Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31, 2009**

** **

**or**

 

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

 

**For the transition period from                   to                  .**

 

**Commission File Number: 1-14100**

** **

**IMPACMORTGAGE HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Maryland**                    | ** ** | **33-0675505**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**19500 Jamboree Road, Irvine, California 92612**

**(Address ofprincipal executive offices)**

** **

**(949) 475-3600**

**(Registrant’stelephone number, including area code)**

** **

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o No o

 

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

 
| Large accelerated filer o | Accelerated filer x         |
|--------------------------------|----------------------------------|
|                           |                             |
| Non-accelerated filer o   | Smaller reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2)    Yes o No x

 

Therewere 7,618,146 shares of common stock outstanding as of May 8, 2009.

 

 

 

----

Table of Contents

 

**IMPAC MORTGAGE HOLDINGS, INC.**

** **

**FORM 10-Q QUARTERLY REPORT**

** **

**TABLE OFCONTENTS**

 
| ** **                             | ** **                                                                                                 | **Page**   |
|----------------------------------------|------------------------------------------------------------------------------------------------------------|------------|
| **PART I. FINANCIAL INFORMATION** |
|                                   |                                                                                                       |       |
| ITEM 1.                                | **CONSOLIDATED FINANCIAL  STATEMENTS**                                                                     | 1          |
|                                   | Consolidated  Balance Sheets as of March 31, 2009 (unaudited) and December 31,  2008             | 1          |
|                                   | Consolidated Statements of Operations for the Three  Months Ended March 31, 2009 and 2008 (unaudited) | 2          |
|                                   | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2009 and 2008 (unaudited) | 3          |
|                                   | Notes to Unaudited Consolidated Financial Statements                                                       | 4          |
|                                   |                                                                                                       |       |
| ITEM 2.                                | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**            | 16         |
|                                   | Forward-Looking Statements                                                                                 | 16         |
|                                   | The Mortgage Banking Industry and Discussion of  Relevant Fiscal Periods                                   | 16         |
|                                   | Status of Operations, Liquidity and Capital Resources                                                      | 16         |
|                                   | Market  Conditions                                                                                         | 19         |
|                                   | Critical Accounting Policies                                                                               | 21         |
|                                   | Fair Value of Financial Instruments                                                                        | 22         |
|                                   | Interest Income and Expense                                                                                | 24         |
|                                   | Selected Financial Results for the Three Months Ended  March 31, 2009                                 | 24         |
|                                   | Estimated  Taxable Income                                                                                  | 24         |
|                                   | Financial Condition and Results of Operations                                                              | 24         |
|                                   |                                                                                                       |       |
| ITEM 3.                                | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                            | 33         |
|                                   |                                                                                                       |       |
| ITEM  4.                               | **CONTROLS AND  PROCEDURES**                                                                               | 33         |
|                                   |                                                                                                       |       |
| **PART II.  OTHER INFORMATION**   |
|                                   |                                                                                                       |       |
| ITEM  1.                               | **LEGAL PROCEEDINGS**                                                                                      | 34         |
|                                   |                                                                                                       |       |
| ITEM  1A.                              | **RISK FACTORS**                                                                                           | 34         |
|                                   |                                                                                                       |       |
| ITEM 2.                                | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                           | 34         |
|                                   |                                                                                                       |       |
| ITEM 3.                                | **DEFAULTS  UPON SENIOR SECURITIES**                                                                       | 34         |
|                                   |                                                                                                       |       |
| ITEM 4.                                | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                   | 34         |
|                                   |                                                                                                       |       |
| ITEM  5.                               | **OTHER INFORMATION**                                                                                      | 34         |
|                                   |                                                                                                       |       |
| ITEM 6.                                | **EXHIBITS**                                                                                               | 35         |
|                                   |                                                                                                       |       |
| ** **                             | **SIGNATURES**                                                                                             | 36         |
|                                   |                                                                                                       |       |
| ** **                             | **CERTIFICATIONS**                                                                                         | ** ** |

 

----

Table of Contents

 

**PART I.FINANCIAL INFORMATION**

** **

**ITEM 1.           CONSOLIDATED FINANCIAL STATEMENTS**

 

**IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                        | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                        |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                         |       | $                  | 38,313     |                  | $          | 46,215 |   |
| Restricted cash                                                                                                                                                                                                                   |       | 1,247              |       | 1,243                 |       |
| Short-term investments                                                                                                                                                                                                            |       | 5,041              |       | —                |       |
| Trust assets                                                                                                                                                                                                                      |       |               |       |                  |       |
| Investment securities available-for-sale                                                                                                                                                                                          |       | 1,322              |       | 2,068                 |       |
| Securitized mortgage collateral                                                                                                                                                                                                   |       | 5,505,729          |       | 5,894,424             |       |
| Derivative assets                                                                                                                                                                                                                 |       | 37                 |       | 37                    |       |
| Real estate owned (REO)                                                                                                                                                                                                           |       | 440,916            |       | 599,084               |       |
| Total trust assets                                                                                                                                                                                                                |       | 5,948,004          |       | 6,495,613             |       |
|                                                                                                                                                                                                                              |       |               |       |                  |       |
| Assets of discontinued operations                                                                                                                                                                                                 |       | 137,947            |       | 141,053               |       |
| Other assets                                                                                                                                                                                                                      |       | 29,114             |       | 31,393                |       |
| Total assets                                                                                                                                                                                                                      |       | $                  | 6,159,666  |                  | $          | 6,715,517 |   |
|                                                                                                                                                                                                                              |       |               |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                   |       |               |       |                  |       |
| Trust liabilities                                                                                                                                                                                                                 |       |               |       |                  |       |
| Securitized mortgage borrowings                                                                                                                                                                                                   |       | $                  | 5,691,028  |                  | $          | 6,193,984 |   |
| Derivative liabilities                                                                                                                                                                                                            |       | 232,357            |       | 273,584               |       |
| Total trust liabilities                                                                                                                                                                                                           |       | 5,923,385          |       | 6,467,568             |       |
|                                                                                                                                                                                                                              |       |               |       |                  |       |
| Trust preferred securities                                                                                                                                                                                                        |       | 11,090             |       | 15,403                |       |
| Liabilities of discontinued operations                                                                                                                                                                                            |       | 209,865            |       | 217,241               |       |
| Other liabilities                                                                                                                                                                                                                 |       | 6,321              |       | 6,053                 |       |
| Total liabilities                                                                                                                                                                                                                 |       | 6,150,661          |       | 6,706,265             |       |
|                                                                                                                                                                                                                              |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                                                                                                              |       |               |       |                  |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                    |       |               |       |                  |       |
| 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                 |       | 20                    |       |
| Series-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  March 31, 2009 and December 31, 2008. |       | 45                 |       | 45                    |       |
| Common stock, $0.01 par value; 200,000,000  shares authorized; 7,618,146 shares issued and outstanding as of  March 31, 2009 and December 31, 2008                                                                      |       | 76                 |       | 76                    |       |
| Additional paid-in capital                                                                                                                                                                                                        |       | 1,178,569          |       | 1,177,697             |       |
| Net accumulated deficit:                                                                                                                                                                                                          |       |               |       |                  |       |
| Cumulative dividends declared                                                                                                                                                                                                     |       | (815,077           | )          | (815,077              | )          |
| Retained deficit                                                                                                                                                                                                                  |       | (354,628           | )          | (353,509              | )          |
| Net accumulated deficit                                                                                                                                                                                                           |       | (1,169,705         | )          | (1,168,586            | )          |
| Total stockholders’ equity                                                                                                                                                                                                   |       | 9,005              |       | 9,252                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                   |       | $                  | 6,159,666  |                  | $          | 6,715,517 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

1

----

Table of Contents

 

**IMPAC MORTGAGE HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                    | ** ** | **Ended March 31,** | ** ** |
| ** **                                                    | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| * *                                                      | * *   | * *                 | * *   | * * | * * |
| **INTEREST INCOME**                                           |       | $                        | 712,649    |   | $ | 271,955 |   |
|                                                          |       |                     |       |   |   |
| **INTEREST EXPENSE**                                          |       | 709,007                  |       | 264,606 |   |
|                                                          |       |                     |       |   |   |
| Net interest income                                           |       | 3,642                    |       | 7,349 |   |
|                                                          |       |                     |       |   |   |
| **NON-INTEREST INCOME:**                                      |       |                     |       |   |   |
| Change in fair value of net trust assets,  excluding REO      |       | 132,930                  |       | 3,528 |   |
| Losses from real estate owned                                 |       | (128,201                 | )          | (4,256 | ) |
| Non-interest income- net trust assets                         |       | 4,729                    |       | (728 | ) |
| Change in fair value of trust preferred  securities           |       | 12                       |       | (4,023 | ) |
| Real estate advisory fees                                     |       | —                   |       | 3,845 |   |
| Other                                                         |       | 5,508                    |       | 1,898 |   |
| Total non-interest income                                     |       | 10,249                   |       | 992 |   |
|                                                          |       |                     |       |   |   |
| **NON-INTEREST EXPENSE:**                                     |       |                     |       |   |   |
| General and administrative                                    |       | 4,339                    |       | 3,988 |   |
| Personnel expense                                             |       | 6,278                    |       | 2,330 |   |
| Total non-interest expense                                    |       | 10,617                   |       | 6,318 |   |
| Net earnings from continuing operations  before income taxes  |       | 3,274                    |       | 2,023 |   |
| Income tax expense from continuing  operations                |       | 1,998                    |       | 6,526 |   |
| Net earnings (loss) from continuing  operations               |       | 1,276                    |       | (4,503 | ) |
| Net (loss) earnings from discontinued  operations, net of tax |       | (2,395                   | )          | 688 |   |
| Net loss                                                      |       | (1,119                   | )          | (3,815 | ) |
| Cash dividends on cumulative redeemable  preferred stock      |       | —                   |       | (3,722 | ) |
| Net loss attributable to common  stockholders                 |       | $                        | (1,119     | ) | $ | (7,537 | ) |
|                                                          |       |                     |       |   |   |
| Net loss per common share - basic and  diluted:               |       |                     |       |   |   |
| Earnings (loss) from continuing operations                    |       | $                        | 0.17       |   | $ | (1.08 | ) |
| (Loss) earnings from discontinued  operations                 |       | (0.32                    | )          | 0.09 |   |
| Net loss per share                                            |       | $                        | (0.15      | ) | $ | (0.99 | ) |

 

See accompanying notes to consolidated financial statements.

 

2

----

Tableof Contents

 

**IMPAC MORTGAGE HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                      | ** **   | **For the Three Months** | ** **   |
|---------------------------------------------------------------------------------|--------------|--------------------------|--------------|
| ** **                                                                      | ** **   | **Ended March 31,** | ** **   |
| ** **                                                                      | ** **   | **2009**                 | ** **   | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                       | *** *** | *** ***             | *** *** | *** *** | *** *** |
| Net earnings (loss) from continuing  operations                                 |         | $                        | 1,276        |   | $ | (4,503 | ) |
|                                                                            |         |                     |         |   |   |
| Losses from real estate owned                                                   |         | 128,201                  |         | 4,256 |   |
| Amortization and impairment of deferred  charge                                 |         | 1,998                    |         | 6,526 |   |
| Amortization and impairment of mortgage  servicing rights                       |         | —                   |         | 647 |   |
| Change in fair value of net trust assets,  excluding REO                        |         | (190,793                 | )            | (29,430 | ) |
| Change in fair value of trust preferred  securities                             |         | (12                      | )            | 4,023 |   |
| Accretion of interest income and expense                                        |         | 197,003                  |         | 101,224 |   |
| Stock-based compensation                                                        |         | 779                      |         | 197 |   |
| Net cash (used in) provided by operating  activities of discontinued operations |         | (2,773                   | )            | 88,984 |   |
| Net change in other assets and liabilities                                      |         | (12,716                  | )            | (24,034 | ) |
| **Net cash provided by operating activities**                                   | ** **   | **122,963**              | ** **   | **147,890** | ** ** |
| ** **                                                                      | ** **   | ** **               | ** **   | ** ** | ** ** |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                       | ** **   | ** **               | ** **   | ** ** | ** ** |
| Net change in securitized mortgage  collateral                                  |         | 197,532                  |         | 612,291 |   |
| Net change in mortgages held-for-investment                                     |         | 390                      |         | 15 |   |
| Purchase of premises and equipment                                              |         | (194                     | )            | — |   |
| Purchase of short-term investments                                              |         | (5,041                   | )            | — |   |
| Net principal change on investment  securities available-for-sale               |         | 1,746                    |         | 538 |   |
| Proceeds from the sale of real estate owned                                     |         | 161,332                  |         | 74,961 |   |
| Net cash provided by investing activities  of discontinued operations           |         | 2,657                    |         | 7,040 |   |
| **Net cash provided by investing activities**                                   | ** **   | **358,422**              | ** **   | **694,845** | ** ** |
|                                                                            |         |                     |         |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                       |         |                     |         |   |   |
| Settlement of trust preferred securities                                        |         | (3,750                   | )            | — |   |
| Repayment of securitized mortgage  borrowings                                   |         | (479,081                 | )            | (739,536 | ) |
| Preferred stock dividends paid                                                  |         | —                   |         | (3,722 | ) |
| Net cash used in financing activities of  discontinued operations               |         | (6,209                   | )            | (92,942 | ) |
| **Net cash used in financing activities**                                       | ** **   | **(489,040**             | **)**        | **(836,200** | **)** |
|                                                                            |         |                     |         |   |   |
| Net change in cash and cash equivalents                                         |         | (7,655                   | )            | 6,535 |   |
| Cash and cash equivalents at beginning of  period                               |         | 46,228                   |         | 26,462 |   |
| Cash and cash equivalents at end of period  - Continuing Operations             |         | 38,313                   |         | 32,901 |   |
| Cash and cash equivalents at end of period  - Discontinued Operations           |         | 260                      |         | 96 |   |
| Cash and cash equivalents at end of period                                      |         | $                        | 38,573       |   | $ | 32,997 |   |
|                                                                            |         |                     |         |   |   |
| **NON-CASH TRANSACTIONS (Continuing and  Discontinued Operations):**            |         |                     |         |   |   |
| Transfer of loans held-for-sale and  held-for-investment to real estate owned   |         | $                        | 3,821        |   | $ | — |   |
| Transfer of securitized mortgage collateral  to real estate owned               |         | 118,851                  |         | 209,801 |   |

 

See accompanying notes to consolidated financial statements.

 

3

----

Table of Contents

 

**IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**NoteA—Summary of Business and Significant Accounting Policies**

 

**1.****             ****Business Summary and FinancialStatement Presentation**

 

***Business Summary***

 

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

 

In thefirst quarter of 2009, the Company created a new subsidiary, Integrated RealEstate Service Corporation (IRES), which will include mortgage and real estate relatedfee-based businesses.

 

TheCompany’s operations include its continuing and discontinued operations.  The continuing operations primarily includethe long-term mortgage portfolio (residual interests in securitizationsreflected as net trust assets and liabilities in the consolidated balancesheets), and to a lesser extent includes the mortgage and real estate relatedfee-based businesses.  The discontinuedoperations include the former non-conforming mortgage and retail operationsconducted by IFC, commercial operations conducted by ICCC, and warehouselending operations conducted by IWLG.

 

Duringthe first quarter of 2009, the Company revoked its election to be taxed as aREIT, effective January 1, 2009.  Asa result of revoking this election, the Company will be subject to income taxesas a regular corporation. As of December 31, 2008, the Company had federaland California net operating loss carryforwards of $406.8 million and $532.2million, respectively.

 

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

 

***Financial Statement Presentation***

 

Theaccompanying unaudited consolidated financial statements of IMH and itssubsidiaries (as defined above) have been prepared in accordance withAccounting Principles Generally Accepted in the United States of America (GAAP)for interim financial information and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by GAAP for complete financialstatements. In the opinion of management, all adjustments, consisting of normalrecurring adjustments considered necessary for a fair presentation, have beenincluded. Operating results for the three-month period ended March 31,2009 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009. These interim period condensed consolidated financial statements shouldbe read in conjunction with the Company’s audited consolidated financialstatements, which are included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, filed with the United StatesSecurities and Exchange Commission (SEC).

 

Allsignificant inter-company balances and transactions have been eliminated inconsolidation. In addition, certain amounts in the prior periods’ consolidatedfinancial statements have been reclassified to conform to the current yearpresentation.

 

Management has made a number of estimates and assumptions relating tothe reporting of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period to prepare theseconsolidated financial statements in conformity with GAAP.  The items affected by management’s estimatesand assumptions include the valuation of trust assets and liabilities, thevaluation of repurchase liabilities related to sold loans, the valuation oftrust preferred securities, and the valuation of loans held-for-sale.  Actual results could differ from thoseestimates.

