Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**For the quarterly period ended March 31, 2010**

**or**

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

 

**For the transition period from           to            .**

 

**Commission File Number: 1-14100**

 

**IMPACMORTGAGE HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

**(949) 475-3600**

(Registrant’s telephone number, including area code)

 

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

 

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

 

| Large accelerated filer o      | Accelerated filer  ̈         |
|-----------------------------------------------|--------------------------------------------|
|                                          |                                       |
| Non-accelerated filer o             | Smaller reporting company x |
| (Do not check if a smaller reporting company) |                                       |

 

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

 

Therewere 7,728,146 shares of common stock outstanding as of May 17, 2010.

 

 

 

----

Table of Contents

 

**IMPAC MORTGAGE HOLDINGS, INC.**

 

**FORM 10-Q QUARTERLY REPORT**

**TABLE OF CONTENTS**

 
| ** **                                | ** **                                                                                                 | **Page** |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------|----------|
| ***PART I.  FINANCIAL INFORMATION*** |                                                                                                       |
|                                      | ** **                                                                                                 |     |
| ITEM 1.                                   | **CONSOLIDATED FINANCIAL  STATEMENTS**                                                                     |     |
|                                      | Consolidated  Balance Sheets as of March 31, 2010 (unaudited) and December 31,  2009             | 1        |
|                                      | Consolidated Statements of Operations for the Three  Months Ended March 31, 2010 and 2009 (unaudited) | 2        |
|                                      | Consolidated Statements of Cash Flows for the Three  Months Ended March 31, 2010 and 2009 (unaudited) | 3        |
|                                      | Notes to Unaudited Consolidated Financial Statements                                                       | 4        |
|                                      |                                                                                                       |     |
| ITEM  2.                                  | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**            |     |
|                                      | ** **                                                                                                 |     |
|                                      | Forward-Looking Statements                                                                                 | 18       |
|                                      | The Mortgage Banking Industry and Discussion of  Relevant Fiscal Periods                                   | 18       |
|                                      | Status of Operations, Liquidity and Capital Resources                                                      | 18       |
|                                      | Market  Conditions                                                                                         | 21       |
|                                      | Critical Accounting Policies                                                                               | 23       |
|                                      | Fair Value of Financial Instruments                                                                        | 24       |
|                                      | Interest Income and Interest Expense                                                                       | 28       |
|                                      | Income  Taxes                                                                                              | 28       |
|                                      | Selected Financial Results for the Three Months Ended  March 31, 2010                                 | 28       |
|                                      | Financial Condition and Results of Operations                                                              | 29       |
|                                      |                                                                                                       |     |
| ITEM  3.                                  | **QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                            | 39       |
|                                      | ** **                                                                                                 |     |
| ITEM 4.                                   | **CONTROLS AND  PROCEDURES**                                                                               | 39       |
|                                      | ** **                                                                                                 |     |
| ***PART II.  OTHER INFORMATION***    |                                                                                                       |
|                                      | *** ***                                                                                               |     |
| ITEM 1.                                   | **LEGAL PROCEEDINGS**                                                                                      | 40       |
|                                      | ** **                                                                                                 |     |
| ITEM 1A.                                  | **RISK FACTORS**                                                                                           | 40       |
|                                      | ** **                                                                                                 |     |
| ITEM  2.                                  | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                           | 43       |
|                                      | ** **                                                                                                 |     |
| ITEM  3.                                  | **DEFAULTS UPON  SENIOR SECURITIES**                                                                       | 43       |
|                                      | ** **                                                                                                 |     |
| ITEM 4.                                   | **RESERVED**                                                                                               | 43       |
|                                      | ** **                                                                                                 |     |
| ITEM 5.                                   | **OTHER INFORMATION**                                                                                      | 44       |
|                                      | ** **                                                                                                 |     |
| ITEM 6.                                   | **EXHIBITS**                                                                                               | 44       |
|                                      | ** **                                                                                                 |     |
|                                      | **SIGNATURES**                                                                                             | 45       |
|                                      | ** **                                                                                                 |     |
|                                      | **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,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                             |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                             |       | $                  | 23,023     |                  | $          | 25,678 |   |
| Restricted cash                                                                                                                                                                                                                                        |       | 1,253              |       | 1,253                 |       |
| Short-term  investments                                                                                                                                                                                                                                |       | —             |       | 5,002                 |       |
| Trust assets                                                                                                                                                                                                                                           |       |               |       |                  |       |
| Investment  securities available-for-sale                                                                                                                                                                                                              |       | 670                |       | 813                   |       |
| Securitized  mortgage collateral                                                                                                                                                                                                                       |       | 6,366,855          |       | 5,666,122             |       |
| Derivative  assets                                                                                                                                                                                                                                     |       | 50                 |       | 146                   |       |
| Real estate owned                                                                                                                                                                                                                                      |       | 128,411            |       | 142,364               |       |
| Total trust  assets                                                                                                                                                                                                                                    |       | 6,495,986          |       | 5,809,445             |       |
|                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Assets of  discontinued operations                                                                                                                                                                                                                     |       | 4,743              |       | 4,480                 |       |
| Other assets                                                                                                                                                                                                                                           |       | 29,418             |       | 27,054                |       |
| Total assets                                                                                                                                                                                                                                           |       | $                  | 6,554,423  |                  | $          | 5,872,912 |   |
|                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Trust  liabilities                                                                                                                                                                                                                                     |       |               |       |                  |       |
| Securitized mortgage  borrowings                                                                                                                                                                                                                       |       | $                  | 6,351,890  |                  | $          | 5,659,865 |   |
| Derivative  liabilities                                                                                                                                                                                                                                |       | 117,926            |       | 126,603               |       |
| Total trust  liabilities                                                                                                                                                                                                                               |       | 6,469,816          |       | 5,786,468             |       |
|                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Long-term debt                                                                                                                                                                                                                                         |       | 10,732             |       | 9,773                 |       |
| Note payable                                                                                                                                                                                                                                           |       | 26,836             |       | 31,060                |       |
| Liabilities of  discontinued operations                                                                                                                                                                                                                |       | 17,938             |       | 19,152                |       |
| Other  liabilities                                                                                                                                                                                                                                     |       | 7,401              |       | 11,026                |       |
| Total  liabilities                                                                                                                                                                                                                                     |       | 6,532,723          |       | 5,857,479             |       |
|                                                                                                                                                                                                                                                   |       |               |       |                  |       |
| 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% redeemable preferred stock, $0.01 par value; liquidation value  $16,639; 2,000,000 shares authorized, 665,592 noncumulative shares issued and  outstanding as of March 31, 2010 and December 31, 2009, respectively    |       | 7                  |       | 7                     |       |
| Series C  9.125% redeemable preferred stock, $0.01 par value; liquidation value  $35,127; 5,500,000 shares authorized; 1,405,086 noncumulative shares issued  and outstanding as of March 31, 2010 and December 31, 2009,  respectively |       | 14                 |       | 14                    |       |
| Common stock,  $0.01 par value; 200,000,000 shares authorized; 7,698,146 shares issued and  outstanding as of March 31, 2010 and December 31, 2009,  respectively                                                                            |       | 77                 |       | 77                    |       |
| Additional  paid-in capital                                                                                                                                                                                                                            |       | 1,076,056          |       | 1,075,707             |       |
| Net accumulated  deficit:                                                                                                                                                                                                                              |       |               |       |                  |       |
| Cumulative  dividends declared                                                                                                                                                                                                                         |       | (822,520           | )          | (822,520              | )          |
| Retained deficit                                                                                                                                                                                                                                       |       | (231,934           | )          | (237,852              | )          |
| Net accumulated  deficit                                                                                                                                                                                                                               |       | (1,054,454         | )          | (1,060,372            | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                       |       | 21,700             |       | 15,433                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                       |       | $                  | 6,554,423  |                  | $          | 5,872,912 |   |

 

See accompanying notes to consolidated financial statements.

 

1

----

Table of Contents

 

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

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                                                                                | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| * *                                                                                                                                  | * *   | * *                                  | * *   | * * | * * |
| **INTEREST  INCOME**                                                                                                                      |       | $                                         | 279,876    |   | $ | 712,649 |   |
| **INTEREST  EXPENSE**                                                                                                                     |       | 279,106                                   |       | 709,007 |   |
| Net interest  income                                                                                                                      |       | 770                                       |       | 3,642 |   |
|                                                                                                                                      |       |                                      |       |   |   |
| **NON-INTEREST  INCOME:**                                                                                                                 |       |                                      |       |   |   |
| Change in fair  value of net trust assets, excluding REO                                                                                  |       | 7,372                                     |       | 132,930 |   |
| Losses from real  estate owned                                                                                                            |       | (1,108                                    | )          | (128,201 | ) |
| Non-interest  income - net trust assets                                                                                                   |       | 6,264                                     |       | 4,729 |   |
|                                                                                                                                      |       |                                      |       |   |   |
| Change in fair  value of long-term debt                                                                                                   |       | (291                                      | )          | 12 |   |
| Mortgage and  real estate services fees                                                                                                   |       | 11,325                                    |       | 5,520 |   |
| Other                                                                                                                                     |       | 8                                         |       | (12 | ) |
| Total  non-interest income                                                                                                                |       | 17,306                                    |       | 10,249 |   |
|                                                                                                                                      |       |                                      |       |   |   |
| **NON-INTEREST  EXPENSE:**                                                                                                                |       |                                      |       |   |   |
| General and  administrative                                                                                                               |       | 4,778                                     |       | 4,339 |   |
| Personnel  expense                                                                                                                        |       | 9,681                                     |       | 6,278 |   |
| Total  non-interest expense                                                                                                               |       | 14,459                                    |       | 10,617 |   |
| Earnings from  continuing operations before income taxes                                                                                  |       | 3,617                                     |       | 3,274 |   |
| Income tax  expense from continuing operations                                                                                            |       | 85                                        |       | 1,998 |   |
| Earnings from  continuing operations                                                                                                      |       | 3,532                                     |       | 1,276 |   |
| Earnings (loss)  from discontinued operations, net of tax                                                                                 |       | 2,386                                     |       | (2,395 | ) |
| Earnings (loss)  available to common stockholders before cummulative redeemable non-declared  preferred stock dividend (Note 4)           |       | $                                         | 5,918      |   | $ | (1,119 | ) |
|                                                                                                                                      |       |                                      |       |   |   |
| Earnings (loss)  per common share - basic:                                                                                                |       |                                      |       |   |   |
| Earnings from  continuing operations                                                                                                      |       | $                                         | 0.46       |   | $ | 0.17 |   |
| Earnings (loss)  from discontinued operations                                                                                             |       | 0.31                                      |       | (0.32 | ) |
| Earnings (loss)  per share available to common stockholders before cummulative redeemable  non-declared preferred stock dividend (Note 4) |       | $                                         | 0.77       |   | $ | (0.15 | ) |
|                                                                                                                                      |       |                                      |       |   |   |
| Earnings (loss)  per common share - diluted:                                                                                              |       |                                      |       |   |   |
| Earnings from  continuing operations                                                                                                      |       | $                                         | 0.42       |   | $ | 0.17 |   |
| Earnings (loss)  from discontinued operations                                                                                             |       | 0.29                                      |       | (0.32 | ) |
| Earnings (loss)  per share available to common stockholders before cummulative redeemable  non-declared preferred stock dividend (Note 4) |       | $                                         | 0.71       |   | $ | (0.15 | ) |

 

See accompanying notes to consolidated financial statements

 

2

----

Table of Contents

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                   | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Earnings from continuing operations                                                         |       | $                                         | 3,532      |   | $ | 1,276 |   |
|                                                                                        |       |                                      |       |   |   |
| Losses from real estate owned                                                               |       | 1,108                                     |       | 128,201 |   |
| Amortization and impairment of deferred charge, net                                         |       | —                                    |       | 1,998 |   |
| Change in fair value of net trust assets, excluding REO                                     |       | (43,300                                   | )          | (190,793 | ) |
| Change in fair value of long-term debt                                                      |       | 291                                       |       | (12 | ) |
| Accretion of interest income and expense                                                    |       | 125,906                                   |       | 197,003 |   |
| Stock-based compensation                                                                    |       | 350                                       |       | 779 |   |
| Net change in other assets and liabilities                                                  |       | (11,361                                   | )          | (12,716 | ) |
| Net cash provided by (used in) operating activities of discontinued  operations             |       | 1,182                                     |       | (2,773 | ) |
| **Net cash provided by operating activities**                                               | ** ** | **77,708**                                | ** ** | **122,963** | ** ** |
| ** **                                                                                  | ** ** | ** **                                | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                   | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net change in securitized mortgage collateral                                               |       | 185,917                                   |       | 197,532 |   |
| Net change in mortgages held-for-investment                                                 |       | 6                                         |       | 390 |   |
| Purchase of premises and equipment                                                          |       | (436                                      | )          | (194 | ) |
| Maturity (purchase) of short-term investments                                               |       | 5,000                                     |       | (5,041 | ) |
| Net principal change on investment securities available-for-sale                            |       | 70                                        |       | 1,746 |   |
| Proceeds from the sale of real estate owned                                                 |       | 63,563                                    |       | 161,332 |   |
| Net cash provided by investing activities of discontinued operations                        |       | 864                                       |       | 2,657 |   |
| **Net cash provided by investing activities**                                               | ** ** | **254,984**                               | ** ** | **358,422** | ** ** |
|                                                                                        |       |                                      |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                   |       |                                      |       |   |   |
| Settlement of trust preferred securities                                                    |       | —                                    |       | (3,750 | ) |
| Principal payments on notes payable                                                         |       | (4,224                                    | )          | — |   |
| Repayment of securitized mortgage borrowings                                                |       | (329,986                                  | )          | (479,081 | ) |
| Net cash used in financing activities of discontinued operations                            |       | —                                    |       | (6,209 | ) |
| **Net cash used in financing activities**                                                   | ** ** | **(334,210**                              | **)**      | **(489,040** | **)** |
|                                                                                        |       |                                      |       |   |   |
| Net change in cash and cash equivalents                                                     |       | (1,518                                    | )          | (7,655 | ) |
| Cash and cash equivalents at beginning of period                                            |       | 25,850                                    |       | 46,228 |   |
| Cash and cash equivalents at end of period - Continuing Operations                          |       | 23,023                                    |       | 38,313 |   |
| Cash and cash equivalents at end of period - Discontinued Operations                        |       | 1,309                                     |       | 260 |   |
| Total cash and cash equivalents at end of period                                            |       | $                                         | 24,332     |   | $ | 38,573 |   |
|                                                                                        |       |                                      |       |   |   |
| **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                            |       | 41,894                                    |       | 118,851 |   |
| Net effect of consolidation of net trust assets from adoption of  accounting principle      |       | 119,631                                   |       | — |   |
| Net effect of consolidation of net trust liabilities from adoption of  accounting principle |       | (119,631                                  | )          | — |   |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

 

Table of Contents

 

**IMPACMORTGAGE HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**(dollarsin thousands, except share and per share data or as otherwise indicated)**

 

**Note 1.—Summary of Business, Significant AccountingPolicies and Legal Proceedings**

 

***Business Summary***

 

ImpacMortgage Holdings, Inc. (the Company or IMH) is a Maryland corporationincorporated in August 1995 and has the following subsidiaries: IntegratedReal Estate Service Corporation (IRES), IMH Assets Corp. (IMH Assets), ImpacWarehouse Lending Group, Inc. (IWLG) and Impac Funding Corporation (IFC).

 

TheCompany’s continuing operations include the long-term mortgage portfolio(residual interests in securitizations reflected as net trust assets andliabilities in the consolidated balance sheets) and the mortgage and realestate fee-based business activities conducted by IRES. The discontinuedoperations include the former non-conforming mortgage and retail operationsconducted by IFC and subsidiaries, and warehouse lending operations conductedby IWLG.

 

Theinformation contained throughout this document is presented on a continuingoperations 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 8-03 of Regulation S-X. Accordingly, they do not include allof the 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 months ended March 31, 2010 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2010. These interim period condensed consolidatedfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements, which are included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2009, filed withthe United States Securities 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.

 

Managementhas made a number of estimates and assumptions relating to the reporting ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period to prepare these consolidated financialstatements in conformity with GAAP. The items affected by such estimates andassumptions include the valuation of trust assets and trust liabilities, thevaluation of repurchase liabilities related to sold loans, the valuation oflong-term debt and the valuation of loans held-for-sale. Actual results coulddiffer from those estimates and assumptions.

 

***Recently Adopted Accounting Pronouncements***

 

InFebruary 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-9“Amendments to Certain Recognition and Disclosure Requirements” (ASU 2010-9).The ASU amends FASB Accounting Standards Codification Topic 855 “SubsequentEvents” to address certain implementation issues related to an entity’srequirement to perform and disclose subsequent events procedures. ASU 2010-9requires (a) SEC filers and (b) conduit debt obligors for conduitdebt securities that are traded in a public market to evaluate subsequentevents through the date the financial statements are issued. All other entitiesare required to evaluate subsequent events through the date the financialstatements are available to be issued. ASU 2010-9 exempts SEC filers fromdisclosing the date through which subsequent events have been evaluated. Forthe Company, ASU 2010-9 is effective immediately for financial statements thatare to be issued or revised. The adoption of ASU 2010-9 did not have an impacton the Company’s consolidated financial statements.

 

4

----

Table of Contents

 

InJanuary 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-6“Improving Disclosures About Fair Value Measurements” (ASU 2010-6). The ASUamends Codification Topic 820 “Fair Value Measurements and Disclosures” to addnew disclosure requirements for transfers into and out of Levels 1 and 2fair value measurements, as well as separate disclosures about purchases,sales, issuances, and settlements relating to Level 3 fair valuemeasurements. ASU 2010-6 also clarifies existing fair value disclosuresregarding the level of disaggregation and inputs and valuation techniques usedto measure fair value. ASU 2010-6 is effective for the first reporting period(including interim periods) beginning after December 15, 2009, except forthe requirement to provide the Level 3 activity of purchases, sales,issuances, and settlements on a gross basis, which will be effective for fiscalyears beginning after December 15, 2010, and for interim periods withinthose fiscal years. ASU 2010-6 only adds new disclosures requirements and as aresult, its adoption did not have an impact on the Company’s consolidatedfinancial statements.

 

InJune 2009, the FASB issued SFAS No. 166, “Accounting for Transfers ofFinancial Assets—An Amendment of FASB Statement 140” which eliminates theconcept of QSPEs and provides additional criteria transferors must use toevaluate transfers of financial assets. This standard modifies certain guidancecontained in FASB ASC 860 “Transfers and Servicing” and is adopted into theCodification through the issuance of ASU 2009-16 “Transfers and Servicing(Topic 860): Accounting for Transfers of Financial Assets.” In order todetermine whether a transfer is accounted for as a sale, the transferor mustassess whether it and all of its consolidated entities have surrendered controlof the financial assets. The standard also requires financial assets andliabilities retained from a transfer accounted for as a sale to be initiallyrecognized at fair value. The Company adopted this standard effective January 1,2010 with no impact on its consolidated financial statements.

