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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**or**

 

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

 

**For the transition periodfrom           to            .**

 

**CommissionFile Number: 1-14100**

 

**IMPAC MORTGAGEHOLDINGS, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

(Address of principalexecutive offices)

 

**(949) 475-3600**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files).  Yes  o  No  o

 

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

 

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

 

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

 

There were 7,763,646 shares of common stock outstanding as ofAugust 13, 2010.

 

 

 

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**IMPACMORTGAGE HOLDINGS, INC.**

 

**FORM 10-QQUARTERLY REPORT**

**TABLE OF CONTENTS**

 
| ** **                                | ** **                                                                                                        | **Page** |
|-------------------------------------------|-------------------------------------------------------------------------------------------------------------------|----------|
| *** ***                              |                                                                                                              |     |
| ***PART I.  FINANCIAL INFORMATION*** |
|                                      |                                                                                                              |     |
| ITEM  1.                                  | **CONSOLIDATED  FINANCIAL STATEMENTS**                                                                            |     |
|                                      | ** **                                                                                                        |     |
|                                      | Consolidated Balance Sheets as of June 30, 2010  (unaudited) and December 31, 2009                      | 1        |
|                                      | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2010 and 2009 (unaudited) | 2        |
|                                      | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 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                                                                                       | 19       |
|                                      | The Mortgage Industry and Discussion of Relevant  Fiscal Periods                                                  | 19       |
|                                      | Status of Operations, Liquidity and Capital Resources                                                             | 19       |
|                                      | Market Conditions                                                                                                 | 22       |
|                                      | Critical  Accounting Policies                                                                                     | 26       |
|                                      | Income Taxes                                                                                                      | 26       |
|                                      | Selected Financial Results for the Three Months Ended  June 30, 2010                                         | 27       |
|                                      | Selected Financial Results for the Six Months Ended  June 30, 2010                                           | 27       |
|                                      | Financial Condition and Results of Operations                                                                     | 28       |
|                                      |                                                                                                              |     |
| ITEM 3.                                   | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                                   | 44       |
|                                      |                                                                                                              |     |
| ITEM 4.                                   | **CONTROLS  AND PROCEDURES**                                                                                      | 44       |
|                                      |                                                                                                              |     |
| ***PART II.  OTHER INFORMATION***    |
|                                      |                                                                                                              |     |
| ITEM 1.                                   | **LEGAL  PROCEEDINGS**                                                                                            | 44       |
|                                      |                                                                                                              |     |
| ITEM  1A.                                 | **RISK  FACTORS**                                                                                                 | 44       |
|                                      |                                                                                                              |     |
| ITEM 2.                                   | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                  | 45       |
|                                      |                                                                                                              |     |
| ITEM 3.                                   | **DEFAULTS UPON  SENIOR SECURITIES**                                                                              | 45       |
|                                      |                                                                                                              |     |
| ITEM  4.                                  | **RESERVED**                                                                                                      | 45       |
|                                      |                                                                                                              |     |
| ITEM 5.                                   | **OTHER  INFORMATION**                                                                                            | 45       |
|                                      |                                                                                                              |     |
| ITEM  6.                                  | **EXHIBITS**                                                                                                      | 45       |
|                                      |                                                                                                              |     |
|                                      | **SIGNATURES**                                                                                                    | 46       |
|                                      |                                                                                                              |     |
|                                      | **CERTIFICATIONS**                                                                                                |     |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS**

 

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

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                                                                           | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                           | ** ** | ** **        |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                            |       | $                 | 14,912     |                  | $          | 25,678 |   |
| Restricted cash                                                                                                                                                                                                                                      |       | 1,000             |       | 1,253                 |       |
| Short-term investments                                                                                                                                                                                                                               |       | —            |       | 5,002                 |       |
| Trust assets                                                                                                                                                                                                                                         |       |              |       |                  |       |
| Investment securities available-for-sale                                                                                                                                                                                                             |       | 1,269             |       | 813                   |       |
| Securitized mortgage collateral                                                                                                                                                                                                                      |       | 6,215,213         |       | 5,666,122             |       |
| Derivative assets                                                                                                                                                                                                                                    |       | 39                |       | 146                   |       |
| Real estate owned                                                                                                                                                                                                                                    |       | 112,086           |       | 142,364               |       |
| Total trust assets                                                                                                                                                                                                                                   |       | 6,328,607         |       | 5,809,445             |       |
|                                                                                                                                                                                                                                                 |       |              |       |                  |       |
| Assets of discontinued operations                                                                                                                                                                                                                    |       | 624               |       | 4,480                 |       |
| Other assets                                                                                                                                                                                                                                         |       | 28,648            |       | 27,054                |       |
| Total assets                                                                                                                                                                                                                                         |       | $                 | 6,373,791  |                  | $          | 5,872,912 |   |
|                                                                                                                                                                                                                                                 |       |              |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Trust liabilities                                                                                                                                                                                                                                    |       |              |       |                  |       |
| Securitized mortgage borrowings                                                                                                                                                                                                                      |       | $                 | 6,200,592  |                  | $          | 5,659,865 |   |
| Derivative liabilities                                                                                                                                                                                                                               |       | 100,762           |       | 126,603               |       |
| Total trust liabilities                                                                                                                                                                                                                              |       | 6,301,354         |       | 5,786,468             |       |
|                                                                                                                                                                                                                                                 |       |              |       |                  |       |
| Long-term debt                                                                                                                                                                                                                                       |       | 11,357            |       | 9,773                 |       |
| Note payable                                                                                                                                                                                                                                         |       | 12,518            |       | 31,060                |       |
| Liabilities of discontinued operations                                                                                                                                                                                                               |       | 13,646            |       | 19,152                |       |
| Other liabilities                                                                                                                                                                                                                                    |       | 9,671             |       | 11,026                |       |
| Total liabilities                                                                                                                                                                                                                                    |       | 6,348,546         |       | 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 June 30, 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 June 30,  2010 and December 31, 2009, respectively |       | 14                |       | 14                    |       |
| Common stock, $0.01 par value; 200,000,000 shares  authorized; 7,743,746 and 7,698,146 shares issued and outstanding as of  June 30, 2010 and December 31, 2009, respectively                                                              |       | 77                |       | 77                    |       |
| Additional paid-in capital                                                                                                                                                                                                                           |       | 1,076,315         |       | 1,075,707             |       |
| Net accumulated deficit:                                                                                                                                                                                                                             |       |              |       |                  |       |
| Cumulative dividends declared                                                                                                                                                                                                                        |       | (822,520          | )          | (822,520              | )          |
| Retained deficit                                                                                                                                                                                                                                     |       | (228,648          | )          | (237,852              | )          |
| Net accumulated deficit                                                                                                                                                                                                                              |       | (1,051,168        | )          | (1,060,372            | )          |
| Total stockholders’ equity                                                                                                                                                                                                                      |       | 25,245            |       | 15,433                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                      |       | $                 | 6,373,791  |                  | $          | 5,872,912 |   |

 

See accompanying notes toconsolidated financial statements.

 

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                                      | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                      | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                      | ** ** | **2010**                 | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| * *                                                                                        | * *   | * *                 | * *   | * *                | * *   | * * | * * | * * | * * |
| **INTEREST INCOME**                                                                             |       | $                        | 248,213    |                    | $          | 454,258 |   | $ | 528,090 |   | $ | 1,166,907 |   |
| **INTEREST EXPENSE**                                                                            |       | 246,658                  |       | 451,305                 |       | 525,765 |   | 1,160,312 |   |
| Net interest income                                                                             |       | 1,555                    |       | 2,953                   |       | 2,325 |   | 6,595 |   |
|                                                                                            |       |                     |       |                    |       |   |   |   |   |
| **NON-INTEREST INCOME:**                                                                        |       |                     |       |                    |       |   |   |   |   |
| Change in fair value of net trust assets,  excluding REO                                        |       | (4,244                   | )          | 54,912                  |       | 3,128 |   | 187,842 |   |
| Gains (losses) from REO                                                                         |       | 4,965                    |       | (46,723                 | )          | 3,857 |   | (174,923 | ) |
| Non-interest income - net trust assets                                                          |       | 721                      |       | 8,189                   |       | 6,985 |   | 12,919 |   |
|                                                                                            |       |                     |       |                    |       |   |   |   |   |
| Change in fair value of long-term debt                                                          |       | 75                       |       | 329                     |       | (216 | ) | 341 |   |
| Mortgage and real estate services fees                                                          |       | 15,677                   |       | 13,233                  |       | 27,002 |   | 18,782 |   |
| Other                                                                                           |       | (103                     | )          | (185                    | )          | (95 | ) | (226 | ) |
| Total non-interest income                                                                       |       | 16,370                   |       | 21,566                  |       | 33,676 |   | 31,816 |   |
|                                                                                            |       |                     |       |                    |       |   |   |   |   |
| **NON-INTEREST EXPENSE:**                                                                       |       |                     |       |                    |       |   |   |   |   |
| General and administrative                                                                      |       | 4,630                    |       | 6,110                   |       | 9,409 |   | 10,449 |   |
| Personnel expense                                                                               |       | 10,768                   |       | 10,359                  |       | 20,449 |   | 16,637 |   |
| Total non-interest expense                                                                      |       | 15,398                   |       | 16,469                  |       | 29,858 |   | 27,086 |   |
| Earnings from continuing operations before income  taxes                                        |       | 2,527                    |       | 8,050                   |       | 6,143 |   | 11,325 |   |
| Income tax expense from continuing operations                                                   |       | 45                       |       | 20                      |       | 129 |   | 2,018 |   |
| Earnings from continuing operations                                                             |       | 2,482                    |       | 8,030                   |       | 6,014 |   | 9,307 |   |
| Earnings (loss) from discontinued operations, net  of tax                                       |       | 804                      |       | (4,195                  | )          | 3,190 |   | (6,591 | ) |
| Net earnings                                                                                    |       | 3,286                    |       | 3,835                   |       | 9,204 |   | 2,716 |   |
| Cash dividends on preferred stock                                                               |       | —                   |       | (7,443                  | )          | — |   | (7,443 | ) |
| Earnings (loss) available to common stockholders  before redemption of preferred stock (Note 4) |       | $                        | 3,286      |                    | $          | (3,608 | ) | $ | 9,204 |   | $ | (4,727 | ) |
|                                                                                            |       |                     |       |                    |       |   |   |   |   |
| Earnings (loss) per common share - basic:                                                       |       |                     |       |                    |       |   |   |   |   |
| Earnings from continuing operations                                                             |       | $                        | 0.32       |                    | $          | 0.08 |   | $ | 0.78 |   | $ | 0.24 |   |
| Earnings (loss) from discontinued operations                                                    |       | 0.11                     |       | (0.55                   | )          | 0.41 |   | (0.86 | ) |
| Earnings (loss) available to common stockholders  before redemption of preferred stock (Note 4) |       | $                        | 0.43       |                    | $          | (0.47 | ) | $ | 1.19 |   | $ | (0.62 | ) |
|                                                                                            |       |                     |       |                    |       |   |   |   |   |
| Earnings (loss) per common share - diluted:                                                     |       |                     |       |                    |       |   |   |   |   |
| Earnings from continuing operations                                                             |       | $                        | 0.30       |                    | $          | 0.08 |   | $ | 0.72 |   | $ | 0.24 |   |
| Earnings (loss) from discontinued operations                                                    |       | 0.09                     |       | (0.55                   | )          | 0.38 |   | (0.86 | ) |
| Earnings (loss) available to common stockholders  before redemption of preferred stock (Note 4) |       | $                        | 0.39       |                    | $          | (0.47 | ) | $ | 1.10 |   | $ | (0.62 | ) |

 

See accompanying notes toconsolidated financial statements

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **For the Six Months**  | ** **   |
|---------------------------------------------------------------------------------------------|------------|-------------------------|--------------|
| ** **                                                                                  | ** ** | **Ended June 30,** | ** **   |
| ** **                                                                                  | ** ** | **2010**                | ** **   | **2009** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                  |       |                    | *** *** | *** *** | *** *** |
| Earnings from continuing operations                                                         |       | $                       | 6,014        |   | $ | 9,307 |   |
|                                                                                        |       |                    |         |   |   |
| (Gains) losses from real estate owned                                                       |       | (3,857                  | )            | 174,923 |   |
| Amortization and impairment of deferred charge,  net                                        |       | —                  |         | 1,998 |   |
| Change in fair value of net trust assets,  excluding REO                                    |       | (67,817                 | )            | (297,870 | ) |
| Change in fair value of long-term debt                                                      |       | 216                     |         | (341 | ) |
| Accretion of interest income and expense                                                    |       | 224,061                 |         | 381,079 |   |
| Stock-based compensation                                                                    |       | 472                     |         | 2,858 |   |
| Net change in other assets and liabilities                                                  |       | (14,727                 | )            | (1,864 | ) |
| Net cash used in operating activities of  discontinued operations                           |       | (150                    | )            | (63,288 | ) |
| **Net cash provided by operating  activities**                                              | ** ** | **144,212**             | ** **   | **206,802** | ** ** |
| ** **                                                                                  | ** ** | ** **              | ** **   | ** ** | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                  |       |                    | ** **   | ** ** | ** ** |
| Net change in securitized mortgage collateral                                               |       | 392,211                 |         | 439,369 |   |
| Net change in mortgages held-for-investment                                                 |       | 141                     |         | 397 |   |
| Purchase of premises and equipment                                                          |       | (746                    | )            | (284 | ) |
| Maturity (purchase) of short-term investments                                               |       | 5,000                   |         | (5,041 | ) |
| Net principal change on investment securities  available-for-sale                           |       | 77                      |         | 2,593 |   |
| Proceeds from the sale of real estate owned                                                 |       | 130,492                 |         | 407,573 |   |
| Net cash provided by investing activities of  discontinued operations                       |       | 1,693                   |         | 5,949 |   |
| **Net cash provided by investing  activities**                                              | ** ** | **528,868**             | ** **   | **850,556** | ** ** |
|                                                                                        |       |                    |         |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                  |       |                    |         |   |   |
| Settlement of trust preferred securities                                                    |       | —                  |         | (3,900 | ) |
| Repurchase of preferred stock                                                               |       | —                  |         | (1,259 | ) |
| Preferred stock dividends paid                                                              |       | —                  |         | (7,443 | ) |
| Principal payments on notes payable                                                         |       | (18,542                 | )            | — |   |
| Repayment of securitized mortgage borrowings                                                |       | (665,308                | )            | (1,042,689 | ) |
| Proceeds from exercise of stock options                                                     |       | 8                       |         | — |   |
| Net cash used in financing activities of  discontinued operations                           |       | —                  |         | (16,969 | ) |
| **Net cash used in financing  activities**                                                  | ** ** | **(683,842**            | **)**        | **(1,072,260** | **)** |
|                                                                                        |       |                    |         |   |   |
| Net change in cash and cash equivalents                                                     |       | (10,762                 | )            | (14,902 | ) |
| Cash and cash equivalents at beginning of period                                            |       | 25,850                  |         | 46,228 |   |
| Cash and cash equivalents at end of period -  Continuing Operations                         |       | 14,912                  |         | 30,694 |   |
| Cash and cash equivalents at end of period -  Discontinued Operations                       |       | 176                     |         | 632 |   |
| Total cash and cash equivalents at end of period                                            |       | $                       | 15,088       |   | $ | 31,326 |   |
|                                                                                        |       |                    |         |   |   |
| **NON-CASH TRANSACTIONS (Continuing  and Discontinued Operations):**                        |       |                    |         |   |   |
| Common stock issued per marketing service  agreement                                        |       | $                       | 129          |   | $ | — |   |
| Transfer of loans held-for-sale and  held-for-investment to real estate owned               |       | —                  |         | 9,555 |   |
| Transfer of securitized mortgage collateral to  real estate owned                           |       | 80,569                  |         | 192,388 |   |
| 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 toconsolidated financial statements.