 

4

----

Table of Contents

 

***Market Conditions and Status of Operations***

 

Duringthe first quarter of 2009, the Company continues to be significantly andnegatively affected by the deteriorating real estate market and the weakeconomic environment. These factors have led to continued deterioration in thequality of the Company’s long-term mortgage portfolio, as evidenced by thecontinued increases in delinquencies, foreclosures and credit losses. Existingconditions are unprecedented and inherently involve significant risks anduncertainty to the Company.  The currentmarket conditions have led to fewer sources of liquidity available to theCompany to operate its business.  Theseconditions continue to adversely affect the performance of the Company’slong-term mortgage portfolio, including significant losses on real estateowned.

 

Duringthe quarter, the Company has initiated various mortgage and real estate relatedfee-based businesses, including loan modifications, real estate disposition,monitoring and surveillance services, real estate brokerage and lendingservices and escrow services, and has begun to generate revenues from thesebusinesses.  However, since thesebusinesses are newly formed, there remains uncertainty about their futuresuccess.

 

InJanuary 2009, the Company fully satisfied $25.0 million in outstandingtrust preferred securities of Impac Capital Trust #2 for $3.75 million.

 

In May 2009, theCompany exchanged an aggregate of $51.3 million in trust preferred securitiesof Impac Capital Trusts #1 and #3 for junior subordinated notes with anaggregate principal balance of $62.0 million, with a maturity date in March 2034.Under the terms of the exchange, the interest rates for each note are reducedfrom 8.01 percent to 2.00 percent through 2013 and increase 1.00 percent peryear through 2017. Starting in 2018, the interest rates become variable at3-month LIBOR plus 375 basis points. In connection with the exchange, theCompany paid a fee of $0.5 million.

 

InMarch 2009, the Company announced that it will continue to defer interestpayments on its remaining $12.0 million in trust preferred securities of ImpacCapital Trust #4. At March 31, 2009, interest that has been deferred andunpaid related to these trust preferred securities was $0.4 million.  The Company has the right to defer paymentsof interest for a period of up to 20 consecutive quarterly interest paymentperiods for Impac Capital Trust #4. During the deferral period, interest on the trust preferred securitieswill bear additional interest at a rate equal to the coupon rate on therespective security. Unless the Company again elects to defer interestpayments, the Company is required to pay all accrued interest together with theadditional interest at the next payment date.

 

InMarch 2009, the Company announced that it will not be paying dividends forthe quarter ended March 31, 2009 on the Company’s 9.375% Series BCumulative Redeemable Preferred Stock and 9.125% Series C CumulativeRedeemable Preferred Stock.  The Companyhas no present intentions to pay dividends on the Series B and Series CPreferred Stock, however, unpaid dividends on the preferred stock willaccumulate. Until such time as all cumulative dividends on the preferred stockare paid, the Company may not pay dividends on, nor redeem, repurchase or makeany distribution on, shares of its common stock. At March 31, 2009cumulative unpaid dividends on preferred stock totaled $7.4 million.  If the Company does not pay dividends on itspreferred stock for six or more quarterly periods (whether or not consecutive),preferred stockholders will be entitled to elect two additional directors tothe Company’s Board of Directors to serve until the Company is current on alldividends.

 

**2.****             ****Recent Accounting Pronouncements**

 

*RecentlyAdopted Accounting Pronouncements*

 

EffectiveJanuary 1, 2009, the Company adopted EITF No. 08-5, “Issuer’sAccounting for Liabilities Measured at Fair Value with a Third-Party CreditEnhancement” (EITF 08-5). EITF 08-5 addresses whether issuer’s of liabilitiesshould consider the effect of the third-party credit enhancement when measuringthe liability at fair value under FASB Statement No. 157 “Fair ValueMeasurements” (SFAS 157). EITF 08-5 requires that the issuer of a liabilitywith a third-party credit enhancement that is inseparable from the liabilityshall not include the effect of the credit enhancement in the fair valuemeasurement of the liability. The guidance in EITF 08-5 is effective in thefirst reporting period beginning on or after December 15, 2008, with theeffect of initially applying its guidance being included in the change in fairvalue in the period of adoption. The adoption of EITF 08-5 did not have asignificant impact on the Company’s consolidated financial statements.

 

Effective,January 1, 2009, application of SFAS 157 to nonfinancial assets andliabilities is required.  As a result ofthe adoption of SFAS 157 for nonfinancial assets and liabilities, the Companyhas included additional disclosures as of and for the three months ended March 31,2009 for nonrecurring fair value measurements related to its nonfinancialassets and liabilities.

 

*RecentAccounting Pronouncements*

 

InApril 2009, the Financial Accounting Standards Board (FASB) issued threestatements of position (FSP) related to fair value measurements:

 

·                  FSPNo. FAS 157-4 “Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly” (FSP 157-4)

 

5

----

Table of Contents

 

·                  FSPNo. FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value ofFinancial Instruments” (FSP FAS 107-1 and APB 28-1)

·                  FASNo. FAS 115-2 and FAS 124-2 “Recognition and Presentation ofOther-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2)

 

FSP157-4 provides additional guidance for estimating fair value in accordance withSFAS 157 when the volume and level of market activity for the asset orliability have significantly decreased. This FSP also includes guidance onidentifying circumstances that indicate a transaction is not orderly.  This FSP emphasizes that even if there hasbeen a significant decrease in the volume and level of market activity for theasset or liability and regardless of the valuation technique(s) used, theobjective of a fair value measurement remains the same. Fair value is the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction (that is, not a forced liquidation or distressed sale)between market participants at the measurement date under current marketconditions. FSP 157-4 is effective for interim and annual reporting periodsending after June 15, 2009, and shall be applied prospectively. TheCompany is in the process of determining the impact adopting FSP 157-4 willhave on its consolidated financial statements.

 

FSPFAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures aboutFair Value of Financial Instruments”, to require disclosures about fair valueof financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. This FSP also amends APBOpinion No. 28, “Interim Financial Reporting”, to require those disclosuresin summarized financial information at interim reporting periods.  FSP FAS 107-1 and APB 28-1 is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  The Company does not expect the adoption ofFSP FAS 107-1 and APB 28-1 to have a significant effect on its consolidatedfinancial statements.

 

FSPFAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance inU.S. GAAP for debt securities to make the guidance more operational and toimprove the presentation and disclosure of other-than-temporary impairments ondebt and equity securities in the financial statements. For debt securities,the statement requires that an entity assess whether it (a) has the intentto sell the debt security or (b) more likely than not will be required tosell the debt security before its anticipated recovery.  If either of these conditions is met, theCompany would be required to recognize other-than-temporary impairment. FSP FAS115-2 and FAS 124-2 is effective for interim and annual reporting periodsending after June 15, 2009, with early adoption permitted for periodsending after March 15, 2009.  TheCompany does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have asignificant effect on its consolidated financial statements.

 

InApril 2008, the FASB voted to eliminate QSPEs from the guidance in FASBStatement No. 140 “Accounting for Transfers and Servicing of FinancialAssets and Extinguishment of Liabilities” (SFAS 140). While the revisedstandard has not been finalized and the FASB’s proposals will be subject to apublic comment period, this change may have a significant impact on the Company’sconsolidated financial statements as it may lose sales treatment for assetspreviously sold to QSPEs, as well as for future sales. An effective date forany proposed revisions has not been determined by the FASB.  As of March 31, 2009, the currentprincipal balance of QSPEs to which the Company, acting as principal, hastransferred assets and received sales treatment were $643.2 million. TheCompany’s investment in these QSPE’s consists of residual interests accountedfor as investment securities available-for-sale in its consolidated balancesheets. The Company is still evaluating the impact of this potential change.

 

Inconnection with the aforementioned proposed changes to SFAS 140, the FASB alsois proposing three key changes to the consolidation model in FASBInterpretation No 46 (revised December 2003), “Consolidation of VariableInterest Entities” (FIN 46R).  First, theFASB 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 whichparty to a VIE should consolidate the VIE to a primarily qualitativedetermination of control instead of today’s risks and rewards model. Finally,the proposed amendment is expected to require all VIEs and their primarybeneficiaries to be reevaluated quarterly. The previous rules requiredreconsideration only when specified reconsideration events occurred. As of March 31,2009, the only significant unconsolidated VIEs are the QSPE’s described in thepreceding paragraph.

 

**3.****             ****Legal Proceedings**

 

TheCompany is party to litigation and claims which are normal in the course of ouroperations.

 

In the matter of Sheldon Pittleman v. Impac MortgageHoldings, Inc. et al filed in the United States district Court, Centraldistrict California against IMH and several of its senior officers a ThirdAmended Complaint was filed. A motion to dismiss was filed by the defendants onDecember 15, 2008. On March 10, 2009, the court sustained thedefendants’ motion to dismiss without leave to amend.  The Plaintiffs have filed a Notice of Appealof the Order Granting the Motion to Dismiss With Prejudice and the Judgmentthereon on April 7, 2009.

 

Please refer to IMH’s report on Form 10-K forthe year ended December 31, 2008 for a description of other litigation andclaims.

 

6

----

Table of Contents

 

Webelieve that we have meritorious defenses to the above claims and intend todefend these claims vigorously and as such the Company believes the finaloutcome of such matters will not have a material adverse effect on ourfinancial condition or results of operations. Nevertheless, litigation isuncertain and we may not prevail in the lawsuits and can express no opinion asto their ultimate resolution. An adverse judgment in any of these matters couldhave a material adverse effect on us.

 

**4.****             ****Income Taxes and Deferred Charge**

 

Duringthe first quarter of 2009, the Company revoked its election to be taxed as aREIT, effective January 1, 2009.  Asa result of revoking this election, the Company will be subject to income taxesas a regular corporation.

 

Priorto January 1, 2009, the Company operated as a REIT under the requirementsof the Internal Revenue Code. Requirements for qualification as a REIT includedvarious restrictions on ownership of IMH’s stock, requirements concerningdistribution of taxable income and certain restrictions on the nature of assetsand sources of income.

 

Asof December 31, 2008, the Company had federal and California net operatingloss carryforwards of $406.8 million and $532.2 million, respectively.  As of December 31, 2008, the Company’staxable REIT subsidiary had an estimated federal net operating loss taxcarryforward of $295.1 million. The federal net operating loss carryforward ofthe Company’s taxable REIT subsidiary, utilization of which may be limited tothe Company’s taxable REIT subsidiary, begins to expire in the year 2027. As ofDecember 31, 2008, the Company and the Company’s taxable REIT subsidiaryhad  net deferred tax assets ofapproximately $547.9 million and $100.0 million, respectively. The Companyrecorded a full valuation allowance against the net deferred tax assets as itbelieves it is more likely than not that the net deferred tax assets will notbe recoverable.

 

Inaccordance with Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” the Company records a deferred charge representing thedeferral of income tax expense on inter-company profits that resulted from thesale of mortgages from taxable subsidiaries to IMH in prior years. The deferredcharge is included in other assets in the accompanying consolidated balancesheets and is amortized as a component of income tax expense in theaccompanying consolidated statements of operations over the estimated life ofthe mortgages retained in the securitized mortgage collateral. The Companyrecorded a tax expense of $2.0 million and $6.5 million for the three monthsended March 31, 2009 and 2008, respectively. The tax expense is the resultof the amount of the deferred charge amortized and/or impaired resulting fromcredit losses, which does not result in any tax liability required to be paid.

 

**NoteB—Fair Value of Financial Instruments**

 

The use of fair value to measure the Company’s financial instruments isfundamental to its consolidated financial statements and is a criticalaccounting estimate because a substantial portion of its assets and liabilitiesare recorded at estimated fair value.

 

The application of fair value estimates may be on a recurring or non-recurringbasis depending on the accounting principles applicable to the specific assetor liability or whether management has elected to carry the item at itsestimated fair value.

 

Thefollowing tables present, the Company’s assets and liabilities that aremeasured at fair value on a recurring basis, including financial instrumentsfor which the Company has elected the fair value option at March 31, 2009and December 31, 2008, based on the fair value hierarchy of SFAS 157:

 
| ** **                               | ** ** | **Recurring Fair Value Measurements** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **As of March 31, 2009**         | ** ** |
| ** **                               | ** ** | **Level 1**                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                               | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment securities available-for-sale |       | $                                     | —     |   | $ | — |   | $ | 1,322 |   |
| Securitized mortgage collateral          |       | —                                |       | — |   | 5,505,729 |   |
| Total assets at fair value               |       | $                                     | —     |   | $ | — |   | $ | 5,507,051 |   |
|                                     |       |                                  |       |   |   |   |   |
| **Liabilities**                          |       |                                  |       |   |   |   |   |
| Securitized mortgage borrowings          |       | $                                     | —     |   | $ | — |   | $ | 5,691,028 |   |
| Derivative liabilities, net (1)          |       | —                                |       | — |   | 232,320 |   |
| Trust preferred securities               |       | —                                |       | — |   | 11,090 |   |
| Total liabilities at fair value          |       | $                                     | —     |   | $ | — |   | $ | 5,934,438 |   |

 

----

(1)         Derivative liabilities, netincludes $37 thousand in derivative assets and $232.4 million in derivativeliabilities, included within trust assets and trust liabilities, respectively.

 

7

----

Table of Contents

 
| ** **                               | ** ** | **Recurring Fair Value Measurements** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **As of December 31, 2008**      | ** ** |
| ** **                               | ** ** | **Level 1**                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                               | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment securities available-for-sale |       | $                                     | —     |   | $ | — |   | $ | 2,068 |   |
| Securitized mortgage collateral          |       | —                                |       | — |   | 5,894,424 |   |
| Total assets at fair value               |       | $                                     | —     |   | $ | — |   | $ | 5,896,492 |   |
| ** **                               | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Liabilities**                          | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securitized mortgage borrowings          |       | $                                     | —     |   | $ | — |   | $ | 6,193,984 |   |
| Derivative liabilities, net (1)          |       | —                                |       | — |   | 273,547 |   |
| Trust preferred securities               |       | —                                |       | — |   | 15,403 |   |
| Total liabilities at fair value          |       | $                                     | —     |   | $ | — |   | $ | 6,482,934 |   |

 

----

(1)        Derivative liabilities, net includes $37 thousand in derivative assetsand $273.6 million in derivative liabilities, included within trust assets andtrust liabilities, respectively.

 

Level3 assets and liabilities were 100 percent of total assets at fair value andtotal liabilities at fair value at March 31, 2009 and December 31,2008, respectively.

 

Thefollowing tables present a reconciliation for all assets and liabilitiesmeasured at fair value on a recurring basis using significant unobservableinputs (Level 3) for the three months ended March 31, 2009 and 2008:

 
| ** **                                               | ** ** | **Level 3 Recurring Fair Value Measurements**    | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                               | ** ** | **For the quarter ended March 31, 2009**    | ** ** |
| ** **                                               | ** ** | **Investment  securities  available-for-  sale** | ** ** | **Securitized  mortgage  collateral** | ** ** | **Securitized  mortgage  borrowings** | ** ** | **Derivative  liabilities, net** | ** ** | **Trust preferred securities** | ** ** |
| Fair value, December 31, 2008                       |       | $                                                | 2,068      |   | $ | 5,894,424 |   | $ | (6,193,984 | ) | $ | (273,547 | ) | $ | (15,403 | ) |
| Total gains (losses) included in earnings:               |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest income                                          |       | 95                                               |       | 476,709 |   | — |   | — |   | — |   |
| Interest expense                                         |       | —                                           |       | — |   | (673,807 | ) | — |   | — |   |
| Change in fair value of net trust assets,  excluding REO |       | 905                                              |       | (549,021 | ) | 697,203 |   | (16,157 | ) | — |   |
| Change in fair value of trust preferred  securities      |       | —                                           |       | — |   | — |   | — |   | 12 |   |
| Total gains (losses) included in earnings                |       | 1,000                                            |       | (72,312 | ) | 23,396 |   | (16,157 | ) | 12 |   |
| Transfers in and/or out of Level 3                       |       | —                                           |       | — |   | — |   | — |   | — |   |
| Purchases, issuances and settlements                     |       | (1,746                                           | )          | (316,383 | ) | 479,560 |   | 57,384 |   | 4,301 |   |
| Fair value, March 31, 2009                          |       | $                                                | 1,322      |   | $ | 5,505,729 |   | $ | (5,691,028 | ) | $ | (232,320 | ) | $ | (11,090 | ) |
|                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Unrealized (losses) gains still held (1)                 |       | $                                                | (897       | ) | $ | (8,100,780 | ) | $ | 9,256,884 |   | $ | (235,173 | ) | $ | 54,380 |   |

 

----

(1)          Represents the amount of unrealized (losses)gains relating to assets and liabilities classified as Level 3 that are stillheld at March 31, 2009.