 

InJune 2009, the FASB issued SFAS No. 167, “Amendments to FASBInterpretation No. 46(R),” which amends several key consolidationprovisions related to VIEs. This standard amends guidance contained in FASB ASC810 “Consolidation” and is adopted into the Codification through the issuanceof ASU 2009-17 “Consolidations (Topic 810): Improvements to Financial Reportingby Enterprises Involved with Variable Interest Entities.” Former QSPEs will beevaluated for consolidation based on the provisions of FASB ASC 810-10-25,which changes the approach to determining a VIE’s primary beneficiary andrequires companies to more frequently reassess whether they must consolidate ordeconsolidate VIEs. The accounting standard requires a qualitative, rather thanquantitative, analysis to determine the primary beneficiary of a VIE forconsolidation purposes. The primary beneficiary of a VIE is the enterprise thathas (a) the power to direct the VIE activities that most significantlyaffect the VIE’s economic performance, and (b) the right to receivebenefits of the VIE that could potentially be significant to the VIE or theobligation to absorb losses of the VIE that could potentially be significant tothe VIE. This standard is effective for fiscal years and interim periodsbeginning after November 15, 2009 and applies to all current QSPEs andVIEs, and all VIEs created after the effective date. In accordance with thisstandard, the Company may consolidate QSPEs and VIEs at carrying value or electthe fair value option. The Company intends to elect the fair value option, inwhich all of the financial assets and liabilities of certain designated QSPEsand VIEs would be recorded at fair value upon the adoption of this standard andcontinue to be recorded at fair value thereafter with changes in fair valuereported in earnings.

 

Inconnection with the adoption of this standard on January 1, 2010, theCompany consolidated $253.7 million of trust assets and trust liabilities atfair value.  Additionally, the Companydeconsolidated $134.1 million of trust assets and liabilities at fair value.The following is a summary of the  impactof adopting the new consolidation provisions of FASB ASC 810.

 
| ** **                                | ** ** | **(prior to adoption)** | ** ** | ** **                     | ** ** | ** **          | ** ** | **(after adoption)** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|---------------------|------------|----------------------|------------|
| ** **                                | ** ** | **December 31,**   | ** ** | **Variable Interest Entities** | ** ** | **January 1,** | ** ** |
| ** **                                | ** ** | **2009**                | ** ** | **Consolidated**               | ** ** | **Deconsolidated**  | ** ** | **2010**             | ** ** |
| Investment  securities available-for-sale |       | $                       | 813        |                           | $          | (298                | )          | $                    | —     |   | $ | 515 |   |
| Securitized  mortgage collateral          |       | 5,666,122               |       | 249,523                        |       | (132,615            | )          | 5,783,030            |       |
| REO                                       |       | 142,364                 |       | 4,499                          |       | (1,478              | )          | 145,385              |       |
| Securitized  mortgage borrowings          |       | (5,649,865              | )          | (244,683                       | )          | 134,065             |       | (5,760,483           | )          |
| Derivative  liabilities, net              |       | (126,457                | )          | (9,041                         | )          | 28                  |       | (135,470             | )          |
| Net trust assets                          |       | $                       | 32,977     |                           | —     |                | —     |                 | $          | 32,977 |   |
|                                           |            |                         |            |                                |            |                     |            |                      |            |  |  |  |  |

 

5

----

Table of Contents

 

Therewas no overall impact on stockholders’ equity as a result of the consolidationand deconsolidation of these trust assets and liabilities on January 1,2010.

 

***Income Taxes and Deferred Charge***

 

EffectiveJanuary 1, 2009, the Company revoked its election to be taxed as a REIT.As a result of revoking this election, the Company is subject to income taxesas a regular (Subchapter C) corporation.

 

TheCompany recorded income tax expense of $85 thousand and $2.0 million for thethree months ended March 31, 2010 and 2009, respectively. The income taxexpense for 2009 is primarily the result of the amount of the deferred chargeamortized and/or impaired resulting from credit losses, which does not resultin any tax liability required to be paid, as well as minor state income taxliabilities. The deferred charge represents the deferral of income tax expenseon inter-company profits that resulted from the sale of mortgages from taxablesubsidiaries to IMH in prior years. The deferred charge is included in otherassets in the accompanying consolidated balance sheets and is amortized as acomponent of income tax expense in the accompanying consolidated statement ofoperations over the estimated life of the mortgages retained in the securitizedmortgage collateral.

 

Asof December 31, 2009, the Company had estimated federal and California netoperating loss carryforwards in the amount of $838.0 million and$819.5 million, respectively, of which $276.4 million (federal)relate to discontinued operations. Federal and state net operating loss (NOL) carryforwards begin to expirein 2020 and 2013, respectively.  TheCompany recorded a full valuation allowance against the deferred tax assets asit believes that as of March 31, 2010 it is more likely than not that thedeferred tax assets will not be recoverable.

 

Duringthe fourth quarter of  2009, the Companyreceived a federal income tax refund in the amount of $8.9 million as aresult of an election to carryback a NOL five years pursuant to 2009 federallegislation, *The Worker, Homeownership, andBusiness Assistance Act of 2009*.  The Company files income tax returns in the U.S. federal and variousstate jurisdictions.  The Company is subjectto routine income tax audits in the various jurisdictions.  A subsidiary of the Company is currentlyunder examination by the Internal Revenue Service for tax year 2008.  Management believes that there are nounresolved issues or claims likely to be material to our financialposition.  As of March 31, 2010, theCompany has no material uncertain tax positions.

 

***Legal Proceedings***

 

TheCompany is party to litigation and claims which arise in the ordinary course ofbusiness.

 

On November 9, 2007,and separately on August 25, 2008, two matters were filed against IFC inOrange County in the Superior Court of California, as case nos. 07CC11612and 00110553, respectively, by Citimortgage, Inc., alleging claims forbreach of contract and damages based upon representations and warranties madein conjunction with whole loan sales. These actions seek combined damages inexcess of $7.5 million.  In April 2010,these matters were settled for a confidential amount that was included in theCompany’s repurchase reserve at March 31, 2010.

 

On June 28, 2008, amatter was filed against IFC in the Circuit Court of the Eighteenth JudicialDistrict, Dupage County in Illinois, as case no. 2008L000721, by TRMid America Plaza Corp., seeking damages for breach of contract (a leaseagreement) in excess of $1.1 million plus such amount as determinedthrough the date of judgment and payment of attorneys fees and costs.  This matter has been completed through atrial on March 26, 2010 and the Company is responsible for an immaterial amount.

 

6

----

Table of Contents

 

On October 2, 2001, acomplaint captioned Deborah Searcy, Shirley Walker, et al. v. ImpacFunding Corporation, Impac Mortgage Holdings, Inc. et. al. was filedin the Wayne County Circuit Court, State of Michigan, as a purported classaction lawsuit alleging that the defendants violated Michigan’s SecondaryMortgage Loan Act, Credit Reform Act and Consumer Protection Act.  We have recently been advised that the matterwas dismissed on July 12, 2006.

 

Pleaserefer to IMH’s report on Form 10-K for the year ended December 31,2009 for a description of other litigation and claims.

 

**Note 2.—Fair Value of Financial Instruments**

 

Theuse of fair value to measure the Company’s financial instruments is fundamentalto its consolidated financial statements and is a critical accounting estimatebecause a substantial portion of its assets and liabilities are recorded atestimated fair value.

 

Forsecuritized mortgage collateral and securitized mortgage borrowings, theunderlying Alt-A residential and commercial loans and mortgage-backedsecurities market have experienced significant declines in market activity,along with a lack of orderly transactions. The Company’s methodology toestimate fair value of these assets and liabilities include the use of internalpricing techniques such as the net present value of future expected cash flows(with observable market participant assumptions, where available) discounted ata rate of return based on the Company’s estimates of market participantrequirements. The significant assumptions utilized in these internal pricingtechniques, which are based on the characteristics of the underlyingcollateral, include estimated credit losses, estimated prepayment speeds andappropriate discount rates.

 

Thefollowing table presents the estimated fair value of financial instrumentsincluded in the consolidated financial statements as of the dates indicated:

 
| ** **                                | ** ** | **March 31, 2010**    | ** ** | **December 31, 2009**     | ** ** |
|-------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Carrying   Amount** | ** ** | **Estimated  Fair Value** | ** ** | **Carrying   Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| **Assets**                                |       |                  |       |                      |       |   |   |   |   |
| Cash and cash  equivalents                |       | $                     | 23,023     |                      | $          | 23,023 |   | $ | 25,678 |   | $ | 25,678 |   |
| Restricted cash                           |       | 1,253                 |       | 1,253                     |       | 1,253 |   | 1,253 |   |
| Short-term  investments                   |       | —                |       | —                    |       | 5,002 |   | 5,002 |   |
| Investment  securities available-for-sale |       | 670                   |       | 670                       |       | 813 |   | 813 |   |
| Securitized  mortgage collateral          |       | 6,366,855             |       | 6,366,855                 |       | 5,666,122 |   | 5,666,122 |   |
| Derivative  assets                        |       | 50                    |       | 50                        |       | 146 |   | 146 |   |
|                                      |       |                  |       |                      |       |   |   |   |   |
| **Liabilities**                           |       |                  |       |                      |       |   |   |   |   |
| Securitized  mortgage borrowings          |       | 6,351,890             |       | 6,351,890                 |       | 5,659,865 |   | 5,659,865 |   |
| Derivative  liabilities                   |       | 117,926               |       | 117,926                   |       | 126,603 |   | 126,603 |   |
| Long-term debt                            |       | 10,732                |       | 10,732                    |       | 9,773 |   | 9,773 |   |
| Note payable                              |       | 26,836                |       | 24,938                    |       | 31,060 |   | 27,789 |   |
|                                           |            |                       |            |                           |            |  |  |  |  |  |  |  |  |

 

Thefair value amounts above have been estimated by management using availablemarket information and appropriate valuation methodologies. Considerablejudgment is required to interpret market data to develop the estimates of fairvalue in both inactive and orderly markets. Accordingly, the estimatespresented are not necessarily indicative of the amounts that could be realizedin a current market exchange. The use of different market assumptions and/orestimation methodologies may have a material effect on the estimated fair valueamounts.

 

Thecarrying amount of cash and cash equivalents and restricted cash approximatesfair value. The fair value of short-term investments was determined usingquoted prices in active markets.

 

Referto *Recurring Fair Value Measurements*below for a description of the valuation methods used to determine the fairvalue of investment securities available for sale, securitized mortgagecollateral and borrowings, derivative assets and liabilities and long-termdebt.

 

7

----

Table of Contents

 

Notepayable is recorded at amortized cost. Fair value of note payable is determinedusing a discounted cash flow model which factors in expected changes ininterest rates and the Company’s own credit risk.

 

***Fair Value Hierarchy***

 

Theapplication of fair value measurements may be on a recurring or nonrecurringbasis depending on the accounting principles applicable to the specific assetor liability or whether management has elected to carry the item at itsestimated fair value.

 

FASBASC 820-10-35 specifies a hierarchy of valuation techniques based on whetherthe inputs to those techniques are observable or unobservable. Observableinputs reflect market data obtained from independent sources, whileunobservable inputs reflect the Company’s market assumptions. These two typesof inputs create the following fair value hierarchy:

 

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

 

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

 

·                  Level 3—Valuationsderived from valuation techniques in which one or more significant inputs orsignificant value drivers are unobservable.

 

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

 

Asa result of the lack of observable market data resulting from inactive markets,the Company has classified its investment securities available-for-sale,securitized mortgage collateral and borrowings, net derivative liabilities andlong-term debt as Level 3 fair value measurements at March 31, 2010and December 31, 2009. Level 3 assets and liabilities were 100% oftotal assets and total liabilities measured at estimated fair value at March 31,2010 and December 31, 2009.

 

***Recurring Fair Value Measurements***

 

We assess our financial instruments on a quarterly basis to determinethe appropriate classification within the fair value hierarchy, as defined byASC Topic 810. Transfers between fair value classifications occur when thereare changes in pricing observability levels. Transfers of financial instrumentsamong the levels occur at the beginning of the reporting period. There were nomaterial transfers between our Level 1 and Level 2 classifiedinstruments during the three months ended March 31, 2010.  The adoption of ASU 2009-17 resulted in theCompany consolidating and deconsolidating certain trust assets and liabilitiesrelating to $119.6 million in net trust assets at fair value as of January 1,2010.   The details of the effect of theadoption of this standard  areillustrated in Note 1.—Summary ofBusiness, Significant Accounting Policies and Legal Proceedings.

 

Thefollowing tables present the Company’s assets and liabilities that are measuredat estimated fair value on a recurring basis, including financial instrumentsfor which the Company has elected the fair value option at March 31, 2010and December 31, 2009, based on the fair value hierarchy:

 

8

----

Table of Contents

 
| ** **                                | ** ** | **Recurring Fair Value Measurements** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **March 31, 2010**                    | ** ** | **December 31, 2009** | ** ** |
| ** **                                | ** ** | **Level 1**                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment  securities available-for-sale |       | $                                     | —     |   | $ | — |   | $ | 670 |   | $ | — |   | $ | — |   | $ | 813 |   |
| Securitized  mortgage collateral          |       | —                                |       | — |   | 6,366,855 |   | — |   | — |   | 5,666,122 |   |
| Total assets at  fair value               |       | $                                     | —     |   | $ | — |   | $ | 6,367,525 |   | $ | — |   | $ | — |   | $ | 5,666,935 |   |
| ** **                                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Liabilities**                           | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securitized  mortgage borrowings          |       | $                                     | —     |   | $ | — |   | $ | 6,351,890 |   | $ | — |   | $ | — |   | $ | 5,659,865 |   |
| Derivative  liabilities, net (1)          |       | —                                |       | — |   | 117,876 |   | — |   | — |   | 126,457 |   |
| Long-term debt                            |       | —                                |       | — |   | 10,732 |   | — |   | — |   | 9,773 |   |
| Total  liabilities at fair value          |       | $                                     | —     |   | $ | — |   | $ | 6,480,498 |   | $ | — |   | $ | — |   | $ | 5,796,095 |   |

 

----

(1)          At March 31,2010, derivative liabilities, net included $50 thousand in derivativeassets and $117.9 million in derivative liabilities, included within trustassets and trust liabilities, respectively. At December 31, 2009,derivative liabilities, net included $146 thousand in derivative assetsand $126.6 million in derivative liabilities, included within trust assetsand trust liabilities, respectively.

 

Thefollowing tables present a reconciliation for all assets and liabilitiesmeasured at estimated fair value on a recurring basis using significantunobservable inputs (Level 3) for the three months ended March 31,2010 and 2009:

 
| ** **                                               | ** ** | **Level 3 Recurring Fair Value Measurements  For the three months ended March 31, 2010** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Investment   securities available-  for-sale**                                         | ** ** | **Securitized   mortgage   collateral** | ** ** | **Securitized   mortgage   borrowings** | ** ** | **Derivative   liabilities, net** | ** ** | **Long-term  debt** | ** ** |
| Fair value,  December 31, 2009                      |       | $                                                                                        | 813        |   | $ | 5,666,122 |   | $ | (5,659,865 | ) | $ | (126,457 | ) | $ | (9,773 | ) |
| Total gains  (losses) included in earnings:              |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Interest income  (1)                                     |       | 47                                                                                       |       | 130,229 |   | — |   | — |   | — |   |
| Interest expense  (1)                                    |       | —                                                                                   |       | — |   | (255,513 | ) | — |   | (668 | ) |
| Change in fair  value of net trust assets, excluding REO |       | 178                                                                                      |       | 681,408 |   | (656,199 | ) | (18,015 | ) | — |   |
| Change in fair  value of long-term debt                  |       | —                                                                                   |       | — |   | — |   | — |   | (291 | ) |
| Total gains  (losses) included in earnings               |       | 225                                                                                      |       | 811,637 |   | (911,712 | ) | (18,015 | ) | (959 | ) |
| Adoption of ASU  2009-17 (2)                             |       | (298                                                                                     | )          | 116,907 |   | (110,618 | ) | (9,013 | ) | — |   |
| Transfers in  and/or out of Level 3                      |       | —                                                                                   |       | — |   | — |   | — |   | — |   |
| Purchases,  issuances and settlements                    |       | (70                                                                                      | )          | (227,811 | ) | 330,305 |   | 35,609 |   | — |   |
| Fair value,  March 31, 2010                         |       | $                                                                                        | 670        |   | $ | 6,366,855 |   | $ | (6,351,890 | ) | $ | (117,876 | ) | $ | (10,732 | ) |
|                                                     |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Unrealized gains  (losses) still held (3)                |       | $                                                                                        | 368        |   | $ | (5,491,407 | ) | $ | 7,093,620 |   | $ | (119,405 | ) | $ | 60,031 |   |

 

----

(1)          Amountsprimarily represent accretion to recognize interest income and interest expenseusing effective yields based on estimated fair values for trust assets andtrust liabilities. The total net interest income, including cash received andpaid, was $770 thousand for the three months ended March 31, 2010, asreflected in the accompanying consolidated statement of operations.

(2)          Amountsrepresent the consolidation and deconsolidation of trust assets and liabilitiesas a result of the adoption of ASU 2009-17 on January 1, 2010.

(3)          Represents theamount of unrealized gains (losses) relating to assets and liabilitiesclassified as Level 3 that are still held at March 31, 2010.

 

9

----

 

 

Table of Contents

 
| ** **                                               | ** ** | **Level 3 Recurring Fair Value Measurements  For the three months ended March 31, 2009** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Investment   securities available-  for-sale**                                         | ** ** | **Securitized   mortgage   collateral** | ** ** | **Securitized   mortgage   borrowings** | ** ** | **Derivative   liabilities, net** | ** ** | **Long-term  debt** | ** ** |
| 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 (1)                                     |       | 95                                                                                       |       | 476,709 |   | — |   | — |   | — |   |
| Interest  expense (1)                                    |       | —                                                                                   |       | — |   | (673,807 | ) | — |   | — |   |
| Change  in fair value of net trust assets, excluding REO |       | 905                                                                                      |       | (549,021 | ) | 697,203 |   | (16,157 | ) | — |   |
| Change  in fair value of long-term debt                  |       | —                                                                                   |       | — |   | — |   | — |   | 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 (2)                |       | $                                                                                        | (897       | ) | $ | (8,100,780 | ) | $ | 9,256,884 |   | $ | (235,173 | ) | $ | 54,380 |   |

 

----

(1)   Amounts primarily representaccretion to recognize interest income and interest expense using effectiveyields based on estimated fair values for trust assets and trust liabilities.The total net interest income, including cash received and paid, was$3.6 million for the three months ended March 31, 2009, as reflectedin the accompanying consolidated statement of operations.

(2)   Represents the amount ofunrealized (losses) gains relating to assets and liabilities classified asLevel 3 that are still held at March 31, 2009.

 

The following tables presentthe changes in recurring fair value measurements included in net earnings(loss) for the three months ended March 31, 2010 and 2009:

 
| ** **                                | ** ** | **Recurring Fair Value Measurements  Changes in Fair Value Included in Net Earnings  For the three months ended March 31, 2010** | ** **  |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|-------------|
| ** **                                | ** ** | ** **                                                                                                                       | ** **  | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Interest Income (1)**                                                                                                          | ** **  | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Long-term Debt** | ** ** | **Total** | ** ** |
| Investment  securities available-for-sale |       | $                                                                                                                                | 47          |   | $ | — |   | $ | 178 |   | $ | — |   | $ | 225 |   |
| Securitized  mortgage collateral          |       | 130,229                                                                                                                          |        | — |   | 681,408 |   | — |   | 811,637 |   |
| Securitized  mortgage borrowings          |       | —                                                                                                                           |        | (255,513 | ) | (656,199 | ) | — |   | (911,713 | ) |
| Derivative  instruments, net              |       | —                                                                                                                           |        | — |   | (18,015 | )(2) | — |   | (18,015 | ) |
| Long-term  debt                           |       | —                                                                                                                           |        | (668 | ) | — |   | (291 | ) | (959 | ) |
| **Total**                                 | ** ** | **$**                                                                                                                            | **130,276** | ** ** | **$** | **(256,181** | **)** | **$** | **7,372** | ** ** | **$** | **(291** | **)** | **$** | **(118,825** | **)** |

 

----

(1)   Amounts primarily representaccretion to recognize interest income and interest expense using effectiveyields based on estimated fair values for trust assets and trust liabilities.The total net interest income, including cash received and paid, was$770 thousand for the three months ended March 31, 2010, as reflectedin the accompanying consolidated statement of operations.