 

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

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**(dollars in thousands, except share and per share dataor as otherwise indicated)**

 

**Note 1.—Summary of Business, SignificantAccounting Policies and Legal Proceedings**

 

***Business Summary***

 

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Marylandcorporation incorporated in August 1995 and has the followingsubsidiaries: Integrated Real Estate Service Corporation (IRES), IMHAssets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG)and Impac Funding Corporation (IFC).

 

The Company’s continuing operations include the long-term mortgageportfolio (residual interests in securitizations determined as total trustassets minus total trust liabilities in the consolidated balance sheets) andthe mortgage and real estate fee-based business activities conducted by IRES.The discontinued operations include the former non-conforming mortgage andretail operations conducted by IFC and subsidiaries, and warehouse lendingoperations conducted by IWLG.

 

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

 

***Financial Statement Presentation***

 

The accompanying unaudited consolidated financial statements of IMH andits subsidiaries (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 and six months ended June 30,2010 are not necessarily indicative of the results that may be expected for theyear ending 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).

 

All significant inter-company balances and transactions have beeneliminated in consolidation. In addition, certain amounts in the prior periods’consolidated financial statements have been reclassified to conform to thecurrent year presentation.

 

Management has made a number of estimates and assumptions relating tothe reporting of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period to prepare theseconsolidated financial statements in conformity with GAAP. The items affectedby such estimates and assumptions include the valuation of trust assets andtrust liabilities, the estimated obligation of repurchase liabilities relatedto sold loans, the valuation of long-term debt and the carrying amount andevaluation of impairment of loans held-for-sale. Actual results could differfrom those estimates and assumptions.

 

***Recently Adopted AccountingPronouncements***

 

In February 2010, the FASB issued Accounting Standards Update(ASU) No. 2010-9 “Amendments to Certain Recognition and DisclosureRequirements” (ASU 2010-9). The ASU amends FASB Accounting StandardsCodification Topic 855 “Subsequent Events” to address certain implementationissues related to an entity’s requirement to perform and disclose subsequentevents procedures. ASU 2010-9 requires (a) SEC filers and (b) conduitdebt obligors for conduit debt securities that are traded in a public market toevaluate subsequent events through the date the financial statements areissued. All other entities are required to evaluate subsequent events throughthe date the financial statements are available to be issued. ASU 2010-9exempts SEC filers from disclosing the date through which subsequent eventshave been evaluated. For the Company, ASU 2010-9 is effective immediately forfinancial statements that are to be issued or revised. The adoption of ASU2010-9 did not have an impact on the Company’s consolidated financialstatements.

 

In January 2010, the FASB issued Accounting Standards Update (ASU)No. 2010-6 “Improving Disclosures About Fair Value Measurements” (ASU2010-6). The ASU amends Codification Topic 820 “Fair Value Measurements andDisclosures” to add new disclosure requirements for transfers into and out ofLevels 1 and 2 fair value measurements, as well as separate disclosuresabout purchases, sales, issuances, and settlements relating to Level 3fair value measurements. ASU 2010-6 also clarifies existing fair valuedisclosures regarding the level of disaggregation and inputs and valuationtechniques used to measure fair value. ASU 2010-6 is effective for the firstreporting period (including interim periods) beginning after December 15,2009, except for the requirement to provide the Level 3 activity ofpurchases, sales, issuances, and settlements on a gross basis, which will beeffective for fiscal years beginning after December 15, 2010, and forinterim periods within those fiscal years. ASU 2010-6 only adds new disclosuresrequirements and as a result, its adoption did not have an impact on theCompany’s consolidated financial statements.

 

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In June 2009, the FASB issued SFAS No. 166, “Accounting forTransfers of Financial Assets—An Amendment of FASB Statement 140” which eliminatesthe concept 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.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments toFASB Interpretation 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.

 

In connection with the adoption of this standard on January 1,2010, the Company consolidated $253.7 million of trust assets and trust liabilitiesat fair 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 |   |
|                                          |            |                         |            |                                |            |                     |            |                      |            |  |  |  |  |

 

There was no overall impact on stockholders’ equity as a result of theconsolidation and deconsolidation of these trust assets and liabilities onJanuary 1, 2010.

 

***Income Taxes and Deferred Charge***

 

Effective January 1, 2009, the Company revoked its election to betaxed as a REIT. As a result of revoking this election, the Company is subjectto income taxes as a regular (Subchapter C) corporation.

 

The Company recorded income tax expense of $45 thousand and $129thousand for the three and six months ended June 30, 2010, respectively.Income tax expense for the three and six months ended June 30, 2009 was$20 thousand and $2.0 million, respectively.  The income tax expense for 2010 is the result of state incometaxes.  The income tax expense for 2009is primarily the result of the amount of the deferred charge amortized and/orimpaired resulting from credit losses, which does not result in any taxliability required to be paid. The deferred charge represents the deferral ofincome tax expense on inter-company profits that resulted from the sale ofmortgages from taxable subsidiaries to IMH in prior years. The deferred chargeis included in other assets in the accompanying consolidated balance sheets andis amortized as a component of income tax expense in the accompanyingconsolidated statement of operations over the estimated life of the mortgagesretained in the securitized mortgage collateral.

 

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As of December 31, 2009, the Company had estimated federal andCalifornia net operating loss carryforwards in the amount of$835.8 million and $837.3 million, respectively, of which$277.6 million (federal) relate to discontinued operations.  Federal and state net operating loss (NOL)carryforwards begin to expire in 2020 and 2013, respectively.  The Company recorded a full valuationallowance against the deferred tax assets as it believes that as ofJune 30, 2010 it is more likely than not that the deferred tax assets willnot be recoverable.

 

During the fourth quarter of 2009, the Company received a federal income tax refund in the amount of$8.9 million as a result of an election to carryback NOLs five yearspursuant to 2009 federal legislation, *TheWorker, Homeownership, and Business Assistance Act of 2009*.   The Company files income tax returns in theU.S. federal and various state jurisdictions. The Company is subject to routine income tax audits in the variousjurisdictions.  A subsidiary of theCompany is currently under examination by the Internal Revenue Service for taxyear 2008.  Management believes thatthere are no unresolved issues or claims likely to be material to our financialposition.  As of June 30, 2010, theCompany has no material uncertain tax positions.

 

***Legal Proceedings***

 

The Company is party to litigation and claims which arise in theordinary course of business.

 

Withrespect to Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al,which is further described in the Company’s Form 10-K for the year ended December 31,2009, on June 29, 2010, the United States Court of Appeals for theNinth Circuit affirmed the District’s Court’s dismissal of the plaintiff’sThird Amended Complaint.

 

Please refer to IMH’s reports on Form 10-K for the year endedDecember 31, 2009 and Form 10-Q for the quarter ended March 31,2010 for a description of other litigation and claims.

 

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

 

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

 

For securitized mortgage collateral and securitized mortgageborrowings, the underlying Alt-A residential and commercial loans andmortgage-backed securities market have experienced significant declines inmarket activity, along with a lack of orderly transactions. The Company’smethodology to estimate fair value of these assets and liabilities include theuse of internal pricing techniques such as the net present value of futureexpected cash flows (with observable market participant assumptions, whereavailable) discounted at a rate of return based on the Company’s estimates ofmarket participant requirements. The significant assumptions utilized in theseinternal pricing techniques, which are based on the characteristics of theunderlying collateral, include estimated credit losses, estimated prepaymentspeeds and appropriate discount rates.

 

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The following table presents the estimated fair value of financialinstruments included in the consolidated financial statements as of the datesindicated:

 
| ** **                               | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **Carrying  Amount**   | ** ** | **Estimated  Fair Value**  | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| **Assets**                               |       |                   |       |                       |       |   |   |   |   |
| Cash and cash equivalents                |       | $                      | 14,912     |                       | $          | 14,912 |   | $ | 25,678 |   | $ | 25,678 |   |
| Restricted cash                          |       | 1,000                  |       | 1,000                      |       | 1,253 |   | 1,253 |   |
| Short-term investments                   |       | —                 |       | —                     |       | 5,002 |   | 5,002 |   |
| Investment securities available-for-sale |       | 1,269                  |       | 1,269                      |       | 813 |   | 813 |   |
| Securitized mortgage collateral          |       | 6,215,213              |       | 6,215,213                  |       | 5,666,122 |   | 5,666,122 |   |
| Derivative assets                        |       | 39                     |       | 39                         |       | 146 |   | 146 |   |
|                                     |       |                   |       |                       |       |   |   |   |   |
| **Liabilities**                          |       |                   |       |                       |       |   |   |   |   |
| Securitized mortgage borrowings          |       | 6,200,592              |       | 6,200,592                  |       | 5,659,865 |   | 5,659,865 |   |
| Derivative liabilities                   |       | 100,762                |       | 100,762                    |       | 126,603 |   | 126,603 |   |
| Long-term debt                           |       | 11,357                 |       | 11,357                     |       | 9,773 |   | 9,773 |   |
| Note payable                             |       | 12,518                 |       | 11,511                     |       | 31,060 |   | 27,789 |   |
|                                          |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair value amounts above have been estimated by management usingavailable market information and appropriate valuation methodologies.Considerable judgment is required to interpret market data to develop theestimates of fair value in both inactive and orderly markets. Accordingly, theestimates presented are not necessarily indicative of the amounts that could berealized in a current market exchange. The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.

 

The carrying amount of cash and cash equivalents and restricted cashapproximates fair value. The fair value of short-term investments wasdetermined using quoted prices in active markets.

 

Refer to *Recurring Fair ValueMeasurements* below for a description of the valuation methods usedto determine the fair value of investment securities available for sale,securitized mortgage collateral and borrowings, derivative assets andliabilities and long-term debt.

 

Note payable is recorded at amortized cost. Fair value of note payableis determined using a discounted cash flow model which factors in expectedchanges in interest rates and the Company’s own credit risk.

 

***Fair Value Hierarchy***

 

The application 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.

 

FASB ASC 820-10-35 specifies a hierarchy of valuation techniques basedon whether the inputs to those techniques are observable or unobservable.Observable inputs 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—Quoted prices(unadjusted) in active markets for identical instruments or liabilities that anentity has the ability to assess at measurement date.

 

·                  Level 2—Quoted pricesfor similar instruments in active markets; quoted prices for identical orsimilar 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.

 

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

 

This hierarchy requires the Company to use observable market data, whenavailable, and to minimize the use of unobservable inputs when estimating fairvalue.

 

As a result of the lack of observable market data resulting frominactive markets, the Company has classified its investment securitiesavailable-for-sale, securitized mortgage collateral and borrowings, net derivativeliabilities and long-term debt as Level 3 fair value measurements atJune 30, 2010 and December 31, 2009. Level 3 assets andliabilities were 100% of total assets and total liabilities measured atestimated fair value at June 30, 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 classified instruments duringthe three and six months ended June 30, 2010.  The adoption of ASU 2009-17 resulted in theCompany consolidating and deconsolidating certain trust assets and liabilitiesat fair value as of January 1, 2010.  The details of the effect of the adoption of this standard  are illustrated in Note 1.—Summary of Business, Significant Accounting Policies andLegal Proceedings.

 

The following tables present the Company’s assets and liabilities thatare measured at estimated fair value on a recurring basis, including financialinstruments for which the Company has elected the fair value option atJune 30, 2010 and December 31, 2009, based on the fair valuehierarchy:

 
| ** **                               | ** ** | **Recurring Fair Value Measurements** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **June 30, 2010**                | ** ** | **December 31, 2009** | ** ** |
| ** **                               | ** ** | **Level 1**                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets**                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities available-for-sale |       | $                                     | —     |   | $ | — |   | $ | 1,269 |   | $ | — |   | $ | — |   | $ | 813 |   |
| Securitized mortgage collateral          |       | —                                |       | — |   | 6,215,213 |   | — |   | — |   | 5,666,122 |   |
| Total assets at fair value               |       | $                                     | —     |   | $ | — |   | $ | 6,216,482 |   | $ | — |   | $ | — |   | $ | 5,666,935 |   |
| ** **                               | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Liabilities**                          |       |                                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securitized mortgage borrowings          |       | $                                     | —     |   | $ | — |   | $ | 6,200,592 |   | $ | — |   | $ | — |   | $ | 5,659,865 |   |
| Derivative liabilities, net (1)          |       | —                                |       | — |   | 100,723 |   | — |   | — |   | 126,457 |   |
| Long-term debt                           |       | —                                |       | — |   | 11,357 |   | — |   | — |   | 9,773 |   |
| Total liabilities at fair value          |       | $                                     | —     |   | $ | — |   | $ | 6,312,672 |   | $ | — |   | $ | — |   | $ | 5,796,095 |   |

 

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(1)          At June 30, 2010,derivative liabilities, net included $39 thousand in derivative assets and$100.8 million in derivative liabilities, included within trust assets andtrust liabilities, respectively. At December 31, 2009, derivativeliabilities, net included $146 thousand in derivative assets and$126.6 million in derivative liabilities, included within trust assets andtrust liabilities, respectively.

 

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The following tables present a reconciliation for all assets andliabilities measured at estimated fair value on a recurring basis using significantunobservable inputs (Level 3) for the three and six months endedJune 30, 2010 and 2009:

 
| ** **                                 | ** ** | **Level 3 Recurring Fair Value Measurements**     | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **For the three months ended June 30, 2010** | ** ** |
| ** **                                 | ** ** | **Investment  securities available-  for-sale**   | ** ** | **Securitized  mortgage  collateral** | ** ** | **Securitized  mortgage  borrowings** | ** ** | **Derivative  liabilities, net** | ** ** | **Long-term  debt** | ** ** |
| Fair value, March 31, 2010            |       | $                                                 | 670        |   | $ | 6,366,855 |   | $ | (6,351,890 | ) | $ | (117,876 | ) | $ | (10,732 | ) |
| Total gains (losses) included in earnings: |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest income (1)                        |       | 66                                                |       | 123,970 |   | — |   | — |   | — |   |
| Interest expense (1)                       |       | —                                            |       | — |   | (221,491 | ) | — |   | (700 | ) |
| Change in fair value                       |       | 541                                               |       | (30,644 | ) | 37,152 |   | (11,293 | ) | 75 |   |
| Total gains (losses) included in earnings  |       | 607                                               |       | 93,326 |   | (184,339 | ) | (11,293 | ) | (625 | ) |
| Transfers in and/or out of Level 3         |       | —                                            |       | — |   | — |   | — |   | — |   |
| Purchases, issuances and settlements       |       | (8                                                | )          | (244,968 | ) | 335,637 |   | 28,446 |   | — |   |
| Fair value, June 30, 2010             |       | $                                                 | 1,269      |   | $ | 6,215,213 |   | $ | (6,200,592 | ) | $ | (100,723 | ) | $ | (11,357 | ) |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |
| Unrealized gains (losses) still held (2)   |       | $                                                 | 969        |   | $ | (5,206,813 | ) | $ | 6,909,596 |   | $ | (101,937 | ) | $ | 59,406 |   |

 

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(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 $1.6million for the three months ended June 30, 2010, as reflected in theaccompanying consolidated statement of operations.