 

8

----

Table of Contents

 
| ** **                                               | ** ** | **Level 3 Recurring Fair Value Measurements**   | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **For the quarter ended March 31, 2008**   | ** ** |
| ** **                                               | ** ** | **Investment securities  available-for-  sale** | ** ** | **Securitized  mortgage  collateral** | ** ** | **Securitized  mortgage  borrowings** | ** ** | **Trust preferred  securities** | ** ** |
| Fair value, January 1, 2008                         |       | $                                               | 15,248     |   | $ | 782,574 |   | $ | (767,704 | ) | $ | (40,952 | ) |
| Total gains (losses) included in earnings:               |       |                                            |       |   |   |   |   |   |   |
| Interest income                                          |       | 200                                             |       | (88 | ) | — |   | — |   |
| Interest expense                                         |       | —                                          |       | — |   | (8,901 | ) | (154 | ) |
| Change in fair value of net trust assets,  excluding REO |       | (4,290                                          | )          | (248,982 | ) | 287,104 |   | — |   |
| Change in fair value of trust preferred  securities      |       | —                                          |       | — |   | — |   | (4,023 | ) |
| Total gains (losses) included in earnings                |       | (4,090                                          | )          | (249,070 | ) | 278,203 |   | (4,177 | ) |
| Transfers in and/or out of Level 3 (1)                   |       | —                                          |       | 526,469 |   | (562,467 | ) | — |   |
| Purchases, issuances and settlements                     |       | (537                                            | )          | (93,015 | ) | 53,573 |   | — |   |
| Fair value, March 31, 2008                          |       | $                                               | 10,621     |   | $ | 966,958 |   | $ | (998,395 | ) | $ | (45,129 | ) |
|                                                     |       |                                            |       |   |   |   |   |   |   |
| Unrealized (losses) gains still held (2)                 |       | $                                               | (2,461     | ) | $ | (386,800 | ) | $ | 419,861 |   | $ | 54,115 |   |

 

----

(1)          Transfers in and/or out of Level 3 arereflected using values as of the beginning of the period.

(2)          Represents the amount of unrealized (losses)gains relating to assets and liabilities classified as Level 3 that are stillheld at March 31, 2008.

 

Basedon the lack of observable market data resulting from inactive markets,recurring fair value measurements designated as Level 3 have increasedsignificantly at March 31, 2009 compared to March 31, 2008, resultingfrom transfers from Level 2 to Level 3 during 2008.

 

FASBStatement No. 159 “The Fair Value Option for Financial Assets andFinancial Liabilities” (SFAS 159) permits fair value accounting to be electedfor certain assets and liabilities on an individual contract basis at the timeof acquisition or under certain other circumstances referred to as “remeasurementevent dates.” For those items for which fair value accounting is elected,changes in fair value will be recognized in earnings, and fees and costsassociated with the origination or acquisition of such items will be recognizedas incurred rather than deferred. In addition, SFAS 159 allows application ofthe Statement’s provisions to eligible items existing at the effective date,and management has elected to apply SFAS 159 to certain of those items asdiscussed below.

 

Thefollowing is a description of the measurement techniques for items recorded atfair value on a recurring basis and a non-recurring basis.

 

***Recurring basis***

 

*Investment securities available-for-sale*— The Company elected to carry all of itsinvestment securities available-for-sale at fair value. The investmentsecurities consist primarily of non-investment grade mortgage-backedsecurities. The fair value of the investment securities are measured based uponthe Company’s expectation of inputs that other market participants would use.Such assumptions include judgments about the underlying collateral, prepaymentspeeds, credit losses, forward interest rates and certain other factors. Giventhe market disruption and lack of observable market data as of March 31,2009 and December 31, 2008, the fair value of the investment securitiesavailable-for-sale were measured using significant internal expectations ofmarket participants’ assumptions.

 

*Securitized mortgage collateral* — The Company elected to carry all of itssecuritized mortgage collateral at fair value. These assets consist primarilyof non-conforming mortgage loans securitized between 2002 and 2007. Fair valuemeasurements are based on the Company’s estimated cash flow models, non-bindingquoted prices for the underlying bonds and yield analysis. The Company’sassumptions include its expectations of inputs that other market participantswould use in pricing these assets. These assumptions include judgments aboutthe underlying collateral, prepayment speeds, estimated future credit losses,forward interest rates, investor yield requirements and certain otherfactors.  As of March 31, 2009,securitized mortgage collateral had an unpaid principal balance of $13.6billion, compared to an estimated fair value of $5.5 billion. The aggregateunpaid principal balance exceeds the fair value by $8.1 billion at March 31,2009.  As of March 31, 2009, theunpaid principal balance of loans 90 days or more past due was $3.0 billioncompared to an estimated fair value of $1.0 billion. The aggregate unpaidprincipal balances of loans 90 days or more past due exceed the fair value by$2.0 billion at March 31, 2009.

 

9

----

Table of Contents

 

*Securitized mortgage borrowings* — The Company elected to carry all of itssecuritized mortgage borrowings at fair value. These borrowings consist ofindividual tranches of bonds issued by securitization trusts and are primarilybacked by non-conforming mortgage loans. Fair value measurements include theCompany’s judgments about the underlying collateral assumptions such asprepayment speeds, estimated future credit losses, forward interest rates,investor yield requirements and certain other factors and are based uponnon-binding quoted prices for the individual tranches of bonds, if available.As of March 31, 2009, securitized mortgage borrowings had an outstandingprincipal balance of $15.0 billion compared to an estimated fair value of $5.7billion. The aggregate outstanding principal balance exceeds the fair value by$9.3 billion at March 31, 2009.

 

*Trust preferred securities* — The Company elected to carry all of its trust preferred securities atfair value. These securities were measured based upon an analysis prepared bythe Company, which considered the Company’s own credit risk, includingconsideration of recent settlements with trust preferred debt holders,comparison to the terms and market prices of the Company’s preferred stockand  negotiations of revised terms ofrestructured trust preferred securities. As of March 31, 2009, trust preferred securities had an  unpaid principal balance of $65.5 millioncompared to an estimated fair value of $11.1 million. The aggregate unpaidprincipal balance exceeds the fair value by $54.4 million at March 31,2009.

 

*Derivative assets and liabilities*—******For non-exchange tradedcontracts, fair value is based on the amounts that would be required to settlethe positions with the related counterparties as of the valuation date.Valuations of derivative assets and liabilities are based on observable marketinputs, if available. To the extent observable market inputs are not available,fair values measurements include the Company’s judgments about the future cashflows, forward interest rates and certain other factors, including counterpartyrisk. Additionally, these values also take into account the Company’s owncredit standing, to the extent applicable, thus included in the valuation ofthe derivative instrument is the value of the net credit differential betweenthe counterparties to the derivative contract.

 

The following tables present changes in fairvalue of recurring fair value measurements for the three months ended March 31,2009 and 2008, respectively:

 
| ** **                               | ** ** | **Recurring Fair Value Measurements**              | ** **  |
|------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                               | ** ** | **Changes in Fair Value Included in Net Loss**     | ** **  |
| ** **                               | ** ** | **For the three months ended March 31, 2009** | ** **  |
| ** **                               | ** ** | ** **                                         | ** **  | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Interest Income (1)**                            | ** **  | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Trust Preferred  Securities** | ** ** | **Total** | ** ** |
|                                     |       |                                               |        |   |   |   |   |   |   |   |   |
| Investment securities available-for-sale |       | $                                                  | 95          |   | $ | — |   | $ | 905 |   | $ | — |   | $ | 1,000 |   |
| Securitized mortgage collateral          |       | 476,709                                            |        | — |   | (549,021 | ) | — |   | (72,312 | ) |
| Securitized mortgage borrowings          |       | —                                             |        | (673,807 | ) | 697,203 |   | — |   | 23,396 |   |
| Derivative instruments                   |       | —                                             |        | — |   | (16,157 | )(2) | — |   | (16,157 | ) |
| Trust preferred securities               |       | —                                             |        | — |   | — |   | 12 |   | 12 |   |
| **Total**                                | ** ** | **$**                                              | **476,804** | ** ** | **$** | **(673,807** | **)** | **$** | **132,930** | (3) | **$** | **12** | ** ** | **$** | **(64,061** | **)** |

 

----

(1)          Amounts represent interest income and interestexpense accretion included in interest income and interest expense,respectively in the consolidated statement of operations.

(2)          Included in this amount is $41.7 millionin changes in the fair value of derivative instruments, offset by $57.9 millionin cash payments from the securitization trusts for the three months ended March 31,2009.

(3)          For the three months ended March 31,2009, change in the fair value of trust assets, excluding REO was $132.9million.  Excluded from the($190.8) million change in fair value of net trust assets, excluding REO,in the accompanying consolidated statement of cash flows is $57.9 million incash payments from the securitization trusts related to the Company’s net derivativeliabilities.

 
| ** **                               | ** ** | **Recurring Fair Value Measurements**          | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **Changes in Fair Value Included in Net Loss** | ** ** |
| ** **                               | ** ** | **For the three months ended March 31, 2008**  | ** ** |
| ** **                               | ** ** | ** **                                     | ** ** | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Interest Income (1)**                        | ** ** | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Trust Preferred Securities** | ** ** | **Total** | ** ** |
|                                     |       |                                           |       |   |   |   |   |   |   |   |   |
| Investment securities available-for-sale |       | $                                              | 200        |   | $ | — |   | $ | (4,290 | ) | $ | — |   | $ | (4,090 | ) |
| Securitized mortgage collateral          |       | (25,595                                        | )          | — |   | (3,229,500 | ) | — |   | (3,255,095 | ) |
| Securitized mortgage borrowings          |       | —                                         |       | (75,675 | ) | 3,419,134 |   | — |   | 3,343,459 |   |
| Derivative instruments                   |       | —                                         |       | — |   | (181,816 | )(2) | — |   | (181,816 | ) |
| Trust preferred securities               |       | —                                         |       | (154 | ) | — |   | (4,023 | ) | (4,177 | ) |
| **Total**                                | ** ** | $                                              | (25,395    | ) | $ | (75,829 | ) | $ | 3,528 | (3) | $ | (4,023 | ) | $ | (101,719 | ) |

 

----

(1)          Amounts represent interest income and interestexpense accretion included in interest income and interest expense,respectively in the consolidated statement of operations.

 

10

----

Table of Contents

 

(2)          Included in this amount is($155.9) million in changes in the fair value of derivative instrumentsand $25.9 million in cash payments from the securitization trusts for the threemonths ended March 31, 2008.

(3)          For the three months ended March 31,2008, change in the fair value of trust assets, excluding REO was $3.5million.  Excluded from the$29.4 million change in fair value of net trust assets, excluding REO, inthe accompanying consolidated statement of cash flows is $25.9 million in cashpayments from the securitization trusts related to the Company’s net derivativeliabilities.

 

Inconnection with the fair value accounting for investment securitiesavailable-for-sale and securitized mortgage collateral and borrowings, interestincome and interest expense is recognized using effective yields, which arebased, in part, on estimated fair values for these instruments.  As the market’s expectation of future creditlosses has increased between periods, market participants have demanded higheryields, which have resulted in significant reductions in the fair values ofthese instruments.  These reductions infair value have significantly increased the effective yields used for purposesof recognizing interest income and interest expense on these instruments.

 

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

 

 ***Non-recurringbasis***

 

TheCompany is required to measure certain assets and liabilities at fair valuefrom time-to-time. These fair value measurements typically result from theapplication of specific accounting pronouncements under GAAP. The fair valuemeasurements are considered non-recurring fair value measurements under SFAS157.

 

*Loans held-for-sale -*Loans held-for-sale for which the fair value option was not elected arecarried at lower of cost or market (LOCOM). When available, such measurementsare based upon what secondary markets offer for portfolios with similarcharacteristics, and are considered Level 2 measurements. If market pricing isnot available, such measurements are significantly impacted by the Company’sexpectations of other market participants’ assumptions, and are consideredLevel 3 measurements. The Company utilizes internal pricing processes toestimate the fair value of loans held-for-sale, which is based on recent loansales and estimates of the fair value of the underlying collateral. Loansheld-for-sale, which are primarily included in assets of discontinuedoperations, are considered Level 3 fair value measurements at March 31,2009 and December 31, 2008 based on the lack of observable market inputs.

 

*Real estate owned -*REO, which consists of residential real estate acquired in satisfactionof loans, is carried at net realizable value. Upon foreclosure, REO is adjusted to the estimated fair value of theresidential real estate less estimated selling and holding costs, offset byexpected mortgage insurance proceeds to be received, if any.  Subsequently, REO is recorded at the lower ofcarrying value or estimated fair value less costs to sell.  Fair values of REO are generally based on appraisalsor market prices, and considered Level 2 measurements at March 31, 2009and December 31, 2008.

 

*Lease liability*— In connection with the discontinuation of our non-conforming mortgage, retailmortgage, warehouse lending and commercial operations, a significant amount ofoffice space that was previously occupied is no longer being used by theCompany. The Company has subleased a significant amount of this officespace.  The Company has recorded aliability, included within discontinued operations, representing the fair valueof the minimum lease payments over the remaining life of the lease, offset bythe expected proceeds from sublet revenue related to this office space.  This liability is based on the present valuetechniques that incorporate the Company’s judgments about estimated subletrevenue and discount rates.  Therefore,this liability is considered a Level 3 measurement at March 31, 2009 and December 31,2008.

 

Thefollowing tables present the fair values of those financial assets measured atfair value on a non-recurring basis at March 31, 2009 and December 31,2008:

 
| ** **               | ** ** | **Non-recurring Fair Value Measurements** | ** ** | **Total Gains (Losses)**  | ** ** |
|--------------------------|------------|-------------------------------------------|------------|---------------------------|------------|
| ** **               | ** ** | **As of March 31, 2009**             | ** ** | **For the Quarter Ended** | ** ** |
| ** **               | ** ** | **Level 1**                               | ** ** | **Level 2**               | ** ** | **Level 3** | ** ** | **March 31, 2009** | ** ** |
| Loans  held-for-sale (1) |       | —                                    |       | —                    |       | $ | 101,830 |   | $ | (72 | ) |
| REO (2)                  |       | —                                    |       | 342,789                   |       | — |   | (85,658 | ) |
| Lease liability (3)      |       | —                                    |       | —                    |       | (6,800 | ) | 58 |   |
|                          |            |                                           |            |                           |            |  |  |  |  |  |  |

 

----

(1)         Includes $0.4 million and $101.4 million of loans held-for-sale withincontinuing and discontinued operations, respectively at March 31, 2009.

 

11

----

Table of Contents

 

(2)         Includes $336.8 million and $6.0 million in REO within continuing anddiscontinued operations, respectively at March 31, 2009.  For the quarter ended March 31, 2009,losses of $85.7 million related to additional impairment write-downs, included$84.3 million and $1.4 million within continuing and discontinued operations,respectively.

(3)         Amounts are included in discontinued operations.

 
| ** **              | ** ** | **Non-recurring Fair Value Measurements** | ** ** | **Total Losses**       | ** ** |
|-------------------------|------------|-------------------------------------------|------------|------------------------|------------|
| ** **              | ** ** | **As of December 31, 2008**          | ** ** | **For the Year Ended** | ** ** |
| ** **              | ** ** | **Level 1**                               | ** ** | **Level 2**            | ** ** | **Level 3** | ** ** | **December 31, 2008** | ** ** |
| Loans held-for-sale (1) |       | —                                    |       | —                 |       | $ | 108,223 |   | $ | 45,960 |   |
|                         |            |                                           |            |                        |            |  |  |  |  |  |  |

 

----

(1)         Includes $0.4 million and $107.8 million of loans held-for-sale withincontinuing and discontinued operations, respectively at December 31, 2008.

 

**Note C— Stock Options**

 

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

 
| ** **                             | ** ** | **Three Months**         | ** ** |
|----------------------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **Ended March 31,** | ** ** |
| ** **                             | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| Risk-free interest rate                |       | —                   |       | 1.88% to 2.13% |   |
| Expected lives (in years)              |       | —                   |       | 3.25 |   |
| Expected volatility (1)                |       | —                   |       | 87.3% - 89.9% |   |
| Expected dividend yield (2)            |       | —                   |       | 0.00% |   |
| Grant date fair value of share options |       | —                   |       | $7.14 - 7.76 |   |

 

----

(1)                     Expected volatilities are based on thehistorical volatility of the Company’s stock over the expected option life.