(2)   Included in this amount is$17.9 million in changes in the fair value of derivative instruments,offset by $35.9 million in cash payments from the securitization trustsfor the three months ended March 31, 2010.

 
| ** **                                | ** ** | **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** | ** ** | **Long-term Debt** | ** ** | **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, net              |       | —                                                                                                                       |        | — |   | (16,157 | )(2) | — |   | (16,157 | ) |
| Long-term  debt                           |       | —                                                                                                                       |        | — |   | — |   | 12 |   | 12 |   |
| **Total**                                 | ** ** | **$**                                                                                                                        | **476,804** | ** ** | **$** | **(673,807** | **)** | **$** | **132,930** | ** ** | **$** | **12** | ** ** | **$** | **(64,061** | **)** |

 

----

(1)   Amounts primarily representaccretion to recognize interest income and interest expense using effectiveyields based on estimated fair values for trust assets and trust liabilities.The total net interest income, including cash received and paid, was$3.6 million for the three months ended March 31, 2009, as reflectedin the accompanying consolidated statement of operations.

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

 

10

----

Table of Contents

 

The following is adescription of the measurement techniques for items recorded at estimated fairvalue on a recurring basis.

 

*Investmentsecurities available-for-sale*—The Company elected tocarry all of its investment securities available-for-sale at fair value. Theinvestment securities consist primarily of non-investment grade mortgage-backedsecurities. The fair value of the investment securities is measured based uponthe Company’s expectation of inputs that other market participants would use.Such assumptions include judgments about the underlying collateral, prepaymentspeeds, future credit losses, forward interest rates and certain other factors.  Given the market disruption and lack ofobservable market data as of March 31, 2010 and December 31, 2009,the estimated fair value of the investment securities available-for-sale wasmeasured using significant internal expectations of market participants’assumptions.

 

*Securitizedmortgage collateral*—The Company elected to carry all of its securitizedmortgage collateral at fair value. These assets consist primarily ofnon-conforming mortgage loans securitized between 2002 and 2007.  Fair value measurements are based on theCompany’s internal models used to compute the net present value of futureexpected cash flows, with observable market participant assumptions, whereavailable. The Company’s assumptions include its expectations of inputs thatother market participants would use in pricing these assets. These assumptionsinclude judgments about the underlying collateral, prepayment speeds, estimatedfuture credit losses, forward interest rates, investor yield requirements andcertain other factors.  As of March 31,2010, securitized mortgage collateral had an unpaid principal balance of$11.9 billion, compared to an estimated fair value of $6.4 billion.The aggregate unpaid principal balance exceeds the fair value by$5.5 billion at March 31, 2010. As of March 31, 2010, the unpaid principal balance of loans90 days or more past due was $2.6 billion compared to an estimated fairvalue of $0.8 billion. The aggregate unpaid principal balances of loans90 days or more past due exceed the fair value by $1.8 billion at March 31,2010.

 

*Securitizedmortgage borrowings*—The Company elected to carry all of its securitizedmortgage borrowings at fair value. These borrowings consist of individualtranches of bonds issued by securitization trusts and are primarily backed bynon-conforming mortgage loans. Fair value measurements include the Company’sjudgments about the underlying collateral and assumptions such as prepaymentspeeds, estimated future credit losses, forward interest rates, investor yieldrequirements and certain other factors. As of March 31, 2010, securitizedmortgage borrowings had an outstanding principal balance of $13.4 billioncompared to an estimated fair value of $6.4 billion. The aggregateoutstanding principal balance exceeds the fair value by $7.0 billion at March 31,2010.

 

*Long-termdebt*—The Company elected to carry all of its long-term debt (consisting oftrust preferred securities and junior subordinated notes) at fair value. Thesesecurities are measured based upon an analysis prepared by management, whichconsidered the Company’s own credit risk, including settlements with trustpreferred debt holders and discounted cash flow analysis. As of March 31,2010, long-term debt had an unpaid principal balance of $70.5 millioncompared to an estimated fair value of $10.7 million. The aggregate unpaidprincipal balance exceeds the fair value by $59.8 million at March 31,2010.

 

*Derivativeassets and liabilities.*  Fornon-exchange traded contracts, fair value is based on the amounts that would berequired to settle the positions with the related counterparties as of thevaluation date. Valuations of derivative assets and liabilities are based onobservable market inputs, if available. To the extent observable market inputsare not available, fair values measurements include the Company’s judgmentsabout future cash flows, forward interest rates and certain other factors,including counterparty risk. Additionally, these values also take into accountthe Company’s own credit standing, to the extent applicable; thus, thevaluation of the derivative instrument includes the estimated value of the netcredit differential between the counterparties to the derivative contract.

 

***Nonrecurring Fair Value Measurements***

 

The Company is required tomeasure certain assets and liabilities at estimated fair value from time totime. These fair value measurements typically result from the application ofspecific accounting pronouncements under GAAP. The fair value measurements areconsidered nonrecurring fair value measurements under FASB ASC 820-10.

 

11

----

Table of Contents

 

The following tables presentfinancial and non-financial assets and liabilities measured using nonrecurringfair value measurements at March 31, 2010 and 2009, respectively:

 
| ** **               | ** ** | **Nonrecurring Fair Value Measurements** | ** ** | **Total Gains**                | ** ** |
|--------------------------|------------|------------------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **March 31, 2010**                       | ** ** | **For the Three Months Ended** | ** ** |
| ** **               | ** ** | **Level 1**                              | ** ** | **Level 2**                    | ** ** | **Level 3** | ** ** | **March 31, 2010 (6)** | ** ** |
| Loans  held-for-sale (1) |       | $                                        | —     |                           | $          | — |   | $ | 3,049 |   | $ | 254 |   |
| REO  (2)                 |       | —                                   |       | 95,794                         |       | — |   | 1,028 |   |
| Lease  liability (3)     |       | —                                   |       | —                         |       | (3,178 | ) | 479 |   |
| Deferred  charge (4)     |       | —                                   |       | —                         |       | 13,144 |   | — |   |
| Intangible  asset (5)    |       | —                                   |       | —                         |       | 1,000 |   | — |   |
|                          |            |                                          |            |                                |            |  |  |  |  |  |  |  |  |

 

----

(1)   Includes $653 thousand and$2.4 million of loans held-for-sale within continuing and discontinuedoperations, respectively, at March 31, 2010.

(2)   Includes $95.6 millionand $175 thousand in REO within continuing and discontinued operations,respectively, at March 31, 2010 which had additional impairment write-downssubsequent to the date of foreclosure. For the three months ended March 31,2010, the $1.0 million gain during the period included $672 thousandand $355 thousand within continuing and discontinued operations,respectively.

(3)   Amounts are included indiscontinued operations. For the three months ended March 31, 2010, theCompany recorded $485 thousand in gains resulting from changes in leaseliabilities as a result of changes in our expected minimum future leasepayments.

(4)   Amounts are included in continuingoperations. For the three months ended March 31, 2010, the Companyrecorded zero in income tax expense resulting from impairment write-downs basedon changes in estimated cash flows and lives of the related mortgages retainedin the securitized mortgage collateral.

(5)   Amount is included in otherassets in the accompanying consolidated balance sheets.

(6)   Total gains reflect gainsand losses from all nonrecurring measurements during the period.

 
| ** **              | ** ** | ** **                                                          | ** ** | **Total Gains (Losses)**         | ** ** |
|-------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Nonrecurring Fair Value Measurements  As of March 31, 2009** | ** ** | **For the Three Months   Ended** | ** ** |
| ** **              | ** ** | **Level 1**                                                         | ** ** | **Level 2**                      | ** ** | **Level 3** | ** ** | **March 31, 2009 (4)** | ** ** |
| Loans held-for-sale (1) |       | —                                                              |       | —                           |       | $ | 101,830 |   | $ | (72 | ) |
| REO (2)                 |       | —                                                              |       | 342,789                          |       | — |   | (85,658 | ) |
| Lease liability (3)     |       | —                                                              |       | —                           |       | (6,800 | ) | 58 |   |
|                         |            |                                                                     |            |                                  |            |  |  |  |  |  |  |

 

----

(1)   Includes $361 thousand and$101.4 million of loans held-for-sale within continuing and discontinuedoperations, respectively at March 31, 2009.

(2)   Includes $336.8 million and$6.0 million in REO within continuing and discontinued operations, respectivelyat March 31, 2009.  For the quarterended March 31, 2009, losses of $85.7 million related to additionalimpairment write-downs, included $84.3 million and $1.4 million withincontinuing and discontinued operations, respectively.

(3)   Amounts are included in discontinuedoperations.

(4)   Total gains (losses) reflectgains and losses from all nonrecurring measurements during the period.

 

*Loansheld-for-sale*—Loans held-for-sale for which the fair value optionwas not elected are carried at the lower of cost or market (LOCOM). Whenavailable, such measurements are based upon what secondary markets offer forportfolios with similar characteristics, and are considered Level 2measurements. If market pricing is not available, such measurements aresignificantly impacted by the Company’s expectations of other marketparticipants’ assumptions, and are considered Level 3 measurements. TheCompany utilizes internal pricing processes to estimate the fair value of loansheld-for-sale, which is based on recent loan sales and estimates of the fairvalue of the underlying collateral. Loans held-for-sale, which are primarilyincluded in assets of discontinued operations, are considered Level 3 fairvalue measurements at March 31, 2010 and December 31, 2009 based onthe lack of observable market inputs.

 

*Realestate owned*—REO consists of residential real estate acquired insatisfaction of loans. Upon foreclosure, REO is adjusted to the estimated fairvalue of the residential real estate less estimated selling and holding costs,offset by expected contractual mortgage insurance proceeds to be received, ifany. Subsequently, REO is recorded at the lower of carrying value or estimatedfair value less costs to sell. Fair values of REO are generally based onobservable market inputs, and considered Level 2 measurements at March 31,2010.

 

12

----

Table of Contents

 

*Leaseliability*—In connection with the discontinuation of our non-conformingmortgage, retail mortgage, warehouse lending and commercial operations, asignificant amount of office space that was previously occupied is no longerbeing used by the Company. The Company has subleased a significant amount ofthis office space. The Company has recorded a liability, included withindiscontinued operations, representing the present value of the minimum leasepayments over the remaining life of the lease, offset by the expected proceedsfrom sublet revenue related to this office space. This liability is based onpresent value techniques that incorporate the Company’s judgments aboutestimated sublet revenue and discount rates. Therefore, this liability isconsidered a Level 3 measurement at March 31, 2010.

 

*Deferredcharge*—Deferred charge represents the deferral of income tax expense oninter-company profits that resulted from the sale of mortgages from taxablesubsidiaries to IMH in prior years. The deferred charge is amortized as acomponent of income tax expense over the estimated life of the mortgagesretained in the securitized mortgage collateral. The Company evaluates thedeferred charge for impairment quarterly using internal estimates of estimatedcash flows and lives of the related mortgages retained in the securitized mortgagecollateral. Deferred charge is considered a Level 3 measurement at March 31,2010.

 

*Intangibleasset*—Intangible assets deemed to have an indefinite life are testedannually for impairment, or more frequently if events or changes incircumstances indicate that the asset might be impaired. Impairment losses arerecognized if carrying amount of an intangible asset exceeds its estimated fairvalue. Intangible asset is considered a Level 3 measurement at March 31,2010.

 

**Note 3.—Stock Options**

 

There were no optionsgranted during the three months ended March 31, 2010 or 2009,respectively.

 

The following tablesummarizes activity, pricing and other information for the Company’s stockoptions for the three months ended March 31, 2010:

 
| ** **                                   | ** ** | ** **    | ** ** | **Weighted-** | ** ** |
|----------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                   | ** ** | ** **    | ** ** | **Average**   | ** ** |
| ** **                                   | ** ** | **Number of** | ** ** | **Exercise**  | ** ** |
| ** **                                   | ** ** | **Shares**    | ** ** | **Price ($)** | ** ** |
| Options  outstanding at January 1, 2010 |       | 1,294,585     |       | $             | 13.47      |   |
| Options  granted                             |       | —        |       | —        |       |
| Options  exercised                           |       | —        |       | —        |       |
| Options  forfeited / cancelled               |       | 13,600        |       | —        |       |
| Options  outstanding at March 31, 2010  |       | 1,280,985     |       | $             | 13.51      |   |
| Options  exercisable at March 31, 2010  |       | 431,834       |       | $             | 37.45      |   |

 

As of March 31, 2010,there was approximately $143 thousand of total unrecognized compensationcost related to nonvested share-based compensation arrangements granted underthe Company’s stock-based incentive compensation plan. This cost is expected tobe recognized over a weighted average period of three months.

 

**Note 4.—Reconciliation of Earnings Per Share**

 

The following table presentsthe computation of basic and diluted earnings (loss) per common share includingthe dilutive effect of stock options for the three months ended March 31,2010 and 2009, respectively, and cumulative redeemable non-declared preferredstock dividend for the three months ended March 31, 2009:

 

13

----

Table of Contents

 
| ** **                                                                                                                           | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| **Numerator for basic earnings (loss) per share:**                                                                                   |       |                                      |       |   |   |
| Earnings  from continuing operations                                                                                                 |       | $                                         | 3,532      |   | $ | 1,276 |   |
| Earnings  (loss) from discontinued operations                                                                                        |       | 2,386                                     |       | (2,395 | ) |
| Earnings  (loss) per share available to common stockholders before cummulative  redeemable non-declared preferred stock dividend (1) |       | $                                         | 5,918      |   | $ | (1,119 | ) |
| **Denominator for basic earnings (loss) per share (2):**                                                                             |       |                                      |       |   |   |
| Basic  weighted average number of common shares outstanding during the period                                                        |       | 7,698                                     |       | 7,618 |   |
| **Denominator for diluted earnings per share (2):**                                                                                  |       |                                      |       |   |   |
| Diluted  weighted average number of common shares outstanding during the period                                                      |       | 7,698                                     |       | 7,618 |   |
| Net  effect of dilutive stock options                                                                                                |       | 620                                       |       | — |   |
| Diluted  weighted average common shares                                                                                              |       | 8,318                                     |       | 7,618 |   |
|                                                                                                                                 |       |                                      |       |   |   |
| Earnings  (loss) per common share - basic:                                                                                           |       |                                      |       |   |   |
| Earnings  from continuing operations                                                                                                 |       | $                                         | 0.46       |   | $ | 0.17 |   |
| Earnings  (loss) from discontinued operations                                                                                        |       | 0.31                                      |       | (0.32 | ) |
| Earnings  (loss) per share available to common stockholders before cummulative  redeemable non-declared preferred stock dividend (1) |       | $                                         | 0.77       |   | $ | (0.15 | ) |
|                                                                                                                                 |       |                                      |       |   |   |
| Earnings  (loss) per common share - diluted:                                                                                         |       |                                      |       |   |   |
| Earnings  from continuing operations                                                                                                 |       | $                                         | 0.42       |   | $ | 0.17 |   |
| Earnings  (loss) from discontinued operations                                                                                        |       | 0.29                                      |       | (0.32 | ) |
| Earnings  (loss) per share available to common stockholders before cummulative  redeemable non-declared preferred stock dividend (1) |       | $                                         | 0.71       |   | $ | (0.15 | ) |

 

----

(1)   Including the cumulativeredeemable non-declared preferred stock dividend, for the first quarter of2009, total basic and diluted loss per share available to common stockholderswas $(0.64).

(2)   Share amounts presented in thousands.

 

In June 2009, theCompany completed the Offer to Purchase and Consent Solicitation (the “Offer toPurchase”) of all of its 9.375% Series B Cumulative Redeemable PreferredStock and 9.125% Series C Cumulative Redeemable Preferred Stock (which aresometimes collectively hereinafter referred to as the Preferred Stock). Theaggregate purchase price for the Preferred Stock was $1.3 million. Inaddition, in connection with completing the Offer to Purchase the Company paid$7.4 million of  accumulated butunpaid dividends on its Preferred Stock.

 

For the three months ended March 31,2010 and 2009, stock options to purchase 459 thousand and 1.1 millionshares, respectively, were outstanding but not included in the above weightedaverage share calculations because they were anti-dilutive.

 

14

----

 

 

Table of Contents

 

**Note 5.—Segment Reporting**

 

TheCompany has three reporting segments, consisting of the long-term mortgageportfolio, mortgage and real estate services and discontinued operations. Thefollowing tables present the selected financial data and operating results byreporting segment for the periods indicated:

 
| ** **                                             | ** ** | ** **    | ** ** | **Mortgage and** | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Long-term** | ** ** | **Real Estate**  | ** ** | **Discontinued** | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **Portfolio** | ** ** | **Services**     | ** ** | **Operations**   | ** ** | **Reclassifications (1)** | ** ** | **Consolidated** | ** ** |
| **Balance  sheet items as of March 31, 2010:**    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       |       |                      | ** ** | ** **       | ** ** |
| Cash and cash  equivalents                             |       | $             | 6,208      |             | $          | 16,815           |       | $                         | 1,309      |             | $          | (1,309 | ) | 23,023 |   |
| Restricted cash                                        |       | —        |       | 1,253            |       | 544              |       | (544                      | )          | 1,253            |       |
| Securitized  mortgage collateral                       |       | 6,366,855     |       | —           |       | —           |       | —                    |       | 6,366,855        |       |
| Loans  held-for-sale                                   |       | —        |       | —           |       | 2,395            |       | (2,395                    | )          | —           |       |
| Other assets                                           |       | 151,548       |       | 7,001            |       | 495              |       | (495                      | )          | 158,549          |       |
| Total assets                                           |       | 6,524,611     |       | 25,069           |       | 4,743            |       | —                    |       | 6,554,423        |       |
| Total  liabilities                                     |       | 6,510,816     |       | 3,969            |       | 17,938           |       | —                    |       | 6,532,723        |       |
| Total  stockholders’ equity (deficit)             |       | 13,795        |       | 21,100           |       | (13,195          | )          | —                    |       | 21,700           |       |
|                                                   |       |          |       |             |       |             |       |                      |       |             |       |
| **Balance  sheet items as of December 31, 2009:** | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       |       |                      | ** ** | ** **       | ** ** |
| Cash and cash  equivalents                             |       | $             | 7,940      |             | $          | 17,738           |       | $                         | 172        |             | $          | (172 | ) | 25,678 |   |
| Restricted cash                                        |       | —        |       | 1,253            |       | 501              |       | (501                      | )          | 1,253            |       |
| Short-term investment                                  |       | 5,002         |       | —           |       | —           |       | —                    |       | 5,002            |       |
| Securitized  mortgage collateral                       |       | 5,666,122     |       | —           |       | —           |       | —                    |       | 5,666,122        |       |
| Loans  held-for-sale                                   |       | —        |       | —           |       | 2,371            |       | (2,371                    | )          | —           |       |
| Other assets                                           |       | 162,829       |       | 7,548            |       | 1,436            |       | (1,436                    | )          | 170,377          |       |
| Total assets                                           |       | 5,841,893     |       | 26,539           |       | 4,480            |       | —                    |       | 5,872,912        |       |
| Total  liabilities                                     |       | 5,831,936     |       | 6,391            |       | 19,152           |       | —                    |       | 5,857,479        |       |
| Total  stockholders’ equity (deficit)             |       | 9,957         |       | 20,148           |       | (14,672          | )          | —                    |       | 15,433           |       |

 

----

(1)          Amountsrepresent reclassifications of balances within the discontinued operationssegment to reflect balances within continuing operations as presented in theaccompanying consolidated balance sheets.

 
| ** **                                                                         | ** ** | ** **    | ** ** | **Mortgage and** | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                                                         | ** ** | **Long-term** | ** ** | **Real Estate**  | ** ** | **Discontinued** | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                                                                         | ** ** | **Portfolio** | ** ** | **Services**     | ** ** | **Operations**   | ** ** | **Reclassifications (1)** | ** ** | **Consolidated** | ** ** |
| **Statement  of Operations Items for the three months ended March 31, 2010:** |       |          |       |             |       |             |       |                      |       |             |       |
| Net interest  income                                                               |       | $             | 765        |             | $          | 5                |       | $                         | 27         |             | $          | (27 | ) | $ | 770 |   |
| Non-interest  income- net trust assets                                             |       | 6,264         |       | —           |       | —           |       | —                    |       | 6,264            |       |
| Mortgage and  real estate services fees                                            |       | —        |       | 11,325           |       | —           |       | —                    |       | 11,325           |       |
| Other non-interest  income (expense)                                               |       | (290          | )          | 7                |       | 2,085            |       | (2,085                    | )          | (283             | )          |
| Non-interest  expense and income taxes                                             |       | (4,645        | )          | (9,899           | )          | 274              |       | (274                      | )          | (14,544          | )          |
| Earnings from  continuing operations                                               |       | $             | 2,094      |             | $          | 1,438            |       |                      |       |             |       | 3,532 |   |
| Earnings from  discontinued operations, net of tax                                 |       |          |       |             |       | $                | 2,386      |                      |       |             | 2,386      |   |
| Net earnings                                                                       |       |          |       |             |       |             |       |                      |       | $                | 5,918      |   |
|                                                                               |       |          |       |             |       |             |       |                      |       |             |       |
| **Statement  of Operations Items for the three months ended March 31, 2009:** |       |          |       |             |       |             |       |                      |       |             |       |
| Net interest  income (expense)                                                     |       | $             | 3,640      |             | $          | 2                |       | $                         | (413       | )                | $          | 413 |   | $ | 3,642 |   |
| Non-interest  income- net trust assets                                             |       | 4,729         |       | —           |       | —           |       | —                    |       | 4,729            |       |
| Mortgage and  real estate services fees                                            |       | —        |       | 5,520            |       | —           |       | —                    |       | 5,520            |       |
| Other  non-interest income (expense)                                               |       | —        |       | —           |       | (1,921           | )          | 1,921                     |       | —           |       |
| Non-interest  expense and income taxes                                             |       | (8,547        | )          | (4,068           | )          | (61              | )          | 61                        |       | (12,615          | )          |
| (Loss) earnings  from continuing operations                                        |       | $             | (178       | )                | $          | 1,454            |       |                      |       |             |       | 1,276 |   |
| Loss from  discontinued operations, net of tax                                     |       |          |       |             |       | $                | (2,395     | )                         |       |             | (2,395     | ) |
| Net loss                                                                           |       |          |       |             |       |             |       |                      |       | $                | (1,119     | ) |

 

----

(1)          Amountsrepresent reclassifications of activity in the discontinued operations segmentinto loss from discontinued operations, net of tax as presented in theaccompanying consolidated statements of operations.

