
$
3.38

$
3.85Net (loss) earnings per common share  Diluted:(Loss) earnings from continuing operations

$
(0.84
)
$
(219.28
)
$
(0.87
)
$
3.34

$
2.29(Loss) earnings from discontinued operations

$
(6.50
)
$
(51.69
)
$
(10.95
)
$
0.01

$
1.48Net (loss) earnings per share

$
(7.34
)
$
(270.97
)
$
(11.82
)
$
3.35

$
3.78Dividends declared per common share

$
-

$
3.50

$
9.50

$
19.50

$
29.00


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As of December 31,2008

2007

2006

2005

2004Balance Sheet Data:Securitized mortgage collateral and mortgages held-for-investment (1)

$
5,895,167

$
16,433,764

$
20,860,711

$
24,586,530

$
21,842,320Assets of discontinued operations


141,053


353,250


2,086,390


2,486,832


1,140,360Total assets


6,715,517


17,391,072


23,598,955


27,720,379


23,815,767Securitized mortgage borrowings (1)


6,193,984


17,780,060


20,527,001


23,990,429


21,206,373Liabilities of discontinued operations


217,241


405,341


1,774,256


2,276,561


982,297Total liabilities


6,706,265


18,468,800


22,589,425


26,553,432


22,771,692Total stockholders' equity (deficit)


9,252


(1,077,728
)

1,009,530


1,166,947


1,044,075




As of and for the year ended December 31,2008

2007

2006

2005

2004Operating Data:Mortgage acquisitions and originations

$
-

$
4,533,715

$
12,560,163

$
22,310,603

$
22,213,104Master servicing portfolio (2)


18,277,999


21,208,745


26,356,240


28,448,507


28,404,008Servicing portfolio (2)


236,140


427,157


1,498,253


2,208,433


1,690,800


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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of operations contain 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. Refer to Item 1. "BusinessForward-Looking
Statements" for a complete description of forward-looking statements. Refer to Item 1. "Business" for information on our businesses and operating segments.

Dollar
amounts are presented in thousands, except per share data or as otherwise indicated.

Selected Financial Results for 2008

The Company prospectively adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities"
(SFAS 159) as of January 1, 2008. The adoption of SFAS 159 resulted in new valuation techniques used by the Company when determining fair value, most notably to value its
securitized mortgage collateral and borrowings and trust preferred securities, which had not previously been carried at fair value.

Continuing Operations



Discontinued Operations



Market Conditions

See Item 1. "Business" for discussion of market conditions.

Status of Operations

In 2007 and 2008, management has been challenged by the unprecedented turmoil in the mortgage market, including the following:
significant increases in delinquencies and foreclosures; significant increases in credit-related losses; tightening of warehouse credit and the virtual elimination of the market for loan
securitizations. As a result, the Company discontinued certain operations, resolved and terminated all but one of our reverse repurchase facilities and settled a significant portion of our outstanding
repurchase claims, while also reducing our overall operating costs and liabilities.

During
2008, the Company entered into an agreement with a real estate marketing company to generate advisory fees. The real estate marketing company specialized in the marketing of
foreclosed properties. During the year, the Company earned $18.4 million in real estate advisory fees plus a $27.0 million fee for agreeing to terminate this relationship in the fourth
quarter of 2008.

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During
2008, the Company continued to fund its operations with revenues and cash flows from its residual interests in securitizations and master servicing fees generated from the
long-term mortgage portfolio and real estate advisory fees from the Company's advisory services agreement with a real estate marketing company, which agreement has been terminated.
Continued deterioration in the housing and credit markets may have a significant impact on these revenues and cash flows.

The
Company continues to explore new mortgage-related fee-based businesses. As a result, the Company has intentionally maintained certain personnel to explore these new
business opportunities.

In
September 2008, the Company entered into an agreement to restructure its reverse repurchase financing (Restructured Financing) with its remaining lender. The balance of this
Restructured Financing was $188.7 million at December 31, 2008 and collateralized by loans held-for-sale within discontinued operations. The agreement removed all
technical defaults from financial covenant noncompliance and any associated margin calls for the term of the agreement. The agreement calls for certain targets including a reduction of the borrowings
balance to $100 million in 18 months (from September 2008) with an advance rate of no more than 65 percent of the outstanding principal balance and $50 million in
24 months with an advance rate of no more than 55 percent of the outstanding principal balance. By meeting these targets, the agreement term can extend to 30 months. At
December 31, 2008, the advance rate was 79 percent. The agreement also calls for monthly principal paydowns of $750,000 for October 2008, then $1.5 million thereafter until the
earlier of the Company raising capital or the end of the agreement term. If the Company is successful in raising capital, approximately 10 percent of the gross proceeds will be required to be
paid as an additional principal paydown and the monthly principal paydown would then be reduced to $750,000. The interest rate is one-month London Interbank Offered Rate (LIBOR) plus 325
basis points, and all cash collected from the securing mortgage loans is required to be paid to the lender. To the extent the cash collected from the collateral is not adequate to pay the interest
expense due on the borrowings, interest expense would be paid to the lender from the margin cash account (included in Restricted cash in discontinued operations) or the Company's cash balances.
Accomplishing the restructuring of this reverse repurchase financing allows the Company to manage the remaining loans on the line for the eventual collection, refinance, sale or securitization without
the risk of receiving margin calls.

In
December 2008, the Company amended its charter to affect a reverse stock split of its outstanding shares of common stock and to reduce the common stock's par value subsequent to the
reverse stock split. Every ten shares of common stock, par value $0.01 per share, of the Company which were issued and outstanding immediately prior to the reverse stock split were combined into one
issued and outstanding share of common stock, par value $0.10 per share. No fractional shares of common stock of the Company were issued upon the effectiveness of the reverse stock split. Any
fractional shares that would otherwise result from the reverse stock split were eliminated by rounding each fraction up to the nearest whole share. Immediately after the
reverse stock split, the par value of the Company's issued and outstanding shares of common stock was decreased from $0.10 per share to $0.01 per share.

In
December 2008, the Company deferred payment of its fourth quarter 2008 dividend on the Company's Series B Cumulative Redeemable Preferred Stock (Series B Preferred
Stock) and Series C Cumulative Redeemable Preferred Stock (Series C Preferred Stock). As a result of this announcement, unpaid dividends on the Series B Preferred Stock and
Series C Preferred Stock totaled $1.2 million and $2.5 million, respectively. All unpaid dividends on the preferred stock will accumulate. Until such time as we pay all cumulative
dividends on the preferred stock, we may not pay dividends on, nor redeem, repurchase or make any distribution on, shares of common stock. If we do not pay dividends on the preferred stock for six or
more quarterly periods (whether or not consecutive), holders of preferred stock will be entitled to elect two additional directors to the Board to serve until all dividends are paid.

In
December 2008, the Company's Board of Directors approved the deferral of the payments of interest on trust preferred securities. During the deferral period, interest on the trust
preferred securities bear additional interest at a rate equal to the coupon rate on the respective security. Unless the Company again elects to defer interest payments, the Company is required to pay
all accrued interest together with the additional interest at the next payment date. Furthermore, during the time that the Company defers interest payments, it may not, with limited exceptions, pay
dividends on or redeem or purchase its capital stock nor make any payments on outstanding debt obligations that rank equally with or junior to the trust preferred obligations and, in some cases, it
may not allow subsidiaries to pay dividends.

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In
December 2008, the Company fully satisfied $8.0 million in outstanding trust preferred securities for $1.2 million and is in the process of canceling the securities.
Under the terms of the agreement, to the extent the Company settles additional amounts of its outstanding trust preferred securities prior to January 2010 at per share values in excess of the per
share amount of this agreement, the Company will be required to pay additional amounts representing the incremental increase in the per share amounts.

In
January 2009, the Company fully satisfied $25.0 million in outstanding trust preferred securities of Impac Capital Trust #2 for $3.75 million.

In
January 2009, the Company agreed to restructure, which is subject to definitive agreements, $51.3 million in trust preferred securities of Impac Capital Trusts #1 and #3.
Under the terms of the restructuring, the interest rates are reduced from 8 percent to 2 percent through 2013 and increase 1 percent per year through 2017. Starting in 2018, the
interest rates become variable at 3-month LIBOR plus 375 basis points. In connection with the restructuring, the Company paid 2 percent interest on each of Impac Capital Trusts #1
and #3 for the January 2009 and December 2008 fourth quarter deferred interest payments, respectively. The Company has deferred interest on the remaining $12.0 million in trust preferred
securities of $257 thousand at December 31, 2008. At the end of the deferral period (five years) the Company must pay all deferred and accrued interest amounts or the securities become
due.

In
order to reduce dividend payments on its preferred stock, the Company has been considering exchanging the outstanding preferred stock for common stock. This exchange could offer the
current preferred stockholders greater liquidity as common stockholders and could reduce dividend obligations for the Company. If we consummate an exchange offer of our Series B Preferred Stock
and Series C Preferred Stock, we may also issue shares of common stock to settle outstanding obligations and liabilities. Issuances of additional shares of our common stock may adversely affect
its market price and significantly dilute stockholders.

If
we are not successful in realizing cashflows from our residual portfolio and initiating new mortgage-related fee-based businesses, we may not be able to satisfy our
contractual obligations for 2009 and subsequent years, including repayment of the Restructured Financing, interest payments on trust preferred securities and preferred stock dividends.

To
understand the financial position of the Company better, we believe it is important to understand the composition of the Company's stockholders' equity (deficit) and to which segment
of the business it relates. At December 31, 2008, the equity (deficit) within our continuing and discontinued operations was comprised of the following significant assets and liabilities:

Condensed Components of
Stockholders' Equity (Deficit) by Segment
As of December 31, 2008Continuing
Operations

Discontinued
Operations

TotalCash

$
46,215

$
13

$
46,228Residual interests in securitizations


28,045


-


28,045Trust preferred securities ($91,244 par)


(15,403
)

-


(15,403
)Repurchase liabilities (1)


-


(68,268
)

(68,268
)Lease liability (2)


-


(7,296
)

(7,296
)Deferred charge


15,142


-


15,142Net other assets (liabilities)


11,441


(637
)

10,804Stockholders' equity (deficit)

$
85,440

$
(76,188
)
$
9,252


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Continuing operations

During 2008, we had three primary sources of cash earnings:



Since
our consolidated and unconsolidated securitization trusts are non-recourse, we have netted trust assets and liabilities to present the Company's interest in these
trusts more simply, which are considered our residual interests in securitizations. For unconsolidated securitizations our residual interests represents the fair value of investment securities,
available-for-sale. For consolidated securitizations, our residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset
by the fair value of securitized mortgage borrowings and net derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after
required distributions to bondholders and maintaining overcollateralization levels within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair
value of trust assets and trust liabilities, was $28.0 million at December 31, 2008.

The
Company acts as the master servicer for mortgages included in our CMO and REMIC securitizations. The master servicing fees we earn are generally 0.03 percent per annum on the
declining principal balances of these mortgages plus interest income on cash held until remitted to investors. Master servicing rights retained in connection with consolidated securitizations are
included in securitized mortgage collateral in the Company's consolidated balance sheet. Master servicing rights retained in connection with unconsolidated securitizations are included in other
assets.

During
2008, we paid $6.0 million and $11.2 million in interest on trust preferred securities and preferred stock dividends, respectively. As previously described, the
Company has deferred both dividend payments on its Series B Preferred Stock and Series C Preferred Stock and interest payments on its trust preferred securities.

At
December 31, 2008, we had deferred charges of $15.1 million, which is amortized as a component of income tax expense in the consolidated statements of operations and
comprehensive loss over the estimated life of the mortgages retained in the securitized mortgage collateral. The deferred charges represent the deferral of income tax expense on inter-company profits
that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. This balance is recorded as required by accounting principles generally accepted in the United States of
America (GAAP) and does not have any realizable cash value.

Net
other assets include $2.6 million in premises and equipment, $2.2 million in investment in capital trusts, $1.2 million in restricted cash and
$2.9 million in prepaid expenses.

At
December 31, 2008, cash within our continuing operations increased to $47.5 million from $24.4 million at December 31, 2007.

Discontinued operations

The Company's most significant liabilities at December 31, 2008 relate to its repurchase liabilities and a lease liability
within discontinued operations.

The
repurchase liabilities consist of a repurchase reserve and the net amount owed to our lenders which is collateralized by loans held-for-sale, restricted cash
balances and certain real estate owned and other assets. The balance of the Restructured Financing was approximately $188.7 million at December 31, 2008. We are currently distributing
all principal and interest received from the collateral securing the Restructured Financing to the lender.

We
were required to make normal and customary representations and warranties about the loans we had previously sold to investors. Our whole loan sale agreements generally required us to
repurchase loans if we breached a representation or warranty given to the loan purchaser. In addition, we also could be required to repurchase loans as a result of borrower fraud or if a payment
default occurs on a mortgage loan shortly after its

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sale.
During 2008, the repurchase liability decreased $11.8 million to $13.9 million as a result of settlements during 2008. The repurchase liability is an estimate of losses from
expected repurchases, and is based, in part, on the recent settlement of claims.

In
connection with the discontinuation of our non-conforming mortgage, retail mortgage, warehouse lending and commercial operations, a significant amount of office space
that was previously occupied is no longer being used by the Company. The Company has subleased a significant amount of this
office space. At December 31, 2008, the Company had a liability of $7.3 million included within discontinued operations, representing the present value of the minimum lease payments over
the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space.

Critical Accounting Policies

We define critical accounting policies as those that are important to the portrayal of our financial condition and results of
operations and require estimates and assumptions based on our judgment of changing market conditions and the performance of our assets and liabilities at any given time. 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 the following:



Fair Value of Financial Instruments

The Company adopted SFAS 157 on January 1, 2008. SFAS 157 defines fair value, establishes a framework for
measuring fair value and outlines a fair value hierarchy based on the inputs to valuation techniques used to measure fair value. SFAS 157 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). SFAS 157 categorizes fair
value measurements into a three-level hierarchy based on the extent to which the measurement relies on observable market inputs in measuring fair value. Level 1, which is the highest priority
in the fair value hierarchy, is based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 is based on observable market-based inputs, other than quoted
prices, in active markets for identical assets or liabilities. Level 3, which is the lowest priority in the fair value hierarchy, is based on unobservable inputs. Assets and liabilities are
classified within this hierarchy in their entirety based on the lowest level of any input that is significant to the fair value measurement.

The
use of fair value to measure our financial instruments is fundamental to our financial statements and is a critical accounting estimate because a substantial portion of our assets
and liabilities are recorded at estimated fair value. Financial instruments classified as Level 3 are generally based on unobservable inputs, and the process to determine fair value is
generally more subjective and involves a high degree of management judgment and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of different
assumptions, as well as changes in market conditions, could have a material effect on our results of operations or financial condition.

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In
conjunction with the adoption of SFAS 157, the Company prospectively adopted SFAS 159 as of January 1, 2008. SFAS 159 provides an option on an
instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial
adoption, the election is made at the acquisition of a financial asset, financial liability, or a firm commitment and it may not be revoked. Management believes that the adoption of SFAS 159
provides an opportunity to mitigate volatility in reported earnings and provides a better representation of the economics of the trust assets and liabilities.

Under
the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments (certain trust assets, trust liabilities and trust
preferred securities) held at January 1, 2008.
Differences between the December 31, 2007 carrying values and the January 1, 2008 fair values were recognized as an adjustment to retained deficit. The adoption of SFAS 159
resulted in a $1.1 billion decrease to retained deficit on January 1, 2008 from $(1.4) billion at December 31, 2007 to $(308.8) million at January 1, 2008.

As
a result of the lack of observable market data resulting from inactive markets, the Company has classified all its investment securities available-for-sale,
securitized mortgage collateral and borrowings, net derivative liabilities and trust preferred securities as Level 3 fair value measurements at December 31, 2008. Level 3 assets
and liabilities were 100 percent of total assets and liabilities at fair value.

Recurring basis

Investment securities available-for-salePursuant to the Company's
adoption of SFAS 159, the Company elected to carry all of its investment securities available-for-sale at fair value. The investment securities consist primarily of
non-investment grade mortgage-backed securities. The fair value of the investment securities are measured based upon our expectation of inputs that other market participants would use.
Such assumptions include our judgments about the underlying collateral, prepayment speeds, credit losses, and certain other factors. Given the market disruption and lack of observable market data as
of December 31, 2008, the fair value of the investment securities available-for-sale were measured using significant internal expectations of market participants'
assumptions.

Securitized mortgage collateralPursuant to the Company's adoption of SFAS 159, the Company elected to carry all of
its securitized mortgage collateral at fair value. These assets consist primarily of non-conforming single-family residential and multi-family mortgage loans securitized between 2002 and
2007. Fair value measurements are based on the Company's estimated cash flow models and non-binding quoted prices for the underlying bonds. The Company's assumptions include our
expectations of inputs that other market participants would use in pricing these assets. These assumptions include our judgments about the underlying collateral, annual prepayment speeds, estimated
future credit losses, forward interest rates, investor yield requirements and certain other factors.

Securitized mortgage borrowingsPursuant to the Company's adoption of SFAS 159, the Company elected to carry all of
its securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by non-conforming
mortgage loans. Fair value measurements include our judgments about the underlying collateral assumptions such as annual prepayment speeds, estimated future credit losses, forward interest rates,
investor yield requirements and certain other factors and are based upon non-binding quoted prices for the individual tranches of bonds, if available.

Trust preferred securitiesPursuant to the Company's adoption of SFAS 159, the Company elected to carry all of its
trust preferred securities at fair value. These securities were measured based upon an analysis prepared by the Company, which considered the Company's own credit risk, including a comparison
to the terms of the Company's preferred stock and consideration of recent settlements with trust preferred debt holders and revised terms of restructured trust preferred securities.

Derivative assets and liabilitiesFor non-exchange traded contracts, fair value is based on the amounts that
would be required to settle the positions with the related counterparties as of the valuation date. Valuations of derivative assets and liabilities are based on observable market inputs, if available.
To the extent observable market inputs are not available, fair values measurements include the Company's judgments about the future cash flows, forward interest rates and certain other factors,
including counterparty risk. With the issuance of SFAS 157, these values must also take into account the Company's own credit standing, to the extent applicable, thus included in

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the
valuation of the derivative instrument is the value of the net credit differential between the counterparties to the derivative contract.

The
Company's primary objective is to limit the exposure to the variability in future cash flows attributable to the variability of one-month LIBOR, which is the underlying
index of adjustable rate securitized mortgage borrowings and short-term borrowings under reverse repurchase agreements. The Company also monitors on an ongoing basis the prepayment risks
that arise in fluctuating interest rate environments. The Company's interest rate risk management policies are formulated with the intent to offset the potential adverse effects of changing interest
rates on securitized mortgage borrowings and reverse repurchase borrowings.

To
mitigate exposure to the effect of changing interest rates on cash flows on securitized mortgage borrowings and reverse repurchase borrowings, the Company purchased derivative
instruments primarily in the form of interest rate swap agreements (swaps) and, to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). Due to the closure
of the mortgage operations, the Company has not entered into a new derivative instrument since the third quarter of 2007.

On
September 15, 2008, Lehman Brothers Holdings Inc. (LBHI) filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date, LBHI,
through affiliated companies, was an interest rate swap counterparty to several of the Company's CMO and REMIC securitizations. At December 31, 2008, the estimated value of derivative
liabilities to LBHI, through its affiliated companies was $107.2 million and is included in derivative liabilities in the consolidated balance sheet. As the related securitization trusts are
non-recourse to the Company, the Company is not required to replace or otherwise settle any derivative positions affected by counterparty default within the consolidated trusts.

Non-recurring basis

The
Company is required to measure certain assets at fair value. These fair value measurements typically result from the application of specific accounting
pronouncements under GAAP. The fair value measurements are considered non-recurring fair value measurements under SFAS 157.

Loans held-for-saleLoans held-for-sale for which the fair value option was
not elected are carried at lower of cost or market (LOCOM). When available, such measurements are based upon what secondary markets offer for portfolios with similar characteristics, and are
considered Level 2 measurements. If market pricing is not available, such measurements are significantly impacted by our expectations of other market participants' assumptions, and are
considered Level 3 measurements. The Company utilizes internal pricing processes to estimate the fair value of loans held-for-sale, which is based on recent sales and
estimates of the fair value of the underlying collateral. Loans held-for-sale, which are primarily included in assets of discontinued operations, are considered Level 3
measurements at December 31, 2008 based on the lack of observability of market inputs.

We
continue to refine our valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While we believe our valuation
methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could
result in a materially different estimate of fair value as of the reporting date.

Interest Income and Interest Expense

Interest income on securitized mortgage collateral and interest expense on securitized mortgage borrowings are recorded using the
effective yield for the period based on the previous quarter's estimated fair value.

In
periods prior to the adoption of SFAS 159, the Company amortized mortgage premiums, securitization costs, bond discounts, deferred charges and master servicing rights
associated with its securitized mortgage collateral and borrowings to interest income and interest expense over the estimated lives of the mortgages and maturity of the borrowings as an adjustment to
yield of the securitized mortgage collateral and borrowings. Amortization calculations included certain loan information, including the interest rate, maturity date, principal balance and certain
assumptions including expected prepayment rates. The Company estimated prepayments on

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a
collateral specific basis and considered actual prepayment activity for the collateral pool. The Company also considered the current interest rate environment and the forward prepayment curve
projections.

Net Realizable Value of REO

The Company considers the net realizable value (NRV) of its REO properties in evaluating REO losses. When real estate is acquired in
settlement of loans, or other real estate owned, the mortgage is written-down to a percentage of the property's appraised value or broker's price opinion or list price less estimated
selling costs and including mortgage insurance expected to be received. Subsequent changes in the NRV of the real estate owned is reflected as a writedown of REO and results in additional losses.

Lower of Cost or Market (LOCOM) of Loans Held-for-Sale

Loans held-for-sale are carried at the lower of amortized cost or fair value. Traditionally, we have estimated
fair value by evaluating a variety of market indicators including recent trades and outstanding commitments. To perform the analysis we stratify the mortgage loans in our
held-for-sale portfolio into loans with expected trades and those on the reverse repurchase lines. After the valuation method is determined
(e.g.,trade price or warehouse line basis) we apply fair value estimates to these stratifications to arrive at a valuation allowance which is
applied against our carrying amount resulting in a net fair value estimate for mortgage loans held for sale. However, during the third and fourth quarters of 2007 the market for unsold loans was
reduced significantly resulting in significant writedowns to the Company's remaining unsold loans.

Securitization of Financial Assets as Financing versus Sale

Securitizations are accounted for as financings or sales. We refer to the sales as "unconsolidated" securitizations. We determine the
gain on sale by allocating the carrying value of the underlying mortgage loans between loans sold and the interests retained, based on relative fair values. The gain recognized is the difference
between the net proceeds of the securitization and the allocated carrying value of the loans sold. Net proceeds consist of cash and any other assets obtained, less any liabilities incurred. Our
estimate of the fair value of our net retained residual interests in these securitizations, which are included in investment securities available-for-sale in the consolidated
balance sheets, requires us to exercise significant judgment as to the timing and amount of future cash flows from the residual interests. We are exposed to credit risk from the underlying mortgage
loans in unconsolidated securitizations to the extent we retain subordinated interests. Changes in expected cash flows resulting from changes in expected net credit losses will impact the value of our
subordinated retained interests and those changes are recorded as a component of change in fair value of net trust assets in periods subsequent to the adoption of SFAS No. 159 on
January 1, 2008. In periods prior to the adoption of SFAS No. 159, the change in fair values was included in comprehensive loss.

In
contrast, for securitizations that are structured as financings, we recognize interest income over the life of the securitized mortgage collateral and interest expense incurred for
the securitized mortgage borrowings. We refer to these transactions as consolidated securitizations. The mortgage loans collateralizing the debt securities for these financings are included in
securitized mortgage collateral and the debt securities payable to investors in these securitizations are included in securitized mortgage borrowings in our consolidated balance sheet.

Whether
a securitization is consolidated or unconsolidated, investors in the securities issued by the securitization trust have no recourse to our non-securitized assets or
to us and have no ability to require us to provide additional assets, but rather have recourse only to the assets transferred to the trust. Whereas the accounting differences are significant, the
underlying economic impact to us, over time, will be the same regardless of whether the securitization trust is consolidated or unconsolidated.

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The mortgage operations recognize gains or losses on the sale of mortgages when the sales transaction settles or upon the securitization of the mortgages when
the risks of ownership have passed to the purchasing party. Gains and losses may be increased or decreased by the amount of any servicing related premiums received and costs associated with the
acquisition or origination of mortgages. A transfer of financial assets in which control is surrendered is accounted for as a sale to the extent that consideration other than a beneficial interest in
the transferred assets is received in the exchange. The long-term investment operations structured securitized mortgage securitizations as financing arrangements and recognized no gain or
loss on the transfer of mortgage assets. The consolidated securitized mortgage securitization trusts do not meet criteria within SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 140), to be qualifying special purpose entities, and further, are considered variable interest entities under FASB Interpretation
No. 46R (FIN 46R) and, therefore, are consolidated by the long-term investment operations as the entities' primary beneficiary. Securitizations which do not meet the sale
criteria within SFAS 140 are accounted for as secured borrowing transactions and consolidated under FIN46R to the extent the Company holds a residual interest and thus is considered the primary
beneficiary. Also, master servicing assets and other retained interests in the transferred assets must be measured by allocating the previous carrying value between the asset sold and the interest
retained, if any, based on their relative fair values at the date of transfer. To determine the value of the securities and retained interests, management uses certain analytics and data to estimate
future rates of prepayments, prepayment penalties to be received, delinquencies, defaults and default loss severity and their impact on estimated cash flows.