(2)                     Expected dividend yield is zero because adividend on the common stock was not probable over the expected life of theoptions granted during the quarters ended March 31, 2009 and 2008.

 

There were no stock options granted during the threemonths ended March 31, 2009.

 

The following table summarizes activity, pricing andother information for the Company’s stock options for the three months ended March 31,2009:

 
| ** **                                  | ** ** | ** **    | ** ** | **Weighted-** | ** ** |
|---------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                  | ** ** | ** **    | ** ** | **Average**   | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Exercise**  | ** ** |
| ** **                                  | ** ** | **Shares**    | ** ** | **Price ($)** | ** ** |
| Options outstanding at January 1, 2009 |       | 1,140,186     |       | $             | 37.18      |   |
| Options granted                             |       | —        |       | —        |       |
| Options exercised                           |       | —        |       | —        |       |
| Options forfeited / cancelled               |       | (500          | )          | 12.00         |       |
| Options outstanding at March 31, 2009  |       | 1,139,686     |       | $             | 37.19      |   |
| Options exercisable at March 31, 2009  |       | 295,760       |       | $             | 86.96      |   |

 

As of March 31, 2009, there was approximately$3.0 million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the plan. That cost isexpected to be recognized over a weighted average period of 0.9 years.

 

12

----

Table of Contents

 

**NoteD—Reconciliation of Earnings Per Share**

 

Thefollowing table presents the computation of basic and diluted net earnings pershare including the dilutive effect of stock options and cumulative redeemablepreferred stock outstanding for the periods indicated:

 
| ** **                                                                      | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                      | ** ** | **Ended March 31,** | ** ** |
| ** **                                                                      | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| **Numerator for basic earnings per share:**                                     |       |                     |       |   |   |
| Net earnings (loss) from continuing  operations                                 |       | $                        | 1,276      |   | $ | (4,503 | ) |
| Net (loss) earnings from discontinued  operations                               |       | (2,395                   | )          | 688 |   |
| Less: Cash dividends on cumulative  redeemable preferred stock                  |       | —                   |       | (3,722 | ) |
| Net loss attributable to common  stockholders                                   |       | $                        | (1,119     | ) | $ | (7,537 | ) |
| **Denominator for basic earnings per share:**                                   |       |                     |       |   |   |
| Basic weighted average number of common  shares outstanding during the period   |       | 7,618                    |       | 7,610 |   |
| **Denominator for diluted earnings per share:**                                 |       |                     |       |   |   |
| Diluted weighted average number of common  shares outstanding during the period |       | 7,618                    |       | 7,610 |   |
| Net effect of dilutive stock options                                            |       | —                   |       | — |   |
| Diluted weighted average common shares                                          |       | 7,618                    |       | 7,610 |   |
|                                                                            |       |                     |       |   |   |
| Net loss per common share - basic and  diluted:                                 |       |                     |       |   |   |
| Earnings (loss) from continuing operations                                      |       | $                        | 0.17       |   | $ | (1.08 | ) |
| (Loss) earnings from discontinued  operations                                   |       | (0.32                    | )          | 0.09 |   |
| Net loss per share                                                              |       | $                        | (0.15      | ) | $ | (0.99 | ) |

 

Forthe three months ended March 31, 2009 and 2008, stock options to purchase1.1 million and 1.3 million shares, respectively, were outstanding but notincluded in the above weighted average calculations because they wereanti-dilutive.

 

**Note E—Segment Reporting**

 

The Company has two reporting segments, thecontinuing operations and discontinued operations.  The following tables present the selectedfinancial data and operating results by reporting segments for the periodsindicated:

 
| ** **                                             | ** ** | **Continuing** | ** ** | **Discontinued** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Operations** | ** ** | **Operations**   | ** ** | **Consolidated** | ** ** |
| **Balance Sheet Items as of March 31,  2009:**    | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Securitized mortgage collateral                        |       | $              | 5,505,729  |             | $          | —           |       | $ | 5,505,729 |   |
| Loans held-for-sale                                    |       | 361            |       | 101,469          |       | 101,830          |       |
| Total assets                                           |       | 6,021,719      |       | 137,947          |       | 6,159,666        |       |
| Total liabilities                                      |       | 5,940,796      |       | 209,865          |       | 6,150,661        |       |
| Total stockholders’ equity (deficit)              |       | 80,923         |       | (71,918          | )          | 9,005            |       |
|                                                   |       |           |       |             |       |             |       |
| **Balance Sheet Items as of December 31,  2008:** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Securitized mortgage collateral                        |       | $              | 5,894,424  |             | $          | —           |       | $ | 5,894,424 |   |
| Loans held-for-sale                                    |       | 454            |       | 107,769          |       | 108,223          |       |
| Total assets                                           |       | 6,574,464      |       | 141,053          |       | 6,715,517        |       |
| Total liabilities                                      |       | 6,489,024      |       | 217,241          |       | 6,706,265        |       |
| Total stockholders’ equity (deficit)              |       | 85,440         |       | (76,188          | )          | 9,252            |       |

 

13

----

Table of Contents

 
| ** **                                                                         | ** ** | **Continuing** | ** ** | **Discontinued** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                         | ** ** | **Operations** | ** ** | **Operations**   | ** ** | **Consolidated** | ** ** |
| **Statement of Operations Items for the three  months ended March 31, 2009:** |       |           |       |             |       |             |       |
| Net interest income                                                                |       | $              | 3,642      |             | $          | (413             | )          | $ | 3,229 |   |
| Non-interest income- net trust assets                                              |       | 4,729          |       | —           |       | 4,729            |       |
| Other non-interest income (expense)                                                |       | 5,520          |       | (1,921           | )          | 3,599            |       |
| Non-interest expense and income taxes                                              |       | (12,615        | )          | (61              | )          | (12,676          | )          |
| Net earnings (loss)                                                                |       | $              | 1,276      |             | $          | (2,395           | )          | $ | (1,119 | ) |
|                                                                               |       |           |       |             |       |             |       |
| **Statement of Operations Items for the three  months ended March 31, 2008:** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net interest income                                                                |       | $              | 7,349      |             | $          | 1,671            |       | $ | 9,020 |   |
| Non-interest income- net trust assets                                              |       | (728           | )          | —           |       | (728             | )          |
| Other non-interest income                                                          |       | 1,720          |       | 9,333            |       | 11,053           |       |
| Non-interest expense and income taxes                                              |       | (12,844        | )          | (10,316          | )          | (23,160          | )          |
| Net (loss) earnings                                                                |       | $              | (4,503     | )                | $          | 688              |       | $ | (3,815 | ) |

 

**Note F—Real Estate Owned (REO)**

 

Real estate owned (REO),which consists of residential real estate acquired in satisfaction of loans, iscarried at net realizable value, which includes the estimated fair value of theresidential real estate less estimated selling and holding costs, offset byexpected mortgage insurance proceeds to be received, if any. Adjustments to theloan carrying value required at the time of foreclosure affect the carryingamount of securitized mortgage collateral. Subsequent write-downs in the netrealizable value of REO are included in losses from real estate owned in theconsolidated statements of operations.

 

Activity for the Company’sREO consisted of the following:

 
| ** **             | ** ** | **At March 31, 2009** | ** ** | **At December 31, 2008** | ** ** |
|------------------------|------------|----------------------------|------------|-------------------------------|------------|
| REO                    |       | $                          | 548,978    |                          | $          | 635,285 |   |
| Impairment (1)         |       | (107,114                   | )          | (35,533                       | )          |
| Ending balance         |       | $                          | 441,864    |                          | $          | 599,752 |   |
|                   |       |                       |       |                          |       |
| REO inside trusts      |       | $                          | 440,916    |                          | $          | 599,084 |   |
| REO outside trusts (2) |       | 948                        |       | 668                           |       |
| Total                  |       | $                          | 441,864    |                          | $          | 599,752 |   |

 

----

(1)         Amount represents REO related to former on-balance sheetsecuritizations, which were collapsed as the result of the Company exercisingits clean-up call options. This REO is included in other assets in theaccompanying consolidated balance sheets.

(2)         Amount represents REO related to former on-balance sheetsecuritizations, which were collapsed as the result of the Company exercisingits clean-up call options. This REO is included in other assets in theaccompanying consolidated balance sheets.

 

**Note G— Reverse Repurchase Financing (Discontinued Operations)**

 

The Company’s reverserepurchase financing, included in discontinued operations, is secured by theCompany’s loans held-for-sale with an unpaid principal balance of $203.3,restricted cash of $20.8 million and certain REOs.  The following table presents the outstandingbalance of the Company’s Restructured Financing as of the dates indicated:

 
| ** **                  | ** ** | **Discontinued Operations** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **as of March 31,**    | ** ** | **as of December 31,** | ** ** |
| ** **                  | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Reverse repurchase line (1) |       | $                           | 182,468    |   | $ | 188,677 |   |
|                             |            |                             |            |  |  |  |  |

 

----

(1)         This line, which is guaranteed by IMH, is no longer funding loans andwas restructured in 2008 as described below.

 

14

----

Table of Contents

 

In September 2008, the Company entered into anagreement to restructure its reverse repurchase line (Restructured Financing)with its remaining lender. The balance of this Restructured Financing was$182.5 million at March 31, 2009 and collateralized by loans held-for-salewithin discontinued operations. The agreement removed all technical defaultsfrom financial covenant noncompliance and any associated margin calls for theterm of the agreement. The agreement calls for certain targets including areduction of the borrowings balance to $100 million by March 2010 with anadvance rate of no more than 65 percent of the outstanding principal balanceand $50 million by September 2010 with an advance rate of no more than 55percent of the outstanding principal balance. By meeting these targets, theagreement term can extend to March 2011. At March 31, 2009, the advancerate was 80 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 theagreement term. If the Company is successful in raising capital, approximately10 percent of the gross proceeds will be required to be paid as an additionalprincipal paydown and the monthly principal paydown would then be reduced to$750,000. The interest rate is LIBOR plus 325 basis points, and all cashcollected from the securing mortgage loans is required to be paid to thelender. To the extent the cash collected from the collateral is not adequate topay the interest expense due on the borrowings, interest expense would be paidto the lender from the Company’s restricted cash account included in assets ofdiscontinued operations or the Company’s cash balances. Accomplishing therestructuring of this reverse repurchase line allows the Company to timelymanage the remaining loans on the line for the eventual collection, refinance,sale or securitization without the risk of receiving margin calls. Upon anevent of default, the Company is responsible for any shortfall if the value ofthe loans securing the financing is insufficient to repay the outstandingbalance.  During the first quarter of2009, the Company paid an additional $4.5 million in principal paydowns asrequired under the restructured terms.

 

**Note H—Subsequent Events**

 

In April 2009, theCompany’s officers and directors gave notice of the surrender of an aggregateof 581,000 options and the Board accepted and approved the cancellation ofthose listed options.  In connection withthe cancellation of these options, the Company will record non-cashcompensation expense of approximately $1.7 million during the second quarter.

 

In May 2009, theCompany exchanged an aggregate of $51.3 million in trust preferred securitiesof Impac Capital Trusts #1 and #3 for junior subordinated notes with anaggregate principal balance of $62.0 million, with a maturity date in March 2034.Under the terms of the exchange, the interest rates for each note are reducedfrom 8.01 percent to 2.00 percent through 2013 and increase 1.00 percent peryear through 2017. Starting in 2018, the interest rates become variable at3-month LIBOR plus 375 basis points.  Inconnection with the exchange, the Company paid a fee of $0.5 million.

 

15

----

Table of Contents

 

**ITEM 2:**                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**(dollars in thousands, except pershare data or as otherwise indicated)**

 

Unless the context otherwise requires, the terms “Company,”“we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Companyor IMH), a Maryland corporation incorporated in August 1995, and itssubsidiaries, IMH Assets Corp. (IMH Assets), Integrated Real Estate Services Corporation(IRES), Impac Warehouse Lending Group, Inc. (IWLG), and Impac FundingCorporation (IFC), together with its wholly-owned subsidiaries Impac SecuredAssets Corp. (ISAC) and Impac Commercial Capital Corporation (ICCC).

 

**Forward-LookingStatements**

** **

This report on Form 10-K contains certainforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. Forward-looking statements, some of which are based on variousassumptions and events that are beyond our control, may be identified byreference to a future period or periods or by the use of forward-lookingterminology, such as “may,” “will,” “believe,” “expect,” “likely,” “should,” “could,”“anticipate,” or similar terms or variations on those terms or the negative ofthose terms. The forward-looking statements are based on current managementexpectations. Actual results may differ materially as a result of severalfactors, including, but not limited to the following: the ongoing volatility inthe mortgage industry; our ability to successfully manage through the currentmarket environment; our ability to meet liquidity needs from current cash flowsor generate new sources of revenue; management’s ability to successfullyinitiate mortgage-related fee-based business strategies; the ability to makeinterest and dividend payments; our ability to reduce or eliminate dividend andinterest payments on preferred stock and trust preferred securities; increasesin default rates and mortgage related losses; potential difficulties insatisfying conditions (payment and covenants) in the Restructured Financing;our ability to obtain additional financing and the terms of any financing thatwe do obtain; inability to effectively liquidate properties to mitigate losses;increase in loan repurchase requests and ability to adequately settlerepurchase obligations; decreases in value of our residual interests thatdiffer from our assumptions; the ability of our common stock and preferredstock to continue trading in an active market; the outcome of litigation orregulatory actions pending against us or other legal contingencies; and ourcompliance with applicable local, state and federal laws and regulations andother general market and economic conditions.

 

For a discussion of these and other risks anduncertainties that could cause actual results to differ from those contained inthe forward-looking statements, see “Risk Factors” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in the Company’sAnnual Report on Form 10-K for the period ended December 31, 2008,the other reports we file under the Securities and Exchange Act of 1934, andthe additional risk factors set forth below in this quarterly report. Thisdocument speaks only as of its date and we do not undertake, and specificallydisclaim any obligation, to publicly release the results of any revisions thatmay be made to any forward-looking statements to reflect the occurrence ofanticipated or unanticipated events or circumstances after the date of suchstatements.

 

**TheMortgage Banking Industry and Discussion of Relevant Fiscal Periods**

** **

The mortgage banking industry is continuallyvulnerable to current events that occur in the financial services industry.These events include changes in economic indicators, government regulation,interest rates, price competition, geographic shifts, disposable income,housing prices, market liquidity, market anticipation, and customer perception,as well as others. The factors that affect the industry change rapidly and canbe unforeseeable.

 

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

 

**Statusof Operations, Liquidity and Capital Resources**

** **

*Long-termmortgage portfolio*

 

Duringthe first quarter of 2009, the Company continues to be significantly andnegatively affected by the deteriorating real estate market and the weakeconomic environment. These factors have led to continued deterioration in thequality of the Company’s long-term mortgage portfolio, as evidenced by thecontinued increases in delinquencies, foreclosures and credit losses. Existingconditions are unprecedented and inherently involve significant risks anduncertainty to the Company.  The currentmarket conditions have led to fewer sources of liquidity available to the Companyto operate its business.  These conditionscontinue to adversely affect the performance of the Company’s long-termmortgage portfolio, including significant losses on real estate owned.

 

*Newbusinesses*

 

Duringthe quarter, the Company has initiated various mortgage and real estate relatedfee-based businesses, including loan modifications, real estate disposition,monitoring and surveillance services, real estate brokerage and lendingservices and escrow services, and has begun to generate revenues from thesebusinesses.  However, since thesebusinesses are newly formed, there remains uncertainty about their futuresuccess.

 

16

----

Table of Contents

 

*Liquidityand capital resources*

 

Duringthe first quarter of 2009, the Company continued to fund its operationsprimarily from the cash flows from its long-term mortgage portfolio, and to alesser extent includes the mortgage and real estate related fee-basedbusinesses.

 

InJanuary 2009, the Company fully satisfied $25.0 million in outstandingtrust preferred securities of Impac Capital Trust #2 for $3.75 million

 

In May 2009, theCompany exchanged an aggregate of $51.3 million in trust preferred securitiesof Impac Capital Trusts #1 and #3 for junior subordinated notes with anaggregate principal balance of $62.0 million, with a maturity date in March 2034.Under the terms of the exchange, the interest rates for each note are reducedfrom 8.01 percent to 2.00 percent through 2013 and increase 1.00 percent peryear through 2017. Starting in 2018, the interest rates become variable at3-month LIBOR plus 375 basis points. The difference in principal balancebetween the original $51.3 million in trust preferred securities and the $62.0million in junior subordinated notes reflects the aforementioned reduction ininterest rates. In connection with the exchange, the Company paid a fee of $0.5million.