(2)          Represents the amount ofunrealized gains (losses) relating to assets and liabilities classified asLevel 3 that are still held and reflected in the fair values atJune 30, 2010.

 
| ** **                                 | ** ** | **Level 3 Recurring Fair Value Measurements**     | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **For the three months ended June 30, 2009** | ** ** |
| ** **                                 | ** ** | **Investment  securities available-  for-sale**   | ** ** | **Securitized  mortgage  collateral** | ** ** | **Securitized  mortgage  borrowings** | ** ** | **Derivative  liabilities, net** | ** ** | **Long-term  debt** | ** ** |
| Fair value, March 31, 2009            |       | $                                                 | 1,322      |   | $ | 5,505,729 |   | $ | (5,691,028 | ) | $ | (232,320 | ) | $ | (11,090 | ) |
| Total gains (losses) included in earnings: |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest income (1)                        |       | 53                                                |       | 233,411 |   | — |   | — |   | — |   |
| Interest expense (1)                       |       | —                                            |       | — |   | (417,215 | ) | — |   | (325 | ) |
| Change in fair value                       |       | 805                                               |       | 594,624 |   | (536,336 | ) | (4,181 | ) | 329 |   |
| Total gains (losses) included in earnings  |       | 858                                               |       | 828,035 |   | (953,551 | ) | (4,181 | ) | 4 |   |
| Transfers in and/or out of Level 3         |       | —                                            |       | — |   | — |   | — |   | — |   |
| Purchases, issuances and settlements       |       | (848                                              | )          | (315,373 | ) | 563,942 |   | 51,829 |   | 1,289 |   |
| Fair value, June 30, 2009             |       | $                                                 | 1,332      |   | $ | 6,018,391 |   | $ | (6,080,637 | ) | $ | (184,672 | ) | $ | (9,797 | ) |
|                                       |       |                                              |       |   |   |   |   |   |   |   |   |
| Unrealized gains (losses) still held (2)   |       | $                                                 | 27         |   | $ | (7,070,940 | ) | $ | 8,303,670 |   | $ | (187,188 | ) | $ | 63,823 |   |

 

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(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$3.0 million for the three months ended June 30, 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 and reflected in the fair values atJune 30, 2009.

 

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| ** **                                 | ** ** | **Level 3 Recurring Fair Value Measurements**   | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **For the six months ended June 30, 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)                        |       | 113                                             |       | 254,199 |   | — |   | — |   | — |   |
| Interest expense (1)                       |       | —                                          |       | — |   | (477,004 | ) | — |   | (1,368 | ) |
| Change in fair value                       |       | 718                                             |       | 650,765 |   | (619,047 | ) | (29,308 | ) | (216 | ) |
| Total gains (losses) included in earnings  |       | 831                                             |       | 904,964 |   | (1,096,051 | ) | (29,308 | ) | (1,584 | ) |
| 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       |       | (77                                             | )          | (472,780 | ) | 665,942 |   | 64,055 |   | — |   |
| Fair value, June 30, 2010             |       | $                                               | 1,269      |   | $ | 6,215,213 |   | $ | (6,200,592 | ) | $ | (100,723 | ) | $ | (11,357 | ) |

 

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(1)          Amounts primarily representaccretion to recognize interest income and interest expense using effective yieldsbased on estimated fair values for trust assets and trust liabilities. Thetotal net interest income, including cash received and paid, was$2.3 million for the six months ended June 30, 2010, as reflected inthe accompanying consolidated statement of operations.

(2)          Amounts represent theconsolidation and deconsolidation of trust assets and liabilities as a resultof the adoption of ASU 2009-17 on January 1, 2010.

 
| ** **                                 | ** ** | **Level 3 Recurring Fair Value Measurements**   | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **For the six months ended June 30, 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)                        |       | 147                                             |       | 710,121 |   | — |   | — |   | — |   |
| Interest expense (1)                       |       | —                                          |       | — |   | (1,091,022 | ) | — |   | (325 | ) |
| Change in fair value                       |       | 1,710                                           |       | 45,603 |   | 160,867 |   | (20,338 | ) | 341 |   |
| Total gains (losses) included in earnings  |       | 1,857                                           |       | 755,724 |   | (930,155 | ) | (20,338 | ) | 16 |   |
| Transfers in and/or out of Level 3         |       | —                                          |       | — |   | — |   | — |   | — |   |
| Purchases, issuances and settlements       |       | (2,593                                          | )          | (631,757 | ) | 1,043,502 |   | 109,213 |   | 5,590 |   |
| Fair value, June 30, 2009             |       | $                                               | 1,332      |   | $ | 6,018,391 |   | $ | (6,080,637 | ) | $ | (184,672 | ) | $ | (9,797 | ) |

 

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(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$6.6 million for the six months ended June 30, 2009, as reflected inthe accompanying consolidated statements of operations.

 

The following tables present the changes in recurring fair valuemeasurements included in net earnings (loss) for the three and six months endedJune 30, 2010 and 2009:

 
| ** **                               | ** ** | **Recurring Fair Value Measurements**              | ** **  |
|------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                               | ** ** | **Changes in Fair Value Included in Net Earnings** | ** **  |
| ** **                               | ** ** | **For the three months ended June 30, 2010**  | ** **  |
| ** **                               | ** ** | ** **                                         | ** **  | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Interest Income (1)**                            | ** **  | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Long-term Debt** | ** ** | **Total** | ** ** |
| Investment securities available-for-sale |       | $                                                  | 66          |   | $ | — |   | $ | 541 |   | $ | — |   | $ | 607 |   |
| Securitized mortgage collateral          |       | 123,970                                            |        | — |   | (30,644 | ) | — |   | 93,326 |   |
| Securitized mortgage borrowings          |       | —                                             |        | (221,491 | ) | 37,152 |   | — |   | (184,339 | ) |
| Derivative instruments, net              |       | —                                             |        | — |   | (11,293 | )(2) | — |   | (11,293 | ) |
| Long-term debt                           |       | —                                             |        | (700 | ) | — |   | 75 |   | (625 | ) |
| **Total**                                | ** ** | **$**                                              | **124,036** | ** ** | **$** | **(222,191** | **)** | **$** | **(4,244** | **)** | **$** | **75** | ** ** | **$** | **(102,324** | **)** |

 

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(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 $1.6million for the three months ended June 30, 2010, as reflected in the accompanyingconsolidated statement of operations.

(2)          Included in this amount is$17.5 million in changes in the fair value of derivative instruments,offset by $28.8 million in cash payments from the securitization trustsfor the three months ended June 30, 2010.

 

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| ** **                               | ** ** | **Recurring Fair Value Measurements**                              | ** **  |
|------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|
| ** **                               | ** ** | **Changes in Fair Value Included in Net Loss** | ** **  |
| ** **                               | ** ** | **For the three months ended June 30, 2009**   | ** **  |
| ** **                               | ** ** | ** **                                                                        | ** **  | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Interest Income (1)**                                                 | ** **  | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Long-term Debt** | ** ** | **Total** | ** ** |
| Investment securities available-for-sale |       | $                                                                                 | 53          |   | $ | — |   | $ | 805 |   | $ | — |   | $ | 858 |   |
| Securitized mortgage collateral          |       | 233,411                                                                           |        | — |   | 594,624 |   | — |   | 828,035 |   |
| Securitized mortgage borrowings          |       | —                                                                            |        | (417,215 | ) | (536,336 | ) | — |   | (953,551 | ) |
| Derivative instruments, net              |       | —                                                                            |        | — |   | (4,181 | )(2) | — |   | (4,181 | ) |
| Long-term debt                           |       | —                                                                            |        | (325 | ) | — |   | 329 |   | 4 |   |
| **Total**                                | ** ** | **$**                                                                             | **233,464** | ** ** | **$** | **(417,540** | **)** | **$** | **54,912** | ** ** | **$** | **329** | ** ** | **$** | **(128,835** | **)** |

 

----

(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$3.0 million for the three months ended June 30, 2009, as reflectedin the accompanying consolidated statement of operations.

(2)          Included in this amount is$48.0 million in changes in the fair value of derivative instruments,offset by $52.2 million in cash payments from the securitization trustsfor the three months ended June 30, 2009.

 
| ** **                               | ** ** | **Recurring Fair Value Measurements**                                  | ** **  |
|------------------------------------------|------------|---------------------------------------------------------------------------------------|-------------|
| ** **                               | ** ** | **Changes in Fair Value Included in Net Earnings** | ** **  |
| ** **                               | ** ** | **For the six months ended June 30, 2010**         | ** **  |
| ** **                               | ** ** | ** **                                                                            | ** **  | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Interest Income (1)**                                                     | ** **  | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Long-term Debt** | ** ** | **Total** | ** ** |
| Investment securities available-for-sale |       | $                                                                                     | 113         |   | $ | — |   | $ | 718 |   | $ | — |   | $ | 831 |   |
| Securitized mortgage collateral          |       | 254,199                                                                               |        | — |   | 650,765 |   | — |   | 904,964 |   |
| Securitized mortgage borrowings          |       | —                                                                                |        | (477,004 | ) | (619,047 | ) | — |   | (1,096,051 | ) |
| Derivative instruments, net              |       | —                                                                                |        | — |   | (29,308) | (2) | — |   | (29,308 | ) |
| Long-term debt                           |       | —                                                                                |        | (1,368 | ) | — |   | (216 | ) | (1,584 | ) |
| **Total**                                | ** ** | **$**                                                                                 | **254,312** | ** ** | **$** | **(478,372** | **)** | **$** | **3,128** | (3) | **$** | **(216** | **)** | **$** | **(221,148** | **)** |

 

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(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$2.3 million for the six months ended June 30, 2010, as reflected inthe accompanying consolidated statement of operations.

(2)          Included in this amount is$35.4 million in changes in the fair value of derivative instruments,offset by $64.7 million in cash payments from the securitization trustsfor the six months ended June 30, 2010.

(3)          For the six months ended June 30, 2010, changein the fair value of trust assets, excluding REO was $3.1 million.  Excluded from the $67.8 million changein fair value of net trust assets, excluding REO, in the accompanyingconsolidated statement of cash flows is $64.7 million in cash payments from thesecuritization trusts related to the Company’s net derivative liabilities.

 
| ** **                               | ** ** | **Recurring Fair Value Measurements**                              | ** **  |
|------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|
| ** **                               | ** ** | **Changes in Fair Value Included in Net Loss** | ** **  |
| ** **                               | ** ** | **For the six months ended June 30, 2009**     | ** **  |
| ** **                               | ** ** | ** **                                                                        | ** **  | ** ** | ** ** | **Change in Fair Value of** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Interest Income (1)**                                                 | ** **  | **Interest Expense (1)** | ** ** | **Net Trust Assets** | ** ** | **Long-term Debt** | ** ** | **Total** | ** ** |
| Investment securities available-for-sale |       | $                                                                                 | 147         |   | $ | — |   | $ | 1,710 |   | $ | — |   | $ | 1,857 |   |
| Securitized mortgage collateral          |       | 710,121                                                                           |        | — |   | 45,603 |   | — |   | 755,724 |   |
| Securitized mortgage borrowings          |       | —                                                                            |        | (1,091,022 | ) | 160,867 |   | — |   | (930,155 | ) |
| Derivative instruments, net              |       | —                                                                            |        | — |   | (20,338) | (2) | — |   | (20,338 | ) |
| Long-term debt                           |       | —                                                                            |        | (325 | ) | — |   | 341 |   | 16 |   |
| **Total**                                | ** ** | **$**                                                                             | **710,268** | ** ** | **$** | **(1,091,347** | **)** | **$** | **187,842** | (3) | **$** | **341** | ** ** | **$** | **(192,896** | **)** |

 

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(1)          Amounts primarily represent accretion to recognizeinterest income and interest expense using effective yields based on estimatedfair values for trust assets and trust liabilities.  The total net interest income, including cashreceived and paid, was $6.6 million for the six months ended June 30,2009, as reflected in the consolidated statements of operations.

(2)          Included in this amount is $89.7 million inchanges in the fair value of derivative instruments, offset by $110.0 millionin cash payments from the securitization trusts for the six months ended June 30,2009.

(3)          For the six months ended June 30, 2009, changein the fair value of trust assets, excluding REO was $187.8 million.  Excluded from the $297.9 million changein fair value of net trust assets, excluding REO, in the accompanyingconsolidated statement of cash flows is $110.0 million in cash payments fromthe securitization trusts related to the Company’s net derivative liabilities.

 

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The following is a description of the measurement techniques for itemsrecorded at estimated fair value on a recurring basis.

 

*Investment securities available-for-sale*—The Companyelected to carry all of its investment securities available-for-sale at fairvalue. The investment securities consist primarily of non-investment grademortgage-backed securities. The fair value of the investment securities ismeasured based upon the Company’s expectation of inputs that other marketparticipants would use. Such assumptions include judgments about the underlyingcollateral, prepayment speeds, future credit losses, forward interest rates andcertain other factors.  Given the marketdisruption and lack of observable market data as of June 30, 2010 andDecember 31, 2009, the estimated fair value of the investment securitiesavailable-for-sale was measured using significant internal expectations ofmarket participants’ assumptions.

 

*Securitized mortgage collateral*—The Companyelected to carry all of its securitized mortgage collateral at fair value.These assets consist primarily of non-conforming mortgage loans securitizedbetween 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 itsexpectations of inputs that other market participants would use in pricingthese assets. These assumptions include judgments about the underlyingcollateral, prepayment speeds, estimated future credit losses, forward interestrates, investor yield requirements and certain other factors.  As of June 30, 2010, securitizedmortgage collateral had an unpaid principal balance of $11.4 billion,compared to an estimated fair value of $6.2 billion. The aggregate unpaidprincipal balance exceeds the fair value by $5.2 billion at June 30,2010.  As of June 30, 2010, theunpaid principal balance of loans 90 days or more past due was $2.3billion compared to an estimated fair value of $0.7 billion. The aggregateunpaid principal balances of loans 90 days or more past due exceed thefair value by $1.6 billion at June 30, 2010.

 

*Securitized mortgage borrowings*—The Companyelected to carry all of its securitized mortgage borrowings at fair value.These borrowings consist of individual tranches of bonds issued by securitizationtrusts and are primarily backed by non-conforming mortgage loans. Fair valuemeasurements include the Company’s judgments about the underlying collateraland assumptions such as prepayment speeds, estimated future credit losses,forward interest rates, investor yield requirements and certain other factors.As of June 30, 2010, securitized mortgage borrowings had an outstandingprincipal balance of $13.1 billion compared to an estimated fair value of$6.2 billion. The aggregate outstanding principal balance exceeds the fairvalue by $6.9 billion at June 30, 2010.