Calculation of Repurchase Reserve

When we have sold loans through whole loan sales we were required to make normal and customary representations and warranties about
the loans to the purchaser. Our whole loan sale agreements generally required us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be
required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale.

Investors
have requested the Company to repurchase loans or to indemnify them against losses on certain loans which the investors believe either do not comply with applicable
representations or warranties or defaulted shortly after its purchase. Upon completion of its own investigation regarding the investor claims, the Company repurchases or provides indemnification on
certain loans, as appropriate. The Company maintains a liability for expected losses on dispositions of loans expected to be repurchased or on which indemnification is expected to be provided and
regularly evaluates the adequacy of this repurchase liability based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiations, and other relevant factors
including economic conditions.

The
Company estimates the repurchase reserve, included in liabilities of discontinued operations in the consolidated balance sheet, based on the estimated trailing whole loan sales that
still have outstanding early payment and misrepresentation warranties. The calculation of the trailing whole loan sales subject to request is based upon historical analysis of the timing of requests
in relation to their sale date. The Company also calculates the rate at which our whole loan sales will develop into early payment default or misrepresentation claims. Based on historical experience,
management will determine what percentage of the claims may incur a loss. The Company applies a historical loss rate, adjusted for current market conditions based on the type of loan (first lien or to
a lesser extent second lien) to the loans we expect to incur loss on in the future to derive the repurchase reserve. The reserve includes the Company's estimate of losses in the fair value of loans
the Company expects it will repurchase, plus any premiums that will be refunded to the investor. The loss in fair value is predominately determined based on several factors including recent
settlements and status of current settlement negotiations.

Allowance for Loan Losses

In periods prior to the adoption of SFAS 159 on January 1, 2008, we maintained an allowance for loan losses for
mortgages held as securitized mortgage collateral, finance receivables and mortgages held-for-investment. In evaluating the adequacy of the allowance for loan losses,
management would take 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

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issuance.
The data was also analyzed by collection status. Our estimate of the required allowance for these loans was developed by estimating both the rate of default of the loans and the amount of
loss in the event of default. The rate 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 method in which to evaluate the allowance for loan losses. Management also recognized that there are qualitative factors that must be taken into
consideration when evaluating and measuring inherent loss in our loan portfolios. These items included, but are not limited to, economic indicators that may affect the borrower's ability to pay,
changes in value of collateral, projected loss curves, political factors, market conditions, competitor's performance, market perception and industry statistics. This evaluation was inherently
subjective, as it required estimates that were susceptible to significant revision as factors change or as more information becomes available.

Specific
valuation allowances would be established for loans that were deemed impaired, if default by the borrower is deemed probable, and if the fair value of the loan or the
collateral is estimated to be less than the gross carrying value of the loan. Actual losses on loans were recorded as a reduction to the allowance through charge-offs.

Amortization of Loan Premiums and Securitization Costs

In periods prior to the adoption of SFAS No. 159 on January 1, 2008, we would amortize the mortgage premiums,
securitization costs, bond discounts, and deferred gains/losses to interest income over the estimated lives of the mortgages as an adjustment to yield of the collateral and borrowings, in accordance
with Statement of Financial Accounting Standard No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases"
("SFAS 91"). Amortization calculations included certain loan information including the interest rate, loan maturity, principal balance and certain assumptions including expected prepayment
rates. We estimated prepayments on a collateral-specific basis and considered actual prepayment activity for the collateral pool. We also considered the current interest rate environment and the
forward market curve projections.

Taxable Income

We have elected to be taxed as a REIT, which generally allows us to pass through income to our stockholders in the form of dividends
without the payment of corporate level tax. To maintain our qualification as a REIT, we must satisfy certain quarterly asset tests, annual gross income tests, and certain organizational tests, and we
must satisfy a distribution requirement under which we must distribute dividends to our stock holders in an amount at least equal to 90 percent of our taxable income (other than net capital
gains).

We
expect to revoke our REIT election, effective January 1, 2009, and become taxable as a regular corporation because we believe that maintaining our continuing qualification as
a REIT will not be a benefit to our stockholders. At the beginning of 2009, we will have significant NOL carryforwards from prior years. We do not expect to be able to generate sufficient taxable
income in future years to absorb these losses and have recognized a full valuation allowance against these NOL carryforwards in our consolidated balance sheets. Once we revoke our REIT election, we
will not be allowed to elect to be taxed as a REIT until 2014.

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Financial Condition and Results of Operations

Financial Condition

As of December 31, 2008 compared to December 31, 2007

As of December 31,Increase
(Decrease)

%
Change2008

2007Securitized mortgage collateral

$
5,894,424

$
16,532,633

$
(10,638,209
)

(64
)%Real estate owned


599,084


400,863


198,221


49Derivative assets


37


7,497


(7,460
)

(100
)Assets of discontinued operations


141,053


353,250


(212,197
)

(60
)Other assets


80,919


96,829


(15,910
)

(16
)Total assets

$
6,715,517

$
17,391,072

$
(10,675,555
)

(61
)%Securitized mortgage borrowings

$
6,193,984

$
17,780,060

$
(11,586,076
)

(65
)%Liabilities of discontinued operations


217,241


405,341


(188,100
)

(46
)Other liabilities


295,040


283,399


11,641


4Total liabilities


6,706,265


18,468,800


(11,762,535
)

(64
)Total stockholders' equity (deficit)


9,252


(1,077,728
)

1,086,980


(101
)Total liabilities and stockholders' equity

$
6,715,517

$
17,391,072

$
(10,675,555
)

(61
)%


Total
assets and liabilities were each approximately $6.7 billion as of December 31, 2008, as compared to $17.4 billion and $18.5 billion as of
December 31, 2007, respectively. The decreases in total assets and liabilities were primarily the result of the Company electing to adopt SFAS 159 for a significant portion of the
Company's financial instruments. The adoption of SFAS 159 resulted in the reduction of the carrying basis of certain financial instruments (securitized mortgage collateral and borrowings and
trust preferred securities) to fair value at January 1, 2008. Changes in the fair value of these and other financial instruments are recognized in earnings. Upon adoption, securitized mortgage
collateral and securitized mortgage borrowings were reduced by $0.8 billion and $1.9 billion, respectively. The $1.1 billion difference between these two amounts at adoption is
the result of the Company historically being required under GAAP to record an allowance for loan losses ($1.2 billion at December 31, 2007) that reduced securitized mortgage collateral
in its consolidated trusts below the balance of the related securitized mortgage borrowings. This resulted in a negative investment in certain consolidated trusts, even though the related trust
agreements are non-recourse to the Company. During 2008, the net change in the fair value of securitized mortgage collateral and securitized mortgage borrowings included in earnings was $(7.4) billion
and $7.2 billion, respectively.

35

---



Table of Contents

As of December 31, 2007 compared to December 31, 2006

As of December 31,Increase
(Decrease)

%
Change2007

2006Securitized mortgage collateral

$
16,532,633

$
20,966,744

$
(4,434,111
)

(21
)%Real estate owned


400,863


135,967


264,896


100Derivative assets


7,497


142,793


(135,296
)

100Assets of discontinued operations


353,250


2,086,390


(1,733,140
)

(83
)Other assets


96,829


267,061


(170,232
)

(64
)Total assets

$
17,391,072

$
23,598,955

$
(6,207,883
)

(26
)%Securitized mortgage borrowings

$
17,780,060

$
20,527,001

$
(2,746,941
)

(13
)%Liabilities of discontinued operations


405,341


1,774,256


(1,368,915
)

(77
)Other liabilities


283,399


288,168


(4,769
)

(2
)Total liabilities


18,468,800


22,589,425


(4,120,625
)

(18
)Total stockholders' (deficit) equity


(1,077,728
)

1,009,530


(2,087,258
)

(207
)Total liabilities and stockholders' equity

$
17,391,072

$
23,598,955

$
(6,207,883
)

(26
)%


Total
assets were $17.4 billion as of December 31, 2007 as compared to $23.6 billion as of December 31, 2006, as the long-term investment
operations retained $3.0 billion of primarily Alt-A mortgages and $234.9 million of commercial mortgages, substantially offset by approximately $5.3 billion in
prepayments. The prepayments, offset by retentions, decreased the long-term mortgage portfolio to $16.5 billion as of December 31, 2007 as compared to $21.0 billion as
of December 31, 2006. The acquisition and origination of mortgages were primarily financed through the issuance of $3.9 billion of securitized mortgage borrowings.

Since
our consolidated and unconsolidated securitization trusts are non-recourse to the Company, our economic risk is limited to our residual interests in these
securitization trusts. Therefore, we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between
our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities. For unconsolidated securitizations,
our residual interests represent the fair value of investment securities, available-for-sale. For consolidated securitizations, our residual interests are represented by the
fair value of securitized mortgage collateral and net realizable value of real estate owned, offset by the fair value of securitized mortgage borrowings and net derivative liabilities. The decline in
the fair value of residual interests in securitizations is primarily due to increases in delinquencies, credit losses, discount rates and overall reductions in real estate prices. 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 December 31, 2008:

Estimated Fair Value of
Residual Interests by Vintage YearSF

MF

Total2002-2003 (1)


10,333


4,703


15,0362004


4,588


4,049


8,6372005


565


667


1,2322006


188


2,546


2,7342007


-


406


406Total


15,674


12,371


28,045Weighted avg. prepayment rate


14
%

19
%

14
%Weighted avg. discount rate


50
%

47
% (2)

48
%


---

36

---



Table of Contents

The
fair value of trust assets is essentially the fair value of trust liabilities plus the fair value of the residual interests. The credit loss, prepayment and forward interest rate
assumptions used in the fair value process were the same for trust assets, liabilities and residual interests, as the collateral assumptions determine collateral cash flows which are used to pay the
bonds and residual interests. The only difference in
assumptions was between the investor yield requirements on trust assets and liabilities (trust liabilities were slightly less on those securitization trusts with residual interests) and the discount
rates used for residual interests. The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage:

Estimated Future Losses (1)

Investor Yield Requirement (2)SF

MF

SF

MF2002-2003


5%


2%


16%


28%2004


8%


2%


36%


27%2005


19%


8%


55%


26%2006


30%


16%


50%


27%2007


30%


15%


48%


25%


---

The
following table presents selected financial data as of the dates indicated:

As of and for the year ended December 31,2008

2007

2006Book value per common share

$
(19.93
)
$
(16.28
)
$
11.15Prior 12-month (CPR)  Residential


11%


25%


38%Prior 12-month (CPR)  Commercial


10%


9%


8%Total non-performing loans

$
3,040,291

$
2,131,537

$
844,925Total non-performing loans to total loans


19.4%


9.1%


3.9%Total non-performing assets (1)

$
3,646,742

$
2,543,775

$
1,006,463Total non-performing assets to total assets (2)


25.8%


14.6%


4.3%


---

We
believe that in order for us to generate cash flows from the long-term mortgage portfolio, we must successfully manage the following operational and market
risks:



37

---



Table of Contents



Liquidity Risk.Refer to "Liquidity and Capital Resources."

Credit risk.We manage credit risk by actively managing delinquencies and defaults through our servicers. Starting
with the second half of 2007 we
have not retained any additional Alt-A mortgages in our long-term mortgage portfolio. Our securitized mortgage collateral primarily consists of Alt-A mortgages
which are generally within typical Fannie Mae and Freddie Mac guidelines but have loan characteristics, which may include higher loan balances, higher loan-to-value ratios or
lower documentation requirements (including stated-income loans), that make them non-conforming under those guidelines.

As
of December 31, 2008, single-family and multi-family securitized mortgage collateral had an original weighted average credit score of 701 and 732, an original weighted average
LTV ratio of 74 and 66 percent and an original CLTV of 84 percent and 66 percent, respectively. The current LTV and CLTV ratios may have increased from origination date as a
result of the deterioration of the real estate market.

Using
historical losses, current portfolio statistics and market conditions and available market data, the Company has estimated future loan losses, which are included in the fair value
adjustment to our securitized mortgage collateral. While the credit performance for the loans has been clearly far worse than the Company's initial expectations when the loans were originated, the
ultimate level of realized losses will largely be influenced by events that will likely unfold over the next several years, including the severity of housing price declines and overall strength of the
economy. If market conditions continue to deteriorate in excess of our
expectations, the Company may need to recognize additional fair value reductions to our securitized mortgage collateral, which may also affect the value of the related securitized mortgage borrowings.

We
monitor our servicers to attempt to ensure that they perform loss mitigation, foreclosure and collection functions according to their servicing practices and each securitization
trust's pooling and servicing agreement. We have met with the management of our servicers to assess our borrowers' current ability to pay their mortgages and to make arrangements with selected
delinquent borrowers which will result in the best interest of the trust, borrower and the Company, in an effort to minimize the number of mortgages which become seriously delinquent. When resolving
delinquent mortgages, servicers are required to take timely action. The servicer is required to determine payment collection under various circumstances, which will result in the maximum financial
benefit. This is accomplished by either working with the borrower to bring the mortgage current or by foreclosing and liquidating the property. When a borrower fails to make required payments on a
mortgage and does not cure the delinquency within 60 days, we generally record a notice of default and commence foreclosure proceedings, or arrange alternative terms of forbearance. If the
mortgage is not reinstated within the time permitted by law for reinstatement, the property may then be sold at a foreclosure sale. At a foreclosure sale, the trusts consolidated on our balance sheet
generally acquire title to the property.

We
use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 days or more 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 late or greater, foreclosures and delinquent bankruptcies were $3.5 billion or
22.7 percent as of December 31, 2008.

The
following table summarizes the unpaid principal balances of non-performing loans in our mortgage portfolio, included in securitized mortgage collateral, loans
held-for-investment and loans held-for-sale for

38

---



Table of Contents

continuing
and discontinued operations combined, that were 60 or more days delinquent (utilizing the MBA method) for the periods indicated:

As of December 31,2008



2007



2006Loans held-for-sale (1)60 - 89 days delinquent

$
13,694


0.1%

$
45,121


0.2%

$
11,696


0.1%90 or more days delinquent


63,541


0.4%


51,294


0.2%


34,598


0.2%Foreclosures (2)


65,661


0.4%


23,936


0.1%


13,267


0.1%Total 60+ days delinquent loans held-for-sale


142,896


0.9%


120,351


0.5%


59,561


0.3%Long-term mortgage portfolio60 - 89 days delinquent

$
494,960


3.2%

$
490,946


2.1%

$
372,649


1.7%90 or more days delinquent


1,096,366


7.0%


773,816


3.3%


275,089


1.3%Foreclosures (2)


1,614,472


10.3%


1,093,385


4.6%


403,489


1.9%Delinquent bankruptcies (3)


200,251


1.3%


189,106


0.8%


118,482


0.5%Total 60+ days delinquent long-term mortgage portfolio


3,406,049


21.7%


2,547,253


10.8%


1,169,709


5.4%Total 60 or more days delinquent

$
3,548,945


22.7%

$
2,667,604


11.3%

$
1,229,270


5.6%Total mortgages owned


15,666,243


100%


23,525,415


100%


21,783,549


100%


---

The
following table summarizes securitized mortgage collateral, loans held-for-investment, loans held-for-sale and real estate owned,
that were non-performing for continuing and discontinued operations combined for the periods indicated:

As of December 31,2008



2007



200690 or more days delinquent, foreclosures and delinquent bankruptcies

$
3,040,291


83%

$
2,131,537


84%

$
844,925


84%Real estate owned


606,451


17%


412,238


16%


161,538


16%Total non-performing assets

$
3,646,742


100%

$
2,543,775


100%

$
1,006,463


100%


Non-performing
assets consist of non-performing loans (mortgages that are 90 days or more delinquent, including loans in foreclosure and delinquent
bankruptcies) plus REO. It is our policy to place a mortgage on non-accrual 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. As of December 31, 2008, non-performing assets (representing the fair value of loans 90 or more days
delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total assets was 26 percent. At December 31, 2007, non-performing assets to total assets
was 15 percent. At December 31, 2008, with the adoption of SFAS 159, securitized mortgage collateral is recorded at fair value and as a result of current market conditions has
significantly decreased. The decrease in the fair value of securitized mortgage collateral resulted in significant decreases in total assets at December 31, 2008 compared to prior periods. This
decrease in total assets, along with the increases in non-performing assets has resulted in higher total non-performing assets to total assets, as compared to 2007.

39

---



Table of Contents

Real
estate owned, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs.
Historically, adjustments to the loan carrying value required at the time of foreclosure were charged against the allowance for loan losses. With the adoption of SFAS 159, the Company no longer
maintains an allowance for loan losses and adjustments to the carrying value of REO at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in the
Company's estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in the
consolidated statements of operations and comprehensive loss. Real estate owned, for continuing and discontinued operations, at December 31, 2008 increased $194.2 million or
47 percent from December 31, 2007 as a result of an increase in foreclosures from higher delinquencies and deterioration in the prevailing real estate market and, in part, due to
borrowers' inability to obtain replacement financing in conjunction with rising borrowing costs due to interest rate resets, reduced housing demand in the marketplace and lower housing prices.

We
realized a loss on sale of REO in the amount $22.3 million for 2008 as compared to a loss of $2.9 million for 2007. Additionally, for 2008, the Company recorded
writedowns of the net realizable value of the REO in the amount of $29.7 million as compared to $103.0 million for 2007, which reflects the decline in value of the REO from the
foreclosure date.

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

For the year ended December 31,2008

2007Beginning balance

$
405,434

$
137,331Foreclosures (1)


678,442


487,314Liquidations


(484,124
)

(219,211
)Ending balance

$
599,752

$
405,434REO inside trusts

$
599,084

$
400,863REO outside trusts (2)


668


4,571Total

$
599,752

$
405,434


---

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

40

---





Table of Contents

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, market conditions, competitor's
performance, market perception, historical losses, and industry statistics. The assessment for losses, is based on delinquency trends and prior loss experience and management's judgment and
assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting
credit quality and inherent losses.

Interest Rate Risk.Refer to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."

Prepayment risk.The Company uses prepayment penalties as a method of partially mitigating prepayment risk
for those borrowers that have the ability to refinance. Historically, mortgage industry evidence suggests that changes in home appreciation rates and lower payment option mortgage products had been a
significant factor affecting borrowers refinancing decisions. However, the recent economic downturn, lack of available credit and decline in property values has limited borrowers' ability to
refinance. Additionally, as mortgage rates increase and housing prices decline, borrowers will find it more difficult to refinance to obtain cheaper financing. If borrowers are unable to pay their
mortgage payments at the adjusted rate, delinquencies may increase. The three-month average combined voluntary prepayment rate of single-family and multi-family loans held as securitized mortgage
collateral decreased to 10 percent at December 31, 2008 from 17 percent as of December 31, 2007.

Results of Operations

Condensed Statements of Operations Data

For the year ended December 31,2008

2007

Increase
(Decrease)

%
ChangeInterest income

$
1,476,972

$
1,224,821

$
252,151


21
%Interest expense


1,463,239


1,179,015


284,224


24Net interest income


13,733


45,806


(32,073
)

(70
)Provision for loan losses





1,390,008


(1,390,008
)

n/aNet interest income (expense) after provision for loan losses


13,733


(1,344,202
)

1,357,935


101Total non-interest income


42,444


(269,553
)

311,997


116Total non-interest expense


29,138


25,096


4,042


16Income tax expense


22,270


14,861


7,409


50Net earnings (loss) from continuing operations


4,769


(1,653,712
)

(1,658,481
)

(100
)Loss from discontinued operations, net


(49,492
)

(393,378
)

343,886


87Net loss

$
(44,723
)
$
(2,047,090
)
$
(2,002,367
)

(98
)%Net loss per share  basic and diluted

$
(7.34
)
$
(270.97
)
$
263.63


97
%Dividends declared per common share

$
-

$
3.50

$
(3.50
)

n/a
%


41

---



Table of Contents



For the Year Ended December 31,2007

2006

Increase
(Decrease)

%
ChangeInterest income

$
1,224,821

$
1,134,002

$
90,819


8
%Interest expense


1,179,015


1,196,199


(17,184
)

(1
)Net interest income (expense)


45,806


(62,197
)

108,003


174Provision for loan losses


1,390,008


34,600


1,355,408


3,917Net interest expense after provision for loan losses


(1,344,202
)

(96,797
)

(1,247,405
)

(1,289
)Total non-interest income


(269,553
)

113,566


(383,119
)

(337
)Total non-interest expense


25,096


22,318


2,778


12Income tax expense (benefit)


14,861


(13,597
)

28,458


209Net (loss) earnings from continuing operations


(1,653,712
)

8,048


1,661,760


20,648Loss from discontinued operations, net


(393,378
)

(83,321
)

(310,057
)

(372
)Net loss

$
(2,047,090
)
$
(75,273
)
$
1,971,817


2,620
%Net loss per share  basic and diluted

$
(270.97
)
$
(11.82
)
$
(259.15
)

(2,192
)%Dividends declared per common share

$
3.50

$
9.50

$
(6.00
)

(63
)%


Net Interest Income (Expense)

We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, loans
held-for-sale and investment securities available-for-sale, or collectively, "mortgage assets," and, to a lesser extent, interest income earned on cash
and cash equivalents. Interest expense is primarily interest paid on borrowings on mortgage assets, which include securitized mortgage borrowings, reverse repurchase agreements and borrowings secured
by investment securities available-for-sale. With the adoption of SFAS 159, net interest income during 2008 represents the effective yield, based on the fair value of
the trust assets and liabilities. During 2007 and 2006, net interest income included (1) amortization of acquisition costs on mortgages acquired from the mortgage operations,
(2) accretion of loan discounts, which primarily represented the amount allocated to mortgage servicing rights when they are sold to third parties and mortgages are transferred to the
long-term investment operations from the mortgage operations and retained for long-term investment, (3) amortization of securitization costs and, to a lesser extent,
(4) amortization of bond discounts.

The
following table summarizes average balance, interest and weighted average yield on mortgage assets and borrowings, included within continuing and discontinued operations, for the
periods indicated. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. In 2008, these
cash receipts and payments are included as a component of the

42

---



Table of Contents

change
in fair value of net trust assets. In periods prior to 2008, these cash receipts and payments were included in change in fair value of derivative instruments.

For the year ended December 31,2008

2007

2006Average Balance

Interest

Yield

Average Balance

Interest

Yield

Average Balance

Interest

YieldMORTGAGE ASSETSInvestment securities, available-for-sale

$
9,544

$
2,168


22.72%

$
22,628

$
5,847


25.84%

$
29,918

$
4,263


14.25%Securitized mortgage collateral (1)


10,527,535


1,472,877


13.99%


19,952,267


1,223,459


6.13%


21,311,592


1,121,481


5.27%Mortgages held-for-investment and held-for-sale (2)


168,669


11,083


6.57%


1,109,030


74,942


6.76%


1,878,675


121,266


6.45%Finance receivables


-


-


-


191,766


8,745


4.56%


275,571


20,960


7.61%Total mortgage assets\ interest income

$
10,705,748

$
1,486,128


13.88%

$
21,275,691

$
1,312,993


6.17%

$
23,495,756

$
1,267,970


5.40%BORROWINGSSecuritized mortgage borrowings

$
10,845,338

$
1,455,076


13.42%

$
19,682,250

$
1,166,666


5.93%

$
20,848,143

$
1,183,150


5.68%Reverse repurchase agreements


228,988


9,869


4.31%


1,326,013


80,388


6.06%


2,010,931


118,958


5.92%Total borrowings on mortgage assets\ interest expense

$
11,074,326

$
1,464,945


13.23%

$
21,008,263

$
1,247,054


5.94%

$
22,859,074

$
1,302,108


5.70%Net Interest Spread (3)




$
21,183


0.65%




$
65,939


0.24%




$
(34,138
)

-0.30%Net Interest Margin (4)








0.20%








0.31%








-0.15%


---

For the year ended December 31, 2008 compared to the year ended December 31, 2007

Net interest spread for 2008 decreased $44.8 million to $21.2 million as compared to 2007. The decrease in net interest
spread was primarily due to declines in outstanding balances. During 2008, the yield on mortgage assets increased to 13.88 percent from 6.17 percent in 2007. The yield on total
borrowings increased to 13.23 percent for 2008 from 5.94 percent for 2007. The increase in the securitized mortgage collateral and borrowing yields is primarily a result of the adoption
of SFAS 159 and the related recognition of interest income and interest expense using effective yields for 2008, based on fair value, as compared to using effective interest rates using the
historical basis in the underlying collateral and borrowings in the prior periods. As the market's expectation of future credit losses has increased, the market has demanded higher yields, as
investors require a higher yield on these financial assets and liabilities, which has resulted in reductions of fair values. The Company's weighted average yields in 2008 and future periods has been
and could be significantly higher than historical periods.