 

15

----

Table of Contents

 

**Note 6.—Real Estate Owned (REO)**

 

TheCompany’s REO consisted of the following:

 
| ** **          | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------------|------------|
| REO                 |       | $                        | 156,371    |                        | $          | 176,800 |   |
| Impairment (1)      |       | (27,455                  | )          | (34,080                     | )          |
| Ending balance      |       | $                        | 128,916    |                        | $          | 142,720 |   |
|                |       |                     |       |                        |       |
| REO inside trusts   |       | $                        | 128,411    |                        | $          | 142,364 |   |
| REO outside  trusts |       | 505                      |       | 356                         |       |
| Total               |       | $                        | 128,916    |                        | $          | 142,720 |   |

 

----

(1)          Impairmentrepresents the cumulative write-downs of REO to estimated net realizable valuesubsequent to foreclosure.

 

**Note 7.—Long-term Debt**

 

*Trust Preferred Securities*

 

Thefollowing table shows the remaining balance of Trust Preferred Securitiesissued as of March 31, 2010 and December 31, 2009:

 
| ** **                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Trust preferred  securities (1) |       | $                  | 8,500      |                  | $          | 8,500 |   |
| Common  securities              |       | 263                |       | 263                   |       |
| Fair value  adjustment          |       | (6,135             | )          | (6,501                | )          |
| Total                           |       | $                  | 2,628      |                  | $          | 2,262 |   |

 

----

(1)          Stated maturityof July 30, 2035. Redeemable at par at any time after July 30, 2010.Requires quarterly distributions initially at a fixed rate of 8.55% per annumthrough July 30, 2010 and thereafter at a variable rate of three-monthLIBOR plus 3.75% per annum.

 

*Junior Subordinated Notes*

 

Thefollowing table shows the remaining balance of junior subordinated notes issuedas of December 31, 2009 and 2008:

 
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Junior  subordinated notes (1) |       | $                  | 62,000     |                  | $          | 62,000 |   |
| Fair value  adjustment         |       | (53,896            | )          | (54,489               | )          |
| Total                          |       | $                  | 8,104      |                  | $          | 7,511 |   |

 

----

(1)          Stated maturityof March 2034. Requires quarterly distributions initially at a fixed rateof 2.00% through 2013 with increases of 1.00% per year through 2017. Startingin 2018, the interest rates become variable at 3-month LIBOR plus 375 basispoints.

 

**Note 8.—Note Payable**

 

InOctober 2009, the Company entered into a settlement agreement (theSettlement Agreement) with its remaining reverse repurchase facility lender tosettle the restructured financing. The Settlement Agreement retired thefacility and removed any further exposure associated with the line or the loansthat secured the line. Pursuant to the terms of the Settlement Agreement, theCompany settled the $140.0 million balance of the reverse repurchase lineby (i) transferring the loans securing the line to the lender at theirapproximate carrying values, (ii) making in a cash payment of$20.0 million and 

 

16

----

Table of Contents

 

(iii) entering into acredit agreement with the lender (the Credit Agreement) for a$33.9 million note payable. The borrowing under the Credit Agreement,which is to be paid over 18 months, bears interest at a rate of one-monthLIBOR plus 350 basis points and requires a monthly principal and interestpayment of $1.5 million. A $10.0 million principal payment was dueand paid in April 2010 as part of the Credit Agreement. At March 31,2010, the balance of the note payable was $26.8 million.

 

Theborrowing under the Credit Agreement may be prepaid by the Company at any time.Upon any sale of assets, excluding mortgage assets, issuance of debt, excludingwarehouse borrowings, or equity by the Company, then all of the proceedstherefrom are required to be applied to the borrowing under the CreditAgreement.

 

Inaddition to the restrictions above, the Credit Agreement requires the Companyto maintain certain business and financial covenants until the borrowing ispaid in full. These covenants place several restrictions on the Company and itsoperations, including limiting its ability to pay dividends, issue equityinterests, make investments over certain amounts without prior consent or enterinto any transaction to merge or consolidate. The covenants also require theCompany to maintain cash and cash equivalents of $10.0 million (based oncertain calculations) and stockholders’ equity greater than zero (based oncertain calculations). At March 31, 2010, the Company was in compliancewith these covenants.

 

**Note 9.—Subsequent Events**

 

OnApril 23, 2010, the Company issued 30,000 shares of common stock inconnection with entering into a marketing services agreement.

 

17

----

Table of Contents

 

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

 

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

 

Unlessthe context otherwise requires, the terms “Company,” “we,” “us,” and “our”refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Marylandcorporation incorporated in August 1995, and its subsidiaries, IntegratedReal Estate Service Corporation (IRES), IMH Assets Corp. (IMH Assets), ImpacWarehouse Lending Group, Inc. (IWLG) and Impac Funding Corporation (IFC).

 

**Forward-Looking Statements**

 

Thisreport on Form 10-Q contains certain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. Forward-looking statements, some ofwhich are based on various assumptions and events that are beyond our control,may be identified by reference to a future period or periods or by the use offorward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,”“should,” “could,” “seem to,” “anticipate,” or similar terms or variations onthose terms or the negative of those terms. The forward-looking statements arebased on current management expectations. Actual results may differ materiallyas a result of several factors, including, but not limited to the following:the ongoing volatility in the mortgage industry; our ability to successfullymanage through the current market environment; our ability to meet liquidityneeds from current cash flows or generate new sources of revenue; management’sability to successfully manage and grow the Company’s mortgage and real estatefee-based business activities; the ability to make interest payments; increasesin default rates or loss severities and mortgage related losses; the ability tosatisfy conditions (payment and covenants) in the note payable with a majorcreditor; our ability to obtain additional financing and the terms of anyfinancing that we do obtain; inability to effectively liquidate properties tomitigate losses; increase in loan repurchase requests and ability to adequatelysettle repurchase obligations; decreases in value of our residual intereststhat differ from our assumptions; the ability of our common stock to continuetrading in an active market; the outcome of litigation or regulatory actionspending against us or other legal contingencies; our compliance with applicablelocal, state and federal laws and regulations and other general market andeconomic conditions.

 

Fora discussion of these and other risks and uncertainties that could cause actualresults to differ from those contained in the forward-looking statements, see “RiskFactors” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s Annual Report on Form 10-K for theperiod ended December 31, 2009, the other reports we file under theSecurities and Exchange Act of 1934. This document speaks only as of its dateand we do not undertake, and specifically disclaim any obligation, to publiclyrelease the results of any revisions that may be made to any forward-lookingstatements to reflect the occurrence of anticipated or unanticipated events orcircumstances after the date of such statements.

 

**The Mortgage Banking Industry and Discussion ofRelevant Fiscal Periods**

 

Themortgage banking industry is continually vulnerable to current events thatoccur in the financial services industry. These events include changes ineconomic indicators, government regulation, interest rates, price competition,geographic shifts, disposable income, housing prices, market liquidity, marketanticipation, and customer perception, as well as others. The factors thataffect the industry change rapidly and can be unforeseeable.

 

Currentevents can diminish the relevance of “quarter over quarter” and “year-to-dateover year-to-date” comparisons of financial information. In such instances, theCompany attempts to present financial information in its Management’sDiscussion and Analysis of Financial Condition and Results of Operations thatis the most relevant to its financial information.

 

**Status of Operations, Liquidity and Capital Resources**

 

*Mortgage and real estate services*

 

In2009, the Company sought to create an integrated services platform to providesolutions to the mortgage and real estate markets. Pursuant to that, theCompany initiated various mortgage and real estate fee-based businessactivities, including loan modifications, real estate disposition, monitoringand surveillance services, real estate brokerage and lending services and titleand escrow services. The Company has been able to develop and enhance itsservice offerings in providing services to investors, servicers and individualborrowers primarily by focusing on loss mitigation and performance of our ownlong-term mortgage portfolio. These business activities have been developed aspart of a centralized platform to operate synergistically to maximize theirsuccess. The Company has established the following business activities:

 

18

----

Table of Contents

 

·                  *LossMitigation*—The Company has established loss mitigationoperations to provide outsourced services including loan modification and shortsale services to investors and institutions with distressed and delinquentresidential and multifamily mortgage portfolios. In addition, we providemodification solutions to individual borrowers by interacting with loanservicers on behalf of the borrowers to assist them in lowering the monthlymortgage payments to an affordable level allowing them to remain in their homes.The Company receives fees paid by the borrower for loan modification servicesperformed for the borrower.  During thefirst quarter of 2010, the Company established operations to market debtresolution services to consumers and assist them in entering a program thathelps them repay their unsecured debt at a discount.

 

·                  *RealEstate Owned (REO) Services*—The Company has establishedREO services operations to provide REO surveillance services to servicers andportfolio managers to assist them in maximizing loss mitigation performance inmanaging distressed mortgage portfolios and foreclosed real estate assets,along with disposition of such assets. In addition, we perform defaultsurveillance and monitoring services for residential and multifamily mortgageportfolios for investors and servicers to assist them with overall portfolioperformance.

 

·                  *RealEstate Brokerage*—The Company has established real estate brokerageoperations which primarily serves the southern California area. The primarybusiness of the real estate brokerage business is the listing and selling ofREO and pre-foreclosure properties associated with short sales.

 

·                  *MortgageLending Operations*—The Company has established mortgage lendingoperations as it seeks to re-enter the mortgage lending industry. The mortgagelending activities include earning fees for brokering loans to third-partylenders since 2008 and originating loans through our mortgage banking platformunder the “Impac” brand name. Although we originated only a minimal amount ofloans in 2009, we expect to increase our loan originations in 2010 throughretail channels, real estate broker channels and captive financing from theCompany’s portfolio of transactions, focusing on originating only loans thatare eligible for sale to HUD and other government-sponsored enterprises.

 

·                  *Titleand Escrow*—During the fourth quarter of 2009, the Companyreceived California Department of Insurance approval for our acquisition of atitle insurance agency and escrow operations. Upon the approval, the Companyacquired the operations effective December 31, 2009. The title insurancecompany services California and selected national markets to provide titleinsurance, escrow and settlement services to residential mortgage lenders, realestate agents, asset managers and REO companies in the residential marketsector of the real estate industry. We deliver services through a proprietaryintegrated technology platform.

 

Forthe three months ended March 31, 2010, mortgage and real estate servicesfees were $11.3 million primarily comprised of $4.4 million inmonitoring and surveillance fees, $3.1 million in loan modification fees,$2.5 million in title and escrow fees, and $732 thousand in servicingincome offset by expenses of $9.9 million, resulting in net earnings inmortgage and real estate services of $1.4 million. Although the Company intendsto generate more fees by providing these services to third parties in themarketplace, the revenues from these businesses have primarily been generatedfrom the Company’s long-term mortgage portfolio.  Furthermore, since these businesses arerecently established there remains uncertainty about their future success.  During the first quarter of 2010, the Companyhas begun to expand the portfolio surveillance and recovery services operationsand has entered into an agreement with a third party to assist in credit riskmanagement and portfolio surveillance services.

 

*Liquidity and capital resources*

 

Duringthe first quarter of 2010, the Company continued to fund its operationsprimarily from the cash flows generated from its long-term mortgage portfolio,which included mortgage and real estate services fees and cash flows from ourresidual interests in securitizations.

 

Theability to meet our long-term liquidity requirements is subject to severalfactors, such as generating fees from our mortgage and real estate fee-basedbusiness activities and realizing cash flows from our long-term mortgageportfolio. Our future financial performance and success are dependent in largepart upon our ability to grow our mortgage and real estate fee-based businessactivities. We believe that current cash balances, cash flows from mortgage andreal estate services fees generated from our long-term mortgage portfolio, andresidual interest cash flows from our long-term mortgage portfolio are adequatefor our current operating needs. However, we believe the mortgage and realestate services market is volatile and highly competitive. The Company’sability to successfully compete in the mortgage and real estate servicesindustry is uncertain as its business activities are recently established andmany competitors have recently entered or have established businessesdelivering similar services.  If we areunsuccessful, we may be unable to satisfy our future operating costs andliabilities, including repayment of the note payable and long-term debt.

 

19

----

Table of Contents

 

Tounderstand the financial position of the Company better, we believe it isimportant to understand the composition of the Company’s stockholders’ equity(deficit) and to which component of the business it relates. At March 31,2010, the equity (deficit) within our continuing and discontinued operations wascomprised of the following significant assets and liabilities:

 
| ** **                               | ** ** | **Condensed Components of Stockholders’ Equity (Deficit)** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                               | ** ** | **As of March 31, 2010**                                        | ** ** |
| ** **                               | ** ** | **Continuing**                                                  | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Operations**                                                  | ** ** | **Operations** | ** ** | **Total** | ** ** |
| Cash                                     |       | $                                                               | 23,023     |   | $ | 1,309 |   | $ | 24,332 |   |
| Residual  interests in securitizations   |       | 26,170                                                          |       | — |   | 26,170 |   |
| Note payable                             |       | (26,836                                                         | )          | — |   | (26,836 | ) |
| Long-term debt  ($71,120 par)            |       | (10,732                                                         | )          | — |   | (10,732 | ) |
| Repurchase  reserve                      |       | —                                                          |       | (10,749 | ) | (10,749 | ) |
| Lease liability  (1)                     |       | —                                                          |       | (3,178 | ) | (3,178 | ) |
| Deferred charge                          |       | 13,144                                                          |       | — |   | 13,144 |   |
| Net other assets  (liabilities)          |       | 10,126                                                          |       | (577 | ) | 9,549 |   |
| **Stockholders’  equity (deficit)** |       | $                                                               | 34,895     |   | $ | (13,195 | ) | $ | 21,700 |   |

 

----

(1)          Guaranteed byIMH.

 

*Continuing operations*

 

AtMarch 31, 2010, cash within our continuing operations decreased to $23.0 millionfrom $25.7 million at December 31, 2009. The primary sources of cashbetween periods were $11.3 million in fees generated from the mortgage andreal estate fee-based businesses and $5.0 million from residual interestsin securitizations. Offsetting the sources of cash were operating expensestotaling $14.5 million and $4.5 million in payments on the notepayable.

 

Sinceour consolidated and unconsolidated securitization trusts are nonrecourse, wehave netted trust assets and liabilities to present the Company’s interest inthese trusts more simply, which are considered our residual interests insecuritizations. For unconsolidated securitizations our residual interestsrepresent the fair value of investment securities available-for-sale. For consolidatedsecuritizations, our residual interests are represented by the fair value ofsecuritized mortgage collateral and real estate owned, offset by the fair valueof securitized mortgage borrowings and net derivative liabilities. We receivecash flows from our residual interests in securitizations to the extent theyare available after required distributions to bondholders and maintainingovercollateralization levels within the trusts. The estimated fair value of theresidual interests, represented by the difference in the fair value of trustassets and trust liabilities, was $26.2 million at March 31, 2010,compared to $23.0 million at December 31, 2009.

 

AtMarch 31, 2010, note payable decreased $4.2 million from December 31,2009, as a result of monthly payments of $4.5 million comprising of principaland interest.  Additionally, during April 2010,the Company made a $10.0 million principal payment that was due per the termsof the note payable.

 

AtMarch 31, 2010, we had deferred charges of $13.1 million, which isamortized as a component of income tax expense in the consolidated statementsof operations over the estimated life of the mortgages retained in thesecuritized mortgage collateral. The deferred charges represent the deferral ofincome tax expense on inter-company profits that resulted from the sale ofmortgages from taxable subsidiaries to IMH in prior years. This balance isrecorded as required by GAAP and does not have any realizable cash value.

 

Netother assets include $3.1 million in accounts receivable, $2.8 million inpremises and equipment, $1.3 million in restricted cash and$2.7 million in prepaid expenses.

 

*Discontinued operations*

 

TheCompany’s most significant liabilities in discontinued liabilities at March 31,2010 relate to its repurchase reserve and a lease liability associated with theformer non-conforming mortgage operations.

 

20

----

Table of Contents

 

Inprevious years when our discontinued operations sold loans to investors, wewere required to make normal and customary representations and warranties aboutthe loans we had previously sold to investors. Our whole loan sale agreementsgenerally required us to repurchase loans if we breached a representation orwarranty given to the loan purchaser. In addition, we also could be required torepurchase loans as a result of borrower fraud or if a payment default occurson a mortgage loan shortly after its sale. The repurchase reserve is anestimate of losses from expected repurchases, and is based, in part, on therecent settlement of claims. At March 31, 2010, the repurchase reserve was$10.7 million.

 

Inconnection 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 asignificant amount of this office space. At March 31, 2010, the Companyhad a liability of $3.2 million included within discontinued operations,representing the present value of the minimum lease payments over the remaininglife of the lease, offset by the expected proceeds from sublet revenue relatedto this office space.