 

*Long-term debt*—The Company elected tocarry all of its long-term debt (consisting of trust preferred securities andjunior subordinated notes) at fair value. These securities are measured basedupon an analysis prepared by management, which considered the Company’s owncredit risk, including settlements with trust preferred debt holders anddiscounted cash flow analysis. As of June 30, 2010, long-term debt had anunpaid principal balance of $70.5 million compared to an estimated fairvalue of $11.4 million. The aggregate unpaid principal balance exceeds thefair value by $59.1 million at June 30, 2010.

 

*Derivative assets and liabilities.*  For non-exchange traded contracts, fair valueis based on the amounts that would be required to settle the positions with therelated counterparties as of the valuation date. Valuations of derivativeassets and liabilities are based on observable market inputs, if available. Tothe extent observable market inputs are not available, fair values measurementsinclude the Company’s judgments about 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.

 

***Nonrecurring Fair Value Measurements***

 

The Company is required to measure certain assets and liabilities atestimated fair value from time to time. These fair value measurements typicallyresult from the application of specific accounting pronouncements under GAAP.The fair value measurements are considered nonrecurring fair value measurementsunder FASB ASC 820-10.

 

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The following tables present financial and non-financial assets andliabilities measured using nonrecurring fair value measurements atJune 30, 2010 and 2009, respectively:

 
| ** **           | ** ** | **Nonrecurring Fair Value Measurements** | ** ** | **Total Gains (Losses)**                 | ** ** |
|----------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **           | ** ** | **June 30, 2010**                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
| ** **           | ** ** | **Level 1**                                        | ** ** | **Level 2**                                   | ** ** | **Level 3** | ** ** | **June 30, 2010 (5)** | ** ** | **June 30, 2010 (5)** | ** ** |
| Loans held-for-sale  |       | $                                                       | —     |                                               | $          | — |   | $ | — |   | $ | (195 | ) | $ | (220 | ) |
| REO (1)              |       | —                                                  |       | 70,326                                             |       | — |   | (200 | ) | 828 |   |
| Lease liability (2)  |       | —                                                  |       | —                                             |       | (2,776 | ) | 78 |   | 557 |   |
| Deferred charge (3)  |       | —                                                  |       | —                                             |       | 13,144 |   | — |   | — |   |
| Intangible asset (4) |       | —                                                  |       | —                                             |       | 1,000 |   | — |   |   |   |
|                      |            |                                                         |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)         The $70.3 million in REO iswithin continuing operations at June 30, 2010.  For the three months ended June 30,2010, the $200 thousand loss related to additional impairment write-downsduring the period was within continuing operations.  For the six months ended June 30, 2010,the $828 thousand gains during the period included $473 thousand and $355thousand within continuing and discontinued operations, respectively.

(2)         Amounts are included indiscontinued operations.  For the three and six months ended June 30,2010, the Company recorded $78 thousand and $557 thousand in recoveriesresulting from reductions in lease liabilities as a result of changes in ourexpected minimum future lease payments, respectively.

(3)          Amounts are included incontinuing operations. For the three and six months ended June 30, 2010,the Company recorded zero in income tax expense resulting from impairmentwrite-downs based on changes in estimated cash flows and lives of the related mortgagesretained in the securitized mortgage collateral.

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

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

 
| ** **              | ** ** | **Non-recurring Fair Value Measurements** | ** ** | **Total Gains (Losses)**       | ** ** |
|-------------------------|------------|-------------------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30, 2009**                    | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
| ** **              | ** ** | **Level 1**                               | ** ** | **Level 2**                    | ** ** | **Level 3** | ** ** | **June 30, 2009** | ** ** | **June 30, 2009** | ** ** |
| Loans held-for-sale (1) |       | $                                         | —     |                           | $          | — |   | $ | 85,235 |   | $ | (7,445 | ) | $ | (7,517 | ) |
| REO (2)                 |       | —                                    |       | 172,019                        |       | — |   | (9,580 | ) | (95,238 | ) |
| Lease liability (3)     |       | —                                    |       | —                         |       | (3,935 | ) | 2,503 |   | 2,560 |   |
| Deferred charge (4)     |       | —                                    |       | —                         |       | 13,144 |   | — |   | — |   |
|                         |            |                                           |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)         Includes $332 thousand and$84.9 million of loans held-for-sale within continuing and discontinuedoperations, respectively at June 30, 2009.

(2)         Includes $167.3 million and$4.7 million in REO within continuing and discontinued operations, respectivelyat June 30, 2009.  For the threemonths ended June 30, 2009, the $9.6 million loss related to additionalimpairment write-downs during the period included $9.1 million and $0.5 millionwithin continuing and discontinued operations, respectively.  For the six months ended June 30, 2009,the $95.2 million loss related to additional impairment write-downs during theperiod included $93.3 million and $1.9 million within continuing anddiscontinued operations, respectively.

(3)         Amounts are included indiscontinued operations.  For the three and six months ended June 30,2009, the Company recorded $2.5 million and $2.6 million in gains resultingfrom reductions in lease liabilities as a result of changes in our expectedminimum future lease payments, respectively.

(4)          Amounts are included incontinuing operations. For the three months ended June 30, 2009, theCompany recorded zero in income tax expense resulting from impairmentwrite-downs based on changes in estimated cash flows and lives of the relatedmortgages retained in the securitized mortgage collateral.

 

*Loans held-for-sale*—Loans held-for-sale forwhich the fair value option was not elected are carried at the lower of cost ormarket (LOCOM). When available, such measurements are based upon what secondarymarkets offer for portfolios with similar characteristics, and are consideredLevel 2 measurements. If market pricing is not available, suchmeasurements are significantly impacted by the Company’s expectations of othermarket participants’ assumptions, and are considered Level 3 measurements.The Company utilizes internal pricing processes to estimate the fair value ofloans held-for-sale, which is based on recent loan sales and estimates of thefair value of the underlying collateral. Loans held-for-sale, which areprimarily included in assets of discontinued operations, are consideredLevel 3 fair value measurements at June 30, 2010 andDecember 31, 2009 based on the lack of observable market inputs.

 

*Real estate owned*—REO consists of residentialreal estate acquired in satisfaction of loans. Upon foreclosure, REO isadjusted to the estimated fair value of the residential real estate lessestimated selling and holding costs, offset by expected contractual mortgageinsurance proceeds to be received, if any. Subsequently, REO is recorded at thelower of carrying value or estimated fair value less costs to sell. Fair valuesof REO are generally based on observable market inputs, and consideredLevel 2 measurements at June 30, 2010.

 

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*Lease liability*—In connection with thediscontinuation of our non-conforming mortgage, retail mortgage, warehouselending and commercial operations, a significant amount of office space thatwas previously occupied is no longer being used by the Company. The Company hassubleased a significant amount of this office space. The Company has recorded aliability, included within discontinued operations, representing the presentvalue of the minimum lease payments over the remaining life of the lease,offset by the expected proceeds from sublet revenue related to this officespace. This liability is based on present value techniques that incorporate theCompany’s judgments about estimated sublet revenue and discount rates.Therefore, this liability is considered a Level 3 measurement atJune 30, 2010.

 

*Deferred charge*—Deferred charge representsthe deferral of income tax expense on inter-company profits that resulted fromthe sale of mortgages from taxable subsidiaries to IMH in prior years. Thedeferred charge is amortized as a component of income tax expense over theestimated life of the mortgages retained in the securitized mortgagecollateral. The Company evaluates the deferred charge for impairment quarterlyusing internal estimates of estimated cash flows and lives of the relatedmortgages retained in the securitized mortgage collateral. Deferred charge isconsidered a Level 3 measurement at June 30, 2010.

 

*Intangible asset*—Intangible assets deemed tohave an indefinite life are tested annually for impairment, or more frequentlyif events or changes in circumstances indicate that the asset might beimpaired. Impairment losses are recognized if carrying amount of an intangibleasset exceeds its estimated fair value. Intangible asset is considered aLevel 3 measurement at June 30, 2010.

 

**Note 3.—Stock Options**

 

The fair value of stock options granted, which is amortized to expenseover the service period, is estimated on the date of grant using theBlack-Scholes-Merton option pricing model with the following weighted averageassumptions:

 
| ** **                             | ** ** | **Six Months**          | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **Ended June 30,** | ** ** |
| ** **                             | ** ** | **2009**                | ** ** |
| Risk-free interest rate                |       | 2.86                    | %          |
| Expected lives (in years)              |       | 5.50                    |       |
| Expected volatility (1)                |       | 259.16                  | %          |
| Expected dividend yield (2)            |       | 0.00                    | %          |
| Grant date fair value of share options |       | $                       | 0.53       |   |
|                                        |            |                         |            |  |

 

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(1)          Expected volatility is basedon the historical volatility of the Company’s stock over the expected life ofthe stock option.

(2)          Expected dividend yield iszero because a dividend on the common stock was not probable over the expectedlife of the options granted during the six months ended June 30, 2009.

 

There were no options granted during the six months ended June 30,2010.

 

The following table summarizes activity, pricing and other informationfor the Company’s stock options for the six months ended June 30, 2010:

 
| ** **                                  | ** ** | ** **    | ** ** | **Weighted-** | ** ** |
|---------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                  | ** ** | ** **    | ** ** | **Average**   | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Exercise**  | ** ** |
| ** **                                  | ** ** | **Shares**    | ** ** | **Price ($)** | ** ** |
| Options outstanding at January 1, 2010 |       | 1,294,585     |       | $             | 13.47      |   |
| Options granted                             |       | —        |       | —        |       |
| Options exercised                           |       | 15,600        |       | 0.53          |       |
| Options forfeited / cancelled               |       | 20,967        |       | 14.65         |       |
| Options outstanding at June 30, 2010   |       | 1,258,018     |       | $             | 13.61      |   |
| Options exercisable at June 30, 2010   |       | 1,237,534     |       | $             | 13.41      |   |

 

As of June 30, 2010, there was no unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under theCompany’s stock-based incentive compensation plan.

 

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

 

Thefollowing table presents the computation of basic and diluted earnings (loss)per common share, including the dilutive effect of stock options and cumulativeredeemable preferred stock outstanding for the periods indicated:

 
| ** **                                                                                           | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                           | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                           | ** ** | **2010**                 | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Numerator for basic earnings  (loss) per share:**                                                  |       |                     |       |                    |       |   |   |   |   |
| Earnings from continuing operations                                                                  |       | $                        | 2,482      |                    | $          | 8,030 |   | $ | 6,014 |   | $ | 9,307 |   |
| Cash dividends on cumulative redeemable preferred  stock                                             |       | —                   |       | (7,443                  | )          | — |   | (7,443 | ) |
| Earnings (loss) from discontinued operations                                                         |       | 804                      |       | (4,195                  | )          | 3,190 |   | (6,591 | ) |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) |       | $                        | 3,286      |                    | $          | (3,608 | ) | $ | 9,204 |   | $ | (4,727 | ) |
| **Denominator for basic earnings  (loss) per share (2):**                                            |       |                     |       |                    |       |   |   |   |   |
| Weighted average number of common shares outstanding  during the period                              |       | 7,723                    |       | 7,618                   |       | 7,711 |   | 7,618 |   |
| **Denominator for diluted earnings  per share (2):**                                                 |       |                     |       |                    |       |   |   |   |   |
| Weighted average number of common shares outstanding  during the period                              |       | 7,723                    |       | 7,618                   |       | 7,711 |   | 7,618 |   |
| Net effect of dilutive stock options                                                                 |       | 625                      |       | —                  |       | 622 |   | — |   |
| Diluted weighted average common shares                                                               |       | 8,348                    |       | 7,618                   |       | 8,333 |   | 7,618 |   |
|                                                                                                 |       |                     |       |                    |       |   |   |   |   |
| Earnings (loss) per common share - basic:                                                            |       |                     |       |                    |       |   |   |   |   |
| Earnings from continuing operations                                                                  |       | $                        | 0.32       |                    | $          | 0.08 |   | $ | 0.78 |   | $ | 0.24 |   |
| Earnings (loss) from discontinued operations                                                         |       | 0.11                     |       | (0.55                   | )          | 0.41 |   | (0.86 | ) |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) |       | $                        | 0.43       |                    | $          | (0.47 | ) | $ | 1.19 |   | $ | (0.62 | ) |
|                                                                                                 |       |                     |       |                    |       |   |   |   |   |
| Earnings (loss) per common share - diluted:                                                          |       |                     |       |                    |       |   |   |   |   |
| Earnings from continuing operations                                                                  |       | $                        | 0.30       |                    | $          | 0.08 |   | $ | 0.72 |   | $ | 0.24 |   |
| Earnings (loss) from discontinued operations                                                         |       | 0.09                     |       | (0.55                   | )          | 0.38 |   | (0.86 | ) |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) |       | $                        | 0.39       |                    | $          | (0.47 | ) | $ | 1.10 |   | $ | (0.62 | ) |

 

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(1)          As discussed below, thedifference between the carrying value of the tendered preferred stock($106.1 million) and the amount paid for the shares ($1.3 million)was recognized as a decrease in retained deficit in 2009. Including theredemption, total basic and diluted earnings per share from continuingoperations available to common stockholders for the three and six month periodended June 30, 2009, were $13.29 and $13.14, respectively.

(2)          Share amounts presented inthousands.

 

In June 2009, the Company completed the Offer to Purchase andConsent Solicitation (the “Offer to Purchase”) of all of its 9.375%Series B Cumulative Redeemable Preferred Stock and 9.125% Series CCumulative Redeemable Preferred Stock (which are sometimes collectively hereinafterreferred to as the Preferred Stock). The aggregate purchase price for thePreferred Stock was $1.3 million. In addition, in connection withcompleting the Offer to Purchase the Company paid $7.4 million ofaccumulated but unpaid dividends on its Preferred Stock.  With the total cash payment of$8.7 million, the Company eliminated $109.5 million of liquidationpreference on its Preferred Stock. After the completion of the Offer to Purchase,the Company has outstanding $52.3 million liquidation preference ofSeries B and Series C Preferred Stock. As this transaction isconsidered a redemption for accounting purposes, in accordance with FASB ASC505-10 and 260-10-S99, the difference between the carrying value of thetendered preferred stock ($106.1 million) and the amount paid for theshares ($1.3 million) was recognized as a decrease in retained deficit in2009. Including the redemption, total basic and diluted earnings per share fromcontinuing operations available to common stockholders for the three and sixmonth ended June 30, 2009, were $13.29 and $13.14, respectively.

 

For the three and six months ended June 30, 2010, stock options topurchase 452 thousand shares were outstanding but not included in the aboveweighted average share calculations because they were anti-dilutive.

 

For the three and six months ended June 30, 2009, stock options topurchase 1.4 million shares were outstanding but not included in the aboveweighted average share calculations because they were anti-dilutive.