For the year ended December 31, 2007 compared to the year ended December 31, 2006

Increases in net interest income were primarily due to an improvement in net interest margins on mortgage assets as a result of the
following:



43

---



Table of Contents



Net
interest spread for 2007 increased $100.1 million (293 percent) as compared to 2006. The increase was primarily due to net interest margins on mortgage assets
increasing by 46 basis points to 0.31 percent for 2007 as compared to (0.15) percent for 2006. The increase in net interest margins on mortgage assets was primarily due to a positive variance
of 77 basis points in yield on mortgage assets, as coupons have adjusted, partially offset by an unfavorable variance of 24 basis points in borrowing costs.

As
a result of the illiquidity in the mortgage market and borrowers' inability to obtain cheaper financing we saw a corresponding decline in mortgage prepayment speeds which we observed
in our portfolio during 2007. Additionally, as home prices have declined in most areas, resulting in increased loan to value ratios. This has limited refinancing options for borrowers with higher
credit scores. Our securitized mortgage collateral reflects reduced prepayments with the three-month CPR rate declining to 17 percent as of December 31, 2007 from 36 percent as of
December 31, 2006.

Non-Interest Income

For the year ended December 31, 2008 compared to the year ended December 31, 2007

For the year ended December 31,2008

2007

Increase
(Decrease)

%
ChangeChange in fair value of derivative instruments

$
-

$
(140,827
)
$
140,827


n/a
%Change in fair value of net trust assets, excluding REO


24,281


-


24,281


n/aLosses from real estate owned


(52,011
)

(105,865
)

53,854


51Change in fair value of trust preferred securities


24,879


-


24,879


n/aReal estate advisory fees


45,388


-


45,388


n/aLoss on sale of loans


(1,129
)

(29,019
)

27,890


96Other


1,036


6,158


(5,122
)

(83
)Total non-interest income

$
42,444

$
(269,553
)
$
311,997


116
%


Change in fair value of derivative instruments.The change in the fair value of derivative instruments increased by
$140.8 million during
2008 as compared to 2007, as the Company no longer recognizes the derivative fair value adjustments as a separate component of non-interest income. As a result of the adoption of
SFAS 159, the Company now recognizes changes in the fair value of derivative instruments as a component of the change in fair value of net trust assets. The change in fair value of derivative
instruments during 2008 was a loss of $298.7 million.

Change in fair value of net trust assets.Subsequent to January 1, 2008, the Company recognized a
$24.3 million gain from the change
in fair value of net trust assets, which is comprised of a gain on the reduction of the fair value of securitized mortgage borrowings of $8.1 billion, loss on the reduction in fair value of
derivatives instruments of $298.7 million and losses on the reduction in fair value of securitized mortgage collateral and investment securities available-for-sale of
$7.8 billion and $10.6 million, respectively. The overall reduction in fair value of the investment securities available-for-sale, securitized mortgage collateral
and securitized mortgage borrowings is the result of increased credit losses and higher investor yield requirements primarily resulting from increased delinquencies, increased credit losses and home
price declines. The increase in net derivative liabilities is the result of decreases in London Interbank Offered Rate (LIBOR) reflected in the forward yield curve.

Change in the fair value of trust preferred securities.Upon adoption of SFAS 159, trust preferred securities
were reduced by
$57.4 million. During 2008 the Company recognized a gain in the amount of $24.9 million as a result of a decrease in the fair value of the trust preferred securities primarily resulting
from recent settlements and renegotiated terms of certain trust preferred securities.

Losses from real estate owned.During 2008, the Company continued to record losses from REO due to increased
severities on the sale of REO,
resulting from increased home price declines and the reduced ability of borrowers to obtain financing.

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Table of Contents

Real estate advisory fees.During 2008, the Company entered into an agreement with a real estate marketing company to
generate advisory fees. The
real estate marketing company specialized in the marketing of foreclosed properties. During the year, the Company earned $18.4 million in real estate advisory fees plus a $27.0 million
fee for agreeing to terminate this relationship in the fourth quarter of 2008.

For the year ended December 31, 2007 compared to the year ended December 31, 2006

For the year ended December 31,2007

2006

Increase
(Decrease)

%
ChangeChange in fair value of derivative instruments

$
(140,827
)
$
93,498

$
(234,325
)

(251
)%Losses from real estate owned


(105,865
)

(9,659
)

96,206


996Loss on sale of loans


(29,019
)

(1,533
)

27,486


1,793Other


6,158


31,260


(25,102
)

(80
)Total non-interest income

$
(269,553
)
$
113,566

$
(383,119
)

(337
)%


Change in fair value of derivative instruments.The change in fair value of derivative instruments is comprised of
both changes in fair value and
realized gains and losses. The change in fair value of derivative instruments decreased by $141.4 million (128 percent) during 2007 as compared to 2006. The amount of market valuation
adjustment is primarily the result of actual cash receipts on derivative instruments, and changes in the expectation of future interest rates. We primarily enter into derivative contracts to offset a
portion of the changes in cash flows associated with securitized mortgage borrowings, as the Federal Open Market Committee reduced the federal funds rate by 100 basis points in 2007. We record a
market valuation adjustment for these derivatives as current period expense or income.

Realized
gains from derivatives decreased by $92.9 million (46 percent) during 2007 as compared to 2006, or 53 basis points of total average mortgage assets during 2007 as
compared to 87 basis points of total average mortgage assets during 2006. The decrease in realized gains is primarily due to a decrease in the notional balance of the trusts. Realized gains from
derivatives are recorded as current period expense or revenue in our consolidated financial statements. Realized gains exclude the mark to market gains or losses that are realized for tax purposes at
the taxable REIT subsidiaries when the loans held-for-sale are deposited into the securitization trust, and the related derivatives are deposited into a swap trust. These gains
are not realized for GAAP purposes, as the deposit of the derivatives into the swap trust are considered an inter-company transfer, as the REIT consolidates the swap trust. For GAAP purpose, these
gains and losses are included in change in fair value of derivative instruments.

Losses from real estate owned.During 2007, the Company recorded a provision for REO losses in the amount of
$103.0 million as a result of
changes in the net realizable value of the real estate owned subsequent to the foreclosure date, due to increases in severities on REO liquidations as a result of an increase in homes for sale in the
marketplace, a reduction in demand due to declining prices (as home buyers postpone home purchases, thereby exacerbating home price declines), and a reduced ability for borrowers to obtain financing.

Loss on sale of loans.The Company recorded a loss on the sale of loans of $29.0 million in 2007 primarily as a
result of a
$24.4 million loss on the sale of all of the remaining financial interest in one of the Company's securitizations that the Company sold to a lender in settlement of all obligations owed on that
security.

Other income.Other income decreased primarily due to a $14.2 million decrease in servicing income as a result of
rising delinquencies and
additional subservicing costs.

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Table of Contents

Non-Interest Expense

For the year ended December 31, 2008 compared to the year ended December 31, 2007

For the year ended December 31,2008

2007

Increase
(Decrease)

%
ChangeGeneral, administrative and other

$
12,272

$
9,824

$
2,448


25
%Personnel expense


10,320


5,502


4,818


88Data processing expense


2,815


4,819


(2,004
)

(42
)Occupancy expense


2,734


3,242


(508
)

(16
)Equipment expense


997


1,709


(712
)

(42
)Total non-interest expense

$
29,138

$
25,096

$
4,042


16
%


Total
non-interest expense increased as personnel expense increased $4.8 million (88 percent) during 2008 as compared to the same period in 2007, as a greater
amount of the Company's personnel costs were utilized during 2008 within the continuing operations versus discontinued operations. However, personnel costs of both continuing and discontinued
operations decreased by $47.9 million to $25.7 million as a result of overall reductions in workforce during the year. The $2.4 million increase in general and administrative
costs is primarily attributable to an increase in professional fees offset by decreases communication, business promotion and property costs. Data processing costs decreased $2.0 million during
2008 as result of a reduction in personnel, facilities and declines in business volume.

For the year ended December 31, 2007 compared to the year ended December 31, 2006

For the year ended December 31,2007

2006

Increase
(Decrease)

%
ChangeGeneral, administrative and other

$
9,824

$
9,707

$
117


1
%Personnel expense


5,502


3,333


2,169


65Data processing expense


4,819


5,055


(236
)

(5
)Occupancy expense


3,242


2,193


1,049


48Equipment expense


1,709


2,030


(321
)

(16
)Total non-interest expense

$
25,096

$
22,318

$
2,778


12
%


Total
non-interest expense increased $2.8 million (12 percent) in 2007 as personnel expense increased $2.2 million (65 percent) and occupancy
expense increased $1.0 million (48 percent) during 2007 as compared to 2006. The increase in personnel expense is primarily the result of severance costs recorded as a result of
headcount reductions undertaken by the Company. Occupancy expense increased $1.0 million from the prior year, as the continuing operations recorded restructuring charges for certain leases that
were no longer being used.

Income Taxes

In accordance with Accounting Research Bulletin No. 51, "Consolidated Financial Statements," the Company records a deferred
charge representing the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. The deferred charge is
included in other assets in the consolidated balance sheets and is amortized as a component of income tax expense in the consolidated statements of operations over the estimated life of the mortgages
retained in the securitized mortgage collateral. The Company recorded a tax provision of $22.3 million, $14.9 million and $14.7 million for the years ended December 31,
2008, 2007 and 2006,
respectively. The net provision is the result of the amount of the deferred charge amortized and/or impaired resulting from credit losses, which does not result in any tax liability to be paid.

46

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Table of Contents

Results of Operations by Business Segment

Continuing Operations

For the year ended December 31, 2008 compared to the year ended December 31, 2007

Condensed Statements of Operations Data

For the year ended December 31,2008

2007

Increase
(Decrease)

%
ChangeNet interest income

$
13,733

$
45,806

$
(32,073
)

(70
)%Provision for loan losses


-


(1,390,008
)

1,390,008


n/aNet interest income (expense) after provison for loan losses


13,733


(1,344,202
)

1,357,935


101Change in fair value of derivative instruments, net


-


(140,827
)

140,827


n/aChange in fair value of net trust assets, excluding REO


24,281


-


24,281


n/aChange in fair value of trust preferred securities


24,879


-


24,879


n/aOther non-interest income


(6,716
)

(128,726
)

122,010


95Total non-interest income (expense)


42,444


(269,553
)

311,997


116Non-interest expense and income taxes


(51,408
)

(39,957
)

(11,451
)

(29
)Net earnings (loss)

$
4,769

$
(1,653,712
)
$
1,658,481


100
%


Net
earnings for the year ended December 31, 2008 increased $1.7 billion to $4.8 million as compared to a net loss of $1.7 billion for the year ended
December 31, 2007. The primary reason for the increase in net earnings is the result of the adoption of SFAS 159 for securitized mortgage collateral, borrowings and trust preferred
securities. The Company no longer records a provision for loan losses ($1.4 billion for 2007) under SFAS 159 as the losses are included in the estimate of fair value for the securitized
mortgage collateral. The change in fair value of derivative instruments ($140.8 million loss for 2007), is now included in the change in fair value of net trust assets, which consisted of a
$298.7 million loss on derivatives for 2008. The change in fair value of trust preferred securities was $24.9 million during 2008.

For the year ended December 31, 2007 compared to the year ended December 31, 2006

Condensed Statements of Operations Data

For the year ended December 31,2007

2006

Increase
(Decrease)

%
ChangeNet interest income (expense)

$
45,806

$
(62,197
)
$
108,003


174
%Provision for loan losses


(1,390,008
)

(34,600
)

(1,355,408
)

(3,917
)Net interest expense after provison for loan losses


(1,344,202
)

(96,797
)

(1,247,405
)

(1,289
)Realized gain from derivative instruments


111,048


203,958


(92,910
)

(46
)Change in fair value of derivative instruments


(251,875
)

(110,460
)

(141,415
)

(128
)Other non-interest income


(128,726
)

20,068


(148,794
)

(741
)Total non-interest income


(269,553
)

113,566


(383,119
)

(337
)Non-interest expense and income taxes


(39,957
)

(8,721
)

(31,236
)

(358
)Net (loss) earnings

$
(1,653,712
)
$
8,048

$
(1,661,760
)

(20,648
)%


Net
loss for 2007 increased $1.7 billion to a loss of $1.7 billion. The decrease in net earnings was primarily due to the increase in the provision for loan losses which
increased $1.4 billion for 2007 as compared to 2006, due to increased delinquencies. In addition, the Company has observed an increase in loss severities on its REO liquidations, which is used
to estimate the losses on our REO inventory.

47

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Table of Contents

Net
interest income increased $108.0 million, primarily as a result of a decrease in projected prepayment speeds which reduced the amortization of loan premiums, which increased
interest income. The decreased amortization was affected by the reduced prepayment rates, which resulted from the sharp decline in available mortgage products for non-conforming borrowers
and declining housing prices reducing the equity in the borrowers' properties. Additionally, the Company's loan yields have increased in excess of the increase in borrowing yields, compared to the
prior year.

Realized
gain from derivatives decreased to $111.0 million for the 2007 compared to $204.0 million for the 2006, as a result of a decrease in the size of the mortgage
portfolio, and the decrease in the size of the underlying notional balance of the derivatives, as well as a decrease in borrowing costs during the second half of 2007, which are inversely correlated
with the realized gains on derivative cash flows.

The
change in fair value on derivative instruments decreased $141.4 million for 2007 as compared to 2006. The market valuation adjustment is primarily the result of changes in
the expectation of future interest rates as well as the net cash payments received or paid on the derivatives, which are recorded as realized gains or losses. The value of the derivatives decreased as
the Company expects declining interest rates in excess of prior year expectations.

Additionally,
other non-interest income decreased $148.8 million to $(128.7) million primarily due to the provision for REO losses of $103.0 million, as
compared to an $8.5 million provision for REO losses for 2006. Also contributing to the decrease in other non-interest income was a loss of $29.0 million on the sale of
securities from some of the Company's securitizations to a reverse repurchase lender in settlement of all financing obligations owed on those securities. Additionally, the Company recorded a
$13.6 million other-than-temporary impairment on the Company's securities available-for-sale, which was recorded primarily due to worsening
credit loss assumptions for the retained interests in securitizations recorded as sales.

Refer
to Note H. "Segment Reporting" in the notes to consolidated financial statements for financial results of the continuing operating segments and see Item 1.
"Business" for additional detail regarding the operating structure.

Discontinued Operations

For the year ended December 31, 2008 compared to the year ended December 31, 2007

Condensed Statements of Operations Data

For the year ended December 31,2008

2007

Increase
(Decrease)

%
ChangeNet interest income

$
2,499

$
16,932

$
(14,433
)

(85
)%Provision for loan losses


-


(5,489
)

5,489


100Net interest income after provison for loan losses

$
2,499

$
11,443

$
(8,944
)

(78
)Loss on sale of loans


(36,349
)

(222,860
)

186,511


84Provision for repurchases


6,712


(34,749
)

41,461


119Other income (loss)


1,250


(19,638
)

20,888


106Personnel expense


(15,340
)

(68,052
)

52,712


77Non-interest expense and income taxes


(8,264
)

(59,522
)

51,258


86Net loss

$
(49,492
)
$
(393,378
)
$
343,886


87
%


Net
loss for the discontinued operations decreased $343.9 million primarily due to the following:



48

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Table of Contents



Loss
on sale of loans decreased $186.5 million to a loss of $36.3 million during 2008. For 2008, gain on sale of loans was $9.2 million, offset by a
$45.5 million charge in additional LOCOM adjustments as a result of continued deterioration of the value of loans held-for-sale. This is compared to a loss on whole loan
sales of $43.7 million and additional LOCOM valuation adjustments of $179.2 million for 2007.

Provision
for repurchases decreased to a recovery of $6.7 million for the year ended December 31, 2008, as compared to a loss of $34.7 million in 2007. The
reduction is the result of settlements of $122.3 million in repurchase obligations during 2008, combined with fewer whole loan sales and a reduction in the amount of repurchase requests during
the year ended December 31, 2008.

The
decrease in personnel expense during the year was a result of more costs being allocated to continuing operations due to the discontinuation of the mortgage operations. Personnel
costs of both continuing and discontinued operations decreased by $47.9 million to $25.7 million as a result of overall reductions in workforce during the year.

Non-interest
expense and income taxes decreased $51.3 million during 2008 primarily due to a reduction in equipment expense and certain non-recurring
charges in the prior year. For the year ended December 31, 2008, equipment expense was $211 thousand as compared to $17.3 million for the year ended December 31, 2007. In
the third quarter 2007, the Company recorded a restructuring charge of
$6.5 million related to lease costs associated with facilities that were no longer used and a $12.8 million impairment on property plant and equipment.

For the year ended December 31, 2007 compared to the year ended December 31, 2006

Condensed Statements of Operations Data

For the year ended December 31,2007

2006

Increase
(Decrease)

%
ChangeNet interest income

$
16,932

$
27,505

$
(10,573
)

(38
)%Provision for loan losses


(5,489
)

(4,187
)

(1,302
)

(31
)Net interest income after provison for loan losses

$
11,443

$
23,318

$
(11,875
)

(51
)(Loss) gain on sale of loans


(222,860
)

10,708


(233,568
)

(2,181
)Provision for repurchases


(34,749
)

(7,367
)

(27,382
)

(372
)Other loss


(19,638
)

(5,217
)

(14,421
)

(276
)Personnel expense


(68,052
)

(61,504
)

(6,548
)

(11
)Non-interest expense and income taxes


(59,522
)

(43,259
)

(16,263
)

(38
)Net loss

$
(393,378
)
$
(83,321
)
$
(310,057
)

(372
)%


During
the third and fourth quarter of 2007, the Company announced plans to exit its mortgage, commercial, retail, and warehouse lending operations. These businesses are presented as
discontinued operations in the Company's financial statements.

Net
loss for the discontinued operations increased $310.1 million (372 percent) primarily due to the following:



Gains
from the sale of loans decreased $88.4 million primarily as a result of the exchange of the Company's collateral, in settlement of its related borrowing obligations. The
Company recorded a loss of $24.4 million which represented the difference between the GAAP basis of the loans and the borrowings outstanding on the repo line at the date the interests in the
securitization was exchanged for payoff of the debt. Additionally the pricing obtained on

49

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Table of Contents

loans
sold to third parties was significantly reduced, when compared to the prior years' execution prices, as the market value of performing and non-performing loans decreased due to the
saturation of loans for sale in the market place and the deterioration in the prevailing real estate market and economic conditions.

The
Company recorded loans held-for-sale at the lower of cost or market resulting in a $145.2 million increase in the write-down of loans
held-for-sale as current market conditions, such as the widening of credit and bond spreads and a lack of demand for mortgage product forced the loans to decline in value. The
Company accumulated $1.6 billion of loans as of June 30, 2007 in the normal course of business, however with the deterioration in the credit markets the Company was unable to securitize
or sell these loans as planned, which resulted in significant margin calls.

Provision
for repurchases increased $27.4 million (372 percent) during 2007 as compared to 2006. The increase in the provision for repurchases was primarily due to an
increase in severities of actual losses, which resulted from a decrease in the perceived credit quality of the loans subject to repurchase.

During
2007, the mortgage operations recorded a lease impairment charge of $12.5 million, for the fair value of lease costs that were no longer being utilized at
December 31, 2007, included in non-interest
expense above. Additionally, the mortgage operations recorded a $14.1 million impairment on property plant and equipment as a result of discontinuing its operations.

Refer
to Note S. "Discontinued Operations" in the notes to consolidated financial statements for financial results of the discontinued operating segments and see Item 1.
"Business" for additional detail regarding the operating structure.

Liquidity and Capital Resources

Due to the unprecedented volatility in the marketplace since the beginning of the third quarter of 2007, it has become difficult to
anticipate market conditions and therefore meet our liquidity objectives. We believe that current cash balances, short-term investments, cash flows generated from our long-term
mortgage portfolio and fees from our master servicing are adequate for our current funding needs. However, the secondary market is volatile and the performance of the long-term mortgage
portfolio is subject to the deteriorating real estate market and current credit crisis, and the potential impact on the Company is unknown. Additionally, as the Company liquidates REOs the resulting
losses in excess of current estimates will reduce the cash receipts from the securitized mortgage collateral.

In
response to these unprecedented market conditions, the Company has taken the following steps:



In
an effort to maintain capital, the Company has not declared a cash dividend on its common stock since the first quarter of 2007. While the Company continues to pay its obligations as
they become due (except those that have been deferred), the ability of the Company to continue is dependent upon many factors, particularly the Company's ability to realize the value of its
long-term mortgage portfolio. There can be no assurance of the Company's ability to do so.

During
2008, our operating businesses were primarily funded as follows:



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The
Company primarily used available funds as follows:



Sources of Liquidity

Excess cash flows from our long-term mortgage portfolio.We receive excess cash flows on mortgages held as
securitized mortgage
collateral after distributions are made to investors on securitized mortgage borrowings to the extent cash or other collateral required to maintain credit ratings on the securitized mortgage
borrowings is fulfilled and can be used to provide funding for some of the long-term investment operations' activities. Excess cash flows represent the difference between principal and
interest payments on the underlying mortgages, effected by the following:



Master servicing fees.The Company acts as the master servicer for mortgages included in our CMO and REMIC
securitizations. The master servicing
fees we earn are generally 0.03 percent per annum on the declining principal balances of these mortgages plus interest income on cash held until remitted to investors, less any interest
shortfall. However, due to the recent decline in interest rates, the interest income on cash held has declined significantly.

Real estate advisory fees.During the first quarter of 2008, the Company entered into an agreement with a real estate
marketing company to generate
advisory fees from the marketing and disposition of foreclosed properties. During the fourth quarter of 2008, the Company and the real estate marketing company agreed to terminate the advisory
services agreement.

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Uses of Liquidity

Reverse repurchase financing.In the past we used reverse repurchase agreements to fund substantially all financing
for the origination of
mortgages. We do not currently have any additional reverse repurchase borrowings available to us, and we continue to wind down the borrowings outstanding at December 31, 2008.

In
September 2008, the Company entered into an agreement to restructure its reverse repurchase financing with its remaining lender. The balance of this line was $188.7 million at
December 31, 2008 and collateralized by loans held-for-sale in discontinued operations. The agreement removed all technical defaults from financial covenant
noncompliance and any associated margin calls for the term of the agreement. The agreement calls for certain targets including a reduction of the borrowings balance to $100 million in
18 months (from September 2008) with an advance rate of no more than 65 percent of the outstanding principal balance and $50 million in 24 months with an advance rate of no
more than 55 percent of the outstanding principal balance. By meeting these targets, the agreement term can extend to 30 months. At December 31, 2008, the advance rate was
79 percent. The agreement also calls for monthly principal paydowns of $1.5 million until the earlier of the Company raising capital or the end of the agreement term. If the Company is
successful in raising capital, approximately 10 percent of the gross proceeds will be required to be paid as an additional principal paydown and the monthly principal paydown would then be
reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be paid to the lender. To the extent the cash collected
from the collateral is not adequate to pay the interest expense due on the borrowings, interest expense would be paid to the lender from the Company's restricted cash account included in assets of
discontinued operations or the Company's cash balances. Accomplishing the restructuring of this reverse repurchase financing allows the Company to timely manage the remaining loans on the line for the
eventual collection, refinance, sale or securitization without the risk of receiving margin calls.

As
of December 31, 2008 and 2007 the Company had the following reverse repurchase and warehouse lines outstanding:

Discontinued Operations
as of December 31,2008

2007Reverse repurchase line (1)

$
188,677

$
318,669Warehouse line (2)


-


18,021Total

$
188,677

$
336,690


---

Repurchase reserve.When we sell loans through whole loan sales we are required to make normal and customary
representations and warranties about
the loans to the purchaser. Our whole loan sale agreements generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be
required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale.

Investors
have requested the Company to repurchase loans or to indemnify them against losses on certain loans which the investors believe either do not comply with applicable
representations or warranties or defaulted shortly after its purchase. The Company records an estimated reserve for these losses at the time the loan is sold, and adjusts the reserve to reflect the
estimated loss. The repurchase reserve is included in liabilities of discontinued operations in the consolidated balance sheet.

The
reserve totaled approximately $13.9 million at December 31, 2008, compared to $25.7 million at December 31, 2007. In determining the adequacy of the
reserve for mortgage repurchases, management considers such factors as specific requests for repurchase, known problem loans, underlying collateral values, recent sales

52

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Table of Contents

activity
of similar loans, historical experience, recent settlement experience, current settlement negotiations, current market conditions and other appropriate information. During 2008, 2007 and
2006, the Company recorded a recovery (provision) for repurchase losses of $6.7 million, $(34.7) million and $(7.4) million, respectively, included in the net loss from discontinued operations.
The Company settled the majority of its outstanding repurchase requests during 2008.

Financing.Although the Company does not anticipate being able to obtain any financing over the next twelve
months, any decision to provide available financing to us in the future will depend upon a number of factors, including:



Distribute common and preferred stock dividends.We are required to distribute a minimum of 90 percent of our
taxable income to our
stockholders in order to maintain our REIT status, exclusive of the application of any tax loss carry forwards that may be used to offset current period taxable income. Because we pay dividends based
on taxable income, dividends may be more or less than net earnings. We did not have taxable income in 2008 and therefore, we did not declare common stock cash dividends during 2008. We paid cash
dividends of $11.2 million on preferred stock during 2008. In December 2008, the Company deferred payment of its fourth quarter dividend on its preferred stock.