 

**Market Conditions**

 

Theeconomy continued to contract during 2009 before showing modest signs ofimprovement toward the end of the year and through the first quarter of 2010.Although certain economists have declared the recession to be over or at leastabating, the current economic environment continues to adversely affect thecredit performance of the Company’s long-term mortgage portfolio. The economyremains weak, as evidenced by many key economic indicators. Notably, thenational unemployment rate increased to 10.1% in October 2009 beforedeclining to 10.0% at the end of the fourth quarter of 2009 and 9.7% throughthe first quarter of 2010.   Ashomebuilders are reluctant with concerns about further foreclosures and thelarge inventory of unsold homes, housing starts continue at relatively lowlevels.  Slower sales volume and thelarge inventory of unsold homes continue to put pressure on housingprices.  Average home prices in theUnited States at the beginning of 2010 are at similar levels to where they werein the autumn of 2003.

 

TheFederal Reserve and U.S. government have undertaken certain initiatives duringthe year to strengthen the capital of financial institutions, promote lending,and inject liquidity into the financial markets. The U.S. government has alsodeveloped programs to incent lenders and servicers to provide loanmodifications to troubled borrowers in an effort to fight the foreclosure crisis.However, mortgage delinquencies and foreclosures continued to increase, mostnotably in the prime loan markets. The level of defaults and the nationalunemployment rate remain high, which creates some uncertainty about thestrength or duration of any recovery. Additional deterioration in the overalleconomic environment, including continued weakening of the labor market, couldcause loan delinquencies to increase beyond the Company’s current expectations,resulting in additional increases in losses and reductions in fair value.

 

Webelieve there is currently no index for Alt-A mortgage products, but thegeneral direction and magnitude of price movement in the ABX 2007-1index isreflective of the disruption in the market and general price movement experiencedby the Company’s securities. The index, which does not include any IMH bonds,is being used for illustrative purposes only because it is a non-conformingsingle-family mortgage index that has traded consistently in recent years. TheABX 2007-1 Index illustrates market prices for designated groups of subprimesecurities by credit rating. The index is shown here as an illustration of theprice volatility in the general non-conforming subprime mortgage market sincethe beginning of 2007 and does not reflect actual pricing on IMH bonds, whichare backed by Alt-A loans rather than subprime loans. As shown below, the ABX2007-1 Index displays dramatic declines in the value of such securities.

 

21

----

 

 

Table of Contents

 

 

*Effects of Recent Market Activity*

 

As a result of the Company’sinability to sell or securitize non-conforming loans during the second half of2007, the Company discontinued funding loans and discontinued substantially allof its mortgage (non-conforming single-family loans and commercial loans, whichconsist primarily of multifamily loans) and warehouse lending operations.Market conditions deteriorated in 2008 and continued to be depressed for mostof 2009 before recovering slightly towards the end of 2009 and early 2010. As aresult, the Company’s investment in securitized non-conforming loans (residualinterests) has been affected by the increase in estimated defaults andseverities, evidenced by significant home price depreciation. The decline insingle-family home prices can be seen in the chart below.

 

22

----

Table of Contents

 

 

As depicted in the chartabove, average home prices peaked in June 2006 at 226.29 and continuedtheir dramatic decline through much of the first half of 2009, while increasingslightly over the remaining half of the year. The Standard & Poor’sCase-Shiller 10-City Composite Home Price Index (the Index) for March 2010was 156.82 (with the base of 100.00 for January 2000) and hasn’t been thislow since October 2003 when the Index was 157.71. Beginning in the thirdquarter of 2007, the Company began to believe that there was a correlationbetween the borrowers’ perceived equity in their homes and defaults. Theoriginal loan-to-value (defined as loan amount as a percentage of collateralvalue, “LTV”) and original combined loan-to-value (defined as first lien plustotal subordinate liens to collateral value, “CLTV”) ratios of single-familymortgages remaining in the Company’s securitized mortgage collateral as of March 31,2010 was 72% and 80%, respectively. The current LTV and CLTV ratios likelyincreased from origination date as a result of the deterioration in the realestate market. We believe that home prices that have declined below theborrower’s original purchase price have a higher risk of default within ourportfolio. Based on the Index, home prices have declined 31% through March 2010from the 2006 peak. Further, we believe the home prices in general withinCalifornia and Florida, the states with the highest concentration of ourmortgages, have declined even further than the Index. We have considered thedeterioration in home prices and its impact on our loss severities, which are aprimary assumption used in the valuation of securitized mortgage collateral andborrowings.

 

**Critical Accounting Policies**

 

We define criticalaccounting policies as those that are important to the portrayal of ourfinancial condition and results of operations. Our critical accounting policiesrequire 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. In determiningwhich accounting policies meet this definition, we considered our policies withrespect to the valuation of our assets and liabilities and estimates andassumptions used in determining those valuations. We believe the most criticalaccounting issues that require the most complex and difficult judgments andthat are particularly susceptible to significant change to our financialcondition and results of operations include the following:

 

23

----

Table of Contents

 

·                  fair value offinancial instruments;

 

·                  variableinterest entities and transfers of financial assets and liabilities;

 

·                  net realizablevalue of REO;

 

·                  lower of costor market of loans held-for-sale;

 

·                  repurchasereserve; and

 

·                  interest incomeand interest expense.

 

**Fair Value of FinancialInstruments**

 

On January 1, 2008, theCompany elected to apply fair value accounting to certain financial instruments(certain trust assets, trust liabilities and trust preferred securities).Financial Accounting Standards Board—Accounting Standards Codification (FASBASC) 820-10-35 defines fair value, establishes a framework for measuring fairvalue and outlines a fair value hierarchy based on the inputs to valuationtechniques used to measure fair value. Fair value is defined as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date (alsoreferred to as an exit price). Fair value measurements are categorized into athree-level hierarchy based on the extent to which the measurement relies onobservable market inputs in measuring fair value. Level 1, which is thehighest priority in the fair value hierarchy, is based on unadjusted quotedprices in active markets for identical assets or liabilities. Level 2 isbased on observable market-based inputs, other than quoted prices, in activemarkets for identical assets or liabilities. Level 3, which is the lowestpriority in the fair value hierarchy, is based on unobservable inputs. Assetsand liabilities are classified within this hierarchy in their entirety based onthe lowest level of any input that is significant to the fair valuemeasurement.

 

The use of fair value tomeasure our financial instruments is fundamental to our financial statementsand is a critical accounting estimate because a substantial portion of ourassets and liabilities are recorded at estimated fair value. Financialinstruments classified as Level 3 are generally based on unobservableinputs, and the process to determine fair value is generally more subjectiveand involves a high degree of management judgment and assumptions. Theseassumptions may have a significant effect on our estimates of fair value, andthe use of different assumptions, as well as changes in market conditions andinterest rates, could have a material effect on our results of operations orfinancial condition.

 

In conjunction with electingto apply fair value accounting to these financial instruments, the Companyadopted FASB ASC 825-10-25 as of January 1, 2008. FASB ASC 825-10-25provides an option on an instrument-by-instrument basis for most financialassets and liabilities to be reported at fair value with changes in fair valuereported in earnings. After the initial adoption, the election is made at theacquisition of a financial asset, financial liability, or a firm commitment andit may not be revoked. Management believes that this adoption provides anopportunity to mitigate volatility in reported earnings and provides a betterrepresentation of the economics of the trust assets and liabilities.

 

As a result of the lack ofobservable market data resulting from inactive markets, the Company hasclassified all its recurring basis assets and liabilities including, investmentsecurities available-for-sale, securitized mortgage collateral and borrowings,net derivative liabilities and long-term debt as Level 3 fair valuemeasurements at March 31, 2010 and December 31, 2009. Level 3assets and liabilities were 100% of total assets and liabilities at fairvalue.  REO is classified Level 2 andfair value is measured on a nonrecurring basis.

 

Recurring basis

 

*Investmentsecurities available-for-sale*—The Company elected tocarry all of its investment securities available-for-sale at fair value. Theinvestment securities 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, future credit losses, forward interest rates and certain otherfactors.  Given the market disruption andlack of observable market data as of March 31, 2010 and December 31,2009, the fair value of the investment securities available-for-sale weremeasured using significant internal expectations of market participants’assumptions.

 

*Securitizedmortgage collateral*—The Company elected to carry all of its securitizedmortgage collateral at fair value. These assets consist primarily ofnon-conforming mortgage loans securitized between 2002 and 2007. Fair valuemeasurements are based on the Company’s internal models used to compute the netpresent value of future expected cash flows, with observable market participantassumptions, where available. The Company’s assumptions include our expectationsof inputs that other market participants would use in pricing these assets.These assumptions include our judgments about the underlying collateral,prepayment speeds, estimated future credit losses, forward interest rates,investor yield requirements and certain other factors.

 

24

----

Table of Contents

 

*Securitizedmortgage borrowings*—The Company elected to carry all of its securitizedmortgage borrowings at fair value. These borrowings consist of individualtranches of bonds issued by securitization trusts and are primarily backed bynon-conforming mortgage loans. Fair value measurements include our judgmentsabout the underlying collateral and assumptions such as prepayment speeds,estimated future credit losses, forward interest rates, investor yieldrequirements and certain other factors.

 

Financial Guaranty InsuranceCompany (FGIC) provides bond guaranty insurance for three of the Company’sconsolidated securitizations. In determining the fair value of securitizedmortgage borrowings, the Company excludes consideration of bond guarantyinsurance payments in accordance with FASB ASC 820-10-35-18A. In November 2009,the Company was notified that FGIC had been ordered by the New York InsuranceDepartment to suspend paying any and all claims based on its financialcondition. As the related securitization trusts are nonrecourse to the Company,it is not required to replace or otherwise settle bond guaranty insurancewithin the consolidated trusts. However, other insurance companies have issuedbond guaranty insurance policies for certain securities within the Company’ssecuritized mortgage borrowings. Additional suspensions on the payment ofclaims may arise, which could materially affect industry-wide market prices forcollateralized mortgage bonds.

 

*Long-termdebt*—The Company elected to carry all of its long-term debt (consisting oftrust preferred securities and junior subordinated notes) at fair value. Thesesecurities were measured based upon an analysis prepared by management, whichconsidered the Company’s own credit risk, including settlements with trustpreferred debt holders and discounted cash flow analysis.

 

*Derivativeassets and liabilities*—For non-exchange traded contracts, fairvalue is based on the amounts that would be required to settle the positionswith the related counterparties as of the valuation date. Valuations ofderivative assets and liabilities are based on observable market inputs, ifavailable. To the extent observable market inputs are not available, fairvalues 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 the valuation of the derivativeinstrument includes the estimated value of the net credit differential betweenthe counterparties to the derivative contract.

 

The Company’s primaryobjective is to limit the exposure to the variability in future cash flowsattributable to the variability of one-month LIBOR, which is the underlyingindex of adjustable rate securitized mortgage borrowings. 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.

 

To mitigate exposure to theeffect of changing interest rates on cash flows on securitized mortgage borrowings,the Company purchased derivative instruments primarily in the form of interestrate swap agreements (swaps) and, to a lesser extent, interest rate capagreements (caps) and interest rate floor agreements (floors). Due to theclosure of the non-conforming mortgage operations, the Company has not enteredinto a new derivative instrument since the third quarter of 2007. However, theCompany has $117.9 million in net derivative liabilities outstanding as ofMarch 31, 2010.

 

On September 15, 2008,Lehman Brothers Holdings Inc. (LBHI) filed a petition for protection underChapter 11 of the U.S. Bankruptcy Code. As of that date, LBHI, throughaffiliated companies, was an interest rate swap counterparty to several of theCompany’s CMO and REMIC securitizations. At March 31, 2010, the estimatedvalue of derivative liabilities to LBHI, through its affiliated companies wasapproximately $35.0 million and is included in derivative liabilities inthe consolidated balance sheet. As the related securitization trusts arenonrecourse to the Company, the Company is not required to replace or otherwisesettle any derivative positions affected by counterparty default within theconsolidated trusts.

 

Nonrecurring basis

 

The Company is required tomeasure certain assets and liabilities at estimated fair value from time totime. These fair value measurements typically result from the application ofspecific accounting pronouncements under GAAP. The fair value measurements areconsidered nonrecurring fair value measurements under FASB ASC 820-10.

 

25

----

Table of Contents

 

*Loansheld-for-sale*—Loans held-for-sale for which the fair value optionwas not elected are carried at lower of cost or market (LOCOM). When available,such measurements are based upon what secondary markets offer for portfolios ofloans with similar characteristics, and are considered Level 2measurements. If market pricing is not available, such measurements aresignificantly impacted by the Company’s expectations of other marketparticipants’ assumptions, and are considered Level 3 measurements. TheCompany utilizes internal pricing processes to estimate the fair value of loansheld-for-sale, which is based on recent loan sales and estimates of the fairvalue of the underlying collateral. Loans held-for-sale, which are primarilyincluded in assets of discontinued operations, are considered Level 3 fairvalue measurements at March 31, 2010 and December 31, 2009, based onthe lack of observable market inputs.

 

*Realestate owned*—REO consists of residential real estate acquired insatisfaction of loans. Upon foreclosure, REO is adjusted to the estimated fairvalue of the residential real estate less estimated selling and holding costs,offset by expected contractual mortgage insurance proceeds to be received, ifany. Subsequently, REO is recorded at the lower of carrying value or estimatedfair value less costs to sell. Fair values of REO are generally based onobservable market inputs, and considered Level 2 measurements at March 31,2010 and December 31, 2009.

 

*Leaseliability*—In connection with the discontinuation of ournon-conforming mortgage, retail mortgage, warehouse lending and commercial operations,a significant amount of office space that was previously occupied is no longerbeing used by the Company. The Company has subleased a significant amount ofthis office space. The Company has recorded a liability, included withindiscontinued operations, representing the present value of the minimum leasepayments over the remaining life of the lease, offset by the expected proceedsfrom sublet revenue related to this office space. This liability is based onpresent value techniques that incorporate the Company’s judgments aboutestimated sublet revenue and discount rates. This lease liability is considereda Level 3 measurement at March 31, 2010 and December 31, 2009.

 

*Deferredcharge*—Deferred charge represents the deferral of income tax expense oninter-company profits that resulted from the sale of mortgages from taxablesubsidiaries to IMH in prior years. The deferred charge is amortized as acomponent of income tax expense over the estimated life of the mortgagesretained in the securitized mortgage collateral. The Company evaluates thedeferred charge for impairment quarterly using internal estimates of estimatedcash flows and lives of the related mortgages retained in the securitizedmortgage collateral. The deferred charge is considered a Level 3measurement at March 31, 2010 and December 31, 2009.

 

*Intangibleasset*—Intangible assets deemed to have an indefinite life are testedannually for impairment, or more frequently if events or changes incircumstances indicate that the asset might be impaired. Impairment losses arerecognized if carrying amount of an intangible asset exceeds its estimated fairvalue. The intangible asset is considered a Level 3 measurement at March 31,2010 and December 31, 2009.

 

We continue to refine ourvaluation methodologies as markets and products develop and the pricing forcertain products becomes more or less transparent. While we believe ourvaluation methods are appropriate and consistent with those of other marketparticipants, the use of different methodologies or assumptions to determinethe fair value of certain financial instruments could result in a materiallydifferent estimate of fair value as of the reporting date.

 

***Variable Interest Entities andTransfers of Financial Assets and Liabilities***

 

Historically, the Companysecuritized mortgages in the form of collateralized mortgage obligations (CMO),which were consolidated and accounted for as secured borrowings for financialstatement purposes. The Company also securitized mortgages in the form of real estatemortgage investment conduits (REMICs), which were either consolidated orunconsolidated depending on the design of the securitization structure. CMO andcertain REMIC securitizations were designed so that the transferee(securitization trust) was not a qualifying special purpose entity (QSPE), andtherefore the Company consolidated the variable interest entity (VIE) as it wasthe primary beneficiary of the sole residual interest in each securitizationtrust. Generally, this was achieved by including terms in the securitizationagreements that gave the Company the ability to unilaterally cause thesecuritization trust to return specific mortgages, other than through aclean-up call. Amounts consolidated are included in trust assets andliabilities as securitized mortgage collateral, real estate owned, derivativeassets, securitized mortgage borrowings and derivative liabilities in theaccompanying consolidated balance sheets.

 

Our estimate of the fairvalue of our net retained residual interests in unconsolidated securitizations,which are included in investment securities available-for-sale in theconsolidated balance sheets, requires us to exercise significant judgment as tothe timing and amount of future cash flows from the residual interests. We areexposed to credit risk from the underlying mortgage loans in unconsolidatedsecuritizations to the extent we retain subordinated interests. Changes inexpected cash flows resulting from changes in expected net credit losses willimpact the value of our subordinated retained interests and those changes arerecorded as a component of change in fair value of net trust assets.

 

26

----

Table of Contents

 

In contrast, forsecuritizations that are structured as secured borrowings, we recognizeinterest income over the life of the securitized mortgage collateral andinterest expense incurred for the securitized mortgage borrowings. We refer tothese transactions as consolidated securitizations. The mortgage loanscollateralizing the debt securities for these financings are included insecuritized mortgage collateral and the debt securities payable to investors inthese securitizations are included in securitized mortgage borrowings in ourconsolidated balance sheet.

 

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

 

Effective January 1,2010, former QSPEs are evaluated for consolidation based on the provisions ofFASB ASC 810-10-25, which eliminates the concept of a QSPE and changes theapproach to determining a securitization trust’s primary beneficiary. Refer toNote 1.—*****Summary of Business, Significant Accounting Policies and LegalProceedings* in the notes to the consolidated financial statementsfor a discussion of the impact of this new standard on the Company’sconsolidated balance sheet at January 1, 2010.

*** ***

***Net Realizable Value of REO***

 

The Company considers thenet realizable value (NRV) of its REO properties in evaluating REO losses. Whenreal estate is acquired in settlement of loans, or other real estate owned, themortgage is written-down to an estimated fair value less estimated sellingcosts and including mortgage insurance proceeds expected to be received.Subsequent changes in the NRV of the REO is reflected as a write-down of REO andresults in additional losses.

 

***Lower of Cost or Market of LoansHeld-for-Sale***

 

Loans held-for-sale arecarried at the lower of amortized cost or fair value. Traditionally, we haveestimated fair value by evaluating a variety of market indicators includingrecent trades and outstanding commitments. In response to diminished secondarymarket activity for loan sales, the Company also evaluates recent liquidationvalues of underlying collateral in estimating fair values. We apply fair valueestimates to these stratifications to arrive at a valuation allowance which isapplied against our carrying amount resulting in a net fair value estimate formortgage loans held for sale.

 

***Repurchase Reserve***

 

When we have sold loansthrough whole loan sales we were required to make normal and customaryrepresentations and warranties about the loans to the purchaser. Our whole loansale agreements generally required us to repurchase loans if we breach arepresentation or warranty given to the loan purchaser. In addition, we may berequired to repurchase loans as a result of borrower fraud or if a paymentdefault occurs on a mortgage loan shortly after its sale.

 

Investors have requested theCompany to repurchase loans or to indemnify them against losses on certainloans which the investors believe either do not comply with applicablerepresentations or warranties or defaulted shortly after its purchase. Uponcompletion of its own investigation regarding the investor claims, the Companyrepurchases or provides indemnification on certain loans, as appropriate. TheCompany maintains a liability for expected losses on dispositions of loansexpected to be repurchased or on which indemnification is expected to beprovided and regularly evaluates the adequacy of this repurchase liabilitybased on trends in repurchase and indemnification requests, actual lossexperience, settlement negotiations, and other relevant factors includingeconomic conditions.

 

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

 

27

----

Table of Contents

 

**Interest Income andInterest Expense**

 

Interest income onsecuritized mortgage collateral and interest expense on securitized mortgageborrowings are recorded using the effective yield for the period based on theprevious quarter-end’s estimated fair value.