 

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**Note 5.—Segment Reporting**

 

The Company has three reporting segments, consisting of the long-termmortgage portfolio, mortgage and real estate services and discontinuedoperations. The following tables present the selected financial data andoperating results by reporting segment for the periods indicated:

 
| ** **                                             | ** ** | ** **    | ** ** | **Mortgage and** | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Long-term** | ** ** | **Real Estate**  | ** ** | **Discontinued** | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **Portfolio** | ** ** | **Services**     | ** ** | **Operations**   | ** ** | **Reclassifications (1)** | ** ** | **Consolidated** | ** ** |
| **Balance sheet items as of  June 30, 2010:**     | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       |       |                      | ** ** | ** **       | ** ** |
| Cash and cash equivalents                              |       | $             | 710        |             | $          | 14,202           |       | $                         | 176        |             | $          | (176 | ) | 14,912 |   |
| Restricted cash                                        |       | —        |       | 1,000            |       | 391              |       | (391                      | )          | 1,000            |       |
| Securitized mortgage collateral                        |       | 6,215,213     |       | —           |       | —           |       | —                    |       | 6,215,213        |       |
| Other assets                                           |       | 126,124       |       | 15,918           |       | 57               |       | (57                       | )          | 142,042          |       |
| Total assets                                           |       | 6,342,047     |       | 31,120           |       | 624              |       | —                    |       | 6,373,791        |       |
| Total liabilities                                      |       | 6,329,416     |       | 5,484            |       | 13,646           |       | —                    |       | 6,348,546        |       |
| Total stockholders’ equity (deficit)              |       | 12,631        |       | 25,636           |       | (13,022          | )          | —                    |       | 25,245           |       |
|                                                   |       |          |       |             |       |             |       |                      |       |             |       |
| **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           |       |

 
| ** **                                          | ** ** | ** **    | ** ** | **Mortgage and** | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                          | ** ** | **Long-term** | ** ** | **Real Estate**  | ** ** | **Discontinued** | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                                          | ** ** | **Portfolio** | ** ** | **Services**     | ** ** | **Operations**   | ** ** | **Reclassifications (1)** | ** ** | **Consolidated** | ** ** |
| **Statement  of Operations Items**                  |       |          |       |             |       |             |       |                      |       |             |       |
| **for the three months ended  June 30, 2010:** |       |          |       |             |       |             |       |                      |       |             |       |
| Net  interest income                                |       | $             | 1,549      |             | $          | 6                |       | $                         | 17         |             | $          | (17 | ) | $ | 1,555 |   |
| Non-interest  income- net trust assets              |       | 721           |       | —           |       | —           |       | —                    |       | 721              |       |
| Mortgage  and real estate services fees             |       | —        |       | 15,677           |       | —           |       | —                    |       | 15,677           |       |
| Other  non-interest income (expense)                |       | (23           | )          | (5               | )          | 48               |       | (48                       | )          | (28              | )          |
| Non-interest  expense and income taxes              |       | (4,574        | )          | (10,869          | )          | 739              |       | (739                      | )          | (15,443          | )          |
| (Loss) earnings from continuing operations          |       | $             | (2,327     | )                | $          | 4,809            |       |                      |       |             |       | 2,482 |   |
| Earnings from discontinued operations, net of tax   |       |          |       |             |       | $                | 804        |                      |       |             | 804        |   |
| Net earnings                                        |       |          |       |             |       |             |       |                      |       | $                | 3,286      |   |
|                                                |       |          |       |             |       |             |       |                      |       |             |       |
| **Statement of Operations Items**                   | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
| **for the six months ended  June 30, 2010:**   | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
| Net  interest income (expense)                      |       | $             | 2,314      |             | $          | 11               |       | $                         | 44         |             | $          | (44 | ) | $ | 2,325 |   |
| Non-interest  income- net trust assets              |       | 6,985         |       | —           |       | —           |       | —                    |       | 6,985            |       |
| Mortgage  and real estate services fees             |       | —        |       | 27,002           |       | —           |       | —                    |       | 27,002           |       |
| Other  non-interest income (expense)                |       | (313          | )          | 2                |       | 2,133            |       | (2,133                    | )          | (311             | )          |
| Non-interest  expense and income taxes              |       | (9,218        | )          | (20,769          | )          | 1,013            |       | (1,013                    | )          | (29,987          | )          |
| (Loss) earnings from continuing operations          |       | $             | (232       | )                | $          | 6,246            |       |                      |       |             |       | 6,014 |   |
| Earnings from discontinued operations, net of tax   |       |          |       |             |       | $                | 3,190      |                      |       |             | 3,190      |   |
| Net earnings                                        |       |          |       |             |       |             |       |                      |       | $                | 9,204      |   |

 

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| ** **                                          | ** ** | ** **    | ** ** | **Mortgage and** | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                          | ** ** | **Long-term** | ** ** | **Real Estate**  | ** ** | **Discontinued** | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                                          | ** ** | **Portfolio** | ** ** | **Services**     | ** ** | **Operations**   | ** ** | **Reclassifications (1)** | ** ** | **Consolidated** | ** ** |
| **Statement  of Operations Items******              |       |          |       |             |       |             |       |                      |       |             |       |
| **for the three months ended  June 30, 2009:** |       |          |       |             |       |             |       |                      |       |             |       |
| Net interest income (expense)                       |       | $             | 2,961      |             | $          | (8               | )          | $                         | (665       | )                | $          | 665 |   | $ | 2,953 |   |
| Non-interest income- net trust assets               |       | 8,189         |       | —           |       | —           |       | —                    |       | 8,189            |       |
| Mortgage and real estate services fees              |       | —        |       | 13,233           |       | —           |       | —                    |       | 13,233           |       |
| Other non-interest income (expense)                 |       | 301           |       | (157             | )          | (6,859           | )          | 6,859                     |       | 144              |       |
| Non-interest expense and income taxes               |       | (8,992        | )          | (7,497           | )          | 3,329            |       | (3,329                    | )          | (16,489          | )          |
| Earnings from continuing operations                 |       | $             | 2,459      |             | $          | 5,571            |       |                      |       |             |       | 8,030 |   |
| Loss from discontinued operations, net of tax       |       |          |       |             |       | $                | (4,195     | )                         |       |             | (4,195     | ) |
| Net earnings                                        |       |          |       |             |       |             |       |                      |       | $                | 3,835      |   |
|                                                |       |          |       |             |       |             |       |                      |       |             |       |
| **Statement of Operations Items**                   | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
| **for the six months ended  June 30, 2009:**   | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** |
| Net interest income (expense)                       |       | $             | 6,601      |             | $          | (6               | )          | $                         | (1,078     | )                | $          | 1,078 |   | $ | 6,595 |   |
| Non-interest income- net trust assets               |       | 12,919        |       | —           |       | —           |       | —                    |       | 12,919           |       |
| Mortgage and real estate services fees              |       | —        |       | 18,782           |       | —           |       | —                    |       | 18,782           |       |
| Other non-interest income (expense)                 |       | 301           |       | (186             | )          | (8,780           | )          | 8,780                     |       | 115              |       |
| Non-interest expense and income taxes               |       | (17,539       | )          | (11,565          | )          | 3,267            |       | (3,267                    | )          | (29,104          | )          |
| Earnings from continuing operations                 |       | $             | 2,282      |             | $          | 7,025            |       |                      |       |             |       | 9,307 |   |
| Loss from discontinued operations, net of tax       |       |          |       |             |       | $                | (6,591     | )                         |       |             | (6,591     | ) |
| Net earnings                                        |       |          |       |             |       |             |       |                      |       | $                | 2,716      |   |

 

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(1)          Amounts representreclassifications of activity in the discontinued operations segment into lossfrom discontinued operations, net of tax as presented in the accompanyingconsolidated statements of operations.

 

**Note 6.—Real Estate Owned (REO)**

 

The Company’s REO consisted of the following:

 
| ** **         | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| REO                |       | $                       | 133,283    |                        | $          | 176,800 |   |
| Impairment (1)     |       | (21,125                 | )          | (34,080                     | )          |
| Ending balance     |       | $                       | 112,158    |                        | $          | 142,720 |   |
|               |       |                    |       |                        |       |
| REO inside trusts  |       | $                       | 112,086    |                        | $          | 142,364 |   |
| REO outside trusts |       | 72                      |       | 356                         |       |
| Total              |       | $                       | 112,158    |                        | $          | 142,720 |   |

 

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(1)          Impairment represents thecumulative write-downs of REO to estimated net realizable value subsequent toforeclosure.

 

**Note 7.—Long-term Debt**

 

*Trust Preferred Securities*

 

The following table shows the remaining balance of Trust PreferredSecurities issued as of June 30, 2010 and December 31, 2009:

 
| ** **                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Trust preferred securities (1) |       | $                 | 8,500      |                  | $          | 8,500 |   |
| Common securities              |       | 263               |       | 263                   |       |
| Fair value adjustment          |       | (6,134            | )          | (6,501                | )          |
| Total                          |       | $                 | 2,629      |                  | $          | 2,262 |   |

 

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(1)          Stated maturity ofJuly 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.

 

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*Junior Subordinated Notes*

 

The following table shows the remaining balance of junior subordinatednotes issued as of June 30, 2010 and December 31, 2009:

 
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Junior subordinated notes (1) |       | $                 | 62,000     |                  | $          | 62,000 |   |
| Fair value adjustment         |       | (53,272           | )          | (54,489               | )          |
| Total                         |       | $                 | 8,728      |                  | $          | 7,511 |   |

 

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(1)          Stated maturity ofMarch 2034. Requires quarterly distributions initially at a fixed rate of2.00% through 2013 with increases of 1.00% per annum through 2017. Starting in2018, the interest rates become variable at three-month LIBOR plus 3.75% perannum.

 

**Note 8.—Note Payable**

 

In October 2009, the Company entered into a settlement agreement(the Settlement Agreement) with its remaining reverse repurchase facilitylender to settle the restructured financing. The Settlement Agreement retiredthe facility and removed any further exposure associated with the line or theloans that secured the line. Pursuant to the terms of the Settlement Agreement,the Company settled the $140.0 million balance of the reverse repurchaseline by (i) transferring the loans securing the line to the lender attheir approximate carrying values, (ii) making in a cash payment of$20.0 million and (iii) entering into a credit agreement with thelender (the Credit Agreement) for a $33.9 million note payable. Theborrowing under the Credit Agreement, which is to be paid over 18 months,bears interest at a rate of one-month LIBOR plus 350 basis points and requiresa monthly principal and interest payment of $1.5 million. An additional$10.0 million principal payment was due and paid in April 2010 as partof the Credit Agreement. At June 30, 2010, the balance of the note payablewas $12.5 million.

 

The borrowing under the Credit Agreement may be prepaid by the Companyat any time. Upon any sale of assets, excluding mortgage assets, issuance ofdebt, excluding warehouse borrowings, or equity by the Company, then all of theproceeds there from are required to be applied to the borrowing under theCredit Agreement.

 

In addition to the restrictions above, the Credit Agreement requiresthe Company to maintain certain business and financial covenants until theborrowing is paid in full. These covenants place several restrictions on theCompany and its operations, including limiting its ability to pay dividends,issue equity interests, make investments over certain amounts without priorconsent or enter into any transaction to merge or consolidate. The covenantsalso require the Company to maintain cash and cash equivalents of$10.0 million (based on certain calculations) and stockholders’ equitygreater than zero (based on certain calculations). At June 30, 2010, theCompany was in compliance with these covenants.

 

**Note 9.—Warehouse Line**

 

OnJune 24, 2010, the Company, through IRES and itssubsidiaries, entered into a Master Repurchase Agreement with EastWest Bank providing a $10 million warehouse facility. The warehousefacility will be used to fund and will be secured by single family residentialmortgage loans that are held for sale. As of June 30, 2010, therewere no borrowings against this facility. The agreement expires June 2011.The rate range in excess of one month LIBOR is 4.00%, with a floor no less than5.00%.  Under the terms of the warehouse facility, IRES and itssubsidiaries are required to maintain various financial and othercovenants, including maintaining a minimum tangible net worth of $17.0million and cash or cash equivalents of at least $5.0 million.

 

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**ITEM2:  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

Unless the context otherwise requires, the terms “Company,” “we,” “us,”and “our” refer to Impac Mortgage Holdings, Inc. (the Company or IMH), aMaryland corporation 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-LookingStatements**

 

This report on Form 10-Q contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934. Forward-lookingstatements, some of which are based on various assumptions and events that arebeyond our control, may be identified by reference to a future period orperiods or by the use of forward-looking terminology, such as “may,” “will,” “believe,”“expect,” “likely,” “should,” “could,” “seem to,” “anticipate,” or similarterms or variations on those terms or the negative of those terms. Theforward-looking statements are based on current management expectations. Actualresults may differ materially as a result of several factors, including, butnot limited to the following: the ongoing volatility in the mortgage industry;our ability to successfully manage through the current market environment; ourability to meet liquidity needs from current cash flows or generate new sourcesof revenue; management’s ability to successfully manage and grow the Company’smortgage and real estate fee-based business activities; the ability to makeinterest payments; increases in default rates or loss severities and mortgagerelated losses; the ability to satisfy conditions (payment and covenants) inthe note payable with a major creditor; our ability to obtain additionalfinancing and the terms of any financing that we do obtain; inability toeffectively liquidate properties to mitigate losses; increase in loanrepurchase requests and ability to adequately settle repurchase obligations;decreases in value of our residual interests that differ from our assumptions;the ability of our common stock to continue trading in an active market; theoutcome of litigation or regulatory actions pending against us or other legalcontingencies; our compliance with applicable local, state and federal laws andregulations and other general market and economic conditions.

 

For a discussion of these and other risks and uncertainties that couldcause actual results to differ from those contained in the forward-lookingstatements, see “Risk Factors” and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in the Company’s Annual Reporton Form 10-K for the period ended December 31, 2009, the otherreports we file under the Securities and Exchange Act of 1934. This documentspeaks only as of its date and we do not undertake, and specifically disclaimany obligation, to publicly release the results of any revisions that may bemade to any forward-looking statements to reflect the occurrence of anticipatedor unanticipated events or circumstances after the date of such statements.

 

**TheMortgage Industry and Discussionof Relevant Fiscal Periods**

 

The mortgage 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.

 

Current events can diminish the relevance of “quarter over quarter” and“year-to-date over year-to-date” comparisons of financial information. In suchinstances, the Company attempts to present financial information in itsManagement’s Discussion and Analysis of Financial Condition and Results ofOperations that is the most relevant to its financial information.

 

**Status ofOperations, Liquidity and Capital Resources**

 

*Mortgage and real estate services*

 

In 2009, the Company sought to create an integrated services platformto provide solutions to the mortgage and real estate markets. Pursuant to that,the Company 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:

 

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·                  *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.

 

·                  *Title andEscrow*—During the fourth quarter of 2009, the Company received CaliforniaDepartment of Insurance approval for our acquisition of a title insuranceagency and escrow operations. Upon the approval, the Company acquired theoperations effective December 31, 2009. The title insurance companyservices California and selected national markets to provide title insurance,escrow and settlement services to residential mortgage lenders, real estateagents, asset managers and REO companies in the residential market sector ofthe real estate industry. We deliver services through a proprietary integratedtechnology platform.

 

For the three and six months ended June 30, 2010, mortgage andreal estate services fees were $15.7 million and $27.0 million, respectively.  The mortgage and real estate services fees of$15.7 million for the three months ended June 30, 2010, was primarilycomprised of $7.8 million in monitoring, surveillance and recovery fees,$3.5 million in title and escrow fees, $2.7 million in loanmodification fees, and $1.7 million in servicing income.  The mortgage and real estate services fees of$27.0 million for the six months ended June 30, 2010, was primarilycomprised of $12.8 million in monitoring, surveillance and recovery fees,$6.0 million in title and escrow fees, $5.8 million in loanmodification fees, and $2.4 million in servicing income.  Although the Company intends to generate morefees by providing these services to third parties in the marketplace, therevenues from these businesses have primarily been generated from the Company’slong-term mortgage portfolio. Furthermore, since these businesses are recently established thereremains uncertainty about their future success. During the first quarter of 2010, the Company began to expand theportfolio surveillance and recovery services operations and entered into anagreement with a third party to assist in credit risk management and portfoliosurveillance services.