 

InMarch 2009, the Company announced that it will continue to defer interestpayments on its remaining $12.0 million in trust preferred securities of ImpacCapital Trust #4.  At March 31,2009, interest that has been deferred and unpaid related to these trustpreferred securities was $0.4 million. The Company has the right to defer payments of interest for a period ofup to 20 consecutive quarterly interest payment periods for Impac Capital Trust#4.  During the deferral period, intereston the trust preferred securities will bear additional interest at a rate equalto the coupon rate on the respective security. Unless the Company again electsto defer interest payments, the Company is required to pay all accrued interesttogether with the additional interest at the next payment date.

 

InMarch 2009, the Company announced that it will not be paying dividends forthe quarter ended March 31, 2009 on the Company’s 9.375% Series BCumulative Redeemable Preferred Stock and 9.125% Series C CumulativeRedeemable Preferred Stock.  The Companyhas no present intentions to pay dividends on the Series B and Series CPreferred Stock, however, unpaid dividends on the preferred stock willaccumulate. Until such time as all cumulative dividends on the preferred stockare paid, the Company may not pay dividends on, nor redeem, repurchase or makeany distribution on, shares of its common stock. At March 31, 2009cumulative unpaid dividends on preferred stock totaled $7.4 million.  If the Company does not pay dividends on itspreferred stock for six or more quarterly periods (whether or not consecutive),preferred stockholders will be entitled to elect two additional directors tothe Company’s Board of Directors to serve until the Company is current on alldividends.

 

Theprimary use of liquidity within discontinued operations continues to be theCompany’s restructured reverse repurchase financing (RestructuredFinancing).  As of March 31, 2009,the balance of the Restructured Financing was $182.5 million secured by loansheld for sale with an unpaid principal balance of $203.3 million, restrictedcash of $20.8 million and certain real estate owned.  Principal and interest received on theunderlying collateral is remitted to the lender monthly.  During the first quarter of 2009, the Companypaid an additional $4.5 million in principal paydowns as required under therestructured terms.

 

In order to reduce its obligations under its Series Band Series C Cumulative Redeemable Preferred Stock, the Company isconsidering repurchasing the preferred stock in accordance with its terms,which may include the payment of accumulated dividends of $7.4 million.

 

If we are not successful in (i) realizing cashflows from our residual interests in securitizations, (ii) realizing cashflows from new mortgage and real estate related fee-based businesses and (iii) restructuringtrust preferred securities, we may not be able to satisfy our contractualobligations for 2010 and subsequent years, including repayment of theRestructured Financing, interest payments on trust preferred securities andpreferred stock dividends.

 

To better understand the financial position of theCompany, we believe it is important to understand the composition of theCompany’s stockholders’ equity (deficit) and to which segment of the businessit relates.  At March 31, 2009, theequity (deficit) within our continuing and discontinued operations wascomprised of the following significant assets and liabilities:

 

17

----

Table of Contents

 
| ** **                               | ** ** | **Condensed Components of Stockholders’ Equity (Deficit) by Segment** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **As of March 31, 2009**                                              | ** ** |
| ** **                               | ** ** | **Continuing**                                                             | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Operations**                                                             | ** ** | **Operations** | ** ** | **Total** | ** ** |
| Cash                                     |       | $                                                                          | 38,313     |   | $ | 260 |   | $ | 38,573 |   |
| Short-term investments                   |       | 5,041                                                                      |       | — |   | 5,041 |   |
| Residual interests in securitizations    |       | 24,619                                                                     |       | — |   | 24,619 |   |
| Trust preferred securities ($65,470 par) |       | (11,090                                                                    | )          | — |   | (11,090 | ) |
| Repurchase liabilities (1)               |       | —                                                                     |       | (65,982 | ) | (65,982 | ) |
| Lease liability (2)                      |       | —                                                                     |       | (6,800 | ) | (6,800 | ) |
| Deferred charge                          |       | 13,144                                                                     |       | — |   | 13,144 |   |
| Net other assets                         |       | 10,896                                                                     |       | 604 |   | 11,500 |   |
| **Stockholders’ equity (deficit)**  |       | $                                                                          | 80,923     |   | $ | (71,918 | ) | $ | 9,005 |   |

 

----

(1)         Balance includes the net amount owed to our lender, which are guaranteedby IMH, and the repurchase reserve.

(2)         Guaranteed by IMH.

 

*Continuing operations*

 

We currently have the following sources of cashearnings:

 

·                  cash flows from the long-term mortgageportfolio (residual interests in securitizations);

 

·                  master servicing fees from the long-termmortgage portfolio; and

 

·                  toa lesser extent, revenues from mortgage and real estate related fee-basedbusinesses

 

Since our consolidated and unconsolidatedsecuritization trusts are non-recourse, we have netted trust assets andliabilities to present the Company’s interest in these trusts more simply,which are considered our residual interests in securitizations. For unconsolidatedsecuritizations our residual interests represent the fair value of investmentsecurities available-for-sale. For consolidated securitizations, our residualinterests are represented by the fair value of securitized mortgage collateraland real estate owned, offset by the fair value of securitized mortgageborrowings and net derivative liabilities. We receive cash flows from ourresidual interests in securitizations to the extent they are available afterrequired distributions to bondholders and maintaining overcollateralizationlevels within the trusts. The estimated fair value of the residual interests,represented by the difference in the fair value of trust assets and trustliabilities, was $24.6 million at March 31, 2009, compared to $28.0 millionat December 31, 2008.

 

The Company acts as themaster servicer for mortgages included in our CMO and REMIC securitizations.The master servicing fees we earn are generally 0.03 percent per annum on thedeclining principal balances of these mortgages plus interest income on cashheld until remitted to investors.

 

During the first quarter of 2008, the Company’ssources of cash flow earnings also included real estate advisory fees.  The real estate advisory agreement wasterminated in the fourth quarter of 2008 and we received a fee of $27.0 millionfor agreeing to terminate this relationship. During the quarter ended March 31, 2008, we earned $3.8 million inreal estate advisory fees.

 

For the three months ended March 31, 2009 and2008, we paid zero and $3.7 million, respectively in preferred stockdividends.   For the three months ended March 31,2009 and 2008, we paid $0.3 million and $2.0 million, respectively in intereston trust preferred securities.

 

At March 31, 2009, we had deferred charges of$13.1 million, which is amortized as a component of income tax expense in theconsolidated statements of operations over the estimated life of the mortgagesretained in the securitized mortgage collateral. The deferred charges representthe deferral of income tax expense on inter-company profits that resulted fromthe sale of mortgages from taxable subsidiaries to IMH in prior years. Thisbalance is recorded as required by accounting principles generally accepted inthe United States of America (GAAP) and does not have any realizable cashvalue.

 

Net other assets include $2.6 million in premisesand equipment, $1.6 million in investment in capital trusts, $1.2 million inrestricted cash and $2.2 million in prepaid expenses.

 

18

----

Table of Contents

 

At March 31, 2009, cash within our continuingoperations decreased to $38.3 million from $46.2 million at December 31,2008. However, during the three months ended March 31, 2009, the Companyinvested $5.0 million in highly liquid short-term investments.

 

*Discontinued operations*

 

The Company’s most significant liabilities at March 31,2009 relate to its repurchase liabilities and a lease liability withindiscontinued operations.

 

The repurchase liabilities consist of a repurchasereserve and the net amount owed to our lender for the Restructured Financing,which is collateralized by loans held-for-sale, restricted cash balances andcertain real estate owned. The balance of the Restructured Financing wasapproximately $182.5 million at March 31, 2009. We are currentlydistributing all principal and interest received from the collateral securingthe Restructured Financing to the lender. Additionally, the Restructured Financing calls for monthly principalpaydowns of $1.5 million.

 

We were required to make normal and customaryrepresentations and warranties about the loans we had previously sold toinvestors. Our whole loan sale agreements generally required us to repurchaseloans 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 ofborrower fraud or if a payment default occurs on a mortgage loan shortly afterits sale. The repurchase reserve is an estimate of losses from expectedrepurchases, and is based, in part, on the recent settlement of claims.  At March 31, 2009, the repurchasereserve was $13.6 million.

 

In connection with the discontinuation of ournon-conforming mortgage, retail mortgage, warehouse lending and commercialoperations, a significant amount of office space that was previously occupiedis no longer being used by the Company. The Company has subleased a significantamount of this office space. At March 31, 2009, the Company had aliability of $6.8 million included within discontinued operations, representingthe present value of the minimum lease payments over the remaining life of thelease, offset by the expected proceeds from sublet revenue related to this officespace.

 

**MarketConditions**

** **

The mortgage market has faced continued adversity asthe broad repricing of mortgage credit risk continued to cause the severecontraction in market liquidity. Market conditions were particularly acute withrespect to securities backed by non-conforming (including Alt-A loans, whichwere the Company’s primary single-family loan product) where marketparticipants were setting price levels based on widely varied opinions aboutinvestor yield requirements, future loan performance and loan loss severity.Furthermore, the market has continued to try to quantify the ultimate lossrates that are going to be experienced in the underlying assets in asset-backedsecurities.

 

Conditions in the secondary markets (the markets in which wehistorically sold or securitized mortgage loans), which dramatically worsenedduring the third quarter of 2007 and throughout 2008, continue to be depressedinto 2009 with investor concerns over credit quality and a deteriorating UnitedStates economy and housing market. As a result, the capital markets remain veryvolatile and illiquid and have effectively been unavailable to the Company.

 

Webelieve there iscurrently no index for Alt-A mortgage product, but the general direction andmagnitude of price movement in the ABX 2007-1index is reflective of thedisruption in the market and general price movement experienced by the Company’ssecurities.  The index, which does not include any IMH bonds, is beingused for illustrative purposes only because it is a non-conformingsingle-family mortgage index that has traded consistently in recentyears.  The ABX 2007-1 Index illustrates market prices for designatedgroups of subprime securities by credit rating. The index is shown here as anillustration of the price volatility in the general non-conforming mortgagemarket since the beginning of 2007 and does not reflect actual pricing on IMHbonds, which are backed by Alt-A loans rather than subprime loans. As shownbelow, the ABX 2007-1 Index displays dramatic declines in the value of suchsecurities.

 

19

----

Table of Contents

 

****

 

*Effectsof Recent Market Activity*

 

Asa result of the Company’s inability to sell or securitize non-conforming loansduring the second half of 2007, the Company discontinued funding loans. As aresult, the Company discontinued substantially all of its mortgage (non-conformingsingle-family loans and commercial loans, which consist primarily ofmulti-family loans) and warehouse lending operations.  Market conditions deteriorated in 2008 andcontinue to be depressed in 2009. As a result, the Company’s investment in securitizednon-conforming loans (residual interests) has declined in value primarily fromincreased estimated losses and significant disruption in the market, evidencedby increased investor yield requirements. The decline in single-family homeprices can be seen in the chart below.

 

20

----

Table of Contents

 

 

Asdepicted in the chart above, average home prices peaked in June 2006 at226.29 and continued their dramatic decline through February 2009.  The Standard & Poor’s Case-Shiller10-City Composite Home Price Index (the Index) for February 2009 was154.70 (with the base of 100.00 for January 2000) and hasn’t been this lowsince August 2003 when the Index was 153.61. Beginning in the thirdquarter of 2007, the Company believes there is a correlation between theborrowers’ perceived equity in their homes and defaults. The originalloan-to-value (defined as loan amount as a percentage of collateral value, “LTV”)and original combined loan-to-value (defined as first lien plus totalsubordinate liens to collateral value, “CLTV”) ratios of single-familymortgages remaining in the Company’s securitized mortgage collateral as of March 31,2009 was 73 percent and 83 percent, respectively. The current LTV and CLTVratios likely increased from origination date as a result of the deteriorationin the real estate market. We believe that home prices that have declined belowthe borrower’s original purchase price have a higher risk of default within ourportfolio. Based on the Index, home prices have declined 32 percent through February 2009from the 2006 peak. Further, we believe the home prices in California andFlorida, the states with the highest concentration of our mortgages, havedeclined even further than the Index. We have considered the deterioration inhome prices in our loss estimates, which are a primary assumption used in thevaluation of securitized mortgage collateral and borrowings.

 

**CriticalAccounting Policies**

** **

Several of the critical accounting policiesimportant to the portrayal of our financial condition and results of operationsrequire management to make difficult and complex judgments that rely onestimates about the effect of matters that are inherently uncertain due to theaffect of changing market conditions and/or consumer behavior. We believe ourmost critical accounting policies relate to the valuation of: (1) assetsand liabilities that are highly dependent on internal valuation models andassumptions rather than market quotations (see Fair Value of FinancialInstruments discussion below); (2) derivatives and other hedginginstruments; (3) real estate owned and loans held-for-sale, includingestimates of fair value, and related lower of cost or market (LOCOM) valuationreserve; and (4) repurchase reserve (included in liabilities ofdiscontinued operations). Refer to our report on Form 10-K for the yearended December 31, 2008 for further discussion of our critical accountingpolicies and judgments.

 

21

----

Table of Contents

 

Management discusses its critical accounting policies and relatedestimates with the Company’s Audit Committee on a regular basis. We believe thejudgments, estimates and assumptions used in the preparation of ourconsolidated financial statements are appropriate given the factual circumstancesat the time. However, given the sensitivity of our consolidated financialstatements to these critical accounting policies, the use of other judgments,estimates and assumptions could result in material differences in our resultsof operations or financial condition.

 

**FairValue of Financial Instruments**

** **

SFAS 157 defines fair value, establishes a frameworkfor measuring fair value and outlines a fair value hierarchy based on theinputs to valuation techniques used to measure fair value. SFAS 157 definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date (also referred to as an exit price). SFAS 157 categorizesfair value measurements into a three-level hierarchy based on the extent towhich the measurement relies on observable market inputs in measuring fairvalue. Level 1, which is the highest priority in the fair value hierarchy, isbased on unadjusted quoted prices in active markets for identical assets orliabilities. Level 2 is based on observable market-based inputs, other thanquoted prices, in active markets for identical assets or liabilities. Level 3,which is the lowest priority in the fair value hierarchy, is based onunobservable inputs. Assets and liabilities are classified within thishierarchy in their entirety based on the lowest level of any input that issignificant to the fair value measurement.

 

The use of fair value to measure our financialinstruments is fundamental to our financial statements and is a criticalaccounting estimate because a substantial portion of our assets and liabilitiesare recorded at estimated fair value. Financial instruments classified as Level3 are generally based on unobservable inputs, and the process to determine fairvalue is generally more subjective and involves a high degree of managementjudgment and assumptions. These assumptions may have a significant effect onour estimates of fair value, and the use of different assumptions, as well aschanges in market conditions, could have a material effect on our results ofoperations or financial condition.

 

As a result of the lack of observable market data resulting frominactive markets, the Company has classified all its investment securitiesavailable-for-sale, securitized mortgage collateral and borrowings, netderivative liabilities and trust preferred securities as Level 3 fair valuemeasurements at March 31, 2009 and December 31, 2008. Level 3 assetsand liabilities were 100 percent of total assets and liabilities at fair valueat March 31, 2009 and December 31, 2008.

 

***Recurring basis***

 

*Investment securities available-for-sale—*The Company elected to carry all of itsinvestment securities available-for-sale at fair value. The investmentsecurities consist primarily of non-investment grade mortgage-backedsecurities. The fair value of the investment securities are measured based uponour expectation of inputs that other market participants would use. Suchassumptions include our judgments about the underlying collateral, prepaymentspeeds, credit losses, and certain other factors. Given the market disruptionand lack of observable market data as of March 31, 2009, the fair value ofthe investment securities available-for-sale were measured using significantinternal expectations of market participants’ assumptions.

 

*Securitized mortgage collateral—*The Company elected to carry all of itssecuritized mortgage collateral at fair value. These assets consist primarilyof non-conforming single-family residential and multi-family mortgage loanssecuritized between 2002 and 2007. Fair value measurements are based on theCompany’s estimated cash flow models, non-binding quoted prices for theunderlying bonds and yield analysis. The Company’s assumptions include ourexpectations of inputs that other market participants would use in pricingthese assets. These assumptions include our judgments about the underlyingcollateral, prepayment speeds, estimated future credit losses, forward interestrates, investor yield requirements and certain other factors.

 

*Securitized mortgage borrowings—*The Company elected to carry all of itssecuritized mortgage borrowings at fair value. These borrowings consist ofindividual tranches of bonds issued by securitization trusts and are primarilybacked by non-conforming mortgage loans. Fair value measurements include ourjudgments about the underlying collateral assumptions such as prepaymentspeeds, estimated future credit losses, forward interest rates, investor yieldrequirements and certain other factors and are based upon non-binding quotedprices for the individual tranches of bonds, if available.