 

**Income Taxes**

 

While the Company hasgenerated significant net operating loss carryforwards in recent periods, we donot expect to generate sufficient taxable income in future periods to be ableto realize these tax benefits. Therefore, we have recorded a full valuationallowance against the net deferred tax assets as we believe that as of March 31,2010 it is more likely than not that the net deferred tax assets will not berecoverable.

 

**Selected Financial Results for the Three Months Ended March 31,2010**

 

*Continuing Operations*

 

·*                 *Earnings fromcontinuing operations of $3.5 million for the first quarter of 2010,compared to $1.3 million for the comparable 2009 period.

 

·                  Net interestincome of $770 thousand for the first quarter of 2010, primarily from ourlong-term mortgage portfolio, compared to $3.6 million for the comparable2009 period.

 

·                  Non-interestincome—net trust assets of $6.3 million for the first quarter of 2010,compared to $4.7 million for the comparable 2009 period.

 

·                  Mortgage andreal estate services fees of $11.3 million for the first quarter of 2010,compared to $5.5 million for the comparable 2009 period.

 

·                  Personnelexpense of $9.7 million for the first quarter of 2010, compared to$6.3 million for the comparable 2009 period.

 

*Discontinued Operations*

 

·*                 *Earnings fromdiscontinued operations of $2.4 million for the first quarter of 2010,compared to a loss of $2.4 million for the comparable 2009 period.

 

·                  Repurchasereserve was $10.7 million at March 31, 2010, compared to$11.0 million at December 31, 2009.

 

28

----

Table of Contents

 

**Financial Condition and Results of Operations**

 

*Financial Condition*

 

Condensed Balance Sheet Data

 
| ** **                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **2010**           | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Investment  securities available-for-sale            |       | $                  | 670        |                  | $          | 813            |       | $          | (143       | ) | (18 | )% |
| Securitized  mortgage collateral                     |       | 6,366,855          |       | 5,666,122             |       | 700,733        |       | 12         |       |
| Derivative  assets                                   |       | 50                 |       | 146                   |       | (96            | )          | (66        | )          |
| Real estate  owned                                   |       | 128,411            |       | 142,364               |       | (13,953        | )          | (10        | )          |
| Total trust  assets                                  |       | 6,495,986          |       | 5,809,445             |       | 686,541        |       | 12         |       |
|                                                 |       |               |       |                  |       |           |       |       |       |
| Assets of  discontinued operations                   |       | 4,743              |       | 4,480                 |       | 263            |       | 6          |       |
| Other assets                                         |       | 53,694             |       | 58,987                |       | (5,293         | )          | (9         | )          |
| **Total  assets**                                    |       | $                  | 6,554,423  |                  | $          | 5,872,912      |       | $          | 681,511    |   | 12 | % |
|                                                 |       |               |       |                  |       |           |       |       |       |
| Securitized  mortgage borrowings                     |       | $                  | 6,351,890  |                  | $          | 5,659,865      |       | $          | 692,025    |   | 12 | % |
| Derivative  liabilities                              |       | 117,926            |       | 126,603               |       | (8,677         | )          | (7         | )          |
| Total trust  liabilities                             |       | 6,469,816          |       | 5,786,468             |       | 683,348        |       | 12         |       |
|                                                 |       |               |       |                  |       |           |       |       |       |
| Liabilities of  discontinued operations              |       | 17,938             |       | 19,152                |       | (1,214         | )          | (6         | )          |
| Other  liabilities                                   |       | 44,969             |       | 51,859                |       | (6,890         | )          | (13        | )          |
| Total  liabilities                                   |       | 6,532,723          |       | 5,857,479             |       | 675,244        |       | 12         |       |
| Total  stockholders’ equity                     |       | 21,700             |       | 15,433                |       | 6,267          |       | 41         |       |
| **Total  liabilities and stockholders’ equity** |       | $                  | 6,554,423  |                  | $          | 5,872,912      |       | $          | 681,511    |   | 12 | % |

 

Totalassets and total liabilities were $6.6 billion and $6.5 billion,respectively, at March 31, 2010 as compared to $5.9 billion at December 31,2009. The increase in total assets and liabilities are primarily attributableto increases in the Company’s trust assets and trust liabilities as summarizedbelow.

 

TheCompany updates its collateral assumptions quarterly based on recentdelinquency, default, prepayment and loss experience.  Additionally, the Company updates the forwardinterest rates and investor yield (discount rate) assumptions based oninformation derived from market participants. At March 31, 2010, the Company decreased the investor yieldrequirements for senior bonds of the securitized mortgage borrowings as yieldshave tightened significantly over the past few quarters.  The Company has seen a corresponding increasein the pricing service prices for senior bonds. The decrease in investor yield assumptions on securitized mortgagecollateral and securitized mortgage borrowings resulted in an increase in thevalue of these trust assets and liabilities. However, this change in assumption did not have any effect on theconsolidated statement of operations or equity of the Company as the increasein the value of collateral directly offset the increase in the value of theborrowings.  The Company did not make anychanges to the discount rate assumptions for residual interests during thefirst quarter of 2010.

 

·                  Securitizedmortgage collateral increased $700.7 million during the three months endedMarch 31, 2010. The increase in securitized mortgage collateral from$5.7 billion at December 31, 2009 to $6.4 billion at March 31,2010 was primarily due to decreased loss assumptions for single-familycollateral, reduction in investor yield requirements as discussed below, andthe net consolidation of trust assets, partially offset by reductions inprincipal balances from defaults and principal payments during the period. Forthe three months ended March 31, 2010, the balance increased due toincreases in fair value of $811.6 million and net consolidation of trustassets related to the adoption of ASU 2009-17 of $116.9 million, offset byreductions in principal balances (resulting from transfers to REO and principalpaydowns) of $227.8 million.

 

·                  REO within theCompany’s securitization trusts decreased $14.0 million to$128.4 million at March 31, 2010. Decreases in REO were due toliquidations of $59.6 million. Offsetting the decrease from liquidations were  increases in REO from foreclosures of$41.9 million, $3.0 million in the net consolidation of trust assetsrelated to the adoption of ASU 2009-17, and $672 thousand in recovery of thenet realizable value.

 

29

----

Table of Contents

 

·                  Securitizedmortgage borrowings increased $692.0 million to $6.4 billion at March 31,2010. The increase in securitized mortgage borrowings was primarily due todecreased loss assumptions for single-family collateral, reduction in investoryield requirements as discussed below, and the net consolidation of trustliabilities, offset by reductions in principal balances during the period. Forthe three months ended March 31, 2010, the balance increased due to increasesin fair value of $911.7 million, net consolidation of trust liabilitiesrelated to the adoption of ASU 2009-17 of $110.6 million, offset by reductionsin outstanding balances of $330.3 million.

 

·                  Derivativeliabilities, net decreased $8.6 million to $117.9 million at March 31,2010. The decrease is the result of $35.6 million in derivative cashpayments from the securitization trusts, offset by an $18.0 millionincrease in fair value resulting from decreases in the forward LIBOR curve andthe net consolidation of off balance sheet trusts related to the adoption ofASU 2009-17 of $9.0 million.

 

Sinceour consolidated and unconsolidated securitization trusts are nonrecourse tothe Company, our economic risk is limited to our residual interests in thesesecuritization trusts. Therefore, in the following table we have netted trustassets and trust liabilities to present these residual interests more simply.Our residual interests in securitizations are segregated between oursingle-family (SF) residential and multifamily (MF) residential portfolios andare represented by the difference between trust assets and trust liabilities.The following tables present the estimated fair value of our residual interests,including investment securities available for sale, by securitization vintageyear and other related assumptions used to derive these values at March 31,2010:

 
| **Origination**                | ** ** | **Estimated Fair Value of  Residual Interests by Vintage Year** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------|------------|
| **Year**                       | ** ** | **SF**                                                          | ** ** | **MF** | ** ** | **Total** | ** ** |
| 2002-2003 (1)                  |       | $                                                               | 11,952     |   | $ | 5,093 |   | $ | 17,045 |   |
| 2004                           |       | 1,361                                                           |       | 7,526 |   | 8,887 |   |
| 2005 (2)                       |       | 7                                                               |       | 197 |   | 204 |   |
| 2006 (2)                       |       | —                                                          |       | 34 |   | 34 |   |
| 2007(2)                        |       | —                                                          |       | — |   | — |   |
| **Total**                      | ** ** | **$**                                                           | **13,320** | ** ** | **$** | **12,850** | ** ** | **$** | **26,170** | ** ** |
|                           |       |                                                            |       |   |   |   |   |
| Weighted avg.  prepayment rate |       | 7                                                               | %          | 6 | % | 6 | % |
| Weighted avg. discount  rate   |       | 30                                                              | %          | 20 | % | 25 | % |

 

----

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

(2)          The estimatedfair values of residual interests in vintage years 2005 through 2007 isreflective of higher estimated future losses and investor yield requirementscompared to earlier vintage years.

 

TheCompany utilizes a number of assumptions to value securitized mortgagecollateral, securitized mortgage borrowings and residual interests.  These assumptions include estimatedcollateral default rates and loss severities (credit losses), collateralprepayment rates,  forward interest ratesand investor yields (discount rates). The Company uses the same collateral assumptions for securitizedmortgage collateral and securitized mortgage borrowings as the collateralassumptions determine collateral cash flows which are used to pay interest andprincipal for securitized mortgage borrowings and excess spread, if any, to theresidual interests. However, the Company uses different investor yield(discount rate) assumptions for securitized mortgage collateral and securitizedmortgage borrowings and the discount rate used for residual interests based onunderlying collateral characteristics, vintage year, assumed risk and marketparticipant assumptions.  The table belowreflects the estimated future credit losses and investor yield requirements fortrust assets by product (SF and MF) and securitization vintage:

 

30

----

Table of Contents

 
| ** ** | ** ** | **Estimated Future Losses (1)** | ** ** | **Investor Yield Requirement (2)** | ** ** |
|------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** ** | ** ** | **SF**                          | ** ** | **MF**                             | ** ** | **SF** | ** ** | **MF** | ** ** |
| 2002-2003  |       | 6                               | %          | 1                                  | %          | 12 | % | 12 | % |
| 2004       |       | 16                              | %          | 1                                  | %          | 12 | % | 10 | % |
| 2005       |       | 31                              | %          | 3                                  | %          | 14 | % | 13 | % |
| 2006       |       | 43                              | %          | 12                                 | %          | 21 | % | 12 | % |
| 2007       |       | 41                              | %          | 7                                  | %          | 19 | % | 10 | % |

 

----

(1)          Estimated futurelosses derived by dividing future projected losses by unpaid principal balancesat March 31, 2010.

(2)          Investor yieldrequirements represent the Company’s estimate of the yield third-party marketparticipants would require to price our trust assets and liabilities given ourprepayment, credit loss and forward interest rate assumptions.

 

Asillustrated in S&Ps Case Shiller 10-City Composite Home Price Index, from2002 through 2007, home price appreciation escalated to historic levels. During2005 through 2007, the company originated or acquired mortgages supported bythese elevated real estate values. Beginning in 2007, deterioration in the economyresulting in high unemployment and a dramatic drop in home prices resulted insignificant negative equity for borrowers. These factors have led tosignificant increases in loss severities resulting from deterioration in thecredit quality of borrowers, as well as strategic defaults, whereby borrowerswith the ability to pay are defaulting on their mortgages based on the beliefthat home prices will not recover in a reasonable amount of time. Home priceshave deteriorated back to October 2003 levels which has significantlyreduced or eliminated equity for loans originated after 2003. Future lossestimates are significantly higher for mortgage loans included insecuritization vintages after 2004 which reflect severe home pricedeterioration and defaults experienced with mortgages originated during theseperiods.

 

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

 

·                  interest raterisk;

 

·                  liquidity risk;

 

·                  credit risk;and

 

·                  prepaymentrisk.

 

*Interest Rate Risk.*  The Company’s earnings depend largely on ourinterest rate spread, represented by the relationship between the yield on ourinterest- earning assets (primarily investment securities available-for-saleand securitized mortgage collateral) and the cost of our interest-bearingliabilities (primarily securitized mortgage borrowings, long-term debt and notepayable). Our interest rate spread is impacted by several factors, includinggeneral economic factors, forward interest rates and our own credit quality.

 

Theresidual interests in our long-term mortgage portfolio are sensitive to changesin interest rates on securitized mortgage collateral and the relatedsecuritized mortgage borrowings. Changes in interest rates can significantlyaffect the cash flows and fair values of the Company’s assets and liabilities,as well as our earnings and stockholders’ equity.

 

TheCompany uses derivative instruments to manage some of its interest rate risk. However,the Company does not attempt to completely hedge interest rate risk. To helpmitigate some of the exposure to the effect of changing interest rates on cashflows on securitized mortgage borrowings, the Company utilized derivativeinstruments primarily in the form of interest rate swap agreements (swaps) and,to a lesser extent, interest rate cap agreements (caps) and interest rate flooragreements (floors). These derivative instruments are recorded at fair value inthe consolidated balance sheets. 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 future cash flows, forward interest ratesand certain other factors, including counterparty risk. Additionally, thesevalues also take into account the Company’s own credit standing, to the extentapplicable; thus, the valuation of the derivative instrument includes theestimated value of the net credit differential between the counterparties tothe derivative contract.

 

31

----

Table of Contents

 

AtMarch 31, 2010, derivative liabilities, net were $117.9 million andreflect the securitization trust’s liability to pay third-party counterpartiesbased on the estimated value to settle the derivative instruments. Cashpayments on these derivative instruments are based on notional amounts that aredecreasing over time. Excluding the effects of other factors such as portfoliodelinquency and loss severities within the securitization trusts, as thenotional amount of these derivative instruments decrease over time, payments tocounterparties in the current interest rate environment are reduced, therebypotentially increasing cash flows on our residual interests in securitizations.Conversely, increases in interest rates from current levels could potentiallyreduce overall cash flows on our residual interests in securitizations. Sinceour consolidated and unconsolidated securitization trusts are nonrecourse tothe Company, our economic risk is limited to our residual interests in thesesecuritization trusts.

 

TheCompany is also subject to interest rate risk on its long-term debt (consistingof trust preferred securities and junior subordinated notes) and notes payable.These interest bearing liabilities include adjustable rate periods based onone-month LIBOR (note payable) and three-month LIBOR (trust preferredsecurities and junior subordinated notes). The Company does not currently hedgeits exposure to the effect of changing interest rates related to theseinterest-bearing liabilities. Significant fluctuations in interest rates couldhave a material adverse effect on the Company’s business, financial condition,results of operations or liquidity.

 

*Liquidity Risk.*Referto “Liquidity and Capital Resources.”

 

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

 

Usinghistorical losses, current portfolio statistics and market conditions andavailable market data, the Company has estimated future loan losses, which areincluded in the fair value adjustment to our securitized mortgage collateral.While the credit performance for the loans has been clearly far worse than theCompany’s initial expectations when the loans were originated, the ultimatelevel of realized losses will largely be influenced by events that will likelyunfold over the next several years, including the severity of housing pricedeclines and overall strength of the economy. If market conditions continue todeteriorate in excess of our expectations, the Company may need to recognizeadditional fair value reductions to our securitized mortgage collateral, whichmay also affect the value of the related securitized mortgage borrowings andresidual interests.

 

Wemonitor our servicers to attempt to ensure that they perform loss mitigation,foreclosure and collection functions according to their servicing practices andeach securitization trust’s pooling and servicing agreement. We have met withthe management of our servicers to assess our borrowers’ current ability to paytheir mortgages and to make arrangements with selected delinquent borrowerswhich will result in the best interest of the trust and borrower, in an effortto minimize the number of mortgages which become seriously delinquent. Whenresolving delinquent mortgages, servicers are required to take timely action.The servicer is required to determine payment collection under variouscircumstances, which will result in the maximum financial benefit. This isaccomplished by either working with the borrower to bring the mortgage currentor by foreclosing and liquidating the property. When a borrower fails to makerequired payments on a mortgage and does not cure the delinquency within60 days, we generally record a notice of default and commence foreclosureproceedings, or arrange alternative terms of forbearance. If the mortgage isnot reinstated within the time permitted by law for reinstatement, the propertymay then be sold at a foreclosure sale. At a foreclosure sale, the trustsconsolidated on our balance sheet generally acquire title to the property.

 

Weuse the Mortgage Bankers Association (MBA) method to define delinquency as acontractually required payment being 30 days or more past due. We measuredelinquencies from the date of the last payment due date in which a payment wasreceived. Delinquencies for loans 60 days late or greater, foreclosuresand delinquent bankruptcies were $3.0 billion or 24.1% as of March 31,2010.

 

32

----

Table of Contents

 

Thefollowing table summarizes the unpaid principal balances of non-performingloans in our mortgage portfolio, included in securitized mortgage collateral,loans held-for-investment and loans held-for-sale for continuing anddiscontinued operations combined, that were 60 or more days delinquent(utilizing the MBA method) as of the periods indicated:

 
| ** **                                                    | ** ** | ** **         | ** ** | **Total**      | ** ** | ** **            | ** ** | **Total**      | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|----------------|------------|-----------------------|------------|----------------|------------|
| ** **                                                    | ** ** | **March 31,** | ** ** | **Collateral** | ** ** | **December 31,** | ** ** | **Collateral** | ** ** |
| ** **                                                    | ** ** | **2010**           | ** ** | **%**          | ** ** | **2009**              | ** ** | **%**          | ** ** |
| Loans held for  sale and investment (1)                       |       |               |       |           |       |                  |       |           |       |
| 60 - 89 days  delinquent                                      |       | $                  | 274        |           | 0.0        | %                     | $          | 66             |       | 0.0 | % |
| 90 or more days  delinquent                                   |       | 7,623              |       | 0.1            | %          | 6,928                 |       | 0.1            | %          |
| Foreclosures (2)                                              |       | 6,431              |       | 0.1            | %          | 7,397                 |       | 0.1            | %          |
| Total 60+ days  delinquent loans held-for-sale and investment |       | 14,328             |       | 0.1            | %          | 14,391                |       | 0.1            | %          |
|                                                          |       |               |       |           |       |                  |       |           |       |
| Securitized  mortgage collateral                              |       |               |       |           |       |                  |       |           |       |
| 60 - 89 days  delinquent                                      |       | $                  | 300,030    |           | 2.4        | %                     | $          | 324,032        |       | 2.6 | % |
| 90 or more days  delinquent                                   |       | 988,298            |       | 8.0            | %          | 1,043,718             |       | 8.4            | %          |
| Foreclosures (2)                                              |       | 1,350,128          |       | 11.0           | %          | 1,449,538             |       | 11.6           | %          |
| Delinquent  bankruptcies (3)                                  |       | 312,886            |       | 2.5            | %          | 302,314               |       | 2.4            | %          |
| Total 60+ days  delinquent long-term mortgage portfolio       |       | 2,951,342          |       | 24.0           | %          | 3,119,602             |       | 25.0           | %          |
| Total 60 or more  days delinquent                             |       | $                  | 2,965,670  |           | 24.1       | %                     | $          | 3,133,993      |       | 25.1 | % |
| Total collateral                                              |       | $                  | 12,300,664 |           |       |                  | $          | 12,492,493     |       |   |   |

 

----

(1)          Loansheld-for-sale are substantially included in discontinued operations in theconsolidated balance sheets.

(2)          Representsproperties in the process of foreclosure.

(3)          Representsbankruptcies that are 30 days or more delinquent.