 

In June 2010, the Company signed adefinitive agreement with a regional bank providing the Company with a $10million warehouse facility.  This facilityprovides the company with a funding source to originate residential conformingloans that are eligible for sale to HUD and other government-sponsoredenterprises.  As of June 30, 2010,there were no borrowings against this facility. The interest rate on thefacility is one month LIBOR plus 4.00%, with a floor no less than 5.00%. Theagreement expires June 2011.

 

*Liquidity and capital resources*

 

During the first six months of 2010, the Company continued to fund itsoperations primarily from the cash flows generated from its long-term mortgageportfolio, which included mortgage and real estate services fees and cash flowsfrom our residual interests in securitizations.

 

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The ability to meet our long-term liquidity requirements is subject toseveral factors, such as generating fees from our mortgage and real estatefee-based business activities and realizing cash flows from our long-termmortgage portfolio. Our future financial performance and success are dependentin large part upon our ability to grow our mortgage and real estate fee-basedbusiness activities. We believe that current cash balances, cash flows frommortgage and real estate services fees generated from our long-term mortgageportfolio, and residual interest cash flows from our long-term mortgageportfolio are adequate for our current operating needs. However, we believe themortgage and real estate services market is volatile and highly competitive.The Company’s ability to successfully compete in the mortgage and real estateservices industry is uncertain as its business activities are recentlyestablished and many competitors have recently entered or have establishedbusinesses delivering similar services. If we are unsuccessful, we may be unable to satisfy our future operatingcosts and liabilities, including repayment of the note payable and long-termdebt.

 

To understand the financial position of the Company better, we believeit is important to understand the composition of the Company’s stockholders’equity (deficit) and to which component of the business it relates. AtJune 30, 2010, the equity (deficit) within our continuing and discontinuedoperations was comprised of the following significant assets and liabilities:

 
| ** **                              | ** ** | **Condensed Components of Stockholders’ Equity  (Deficit)** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                              | ** ** | **As of June 30, 2010**                                     | ** ** |
| ** **                              | ** ** | **Continuing**                                                   | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Operations**                                                   | ** ** | **Operations** | ** ** | **Total** | ** ** |
| Cash                                    |       | $                                                                | 14,912     |   | $ | 176 |   | $ | 15,088 |   |
| Residual interests in securitizations   |       | 27,253                                                           |       | — |   | 27,253 |   |
| Note payable                            |       | (12,518                                                          | )          | — |   | (12,518 | ) |
| Long-term debt ($71,120 par)            |       | (11,357                                                          | )          | — |   | (11,357 | ) |
| Repurchase reserve                      |       | —                                                           |       | (7,570 | ) | (7,570 | ) |
| Lease liability (1)                     |       | —                                                           |       | (2,776 | ) | (2,776 | ) |
| Deferred charge                         |       | 13,144                                                           |       | — |   | 13,144 |   |
| Net other assets (liabilities)          |       | 6,833                                                            |       | (2,852 | ) | 3,981 |   |
| **Stockholders’ equity (deficit)** |       | $                                                                | 38,267     |   | $ | (13,022 | ) | $ | 25,245 |   |

 

----

(1)          Guaranteed by IMH.

 

*Continuing operations*

 

At June 30, 2010, cash within our continuing operations decreasedto $14.9 million from $25.7 million at December 31, 2009. Theprimary sources of cash between periods were $27.0 million in fees generatedfrom the mortgage and real estate fee-based businesses and $7.9 million fromresidual interests in securitizations. Offsetting the sources of cash wereoperating expenses totaling $30.0 million and $19.0 million in payments onthe note payable.

 

Since our consolidated and unconsolidated securitization trusts arenonrecourse, we have netted trust assets and liabilities to present the Company’sinterest in these trusts more simply, which are considered our residualinterests in securitizations. For unconsolidated securitizations our residual interestsrepresent the fair value of investment securities available-for-sale. Forconsolidated securitizations, our residual interests are represented by thefair value of securitized mortgage collateral and real estate owned, offset bythe fair value of securitized mortgage borrowings and net derivativeliabilities. We receive cash flows from our residual interests insecuritizations to the extent they are available after required distributionsto bondholders and maintaining overcollateralization levels within the trusts.The estimated fair value of the residual interests, represented by thedifference in the fair value of trust assets and trust liabilities, was $27.3million at June 30, 2010, compared to $23.0 million atDecember 31, 2009.

 

At June 30, 2010, note payable decreased $18.5 million fromDecember 31, 2009, as a result of monthly payments totaling $9.0 millioncomprising of principal and interest. Additionally, during April 2010, the Company made a $10.0 millionprincipal payment that was due per the terms of the note payable.

 

At June 30, 2010, we had deferred charges of $13.1 million,which is amortized as a component of income tax expense in the consolidatedstatements of operations over the estimated life of the mortgages retained inthe securitized mortgage collateral. The deferred charges represent thedeferral of income tax expense on inter-company profits that resulted from thesale of mortgages from taxable subsidiaries to IMH in prior years. This balanceis recorded as required by GAAP and does not have any realizable cash value.

 

Net other assets include $3.4 million in accounts receivable,$2.8 million in premises and equipment, $1.7 million in prepaidexpenses and $1.0 million in restricted cash.

 

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*Discontinued operations*

 

The Company’s most significant liabilities in discontinued liabilitiesat June 30, 2010 relate to its repurchase reserve and a lease liabilityassociated with the former non-conforming mortgage operations.

 

In previous years when our discontinued operations sold loans toinvestors, we were required to make normal and customary representations andwarranties about the loans we had previously sold to investors. Our whole loansale agreements generally required us to repurchase loans if we breached arepresentation or warranty given to the loan purchaser. In addition, we alsocould be required to repurchase loans as a result of borrower fraud or if apayment default occurs on a mortgage loan shortly after its sale. Therepurchase reserve is an estimate of losses from expected repurchases, and isbased, in part, on the recent settlement of claims. At June 30, 2010, therepurchase reserve was $7.6 million.

 

In connection with the discontinuation of our non-conforming mortgage,retail mortgage, warehouse lending and commercial operations, a significantamount of office space that was previously occupied is no longer being used bythe Company.  The Company has subleased asignificant amount of this office space. At June 30, 2010, the Company hada liability of $2.8 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.

 

**MarketConditions**

 

Duringthe first half of 2010, economic conditions in the United States showed modestsigns of improvement, although the pace of improvement began to show signs ofslowing during the second quarter. While housing prices have stabilized in manymarkets and have begun to recover in others, particularly in the middle andlower price sectors, the first-time homebuyer tax credit, which expired in May 2010,as well as low interest rates attributable to government monetary policyactions have been the main stabilizing forces improving home sales and reducinghome inventories. How sustainable these improvements will be in the absence ofthese government actions remains to be seen.

 

The job market also continued to slightly improve in the first half of2010, as the economy began to add jobs in March which continued into thesecond quarter. Despite improving job creation, U.S. unemployment rates,which have been a major factor in the deterioration of credit quality in theU.S., remained high at 9.50 percent in June 2010, a decrease of20 basis points during the quarter and 50 basis points since December 2009.However, a significant number of U.S. residents are no longer looking forwork and, therefore, are not reflected in the U.S. unemployment rates.Unemployment rates in 18 states are greater than the U.S. nationalaverage. The increases in unemployment rates have generally been mostpronounced in the markets which had previously experienced the highestappreciation in home values. Unemployment rates in 6 states are at orabove 11 percent, including California and Florida.   California and Florida represent 51 percentand 12 percent of the aggregate unpaid principal of the long-term portfolio,respectively, at June 30, 2010.

 

Although we noted signs ofimprovement in mortgage lending industry trends during the first half of 2010,we continue to be affected by the following:

 

·                  Overall levelsof delinquencies remain elevated;

 

·                  Mortgage loanoriginations from 2005 to 2008 continue to perform worse than originations fromprior periods;

 

·                  Real estatemarkets in a large portion of the United States continue to be affected bystagnation or declines in property values experienced over the last threeyears;

 

·                  While homeprices have begun to stabilize in most markets, including some parts ofCalifornia, they remain under pressure due to elevated foreclosure levels; and

 

·                  Tighter lendingstandards by mortgage lenders which impacts the ability of borrowers torefinance existing mortgage loans.

 

Concernsabout the future of the U.S. economy, including the pace and magnitude ofrecovery from the recent economic recession, consumer confidence, volatility inenergy prices, volatility experienced by the credit markets including thepossibility the recent European sovereign debt crisis will spread and trends incorporate earnings will continue to influence the U.S. economic recoveryand the capital markets. In particular, continued improvement in unemploymentrates and a sustained recovery of the housing market remain critical componentsof a broader U.S. economic recovery. Further weakening in these componentsas well as in consumer confidence may result in additional deterioration inconsumer payment patterns and credit quality. Although consumer confidence hasimproved from the levels seen early in 2009, it remains low on a historicalbasis. Weak consumer fundamentals, 

 

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includingdeclines in wage income, reduced consumer spending, declines in wealth and adifficult job market continue to depress consumer confidence. Additionallythere is uncertainty as to the future course of monetary policy and uncertaintyas to the impact on the economy and consumer confidence when the remainingactions taken by the government to restore faith in the capital markets andstimulate consumer spending. These conditions in combination with generaleconomic weakness and the impact of recent and proposed regulatory changes willcontinue to impact our results in 2010, the degree of which is largelydependent upon the nature and timing of the economic recovery.

 

*Financial Regulatory Reform*On July 21, 2010, the “Dodd-FrankWall Street Reform and Consumer Protection Act” was signed into law. Thislegislation is a sweeping overhaul of the financial regulatory system.

 

Thelegislation provides for new legislation on financial institutions, creates newsupervisory and advisory bodies, including the new Consumer FinancialProtection Bureau, and contains many consumer related provisions includingprovisions addressing mortgage reform. In the area of mortgage origination,there is the elimination of stated income loans and a requirement to apply anet tangible benefit test for all refinancing transactions. There are alsonumerous revised servicing requirements for mortgage loans.

 

Thelegislation will have a significant impact on the operations of many financialinstitutions in the U.S. As the legislation calls for extensive regulations tobe promulgated to interpret and implement the legislation, it is not possibleto precisely determine the impact to operations and financial results at thistime.

 

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We believe there is currently no index for Alt-A mortgage products, butthe general direction and magnitude of price movement in the ABX 2007-1index isreflective of the disruption in the market and general price movementexperienced by the Company’s securities. The index, which does not include anyIMH bonds, is being used for illustrative purposes only because it is anon-conforming single-family mortgage index that has traded consistently inrecent years. The ABX 2007-1 Index illustrates market prices for designatedgroups of subprime securities by credit rating. The index is shown here as anillustration of the price volatility in the general non-conforming subprimemortgage market since the beginning of 2007 and does not reflect actual pricingon IMH bonds, which are backed by Alt-A loans rather than subprime loans. Asshown below, the ABX 2007-1 Index displays dramatic declines in the value ofsuch securities.

 

 

 

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*Effects of Recent Market Activity*

 

As a result of the Company’s inability to sell or securitizenon-conforming loans during the second half of 2007, the Company discontinuedfunding loans and discontinued substantially all of its mortgage(non-conforming single-family loans and commercial loans, which consistprimarily of multifamily loans) and warehouse lending operations. Marketconditions deteriorated in 2008 and continued to be depressed for most of 2009before recovering slightly towards the end of 2009 and early 2010. As a result,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.

 

 

As depicted in the chart above, average home prices peaked inJune 2006 at 226.29 and continued their dramatic decline through much ofthe first half of 2009, while increasing slightly over the remaining half ofthe year. The Standard & Poor’s Case-Shiller 10-City Composite HomePrice Index (the Index) for May 2010 was 159.36 (with the base of 100.00for January 2000) and hasn’t been this low since November 2003 whenthe Index was 159.55. Beginning in the third quarter of 2007, the Company beganto believe that there was a correlation between the borrowers’ perceived equityin their homes and defaults. The original loan-to-value (defined as loan amountas a percentage of collateral value, “LTV”) and original combined loan-to-value(defined as first lien plus total subordinate liens to collateral value, “CLTV”)ratios of single-family mortgages remaining in the Company’s securitizedmortgage collateral as of June 30, 2010 was 72% and 80%, respectively. Thecurrent LTV and CLTV ratios likely increased from origination date as a resultof the deterioration in the real estate market. We believe that home pricesthat have declined below the borrower’s original purchase price have a higherrisk of default within our portfolio. Based on the Index, home prices havedeclined 30% through May 2010 from the 2006 peak. Further, we believe thehome prices in general within California and Florida, the states with thehighest concentration of our mortgages, have declined even further than theIndex. We have considered the deterioration in home prices and its impact onour loss severities, which are a primary assumption used in the valuation ofsecuritized mortgage collateral and borrowings.

 

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**CriticalAccounting Policies**

 

We define critical accounting policies as those that are important tothe portrayal of our financial condition and results of operations. Ourcritical accounting policies require management to make difficult and complexjudgments that rely on estimates about the effect of matters that areinherently uncertain due to the affect of changing market conditions and/orconsumer behavior. In determining which accounting policies meet thisdefinition, we considered our policies with respect to the valuation of ourassets and liabilities and estimates and assumptions used in determining thosevaluations. We believe the most critical accounting issues that require themost complex and difficult judgments and that are particularly susceptible tosignificant change to our financial condition and results of operations includethe following:

 

Pleaserefer to IMH’s report on Form 10-K on pages 33 through 39 ofManagement’s Discussion and Analysis of Results of Operations for the yearended December 31, 2009  for adetailed discussion of our significant accounting policies. Such policies havenot changed during 2010 except those outlined below:

 

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

 

Historically, the Company securitized mortgages in the form ofcollateralized mortgage obligations (CMO), which were consolidated andaccounted for as secured borrowings for financial statement purposes. TheCompany also securitized mortgages in the form of real estate mortgageinvestment conduits (REMICs), which were either consolidated or unconsolidateddepending on the design of the securitization structure. CMO and certain REMICsecuritizations were designed so that the transferee (securitization trust) wasnot a qualifying special purpose entity (QSPE), and therefore the Companyconsolidated the variable interest entity (VIE) as it was the primarybeneficiary of the sole residual interest in each securitization trust.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 the accompanyingconsolidated balance sheets.

 

Our estimate of the fair value of our net retained residual interestsin unconsolidated securitizations, which are included in investment securitiesavailable-for-sale in the consolidated balance sheets, requires us to exercisesignificant judgment as to the timing and amount of future cash flows from theresidual interests. We are exposed to credit risk from the underlying mortgageloans in unconsolidated securitizations to the extent we retain subordinatedinterests. Changes in expected cash flows resulting from changes in expectednet credit losses will impact the value of our subordinated retained interestsand those changes are recorded as a component of change in fair value of nettrust assets.

 

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

 

Whether a securitization is consolidated or unconsolidated, investorsin the securities issued by the securitization trust have no recourse to ournon-securitized assets or to us and have no ability to require us to provideadditional assets, but rather have recourse only to the assets transferred tothe trust. Whereas the accounting differences are significant, the underlyingeconomic impact to us, over time, will be the same regardless of whether thesecuritization trust is consolidated or unconsolidated.