Pay interest on trust preferred securities.In December 2008, the Company fully satisfied $8.0 million in
outstanding trust preferred
securities of Impac Capital Trust #4 for $1.2 million and is in the process of cancelling the securities. Under the terms of the agreement, to the extent the Company settles additional amounts
of its outstanding trust preferred securities prior to January 2010 at per share values in excess of the per share amount of this agreement, the Company will be required to pay additional amounts
representing the incremental increase in the per share amounts.

In
December 2008, the Company deferred interest on the Impac Capital Trusts #1, #2 and #4 securities due January 30, 2009, and interest on the Impac Capital Trust #3 securities
due December 30, 2008.

In
January 2009, the Company fully satisfied $25.0 million in outstanding trust preferred securities of Impac Capital Trust #2 for $3.75 million.

In
January 2009, the Company agreed to restructure, which is subject to definitive agreements, $51.3 million in trust preferred securities of Impac Capital Trusts #1 and #3.
Under the terms of the restructuring, the interest rates are reduced to 2 percent through 2013 and increase 1 percent per year through 2017. Starting in 2018, the interest rates become
variable at 3-month LIBOR plus 375 basis points. In connection with the restructuring, the Company paid 2 percent interest on each of Impac Capital Trusts #1 and #3 for the January
2009 and December 2008 interest payments, respectively.

After
these transactions, the Company has the option to defer interest for up to five years for the $12.0 million in outstanding trust preferred securities that have not been
fully satisfied or restructured.

Operating activities.Net cash provided by (used in) operating activities was $439.8 million for 2008 as
compared to $(2.1) billion for 2007
and $(5.0) billion for 2006. During 2008, the primary sources of cash in operating activities were cash received from excess cash flows from our residual interests in securitizations, master servicing
fees and real estate advisory fees.

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Table of Contents

Investing activities.Net cash provided by investing activities was $2.2 billion for 2008 as compared to
$6.3 billion for 2007 and
$9.1 billion for 2006. For 2008, 2007 and 2006 net cash of $1.7 billion, $5.6 billion and $9.1 billion, respectively, was provided by principal repayments on our
securitized mortgage collateral.

Financing activities.Net cash used in financing activities was $2.6 billion for 2008, $4.4 billion for 2007
and $4.1 billion
for 2006. For 2008, 2007 and 2006, net cash used in securitized mortgage financing, net of principal repayments was 2.4 billion, $2.8 billion and $3.5 billion, respectively.

Inflation.The consolidated financial statements and corresponding notes to the consolidated financial statements
have been prepared in accordance
with GAAP, which require the measurement of financial position
and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased costs of our operations during each of 2008, 2007 and 2006. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a
greater impact on our performance than do the effects of general levels of inflation. Inflation affects our operations primarily through its effect on interest rates, since interest rates normally
increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand for mortgages and a borrower's ability to qualify for
mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interest rates, borrowers may prepay their mortgages, which in turn may adversely affect our yield
and subsequently the value of our portfolio of mortgage assets. Additionally, the depreciation in home prices has increased the loss severities experienced by the Company.

Off Balance Sheet Arrangements

When we sold loans through whole-loan sales, we were required to make normal and customary representations and warranties
to the loan purchasers, including guarantees against early payment defaults typically 90 days, and fraudulent misrepresentations by the borrowers. Our whole-loan sale agreements
generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or if
a payment default occurs on a mortgage loan shortly after its sale. Because the loans are no longer on our balance sheet, the recourse component is considered a guarantee. During 2008, we sold
$84.4 million of loans with recourse compared to $2.2 billion in 2007. We maintained a $13.9 million reserve related to these guarantees as of December 31, 2008 compared to
a reserve of $25.7 million as December 31, 2007. During 2008 we paid $5.4 million to settle repurchase demands on loans previously sold to third parties as compared to
$126.9 million to repurchase loans during 2007.

See
disclosures in the consolidated notes to the financial statements under "Commitments and Contingencies" for other arrangements that qualify as off balance sheet arrangements.

Contractual Obligations

As of December 31, 2008, we had the following contractual obligations:

Payments Due by PeriodTotal

Less than
one year

One to
Three Years

Three to
Five Years

More than
Five YearsSecuritized mortgage borrowings (1)

$
15,426,994

$
3,208,977

$
5,026,713

$
2,304,462

$
4,886,842Trust preferred securities (2)


88,250


-


-


-


88,250Premises operating lease agreements


58,639


8,102


15,472


14,510


20,555Total Contractual Obligations

$
15,573,883

$
3,217,079

$
5,042,185

$
2,318,972

$
4,995,647


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For additional information regarding our commitments refer to "Note GSecuritized Mortgage Borrowings" and
"Note LCommitments and Contingencies" in the accompanying notes to the consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General Overview

Although we manage credit, prepayment and liquidity risk in the normal course of business, we consider interest rate risk to be a
significant market risk, which could potentially have the largest material impact on our financial condition and results of operations. Since a significant portion of our revenues and earnings are
derived from net interest income, we strive to manage our interest-earning assets and interest-bearing liabilities to generate what we believe to be an appropriate contribution from net interest
income. When interest rates fluctuate, profitability can be adversely affected by changes in the fair market value of our assets and liabilities and by the interest spread earned on interest-earning
assets and interest-bearing liabilities. We derive income from the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Any change in
interest rates affects income received and income paid from assets and liabilities in varying and typically in unequal amounts. Changing interest rates may compress or widen our interest rate margins
and affect overall earnings.

Interest
rate risk management is the responsibility of senior management who reports results of interest rate risk analysis to the IMH board of directors on at least a quarterly basis.
We have established policies that monitor and coordinate sources, uses and pricing of funds. We attempt to reduce the volatility in net interest income by managing the relationship of interest rate
sensitive assets to interest rate sensitive liabilities. In addition, various modeling techniques are used to value interest sensitive mortgage-backed securities. The fair value of our investment
securities available-for-sale, securitized mortgage collateral and borrowings and trust preferred securities is determined using a discounted cash flow model using prepayment
rate, discount rate and credit loss assumptions. We continually monitor interest rates of our interest sensitive assets and liabilities to prevalent interest rates in the market. We do not currently
maintain a securities trading portfolio and are not exposed to market risk as it relates to trading activities.

Changes in Interest Rates

Interest rate risk management policies are intended to limit our exposure to changes in interest rates primarily associated with cash
flows on our adjustable rate securitized mortgage borrowings. Our primary objective is to limit our exposure to the variability in future cash flows attributable to the variability of
one-month LIBOR, which is the underlying index of our adjustable rate securitized mortgage borrowings. We also monitor on an ongoing basis the prepayment risks that arise in
fluctuating interest rate environments. Our interest rate risk management policies are formulated with the intent to offset potential adverse effects of changing interest rates on cash flows on
adjustable rate securitized mortgage borrowings. However, we are currently limited on what we can do to offset future changes in interest rates. The Company maintains derivatives on the securitized
mortgage borrowings to partially offset the potentially adverse risk.

In
the past we primarily acquired for long-term investment ARMs and hybrid ARMs and, to a lesser extent, FRMs. ARMs are generally subject to
periodic and lifetime interest rate caps. This means that the interest rate of each ARM is limited to upwards or downwards movements on its periodic interest rate adjustment date, generally nine
months, or over the life of the mortgage. Periodic caps limit the maximum interest rate change, which can occur on any interest rate change date to generally a maximum of one percent per semiannual
adjustment. Also, each ARM has a maximum lifetime interest rate cap. Generally, borrowings are not subject to the same periodic or lifetime interest rate limitations. During a period of rapidly
increasing or decreasing interest rates, financing costs could increase or decrease at a faster rate than the periodic interest rate adjustments on mortgages would allow, which could affect net
interest income. In addition, if market rates were to exceed the maximum interest rate limits of our ARMs, borrowing costs could increase while interest rates on ARMs would remain constant. In
the past we also acquired hybrid ARMs that had initial fixed interest rate periods generally ranging from two to seven years which subsequently convert to ARMs. During a rapidly
increasing or decreasing interest rate environment financing costs would increase or decrease more rapidly than would interest rates on mortgages, which would remain fixed

55

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until
their next interest rate adjustment date. In order to provide protection against potential resulting basis risk shortfall on the related liabilities, in the past we purchased derivatives.

The
use of derivatives to manage risk associated with changes in interest rates was an integral part of our strategy. The amount of cash payments or cash receipts on derivatives is
determined by (1) the notional amount of the derivative and (2) current interest rate levels in relation to the various strikes or coupons of derivatives during a particular time period.
As of December 31, 2008 and December 31, 2007, notional balances of interest rate swaps, caps, and floors of $8.7 billion and $13.3 billion, respectively, with net fair
values of $(273.6) million and $(120.0) million, respectively, were included in our securitizations. By using derivatives, we attempted to minimize the effect of both upward and downward interest rate
changes on our long-term mortgage portfolio. Our goal was to moderate significant changes to base case net cash flows as interest rates change. We primarily acquired swaps, and to a lesser
extent caps, to essentially convert our adjustable rate securitized mortgage borrowings into fixed rate borrowings during the fixed rate period of the corresponding securitized mortgage collateral.
For instance, we receive one-month LIBOR on swaps, which offsets interest expense on adjustable rate securitized mortgage borrowings, and we pay a fixed interest rate.

The
interest rate risk profile of our balance sheet is more sensitive to changes in interest rates related to our liabilities. We used derivatives in order to manage the interest rate,
or price risk, inherent in our assets and liabilities. Our main objective in managing interest rate risk was to moderate the effect of changes in interest rates on our earnings and cash flows over
time. Our interest rate risk management strategies may result in significant earnings volatility in the short term. The success of our interest rate risk management strategy is largely dependent on
our ability to predict the earnings sensitivity of our long-term mortgage operations in various interest rate environments. There are many market factors that affect the performance of our
interest rate risk management activities including interest rate volatility, prepayment behavior, the shape of the yield curve and the spread between mortgage interest rates and swap rates. The
success of this strategy affects our net earnings and cash flows. This effect, which can be either positive or negative, can be material.

We
measure the sensitivity of our net cash flows to changes in interest rates affecting interest sensitive assets and liabilities using various simulations. These simulations take into
consideration changes that may occur in investment and financing strategies, the forward yield curve, interest rate risk management strategies, mortgage prepayment speeds. As part of various interest
rate simulations, we calculate the effect of potential changes in interest rates on our interest sensitive assets and liabilities and their affect on overall earnings and cash flows. The simulations
assume instantaneous and parallel shifts in interest rates and to what degree those shifts affect net cash flows.

We
refer to the 12-month projection of cash flows from our interest sensitive assets and liabilities, including the effect of net cash flows from derivatives, as the "base
case." Once the base case has been established, we "shock" the base case with instantaneous and parallel shifts in interest rates in 100 basis point increments upward and downward. Calculations are
made for each of the defined instantaneous and parallel shifts in interest rates over or under the forward yield curve used to determine the base case. The results of each 100 basis point change in
interest rates are then compared against the base case to determine the estimated dollar and percentage change to base case. The simulations consider the affect of interest rate changes on interest
sensitive assets and liabilities as well as derivatives.

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The
following table shows the estimated effect to our base case cash flows over the next twelve months from various instantaneous and parallel shifts in interest rates on our interest
sensitive assets and liabilities (within our continuing and discontinued operations) as of December 31, 2008:

Changes in base case cash flows as of December 31, 2008 (1)Instantaneous and Parallel Change in Interest Rates (2)

Amount

%Up 200 basis points, or 2%


(9,681
)

(64
)Up 100 basis points, or 1%


(5,882
)

(39
)Down 100 basis points or 1%


7,413


49


---

In
the previous table, the up 100 basis point scenario as of December 31, 2008 represents our projection of the net change from base case net interest income, which is derived
from assumptions as previously discussed, if market interest rates were to immediately rise by 100 basis points. This means that we increase interest rates at all data points along our projected
forward yield curve by 100 basis points and recalculate our projection of net interest income over the next 12 months.

Our
estimates are based upon numerous assumptions and actual sensitivity to interest rate changes could vary if actual experience differs from the assumptions used.

The
following table presents the extent to which changes in interest rates and changes in the volume of interest rate sensitive assets and interest rate sensitive liabilities have
affected interest income and interest expense during the periods indicated. Information is provided on mortgage assets and borrowings on mortgage assets, only, with respect to the
following:



Year ended December 31, 2008 over 2007Volume

Rate

Rate/Volume

Net Change(in thousands)Increase (decrease) in:Investment securities, available-for-sale

$
(3,381
)
$
(707
)
$
409

$
(3,679
)Securitized mortgage collateral


(577,918
)

1,568,005


(740,669
)

249,418Mortgages held-for-investment and held-for-sale


(63,544
)

(2,069
)

1,754


(63,859
)Finance receivables


(8,745
)

(8,745
)

8,745


(8,745
)Change in interest income on mortgage assets


(653,588
)

1,556,484


(729,761
)

173,135Securitized mortgage borrowings


(523,808
)

1,474,023


(661,805
)

288,410Reverse repurchase agreements


(66,506
)

(23,239
)

19,226


(70,519
)Change in interest expense on borrowings on mortgage assets


(590,314
)

1,450,784


(642,579
)

217,891Change in net interest income on mortgage assets

$
(63,274
)
$
105,700

$
(87,182
)
$
(44,756
)


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Year ended December 31, 2007 over 2006Volume

Rate

Rate/Volume

Net Change(in thousands)Increase (decrease) in:Investment securities, available-for-sale

$
(1,039
)
$
3,467

$
(844
)
$
1,584Securitized mortgage collateral


(71,532
)

185,331


(11,821
)

101,978Mortgages held-for-investment and held-for-sale


(49,679
)

5,684


(2,329
)

(46,324
)Finance receivables


(6,374
)

(8,393
)

2,552


(12,215
)Change in interest income on mortgage assets


(128,624
)

186,089


(12,442
)

45,023Securitized mortgage borrowings


(66,165
)

52,624


(2,943
)

(16,484
)Reverse repurchase agreements


(40,517
)

2,952


(1,005
)

(38,570
)Change in interest expense on borrowings on mortgage assets


(106,682
)

55,576


(3,948
)

(55,054
)Change in net interest income on mortgage assets

$
(21,942
)
$
130,513

$
(8,494
)
$
100,077


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by reference to Impac Mortgage Holdings, Inc.'s Consolidated
Financial Statements and Independent Auditors' Report beginning at page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On November 17, 2008, the Company engaged Squar, Milner, Peterson, Miranda & Williamson, LLP
("Squar Milner") as the Company's new independent registered public accounting firm to audit the Company's financial statements for the year ending
December 31, 2008 and dismissed Ernst & Young LLP ("Ernst & Young") as the Company's independent registered public accounting firm. The decision to dismiss Ernst &
Young and engage Squar Milner was approved by the Company's audit committee.

The
reports of Ernst & Young on the financial statements of the Company for the years ended December 31, 2007 and 2006 contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

During
the period from January 1, 2006 through the date of Ernst & Young's dismissal, there have been no disagreements (as defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions) with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Ernst & Young would have caused it to make reference to the subject matter of such disagreements in their reports on the
financial statements for such years. Further, there have been no reportable events (as described in Item 304(a)(1)(v) of Regulation S-K), except for the following:
a) as previously disclosed by the Company in its Annual Report on Form 10-K for the year ended December 31, 2007, Ernst & Young reported that the Company did
not maintain effective internal control over financial reporting as of December 31, 2007 because of the effect of a material weakness in controls related to the Company's financial statement
close process that existed as of December 31, 2007; and b) as previously disclosed by the Company in its Annual Report on Form 10-K for the year ended
December 31, 2006, Ernst & Young reported that the Company did not maintain effective internal control over financial reporting as of December 31, 2006 because of the effect of a
material weakness in controls over the preparation, review, presentation and disclosure of amounts included in the Consolidated Statements of Cash Flows.

Neither
the Company nor anyone acting on its behalf consulted with Squar Milner during the period from January 1, 2006 through the date of Ernst & Young's dismissal
regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or (ii) any matter that was either the subject
of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of
Regulation S-K).

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

The
Company's management, with the participation of its chief executive officer and its chief financial officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of December 31, 2008. Based on that evaluation, the Company's chief executive
officer and chief financial officer concluded that, as of that date, the Company's disclosure controls and procedures, were effective at a reasonable assurance level.

Management's Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Section 13a-15(f) of the Securities Exchange Act of 1934, as amended). Internal control over financial reporting is a process designed by, or under the supervision of,
the Company's CEO and CFO to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in conformity with U.S. generally accepted accounting principles and
include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

As
of December 31, 2008, management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the criteria established by COSO management concluded
that the Company's internal control over financial reporting was effective as of December 31, 2008.

Our
management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.

Squar,
Milner, Peterson, Miranda & Williamson, LLP, the registered public accounting firm that audited the consolidated financial statements included in this Annual Report
on Form 10-K, has issued an attestation report on the Company's internal control over financial reporting, a copy of which is included herein.

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Management's Remediation of prior Material Weakness

At December 31, 2007, the Company's management identified a material weakness in the effectiveness of internal control over
financial reporting related to a shortage of resources in the accounting department required to close its books and records effectively at each reporting date, obtain the necessary information from
operational departments to complete the work necessary to file its financial reports timely and failure to timely identify and remediate accounting errors. Management determined that a material
weakness existed due to a lack of an adequate number of personnel in the accounting department. During 2008, management remediated the material weakness by hiring a sufficient number of resources to
perform controls and to aid in the timeliness of the financial statement close process leading to the correct preparation, review, presentation of and disclosures in our consolidated statements.

The
Company's disclosure controls and procedures, including our internal control over financial reporting, are effective as of December 31, 2008 due to the scrutiny of such
matters by our management and Audit Committee and the changes described above. The Company's management cannot assure you that, as circumstances change, any additional material weakness will not be
identified.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2008, the following changes were made to the Company's internal controls over financial
reporting:



During
the quarter ended December 31, 2008, there were no other changes in our internal control over financial reporting that materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Impac Mortgage Holdings, Inc.

We
have audited Impac Mortgage Holdings, Inc.'s (the Company) internal control over financial reporting as of December 31, 2008 based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Impac Mortgage Holdings, Inc.'s management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Impac Mortgage Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on
the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Impac Mortgage
Holdings, Inc. and subsidiaries as of December 31, 2008 and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity and cash flows for
the year then ended, and our report dated March 12, 2009 expressed an unqualified opinion thereon.

/s/SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP

Newport
Beach, California
March 12, 2009

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ITEM 9B. OTHER INFORMATION

In December 2008, the Company fully satisfied $8.0 million in outstanding Trust Preferred Securities of Impac Capital Trust #4
for $1.2 million and is in the process of canceling the securities. Under the terms of the agreement, to the extent the Company settles additional amounts of its outstanding Trust Preferred
Securities prior to January 2010 at per share values in excess of the per share amount of this agreement, the Company will be required to pay additional amounts representing the incremental increase
in the per share amounts.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.'s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.'s 2008 fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.'s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.'s 2008 fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 including Equity Compensation Plan Information is hereby incorporated by reference to
Impac Mortgage Holdings, Inc.'s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.'s 2008
fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.'s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.'s 2008 fiscal year.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.'s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.'s 2008 fiscal year.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(3)
Exhibits

The
exhibits listed on the accompanying Exhibit Index are incorporated by reference into this Item 15 of this Annual Report on Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine, State of California, on the 13th day of March 2009.

IMPAC MORTGAGE HOLDINGS, INC.by

/s/ JOSEPH R. TOMKINSON Joseph R. Tomkinson Chairman of the Board
and Chief Executive Officer


Pursuant
to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

Signature

Title

Date/s/ JOSEPH R. TOMKINSON Joseph R. Tomkinson

Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)


March 13, 2009/s/ WILLIAM S. ASHMORE William S. Ashmore

President and Director


March 13, 2009/s/ TODD R. TAYLOR Todd R. Taylor

Chief Financial Officer (Principal Financial and Accounting Officer)


March 13, 2009/s/ JAMES WALSH James Walsh

Director


March 13, 2009/s/ FRANK P. FILIPPS Frank P. Filipps

Director


March 13, 2009/s/ STEPHAN R. PEERS Stephan R. Peers

Director


March 13, 2009/s/ LEIGH J. ABRAMS Leigh J. Abrams

Director


March 13, 2009


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Exhibit Index

Exhibit
Number

Description3.1

Charter of the Registrant (incorporated by reference to the corresponding exhibit number to the Registrant's Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the Securities and
Exchange Commission on November 8, 1995).3.1(a)

Certificate of Correction of the Registrant (incorporated by reference to exhibit 3.1(a) of the Registrant's 10-K for the year-ended December 31, 1998).3.1(b)

Articles of Amendment of the Registrant (incorporated by reference to exhibit 3.1(b) of the Registrant's 10-K for the year-ended December 31, 1998).3.1(c)

Articles of Amendment for change of name to Charter of the Registrant (incorporated by reference to exhibit number 3.1(a) of the Registrant's Current Report on Form 8-K/A Amendment No. 1, filed
February 12, 1998).3.1(d)

Articles Supplementary and Certificate of Correction for Series A Junior Participating Preferred Stock of the Registrant (incorporated by reference to exhibit 3.1(d) of the Registrant's 10-K for the
year-ended December 31, 1998).3.1(e)

Articles Supplementary for Series B 10.5 percent Cumulative Convertible Preferred Stock of the Registrant (incorporated by reference to exhibit 3.1b of the Registrant's Current Report on Form 8-K,
filed December 23, 1998).3.1(f)

Articles Supplementary for Series C 10.5 percent Cumulative Convertible Preferred Stock of the Registrant (incorporated by reference to the corresponding exhibit number of the Registrant's Annual Report on
Form 10-K for the period ending December 31, 1999.3.1(g)

Certificate of Correction for Series C Preferred Stock of the Registrant (incorporated by reference to the corresponding exhibit number of the Registrant's Annual Report on Form 10-K for the period ending
December 31, 1999).3.1(h)

Articles Supplementary, filed with the State Department of Assessments and Taxation of Maryland on February 24, 2000, reclassifying Series B Preferred Stock of the Registrant (incorporated by reference to
exhibit 3.1(h) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).3.1(i)

Articles Supplementary, filed with the State Department of Assessments and Taxation of Maryland on July 12, 2002, reclassifying Series C Preferred Stock of the Registrant (incorporated by reference to
exhibit 9 of the Registrant's Form 8-A/A, Amendment No. 2, filed July 30, 2002).3.1(j)

Articles of Amendment, filed with the State Department of Assessments and Taxation of Maryland on July 16, 2002, increasing authorized shares of Common Stock of the Registrant (incorporated by reference to
exhibit 10 of the Registrant's Form 8-A/A, Amendment No. 2, filed July 30, 2002).3.1(k)

Articles of Amendment, filed with the State Department of Assessments and Taxation of Maryland on June 22, 2004, amending and restating Article VII of the Registrant's Charter (incorporated by reference to
exhibit 7 of the Registrant's Form 8-A/A, Amendment No. 1, filed June 30, 2004).3.1(l)

Articles Supplementary designating the Company's 9.375 percent Series B Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, filed with the State
Department of Assessments and Taxation of Maryland on May 26, 2004 (incorporated by reference to exhibit 3.8 of the Registrant's Form 8-A/A, Amendment No. 1, filed June 30, 2004).3.1(m)

Articles Supplementary designating the Company's 9.125 percent Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, filed with the State
Department of Assessments and Taxation of Maryland on November 18, 2004 (incorporated by reference to exhibit 3.10 of the Registrant's Form 8-A filed November 19, 2004).


64

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Table of Contents

Exhibit
Number

Description3.1(n)

Articles of Amendment of the Company, effective as of December 30, 2008, effecting 1-for-10 reverse stock split (incorporated by reference to exhibit 3.1 of the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 30, 2008).3.2(o)

Articles of Amendment of the Company, effective as of December 30, 2008, amending par value (incorporated by reference to exhibit 3.2 of the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 30, 2008).3.2

Bylaws, as amended and restated (incorporated by reference to the corresponding exhibit number of the Registrant's Quarterly Report on Form 10-Q for the period ending March 31, 1998).3.2(a)

Amendment to Bylaws (incorporated by reference to exhibit 3.2(a) of the Registrant's Registration Statement of Form S-3 (File No. 333-111517) filed with the Securities and Exchange Commission on
December 23, 2003).3.2(b)

Second Amendment to Bylaws (incorporated by reference to Exhibit 3.2(b) of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on April 1, 2005).3.2(c)

Third Amendment to Bylaws of the Company (incorporated by reference to Exhibit 3.2(c) of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on March 29, 2006).3.2(d)

Fourth Amendment to Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on December 20,
2007).3.2(e)

Fifth Amendment to Bylaws of the Company (incorporated by reference to Exhibit 3.2(e) of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on February 13, 2008).3.2(f)

Amendment No. 6 to Bylaws of the Company (incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2008).4.1

Form of Stock Certificate of the Company (incorporated by reference to the corresponding exhibit number to the Registrant's Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on September 7, 1995).4.2

Specimen Certificate representing the 9.375 percent Series B Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A, filed with the Securities
and Exchange Commission on May 27, 2004).4.3

Specimen Certificate representing the 9.125 percent Series C Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A, filed with the Securities
and Exchange Commission on November 19, 2004).4.4

Amended and Restated Junior Subordinated Indenture between Impac Mortgage Holdings, Inc. and JPMorgan Chase Bank, N.A. dated September 16, 2005 (incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 20, 2005).4.6

Junior Subordinated Indenture between Impac Mortgage Holdings, Inc. and JPMorgan Chase Bank, National Association, dated May 20, 2005 (incorporated by reference to Exhibit 4.1 of the Registrant's
Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 25, 2005).4.7

Indenture between Impac Mortgage Holdings, Inc. and Wilmington Trust Company, as trustee, dated October 18, 2005 (incorporated by reference to Exhibit 4.8 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2005).10.1*

1995 Stock Option, Deferred Stock and Restricted Stock Plan, as amended and restated (incorporated by reference to exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the period ending
March 31, 1998).