 

Thefollowing table summarizes securitized mortgage collateral, loansheld-for-investment, loans held-for-sale and real estate owned, that werenon-performing for continuing and discontinued operations combined as of thedates indicated (excludes 60-89 days delinquent):

 
| ** **                                                            | ** ** | ** **         | ** ** | **Total**      | ** ** | ** **            | ** ** | **Total**      | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|-----------------------|------------|----------------|------------|
| ** **                                                            | ** ** | **March 31,** | ** ** | **Collateral** | ** ** | **December 31,** | ** ** | **Collateral** | ** ** |
| ** **                                                            | ** ** | **2010**           | ** ** | **%**          | ** ** | **2009**              | ** ** | **%**          | ** ** |
| 90 or more days  delinquent, foreclosures and delinquent bankruptcies |       | $                  | 2,665,366  |           | 21.7       | %                     | $          | 2,809,895      |       | 22.5 | % |
| Real estate  owned                                                    |       | 129,091            |       | 1.0            | %          | 142,676               |       | 1.1            | %          |
| Total  non-performing assets                                          |       | $                  | 2,794,457  |           | 22.7       | %                     | $          | 2,952,571      |       | 23.6 | % |

 

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 for interest income on securitized mortgage collateral when thescheduled payment is received from the servicer. The servicers are required toadvance principal and interest on loans within the securitization trusts to theextent the advances are considered recoverable. As of March 31, 2010,non-performing assets (unpaid principal balance of loans 90 or more daysdelinquent, foreclosures and delinquent bankruptcies plus REO) as a percentageof the total collateral was 23%. At December 31, 2009, non-performing assetsto total collateral was 24%.  As of March 31,2010, the estimated fair value of non-performing assets (representing the fairvalue of loans 90 or more days delinquent, foreclosures and delinquentbankruptcies plus REO) as a percentage of the total assets was 14%. At December 31,2009, the estimated fair value of non-performing assets to total assets was16%.

 

REO,which consists of residential real estate acquired in satisfaction of loans, iscarried at the lower of cost or net realizable value less estimated sellingcosts. Adjustments to the loan carrying value required at the time offoreclosure are included in the change in the fair value of net trust assets.Changes in the Company’s estimates of net realizable value subsequent to thetime of foreclosure and through the time of ultimate disposition are recordedas gains or losses from real estate owned in the consolidated statements ofoperations. REO, for continuing and discontinued operations, at March 31,2010 decreased $13.6 million or 10% from December 31, 2009 as aresult of liquidations and a decrease in foreclosures.

 

Werealized a loss on sale of REO in the amount $1.8 million for the firstquarter of 2010 as compared to a loss of $43.9 million for the firstquarter of 2009. Additionally, for the first quarter of 2010, the Companyrecorded a recovery of the net realizable value of the REO in the amount of$672 thousand as compared to a write-down of $84.3 million for thefirst quarter of 2009.

 

33

----

Table ofContents

 

The following table presentsthe balances of REO for continuing operations:

 
| ** **          | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------------|------------|
| REO                 |       | $                        | 156,371    |                        | $          | 176,800 |   |
| Impairment  (1)     |       | (27,455                  | )          | (34,080                     | )          |
| Ending  balance     |       | $                        | 128,916    |                        | $          | 142,720 |   |
|                |       |                     |       |                        |       |
| REO  inside trusts  |       | $                        | 128,411    |                        | $          | 142,364 |   |
| REO  outside trusts |       | 505                      |       | 356                         |       |
| Total               |       | $                        | 128,916    |                        | $          | 142,720 |   |

 

----

(1)                                  Impairmentrepresents the cumulative write-downs of net realizable value subsequent toforeclosure.

 

In calculating the cashflows to assess the fair value of the securitized mortgage collateral, theCompany estimates the future losses embedded in our loan portfolio. Inevaluating the adequacy of these losses, management takes many factors intoconsideration. For instance, a detailed analysis of historical loan performancedata is accumulated and reviewed. This data is analyzed for loss performanceand prepayment performance by product type, origination year and securitizationissuance. The data is also broken down by collection status. Our estimate oflosses for these loans is developed by estimating both the rate of default ofthe loans and the amount of loss severity in the event of default. The rate ofdefault is assigned to the loans based on their attributes (*e.g.*, original loan-to-value, borrower credit score,documentation type, geographic location, etc.) and collection status. The rateof default is based on analysis of migration of loans from each aging category.The loss severity is determined by estimating the net proceeds from theultimate sale of the foreclosed property. The results of that analysis are thenapplied to the current mortgage portfolio and an estimate is created. Webelieve that pooling of mortgages with similar characteristics is anappropriate methodology in which to evaluate the future loan losses.

 

Management recognizes thatthere are qualitative factors that must be taken into consideration whenevaluating and measuring losses in the loan portfolios. These items include,but are not limited to, economic indicators that may affect the borrower’sability to pay, changes in value of collateral, political factors, employmentand market conditions, competitor’s performance, market perception, historicallosses, and industry statistics. The assessment for losses, is based ondelinquency trends and prior loss experience and management’s judgment andassumptions regarding various matters, including general economic conditionsand loan portfolio composition. Management continually evaluates theseassumptions and various relevant factors affecting credit quality and inherentlosses.

 

*PrepaymentRisk.*  The Company historically usedprepayment penalties as a method of partially mitigating prepayment risk forthose borrowers that have the ability to refinance. The recent economicdownturn, lack of available credit and declines in property values have limitedborrowers’ ability to refinance. These factors have significantly reducedprepayment risk within our long-term mortgage portfolio. With the seasoning ofthe long-term mortgage portfolio, a significant portion of prepayment penaltiesterms have expired, thereby further reducing prepayment penalty income.

 

34

----

Table of Contents

 

**Results of Operations**

 

*For the Three Months Ended March 31, 2010compared to the Three Months Ended March 31, 2009*

 

Condensed Statements ofOperations Data

 
| ** **                                                                                                                                          | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                          | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                                                                                                          | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest  income                                                                                                                                    |       | $                                             | 279,876    |   | $ | 712,649 |   | $ | (432,773 | ) | (61 | )% |
| Interest  expense                                                                                                                                   |       | 279,106                                       |       | 709,007 |   | (429,901 | ) | (61 | ) |
| Net  interest income                                                                                                                                |       | 770                                           |       | 3,642 |   | (2,872 | ) | (79 | ) |
| Total  non-interest income                                                                                                                          |       | 17,306                                        |       | 10,249 |   | 7,057 |   | 69 |   |
| Total  non-interest expense                                                                                                                         |       | 14,459                                        |       | 10,617 |   | 3,842 |   | 36 |   |
| Income  tax expense                                                                                                                                 |       | 85                                            |       | 1,998 |   | (1,913 | ) | (96 | ) |
| Earnings  from continuing operations                                                                                                                |       | 3,532                                         |       | 1,276 |   | 2,256 |   | 177 |   |
| Earnings  (loss) from discontinued operations, net                                                                                                  |       | 2,386                                         |       | (2,395 | ) | 4,781 |   | 200 |   |
| Earnings  (loss)                                                                                                                                    |       | $                                             | 5,918      |   | $ | (1,119 | ) | $ | 7,037 |   | 629 |   |
| Earnings  (loss) available to common stockholders before cummulative redeemable  non-declared preferred stock dividend (1)                          |       | $                                             | 5,918      |   | $ | (1,119 | ) | $ | 7,037 |   | 629 | % |
|                                                                                                                                                |       |                                          |       |   |   |   |   |   |   |
| Earnings  (loss) per share available to common stockholders before cummulative  redeemable non-declared preferred stock dividend (1) - basic   |       | $                                             | 0.77       |   | $ | (0.15 | ) | $ | 0.92 |   | 623 | % |
| Earnings  (loss) per share available to common stockholders before cummulative  redeemable non-declared preferred stock dividend (1) - diluted |       | $                                             | 0.71       |   | $ | (0.15 | ) | $ | 0.86 |   | 584 | % |

 

----

(1)          Including the cumulativeredeemable non-declared preferred stock dividend, for the first quarter of2009, total basic and diluted loss per share from continuing operationsavailable to common stockholders was $(0.64).

 

*Net Interest Income*

 

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

 

The following tablessummarize average balance, interest and weighted average yield on mortgageassets and borrowings, included within continuing operations, for the periodsindicated. Cash receipts and payments on derivative instruments hedginginterest rate risk related to our securitized mortgage borrowings are notincluded in the results below. These cash receipts and payments are included asa component of the change in fair value of net trust assets.

 
| ** **                                | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **Average**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Balance**                                   | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **ASSETS**                                |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment  securities available-for-sale |       | $                                             | 499        |   | $ | 47 |   | 37.68 | % | $ | 1,421 |   | $ | 130 |   | 36.59 | % |
| Securitized  mortgage collateral          |       | 6,016,489                                     |       | 279,766 |   | 18.60 | % | 5,700,077 |   | 712,080 |   | 49.97 | % |
| Other                                     |       | 14,112                                        |       | 63 |   | 1.79 | % | 47,124 |   | 439 |   | 3.73 | % |
| Total  interest-earning assets            |       | $                                             | 6,031,100  |   | $ | 279,876 |   | 18.56 | % | $ | 5,748,622 |   | $ | 712,649 |   | 49.59 | % |
|                                      |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Securitized  mortgage borrowings          |       | $                                             | 6,005,877  |   | $ | 277,665 |   | 18.49 | % | $ | 5,942,506 |   | $ | 708,465 |   | 47.69 | % |
| Long-term  debt                           |       | 10,253                                        |       | 1,165 |   | 45.45 | % | 13,247 |   | 542 |   | 16.37 | % |
| Note  payable                             |       | 28,948                                        |       | 276 |   | 3.81 | % | — |   | — |   | — |   |
| Total  interest-bearing liabilities       |       | $                                             | 6,045,078  |   | $ | 279,106 |   | 18.47 | % | $ | 5,955,753 |   | $ | 709,007 |   | 47.62 | % |
|                                      |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Spread (1)**               |       |                                          |       | $ | 770 |   | 0.09 | % |   |   | $ | 3,642 |   | 1.97 | % |
| **Net Interest Margin (2)**               |       |                                          |       |   |   | 0.05 | % |   |   |   |   | 0.25 | % |

 

----

(1)                                  Net interestspread is calculated by subtracting the weighted average yield oninterest-bearing liabilities from the weighted average yield on interest-earningassets.

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

 

35

----

Table of Contents

 

Net interest income spreaddecreased $2.9 million for the three months ended March 31, 2010 to$770 thousand from $3.6 million for the comparable 2009 period. Thedecrease in net interest spread was primarily attributable to overall declinesin yields between periods and the resulting decrease in net interest income onsecuritized mortgage collateral and securitized mortgage borrowings, as well asan increase in interest expense incurred on the note payable of $276 thousandfor the quarter ended March 31, 2010 as compared to none for thecomparable 2009 period.   As a result,net interest margin decreased from 0.25% for the three months ended March 31,2009 to 0.05% for the three months ended March 31, 2010.

 

During the three months endedMarch 31, 2010, the yield on interest-earning assets decreased to 18.56%from 49.59% in the comparable 2009 period. The yield on interest-bearingliabilities decreased to 18.47% for the three months ended March 31, 2010from 47.62% for the comparable 2009 period. In connection 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 based onestimated fair values for these instruments. The decrease in yield for securitized mortgage collateral andsecuritized mortgage borrowings is primarily related to the adoption of FAS ASC820-10-65-4, “Determining Fair Value When the Volume and Level of Activity forthe Asset or Liability Have Significantly Decreased and IdentifyingTransactions That Are Not Orderly,” during the second quarter of 2009.  The fair value of the securitized mortgagecollateral and securitized mortgage borrowings increased and the yieldsdecreased as a result of the adoption which clarified the use of quoted pricesin determining fair value in markets that are inactive, thus moderating theneed to use distressed prices in valuing financial assets and liabilities inilliquid markets as the Company had used in prior periods.  Furthermore, the Company adjusted theinvestor yield requirement assumptions for senior mortgage backed bonds duringthe first quarter of 2010 based on market participant expectations for similarmortgage backed bonds.  The increase infair value and decrease in yields was partially offset by increased futurecredit losses between periods.  Theseincreases in fair value have decreased the effective yields used for purposesof recognizing interest income and interest expense on these instruments.

 

*Non-Interest Income*

 

Changes in Non-InterestIncome

 
| ** **                                               | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Change  in fair value of net trust assets, excluding REO |       | $                                             | 7,372      |   | $ | 132,930 |   | $ | (125,558 | ) | (94 | )% |
| Losses  from real estate owned                           |       | (1,108                                        | )          | (128,201 | ) | 127,093 |   | 99 |   |
| Non-interest  income - net trust assets                  |       | 6,264                                         |       | 4,729 |   | 1,535 |   | 32 |   |
| Change  in fair value of long-term debt                  |       | (291                                          | )          | 12 |   | (303 | ) | (2,525 | ) |
| Mortgage  and real estate services fees                  |       | 11,325                                        |       | 5,520 |   | 5,805 |   | 105 |   |
| Other                                                    |       | 8                                             |       | (12 | ) | 20 |   | 167 |   |
| Total  non-interest income                               |       | $                                             | 17,306     |   | $ | 10,249 |   | $ | 7,057 |   | 69 | % |

 

*Non-interestincome—net trust assets.*  Sinceour consolidated and unconsolidated securitization trusts are nonrecourse tothe Company, 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 and losses from real estate owned.All estimated future losses are included in the estimate of the fair value ofsecuritized mortgage collateral and REO. Losses on REO are reported separatelyin the consolidated statement of operations as REO is a nonfinancial asset whichis the only component of trust assets and liabilities that is not recorded atfair value. Therefore, REO value at the time of sale or losses from furtherwrite-downs are recorded separately in the Company’s consolidated statement ofoperations. The net effect of changes in value related to our investment in alltrust assets and liabilities is shown as non-interest income—net trust assets,which includes losses from REO. Non-interest income related to our net trust assets (residual interestsin securitizations) was $6.3 million for the three months ended March 31,2010, compared to $4.7 million in the comparable 2009 period.  The $6.3 million gain on net trustassets was primarily attributable to increased expected net interest spread asa result of a downward shift in the forward LIBOR curve during the three monthsended March 31, 2010. The individual components of the non-interest incomefrom net trust assets were comprised of:

 

*Change infair value of net trust assets, excluding REO.*  For the quarter ended March 31, 2010,the Company recognized a $7.4 million gain from the change in fair value of nettrust assets, excluding REO.  The netgain recognized during the period was comprised of gains resulting from theincrease in fair value of investment securities-for-sale and securitizedmortgage collateral of $178 thousand and $681.4 million, respectively.Offsetting these gains were losses  resulting from increases in the fair value ofsecuritized mortgage borrowings and net derivative liabilities of $656.2million and $18.0 million, respectively.

 

36

----

Table of Contents

 

For the quarter ended March 31, 2009, the Companyrecognized a $132.9 million gain from the change in fair value of net trustassets, 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 $905 thousand 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.

 

*Lossesfrom real estate owned.* Losses from real estate owned were $1.1 million for the threemonths ended March 31, 2010. This loss was comprised of a$1.8 million loss on sale of real estate owned, coupled with$672 thousand in recovery of the net realizable value during the period.

 

Losses from real estateowned were $128.2 million for the three months ended March 31, 2009,comprised of $43.9 million in losses from the sale of real estate ownedand $84.3 million in additional impairment write-downs.

 

*Change inthe fair value of long-term debt.*  Change in the fair value of long-term debtwas a loss of $291 thousand for the three months ended March 31,2010, compared to a gain of $12 thousand for the comparable 2009period.  Long-term debt (consisting oftrust preferred securities and junior subordinated notes) is measured basedupon an analysis prepared by the Company, which considers the Company’s owncredit risk, including consideration of settlements with trust preferred debtholders and discounted cash flow analysis.

 

*Mortgageand real estate services fees.*  Revenues generated from these businesses areprimarily from the Company’s long-term mortgage portfolio. For the three monthsended March 31, 2010, mortgage and real estate services fees, whichprimarily include loan modification fees and monitoring and surveillanceservices fees, were $11.3 million compared to $5.5 million inmonitoring fees in the comparable 2009 period. The mortgage and real estate services fees of $11.3 million wasprimarily comprised of $4.4 million in monitoring and surveillance fees,$3.1 million in loan modification fees, $2.5 million in title andescrow fees, and $732 thousand in servicing income.

 

*Non-Interest Expense*

 

Changes in Non-InterestExpense

 
| ** **                  | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                  | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| General  and administrative |       | $                                             | 4,778      |   | $ | 4,339 |   | $ | 439 |   | 10 | % |
| Personnel  expense          |       | 9,681                                         |       | 6,278 |   | 3,403 |   | 54 |   |
| Total  operating expense    |       | $                                             | 14,459     |   | $ | 10,617 |   | $ | 3,842 |   | 36 | % |

 

Total non-interest expensewas $14.5 million for the three months ended March 31, 2010, comparedto $10.6 million for the comparable period of 2009.  The $3.8 million increase innon-interest expense was primarily attributable to a $3.4 million increasein personnel expense over the previous period as a result of increases inpersonnel and related costs associated with the initiation of our new mortgageand real estate fee-based business activities.

 

***Results of Operations by BusinessSegment***

 

***Mortgage and Real Estate Services***

 

During 2009, the Company initiatedvarious mortgage and real estate fee-based business activities, including loanmodifications, real estate disposition, monitoring and surveillance services,real estate brokerage, mortgage lending and title and escrow services. Althoughthe Company intends to generate fees by providing these services to thirdparties in the marketplace, the revenues from these business activities haveprimarily been generated from the Company’s long-term mortgage portfolio.Furthermore, since these business activities are recently formed there remainsuncertainty about their future success.

 

37

----

Table of Contents

 

Condensed Statements ofOperations Data

 
| ** **                              | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                              | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net  interest income                    |       | $                                             | 5          |   | $ | 2 |   | $ | 3 |   | 150 | % |
|                                    |       |                                          |       |   |   |   |   |   |   |
| Mortgage  and real estate services fees |       | 11,325                                        |       | 5,520 |   | 5,805 |   | 105 |   |
| Other  non-interest income              |       | 7                                             |       | — |   | 7 |   | N/A |   |
| Total  non-interest income              |       | 11,332                                        |       | 5,520 |   | 5,812 |   | 105 |   |
|                                    |       |                                          |       |   |   |   |   |   |   |
| Personnel  expense                      |       | 7,611                                         |       | 2,875 |   | 4,736 |   | 165 |   |
| Non-interest  expense and income taxes  |       | 2,288                                         |       | 1,193 |   | 1,095 |   | 92 |   |
| Net  earnings                           |       | $                                             | 1,438      |   | $ | 1,454 |   | $ | (16 | ) | (1 | )% |

 

For the three months ended March 31,2010, mortgage and real estate services fees were $11.3 million comparedto $5.5 million in the comparable period for 2009.   The mortgage and real estate services feesof $11.3 million was primarily comprised of $4.4 million in monitoring andsurveillance fees, $3.1 million in loan modification fees,$2.5 million in title and escrow fees, and $732 thousand in servicingincome.

 

For the three months ended March 31,2010, personnel expense increased $4.7 million to $7.6 million as aresult of increases in personnel and related costs associated with theinitiation of the new mortgage and real estate fee-based business activities.

 

For the three months ended March 31,2010, non-interest expense and income taxes increased $1.1 million to$2.3 million. The increase is related to higher occupancy and general andadministrative expenses associated with the new mortgage and real estatefee-based business activities.