 

Effective January 1, 2010, former QSPEs are evaluated forconsolidation based on the provisions of FASB ASC 810-10-25, which eliminatesthe concept of a QSPE and changes the approach to determining a securitizationtrust’s primary beneficiary. Refer to Note 1.—*****Summary of Business,Significant Accounting Policies and Legal Proceedings* in the notesto the consolidated financial statements for a discussion of the impact of thisnew standard on the Company’s consolidated balance sheet at January 1,2010.

 

**IncomeTaxes**

 

While the Company has generated significant net operating losscarryforwards in recent periods, we do not expect to generate sufficienttaxable income in future periods to be able to realize these tax benefits.Therefore, we have recorded a full valuation allowance against the net deferredtax assets as we believe that as of June 30, 2010 it is more likely thannot that the net deferred tax assets will not be recoverable.

 

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**SelectedFinancial Results for the Three Months Ended June 30, 2010**

 

*Continuing Operations*

 

·*                 *Earnings fromcontinuing operations of $2.5 million for the second quarter of 2010,compared to $8.0 million for the comparable 2009 period.

 

·                  Net interest income of$1.6 million for the second quarter of 2010, primarily from our long-termmortgage portfolio, compared to $3.0 million for the comparable 2009period.

 

·                  Non-interest income—nettrust assets of $721 thousand for the second quarter of 2010, compared to $8.2million for the comparable 2009 period.

 

·                  Mortgage and real estateservices fees of $15.7 million for the second quarter of 2010, compared to$13.2 million for the comparable 2009 period.

 

·                  Personnel expense of $10.8million for the second quarter of 2010, compared to $10.4 million for thecomparable 2009 period.

 

*Discontinued Operations*

 

·*                 *Earnings fromdiscontinued operations of $804 thousand for the second quarter of 2010,compared to a loss of $4.2 million for the comparable 2009 period.

 

·                  Repurchase reserve was $7.6million at June 30, 2010, compared to $11.0 million atDecember 31, 2009.

 

**SelectedFinancial Results for the Six Months Ended June 30, 2010**

 

·*                 *Earnings fromcontinuing operations of $6.0 million for the six months ended June 30,2010, compared to $9.3 million for the comparable 2009 period.

 

·                  Net interest income of$2.3 million for the six months ended June 30, 2010, primarily fromour long-term mortgage portfolio, compared to $6.6 million for thecomparable 2009 period.

 

·                  Non-interest income—nettrust assets of $7.0 million for the six months ended June 30, 2010,compared to $12.9 million for the comparable 2009 period.

 

·                  Mortgage and real estateservices fees of $27.0 million for the six months ended June 30, 2010,compared to $18.8 million for the comparable 2009 period.

 

·                  Personnel expense of $20.4million for the six months ended June 30, 2010, compared to $16.6 millionfor the comparable 2009 period.

 

*Discontinued Operations*

 

·*                 *Earnings fromdiscontinued operations of $3.2 million for the six months ended June 30,2010, compared to a loss of $6.6 million for the comparable 2009 period.

 

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**FinancialCondition and Results of Operations**

 

*Financial Condition*

 

Condensed Balance Sheet Data

 
| ** **                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **2010**          | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Investment securities available-for-sale             |       | $                 | 1,269      |                  | $          | 813            |       | $          | 456        |   | 56 | % |
| Securitized mortgage collateral                      |       | 6,215,213         |       | 5,666,122             |       | 549,091        |       | 10         |       |
| Derivative assets                                    |       | 39                |       | 146                   |       | (107           | )          | (73        | )          |
| Real estate owned                                    |       | 112,086           |       | 142,364               |       | (30,278        | )          | (21        | )          |
| Total trust assets                                   |       | 6,328,607         |       | 5,809,445             |       | 519,162        |       | 9          |       |
|                                                 |       |              |       |                  |       |           |       |       |       |
| Assets of discontinued operations                    |       | 624               |       | 4,480                 |       | (3,856         | )          | (86        | )          |
| Other assets                                         |       | 44,560            |       | 58,987                |       | (14,427        | )          | (24        | )          |
| **Total assets**                                     |       | $                 | 6,373,791  |                  | $          | 5,872,912      |       | $          | 500,879    |   | 9 | % |
|                                                 |       |              |       |                  |       |           |       |       |       |
| Securitized mortgage borrowings                      |       | $                 | 6,200,592  |                  | $          | 5,659,865      |       | $          | 540,727    |   | 10 | % |
| Derivative liabilities                               |       | 100,762           |       | 126,603               |       | (25,841        | )          | (20        | )          |
| Total trust liabilities                              |       | 6,301,354         |       | 5,786,468             |       | 514,886        |       | 9          |       |
|                                                 |       |              |       |                  |       |           |       |       |       |
| Liabilities of discontinued operations               |       | 13,646            |       | 19,152                |       | (5,506         | )          | (29        | )          |
| Other liabilities                                    |       | 33,546            |       | 51,859                |       | (18,313        | )          | (35        | )          |
| Total liabilities                                    |       | 6,348,546         |       | 5,857,479             |       | 491,067        |       | 8          |       |
| Total stockholders’ equity                      |       | 25,245            |       | 15,433                |       | 9,812          |       | 64         |       |
| **Total liabilities and  stockholders’ equity** |       | $                 | 6,373,791  |                  | $          | 5,872,912      |       | $          | 500,879    |   | 9 | % |

 

Total assets and total liabilities were $6.4 billion and $6.3billion, respectively, at June 30, 2010 as compared to $5.9 billionat December 31, 2009. The increase in total assets and liabilities areprimarily attributable to increases in the Company’s trust assets and trustliabilities as summarized below.

 

The Company updates its collateral assumptions quarterly based onrecent delinquency, 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 prices for senior bonds from our pricing services.  The decrease in investor yield assumptions onsecuritized mortgage collateral and securitized mortgage borrowings resulted inan increase in the value of these trust assets and liabilities.  However, this change in assumption did nothave any effect on the consolidated statement of operations or equity of theCompany as the increase in the value of collateral directly offset the increasein the value of the borrowings.  TheCompany did not make any changes to the discount rate assumptions for residualinterests during the first six months of 2010.

 

·                  Securitized mortgagecollateral increased $549.1 million during the six months endedJune 30, 2010. The increase in securitized mortgage collateral from$5.7 billion at December 31, 2009 to $6.2 billion atJune 30, 2010 was primarily due to decreased loss assumptions forsingle-family collateral, reduction in investor yield requirements as discussedbelow, and the net consolidation of trust assets, partially offset byreductions in principal balances from defaults and principal payments duringthe period. For the six months ended June 30, 2010, the balance increaseddue to increases in fair value of $905.0 million and net consolidation oftrust assets related to the adoption of ASU 2009-17 of $116.9 million, offsetby reductions in principal balances (resulting from transfers to REO andprincipal paydowns) of $472.8 million.

 

·                  REO within the Company’ssecuritization trusts decreased $30.3 million to $112.1 million atJune 30, 2010.  Decreases in REOwere due to liquidations of $114.4 million.  Offsetting the decrease from liquidationswere increases in REO from foreclosures of $80.6 million, $3.0 million inthe net consolidation of trust assets related to the adoption of ASU 2009-17,and $473 thousand in recovery of the net realizable value.

 

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·                  Securitized mortgageborrowings increased $540.7 million to $6.2 billion at June 30,2010. The increase in securitized mortgage borrowings was primarily due todecreased loss assumptions for single-family collateral, reduction in investor yieldrequirements as discussed below, and the net consolidation of trustliabilities, offset by reductions in principal balances during the period. Forthe six months ended June 30, 2010, the balance increased due to increasesin fair value of $1.1billion, net consolidation of trust liabilities related tothe adoption of ASU 2009-17 of $110.6 million, offset by reductions inoutstanding balances of $665.9 million.

 

·                  Derivative liabilities, netdecreased $25.8 million to $100.7 million at June 30, 2010. Thedecrease is the result of $64.1 million in derivative cash payments fromthe securitization trusts, offset by a $29.3 million increase in fairvalue resulting from decreases in the forward LIBOR curve and the netconsolidation of off balance sheet trusts related to the adoption of ASU2009-17 of $9.0 million.

 

Since our consolidated and unconsolidated securitization trusts arenonrecourse to the Company, our economic risk is limited to our residualinterests in these securitization trusts. Therefore, in the following table wehave netted trust assets and trust liabilities to present these residualinterests more simply. Our residual interests in securitizations are segregatedbetween our single-family (SF) residential and multifamily (MF) residentialportfolios and are represented by the difference between trust assets and trustliabilities. The following tables present the estimated fair value of ourresidual interests, including investment securities available for sale, bysecuritization vintage year and other related assumptions used to derive thesevalues at June 30, 2010:

 
| **Origination**                | ** ** | **Estimated Fair Value of  Residual Interests by Vintage Year** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------|------------|
| **Year**                       | ** ** | **SF**                                                          | ** ** | **MF** | ** ** | **Total** | ** ** |
| 2002-2003 (1)                  |       | $                                                               | 12,589     |   | $ | 4,168 |   | $ | 16,757 |   |
| 2004                           |       | 3,143                                                           |       | 7,125 |   | 10,268 |   |
| 2005 (2)                       |       | 14                                                              |       | 178 |   | 192 |   |
| 2006 (2)                       |       | —                                                          |       | 36 |   | 36 |   |
| 2007 (2)                       |       | —                                                          |       | — |   | — |   |
| **Total**                      | ** ** | **$**                                                           | **15,746** | ** ** | **$** | **11,507** | ** ** | **$** | **27,253** | ** ** |
|                           |       |                                                            |       |   |   |   |   |
| Weighted avg. prepayment  rate |       | 6                                                               | %          | 6 | % | 6 | % |
| Weighted avg. discount  rate   |       | 30                                                              | %          | 20 | % | 26 | % |

 

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(1)         2002-2003 vintage yearincludes CMO 2007-A, since the majority of the mortgages collateralized in thissecuritization were originated during this period.

(2)         The estimated fair values ofresidual interests in vintage years 2005 through 2007 is reflective of higherestimated future losses and investor yield requirements compared to earliervintage years.

 

The Company utilizes a number of assumptions to value securitizedmortgage collateral, securitized mortgage borrowings and residualinterests.  These assumptions includeestimated collateral default rates and loss severities (credit losses),collateral prepayment rates, forward interest rates and investor yields(discount rates).  The Company uses thesame collateral assumptions for securitized mortgage collateral and securitizedmortgage borrowings as the collateral assumptions determine collateral cashflows which are used to pay interest and principal for securitized mortgageborrowings and excess spread, if any, to the residual interests. However, theCompany uses different investor yield (discount rate) assumptions forsecuritized mortgage collateral and securitized mortgage borrowings and thediscount rate used for residual interests based on underlying collateral characteristics,vintage year, assumed risk and market participant assumptions.  The table below reflects the estimated futurecredit losses and investor yield requirements for trust assets by product (SFand MF) and securitization vintage:

 

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| ** ** | ** ** | **Estimated Future Losses (1)** | ** ** | **Investor Yield Requirement (2)** | ** ** |
|------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** ** | ** ** | **SF**                          | ** ** | **MF**                             | ** ** | **SF** | ** ** | **MF** | ** ** |
| 2002-2003  |       | 7                               | %          | 5                                  | %          | 21 | % | 12 | % |
| 2004       |       | 14                              | %          | 1                                  | %          | 19 | % | 10 | % |
| 2005       |       | 26                              | %          | 5                                  | %          | 14 | % | 13 | % |
| 2006       |       | 41                              | %          | 13                                 | %          | 21 | % | 12 | % |
| 2007       |       | 38                              | %          | 7                                  | %          | 19 | % | 10 | % |

 

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(2)         Estimated future lossesderived by dividing future projected losses by unpaid principal balances atJune 30, 2010.

(3)         Investor yield requirementsrepresent the Company’s estimate of the yield third-party market participantswould require to price our trust assets and liabilities given our prepayment,credit loss and forward interest rate assumptions.

 

As illustrated in S&Ps Case Shiller 10-City Composite Home PriceIndex, from 2002 through 2007, home price appreciation escalated to historiclevels. During 2005 through 2007, the company originated or acquired mortgagessupported by these elevated real estate values. Beginning in 2007,deterioration in the economy resulting in high unemployment and a dramatic dropin home prices resulted in significant negative equity for borrowers. Thesefactors have led to significant increases in loss severities resulting fromdeterioration in the credit quality of borrowers, as well as strategicdefaults, whereby borrowers with the ability to pay are defaulting on theirmortgages based on the belief that home prices will not recover in a reasonableamount of time. Home prices have deteriorated back to October 2003 levelswhich has significantly reduced or eliminated equity for loans originated after2003. Future loss estimates are significantly higher for mortgage loansincluded in securitization vintages after 2004 which reflect severe home pricedeterioration and defaults experienced with mortgages originated during theseperiods.

 

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

 

·                  interest rate risk;

 

·                  liquidity risk;

 

·                  credit risk; and

 

·                  prepayment risk.

 

*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.

 

The residual interests in our long-term mortgage portfolio aresensitive to changes in interest rates on securitized mortgage collateral andthe related securitized mortgage borrowings. Changes in interest rates cansignificantly affect the cash flows and fair values of the Company’s assets andliabilities, as well as our earnings and stockholders’ equity.

 

The Company uses derivative instruments to manage some of its interestrate risk. However, the Company does not attempt to completely hedge interestrate risk. To help mitigate some of the exposure to the effect of changinginterest rates on cash flows on securitized mortgage borrowings, the Companyutilized derivative instruments primarily in the form of interest rate swapagreements (swaps) and, to a lesser extent, interest rate cap agreements (caps)and interest rate floor agreements (floors). These derivative instruments arerecorded at fair value in the consolidated balance sheets. For non-exchangetraded contracts, fair value is based on the amounts that would be required tosettle the positions with the related counterparties as of the valuation date.Valuations of derivative assets and liabilities are based on observable marketinputs, if available. To the extent observable market inputs are not available,fair values measurements include the Company’s judgments about 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 thederivative instrument includes the estimated value of the net creditdifferential between the counterparties to the derivative contract.

 

At June 30, 2010, derivative liabilities, net were $100.7 millionand reflect the securitization trust’s liability to pay third-partycounterparties based on the estimated value to settle the derivativeinstruments. Cash payments on these derivative instruments are based onnotional amounts that are decreasing over time. Excluding the effects of otherfactors such as portfolio delinquency and loss 

 

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severitieswithin the securitization trusts, as the notional amount of these derivativeinstruments decrease over time, payments to counterparties in the currentinterest rate environment are reduced, thereby potentially increasing cashflows on our residual interests in securitizations. Conversely, increases ininterest rates from current levels could potentially reduce overall cash flowson our residual interests in securitizations. Since our consolidated andunconsolidated securitization trusts are nonrecourse to the Company, oureconomic risk is limited to our residual interests in these securitizationtrusts.

 

The Company is also subject to interest rate risk on its long-term debt(consisting of trust preferred securities and junior subordinated notes) andnotes payable. These interest bearing liabilities include adjustable rateperiods based on one-month LIBOR (note payable) and three-month LIBOR (trustpreferred securities and junior subordinated notes). The Company does notcurrently hedge its exposure to the effect of changing interest rates relatedto these interest-bearing liabilities. Significant fluctuations in interestrates could have a material adverse effect on the Company’s business, financialcondition, 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.