65

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Table of Contents

Exhibit
Number

Description10.2(a)

Form of 2002 Indemnification Agreement between the Registrant and its Directors and Officers (incorporated by reference to exhibit 10.1(a) of the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2004).10.2(b)

Schedule of each officer and director that is a party to an Indemnification Agreement (incorporated by reference to exhibit 10.2(b) of the Registrant's Annual Report on Form 10-K for the year-ended
December 31, 2007).10.3

Form of Loan Purchase and Administrative Services Agreement between the Registrant and Impac Funding Corporation (incorporated by reference to exhibit 10.9 to the Registrant's Registration Statement on
Form S-11, as amended (File No. 33-96670), filed with the Securities and Exchange Commission on September 7,1995).10.4

Servicing Agreement effective November 11, 1995 between the Registrant and Impac Funding Corporation (incorporated by reference to exhibit 10.14 to the Registrant's Registration Statement on Form S-11,
as amended (File No. 333-04011), filed with the Securities and Exchange Commission on May 17, 1996).10.5

Lease dated March 4, 2005 regarding 19500 Jamboree Road, Newport Beach California (incorporated by reference to exhibit 10.8 of the Registrant's Annual Report on Form 10-K for the year-ended
December 31, 2004).10.6*

Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred Stock and Restricted Stock Plan (incorporated by reference to Appendix A of Registrant's Definitive Proxy Statement filed with the SEC on
April 30, 2001).10.7(a)*

Amendment to Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit 4.1(a) of the Registrant's Form S-8 filed with the SEC
on March 1, 2002).10.7(b)*

Amendment No. 2 to Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit 10.10(b) of the Registrant's Annual Report on
Form 10-K for the year-ended December 31, 2003).10.7(c)*

Form of Stock Option Agreement for 2001 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2004).10.7(d)*

Form of Restricted Stock Agreement (incorporated by reference to exhibit 10.1 of the Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 2,
2005).10.8

Executive Employment Agreement made as of April 1, 2008 between Impac Funding Corporation and Joseph R. Tomkinson (incorporated by reference to exhibit 10.1 of the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 17, 2008).10.9

Impac Mortgage Holdings, Inc. Guaranty dated as of April 1, 2008 in favor of Joseph R. Tomkinson (incorporated by reference to exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 17, 2008).10.10

Executive Employment Agreement made as of April 1, 2008 between Impac Funding Corporation and William S. Ashmore (incorporated by reference to exhibit 10.3 of the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 17, 2008).10.11

Impac Mortgage Holdings, Inc. Guaranty dated as of April 1, 2008 in favor of William S. Ashmore (incorporated by reference to exhibit 10.4 of the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 17, 2008).10.12*

Employment Agreement executed January 9, 2007 between Impac Funding Corporation and Ronald M. Morrison (incorporated by reference to exhibit 10.1 of the Registrant's Current Report on Form 8-K, filed
January 12, 2007).


66

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Table of Contents

Exhibit
Number

Description10.13*

Guaranty executed January 9, 2007 between Impac Mortgage Holdings, Inc. in favor of Ronald M. Morrison (incorporated by reference to exhibit 10.1(a) of the Registrant's Current Report on Form 8-K,
filed January 12, 2007).10.14

Second Amended and Restated Trust Agreement among Impac Mortgage Holdings, Inc., JPMorgan Chase Bank, N.A., Chase Manhattan Bank USA, N.A., and the Administrative Trustees named therein, dated September 16,
2005 (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report Form 8-K, filed with the Securities and Exchange Commission September 20, 2005).10.15

Amended and Restated Trust Agreement among Impac Mortgage Holdings, Inc., JPMorgan Chase Bank, National Association, as Property Trustee, Chase Bank USA, National Association, as Delaware Trustee, and the
Administrative Trustees named therein, dated May 20, 2005 (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission May 25, 2005).10.16

Amended and Restated Declaration of Trust among Impac Mortgage Holdings, Inc., Wilmington Trust Company, as Delaware and Institutional Trustee, and the Administrative Trustees named therein, dated October 18,
 2005 (incorporated by reference to Exhibit 10.29 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005).10.17***

Exclusive Services Agreement effective January 1, 2008, between Impac Funding Corporation and Real Estate Disposition Corporation (incorporated by reference to exhibit 10.26 of the Registrant's Annual Report
on Form 10-K for the year-ended December 31, 2007).10.18*

Employment Agreement effective October 1, 2007 and Amendment No. 1 effective February 12, 2008 between Impac Mortgage Holdings, Inc. and Todd R. Taylor (incorporated by reference to
exhibit 10.27 of the Registrant's Annual Report on Form 10-K for the year-ended December 31, 2007).10.19

Amended and Restated Master Purchase Agreement between UBS Real Estate Securities, Inc., Impac Funding Corporation, Impac Mortgage Holdings, Inc. and Impac Warehouse Lending Group, Inc. dated as of
September 11, 2008 (incorporated by reference to exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2008).10.19(a)

Waiver Agreement with UBS Real Estate Securities, Inc., dated September 11, 2008 (incorporated by reference to exhibit 10.1(a) of the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2008).10.19(b)

Fee Letter with UBS Real Estate Securities, Inc., dated September 11, 2008(incorporated by reference to exhibit 10.1(b) of the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2008).21.1

Subsidiaries of the Registrant (incorporated by reference to exhibit 21.1 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2006).23.1

Consent of Squar, Milner, Peterson, Miranda & Williamson, LLP23.2

Consent of Ernst & Young LLP31.1

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

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


---

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68

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Table of Contents

CONSOLIDATED FINANCIAL STATEMENTS

INDEX



Reports of Independent Registered Public Accounting Firms


F-2Consolidated Balance Sheets as of December 31, 2008 and 2007


F-4Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2008, 2007 and
2006


F-5Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2008, 2007 and
2006


F-7Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006


F-8Notes to Consolidated Financial Statements


F-10


F-1

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Impac Mortgage Holdings, Inc.

We
have audited the accompanying consolidated balance sheet of Impac Mortgage Holdings, Inc. and subsidiaries (the Company) as of December 31, 2008, and the related consolidated
statements of operations
and comprehensive loss, changes in stockholders' equity, and cash flows for the year ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Impac Mortgage Holdings, Inc. and subsidiaries at
December 31, 2008, and the consolidated results of their operations and their cash flows for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Impac Mortgage Holdings, Inc's. internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 12, 2009 expressed an unqualified opinion thereon.

/s/SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP

Newport Beach, California
March 12, 2009

F-2

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Table of Contents

Report of Independent Registered Public Accounting FirmErnst & Young LLP

The
Board of Directors and Shareholders
Impac Mortgage Holdings, Inc.

We
have audited the accompanying consolidated balance sheet of Impac Mortgage Holdings, Inc. and subsidiaries (the Company) as of December 31, 2007, and the related consolidated
statements of operations and comprehensive loss, changes in stockholders' (deficit) equity, and cash flows for each of the two years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Impac Mortgage Holdings, Inc. and subsidiaries at
December 31, 2007, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.



Orange
County, California
May 19, 2008

F-3

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Table of Contents



IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS  (dollar amounts in thousands, except share data)

At December 31,2008

2007ASSETSCash and cash equivalents

$
46,215

$
24,387Restricted cash


1,243


-Trust assetsInvestment securities available-for-sale


2,068


15,248Securitized mortgage collateral (at fair value at December 31, 2008)


5,894,424


16,532,633Derivative assets


37


7,497Real estate owned


599,084


400,863Total trust assets


6,495,613


16,956,241Assets of discontinued operations


141,053


353,250Other assets


31,393


57,194Total assets

$
6,715,517

$
17,391,072LIABILITIESTrust liabilitiesSecuritized mortgage borrowings (at fair value at December 31, 2008)

$
6,193,984

$
17,780,060Derivative liabilities


273,584


127,757Total trust liabilities


6,467,568


17,907,817Trust preferred securities (at fair value at December 31, 2008)


15,403


98,398Liabilities of discontinued operations


217,241


405,341Other liabilities


6,053


57,244Total liabilities


6,706,265


18,468,800Commitments and contingenciesSTOCKHOLDERS' EQUITY (DEFICIT)Series-A junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued and outstanding


-


-Series-B 9.375% cumulative redeemable preferred stock, $0.01 par value; liquidation value $50,000; 2,000,000 shares authorized, issued and
outstanding


20


20Series-C 9.125% cumulative redeemable preferred stock, $0.01 par value; liquidation value $111,765; 5,500,000 shares authorized; 4,470,600 shares issued
and outstanding as of December 31, 2008 and 2007


45


45Common stock, $0.01 par value; 200,000,000 shares authorized; 7,618,146 and 7,609,639 shares issued and outstanding as of December 31, 2008 and 2007,
respectively


76


76Additional paid-in capital


1,177,697


1,174,247Accumulated other comprehensive income


-


1,028Net accumulated deficit:Cumulative dividends declared


(815,077
)

(803,912
)Retained deficit


(353,509
)

(1,449,232
)Net accumulated deficit


(1,168,586
)

(2,253,144
)Total stockholders' equity (deficit)


9,252


(1,077,728
)Total liabilities and stockholders' equity (deficit)

$
6,715,517

$
17,391,072


See accompanying notes to consolidated financial statements.

F-4

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Table of Contents



IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS  AND COMPREHENSIVE LOSS  (dollar amounts in thousands, except per share
data)

For the year ended December 31,2008

2007

2006INTEREST INCOME

$
1,476,972

$
1,224,821

$
1,134,002INTEREST EXPENSE


1,463,239


1,179,015


1,196,199Net interest income (expense)


13,733


45,806


(62,197
)Provision for loan losses


-


1,390,008


34,600Net interest income (expense) after provision for loan losses


13,733


(1,344,202
)

(96,797
)NON-INTEREST INCOME:Change in fair value of derivative instruments


-


(140,827
)

93,498Change in fair value of net trust assets, excluding REO


24,281


-


-Losses from real estate owned


(52,011
)

(105,865
)

(9,659
)Change in fair value of trust preferred securities


24,879


-


-Real estate advisory fees


45,388


-


-Loss on sale of loans


(1,129
)

(29,019
)

(1,533
)Other income


1,036


6,158


31,260Total non-interest income (expense)


42,444


(269,553
)

113,566NON-INTEREST EXPENSE:General, administrative and other


12,272


9,824


9,707Personnel expense


10,320


5,502


3,333Data processing expense


2,815


4,819


5,055Occupancy expense


2,734


3,242


2,193Equipment expense


997


1,709


2,030Total non-interest expense


29,138


25,096


22,318Net earnings (loss) from continuing operations before income taxes


27,039


(1,638,851
)

(5,549
)Income tax expense (benefit) from continuing operations


22,270


14,861


(13,597
)Net earnings (loss) from continuing operations


4,769


(1,653,712
)

8,048Net loss from discontinued operations, net of tax


(49,492
)

(393,378
)

(83,321
)Net loss


(44,723
)

(2,047,090
)

(75,273
)Cash dividends on cumulative redeemable preferred stock


(11,165
)

(14,886
)

(14,698
)Net loss attributable to common stockholders

$
(55,888
)
$
(2,061,976
)
$
(89,971
)


See
accompanying notes to consolidated financial statements.

F-5

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(dollar amounts in thousands, except per share data) - (continued)

For the year ended December 31,2008

2007

2006Net loss

$
(44,723
)
$
(2,047,090
)
$
(75,273
)Net unrealized (losses) gains on securities:Unrealized holding (losses) gains arising during year


-


(7
)

55Reclassification of (losses) gains included in net earnings


-


(1,322
)

997Net unrealized (losses) gains


-


(1,329
)

1,052Comprehensive loss

$
(44,723
)
$
(2,048,419
)
$
(74,221
)Net loss per common share  Basic and Diluted:Loss from continuing operations

$
(0.84
)
$
(219.28
)
$
(0.87
)Loss from discontinued operations


(6.50
)

(51.69
)

(10.95
)Net loss per share

$
(7.34
)
$
(270.97
)
$
(11.82
)Dividends declared per common share

$
-

$
3.50

$
9.50


See
accompanying notes to consolidated financial statements.

F-6

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(dollar amounts in thousands, except share amounts)

Number of
Preferred
Shares
Outstanding

Preferred
Stock

Number of
Common
Shares
Outstanding (1)

Common
Stock (1)

Additional
Paid-In
Capital (1)

Accumulated
Other
Comprehensive
Income

Cumulative
Dividends
Declared

Retained
(Deficit)
Earnings

Total
Stockholders'
Equity (Deficit)Balance, December 31, 2005


6,371,200

$
64


7,611,296

$
76

$
1,167,744

$
1,305

$
(675,373
)
$
673,131

$
1,166,947Dividends declared ($9.50 per common share)


-


-


-


-


-


-


(72,311
)

-


(72,311
)Dividends declared on preferred shares


-


-


-


-


-


-


(14,698
)

-


(14,698
)Proceeds and tax benefit from exercise of stock options


-


-


7,187


-


755


-


-


-


755Sale of stock via equity distribution agreement


72,800


-


-


-


1,621


-


-


-


1,621Stock based compensation expense


-


-


-


-


2,387


-


-


-


2,387Repurchases and retirement of common stock


-


-


(10,430
)

-


(950
)

-


-


-


(950
)Net loss


-


-


-


-


-


-


-


(75,273
)

(75,273
)Other comprehensive income


-


-


-


-


-


1,052


-


-


1,052Balance, December 31, 2006


6,444,000


64


7,608,053


76


1,171,557


2,357


(762,382
)

597,858


1,009,530Dividends declared ($3.50 per common share)


-


-


-


-


-


-


(26,644
)

-


(26,644
)Dividends declared on preferred shares


-


-


-


-


-


-


(14,886
)

-


(14,886
)Issuance of vested restricted shares


-


-


1,586


-


-


-


-


-


-Sale of stock via equity distribution agreement


26,600


1


-


-


517


-


-


-


518Stock based compensation expense


-


-


-


-


2,173


-


-


-


2,173Net loss


-


-


-


-


-


-


-


(2,047,090
)

(2,047,090
)Other comprehensive loss


-


-


-


-


-


(1,329
)

-


-


(1,329
)Balance, December 31, 2007


6,470,600


65


7,609,639


76


1,174,247


1,028


(803,912
)

(1,449,232
)

(1,077,728
)Dividends declared on preferred shares


-


-


-


-


-


-


(11,165
)

-


(11,165
)Issuance of vested restricted shares


-


-


413


-


-


-


-


-


-Additional shares issued upon reverse stock split


-


-


8,094


-


-


-


-


-


-Stock based compensation expense


-


-


-


-


3,450


-


-


-


3,450Cumulative effect of adoption of SFAS 159


-


-


-


-


-


(1,028
)

-


1,140,446


1,139,418Net loss


-


-


-


-


-


-


-


(44,723
)

(44,723
)Balance, December 31, 2008


6,470,600

$
65


7,618,146

$
76

$
1,177,697

$
-

$
(815,077
)
$
(353,509
)
$
9,252




(1)Amounts retrospectively reflect the ten-for-one reverse stock split and
subsequent reduction in par value. Refer to Note A"Business Summary, Market Conditions and Status of Operations" for additional information related to the reverse stock split.

See accompanying notes to consolidated financial statements.

F-7

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Table of Contents



IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (dollar amounts in thousands)

For the year ended December 31,2008

2007

2006CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings (loss) from continuing operations

$
4,769

$
(1,653,712
)
$
8,048Provision for loan losses


-


1,390,008


34,600Losses from real estate owned


52,011


105,865


9,659Amortization and impairment of deferred charge, net


22,270


14,919


20,589Amortization of premiums, securitization costsand debt issuance costs


-


147,202


232,865Amortization and impairment of mortgage servicing rights


2,209


770


1,428Loss on sale of loans


1,129


29,019


1,533Change in fair value of derivative instruments


-


251,875


110,460Change in fair value of net trust assets, excluding REO


(171,779
)

-


-Change in fair value of trust preferred securities


(24,879
)

-


-Accretion of interest income and expense


507,795


-


-Stock-based compensation


1,741


1,093


304Write-down of securities available-for-sale


-


13,618


925Net change in accrued interest


-


8,228


3,309Net change in restricted cash


(1,243
)

-


687Net cash provided by (used in) operating activities of discontinued operations


82,469


(2,346,823
)

(5,393,477
)Net change in other assets and liabilities


(36,675
)

(23,258
)

(4,005
)Net cash provided by (used in) operating activities


439,817


(2,061,196
)

(4,973,075
)CASH FLOWS FROM INVESTING ACTIVITIES:Net change in securitized mortgage collateral


1,674,077


5,583,026


9,112,307Net change in mortgages held-for-investment


73


(11,508
)

-Sale of investment securities available-for-sale


-


-


36,782Purchase of premises and equipment


(90
)

(1,560
)

-Net principal change on investment securities available-for-sale


3,589


2,401


(28,188
)Proceeds from the sale of real estate owned


483,756


269,967


95,652Net cash provided by (used in) investing activities of discontinued operations


14,997


423,050


(74,873
)Other investing cash flows from continuing operations


-


-


(495
)Net cash provided by investing activities


2,176,402


6,265,376


9,141,185CASH FLOWS FROM FINANCING ACTIVITIES:Cash disbursements under reverse repurchase agreements


-


(256,493
)

(241,205
)Cash receipts from reverse repurchase agreements


-


92,489


220,406Proceeds from securitized mortgage borrowings


-


3,858,143


5,949,095Repayment of securitized mortgage borrowings


(2,436,075
)

(6,627,229
)

(9,452,566
)Settlement of trust preferred securities


(1,200
)

-


-Common stock dividends paid


-


(26,644
)

(72,311
)Preferred stock dividends paid


(11,165
)

(18,568
)

(11,018
)Purchases of common stock


-


-


(951
)Proceeds from exercise of stock options


-


-


755Proceeds from sale of cumulative redeemable preferred stock


-


608


1,621Net cash used in financing activities of discontinued operations


(148,013
)

(1,379,701
)

(528,880
)Net cash used in financing activities


(2,596,453
)

(4,357,395
)

(4,135,054
)Net change in cash and cash equivalents


19,766


(153,215
)

33,056Cash and cash equivalents at beginning of period


26,462


179,677


146,621Cash and cash equivalents at end of period  continuing operations


46,215


24,387


151,714Cash and cash equivalents at end of period  discontinued operations


13


2,075


27,963Cash and cash equivalents at end of period

$
46,228

$
26,462

$
179,677


F-8

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

(dollar amounts in thousands)

For the year ended December 31,2008

2007

2006SUPPLEMENTARY INFORMATION (Continuing and Discontinued Operations):Interest paid

$
559,452

$
1,247,947

$
1,269,595Taxes paid


-


269


541NON-CASH TRANSACTIONS (Continuing and Discontinued Operations):Accumulated other comprehensive (loss) gain

$
-

$
(1,329
)
$
1,052Transfer of loans held-for-sale and held-for-investment to REO


7,345


44,211


30,647Transfer of securitized mortgage collateral to REO


713,974


547,375


185,283Transfer of loans held-for-sale to securitized mortgage collateral


-


3,245,500


5,810,208Transfer of loans held-for-investment to securitized mortgage collateral


-


-


314,578Transfer of securitized mortgage collateral to loans held-for-sale


-


27,040


-Transfer of net assets from discontinued operations to continuing operations


25,600


4,012


-Collapsed deals from securitized mortgage collateral to loans held-for-investment


-


-


159,194


See accompanying notes to consolidated financial statements.

F-9

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Table of Contents



IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except per share data or as otherwise indicated)

Note ASummary of Market Conditions, Business and Financial Statement Presentation including Significant Accounting Policies

1.        Business Summary, Market Conditions and Status of Operations

Business Summary

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Maryland corporation incorporated in August 1995 and has the following
subsidiaries: IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets
Corp. (ISAC) and Impac Commercial Capital Corporation (ICCC).

During
2007, the Company's board of directors elected to discontinue the non-conforming mortgage and retail operations conducted by IFC, commercial operations conducted by
ICCC, and warehouse lending operations conducted by IWLG (collectively, the discontinued operations).

During
2008, the Company's continuing operations included the long-term mortgage operations (residual interests in securitizations), the master servicing portfolio, and real
estate advisory fees from the Company's advisory services agreement with a real estate marketing company.

Market Conditions

During 2008, the Company has been significantly impacted by concerns over credit quality, home prices and the general economic
environment. These concerns have led to deterioration in the quality of the Company's long-term mortgage portfolio, as evidenced by the significant increases in delinquencies, foreclosures
and credit losses. Existing conditions are unprecedented and inherently involve significant risks and uncertainty to the Company. These conditions continue to adversely impact the performance of the
Company's long-term mortgage portfolio.

Status of Operations

In September 2008, the Company entered into an agreement to restructure its reverse repurchase financing with its remaining lender
(Restructured Financing). The agreement removed all technical defaults from financial covenant noncompliance and any associated margin calls for the term of the agreement. Refer to
Note LCommitments and Contingencies (Continuing and Discontinued Operations)for additional information related to this
restructuring.

During
2008, the Company entered into an agreement with a real estate marketing company to generate advisory fees. The real estate marketing company specialized in the marketing of
foreclosed properties. During the year, the Company earned $18.4 million in real estate advisory fees plus a $27.0 million fee for agreeing to terminate this relationship in the fourth
quarter of 2008.

In
December 2008, the Company fully satisfied $8.0 million in outstanding trust preferred securities for $1.2 million. In January 2009, the Company fully satisfied
$25.0 million in trust preferred securities for $3.75 million and agreed to restructure another $51.3 million in trust preferred securities. The Company deferred the December 2008
interest payments of $257 thousand on the remaining $12.0 million trust preferred securities. Refer to Note R"Trust Preferred Securities" for additional information
related to the deferral of interest and this settlement.

During
2008, the Company funded its operations primarily from the cash flows from its long-term mortgage portfolio and the aforementioned real estate advisory fees.

The
Company continues to explore new mortgage-related fee-based businesses. As a result, the Company has intentionally maintained certain personnel to explore these new
business opportunities.

F-10

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The
information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.

2.        Financial Statement Presentation

Principles of Consolidation

The financial condition and results of operations have been presented in the consolidated financial statements for the
three-year period ended December 31, 2008 and include the financial results of IMH, and IMH Assets, in continuing operations and IWLG, and IFC (together with its wholly-owned
subsidiaries ICCC and ISAC), in discontinued operations.

All
significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain amounts in the prior periods' consolidated financial statements have
been reclassified to conform to the current year presentation including the discontinued operations. Additionally, all historical share and per share data in our consolidated financial statements and
notes thereto have been restated to give retroactive recognition of the Company's ten-for-one reverse stock split effected in December 2008. Refer to
Note A-11Common Stock, for additional information regarding this reverse stock split.

The
accompanying consolidated financial statements include accounts of IMH and other entities in which the Company has a controlling financial interest. The usual condition for a
controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as special purpose entities
(SPEs), through arrangements that do not involve voting interests.

There
are two different accounting frameworks applicable to SPEs, depending on the nature of the entity and the Company's relation to that entity; the qualifying special purpose entity
(QSPE) framework under Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS 140) and the variable interest entity (VIE) framework under the Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), "Consolidation of
Variable Interest Entities" (FIN 46R).

The
QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE meeting certain criteria. These criteria are designed to ensure that the activities of the
SPE are essentially predetermined in their entirety at the inception of the vehicle and that the transferor cannot exercise control over the entity, its assets or activities. Entities meeting these
criteria are not consolidated by the Company.

When
the SPE does not meet the QSPE criteria, consolidation is assessed pursuant to FIN 46R. A VIE is defined as an entity that (1) lacks enough equity investment at risk
to permit the entity to finance its activities without additional subordinated financial support from other parties, (2) has equity owners who are unable to make decisions and/or (3) has
equity owners that do not absorb or receive the entity's losses and returns. QSPEs are excluded from the scope of FIN 46R.

FIN 46R
requires a variable interest holder (counterparty to a VIE) to consolidate the VIE if that party will absorb a majority of the expected losses of the VIE, receive a
majority of the residual returns of the VIE, or both. This party is considered the primary beneficiary of the entity. The determination of whether the Company meets the criteria to be considered the
primary beneficiary of a VIE requires an evaluation of all transactions (such as investments, liquidity commitments, derivatives and fee arrangements) with the entity.

Use of Estimates and Assumptions

The accompanying consolidated financial statements of IMH and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of

F-11

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

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. Actual results could differ from those estimates.

3.        Adoption of New Accounting Standards

Adoption of SFAS 157Fair Value Measurements

The Company prospectively adopted the provisions of SFAS No. 157 "Fair Value Measurements" (SFAS 157), as of
January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These
two types of inputs create the following fair value hierarchy:



Level 1



Quoted prices for identical instruments in active markets.

Level 2



Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant
value drivers are observable in active markets.

Level 3



Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.