 

*Trust preferred securities—*The**Company elected to carry all of itstrust preferred securities at fair value. These securities were measured basedupon an analysis prepared by the Company, which considered the Company’s owncredit risk, including consideration of recent settlements with trust preferreddebt holders, comparison to the terms and market prices of the Company’spreferred stock and negotiations of revised terms of restructured trustpreferred securities.

 

22

----

Table of Contents

 

*Derivative assets and liabilities—*For non-exchange traded contracts, fair valueis based on the amounts that would be required to settle the positions with therelated counterparties as of the valuation date. Valuations of derivativeassets and liabilities are based on observable market inputs, if available. Tothe extent observable market inputs are not available, fair values measurementsinclude the Company’s judgments about the future cash flows, forward interestrates and certain other factors, including counterparty risk. These values alsotake into account the Company’s own credit standing, to the extent applicable,thus included in the valuationof the derivative instrument is the value of the net credit differentialbetween the counterparties to the derivative contract.

 

TheCompany’s primary objective is to limit the exposure to the variability infuture cash flows attributable to the variability of one-month LIBOR, which isthe underlying index of adjustable rate securitized mortgage borrowings andshort-term borrowings under reverse repurchase agreements. The Company alsomonitors on an ongoing basis the prepayment risks that arise in fluctuatinginterest rate environments. The Company’s interest rate risk managementpolicies are formulated with the intent to offset the potential adverse effectsof changing interest rates on securitized mortgage borrowings and reverserepurchase agreements.

 

Tomitigate exposure to the effect of changing interest rates on cash flows onsecuritized mortgage borrowings and reverse repurchase borrowings, the Companypurchased derivative instruments primarily in the form of interest rate swapagreements (swaps) and, to a lesser extent, interest rate cap agreements (caps)and interest rate floor agreements (floors). Due to the closure of the mortgageoperations, the Company has not entered into a new derivative instrument sincethe third quarter of 2007.

 

OnSeptember 15, 2008, Lehman Brothers Holdings Inc. (LBHI) filed a petitionfor protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date,LBHI, through affiliated companies, was an interest rate swap counterparty toseveral of the Company’s CMO and REMIC securitizations. At March 31, 2009,the estimated value of derivative liabilities to LBHI, through its affiliated companieswas $92.3 million and is included in derivative liabilities in the consolidatedbalance sheet. As the related securitization trusts are non-recourse to theCompany, the Company is not required to replace or otherwise settle anyderivative positions affected by counterparty default within the consolidatedtrusts.

 

***Non-recurring basis***

 

TheCompany is required to measure certain assets and liabilities at fair value.These fair value measurements typically result from the application of specificaccounting pronouncements under GAAP. The fair value measurements areconsidered 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 arecarried at lower of cost or market (LOCOM). When available, such measurementsare based upon what secondary markets offer for portfolios with similarcharacteristics, and are considered Level 2 measurements. If market pricing isnot available, such measurements are significantly impacted by the Company’sexpectations of other market participants’ assumptions, and are consideredLevel 3 measurements. The Company utilizes internal pricing processes toestimate the fair value of loans held-for-sale, which is based on recent loansales and estimates of the fair value of the underlying collateral. Loansheld-for-sale, which are primarily included in assets of discontinuedoperations, are considered Level 3 fair value measurements at March 31,2009 and December 31, 2008 based on the lack of observable market inputs.

 

*Real estate owned -*REO, which consists of residential real estate acquired in satisfactionof loans, is carried at net realizable value. Upon foreclosure, REO is adjusted to the estimated fair value of theresidential real estate less estimated selling and holding costs, offset byexpected mortgage insurance proceeds to be received, if any.  Subsequently, REO is recorded at the lower ofcarrying value or estimated fair value less costs to sell.  Fair values of REO are generally based onappraisals or market prices, and considered Level 2 measurements at March 31,2009 and December 31, 2008.

 

*Lease liability*– In connection with the discontinuation of our non-conforming mortgage, retailmortgage, warehouse lending and commercial operations, a significant amount ofoffice space that was previously occupied is no longer being used by theCompany. The Company has subleased a significant amount of this officespace.  The Company has recorded a liability,included within discontinued operations, representing the fair value of theminimum lease payments over the remaining life of the lease, offset by theexpected proceeds from sublet revenue related to this office space.  This liability is based on the present valuetechniques that incorporate the Company’s judgments about estimated subletrevenue and discount rates.  Therefore,this liability is considered a Level 3 measurement at March 31, 2009 and December 31,2008.

 

Wecontinue to refine our valuation methodologies as markets and products developand the pricing for certain products becomes more or less transparent. While webelieve our valuation methods are appropriate and consistent with those ofother market participants, the use of different methodologies or assumptions todetermine the fair value of certain financial instruments could result in amaterially different estimate of fair value as of the reporting date.

 

23

----

Table of Contents

 

**InterestIncome and Expense**

 

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

 

**SelectedFinancial Results for the Three Months Ended March 31, 2009**

 

***Continuing Operations***

 

·                  Net earnings of $1.3million for the first quarter of 2009, compared to a net loss of $4.5 millionfor the first quarter of 2008.

·                  Net interest income of$3.6 million for the first quarter of 2009, primarily from our long-termmortgage portfolio, compared to net interest income of $7.3 million for thefirst quarter of 2008.

·                  Non-interest income - nettrust assets of $4.7 million for the first quarter of 2009, compared to ($0.7)million for the first quarter of 2008

 

***Discontinued Operations***

 

·                  Net loss of $2.4 millionfor the first quarter of 2009, compared to net earnings of $0.7 million for thefirst quarter of 2008.

 

·                  Restructured Financing was$182.5 million at March 31, 2009, compared to $188.7 million at December 31,2008.

 

·                  Loans held-for-sale were$101.5 million, including a fair value adjustment of $102.7 million at March 31,2009, compared to loans held-for-sale of $107.8 million, including a $109.1million fair value adjustment at December 31, 2008.

 

**EstimatedTaxable Income**

** **

Whilethe Company has generated significant net operating loss carryforwards inrecent periods, we do not expect to generate sufficient taxable income infuture periods to be able to realize these tax benefits.  Therefore, we have recognized a fullvaluation allowance against these net operating loss carryforwards in ourconsolidated balance sheets.

 

**FinancialCondition and Results of Operations**

** **

*Financial Condition*

 

Condensed Balance Sheet Data

 
| ** **                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                          | ** ** | **2009**           | ** ** | **2008**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Investment securities available-for-sale            |       | $                  | 1,322      |                  | $          | 2,068          |       | $          | (746       | ) | (36 | )% |
| Securitized mortgage collateral                     |       | 5,505,729          |       | 5,894,424             |       | (388,695       | )          | (7         | )          |
| Derivative assets                                   |       | 37                 |       | 37                    |       | —         |       | —     |       |
| Real estate owned (REO)                             |       | 440,916            |       | 599,084               |       | (158,168       | )          | (26        | )          |
| Total trust assets                                  |       | 5,948,004          |       | 6,495,613             |       | (547,609       | )          | (8         | )          |
|                                                |       |               |       |                  |       |           |       |       |       |
| Assets of discontinued operations                   |       | 137,947            |       | 141,053               |       | (3,106         | )          | (2         | )          |
| Other assets                                        |       | 73,715             |       | 78,851                |       | (5,136         | )          | (7         | )          |
| **Total assets**                                    |       | $                  | 6,159,666  |                  | $          | 6,715,517      |       | $          | (555,851   | ) | (8 | )% |
|                                                |       |               |       |                  |       |           |       |       |       |
| Securitized mortgage borrowings                     |       | $                  | 5,691,028  |                  | $          | 6,193,984      |       | $          | (502,956   | ) | (8 | )% |
| Derivative liabilities                              |       | 232,357            |       | 273,584               |       | (41,227        | )          | (15        | )          |
| Total trust liabilities                             |       | 5,923,385          |       | 6,467,568             |       | (544,183       | )          | (8         | )          |
|                                                |       |               |       |                  |       |           |       |       |       |
| Liabilities of discontinued operations              |       | 209,865            |       | 217,241               |       | (7,376         | )          | (3         | )          |
| Other liabilities                                   |       | 17,411             |       | 21,456                |       | (4,045         | )          | (19        | )          |
| Total liabilities                                   |       | 6,150,661          |       | 6,706,265             |       | (555,604       | )          | (8         | )          |
| Total stockholders’ equity                     |       | 9,005              |       | 9,252                 |       | (247           | )          | (3         | )          |
| **Total liabilities and stockholders’ equity** |       | $                  | 6,159,666  |                  | $          | 6,715,517      |       | $          | (555,851   | ) | (8 | )% |

 

24

----

Table of Contents

 

Total assets and liabilities were $6.2 billion at March 31,2009 as compared to $6.7 billion at December 31, 2008.  The decrease in total assets and liabilitiesare primarily attributable to continued decreases in fair values related to theCompany’s trust assets and liabilities as summarized below:

 

·                  Securitized mortgage collateral decreased$388.7 million to $5.5 billion at March 31, 2009.  The decrease in securitized mortgagecollateral was the result of a decline in fair value of $72.3 million andreductions in principal balances (resulting from transfers to REO and principalpaydowns) of $316.4 million.

·                  REO within the Company’s securitizationtrusts decreased $158.2 million during the quarter to $440.9 million at March 31,2009.  Increases in REO from foreclosurestotaled $118.6 million.  Offsetting theincrease in REO from foreclosures were $192.5 million in liquidations and $84.3million in additional lower of cost or market write-downs subsequent toforeclosure.

·                  Securitized mortgage borrowings decreased$503.0 million to $5.7 billion at March 31, 2009.  The decrease in securitized mortgageborrowings was the result of a decrease in fair value of $23.4 million andreductions in outstanding balances (resulting from principal paydowns) of$479.1 million.

·                  Derivative liabilities, net decreased $41.2million during the quarter to $232.3 million at March 31, 2009.  The decrease is the result of a $16.2 millionnegative change in fair value, offset by cash payments from the securitizationtrusts of $57.4 million.

 

Sinceour consolidated and unconsolidated securitization trusts are non-recourse tothe Company, our economic risk is limited to our residual interests in thesesecuritization trusts. Therefore, we have netted trust assets and trustliabilities to present these residual interests more simply. Our residualinterests in securitizations are segregated between our single-family (SF)residential and multi-family (MF) residential portfolios and are represented bythe difference between trust assets and trust liabilities. For unconsolidatedsecuritizations, our residual interests represent the fair value of investmentsecurities available-for-sale. For consolidated securitizations, our residualinterests are represented by the fair value of securitized mortgage collateraland net realizable value of real estate owned, offset by the fair value ofsecuritized mortgage borrowings and net derivative liabilities. The followingtables present the estimated fair value of our residual interests bysecuritization vintage year and other related assumptions used to derive thesevalues at March 31, 2009:

 
| ** **                      | ** **    | **Estimated Fair Value of   Residual Interests by Vintage Year** | ** ** |
|---------------------------------|---------------|------------------------------------------------------------------|------------|
| ** **                      | ** **    | **SF**                                                           | ** ** | **MF** | ** ** | **Total** | ** ** |
|                            | 2002-2003 (1) |                                                             | 9,177      |   | 4,410 |   | 13,587 |   |
|                            |          | 2004                                                             |       | 3,962 |   | 4,426 |   | 8,388 |   |
|                            |          | 2005 (2)                                                         |       | 312 |   | 600 |   | 912 |   |
|                            |          | 2006 (2)                                                         |       | 55 |   | 1,481 |   | 1,536 |   |
|                            |          | 2007 (2)                                                         |       | — |   | 196 |   | 196 |   |
| ** **                      | ** **    | **Total**                                                        | ** ** | **13,506** | ** ** | **11,113** | ** ** | **24,619** | ** ** |
|                            |          |                                                             |       |   |   |   |   |
| Weighted avg. prepayment rate   |          | 14                                                               | %          | 19 | % | 14 | % |
| Weighted avg. discount rate (3) |          | 49                                                               | %          | 48 | % | 49 | % |

 

----

| (1) |   | 2002-2003 vintage year includes CMO 2007-A, since the majority of the  mortgages collateralized in this securitization were originated during this  period.                                             |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The estimated fair values of residual interests in vintage years 2005  through 2007 is reflective of higher estimated future losses and investor  yield requirements compared to earlier vintage years. |
| (3) |   | Discount rates were 30 percent on SF and MF prepayment penalties.                                                                                                                                       |

 

Thefair value of trust assets is essentially the fair value of trust liabilities plusthe fair value of the residual interests. The credit loss, prepayment andforward interest rate assumptions used in the fair value process were the samefor trust assets, liabilities and residual interests, as the collateralassumptions determine collateral cash flows which are used to pay the bonds andresidual interests. The only difference in assumptions was between the investoryield requirements on trust assets and liabilities (trust liabilities wereslightly less on those securitization trusts with residual interests) and thediscount rates used for residual interests. The table below reflects theestimated future credit losses and investor yield requirements for trust assetsby product (SF and MF) and securitization vintage:

 

25

----

Table of Contents

 
| ** ** | ** ** | **Estimated Future Losses (1)** | ** ** | **Investor Yield Requirement (2)** | ** ** |
|------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** ** | ** ** | **SF**                          | ** ** | **MF**                             | ** ** | **SF** | ** ** | **MF** | ** ** |
| 2002-2003  |       | 5                               | %          | 2                                  | %          | 17 | % | 27 | % |
|       | 2004       |                            | 7          | %                                  | 2          | % | 33 | % | 25 | % |
|       | 2005       |                            | 17         | %                                  | 8          | % | 49 | % | 28 | % |
|       | 2006       |                            | 29         | %                                  | 16         | % | 39 | % | 25 | % |
|       | 2007       |                            | 29         | %                                  | 15         | % | 35 | % | 31 | % |

 

----

(1)          Estimated future losses derived by dividingfuture projected losses by current unpaid principal balances.

(2)          Investor yield requirements represent theCompany’s estimate of the yield third-party market participants would requireto price our trust assets and liabilities given our prepayment, credit loss andforward interest rate assumptions.

 

Thefollowing table presents selected financial data as of the dates indicated:

 
| ** **                                                   | ** ** | **As of and Year-to-Date Ended,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**                | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                   | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2008** | ** ** |
| Prior 12-month constant prepayment rate  (CPR) - Residential |       | 11                                | %          | 11 | % | 20 | % |
| Prior 12-month constant prepayment rate  (CPR) - Commercial  |       | 11                                | %          | 10 | % | 10 | % |
| Total non-performing loans                                   |       | $                                 | 3,278,977  |   | $ | 3,040,291 |   | $ | 2,359,590 |   |
| Total non-performing loans to total loans                    |       | 21.8                              | %          | 19.4 | % | 13.3 | % |
| Total non-performing assets (1)                              |       | $                                 | 3,727,684  |   | $ | 3,646,742 |   | $ | 2,870,087 |   |
| Total non-performing assets to total assets  (2)             |       | 25.4                              | %          | 25.8 | % | 13.9 | % |

 

----

(1)          Non-performing assets include the unpaidprincipal balance of non-performing loans (loans that are 90 days or moredelinquent, including loans in foreclosure and delinquent bankruptcies) and REO

(2)          Non-performing assets to total assets ispresented as the fair value of loans 90 or more days delinquent, foreclosuresand delinquent bankruptcies plus REO as a percentage of total assets.

 

Webelieve that in order for us to generate cash flows from the long-term mortgageportfolio, we must successfully manage the following operational and marketrisks:

 

·                 liquidity risk;

 

·                 credit risk;

 

·                 interest rate risk; and

 

·                 prepayment risk.

 

*Liquidity Risk. *Refer to “Status ofOperations, Liquidity and Capital Resources.”

 

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

 

As of March 31, 2009, single-family and multi-family securitizedmortgage collateral had an original weighted average credit score of 701 and731, an original weighted average LTV ratio of 73 and 66 percent and anoriginal CLTV of 83 percent and 66 percent, respectively. The current LTV andCLTV ratios may have increased from origination date as a result of thedeterioration of the real estate market.

 

26

----

Table of Contents

 

Using historical losses, current portfolio statistics and marketconditions and available market data, the Company has estimated future loanlosses, which are included in the fair value adjustment to our securitizedmortgage collateral. While the credit performance for the loans has beenclearly far worse than the Company’s initial expectations when the loans wereoriginated, the ultimate level of realized losses will largely be influenced byevents that will likely unfold over the next several years, including theseverity of housing price declines and overall strength of the economy. Ifmarket conditions continue to deteriorate in excess of our expectations, theCompany may need to recognize additional fair value reductions to oursecuritized mortgage collateral, which may also affect the value of the relatedsecuritized mortgage borrowings.