 

***Long-term Portfolio***

 

Condensed Statements ofOperations Data

 
| ** **                                               | ** ** | **For the Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2010**                                          | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net  interest income                                     |       | $                                                 | 765        |   | $ | 3,640 |   | $ | (2,875 | ) | (79 | )% |
|                                                     |       |                                              |       |   |   |   |   |   |   |
| Change  in fair value of net trust assets, excluding REO |       | 7,372                                             |       | 132,930 |   | (125,558 | ) | (94 | ) |
| Losses  from real estate owned                           |       | (1,108                                            | )          | (128,201 | ) | 127,093 |   | 99 |   |
| Non-interest  income- net trust assets                   |       | 6,264                                             |       | 4,729 |   | 1,535 |   | 32 |   |
| Change  in fair value of long-term debt                  |       | (291                                              | )          | 12 |   | (303 | ) | (2,525 | ) |
| Other  non-interest income                               |       | 1                                                 |       | (12 | ) | 13 |   | 108 |   |
| Total  non-interest income                               |       | 5,974                                             |       | 4,729 |   | 1,245 |   | 26 |   |
|                                                     |       |                                              |       |   |   |   |   |   |   |
| Personnel  expense                                       |       | 2,071                                             |       | 3,403 |   | (1,332 | ) | (39 | ) |
| Non-interest  expense and income taxes                   |       | 2,574                                             |       | 5,144 |   | (2,570 | ) | (50 | ) |
| Net  earnings (loss)                                     |       | $                                                 | 2,094      |   | $ | (178 | ) | $ | 2,272 |   | 1,276 | % |

 

Net earnings (loss) for thethree months ended March 31, 2010 increased $2.3 million to$2.1 million, compared to a loss of $178 thousand for the comparableperiod of 2009.  This increase in netearnings is primarily attributable to a $1.2 million increase in non-interestincome, a $1.3 million reduction in personnel expense and a $2.6 millionreduction in non-interest expense and income taxes, offset by a$2.9 million decrease in net interest income.

 

Non-interest incomeincreased $1.2 million primarily due to an increase in non- interest income-nettrust assets to  $6.3 million forthe three months ended March 31, 2010, compared to $4.7 million forthe comparable period in 2009. The increase in the fair value of net trustassets was primarily due to increased expected net interest spread as a resultof a downward shift in forward LIBOR rates during the three months ended March 31,2010. Offsetting the positive changes in fair value related to trust assets wasa $291 thousand reduction in the fair value of long-term debt.

 

38

----

Table of Contents

 

Personnelexpense decreased $1.3 million during the three months ended March 31,2010 as a result of reduced personnel associated with the long-term portfoliosegment of the Company.

 

Non-interestexpense and income taxes decreased $2.6 million.  The decrease is primarily attributable to a$2.0 million reduction in income tax expense as a result of noamortization or impairment of deferred charge during the three months ended March 31,2010, as compared to the same period in 2009.

 

***Discontinued Operations***

 

Condensed Statements of Operations Data

 
| ** **                              | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                              | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  income (expense)          |       | $                                             | 27         |   | $ | (413 | ) | $ | 440 |   | 107 | % |
|                                    |       |                                          |       |   |   |   |   |   |   |
| Gain on sale of  loans                  |       | 195                                           |       | 42 |   | 153 |   | 364 |   |
| Recoveries  (provision) for repurchases |       | 53                                            |       | (756 | ) | 809 |   | 107 |   |
| Other  non-interest income              |       | 1,837                                         |       | (1,207 | ) | 3,044 |   | 252 |   |
| Total  non-interest income              |       | 2,085                                         |       | (1,921 | ) | 4,006 |   | 209 |   |
|                                    |       |                                          |       |   |   |   |   |   |   |
| Personnel  expense                      |       | 26                                            |       | 347 |   | (321 | ) | (93 | ) |
| Lease impairment  adjustment            |       | (554                                          | )          | (334 | ) | (220 | ) | (66 | ) |
| Non-interest  expense and income taxes  |       | 254                                           |       | 48 |   | 206 |   | 429 |   |
| Net earnings  (loss)                    |       | $                                             | 2,386      |   | $ | (2,395 | ) | $ | 4,781 |   | 200 | % |

 

Netearnings (loss) for discontinued operations was $2.4 million for the threemonths ended March 31, 2010, compared to a loss of $2.4 million forthe comparable period in 2009. Net interest income increased $440 thousand to$27 thousand as a result of reductions in overall interest expense fromthe decrease in loans held-for-sale resulting from the Settlement Agreement in October 2009with its reverse repurchase facility lender, which removed any further exposureassociated with the loans that secured the line.

 

Recoveries(provision) for repurchases decreased $809 thousand to a recovery of $53thousand for the period ended March 31, 2010, compared to a provisionof $756 thousand for the same period in 2009. The $809 thousanddecrease is the result of settlements reached with whole-loan investors during2010. Other non-interest income increased $3.0 million during the quarterto $1.8 million as compared to a loss of $(1.2) million in the comparableperiod in 2009.   The increase in othernon-interest income was the result of $1.1 million in gains on REO salesand reductions in the provision for REO write-downs during the three monthsended March 31, 2010 as compared to loss on sale of REO and write-downs ofREO totaling $(1.2) million for the comparable period in 2009.

 

The$321 thousand decrease in personnel expense during the three months ended March 31,2010 over the comparable period was a result of a reduction in personnelexpense associated with the discontinuation of the Company’s non-conformingmortgage, retail mortgage, warehouse lending and commercial operations.

 

**ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Asa smaller reporting company, we are not required to provide the informationrequired by this Item.

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controlsand 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

 

39

----

Table of Contents

 

procedures designed to ensure thatinformation required to be disclosed by the Company in its reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including its principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

Asrequired by Rules 13a-15 and 15d-15 under the Exchange Act, in connectionwith the filing of this Quarterly Report on Form 10-Q, our management,under the supervision and with the participation of our CEO and CFO, conductedan evaluation of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e). Based on that evaluation, the Company’schief executive officer and chief financial officer concluded that, as of thatdate, the Company’s disclosure controls and procedures were effective at areasonable assurance level.

 

***Changes in Internal Control OverFinancial Reporting***

 

Therehas been no change in the Company’s internal control over financial reportingduring the Company’s quarter ended March 31, 2010, that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

***PART II. OTHER INFORMATION***

 

**ITEM 1:  LEGALPROCEEDINGS**

 

TheCompany is party to litigation and claims which arise in the ordinary course ofbusiness.

 

On November 9, 2007,and separately on August 25, 2008, two matters were filed against IFC inOrange County in the Superior Court of California, as case nos. 07CC11612and 00110553, respectively, by Citimortgage, Inc., alleging claims forbreach of contract and damages based upon representations and warranties madein conjunction with whole loan sales. These actions seek combined damages inexcess of $7.5 million.  In April 2010,these matters were settled for a confidential amount that was included in theCompany’s repurchase reserve at March 31, 2010.

 

On June 28, 2008, amatter was filed against IFC in the Circuit Court of the Eighteenth JudicialDistrict, Dupage County in Illinois, as case no. 2008L000721, by TRMid America Plaza Corp., seeking damages for breach of contract (a leaseagreement) in excess of $1.1 million plus such amount as determinedthrough the date of judgment and payment of attorneys fees and costs.  This matter has been completed through atrial on March 26, 2010 and the Company is responsible for an immaterialamount.

 

On October 2, 2001, acomplaint captioned Deborah Searcy, Shirley Walker, et al. v. ImpacFunding Corporation, Impac Mortgage Holdings, Inc. et. al. was filedin the Wayne County Circuit Court, State of Michigan, as a purported classaction lawsuit alleging that the defendants violated Michigan’s SecondaryMortgage Loan Act, Credit Reform Act and Consumer Protection Act.  We have recently been advised that the matterwas dismissed on July 12, 2006.

 

Pleaserefer to IMH’s report on Form 10-K for the year ended December 31,2009 for a description of other litigation and claims.

 

**ITEM 1A:  RISKFACTORS**

 

OurAnnual Report on Form 10-K for the year ended December 31, 2009includes a detailed discussion of our risk factors.  Theinformation presented below updates and should be read in conjunction with therisk factors and information disclosed in that Form 10-K.

 

**Competitionin the residential real estate and mortgage services business is intense andmay adversely affect our business operations and financial performance; the****dominance of a limitednumber of companies may affect our ability to operate and compete effectively.**

 

40

----

Table of Contents

 

Competition in theresidential real estate and mortgage services business is intense. Plus, the mortgage business and other businesses inwhich we have begun operations have recently experienced substantialconsolidation. Our competitors include banks, thrifts, credit unions,real estate brokerage firms, title and escrow companies, asset managementcompanies, and mortgage banking companies. Several of our competitors enjoyadvantages, including greater financial resources and access to capital, awider geographic presence, more accessible branch office locations, moreaggressive marketing campaigns, better brand recognition, the ability to offera wider array of services or more favorable pricing alternatives, as well aslower origination and operating costs. To compete effectively, we must have a very high level of operational,technological, and managerial expertise, as well as access to capital at acompetitive cost. As a result of reduced access to capital, general housingtrends, rising delinquencies and defaults and other factors, many mortgage andreal estate services firms have recently experienced severe financialdifficulty, with some exiting the business or filing for bankruptcy protection,resulting in a consolidation of companies in such industries.  Thedominance of a limited number of companies has created greater competition andto the extent that we can not compete effectively, it may adversely affect ourbusiness operations and financial performance.

 

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

 

In connection with our loan sales to thirdparties and our prior securitizations, we transferred mortgages acquired andoriginated by us to the third parties or into a securitization trust inexchange for cash and, in the case of a securitized mortgage, residualcertificates issued by the trust. The trustee, purchaser, bondholder,underwriters, or other entities involved in the issuance of the securities(which may include bond insurers) may have recourse to us with respect to abreach of the representations and warranties made by us at the time suchmortgages are transferred or when the securities are created or sold. While wemay have recourse to our customers or others for any such breaches, there canbe no assurance of their abilities to honor their respective obligations.Furthermore, new and proposed changes to the requirements of issuingsecuritizations in the future, which may include stronger representations andwarranties, greater disclosures, and greater equity involvement, may increaseour liability exposure in those transactions. Also, we previously engaged in bulk whole loan sales pursuant to agreementsthat generally provide for recourse by the purchaser against us in the event ofa breach of one of our representations or warranties, any fraud ormisrepresentation during the mortgage origination process, or upon earlydefault on such mortgage. We attempted to limit the potential remedies of suchpurchasers to the potential remedies we received from the customers from whomwe acquired or originated the mortgages. However, in some cases, the remediesavailable to a purchaser of mortgages from us may be broader or extend longerthan those available to us against the sellers of the mortgages and should apurchaser enforce its remedies against us, we are not always able to enforcewhatever remedies we have against our customers. Furthermore, if we discover,prior to the sale or transfer of a loan, that there is any fraud ormisrepresentation with respect to the mortgage and the originator fails torepurchase the mortgage, then we may not be able to sell the mortgage or we mayhave to sell the mortgage at a discount.

 

**There has been recent litigation in the mortgage industryrelated to securitizations.**

 

Asdefaults, delinquencies, foreclosures, and losses in the real estate marketcontinue, there have been recent lawsuits by various investors, insurers, underwritersand others against various participants in securitizations, such as sponsors,depositors, underwriters, and loan sellers. Some lawsuits have alleged that themortgage loans had origination defects, that there were misrepresentations madeabout the mortgage loans and the parties failed to properly disclose thequality of the mortgage loans or repurchase defective loans or that there wereother misrepresentations,  lack ofrepresentations, or errors in securitization documents. There have been other claimscontending errors or misrepresentations in the securitization documents orprocess itself.  Historically, we bothsecuritized and sold mortgage loans to third parties that may have beendeposited or included in pools for securitizations.  We have recently discovered discrepancies inour securitization documents and are working with the parties involved,including holders of the securities, on the issue.  To the extent that we are not successful incorrecting the discrepancies or even if we are successful and make revisions tocorrect the discrepancies, we may be subject to liability.   In connection with these potential claims,we may be asked to repurchase these mortgage loans, provide indemnificationagainst such claims or we may become subject to litigation related to thesecuritizations. As a result, we may incur significant legal and other expensesin defending against claims and litigation and we may be required to paysettlement costs, damages, penalties or other charges which could adversely affectour financial results.

 

41

----

Table of Contents

 

**Our ability to utilize our net operating losses and certainother tax attributes may be limited; any adverse tax determination may affectour liquidity.**

 

Atthe end of our 2009 taxable year, we had net operating loss (NOL) carryforwardsof approximately $838.0 million for federal income tax purposes andapproximately $819.5 million for state income tax purposes. Although,under existing tax rules, we are generally allowed to use those NOLcarryforwards to offset taxable income in subsequent taxable years, our abilityto use those NOL carryforwards to offset income may be severely limited to theextent that we have experienced or do experience an ownership change within themeaning of Section 382 of the Internal Revenue Code. These provisionscould also limit our ability to deduct certain losses (built-in losses) werecognize after an ownership change with respect to assets we own at the timeof the ownership change. In general, an ownership change, as defined by Section 382,results from transactions increasing ownership of certain stockholders orpublic groups in our stock by more than 50 percentage points over athree-year period. Any limitation on our NOL carryforwards that could be usedto offset post-ownership change taxable income would adversely affect ourliquidity and cash flow, as and when we become profitable. However, even if no ownershipchange occurs, we do not expect to generate sufficient taxable income in futureperiods to be able to realize fully the tax benefits of our NOL carryforwards.

 

Aspart of *The Worker, Homeownership, andBusiness Assistance Act of 2009,*the Company received an additional federal income tax refund of $8.9million.  The Company has recently beennotified of an IRS examination to review the related tax periods.  An adverse change of the tax returns as aresult of the examination could cause a decrease in our liquidity.

 

**Violation of various federal, state and local laws may resultin financial losses.**

 

Tothe extent we originated and purchased mortgage loans, re-enter the mortgagelending business, or provide title and escrow services, loan modification anddebt settlement services, asset management, liquiquidation and oversightservices, and other new businesses in which we may commence, applicable stateand local laws generally regulate interest rates and other charges, requirecertain disclosure, and require applicable licensing. In addition, other stateand local laws, public policy and general principles of equity relating to theprotection of consumers, unfair and deceptive practices and debt collectionpractices may apply to the origination, servicing and collection of our loans,and title and escrow services. Our business is also subject to various federallaws, including:

 

·                  the Federal Truth-in-LendingAct and Regulation Z promulgated there under, which require certaindisclosures to the borrowers regarding the terms of the loans;

·                  the Equal Credit OpportunityAct and Regulation B promulgated there under, which prohibitdiscrimination on the basis of age, race, color, sex, religion, marital status,national origin, receipt of public assistance or the exercise of any rightunder the Consumer Credit Protection Act, in the extension of credit;

·                  the Fair Housing Act, whichprohibits discrimination in housing on the basis of race, color, nationalorigin, religion, sex, familial status, or handicap, in housing-relatedtransactions;

·                  the Fair Credit ReportingAct, which regulates the use and reporting of information related to theborrower’s credit experience;

·                  the Fair and Accurate CreditTransaction Act, which regulates credit reporting and use of credit informationin making unsolicited offers of credit;

·                  the Gramm-Leach-Bliley Act,which imposes requirements on all lenders with respect to their collection anduse of nonpublic financial information and requires them to maintain thesecurity of that information;

·                  the Real Estate SettlementProcedures Act, which requires that consumers receive disclosures at varioustimes and outlaws kickbacks that increase the cost of settlement services;

·                  the Home Mortgage DisclosureAct, which requires the reporting of public loan data;

·                  the Telephone ConsumerProtection Act and the Can Spam Act, which regulate commercial solicitationsvia telephone, fax, and the Internet;

·                  the Depository InstitutionsDeregulation and Monetary Control Act of 1980, which preempts certain stateusury laws;

·                  the Alternative MortgageTransaction Parity Act of 1982, which preempts certain state lending laws whichregulate alternative mortgage transactions;

·                  the Fair Debt CollectionPractices Act which prohibits unfair debt collection practices;

·                  the Secure and FairEnforcement for Mortgage Licensing Act of 2008 establishes national minimumstandards for mortgage licensees; and

·                  New and proposed legislationaffecting the debt settlement business.

 

42

----

Table of Contents

 

Violationsof certain provisions of these federal and state laws may limit our ability tocollect all or part of the principal of or interest on the loans and inaddition could subject us to damages and could result in the mortgagorsrescinding the loans whether held by us or subsequent holders of the loans. Inaddition, such violations could cause us to be in default under our credit andrepurchase lines and could result in the loss of licenses held by us.

 

Similarly,it is possible borrowers may assert that the loan forms we used or acquired,including forms for “interest-only” and “option-ARM” loans for which there islittle standardization or uniformity, fail to properly describe thetransactions they intended, or that our forms failed to comply with applicableconsumer protection statutes or other federal and state laws. This could resultin liability for violations of certain provisions of federal and state consumerprotection laws and our inability to sell the loans and our obligation torepurchase the loans or indemnify the purchasers.

 

OnNovember 17, 2008, the Department of Housing and Urban Development (“HUD”)published a new final rule that seeks to simplify and improve disclosuresregarding mortgage settlement services and encourage consumers to compareprices for such services by consumers. Parts of the new rule becameeffective on January 16, 2009 but the majority of the rule had amandatory effective date of January 1, 2010. The material provisions ofthe new rule include: new Good Faith Estimate (“GFE”) and HUD-1 forms,permissibility of average cost pricing by settlement service providers,implementation of tolerance limits on various fees from the issuance of the GFEand the HUD-1 provided at closing, and disclosure of the title agent and titleunderwriter premium splits. We have revised our systems and processes to becompliant with the new rules and implemented our changes as of January 1,2010. It is too early to determine the impact that these new rules mayhave on the real estate and settlement services industries, including on theCompany.

 

Thetitle insurance business is heavily regulated by state insurance regulatoryauthorities including the California Department of Insurance. These authoritiesgenerally possess broad powers with respect to the licensing of title insurers,the types and amounts of investments that title insurers may make, insurancerates, forms of policies and the form and content of required annualstatements, as well as the power to audit and examine title insurers. Understate laws, certain levels of capital and surplus must be maintained andcertain amounts of securities must be segregated or deposited with appropriatestate officials. Various state statutes require title insurers to defer aportion of all premiums in a reserve for the protection of policyholders and tosegregate investments in a corresponding amount. Further, most states restrictthe amount of dividends and distributions a title insurer may make to itsshareholders.

 

**New regulatory laws affecting our operations may affect ourability to re-enter the mortgage market, continue our current operations orcommence new operations.**

 

Theregulatory environments in which we previously operated, and continue tooperate, have an effect on all the activities in which we are engaged and mayengage in the future. Changes to the laws, regulations or regulatory policiescan affect whether and to what extent we may be able to profitably reenter themortgage markets, whether we can continue to operate current businesses andwhether we can commence new operations. Many states and local governments andthe Federal Government have enacted, or may enact laws, or regulations thatrestrict or prohibit some provisions in some programs or businesses that wehave previously participated in, currently participate in or plan toparticipate in the future. As such, we cannot be sure that in the future wewill be able to engage in activities that were similar to those we engaged orparticipated in the past thereby limiting ability to commence newoperations.  As a result, we might be ata competitive disadvantage which would affect our operations and profitability.

 

**ITEM 2:  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3: DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4: RESERVED**

 

None.

 

43

----

Table of Contents

 

**ITEM 5:  OTHERINFORMATION**

 

OnApril 23, 2010, the Company issued 30,000 shares of common stock inconnection with entering into a marketing services agreement. This issuance of the shares were made in reliance upon the exemption fromregistration provided by Section 4(2) of the Securities Act fortransactions by an issuer not involving a public offering.

 

**ITEM 6: EXHIBITS**

 

(a)                                  Exhibits:

 
| 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 exhibitshall not be deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934 or otherwise subject to the liabilities of that section,nor shall it be deemed incorporated by reference in any filing under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

44

----

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.

 
| **IMPAC MORTGAGE HOLDINGS, INC.**                                     |     |
|-----------------------------------------------------------------------|----------|
| /s/ TODD R. TAYLOR                                                    |     |
| Todd R. Taylor                                                        |     |
| *Chief Financial Officer*                                             | * * |
| *(authorized officer of  registrant and principal financial officer)* | * * |

 

May 17,2010

 

45

----