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

For
some products or in certain market conditions, observable inputs may not always be available. During 2008, certain markets remained inactive, and some key observable inputs used in
valuing certain financial assets and liabilities were unavailable. Under the provisions of FASB Staff Position No. 157-3 "Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active", in situations in which there is little, if any, market activity for an asset at measurement date, the fair value measurement objective remains to measure the
financial asset at the price that would be received by the holder of the financial asset in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. In the
absence of observable market data at December 31, 2008, the Company's fair value measurements include its own internal assumptions about future cash flows and appropriately
risk-adjusted discount rates that it believes market participants would make in orderly market transactions. When and if these markets become active, the Company will use the related
observable inputs available at that time. Therefore, at December 31, 2008, all of the items measured at fair value are considered Level 3 fair value measurements.

Under
fair value accounting, the Company has taken into account its own credit risk when measuring the fair value of assets and liabilities.

Adoption of SFAS 159Fair Value Option

The Company prospectively adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities"
(SFAS 159) as of January 1, 2008. The adoption of SFAS 159 resulted in new valuation techniques used by the Company when determining fair value, most notably to value its
securitized mortgage collateral and borrowings and trust preferred securities, which had not previously been carried at fair value. SFAS 159 provides an option on an
instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial
adoption, the election is made at the acquisition of a financial asset, financial liability, or a firm commitment and it may not be revoked. Management believes that the adoption of SFAS 159
provides an opportunity to mitigate volatility in reported earnings and provides a better representation of the economics of the trust assets and liabilities.

F-12

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Under
the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments (certain trust assets, trust liabilities and trust
preferred securities) held at January 1, 2008. Differences between the December 31, 2007 carrying values and the January 1, 2008 fair values were recognized as an adjustment to
retained deficit. The adoption of SFAS 159 resulted in a $1.1 billion decrease to retained deficit on January 1, 2008 from $(1.4) billion at December 31, 2007 to $(308.8)
million at January 1, 2008.

As
a result of deterioration in the real estate market since the second half of 2007, the Company significantly added to its allowance for loan losses during the third and fourth
quarters of 2007. Principally, because of the increase in the allowance for loan losses, the Company reported a stockholders' deficit as of December 31, 2007. This stockholders' deficit was
created primarily because the Company was required under GAAP to record an allowance for loan losses that reduced securitized mortgage collateral in its consolidated trusts below the balance of the
related securitized mortgage borrowings, resulting in a negative investment in certain consolidated trusts, even though the related trust agreements are nonrecourse to the Company. However, with the
adoption of SFAS 159, the Company's net investment position is unable to go below zero since the related trust liabilities are also recorded at fair value. Therefore the difference between the
fair value of the trust assets and trust liabilities represents the net investment interests (residual interests in securitizations) in the consolidated trusts at fair value.

The
following table summarizes the initial retained earnings charge related to the prospective adoption of SFAS 159 as of January 1, 2008 and the related fair value
balances as of January 1, 2008.

Ending Balance as of December 31, 2007
(Prior to Adoption)

Adoption Net Gain/(Loss)

Fair Value Balance as of January 1, 2008
(After Adoption) (5)Impact of electing the fair value option under SFAS 159:Investment securities available-for-sale

$
15,248

$
1,028
(1)
$
15,248Securitized mortgage collateral (2)


16,532,633


(821,311
)

15,711,322Securitized mortgage borrowings (3)


(17,780,060
)

1,903,283


(15,876,777
)Trust preferred securities


(98,398
)

57,446


(40,952
)Cumulative-effect adjustment (pre-tax)





1,140,446Tax impact (4)





-Cumulative-effect adjustment to reduce retained deficit




$
1,140,446Total retained deficit as of December 31, 2007




$
(1,449,232
)Cumulative-effect adjustment to reduce retained deficit





1,140,446Total retained deficit as of January 1, 2008 (6)




$
(308,786
)


---

F-13

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

4.        Cash and Cash Equivalents and Restricted Cash

For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash and highly liquid investments with maturities of three
months or less at the date of acquisition. The carrying amount of cash and cash equivalents approximates fair value.

Cash
and cash equivalents balances that have restrictions as to the Company's ability to withdraw funds are considered restricted cash. At December 31, 2008 and 2007, restricted
cash totaled $1.2 million and zero, respectively.

5.        Investment Securities Available-for-Sale

Investment securities classified as available-for-sale are reported at fair value. With the adoption of SFAS 159 on
January 1, 2008, unrealized gains and losses are recognized in earnings as changes in fair value of net trust assets. Prior to the adoption of SFAS 159 on January 1, 2008,
unrealized gains and losses were recognized as other comprehensive earnings or loss. Gains and losses realized on the sale of available-for-sale investment securities and
declines in value considered to be other-than-temporary are based on the specific identification method and reported in current earnings.

With
the adoption of SFAS 159, interest income from investment securities available-for-sale is recognized based on current market yields. Prior to the
adoption of SFAS 159, premiums or discounts obtained on investment securities were accreted or amortized to interest income over the estimated life of the investment securities using the
effective interest method. Investment securities available-for-sale may be subject to credit, interest rate and/or prepayment risk.

6.        Securitized Mortgage Collateral

The Company's long-term investment operations primarily invest in adjustable rate and, to a lesser extent, fixed rate non-conforming
mortgages and commercial mortgages that were acquired and originated by our mortgage and commercial operations.

Non-conforming
mortgages may not have certain documentation or verifications that are required by government sponsored entities and, therefore, in making our credit
decisions, we were more reliant upon the borrower's credit score and the adequacy of the underlying collateral.

The
Company securitized mortgages in the form of collateralized mortgage obligations (CMO) on balance sheet and real estate mortgage investment conduits (REMICs), which may be
consolidated or un-consolidated depending on the design of the securitization structure. A CMO or REMIC securitization may be designed so that the transferee (securitization trust) is not
a QSPE, and therefore the Company consolidates the VIE as the Company is the primary beneficiary of the sole residual interest in each securitization trust. Generally, this is achieved by including
terms in the securitization agreements that give the Company the ability to unilaterally cause the securitization trust to return specific mortgages, other than through a clean-up call.
Amounts consolidated are included in trust assets and liabilities as securitized mortgage collateral, real estate owned, derivative assets, securitized mortgage borrowings and derivative liabilities
in the accompanying consolidated balance sheets.

Securitized
mortgage collateral is not placed on non-accrual status as the servicer remits the interest payments to the trust regardless of the delinquency status of the
underlying mortgage loan.

In
connection with the adoption of SFAS 159 on January 1, 2008, the Company accounts for securitized mortgage collateral at fair value, with changes in fair value during
the period reflected in earnings. Fair value measurements are based on the Company's estimated cash flow models, which incorporate assumptions, inputs of other market participants and quoted prices
for the underlying bonds. The Company's assumptions include its

F-14

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

expectations
of inputs that other market participants would use. These assumptions include judgments about the underlying collateral, prepayment speeds, credit losses, forward interest rates and
certain other factors.

In
periods prior to the adoption of SFAS 159 on January 1, 2008, securitized mortgage loans were recorded at cost, adjusted for amortization of net deferred costs and for
credit losses inherent in the portfolio.

Allowance for loan losses

In periods prior to the adoption of SFAS 159 on January 1, 2008, an allowance was maintained for loan losses on
mortgages held as securitized mortgage collateral and mortgages held-for-investment. With the adoption of SFAS 159 for mortgages held as securitized mortgage collateral,
the allowance for loan losses related to these assets was reduced to zero and included in the cumulative-effect adjustment as part of the fair value option election at January 1, 2008. During
2008, losses inherent in this portfolio are reflected in the change in fair value of net trust assets in the consolidated statement of operations and comprehensive loss.

Historically,
allowances for loan losses were maintained at an amount that management believed provided for losses inherent in those loan portfolios. The Company's methodology was
designed to analyze the performance of various loan portfolios, based upon the relatively homogeneous nature within these loan portfolios. The allowance for losses was also analyzed using the
following factors:



In
evaluating the adequacy of the allowance for loan losses, management took several items into consideration. For instance, a detailed analysis of historical loan performance data was
accumulated and reviewed. This data was analyzed by securitization issuance, and loan level for delinquent loans for loss performance. The results of that analysis were then applied to the current
mortgage portfolio and an estimate was determined. Historically, management also recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring
inherent losses in our loan portfolios. These items included, but were not limited to, economic indicators that may affect the borrower's ability to pay, changes in value of collateral, projected loss
curves, political and economic factors, and industry statistics.

In
addition, specific valuation allowances were historically established for loans that were deemed impaired, including repurchased loans, finance receivables and loans impaired by
natural disasters, if default by the borrower was deemed probable and if the fair value of the loan or the collateral was estimated to be less than the gross carrying value of the loan. Actual losses
on loans were recorded as a reduction to the allowance through charge-offs. Subsequent recoveries of amounts previously charged off were credited to the allowance.

Loans
with contractual terms that have been restructured for economic, borrower's financial difficulties or other reasons, are classified as troubled debt restructurings. Troubled debt
restructurings may include changing repayment terms, reducing or fixing the stated interest rate, or extending the maturity date of the loan. The Company would record an estimated loss for each of its
restructured loans, which was historically included in the provision for loan losses.

Loans
were charged off against the allowance for loan losses when foreclosure of the property is complete and the property is transferred to real estate owned at the lower of its cost
or its estimated net realizable value.

F-15

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Provisions
to the allowance for loan losses based upon an estimate of inherent loan losses were recorded by a charge to earnings.

7.        Real Estate Owned

Real estate owned (REO), which consists of residential real estate acquired in satisfaction of loans, is carried at net realizable value, which includes the
estimated fair value of the residential real estate less estimated selling and holding costs, offset by expected mortgage insurance proceeds to be received, if any. Adjustments to the loan carrying
value required at the time of foreclosure affect the carrying amount of securitized mortgage collateral. Subsequent write-downs in the net realizable value of REO are included in losses from real
estate owned in the consolidated statements of operations and comprehensive loss.

8.        Securitized Mortgage Borrowings

The debt from each issuance of a securitized mortgage borrowing is payable from the principal and interest payments on the underlying mortgages collateralizing
such debt, as well as the proceeds from liquidations of real estate owned. If the principal and interest payments are insufficient to repay the debt, the shortfall is allocated first to the residual
interest holders (generally the Company) then, if necessary, to the certificate holders (e.g. investors in the securitized mortgage borrowings) in accordance with the specific terms of the
various respective indentures. Securitized mortgage borrowings typically are structured as one-month LIBOR "floaters" and fixed rate securities with interest payable to certificate holders
monthly. The maturity of each class of securitized mortgage borrowing is directly affected by the amount of net interest spread, overcollateralization and the rate of principal prepayments and
defaults on the related securitized mortgage collateral. The actual maturity of any class of a securitized mortgage borrowing can occur later than the stated maturities of the underlying mortgages.

When
the Company issued securitized mortgage borrowings for financing purposes, the Company generally sought an investment grade rating for the Company's securitized mortgages by
nationally recognized rating agencies. To secure such ratings, it was often necessary to incorporate certain structural features that provide for credit enhancement. This generally included the pledge
of collateral in excess of the principal amount of the securities to be issued, a bond guaranty insurance policy for some or all of the issued securities, or additional forms of mortgage insurance.
The Company's total loss exposure is limited to the Company's initial net economic investment in each trust, which is referred to as a residual interest.

In
connection with the adoption of SFAS 159 on January 1, 2008, the Company accounts for securitized mortgage borrowings at fair value, with changes in fair value during
the period reflected in earnings. Fair value measurements are based on the Company's estimated cash flow models, which incorporate assumptions, inputs of other market participants and quoted prices
for the underlying bonds. The Company's assumptions include its expectations of inputs that other market participants would use. These assumptions include judgments about the underlying collateral,
prepayment speeds, credit losses, forward interest rates and certain other factors.

In
periods prior to the adoption of SFAS 159 on January 1, 2008, securitized mortgage borrowings were recorded at cost, adjusted for unamortized securitization costs and
discounts.

9.        Derivative Instruments

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133), as amended by SFAS No. 149
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities", the Company records all its derivative instruments at fair value as either derivative assets or derivative liabilities,
included within trust assets and trust liabilities in the consolidated balance sheets. The Company has accounted for all its derivatives as non-designated hedge instruments or
free-standing derivatives. The Company uses derivative instruments to manage interest rate risk.

F-16

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Interest Rate Swaps, Caps and Floors

The Company's primary objective is to limit the exposure to the variability in future cash flows attributable to the variability of
one-month LIBOR, which is the underlying index of adjustable rate securitized mortgage borrowings and short-term borrowings under reverse repurchase agreements. The Company
also monitors on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. The Company's interest rate risk management policies are formulated with the intent to
offset the potential adverse effects of changing interest rates on securitized mortgage borrowings and reverse repurchase borrowings.

To
mitigate exposure to the effect of changing interest rates on cash flows on securitized mortgage borrowings and reverse repurchase borrowings, the Company purchased derivative
instruments primarily in the form of interest rate swap agreements (swaps) and, to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). Due to the closure
of the mortgage operations, the Company has not entered into a new derivative instrument since the third quarter of 2007.

The
fair value of the Company's swaps, caps, floors and other derivative instruments is generally based on market prices provided by dealers and market-makers, or estimates of future
cash flows from these financial instruments.

10.      Trust Preferred Securities

Trust preferred securities are reported at fair value. With the adoption of SFAS 159 on January 1, 2008, unrealized gains and losses are recognized
in earnings as changes in fair value of trust preferred securities. Prior to the adoption of SFAS 159, trust preferred securities were reported at historical cost, adjusted for unamortized debt
issuance costs.

The
Company does not consolidate trust preferred entities since the Company does not have a significant variable interest in the trust. Instead, the Company records its investment in
the trust preferred entities (included in other assets in the accompanying consolidated balance sheets) and accounts for such under the equity method of accounting and reflects a liability for the
issuance of the junior subordinated notes to the trust preferred entities. The interest expense on such notes is recorded in total interest expense in the consolidated statement of operations and
comprehensive loss.

11.      Common Stock

On December 29, 2008, the Company amended its charter to affect a reverse stock split of its outstanding shares of common stock and to reduce the common
stock's par value subsequent to the reverse stock split. Every ten shares of common stock, par value $0.01 per share, of the Company which were issued and outstanding immediately prior to the reverse
stock split were combined into one issued and outstanding share of common stock, par value $0.10 per share. No fractional shares of common stock of the Company were issued upon the effectiveness of
the reverse stock split. Any fractional shares that would otherwise result from the reverse stock split were eliminated by rounding each fraction up to the nearest whole share. Immediately after the
reverse stock split, the par value of the Company's issued and outstanding shares of common stock was decreased from $0.10 per share to $0.01 per share.

This
reverse stock split and subsequent reduction in par value resulted in the issuance of an additional 8,094 shares of outstanding common stock and was accounted for by the transfer
of $685 thousand from common stock to additional paid-in capital, which is retrospectively presented for all periods shown.

All
share and per share amounts retrospectively reflect the ten-for-one reverse stock split and subsequent reduction in par value. Refer to
Note NReconciliation of Earnings Per Sharefor the impact on the Company's net loss per share amounts as a result of the reverse
stock split.

F-17

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

12.      Interest Income and Interest Expense

Interest income on securitized mortgage collateral and interest expense on securitized mortgage borrowings are recorded using the effective yield for the period
based on the previous quarter's estimated fair value.

In
periods prior to the adoption of SFAS 159, the Company amortized mortgage premiums, securitization costs, bond discounts, deferred charges and master servicing rights
associated with its securitized mortgage collateral and borrowings to interest income and interest expense over the estimated lives of the mortgages and maturity of the borrowings as an adjustment to
yield of the securitized mortgage collateral and borrowings. Amortization calculations included certain loan information, including the interest rate, maturity date, principal balance and certain
assumptions including expected prepayment rates. The Company estimated prepayments on a collateral-specific basis and considered actual prepayment activity for the collateral pool. The Company also
considered the current interest rate environment and the forward prepayment projections.

13.      Stock-Based Compensation

The Company maintains a stock-based incentive compensation plan, the terms of which are governed by the Impac Mortgage Holdings, Inc. 2001 Stock Option,
Deferred Stock and Restricted Stock Plan, as amended (the 2001 Stock Plan). Officers, key employees, directors, consultants and advisors are eligible to receive awards pursuant to the 2001 Stock Plan.
The aggregate number of shares reserved under the 2001 Stock Plan is 1,288,719 shares (including increases pursuant to the plan's "evergreen provision"), and as of December 31, 2008 there were
53,414 shares available for grant as stock options, restricted stock and deferred stock awards. The Company issues new shares of common stock to satisfy stock option exercises.

The
Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," (SFAS 123R). Accordingly,
the Company measures the cost of stock-based awards using the grant-date fair value of the award and recognizes that cost over the requisite service period.

The
fair value of each stock option granted under the Company's stock-based compensation plan is estimated on the date of grant using the Black-Scholes-Merton option-pricing model and
the assumptions noted below. The expected volatility is based on both the implied and historical volatility of the Company's stock. The expected term of options granted is derived using the
"simplified method" as defined in the SEC's Staff Accounting Bulletin 107, "Implementation of FASB 123R". The risk-free interest rate is based on the U.S. Treasury rate with a term
equal to the expected term of the option grants on the date of grant.

SFAS 123R
requires forfeitures to be estimated at the time of grant and prospectively revised, if necessary, in subsequent periods if actual forfeitures differ from initial
estimates. Stock-based compensation expense is recorded net of estimated forfeitures for the years ended December 31, 2008, 2007 and 2006, such that expense was recorded only for those
stock-based awards that were expected to vest.

F-18

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The
fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant using the Black-Scholes-Merton option pricing model
with the following weighted average assumptions:

For the year ended December 31,2008

2007

2006Risk-free interest rate

1.88% to 2.54%

4.02%

4.82%Expected lives (in years)

3.25 - 3.50

3

3Expected volatility (1)

87.3% - 91.9%

75.09%

38.58%Expected dividend yield

0.00%

0.00%

11.00%Fair value per share

$5.02 - 7.76

$6.01

$14.12


---

The
following table summarizes activity, pricing and other information for the Company's stock options for the years presented below:

For the year ended December 31,2008

2007

2006Number of
Shares

Weighted-
Average
Exercise
Price $

Number of
Shares

Weighted-
Average
Exercise
Price $

Number of
Shares

Weighted-
Average
Exercise
Price $Options outstanding at beginning of year


593,991

$
98.03


704,876

$
129.10


526,654

$
145.50Options granted


797,004


12.73


216,350


25.60


277,400


99.40Options exercised


-


-


-


-


(7,520
)

109.50Options forfeited / cancelled


(250,809
)

104.02


(327,234
)

117.90


(91,659
)

135.66Options outstanding at end of year


1,140,186

$
37.18


593,991

$
97.50


704,876

$
129.10Options exercisable at end of year


295,760

$
86.96


290,472

$
131.30


310,239

$
139.70




For the year ended December 31,2008

2007

2006Weighted-
Average
Remaining Life
(Years)

Aggregate
Intrinsic
Value
(in thousands)

Weighted-
Average
Remaining Life
(Years)

Aggregate
Intrinsic
Value
(in thousands)

Weighted-
Average
Remaining Life
(Years)

Aggregate
Intrinsic
Value
(in thousands)Options outstanding at end of period


3.33

$
-


2.61

$
-


2.74

$
3,319Options exercisable at end of period


1.77

$
-


2.08

$
-


2.16

$
3,319


The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company's closing stock price of
$0.60 per common share as of December 31, 2008, which would have been received by the option holders, had all option holders exercised their options as of that date. As of December 31,
2008, there was approximately $3.8 million of total unrecognized compensation cost related to stock option compensation arrangements granted under the plan, net of estimated forfeitures. That
cost is expected to be recognized over the weighted average estimated life of one year.

F-19

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

For
the years ended December 31, 2008, 2007 and 2006, total stock-based compensation expense was $3.5 million, $2.2 million and $2.4 million, respectively.

Additional
information regarding stock options outstanding as of December 31, 2008, is as follows:

Stock Options Outstanding

Options ExercisableExercise  
Price
Range ($)

Number
Outstanding

Weighted-
Average
Remaining
Contractual
Life in Years

Weighted-
Average
Exercise
Price ($)

Number
Exercisable

Weighted-
Average
Exercise
Price ($)8.00


16,000


4.64


8.00


-


-12.00


245,004


4.24


12.00


-


-13.30


455,000


4.12


13.30


-


-25.60 - 99.40


355,532


2.11


66.10


227,110


70.25137.60 - 217.70


68,650


0.89


142.27


68,650


142.278.00 - 217.70


1,140,186


3.33


37.18


295,760


86.96


14.      Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If an asset is considered
to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds its estimated fair value. Assets to be disposed of are reported at the lower of
the carrying amount or estimated fair value less costs to sell.

15.      Income Taxes

The Company operates so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various
restrictions on ownership of IMH's stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least
90 percent of its taxable income to its stockholders of which 85 percent must be distributed within the taxable year in order to avoid the imposition of an excise tax. The remaining
balance may extend until timely filing of the tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income. If in any tax
year IMH should not qualify as a REIT, the Company would be taxed as a corporation and distributions to stockholders would not be deductible in computing taxable income. If IMH were to fail to qualify
as a REIT in any tax year, the Company would not be permitted to qualify for that year and the succeeding four years.

In
accordance with Accounting Research Bulletin No. 51, "Consolidated Financial Statements," the Company records a deferred charge representing the deferral of income tax expense
on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. The deferred charge is included in other assets in the accompanying consolidated
balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statements of operations and comprehensive loss over the estimated life of the mortgages retained
in the securitized mortgage collateral. The Company recorded a tax expense of $22.3 million and $14.9 million for the years ended December 31, 2008 and 2007, respectively. The net
provision is the result of the amount of the deferred charge amortized and/or impaired resulting from credit losses, which does not result in any tax liability required to be paid.

F-20

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except per share data or as otherwise indicated)

As of December 31, 2008, the Company had federal and California net operating loss carryforwards of $406.8 million and $532.2 million,
respectively. As of December 31, 2008, the Company's taxable REIT subsidiary had an estimated federal net operating loss tax carryforward of $295.1 million. The federal net operating
loss carryforward of the Company's taxable REIT subsidiary, utilization of which may be limited to the Company's taxable REIT subsidiary, begins to expire in the year 2027. As of December 31,
2008, the Company and the Company's taxable REIT subsidiary have net deferred tax assets of approximately $547.9 million and $100.0 million, respectively. The Company recorded a full
valuation allowance against the net deferred tax assets as it believes it is more likely than not that the net deferred tax assets will not be recoverable.

16.      Net Earnings (Loss) per Share

Basic net earnings (loss) per share is computed on the basis of the weighted average number of shares outstanding for the year divided into net earnings (loss)
for the year. Diluted net earnings (loss) per share is computed on the basis of the weighted average number of shares and dilutive common equivalent shares outstanding for the year divided by net
earnings (loss) for the year, unless anti-dilutive. Refer to Note NReconciliation of Earnings Per Share.

17.      Recent Accounting Pronouncements

In October 2008, the FASB issued FASB Staff Position No. 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active" (FSP 157-3). The staff position clarifies the application of SFAS 157 in inactive markets and provides an illustrative example of how the fair value of a financial
asset is determined in an inactive market. FSP 157-3 is effective immediately, including prior periods for which financial statements have not been issued. The issuance of this staff
position affects the Company as a significant portion of the Company's financial assets and liabilities are measured at fair value using market value approaches based on active markets. Availability
of observable market inputs has diminished considerably as a result of the increasing inactivity in the secondary market for mortgage loans, mortgage-backed securities and other real estate related
assets. The lack of observable market inputs requires that the Company rely heavily on its own internal assumptions of the future cash flows and appropriate risk-adjusted discount rates
market participants would apply in measuring the fair value of financial assets and liabilities in orderly market transactions that are not forced liquidations or distressed sales. As discussed in
Note BFinancial Instruments Elected For Fair Value Accounting, all of the Company's financial assets and liabilities, which were
previously classified as Level 2 fair value measurements, were classified as Level 3 fair value measurements at December 31, 2008, as a result of market inactivity and the lack of
availability of observable market inputs.

In
September 2008, the FASB ratified EITF No. 08-5, "Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement"
(EITF 08-5). EITF 08-5 addresses whether issuer's of liabilities should consider the effect of the third-party credit enhancement when
measuring the liability at fair value under SFAS 157. EITF 08-5 requires that the issuer of a liability with a third-party credit enhancement that is inseparable from the
liability shall not include the effect of the credit enhancement in the fair value measurement of the liability. The guidance in EITF 08-5 is effective in the first reporting period
beginning on or after December 15, 2008, with the effect of initially applying its guidance being included in the change in fair value in the period of adoption. The Company does not expect the
adoption of EITF 08-5 to have a significant impact on its consolidated financial statements.

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). The new standard is intended to improve financial
reporting by identifying a consistent framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for
nongovernmental entities. SFAS 162 will be effective 60 days after the U.S. Securities and Exchange Commission approves the Public Company Accounting Oversight Board's amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company does not expect the adoption of SFAS 162 to have a significant
impact on its consolidated financial statements.