 

We monitor our servicers to attempt to ensure that they perform lossmitigation, foreclosure and collection functions according to their servicingpractices and each securitization trust’s pooling and servicing agreement. Wehave met with the management of our servicers to assess our borrowers’ currentability to pay their mortgages and to make arrangements with selecteddelinquent borrowers which will result in the best interest of the trust,borrower and the Company, in an effort to minimize the number of mortgageswhich become seriously delinquent. When resolving delinquent mortgages,servicers are required to take timely action. The servicer is required todetermine payment collection under various circumstances, which will result inthe maximum financial benefit. This is accomplished by either working with theborrower 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 curethe delinquency within 60 days, we generally record a notice of default andcommence foreclosure proceedings, or arrange alternative terms of forbearance.If the mortgage is not reinstated within the time permitted by law forreinstatement, the property may then be sold at a foreclosure sale. At aforeclosure sale, the trusts consolidated on our balance sheet generallyacquire title to the property.

 

We use the Mortgage Bankers Association (MBA) method to definedelinquency 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 apayment was received. Delinquencies for loans 60 days late or greater,foreclosures and delinquent bankruptcies were $3.7 billion or 24.8 percent asof March 31, 2009.

 

The followingtable summarizes the unpaid principal balances of non-performing loans in ourmortgage portfolio, included in securitized mortgage collateral, loansheld-for-investment and loans held-for-sale for continuing and discontinuedoperations combined, that were 60 or more days delinquent (utilizing the MBAmethod) for the periods indicated:

 
| ** **                                              | ** ** | **At March 31,** | ** ** | ** ** | ** ** | **At December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2009**              | ** ** | **%**      | ** ** | **2008**                 | ** ** | **%**      | ** ** |
| Loans held for sale (1)                                 |       |                  |       |       |       |                     |       |       |       |
| 60 - 89 days delinquent                                 |       | $                     | 9,517      |       | 0.1        | %                        | $          | 13,694     |       | 0.1 | % |
| 90 or more days delinquent                              |       | 66,271                |       | 0.4        |       | 63,541                   |       | 0.4        |       |
| Foreclosures (2)                                        |       | 73,609                |       | 0.5        |       | 65,661                   |       | 0.4        |       |
| Total 60+ days delinquent loans  held-for-sale          |       | 149,397               |       | 1.0        |       | 142,896                  |       | 0.9        |       |
|                                                    |       |                  |       |       |       |                     |       |       |       |
| Securitized mortgage collateral                         |       |                  |       |       |       |                     |       |       |       |
| 60 - 89 days delinquent                                 |       | $                     | 435,054    |       | 2.9        | %                        | $          | 494,960    |       | 3.2 | % |
| 90 or more days delinquent                              |       | 1,459,021             |       | 9.7        |       | 1,096,366                |       | 7.0        |       |
| Foreclosures (2)                                        |       | 1,440,503             |       | 9.6        |       | 1,614,472                |       | 10.3       |       |
| Delinquent bankruptcies (3)                             |       | 239,573               |       | 1.6        |       | 200,251                  |       | 1.3        |       |
| Total 60+ days delinquent long-term  mortgage portfolio |       | 3,574,151             |       | 23.8       |       | 3,406,049                |       | 21.7       |       |
| Total 60 or more days delinquent                        |       | $                     | 3,723,548  |       | 24.8       |                     | $          | 3,548,945  |       | 22.7 |   |
| Total mortgages owned                                   |       | $                     | 15,018,922 |       |       |                     | $          | 15,666,243 |       |   |   |

 

----

(1)          Loans held-for-sale are substantially included in discontinuedoperations in the consolidated balance sheets.

(2)          Represents properties in the process of foreclosure.

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

 

The followingtable summarizes securitized mortgage collateral, loans held-for-investment,loans held-for-sale and real estate owned, that were non-performing forcontinuing and discontinued operations combined for the periods indicated(excludes 60-89 days delinquent):

 

27

----

Table of Contents

 
| ** **                                                            | ** ** | **At March 31,** | ** ** | ** ** | ** ** | **At December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **2009**              | ** ** | **%**      | ** ** | **2008**                 | ** ** | **%**      | ** ** |
| 90 or more days delinquent, foreclosures  and delinquent bankruptcies |       | $                     | 3,278,977  |       | 88         | %                        | $          | 3,040,291  |       | 83 | % |
| Real estate owned                                                     |       | 448,707               |       | 12         | %          | 606,451                  |       | 17         | %          |
| Total non-performing assets                                           |       | $                     | 3,727,684  |       | 100        | %                        | $          | 3,646,742  |       | 100 | % |

 

Non-performingassets consist of non-performing loans (mortgages that are 90 days or moredelinquent, including loans in foreclosure and delinquent bankruptcies) plusREO. It is our policy to place a mortgage on non-accrual status when it becomes90 days delinquent and to reverse from revenue any accrued interest, except forinterest income on securitized mortgage collateral when the scheduled paymentis received from the servicer. The servicers are required to advance principaland interest on loans within the securitization trusts to the extent theadvances are considered recoverable.  Asof March 31, 2009, non-performing assets (representing the fair value ofloans 90 or more days delinquent, foreclosures and delinquent bankruptcies plusREO) as a percentage of the total assets was 25 percent. At December 31,2008, non-performing assets to total assets was 26 percent.

 

Real estate owned, which consists of residential real estate acquiredin satisfaction of loans, is carried at the lower of cost or net realizablevalue less estimated selling costs. Adjustments to the carrying value of REO atthe time of foreclosure are included in the change in the fair value of nettrust assets. Changes in the Company’s estimates of net realizable valuesubsequent to the time of foreclosure and through the time of ultimatedisposition are recorded as gains or losses from real estate owned in theconsolidated statements of operations. Real estate owned, for continuing anddiscontinued operations, at March 31, 2009 decreased $157.7 million or 26percent from December 31, 2008 as a result of increased liquidationsduring the period.  Foreclosures continueto increase resulting from higher delinquencies and deterioration in theprevailing real estate market and, in part, due to borrowers’ inability toobtain replacement financing.

 

We realized a losson sale of real estate owned in the amount $43.9 million for the first quarter of 2009 as compared to a gainof $3.5 million for the first quarter of 2008. Additionally, during the first quarter of 2009, the Company recordedwritedowns of the net realizable value of the REO in the amount of $84.3 million as compared to $7.7 million for the first quarter of2008, which reflects the decline in value of the REO from the foreclosure date.

 

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

 
| ** **             | ** ** | **At March 31, 2009** | ** ** | **At December 31, 2008** | ** ** |
|------------------------|------------|----------------------------|------------|-------------------------------|------------|
| REO                    |       | $                          | 548,978    |                          | $          | 635,285 |   |
| Impairment (1)         |       | (107,114                   | )          | (35,533                       | )          |
| Ending balance         |       | $                          | 441,864    |                          | $          | 599,752 |   |
|                   |       |                       |       |                          |       |
| REO inside trusts      |       | $                          | 440,916    |                          | $          | 599,084 |   |
| REO outside trusts (2) |       | 948                        |       | 668                           |       |
| Total                  |       | $                          | 441,864    |                          | $          | 599,752 |   |

 

----

(1)         Impairment represents the cumulative writedowns of net realizable valuesubsequent to foreclosure.

(2)         Amount represents REO related to former on-balance sheetsecuritizations, which were collapsed as the result of the Company exercisingits clean-up call options. This REO is included in other assets in theaccompanying consolidated balance sheets.

 

In calculating the cash flows to assess the fair value of thesecuritized mortgage collateral, the Company estimates the future losses embeddedin our loan portfolio. In evaluating the adequacy of these losses, managementtakes many factors into consideration. For instance, a detailed analysis ofhistorical loan performance data is accumulated and reviewed. This data isanalyzed for loss performance and prepayment performance by product type,origination year and securitization issuance. The data is also broken down bycollection status. Our estimate of losses for these loans is developed byestimating both the rate of default of the loans and the amount of loss in theevent of default. The rate of default is assigned to the loans based on theirattributes (e.g., original loan-to-value, borrower credit score, documentationtype, geographic location, etc.) and collection status. The rate of default isbased on analysis of migration of loans from each aging category. The lossseverity is determined by estimating the net proceeds from the ultimate sale ofthe foreclosed property. The results of that analysis are then applied to thecurrent mortgage portfolio and an estimate is created. We believe that poolingof mortgages with similar characteristics is an appropriate methodology inwhich to evaluate the future loan losses.

 

28

----

Table of Contents

 

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

 

*Interest Rate Risk.*Refer to Item 3. “Quantitative andQualitative Disclosures About Market Risk.”

 

*Prepayment Risk*. The Company uses prepayment penalties as amethod of partially mitigating prepayment risk for those borrowers that havethe ability to refinance. Historically, mortgage industry evidence suggeststhat changes in home appreciation rates and lower payment option mortgageproducts had been a significant factor affecting borrowers refinancingdecisions. However, the recent economic downturn, lack of available credit anddecline in property values has limited borrowers’ ability to refinance.Additionally, as mortgage rates increase and housing prices decline, borrowerswill find it more difficult to refinance to obtain cheaper financing. Ifborrowers are unable to pay their mortgage payments at the adjusted rate,delinquencies may increase. The three-month average combined voluntaryprepayment rate of single-family and multi-family loans held as securitizedmortgage collateral increased to 12 percent at March 31, 2009 from 10percent as of December 31, 2008.

 

Results of Operations

 

*For the Three Months Ended March 31, 2009 compared tothe Three Months Ended March 31, 2008*

 

Condensed Statements of Operations Data

* *
| ** **                                             | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                             | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income                                        |       | $                                             | 712,649    |   | $ | 271,955 |   | $ | 440,694 |   | 162 | % |
| Interest expense                                       |       | 709,007                                       |       | 264,606 |   | 444,401 |   | 168 |   |
| Net interest income                                    |       | 3,642                                         |       | 7,349 |   | (3,707 | ) | (50 | ) |
| Total non-interest income                              |       | 10,249                                        |       | 992 |   | 9,257 |   | 933 |   |
| Total non-interest expense                             |       | 10,617                                        |       | 6,318 |   | 4,299 |   | 68 |   |
| Income tax expense                                     |       | 1,998                                         |       | 6,526 |   | (4,528 | ) | (69 | ) |
| Net earnings (loss) from continuing  operations        |       | 1,276                                         |       | (4,503 | ) | 5,779 |   | 128 |   |
| Net (loss) earnings from discontinued  operations, net |       | (2,395                                        | )          | 688 |   | (3,083 | ) | (448 | ) |
| Net loss                                               |       | $                                             | (1,119     | ) | $ | (3,815 | ) | $ | 2,696 |   | 71 | % |
|                                                   |       |                                          |       |   |   |   |   |   |   |
| Net loss per common share - basic and  diluted:        |       | $                                             | (0.15      | ) | $ | (0.99 | ) | $ | 0.84 |   | 85 | % |

 

*Net Interest Income*

 

Weearn net interest income primarily from mortgage assets which includesecuritized mortgage collateral, loans held-for-sale and investment securitiesavailable-for-sale, or collectively, “mortgage assets,” and, to a lesserextent, interest income earned on cash and cash equivalents.  Interest expense is primarily interest paidon borrowings on mortgage assets, which include securitized mortgage borrowingsand reverse repurchase agreements. Interest income and interest expense duringthe period represents the effective yield, based on the fair value of the trustassets and liabilities.

 

Thefollowing table summarizes average balance, interest and weighted average yieldon mortgage assets and borrowings, included within continuing and discontinuedoperations, for the periods indicated. Cash receipts and payments on derivative instruments hedging interestrate risk related to our securitized mortgage borrowings are not included inthe results below. These cash receipts and payments are included as a componentof the change in fair value of net trust assets.

 

29

----

Table of Contents

 
| ** **                                             | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **Average**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **Balance**                                   | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **MORTGAGE ASSETS**                                    |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities, available-for-sale              |       | $                                             | 1,421      |   | $ | 130 |   | 36.59 | % | $ | 15,144 |   | $ | 733 |   | 19.36 | % |
| Securitized mortgage collateral                        |       | 5,700,077                                     |       | 712,080 |   | 49.97 |   | 13,672,728 |   | 269,897 |   | 7.90 |   |
| Loans held-for-investment and held-for-sale  (1)       |       | 106,029                                       |       | 1,129 |   | 4.26 |   | 212,811 |   | 4,256 |   | 8.00 |   |
| Total mortgage assets\ interest income                 |       | $                                             | 5,807,527  |   | $ | 713,339 |   | 49.13 | % | $ | 13,900,683 |   | $ | 274,886 |   | 7.91 | % |
|                                                   |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| **BORROWINGS**                                         |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage borrowings                        |       | $                                             | 5,942,506  |   | $ | 708,465 |   | 47.69 | % | $ | 13,835,280 |   | $ | 261,816 |   | 7.57 | % |
| Reverse repurchase agreements                          |       | 184,907                                       |       | 1,715 |   | 3.71 |   | 285,808 |   | 3,362 |   | 4.71 |   |
| Total borrowings on mortgage assets\  interest expense |       | $                                             | 6,127,413  |   | $ | 710,180 |   | 46.36 | % | $ | 14,121,088 |   | $ | 265,178 |   | 7.51 | % |
|                                                   |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Spread (2)**                            |       |                                          |       | $ | 3,159 |   | 2.77 | % |   |   | $ | 9,708 |   | 0.40 | % |
| **Net Interest Margin (3)**                            |       |                                          |       |   |   | 0.22 | % |   |   |   |   | 0.28 | % |

 

----

(1)          The held-for-sale balance excludes the lowerof cost or market (LOCOM) write-down on the loans.

(2)          Netinterest spread on mortgage assets is calculated by subtracting the weightedaverage yield on total borrowings on mortgage assets from the weighted averageyield on total mortgage assets.

(3)          Netinterest margin on mortgage assets is calculated by subtracting interestexpense on total borrowings on mortgage assets from interest income on totalmortgage assets and then dividing by total average mortgage assets.

 

Net interest income spread for the three months ended March 31,2009 decreased $6.5 million to $3.2 million from $9.7 million for the threemonths ended March 31, 2008.  Thedecrease in net interest spread was primarily attributable to overall declinesin averages balances between periods, offset by an increase in the net interestspread from 0.40 percent for the quarter ended March 31, 2008 to 2.77 percentfor the three months ended March 31, 2009.

 

During the first quarter of 2009, the yield on mortgage assetsincreased to 49.13 percent from 7.91 percent in the comparable 2008period.  The yield on total borrowingsincreased to 46.36 percent for the first quarter of 2009 from 7.51 percent forcomparable 2008 period.  In connectionwith the fair value accounting for investment securities available-for-sale andsecuritized mortgage collateral and borrowings, interest income and interestexpense is recognized using effective yields, which are based, in part, on estimatedfair values for these instruments.  Asthe market’s expectation of future credit losses has increased between periods,market participants have demanded higher yields, which have resulted insignificant reductions in the fair values of these instruments.  These reductions in fair value havesignificantly increased the effective yields used for purposes of recognizinginterest income and interest expense on these instruments.

 

*Non-Interest Income*

 

Changes in Non-Interest Income

* *
| ** **                                               | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Change in fair value of net trust assets,  excluding REO |       | 132,930                                       |       | 3,528 |   | 129,402 |   | 3,668 | % |
| Losses from real estate owned                            |       | (128,201                                      | )          | (4,256 | ) | (123,945 | ) | (2,912 | ) |
| Non-interest income - net trust assets                   |       | 4,729                                         |       | (728 | ) | 5,457 |   | 750 |   |
| Change in fair value of trust preferred  securities      |       | 12                                            |       | (4,023 | ) | 4,035 |   | 100 |   |
| Real estate advisory fees                                |       | —                                        |       | 3,845 |   | (3,845 | ) | (100 | ) |
| Other                                                    |       | 5,508                                         |       | 1,898 |   | 3,610 |   | 190 |   |
| Total non-interest income                                |       | $                                             | 10,249     |   | $ | 992 |   | $ | 9,257 |   | 933 | % |
|                                                          |            |                                               |            |  |  |  |  |  |  |  |  |  |

 

30

----

Table of Contents

 

*Non-interest income – net trust assets.*Since ourconsolidated and unconsolidated securitization trusts are non-recourse to theCompany, our economic risk is limited to our residual interests in thesesecuritization trusts. To better understand the economics on our residualinterests in securitizations, it is necessary to consider the net effect ofchanges in fair value of net trust assets. ..  All estimated future losses areincluded in the estimate of the fair value of securitized mortgagecollateral.  Losses on REO are reportedseparately in the consolidated statement of operations.  Since REO is a nonfinancial asset, REO is theonly component of trust assets and liabilities that is not recorded at fairvalue.  Therefore, REO values at the timeof sale  or losses from further write-downsare recorded separately in the Company’s consolidated statement ofoperations.  The net effect of changes invalue related to our investment in all trust assets and liabilities is shown asnon-interest income — net trust assets. Non-interest income related to our net trust assets (residual interestsin securitizations) was $4.7 million for the three months ended March 31,2009, compared to a loss of $0.7 million in the comparable 2008 period.  The individual components of the non-interestincome from net trust assets was comprised of:

 

*Change in fair value of net trust assets, excludingREO*.  For the quarter ended March 31, 2009, theCompany recognized a $132.9 million gain from the change in fair value of nettrust assets, excluding REO.  This gain wascomprised of gains resulting from the increase in fair value of investmentsecurities-for-sale and a reduction in the fair value of securitized mortgageborrowings of $0.9 million and $697.2 million, respectively.  Offsetting these gains were reductions in thefair value of securitized mortgage collateral and derivative instruments of$549.0 million and $16.2 million, respectively.

 

Forthe quarter ended March 31, 2008, the Company recognized a $3.5 milliongain from the change in fair value of net trust assets.  This gain was comprised of gains resultingfrom the reduction in the fair value of securitized mortgage borrowings of $3.4billion.  Offsetting these gains werereductions in the fair value of investment securities, available-for-sale,securitized mortgage collateral and derivative instruments of $4.3 million,$3.2 billion and $181.8 million, respectively.

 

Theoverall reductions in fair value of the securitized mortgage collateral,securitized mortgage borrowings and derivative instruments for the three monthsended March 31, 2009 and 2008 are the result of decreases in LondonInterbank Offered Rate (LIBOR) reflected in the forward yield curve, as well asdecreases in the market prices of our mortgage-backed securities.

 

*Losses from real estate owned*.  Losses from real estate owned were $128.2million for the three months ended March 31, 2009.  This loss was comprised of a $43.9 millionloss on sale of real estate owned, coupled with $84.3 million in additionallower of cost or market adjustments during the period.  During the first quarter of 2009, lossseverities resulting from liquidations in areas where we have highconcentration of foreclosed properties (such as California and Florida) haveincreased significantly over previous periods as a result of continueddeterioration in the U.S. economy and real estate markets.  These continued declines in housing priceshave resulted in liquidations of foreclosed assets at prices below expectedlevels as wells as additional impairment write-downs of REO since foreclosure.

 

Losses from real estate owned were $4.3 million forthe three months ended March 31, 2008, comprised of $3.5 million in gainsfrom the sale of real estate owned, offset by $7.7 million in additional lowerof cost or market adjustments.

 

*Change in the fair value of trust preferredsecurities.** *Change in the fairvalue of trust preferred securities was a gain of $12 thousand for the threemonths ended March 31, 2009, compared to a loss of $4.0 million for thethree months ended March 31, 2008. Trust preferred securities are measured based upon an analysis preparedby the Company, which considers the Company’s own credit risk, including considerationof recent settlements with trust preferred debt holders, comparison to theterms and market prices of the Company’s preferred stock and negotiations of revisedterms of restructured trust preferred securities.  For the three months ended March 31,2009, the fair value of trust preferred securities remained essentiallyunchanged.  During the quarter, theCompany fully satisfied $25 million in outstanding trust preferred securitiesfor $3.75 million.  For the three monthsended March 31, 2008, the change in fair value of trust preferredsecurities was a loss of $4.0 million as a result of the change in trustpreferred securities to $45.1 million at March 31, 2008, compared to $40.9million at January 1, 2008.

 

31

----

Table of Contents

 

*Non-Interest Expense*

 

Changes in Non-Interest Expense

 
| ** **                 | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                 | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| General and administrative |       | $                                             | 4,339      |   | $ | 3,988 |   | $ | 351 |   | 9 | % |
| Personnel expense          |       | 6,278                                         |       | 2,330 |   | 3,948 |   | 169 |   |
| Total operating expense    |       | $                                             | 10,617     |   | $ | 6,318 |   | $ | 4,299 |   | 68 | % |

 

Totalnon-interest expense was $10.6 million for the three months ended March 31,2009, compared to $6.3 million for the comparable period of 2008.  The $4.3 million increase in non-interest expensewas primarily attributable to a $3.9 million increase in personnel expensesover the prior quarter, as a greater amount of the Company’s personnel wereutilized within the continuing operations versus discontinued operations.  The Company has intentionally maintainedcertain personnel for new mortgage and real estate related fee-basedbusinesses.  However, personnel costs ofboth continuing and discontinued operations decreased by $1.0 million to $6.6million for the three months ended March 31, 2009, compared to $7.6million in the comparable period of 2008, as a result of overall reductions inworkforce between periods.

 

***Results of Operations by Business Segment***

 

***Continuing Operations***

 

Condensed Statements of Operations Data

 
| ** **                                               | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income                                      |       | $                                             | 3,642      |   | $ | 7,349 |   | $ | (3,707 | ) | (50 | )% |
|                                                     |       |                                          |       |   |   |   |   |   |   |
| Change in fair value of net trust assets,  excluding REO |       | 132,930                                       |       | 3,528 |   | 129,402 |   | 3,668 |   |
| Losses from real estate owned                            |       | (128,201                                      | )          | (4,256 | ) | (123,945 | ) | (2,912 | ) |
| Non-interest income- net trust assets                    |       | 4,729                                         |       | (728 | ) | 5,457 |   | 750 |   |
| Change in fair value of trust preferred  securities      |       | 12                                            |       | (4,023 | ) | 4,035 |   | 100 |   |
| Other non-interest expense                               |       | 5,508                                         |       | 5,743 |   | (235 | ) | (4 | ) |
| Total non-interest income                                |       | 10,249                                        |       | 992 |   | 9,257 |   | 933 |   |
|                                                     |       |                                          |       |   |   |   |   |   |   |
| Non-interest expense and income taxes                    |       | 12,615                                        |       | 12,844 |   | (229 | ) | (2 | ) |
| Net earnings (loss) from continuing  operations          |       | $                                             | 1,276      |   | $ | (4,503 | ) | $ | 5,779 |   | 128 | % |

 

Net earnings for the quarter ended March 31, 2009 increased $5.8million to net earnings of $1.3 million from a net loss of $4.5 million for thecomparable period of 2008.  This increaseis primarily attributable to a $9.3 million increase in total non-interest incomeoffset by a $3.7 million decrease in net interest income.  Non-interest income from net trust assetsincreased $5.5 million to a $4.7 million gain in the first quarter of 2009,compared to a loss of $0.7 million for the comparable period in 2008.  The increase is due to the downward shift in Libor rates between periods, which hasresulted in increases in future expected net cash flows on net trust assetsbetween periods.

 

32

----

Table of Contents

 

***Discontinued Operations***

 

Condensed Statements of Operations Data

 
| ** **                            | ** ** | **For the Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest (expense) income         |       | $                                             | (413       | ) | $ | 1,671 |   | $ | (2,084 | ) | (125 | )% |
|                                  |       |                                          |       |   |   |   |   |   |   |
| Gain (loss) on sale of loans          |       | 42                                            |       | (465 | ) | 507 |   | 109 |   |
| (Provision) recovery for repurchases  |       | (756                                          | )          | 10,258 |   | (11,014 | ) | (107 | ) |
| Other loss                            |       | (1,207                                        | )          | (460 | ) | (747 | ) | (162 | ) |
| Personnel expense                     |       | (347                                          | )          | (5,293 | ) | 4,946 |   | 93 |   |
| Non-interest expense and income taxes |       | 286                                           |       | (5,023 | ) | 5,309 |   | 106 |   |
| Net loss (earnings)                   |       | $                                             | (2,395     | ) | $ | 688 |   | $ | (3,083 | ) | (448 | )% |

 

Netloss for the discontinued operations was $2.4 million for the three monthsended March 31, 2009, compared to net earnings of $0.7 million for thecomparable period in 2008.  The change isprimarily due to the following:

 

·                  decreaseof $2.1 million in net interest income

 

·                  increase of $11.0 million in provision for repurchases

 

·                  decreasein personnel expense of $4.9 million

 

·                  decrease in non-interest expense and income taxes of$5.3 million.

 

Provisionfor repurchases increased to an expense of $0.8 million for the three monthsended March 31, 2009, compared to a recovery of $10.3 million in thecomparable period of 2008.  The $11.0million decrease is the result of the settlement of $113 million in repurchaseobligations during the first quarter of 2008.

 

The$4.9 million decrease in personnel expense during the three months ended March 31,2009 over the comparable period was a result of more costs being allocated tocontinuing operations due to the discontinuation of the mortgage operations.However, personnel costs of both continuing and discontinued operationsdecreased by $1.0 million to $6.6 million for the three months ended March 31,2009, compared to $7.6 million in the comparable period of 2008, as a result ofoverall reductions in workforce between periods.

 

Asa result of the discontinuation of certain operations, non-interest expense andincome taxes decreased $5.3 million between periods primarily due to areductions of $3.0 million in occupancy expense, $1.1 million in legal andprofessional expense and $1.4 million in general and administrative expenses.

 

**ITEM 3:**                               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

** **

Forquantitative and qualitative disclosures about market risk, see Item 7A, “*Quantitative and Qualitative Disclosures About Market Risk*,”included in our annual report on Form 10-K for the year ended December 31,2008.  Our exposures to market risks havenot changed materially since December 31, 2008.

 

**ITEM 4:**                               CONTROLSAND PROCEDURES

 

**Evaluation of DisclosureControls and Procedures**

 

TheCompany maintains disclosure controls and procedures (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e))designed to ensure that information required to be disclosed in reports filedor submitted under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in its reports that it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

33

----

Table of Contents

 

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

 

**Changes in Internal Control Over Financial Reporting**

 

There has been no change in the Company’s internal control over financialreporting during the Company’s quarter ended March 31, 2009, that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**PART II.OTHER INFORMATION**

** **

**ITEM 1:**                               LEGALPROCEEDINGS

** **

TheCompany is party to litigation and claims which are normal in the course of ouroperations.

 

In the matter of Sheldon Pittleman v. Impac Mortgage Holdings, Inc. etal filed in the United States district Court, Central district Californiaagainst IMH and several of its senior officers a Third Amended Complaint wasfiled. A motion to dismiss was filed by the defendants on December 15, 2008. OnMarch 10, 2009, the court sustained the defendants’ motion to dismiss withoutleave to amend.  The Plaintiffs havefiled a Notice of Appeal of the Order Granting the Motion to Dismiss WithPrejudice and the Judgment thereon on April 7, 2009.

 

Please refer to IMH’s report on Form 10-K forthe year ended December 31, 2008 for a description of other litigation andclaims.

 

Webelieve that we have meritorious defenses to the above claims and intend todefend these claims vigorously and as such the Company believes the finaloutcome of such matters will not have a material adverse effect on ourfinancial condition or results of operations. Nevertheless, litigation isuncertain and we may not prevail in the lawsuits and can express no opinion asto their ultimate resolution. An adverse judgment in any of these matters couldhave a material adverse effect on us.

 

**ITEM 1A:**                      RISK FACTORS

** **

Our Annual Report on Form 10-K for the year ended December 31,2008 includes a detailed discussion of our risk factors.  The information presented below updates and shouldbe read in conjunction with the risk factors and information disclosed in that Form 10-K.

 

**ITEM 2:****                              ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3:****                              ****DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4:****                              ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

None

 

**ITEM 5:****                              ****OTHER INFORMATION**

 

*Impac Capital Trust #2*

 

In January 2009, Impac Mortgage Holdings, Inc.(the “Company”) fully satisfied $25 million in outstanding trust preferredsecurities for $3.75 million. In connection with the settlement, the Companyterminated the Junior Subordinated Indenture dated April 22, 2005 withWilmington Trust Company on February 18, 2009 and the Amended and RestatedTrust Agreement dated April 22, 2005 on February 19, 2009.

 

The above information included in this Item 5is provided in accordance with Item 1.02 of Form 8-K.

 

*Amendment No. 4 to 2001 Stock Plan*

 

On April 28, 2009, the Board of Directorsapproved an amendment to the  Company’s2001 Stock Option, Deferred Stock and Restricted Stock Plan requiring, inaccordance with California securities regulations and to the extent applicable,the delivery to participants of annual financial statements and a 30% limit ontotal reserved shares unless stockholder approval is obtained.

 

The above information included in this Item 5is provided in accordance with Item 5.02 of Form 8-K.

 

34

----

Table of Contents

 

*Option Cancellations*

 

On April 28 2009, the Company’s officers anddirectors gave notice of the surrender of an aggregate of 581,000 options andthe Board accepted and approved the cancellation of those listed options.  Joseph R. Tomkinson and William S. Ashmoreeach surrendered for cancellation 225,000 options, Todd R. Taylor surrenderedfor cancellation 37,500 options, and Ronald M. Morrison surrendered forcancellation 42,500 options.

 

The above information included in this Item 5is provided in accordance with Item 5.02 of Form 8-K.

 

*Exchange of Trust Preferred Securities for Notes*

 

On May 8, 2009, Impac Mortgage Holdings, Inc. (the “Company”)entered into an Exchange Agreement with Taberna Preferred Funding I, Ltd. andTaberna Preferred Funding II, Ltd. whereby the Company agreed to issue newnotes (the “New Notes”) in the aggregate principal balance of $62.0 million (asfurther described below) in exchange for (i) preferred securities in theoriginal aggregate principal amount of $26,250,000 issued by Impac CapitalTrust #3 issued pursuant to that certain Amended and Restated Trust Agreementdated as of May 20, 2005 and (ii) the preferred securities in theoriginal aggregate principal amount of $25 million issued by Impac CapitalTrust #1 issued pursuant to that certain Second Amended and Restated TrustAgreement dated as of September 26, 2005.

 

Simultaneously with the execution of the Exchange Agreement, theCompany and The Bank of New York Mellon Trust Company, National Association, astrustee entered into (i) a Junior Subordinated Indenture  pursuant to which the Company issued a JuniorSubordinated Note due 2034 in the original principal amount of $30,244,000 and (ii) aJunior Subordinated Indenture pursuant to which the Company issued a JuniorSubordinated Note due 2034 in the original principal amount of $31,756,000.

 

As a result of the exchange of the preferred securities for the NewNotes, the preferred securities and related junior subordinated notes due 2035in the aggregate principal balances of $25.8 million and $27.1 million issuedpursuant to Indentures dated September 16, 2005 and May 20, 2005 willbe cancelled and the applicable Trust Agreements and Indentures will beterminated.

 

The New Notes are payable quarterly in arrears and bear interest at afixed rate equal to 2% per for the first five years (i.e., until 2014),and then 3%, 4%, 5% and 6% per annum for each subsequent year thereafter.Starting in 2018, the interest rate will be equal to LIBOR plus 3.75% perannum.  Interest is cumulative and willaccrue from the date of original issuance.  The Notes mature on March 30, 2034. The Company may at its option redeem at par the Notes, in whole or inpart, beginning on March 30, 2010, but they may be redeemed earlierfollowing the occurrence of a “Special Event” (as defined in the Indenture) ata price equal to 107.5% of the principal amount together with accrued interest.

 

Either the trustee or the holders of at least 25% of the aggregateprincipal 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 ifan Event of Default occurs. An Event of Default generally includes a default inpayment of any interest for 30 days, default under either Indenture (i.e., across-default), a default in payment upon maturity, a default in performance,or breach of any covenant or representation, bankruptcy or insolvency of theCompany or liquidation or dissolution of the Trust.

 

The aboveinformation included in this Item 5 is provided in accordance with Items 1.01,1.02 and Item 2.03 of Form 8-K.

 

**ITEM 6:****                              ****EXHIBITS**

 

(a)         Exhibits:

 
| 10.1  |   | Amendment  No. 3 to 2001 Stock Option, Deferred Stock and Restricted Stock Plan                                                                                                        |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | Amendment  No. 4 to 2001 Stock Option, Deferred Stock and Restricted Stock Plan                                                                                                        |
| 31.1  |   | Certification  of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                        |
| 31.2  |   | Certification  of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                        |
| 32.1* |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

----

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

 

35

----

Table of Contents

 

**SIGNATURES**

 

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

 

**IMPACMORTGAGE HOLDINGS, INC.**

 
| /s/ Todd R. Taylor                                                  |   |
|---------------------------------------------------------------------|--------|
| Todd R. Taylor                                                      |   |
| Chief Financial Officer                                             |   |
| (authorized  officer of registrant and principal financial officer) |   |

 

May 11, 2009

 

36

----