F-21

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

In
April 2008, the FASB voted to eliminate QSPEs from the guidance in SFAS 140. While the revised standard has not been finalized and the FASB's proposals will be subject to a
public comment period, this change may have a significant impact on the Company's consolidated financial statements as it may lose sales treatment for assets previously sold to QSPEs, as well as for
future sales. An effective date for any proposed revisions has not been determined by the FASB. As of December 31, 2008, the current principal balance of QSPEs to which the Company, acting as
principal, has transferred assets and received sales treatment were $678.3 million. The Company's investment in these QSPE's consists of residual interests accounted for as investment
securities available-for-sale in its consolidated balance sheets. The Company is still evaluating the impact of this potential change.

In
connection with the aforementioned proposed changes to SFAS 140, the FASB also is proposing three key changes to the consolidation model in FIN 46R. First, the FASB has
proposed to include former QSPEs in the scope of FIN 46R. In addition, the FASB supports amending FIN 46R to change the method of analyzing which party to a VIE should consolidate the
VIE to a primarily qualitative determination of control instead of today's risks and rewards model. Finally, the proposed amendment is expected to require all VIEs and their primary beneficiaries to
be reevaluated quarterly. The previous rules required reconsideration only when specified reconsideration events occurred. As of December 31, 2008, the only significant unconsolidated VIEs are
the QSPE's described in the preceding paragraph.

In
March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" (SFAS 161), an amendment of FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), to expand disclosure requirements for an entity's derivative and hedging activities. Under
SFAS 161, entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. In order to
meet these requirements, entities
shall include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years and interim periods beginning after
November 15, 2008 with early adoption encouraged. The Company plans to adopt SFAS 161 on January 1, 2009, and there should be no impact on the consolidated financial statements as
it only addresses disclosures.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" which is a revision to SFAS No. 141. The provisions of this statement establish principles in
which the acquirer in a business combination is required to recognize and measure in its financial statements all identifiable assets acquired, liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that date. As such, contingent consideration will need to be recognized based on estimated fair value at the date of
acquisition. In addition, the costs related to the acquisition are to be recognized separately from the acquisition rather than allocated to the individual assets and liabilities. Also, if applicable,
where the fair value of the assets acquired exceeded the acquisition cost, the excess asset value will be recognized as income. This statement makes significant amendments to other statements and
other authoritative guidance. The provisions of this statement apply prospectively to business combinations with acquisition dates on or after January 1, 2009.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements". This statement amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements". This statement clarifies that a noncontrolling interest (minority interest) in a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. Sufficient disclosure should be provided to identify and distinguish between the interests of the parent and the interest on the
noncontrolling owners. This statement also establishes that purchases or sales of equity securities that do not result in a change in control will be accounted for as equity transactions. Upon loss of
control, the interest sold, as well any interest retained will be measured at fair value with any gain or loss recognized in earnings. This statement will be effective as of our fiscal year beginning
January 1, 2009. We do not anticipate the adoption of this statement to have a material impact on our financial statements.

F-22

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The
Company will be evaluating the impact of these changes on the Company's consolidated financial statements once the actual standards become effective.

Note BFinancial Instruments Elected For Fair Value Accounting

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
application of fair value estimates may be on a recurring or non-recurring 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 as discussed previously.

Effective
January 1, 2008, the Company adopted two pronouncements affecting its fair value measurements and accounting: SFAS 157 and SFAS 159.

SFAS 157
defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 establishes a three-tiered fair value hierarchy that prioritizes the inputs used to
estimate fair value into three broad levels, considering the relative reliability of the inputs:



F-23

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)



The
following table presents for each of these hierarchy levels, the Company's assets and liabilities that are measured at fair value on a recurring basis, including financial
instruments for which the Company has elected the fair value option at December 31, 2008:

Recurring Fair Value Measurements
At December 31, 2008Level 1

Level 2

Level 3AssetsInvestment securities available-for-sale

$
-

$
-

$
2,068Securitized mortgage collateral


-


-


5,894,424Total Assets at Fair Value

$
-

$
-

$
5,896,492LiabilitiesSecuritized mortgage borrowings

$
-

$
-

$
6,193,984Derivative liabilities, net (1)


-


-


273,547Trust preferred securities


-


-


15,403Total Liabilities at Fair Value

$
-

$
-

$
6,482,934


---

As
a result of the lack of observable market data resulting from inactive markets, the Company has classified its investment securities available-for-sale,
securitized mortgage collateral and borrowings, net derivative liabilities and trust preferred securities as Level 3 fair value measurements at
December 31, 2008. Level 3 assets and liabilities were 100 percent of total assets and total liabilities at fair value.

The
following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
year ended December 31, 2008:

Level 3 Recurring Fair Value MeasurementsFor the year ended December 31, 2008Fair Value-
January 1,
2008

Total Gains
(Losses)
Included in
Earnings

Transfers in
and/or out of
Level 3 (2)

Purchases,
issuances
and
settlements

Fair Value-
December 31,
2008



Unrealized
gains (losses)
still held (1)Investment securities available-for-sale

$
15,248

$
(9,591
)
$
-

$
(3,589
)
$
2,068



$
(1,802
)Securitized mortgage collateral


782,574


(7,419,747
)

14,919,649


(2,388,052
)

5,894,424




(8,239,882
)Securitized mortgage borrowings


(767,704
)

7,245,095


(15,109,073
)

2,437,698


(6,193,984
)



9,233,009Derivative liabilities, net


-


(298,741
)

(120,260
)

145,454


(273,547
)



(276,879
)Trust preferred securities


(40,952
)

24,349


-


1,200


(15,403
)



75,841


---

During the year ended December 31, 2008, $14.9 billion and $15.1 billion in securitized mortgage collateral and borrowings,
respectively, were transferred from Level 2 to Level 3 fair value measurements due to significant market disruption and the lack of market activity. Additionally, $120.3 million
in derivative liabilities, net was transferred from Level 2 to Level 3 fair value measurements.

F-24

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The
table below summarize gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and
liabilities for the year ended December 31, 2008:

Recurring Fair Value Measurements
Level 3  Total Gains (Losses) Included in Net Loss
For the year ended December 31, 2008Investment
Securities
Available-
for-Sale

Securitized
Mortgage
Collateral

Securitized
Mortgage
Borrowings

Derivative
Liabilities,
Net

Trust
Preferred
SecuritiesInterest income

$
1,015

$
387,212

$
-

$
-

$
-Interest expense


-


-


(895,492
)

-


(530
)Change in fair value of net trust assets, excluding REO


(10,606
)

(7,806,959
)

8,140,587


(298,741
)

-Change in fair value of trust preferred securities


-


-


-


-


24,879Total

$
(9,591
)
$
(7,419,747
)
$
7,245,095

$
(298,741
)
$
24,349


SFAS 159 permits fair value accounting to be elected for certain assets and liabilities on an individual contract basis at the time of
acquisition or under certain other circumstances referred to as "remeasurement event dates." For those items for which fair value accounting is elected, changes in fair value will be recognized in
earnings, and fees and costs associated with the origination or acquisition of such items will be recognized as incurred rather than deferred. In addition, SFAS 159 allows application of the
Statement's provisions to eligible items existing at the effective date, and management has elected to apply SFAS 159 to certain of those items as discussed below.

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

Recurring Basis

Investment Securities Available-for-Sale.Pursuant to the Company's adoption of SFAS 159, the Company elected to
carry all of its investment securities available-for-sale at fair value. The investment securities consist primarily of non-investment-investment grade
mortgage-backed securities. The fair value of the investment securities are measured based upon the Company's expectation of inputs that other market participants would use. Such assumptions include
judgments about the underlying collateral, prepayment speeds, credit losses, forward interest rates and certain other factors. Given the market disruption and lack of observable market data as of
December 31, 2008, the fair value of the investment securities available-for-sale were measured using significant internal expectations of market participants'
assumptions.

Securitized Mortgage CollateralPursuant to the Company's adoption of SFAS 159, the Company elected to carry all of
its securitized mortgage collateral at fair value. These assets consist primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value measurements are based on
the Company's estimated cash flow models, and non-binding quoted prices for the underlying bonds and yield analysis using the Company's validation process. The Company's assumptions
include its expectations of inputs that other market participants would use in pricing these assets. These assumptions include judgments about the underlying collateral, annual prepayment speeds,
estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of December 31, 2008, the unpaid principal balance and estimated fair value of
securitized mortgage collateral was $14.1 billion and $5.9 billion, respectively. The aggregate unpaid principal balance exceeds the fair value by $8.2 billion at
December 31, 2008. As of December 31, 2008, the unpaid principal balance and estimated fair value of loans 90 days or more past due was $3.1 billion and
$1.0 billion, respectively. The aggregate unpaid principal balances of loans 90 days or more past due exceed the fair value by $2.1 billion at December 31, 2008.

F-25

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Securitized Mortgage BorrowingsPursuant to the Company's adoption of SFAS 159, the Company elected to carry all of
its securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by non-conforming
mortgage loans. Fair value measurements include the Company's judgments about the underlying collateral assumptions such as annual prepayment speeds, estimated future credit losses, forward interest
rates, investor yield requirements and certain other factors and are based upon non-binding quoted prices for the individual tranches of bonds, if available. As of December 31,
2008, the outstanding principal balance and estimated fair value of securitized mortgage borrowings was $15.4 billion and $6.2 billion, respectively. The aggregate outstanding principal
balance exceeds the fair value by $9.2 billion at December 31, 2008.

Trust Preferred SecuritiesPursuant to the Company's adoption of SFAS 159, the Company elected to carry all of its
trust preferred securities at fair value. These securities were measured based upon an analysis prepared by the Company, which considered the Company's own credit risk, including comparison to the
terms of the Company's preferred stock and consideration of recent settlements with trust preferred debt holders and revised terms of restructured trust preferred securities.

As
of December 31, 2008, the unpaid principal balance and fair value of trust preferred securities was $91.2 million and $15.4 million, respectively. The aggregate
unpaid principal balance exceeds the fair value by $75.8 million at December 31, 2008.

Derivative Assets and Liabilities.For non-exchange traded contracts, fair value is based on the amounts that would be
required to
settle the positions with the related counterparties as of the valuation date. Valuations of derivative assets and liabilities are based on observable market inputs, if available. To the extent
observable market inputs are not available, fair values measurements include the Company's judgments about the future cash flows, forward interest rates and certain other factors, including
counterparty risk. With the issuance of SFAS 157, these values must also take into account the Company's own credit standing, to the extent applicable, thus included in the valuation of the
derivative instrument is the value of the net credit differential between the counterparties to the derivative contract.

The
following table represents changes in fair value of recurring fair value measurements for the year ended December 31, 2008.

Recurring Fair Value Measurements
Changes in Fair Value Included in Net Loss
For the year ended December 31, 2008Change in Fair Value ofInterest
Income (1)

Interest
Expense (1)

Net Trust
Assets

Trust
Preferred
Securities

TotalInvestment securities available-for-sale

$
1,015

$
-

$
(10,606
)
$
-

$
(9,591
)Securitized mortgage collateral


387,212


-


(7,806,959
)

-


(7,419,747
)Securitized mortgage borrowings


-


(895,492
)

8,140,587


-


7,245,095Derivative instruments


-


-


(298,741
)(2)

-


(298,741
)Trust preferred securities


-


(530
)

-


24,879


24,349Total

$
388,227

$
(896,022
)
$
24,281
(3)
$
24,879

$
(458,635
)


---

F-26

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The change in fair value of the asset and liabilities above, excluding derivative instruments, are primarily due to the changes in credit risk.
The change in fair value for derivative instruments is primarily due to the change in the forward LIBOR curve.

Non-recurring Basis

The Company is required to measure certain assets at 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 non-recurring fair value measurements under
SFAS 157.

Loans Held-for-SaleLoans held-for-sale for which the fair value option was
not elected are carried at lower of cost or market (LOCOM). When available, such measurements are based upon what secondary markets offer for portfolios with similar characteristics, and are
considered Level 2 measurements. If market pricing is not available, such measurements are significantly impacted by the Company's expectations of other market participants' assumptions, and
are considered Level 3 measurements. The Company utilizes internal pricing processes to estimate the fair value of loans held-for-sale, which is based on recent loan
sales and estimates of the fair value of the underlying collateral. Loans held-for-sale, which are primarily included in assets of discontinued operations, are considered
Level 3 fair value measurements at December 31, 2008 based on the lack of observability of market inputs.

The
following table presents the fair values of those financial assets measured at fair value on a non-recurring basis at December 31, 2008.

Total
Losses For
the Year
Ended
December 31,
2008Non-recurring Fair Value Measurements
As of December 31, 2008Level 1

Level 2

Level 3Loans held-for-sale (1)


-


-


108,223

$
(45,960
)


---

Note CInvestment Securities Available-for-Sale

As of December 31, 2008 and 2007, the Company's investment securities available-for-sale totaled
$2.1 million and $15.2 million, respectively.

During
2008, investment securities available-for-sale were recorded at fair value with changes in fair value included in earnings. Prior to 2008, investment
securities available-for-sale were recorded at fair value with changes in fair value included in comprehensive income. The following table presents the amortized cost
unrealized holding gains (losses) included in accumulated comprehensive income at December 31, 2007:

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Estimated
Fair
ValueAs of December 31, 2007:Subordinated securities secured by mortgages

$
14,220

$
1,136

$
(108
)
$
15,248$
14,220

$
1,136

$
(108
)
$
15,248


F-27

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

During
2007, the Company considered $13.6 million of investment securities available-for-sale to be other-than-temporarily
impaired, primarily due to changes in the expected credit losses. The other-than-temporary impairments were charged against other non-interest income in the
accompanying consolidated statements of operations and comprehensive loss.

Note DSecuritized Mortgage Collateral and Allowance for Loan Losses

Securitized mortgage collateral consisted of the following:

At December 31,2008

2007Mortgages secured by residential real estate

$
12,602,220

$
15,682,664Mortgages secured by commercial real estate


1,532,086


1,753,531Fair value adjustment


(8,239,882
)

-Net unamortized premiums on mortgages - residential


-


160,852Net unamortized premiums on mortgages - commercial


-


22,297Subtotal

$
5,894,424

$
17,619,344Allowance for loan loss


-


(1,186,396
)Accrued interest receivable


-


99,685Total securitized mortgage collateral

$
5,894,424

$
16,532,633


In
periods prior to the adoption of SFAS 159 on January 1, 2008, the Company maintained an allowance for loan losses for estimated losses inherent in the portfolio. The
Company would provide for estimated losses in earnings through the provision for loan losses. Losses incurred would be charged-off losses against the allowance for loan losses.

With
the adoption of SFAS 159, the Company no longer maintains an allowance for loan losses. Instead, estimated losses inherent in the portfolio are considered part of the fair
value adjustment recognized in estimating the fair value of securitized mortgage collateral. Changes in estimated losses, which are a component of the overall changes in fair value of the securitized
mortgage collateral, are recognized in earnings as change in the fair value of net trust assets in the accompanying statement of operations and comprehensive loss. In connection with the adoption of
SFAS 159, the Company reversed the $1.2 billion allowance for loan losses as part of the cumulative-effect adjustment at January 1, 2008.

Activity
for the allowance for loan losses was as follows:

For the year ended December 31,2008

2007

2006Beginning balance

$
1,186,396

$
77,684

$
67,831Provision for loan losses


-


1,390,008


34,600Reduction resulting from fair value option election


(1,186,396
)

-


-Charge-offs, net of recoveries


-


(281,296
)

(24,747
)Total allowance for loan losses

$
-

$
1,186,396

$
77,684


The
Company had troubled debt restructurings during 2008, which are included in change in fair value of net trust assets. Troubled debt restructurings during 2007 totaled
$42.6 million, the majority of which were the conversions of adjustable rate mortgages (ARMs) loans to reduced or fixed interest rate loans. An impairment loss of $2.5 million relating
to these loans was recorded as a provision for loan losses. No loans were modified during 2006.

F-28

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Master
servicing rights are retained when the sub-servicing of mortgage servicing rights are sold and the corresponding mortgages are retained in a CMO or REMIC
securitization. The retained master servicing rights are recorded as a separate retained asset in accordance with SFAS 140 for the unconsolidated securitizations, while in the consolidated
securitizations such rights remained as part of the securitized mortgage collateral. The Company recognizes an impairment loss when the master servicing rights have an unamortized balance in excess of
the estimated fair value.

During
2008, the Company recorded $2.1 million in impairment for master servicing rights in unconsolidated securitizations. The carrying value of master servicing rights for
unconsolidated securitizations, which is included in other assets in the accompanying consolidated balance sheets, was zero and $2.1 million as of December 31, 2008 and 2007,
respectively.

As
of December 31, 2008, the Company master serviced mortgages for others of approximately $2.6 billion that were primarily mortgages collateralizing REMIC
securitizations, compared to $3.0 billion at December 31, 2007. Related fiduciary funds are held in trust for investors in non-interest bearing accounts and therefore not
included in the Company's consolidated balance sheets. The Company may also be required to advance funds or cause loan servicers to advance funds to cover principal and interest payments not received
from borrowers depending on the status of their mortgages.

Note EReal Estate Owned (REO)

Activity for the Company's real estate portfolio consisted of the following as of and for the periods presented:

For the year ended December 31,2008

2007Beginning balance

$
405,434

$
137,331Foreclosures (1)


678,442


487,314Liquidations


(484,124
)

(219,211
)Ending balance

$
599,752

$
405,434REO inside trusts

$
599,084

$
400,863REO outside trusts (2)


668


4,571Total

$
599,752

$
405,434


---

F-29

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note FOther Assets

Other Assets

Other assets consisted of the following:

At December 31,2008

2007Deferred charge

$
15,142

$
37,412Prepaid expenses


2,881


3,505Premises and equipment


2,613


3,904Investment in capital trusts


2,166


2,394Mortgages held-for-investment


743


816Real estate owned outside trust


668


4,571Mortgages held-for-sale


454


1,684Other assets


6,726


2,908Total other assets

$
31,393

$
57,194


At
December 31, 2008 and 2007, cash collateral balances, included in other assets, was zero and $588 thousand, respectively.

Premises and equipment, net

Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is
recorded using the straight-line method
over the estimated useful lives of individual assets, typically, three to twenty years. Premises and equipment consisted of the following for the periods indicated:

At December 31,2008

2007Premises and equipment

$
9,552

$
9,856Less: Accumulated depreciation


(6,939
)

(5,952
)Total premises and equipment, net

$
2,613

$
3,904


During
2007, the Company recorded a $14.1 million impairment on property plant and equipment as a result of discontinuing its mortgage operations.

F-30

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note GSecuritized Mortgage Borrowings

Selected information on securitized mortgage borrowings for the periods indicated consisted of the following (dollars in millions):

Securitized mortgage
borrowings
outstanding as of
December 31,

Range of Percentages:Year of Issuance

Original
Issuance
Amount

2007

2006

Fixed
Interest
Rates

Interest
Rate
Margins over
One-Month
LIBOR (1)

Interest
Rate
Margins after
Contractual
Call Date (2)2002

$
3,876.1

$
36.9

$
42.1


5.25 - 12.00


0.27 - 2.75


0.54 - 3.682003


5,966.1


316.5


409.4


4.34 - 12.75


0.27 - 3.00


0.54 - 4.502004


17,710.7


2,249.4


2,751.8


3.58 - 5.56


0.25 - 2.50


0.50 - 3.752005


13,387.7


4,956.3


5,961.6


-


0.24 - 2.90


0.48 - 4.352006


5,971.4


4,546.3


5,015.7


6.25


0.10 - 2.75


0.20 - 4.132007


3,860.5


3,321.6


3,619.9


-


0.06 - 2.00


0.12 - 3.00Subtotal securitized mortgage borrowings


15,427.0


17,800.5Accrued interest payable


-


17.1Unamortized securitization costs


-


(37.5
)Fair value adjustment


(9,233.0
)

-Total securitized mortgage borrowings

$
6,194.0

$
17,780.1


---

As
of December 31, 2008, expected principal reductions of the securitized mortgage borrowings, which is based on expected prepayment rates, was as follows (dollars in millions):

Payments Due by PeriodTotal

Less Than
One Year

One to
Three
Years

Three to
Five
Years

More Than
Five YearsSecuritized mortgage borrowings

$
15,427.0

$
3,209.0

$
5,026.7

$
2,304.5

$
4,886.8


F-31

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note HSegment Reporting

The Company has two reporting segments, the long-term mortgage operations and discontinued operations. The following table
presents reporting segments as of and for the year-ended December 31, 2008:

Balance Sheet Items
as of December 31, 2008:

Continuing
Operations

Discontinued
Operations

ConsolidatedCash and cash equivalents

$
46,215

$
13

$
46,228Restricted cash


1,243


19,832


21,075Securitized mortgage collateral and mortgages held-for-investment


5,895,167


-


5,895,167Loans held-for-sale


454


107,769


108,223Other assets


631,385


13,439


644,824Total assets


6,574,464


141,053


6,715,517Total liabilities


6,489,024


217,241


6,706,265Total stockholders' equity (deficit)

$
85,440

$
(76,188
)
$
9,252Statement of Operations Items
for the year ended December 31, 2008:Net interest income

$
13,733

$
2,499

$
16,232Change in fair value of derivatives, net


-


6


6Change in fair value of net trust assets


24,281


-


24,281Change in fair value of trust preferred securities


24,879


-


24,879Other non-interest income


(6,716
)

(28,393
)

(35,109
)Non-interest expense and income taxes


(51,408
)

(23,604
)

(75,012
)Net earnings (loss)

$
4,769

$
(49,492
)
$
(44,723
)


The
following table presents reporting segments as of and for the year-ended December 31, 2007:

Balance Sheet Items
as of December 31, 2007:

Continuing
Operations

Discontinued
Operations

ConsolidatedCash and cash equivalents

$
24,387

$
2,075

$
26,462Securitized mortgage collateral and mortgages held-for-investment


16,533,376


3


16,533,379Loans held-for-sale


454


279,659


280,113Finance receivables


336


12,458


12,794Other assets


479,269


59,055


538,324Total assets


17,037,822


353,250


17,391,072Total liabilities


18,063,459


405,341


18,468,800Total stockholders' deficit

$
(1,025,637
)
$
(52,091
)
$
(1,077,728
)Statement of Operations Items
for the year ended December 31, 2007:Net interest income

$
45,806

$
16,932

$
62,738Provision for loan losses


(1,390,008
)

(5,489
)

(1,395,497
)Change in fair value of derivatives, net


(140,827
)

(5,410
)

(146,237
)Change in fair value of net trust assets


-


-


-Other non-interest income


(128,726
)

(271,837
)

(400,563
)Non-interest expense and income taxes


(39,957
)

(127,574
)

(167,531
)Net loss

$
(1,653,712
)
$
(393,378
)
$
(2,047,090
)


F-32

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The
following table presents reporting segments for the year-ended December 31, 2006:

Statement of Operations Items
for the year ended December 31, 2006:

Continuing
Operations

Discontinued
Operations

ConsolidatedNet interest (expense) income

$
(62,197
)
$
27,505

$
(34,692
)Provision for loan losses


(34,600
)

(4,187
)

(38,787
)Realized gain from derivatives


203,958


478


204,436Change in fair value of derivatives


(110,460
)

(2,557
)

(113,017
)Other non-interest income


20,068


203


20,271Non-interest expense and income taxes


(8,721
)

(104,763
)

(113,484
)Net earnings (loss)

$
8,048

$
(83,321
)
$
(75,273
)


Note IFair Value of Financial Instruments

The estimated fair value amounts have been determined 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. 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.

The
following table presents the fair value of financial instruments included in the consolidated balance sheets for the periods indicated:

December 31, 2008

December 31, 2007Carrying
Amount

Estimated Fair
Value of
Financial
Instruments

Carrying
Amount

Estimated Fair
Value of
Financial
InstrumentsAssetsCash and cash equivalents

$
46,215

$
46,215

$
24,387


24,387Restricted cash


1,243


1,243


-


-Investment securities available-for-sale


2,068


2,068


15,248


15,248Securitized mortgage collateral


5,894,424


5,894,424


16,432,948


15,680,000Derivative assets


37


37


7,497


7,497Other assets  cash collateral balances


-


-


588


588LiabilitiesSecuritized mortgage borrowings

$
6,193,984

$
6,193,984

$
17,780,060

$
15,970,000Derivative liabilities


273,584


273,584


127,855


127,855Trust preferred securities


15,403


15,403


98,398


44,000


The
fair value estimates as of December 31, 2008 and 2007 are based on pertinent information available to management as of that date. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since those dates
and, therefore, current estimates of fair value may differ significantly from the amounts presented. The determination of fair value is important to the portrayal of our financial condition and
results of operations, however, it requires estimates and assumptions based on our judgment of changing market conditions and the performance of our assets and liabilities at those dates.

Refer
to Note BFair Value of Financial Instruments for discussion of the methods and assumptions used as of December 31, 2008 to estimate the fair value of
investment securities available-for-sale, securitized mortgage collateral and borrowings, derivative assets and liabilities and trust preferred securities.

F-33

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

In periods prior to the adoption of SFAS No. 159 on January 1, 2008, the following methods and assumptions were used by management in estimating
fair values:



Fair value is estimated using a discounted cash flow model, which incorporates certain assumptions such as prepayment, yield and
losses.



Fair value of securitized mortgage borrowings is estimated based on the use of a bond model, which incorporates certain assumptions
such as prepayment, yield and losses.



Fair value is estimated based on quoted market prices from independent dealers and brokers.



Fair value is estimated based on quoted market prices for the Company's preferred C shares which are similar in rights and preference.

Note JEmployee Benefit Plans

401(k) Plan

After meeting certain employment requirements, employees can participate in the Company's 401(k) plan. Under the 401(k) plan,
employees may contribute up to 25 percent of their salaries, pursuant to certain restrictions. The Company matches 50 percent of the first 4 percent of employee contributions.
Additional contributions may be made at the discretion of the board of directors. During the years ended December 31, 2008, 2007 and 2006, the Company recorded $200 thousand,
$487 thousand, and $977 thousand, respectively, for matching and discretionary contributions.

Note KRelated Party Transactions

During the ordinary course of business, mortgage loans have been extended to officers and directors of the Company. All such loans are
made at the prevailing market rates and conditions existing at the time.

Note LCommitments and Contingencies (Continuing and Discontinued Operations)

Legal Proceedings

Mortgage-related Litigation

On
June 27, 2000, a complaint captioned Michael P. and Shellie Gilmor v. Preferred Credit Corporation and Impac Funding Corporation, et
al. was filed in the Circuit Court for Clay County, Missouri, as a purported class action lawsuit alleging that the defendants violated Missouri's Second Loans Act and Merchandising
Practices Act. In July 2001, the Missouri complaint was amended to include IMH and other Impac-related entities. A plaintiffs class was certified on January 2, 2003. On January 27, 2006
the Company filed pleadings in response to the Sixth Amended Complaint, including motions to dismiss. No opposition has yet been filed by the Plaintiffs.

On
February 3, 2004, a complaint captioned James and Jill Baker v. Century Financial Group, Inc, et al was filed in the Circuit Court of Clay County,
Missouri, as a purported class action lawsuit alleging that the defendants

F-34

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

violated
Missouri's Second Loan Act and Merchandising Practices Act. An Answer was filed on March 7, 2005 and limited discovery has taken place since then.

On
October 2, 2001, a complaint captioned Deborah Searcy, Shirley Walker, et al. v. Impac Funding Corporation, Impac Mortgage Holdings, Inc. et.
al. was filed in the Wayne County Circuit Court, State of Michigan, as a purported class action lawsuit alleging that the defendants violated Michigan's Secondary Mortgage Loan Act,
Credit Reform Act and Consumer Protection Act. A motion to dismiss an amended complaint has been filed, but not yet ruled upon.

All
of the above purported class action lawsuits are similar in nature in that they allege that the mortgage loan originators violated the respective state's statutes by charging
excessive fees and costs when making second mortgage loans on residential real estate. The complaints allege that IFC was a purchaser, and is a holder, along with other affiliated entities, of second
mortgage loans originated by other lenders. The plaintiffs in the lawsuits are seeking damages that include disgorgement of interest paid, restitution, rescission, actual damages, statutory damages,
exemplary damages, pre-judgment interest and punitive damages. No specific dollar amount of damages is specified in the complaints.

On
November 9, 2007, and separately on August 25, 2008, two matters were filed against IFC in Orange County in the Superior Court of California, as case
nos. 07CC11612 and 00110553, respectively, by
Citimortgage, Inc., alleging claims for breach of contract and damages based upon representations and warranties made in conjunction with whole loan sales. These actions seek combined damages
in excess of $4.2 million.

On
June 28, 2008 a matter was filed against IFC in the Circuit Court of the Eighteenth Judicial District, Dupage County in Illinois, as case no. 2008L000721, by TR Mid
America Plaza Corp., seeking damages for breach of contract (a lease agreement) in excess of $0.6 million plus such amount as determined through the date of judgment and payment of attorneys
fees and costs.

On
October 4, 2007, a purported class action matter was filed in the United States District Court, Central District of California against Impac Funding Corporation and Impac
Mortgage Holdings, Inc. entitled Vincent Marshell v. Impac Funding Corporation, et al. as Case no. EDCV07-1290SGL, the action alleges violations of
Truth in Lending Act, violation of California Business and Professional Code Section 17200, et seq, breach of contract, and an additional claim under Business and Professional Code
Section 17200. The complaint alleges that the defendants failed to disclose pertinent information in a clear conspicuous manner as called for in the Truth in Lending Act, and that they misled
the plaintiff. The action seeks to recover actual damages, compensatory damages, consequential damages, punitive damages, rescission, reasonable attorneys fees and costs, statutory damages, a
disgorgement of all profits obtained as a result of the unfair competition, equitable relief including restitution and such other relief as is just and proper.

The
Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously. Nevertheless, litigation is uncertain and the Company may not
prevail in the lawsuits and can express no opinion as to its ultimate outcome. An adverse judgment in any of these matters could have a material adverse affect on us; however, no judgment in any
matter is probable to occur nor is any amount of any loss from such judgment reasonably estimable at this time.

Securities Litigation

On
August 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and
several of its senior officers entitled Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al. The action alleges against all defendants violations of
Section 10(b) and 10b-5 of the Securities Exchange Act of 1934 (the "Exchange Act") and against the individual defendants violations of Section 20(a) of the Exchange Act.
Plaintiffs contend that the defendants caused the Company's stock to trade at artificially inflated prices through false and misleading statements and intentional or reckless disregard of basic
accounting principles. The complaint seeks compensatory damages for all damages sustained as a result of the defendants' actions,

F-35

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

including
reasonable costs and expenses and other relief as the court may deem proper. On October 3, 2007, a similar case was filed in the same Court entitled Richard Abrams v.
Impac Mortgage Holdings, Inc., et al. This action makes allegations similar to those in the Pittleman action and also seeks similar recovery. These matters were consolidated with
lead counsel appointed by the Court. A Consolidated Complaint captioned Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al was filed on January 8,
2008. A motion to dismiss
was filed by the defendants on March 10, 2008 and that motion was granted. On October 27, 2008 a Third Amended Complaint was filed. A motion to dismiss was filed by the defendants on
December 15, 2008. On March 10, 2009, the court sustained the defendants' motion to dismiss without leave to amend.

On
December 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and several of its senior
officers entitled Sharon Page v. Impac Mortgage Holdings, Inc., et al. The action is a complaint for violations of the Employee Retirement Income Security
Act in relation to the Company's 401(k) plan. The complaint alleges breach of fiduciary duties, breach of duty to avoid conflicts of interest, allegations of co-fiduciary liability and
knowing participation in a breach of fiduciary duty by IMH. Plaintiffs contend that the defendants breached their fiduciary duties in violation of ERISA by failing to prudently and loyally manage the
plan's investment in IMH stock by continuing to offer IMH stock as an investment option and to make contributions in stock, provide complete and accurate information to participants, and monitor
appointed plan fiduciaries and provide them with accurate information. The complaint seeks monetary payment to the plan for the losses in an amount to be proven, injunctive and other appropriate
equitable relief, a constructive trust on amounts by which any defendant was unjustly enriched, an appointment of one or more independent fiduciaries, actual damages, reasonable attorney fees and
expenses, taxable costs, interests on these amounts and other legal or equitable relief as may be just and proper.

We
believe that we have meritorious defenses to the above claims and intend to defend these claims vigorously. Nevertheless, litigation is uncertain and we 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 us; however, no judgment in any matter is
probable to occur nor is any amount of any loss from such judgment reasonably estimable at this time.

Other Litigation

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

Lease Commitments

The Company leases office space under various operating lease agreements. Minimum premises rental commitments under
non-cancelable leases are as follows:

Year 2009

$
8,102Year 2010


7,845Year 2011


7,627Year 2012


7,255Year 2013


7,255Year 2014 and thereafter


20,555Sublet income


(31,425
)Total lease commitments

$
27,214


Total
rental expense for the years ended December 31, 2008, 2007 and 2006 was $4.9 million, $23.5 million and $7.8 million, respectively. During 2008, 2007
and 2006, approximately $2.4 million, $2.7 million and $1.8 million,

F-36

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

respectively,
were charged to continuing operations, and is included in occupancy expense in the consolidated statements of operations and comprehensive loss. Included in the $4.9 million rent
expense for 2008 is a $2.5 million charge related to discontinued operations for the fair value of leases that have ceased to be occupied, compared to $12.5 million in 2007.

During
the twelve months ended December 31, 2007, the discontinued operations of the Company incurred a lease impairment charge in the amount of $12.5 million, net of the
estimated fair value of sublet income which was estimated to be approximately $23.9 million, over the remaining approximate 8.5 years.

Reverse Repurchase Financings

The Company's reverse repurchase financing, included in discontinued operations, is secured by the Company's loans
held-for-sale with an unpaid principal balance of $215.9 million, restricted cash of $18.5 million and certain REOs. The following table presents the outstanding
balance of the Company's reverse repurchase financings as of the dates indicated:

Discontinued Operations
as of December 31,2008

2007Reverse repurchase line (1)

$
188,677

$
318,669Warehouse line (2)


-


18,021Total

$
188,677

$
336,690


---

In
September 2008, the Company entered into an agreement to restructure its reverse repurchase line with its remaining lender. The balance of this Restructured Financing was
$188.7 million at December 31, 2008 and collateralized by loans held-for-sale within discontinued operations. The agreement removed all technical defaults from
financial covenant noncompliance and any associated margin calls for the term of the agreement. The agreement calls for certain targets including a reduction of the borrowings balance to
$100 million in 18 months (from September 2008) with an advance rate of no more than 65 percent of the outstanding principal balance and $50 million in 24 months
with an advance rate of no more than 55 percent of the outstanding principal balance. By meeting these targets, the agreement term can extend to 30 months. At December 31, 2008,
the advance rate was 79 percent. The agreement also calls for monthly principal paydowns of $750,000 for one month and $1.5 million thereafter until the earlier of the Company raising
capital or the end of the agreement term. If the Company is successful in raising capital, approximately 10 percent of the gross proceeds will be required to be paid as an additional principal
paydown and the monthly principal paydown would then be reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be
paid to the lender. To the extent the cash collected from the collateral is not adequate to pay the interest expense due on the borrowings, interest expense would be paid to the lender from the
Company's restricted cash account included in assets of discontinued operations or the Company's cash balances. Accomplishing the restructuring of this reverse repurchase line allows the Company to
timely manage the remaining loans on the line for the eventual collection, refinance, sale or securitization without the risk of receiving margin calls. Upon an event of default, the

F-37

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Company
is responsible for any shortfall if the value of the loans securing the financing is insufficient to repay the outstanding balance.

For the year ended December 31,2008

2007Maximum month-end outstanding balance during the year

$
311,437

$
2,325,844Average balance outstanding for the year


228,988


1,326,013Weighted average rate for period


4.31
%

6.06
%


Repurchase Reserve

When the Company sells loans through whole loan sales it is required to make normal and customary representations and warranties about
the loans to the purchaser. The Company's whole loan sale agreements generally require it to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. In
addition, the Company may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. As of December 31, 2008 and
2007, the Company had a liability for losses on loans sold with representations and warranties totaling $13.9 million and $25.7 million, respectively, included in liabilities from
discontinued operations in the accompanying consolidated balance sheets.

Geographic Concentration

The aggregate unpaid principal balance of loans in the Company's long-term mortgage portfolio secured by properties in
California was $8.0 billion or 52 percent at December 31, 2008.

Note MDerivative Instruments

The Company's primary objective is to limit exposure to the variability in future cash flows attributable to the variability of
one-month LIBOR, which is the underlying index of adjustable rate securitized mortgages. To mitigate exposure to the effect of changing interest rates, the Company purchased derivative
instruments primarily in the form of swaps and, to a lesser extent, caps and floors.

As
of December 31, 2008, the net derivative liability included in the securitization trusts was $273.5 million, as compared to $120.4 million at December 31,
2007. The derivative values are based on the net cash receipts or payments expected to be received or paid by the bankruptcy remote trusts. The value of the derivatives fluctuates with changes in the
future expectation of LIBOR, in addition to cash receipts or payments.

On
September 15, 2008, Lehman Brothers Holdings Inc. ("LBHI") filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date, LBHI,
through affiliated companies, was an interest rate swap counterparty to several of the Company's CMO and REMIC securitizations. At December 31, 2008, the estimated fair value of derivatives
with LBHI, through its affiliated companies was $107.2 million and is included in derivative liabilities in the accompanying consolidated balance sheet. As the related securitization trusts are
non-recourse to the Company, the Company is not required to replace or otherwise settle any derivative positions affected by counterparty default within the consolidated trusts.

F-38

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note NReconciliation of Earnings Per Share

The following table presents the computation of basic and diluted net earnings per share, including the dilutive effect of stock
options and cumulative redeemable preferred stock outstanding for the periods indicated:

For the year ended December 31,2008

2007

2006Numerator for basic earnings per share:Net earnings (loss) from continuing operations

$
4,769

$
(1,653,712
)
$
8,048Net loss from discontinued operations


(49,492
)

(393,378
)

(83,321
)Less: Cash dividends on cumulative redeemable preferred stock


(11,165
)

(14,886
)

(14,698
)Net loss attributable to common stockholders

$
(55,888
)
$
(2,061,976
)
$
(89,971
)Denominator for basic earnings per share:Basic weighted average number of common shares outstanding during the period


7,610


7,610


7,611Denominator for diluted earnings per share:Diluted weighted average number of common shares outstanding during the period


7,610


7,610


7,611Net effect of dilutive stock options


-


-


-Diluted weighted average common shares


7,610


7,610


7,611Net loss per common share  Basic:Loss from continuing operations

$
(0.84
)
$
(219.28
)
$
(0.87
)Loss from discontinued operations


(6.50
)

(51.69
)

(10.95
)Net loss per share

$
(7.34
)
$
(270.97
)
$
(11.82
)Net loss per common share  Diluted:Loss from continuing operations

$
(0.84
)
$
(219.28
)
$
(0.87
)Loss from discontinued operations


(6.50
)

(51.69
)

(10.95
)Net loss per share

$
(7.34
)
$
(270.97
)
$
(11.82
)Net loss per share attributable to common shareholders

$
(7.34
)
$
(270.97
)
$
(11.82
)


The
anti-dilutive stock options outstanding for the periods ending December 31, 2008, 2007 and 2006 were 1.1 million, 594 thousand, and
705 thousand shares, respectively.

F-39

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note OQuarterly Financial Data (unaudited)

Selected quarterly financial data for 2008 is as follows:

For the Three Months Ended,December 31,

September 30,

June 30,

March 31,Interest income

$
399,717

$
397,445

$
407,855

$
271,955Interest expense


400,603


394,431


403,599


264,606Net interest (expense) income


(886
)

3,014


4,256


7,349Total non-interest income


40,727


11,473


(10,748
)

992Total non-interest expense


7,742


7,333


7,745


6,318Income tax expense


8,289


5,253


2,202


6,526Net earnings (loss) from continuing operations


23,810


1,901


(16,439
)

(4,503
)Net (loss) earnings from discontinued operations, net


(21,011
)

(18,121
)

(11,048
)

688Net earnings (loss) from continuing operations

$
2,799

$
(16,220
)
$
(27,487
)
$
(3,815
)Net earnings (loss) per common share  Diluted:Earnings (loss) from continuing operations

$
3.13

$
(0.24
)
$
(2.65
)
$
(1.08
)(Loss) earnings from discontinued operations

$
(2.76
)
$
(2.38
)
$
(1.45
)
$
0.09Net earnings (loss) per share

$
0.37

$
(2.62
)
$
(4.10
)
$
(0.99
)Dividends declared per common share

$
-

$
-

$
-

$
-


F-40

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Selected
quarterly financial data for 2007 is as follows:

For the Three Months Ended,December 31,

September 30,

June 30,

March 31,Interest income

$
293,624

$
310,006

$
316,443

$
304,748Interest expense


275,638


298,003


308,569


296,805Net interest income


17,986


12,003


7,874


7,943Provision for loan losses


410,268


789,445


161,163


29,132Net interest expense after provision for loan losses


(392,282
)

(777,442
)

(153,289
)

(21,189
)Total non-interest income


(135,511
)

(182,243
)

70,804


(22,603
)Total non-interest expense


5,971


6,701


6,071


6,353Income tax expense


2,848


3,056


4,969


3,988Net loss from continuing operations


(536,612
)

(969,442
)

(93,525
)

(54,133
)Net loss from discontinued operations, net


(45,028
)

(221,793
)

(59,022
)

(67,535
)Net loss

$
(581,640
)
$
(1,191,235
)
$
(152,547
)
$
(121,668
)Net loss per common share  Diluted:Net loss from continuing operations

$
(71.00
)
$
(127.90
)
$
(12.78
)
$
(7.60
)Net loss from discontinued operations

$
(5.91
)
$
(29.15
)
$
(7.75
)
$
(8.88
)Net loss per share

$
(76.92
)
$
(157.04
)
$
(20.53
)
$
(16.48
)Dividends declared per common share

$
-

$
-

$
-

$
3.50


---

F-41

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note PSecuritized Mortgage Collateral and Loans Held-for-Investment

The following table presents the activity included in securitized mortgage collateral and loans
held-for-investment on the consolidated balance sheets for the years presented.

For the year ended December 31,2008

2007

2006Beginning Balance

$
17,620,160

$
20,938,395

$
24,654,360Additions:Loans retained and originated


-


3,225,717


5,810,208Additions of premiums


-


102,558


84,978Total additions


-


3,328,275


5,895,186Deductions:Fair value adjustment upon adoption of SFAS 159


(1,004,460
)Changes in fair value during the period


(7,419,747
)

-


-Principal paydowns


(2,586,812
)

(5,660,651
)

(9,230,570
)Loans transferred to mortgages held-for-sale


-


(27,040
)

-Amortization of premiums


-


(123,934
)

(192,570
)Transfers to real estate owned


(713,974
)

(834,885
)

(188,011
)Total deductions


(11,724,993
)

(6,646,510
)

(9,611,151
)Ending Balance

$
5,895,167

$
17,620,160

$
20,938,395Accrued interest


-


99,686


107,913Allowance for loan losses


-


(1,186,396
)

(77,684
)Total securitized mortgage collateral and loans held for investment

$
5,895,167

$
16,533,450

$
20,968,624


Note QRedeemable Preferred Stock

As of December 31, 2008 and 2007, the Company had 2.0 million shares of Series B Cumulative Redeemable Preferred
Stock (Series B Preferred Stock) outstanding. The shares have a liquidation value of $25.00 per share and pay an annual coupon of 9.375 percent. The non-voting shares are
redeemable at the Company's option, in whole or in part, on or after May 28, 2009 except in limited circumstances to preserve the Company's REIT status. The Company has the ability to defer the
dividend on the Series B Preferred Stock for a period not to exceed six quarters.

As
of December 31, 2008 and 2007, the Company had 4.5 million shares of Series C Cumulative Redeemable Preferred Stock (Series C Preferred Stock)
outstanding. The shares have a liquidation value of $25.00 per share and pay an annual coupon of 9.125 percent. The non-voting shares are redeemable at the Company's option, in
whole or in part, on or after November 23, 2009 except in limited circumstances to preserve the Company's REIT status. The Company has the ability to defer the dividend on the Series C
Preferred Stock for a period not to exceed six quarters.

In
December 2008, the Company deferred payment of its fourth quarter 2008 dividends on the Company's Series B Preferred Stock and Series C Preferred Stock. As a result of
this announcement, unpaid dividends on the Series B Preferred Stock and Series C Preferred Stock totaled $1.2 million and $2.5 million, respectively. Until such time as all
cumulative dividends on the preferred stock are paid, the Company may not pay dividends on, nor redeem, repurchase or make any distribution on, shares of its common stock. If the Company does not pay
dividends on its preferred stock for six or more quarterly periods (whether or not consecutive), preferred

F-42

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

stockholders
will be entitled to elect two additional directors to the Company's Board of Directors to serve until all dividends are paid.

Note RTrust Preferred Securities

During 2005, the Company formed four wholly-owned trust subsidiaries (Trusts) for the purpose of issuing an aggregate of
$99.2 million of trust preferred securities (the Trust Preferred Securities). All proceeds from the sale of the Trust Preferred Securities and the common securities issued by the Trusts are
invested in junior subordinated notes (Notes), which are the sole assets of the Trusts. The Trusts pay dividends on the Trust Preferred Securities at the same rate as paid by the Company on the Notes
held by the Trusts.

The
following table shows the Trust Preferred Securities issued as of December 31, 2008:

Trust
Preferred
Securities

Common
Securities

Junior
Subordinated
Debt

Stated
Maturity
Date

Optional
Redemption
DateImpac Capital Trust # 1 (1)


25,000


780

$
25,780


04/30/35


4/30/2010(5
)Impac Capital Trust # 2 (2)


25,000


774


25,774


04/30/35


4/30/2010(6
)Impac Capital Trust # 3 (3)


26,250


820


27,070


06/30/35


6/30/2010(5
)Impac Capital Trust # 4 (4)


12,000


620


12,620


07/30/35


7/30/2010(5
)Sub-total


88,250


2,994


91,244Fair value adjustment








(75,841
)Total







$
15,403


---

During an Extension Period, interest on the Trust Preferred Securities will bear additional interest at a rate equal to the coupon rate on the
respective security. Unless the Company again elects to defer interest payments, the Company is required to pay all accrued interest together with the additional interest at the next payment date.
Furthermore, during the time that the Company defers interest payments, it may not, with limited exceptions, pay dividends on or redeem or purchase its capital stock nor make any payments on
outstanding debt obligations that rank equally with or junior to the trust preferred obligations and, in some cases, it may not allow subsidiaries to pay dividends.

F-43

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

If
an event of default occurs (such as a payment default that is outstanding for 30 days, a default in performance, a breach of any covenant or representation, bankruptcy or
insolvency of the Company or liquidation or dissolution of the Trust) either the trustee of the Notes or the holders of at least 25 percent of the aggregate principal amount of the outstanding
Notes may declare the principal amount of, and all accrued interest on, all the Notes to be due and payable immediately, or if the holders of the Notes fail to make such declaration, the holders of at
least 25 percent in aggregate liquidation amount of the Trust Preferred Securities outstanding shall have a right to make such declaration.

In
December 2008, the Company deferred interest on Impac Capital Trusts #1, #2 and #4 securities due January 30, 2009, and interest on Impac Capital Trust #3 securities due
December 30, 2008.

In
December 2008, the Company fully satisfied $8.0 million in outstanding Trust Preferred Securities of Impac Capital Trust #4 for $1.2 million and is in the process of
canceling the securities. Under the terms of the agreement, to the extent the Company settles additional amounts of its outstanding Trust Preferred Securities prior to January 2010 at per share values
in excess of the per share amount of this agreement, the Company will be required to pay additional amounts representing the incremental increase in the per share amounts.

In
January 2009, the Company fully satisfied $25.0 million in outstanding Trust Preferred Securities of Impac Capital Trust #2 for $3.75 million.

In
January 2009, the Company agreed to restructure, which is subject to definitive agreements, $51.3 million in Trust Preferred Securities of Impac Capital Trusts #1 and #3.
Under the terms of the restructuring, the interest rates are reduced to 2 percent through 2013 and increase 1 percent per year through 2017. Starting in 2018, the interest rates become
variable at 3-month LIBOR plus 375 basis points. In connection with the restructuring, the Company paid 2 percent interest on each of Impac Capital Trusts #1 and #3 for the January
2009 and December 2008 interest payments, respectively.

The
Company deferred interest on the remaining $12.0 million in trust preferred securities of $257 thousand at December 31, 2008. At the end of the deferral period
(five years) the Company must pay all deferred and accrued interest amounts or the securities become due.

Note SDiscontinued Operations

During 2007, the Company announced plans to exit substantially all of its mortgage, commercial, retail, and warehouse lending
operations. Consequently, the amounts related to these operations are presented as discontinued operations in the Company's consolidated statements of operations and comprehensive loss and its
consolidated statements of cash flows, and the asset groups to be exited are reported as assets and liabilities of discontinued operations in its consolidated balance sheets for the periods presented.

In
2007, assets with fair values that were being utilized in continuing operations were transferred from discontinued operations and amounted to $4.0 million. During the year
ended December 31, 2007, discontinued operations of the Company incurred impairment charges in the amount of $27.8 million.

F-44

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Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The
following tables present the discontinued operations' condensed balance sheets for the periods ended December 31, 2008 and 2007;

Discontinued Operations
as of December 31,2008

2007Balance Sheet Items:Cash and cash equivalents

$
13

$
2,075Restricted cash


19,832


18,303Loans held-for-sale


107,769


279,659Finance receivables


-


12,458Allowance for loan losses


-


(8,195
)Other assets


13,439


48,950Total assets


141,053


353,250Total liabilities


217,241


405,341Total stockholders' deficit

$
(76,188
)
$
(52,091
)


The
following table presents discontinued operations condensed statement of operations for the years ended December 31, 2008, 2007 and 2006.

Discontinued Operations
for the year ended December 31,2008

2007

2006Income Statement Items:Net interest income

$
2,499

$
16,932

$
27,505Provision for loan losses


-


(5,489
)

(4,187
)Realized gain from derivative instruments


-


1,181


478Change in fair value of derivative instruments


6


(6,591
)

(2,557
)Other non-interest (expense) income


(28,393
)

(271,837
)

203Non-interest expense and income taxes


(23,604
)

(127,574
)

(104,763
)Net loss

$
(49,492
)
$
(393,378
)
$
(83,321
)


Note TSubsequent Events

As discussed in Note RTrust Preferred Securities, in January 2009,
the Company fully satisfied $25.0 million and agreed to restructure $51.3 million of trust preferred securities, respectively.

F-45

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