 

Using historical losses, current portfolio statistics and market conditionsand available market data, the Company has estimated future loan losses, whichare included in the fair value adjustment to our securitized mortgagecollateral. While the credit performance for the loans has been clearly farworse than the Company’s initial expectations when the loans were originated,the ultimate level of realized losses will largely be influenced by events thatwill likely unfold over the next several years, including the severity ofhousing price declines and overall strength of the economy. If marketconditions continue to deteriorate in excess of our expectations, the Companymay need to recognize additional fair value reductions to our securitizedmortgage collateral, which may also affect the value of the related securitizedmortgage borrowings and residual interests.

 

We monitor our servicers to attempt to ensure that they perform lossmitigation, foreclosure and collection functions according to their servicingpractices and each securitization trust’s pooling and servicing agreement. Wehave met with the management of our servicers to assess our borrowers’ currentability to pay their mortgages and to make arrangements with selecteddelinquent borrowers which will result in the best interest of the trust andborrower, in an effort to minimize the number of mortgages which becomeseriously delinquent. When resolving delinquent mortgages, servicers arerequired to take timely action. The servicer is required to determine paymentcollection under various circumstances, which will result in the maximumfinancial benefit. This is accomplished by either working with the borrower tobring the mortgage current or by foreclosing and liquidating the property. Whena borrower fails to make required payments on a mortgage and does not cure thedelinquency within 60 days, we generally record a notice of default andcommence foreclosure proceedings, or arrange alternative terms of forbearance.If the mortgage is not reinstated within the time permitted by law forreinstatement, the property may then be sold at a foreclosure sale. At aforeclosure sale, the trusts consolidated on our balance sheet generallyacquire title to the property.

 

We use the Mortgage Bankers Association (MBA) method to definedelinquency as a contractually required payment being 30 days or more pastdue. We measure delinquencies from the date of the last payment due date inwhich a payment was received. Delinquencies for loans 60 days late orgreater, foreclosures and delinquent bankruptcies were $2.7 billion or22.9% as of June 30, 2010.

 

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The following table summarizes the unpaid principal balances ofnon-performing loans in our mortgage portfolio, included in securitizedmortgage collateral, loans held-for-investment and loans held-for-sale forcontinuing and discontinued operations combined, that were 60 or more daysdelinquent (utilizing the MBA method) as of the periods indicated:

 

| ** **                                                    | ** ** | ** **        | ** ** | **Total**      | ** ** | ** **            | ** ** | **Total**      | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-----------------------|------------|----------------|------------|
| ** **                                                    | ** ** | **June 30,** | ** ** | **Collateral** | ** ** | **December 31,** | ** ** | **Collateral** | ** ** |
| ** **                                                    | ** ** | **2010**          | ** ** | **%**          | ** ** | **2009**              | ** ** | **%**          | ** ** |
| Loans held for sale and investment (1)                        |       |              |       |           |       |                  |       |           |       |
| 60 - 89 days delinquent                                       |       | $                 | 42         |           | 0.0        | %                     | $          | 66             |       | 0.0 | % |
| 90 or more days delinquent                                    |       | 5,809             |       | 0.0            | %          | 6,928                 |       | 0.1            | %          |
| Foreclosures (2)                                              |       | 5,390             |       | 0.0            | %          | 7,397                 |       | 0.1            | %          |
| Total 60+ days delinquent loans held-for-sale and  investment |       | 11,241            |       | 0.1            | %          | 14,391                |       | 0.1            | %          |
|                                                          |       |              |       |           |       |                  |       |           |       |
| Securitized mortgage collateral                               |       |              |       |           |       |                  |       |           |       |
| 60 - 89 days delinquent                                       |       | $                 | 269,102    |           | 2.3        | %                     | $          | 324,032        |       | 2.6 | % |
| 90 or more days delinquent                                    |       | 957,153           |       | 8.1            | %          | 1,043,718             |       | 8.4            | %          |
| Foreclosures (2)                                              |       | 1,144,359         |       | 9.7            | %          | 1,449,538             |       | 11.6           | %          |
| Delinquent bankruptcies (3)                                   |       | 319,093           |       | 2.7            | %          | 302,314               |       | 2.4            | %          |
| Total 60+ days delinquent long-term mortgage  portfolio       |       | 2,689,707         |       | 22.8           | %          | 3,119,602             |       | 25.0           | %          |
| Total 60 or more days delinquent                              |       | $                 | 2,700,948  |           | 22.9       | %                     | $          | 3,133,993      |       | 25.1 | % |
| Total collateral                                              |       | $                 | 11,801,077 |           |       |                  | $          | 12,492,493     |       |   |   |

 

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(1)         Loans held-for-sale aresubstantially included in discontinued operations in the consolidated balancesheets.

(2)         Represents properties in theprocess of foreclosure.

(3)         Represents bankruptcies thatare 30 days or more delinquent.

 

The following table summarizes securitized mortgage collateral, loansheld-for-investment, loans held-for-sale and real estate owned, that were non-performingfor continuing and discontinued operations combined as of the dates indicated(excludes 60-89 days delinquent):

 
| ** **                                                            | ** ** | ** **        | ** ** | **Total**      | ** ** | ** **            | ** ** | **Total**      | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-----------------------|------------|----------------|------------|
| ** **                                                            | ** ** | **June 30,** | ** ** | **Collateral** | ** ** | **December 31,** | ** ** | **Collateral** | ** ** |
| ** **                                                            | ** ** | **2010**          | ** ** | **%**          | ** ** | **2009**              | ** ** | **%**          | ** ** |
| 90 or more days delinquent, foreclosures and  delinquent bankruptcies |       | $                 | 2,431,804  |           | 20.6       | %                     | $          | 2,809,895      |       | 22.5 | % |
| Real estate owned                                                     |       | 112,158           |       | 1.0            | %          | 142,676               |       | 1.1            | %          |
| Total non-performing assets                                           |       | $                 | 2,543,962  |           | 21.6       | %                     | $          | 2,952,571      |       | 23.6 | % |

 

Non-performing assets consist of non-performing loans (mortgages thatare 90 days or more delinquent, including loans in foreclosure anddelinquent bankruptcies) plus REO. It is our policy to place a mortgage onnon-accrual status when it becomes 90 days delinquent and to reverse fromrevenue any accrued interest, except for interest income on securitizedmortgage collateral when the scheduled payment is received from the servicer.The servicers are required to advance principal and interest on loans withinthe securitization trusts to the extent the advances are consideredrecoverable. As of June 30, 2010, non-performing assets (unpaid principalbalance of loans 90 or more days delinquent, foreclosures and delinquentbankruptcies plus REO) as a percentage of the total collateral was 22%. AtDecember 31, 2009, non-performing assets to total collateral was 24%.  As of June 30, 2010, the estimated fairvalue of non-performing assets (representing the fair value of loans 90 or moredays delinquent, foreclosures and delinquent bankruptcies plus REO) as apercentage of the total assets was 13%. At December 31, 2009, theestimated fair value of non-performing assets to total assets was 16%.

 

REO, which consists of residential real estate acquired in satisfactionof loans, is carried at the lower of cost or net realizable value lessestimated selling costs. Adjustments to the loan carrying value required at thetime of foreclosure are included in the change in the fair value of net trustassets. Changes in the Company’s estimates of net realizable value subsequentto the time of foreclosure and through the time of ultimate disposition arerecorded as gains or losses from real estate owned in the consolidatedstatements of operations. REO, for continuing and discontinued operations, atJune 30, 2010 decreased $30.5 million or 21% from December 31, 2009as a result of liquidations and a decrease in foreclosures.

 

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We realized gains on the sale of real estate owned in the amount $5.2million and $3.4 million for the three and six months ended June 30, 2010,respectively,  compared to gains of $37.6 million and $81.6 million,respectively for the comparable 2009 periods.  Additionally, duringthe three and six month ended June 30, 2010, the Company recorded awrite-down of and recovery of the net realizable value of the REO in the amountof $200 thousand and $473 thousand, respectively, compared to write-down’s of$9.1 million and $93.3 million, respectively for the comparable 2009periods.  These write-downs of the net realizable value reflectdeclines in value of the REO subsequent to foreclosure date.

 

The following table presents the balances of REO for continuingoperations:

 
| ** **         | ** ** | **June 30,   2010** | ** **    | ** December 31,   2009** | ** ** |
|--------------------|------------|--------------------------|---------------|------------------------------------|------------|
| REO                |       | $                        |  133,283 |                               | $          |  176,800 |   |
| Impairment (1)     |       | (21,125                  | )             | (34,080                            | )          |
| Ending balance     |       | $                        |  112,158 |                               | $          |  142,720 |   |
|               |       |                     |          |                               |       |
| REO inside trusts  |       | $                        |  112,086 |                               | $          |  142,364 |   |
| REO outside trusts |       | 72                       |          | 356                                |       |
| Total              |       | $                        |  112,158 |                               | $          |  142,720 |   |

 

----

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

 

In calculating the cash flows to assess the fair value of thesecuritized mortgage collateral, the Company estimates the future lossesembedded in our loan portfolio. In evaluating the adequacy of these losses,management takes many factors into consideration. For instance, a detailedanalysis of historical loan performance data is accumulated and reviewed. Thisdata is analyzed for loss performance and prepayment performance by producttype, origination year and securitization issuance. The data is also brokendown by collection status. Our estimate of losses for these loans is developedby estimating both the rate of default of the loans and the amount of lossseverity in the event of default. The rate of default is assigned to the loansbased on their attributes (*e.g.*, originalloan-to-value, borrower credit score, documentation type, geographic location, etc.)and collection status. The rate of default is based on analysis of migration ofloans from each aging category. The loss severity is determined by estimatingthe net proceeds from the ultimate sale of the foreclosed property. The resultsof that analysis are then applied to the current mortgage portfolio and anestimate is created. We believe that pooling of mortgages with similarcharacteristics is an appropriate methodology in which to evaluate the futureloan losses.

 

Management recognizes that there are qualitative factors that must betaken into consideration when evaluating and measuring losses in the loanportfolios. These items include, but are not limited to, economic indicatorsthat may affect the borrower’s ability to pay, changes in value of collateral,political factors, employment and market conditions, competitor’s performance,market perception, historical losses, and industry statistics. The assessmentfor losses, is based on delinquency trends and prior loss experience andmanagement’s judgment and assumptions regarding various matters, includinggeneral economic conditions and loan portfolio composition. Managementcontinually evaluates these assumptions and various relevant factors affectingcredit quality and inherent losses.

 

*Prepayment Risk.*  The Company historically used prepaymentpenalties as a method of partially mitigating prepayment risk for thoseborrowers that have the ability to refinance. The recent economic downturn,lack of available credit and declines in property values have limited borrowers’ability to refinance. These factors have significantly reduced prepayment riskwithin our long-term mortgage portfolio. With the seasoning of the long-termmortgage portfolio, a significant portion of prepayment penalties terms haveexpired, thereby further reducing prepayment penalty income.

 

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**Results of Operations**

 

*For the Three and Six Months Ended June 30, 2010compared to the Three and Six Months Ended June 30, 2009*

 

Condensed Statements ofOperations Data

 
| ** **                                                                                                          | ** ** | **For the Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                          | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                                                                          | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income                                                                                                     |       | $                                            | 248,213    |   | $ | 454,258 |   | $ | (206,045 | ) | (45 | )% |
| Interest expense                                                                                                    |       | 246,658                                      |       | 451,305 |   | (204,647 | ) | (45 | ) |
| Net interest income                                                                                                 |       | 1,555                                        |       | 2,953 |   | (1,398 | ) | (47 | ) |
| Total non-interest income                                                                                           |       | 16,370                                       |       | 21,566 |   | (5,196 | ) | (24 | ) |
| Total non-interest expense                                                                                          |       | 15,398                                       |       | 16,469 |   | (1,071 | ) | (7 | ) |
| Income tax expense                                                                                                  |       | 45                                           |       | 20 |   | 25 |   | 125 |   |
| Earnings from continuing operations                                                                                 |       | 2,482                                        |       | 8,030 |   | (5,548 | ) | (69 | ) |
| Earnings (loss) from discontinued operations, net                                                                   |       | 804                                          |       | (4,195 | ) | 4,999 |   | 119 |   |
| Earnings                                                                                                            |       | 3,286                                        |       | 3,835 |   | (549 | ) | (14 | ) |
| Cash dividends on preferred stock                                                                                   |       | —                                       |       | (7,443 | ) | 7,443 |   | 100 |   |
| Earnings available to common stockholders before  redemption of preferred stock (1)                                 |       | $                                            | 3,286      |   | $ | 3,835 |   | $ | (549 | ) | (14 | )% |
|                                                                                                                |       |                                         |       |   |   |   |   |   |   |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) - basic   |       | $                                            | 0.43       |   | $ | (0.47 | ) | $ | 0.90 |   | 190 | % |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) - diluted |       | $                                            | 0.39       |   | $ | (0.47 | ) | $ | 0.86 |   | 183 | % |

 
| ** **                                                                                                          | ** ** | **For the Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                                                                          | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income                                                                                                     |       | $                                          | 528,090    |   | $ | 1,166,907 |   | $ | (638,817 | ) | (55 | )% |
| Interest expense                                                                                                    |       | 525,765                                    |       | 1,160,312 |   | (634,547 | ) | (55 | ) |
| Net interest income                                                                                                 |       | 2,325                                      |       | 6,595 |   | (4,270 | ) | (65 | ) |
| Total non-interest income                                                                                           |       | 33,676                                     |       | 31,816 |   | 1,860 |   | 6 |   |
| Total non-interest expense                                                                                          |       | 29,858                                     |       | 27,086 |   | 2,772 |   | 10 |   |
| Income tax expense                                                                                                  |       | 129                                        |       | 2,018 |   | (1,889 | ) | (94 | ) |
| Earnings from continuing operations                                                                                 |       | 6,014                                      |       | 9,307 |   | (3,293 | ) | (35 | ) |
| Earnings (loss) from discontinued operations, net                                                                   |       | 3,190                                      |       | (6,591 | ) | 9,781 |   | 148 |   |
| Earnings                                                                                                            |       | 9,204                                      |       | 2,716 |   | 6,488 |   | 239 |   |
| Cash dividends on preferred stock                                                                                   |       | —                                     |       | (7,443 | ) | 7,443 |   | 100 |   |
| Earnings available to common stockholders before  redemption of preferred stock (1)                                 |       | $                                          | 9,204      |   | $ | 2,716 |   | $ | 6,488 |   | 239 | % |
|                                                                                                                |       |                                       |       |   |   |   |   |   |   |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) - basic   |       | $                                          | 1.19       |   | $ | (0.62 | ) | $ | 1.81 |   | 292 | % |
| Earnings (loss) per share available to common  stockholders before redemption of preferred stock (1) - diluted |       | $                                          | 1.10       |   | $ | (0.62 | ) | $ | 1.72 |   | 278 | % |

 

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(1)          As discussed in Note 4 to the consolidatedfinancial statements, the difference between the carrying value of the tenderedpreferred stock ($106.1 million) and the amount paid for the shares($1.3 million) was recognized as a decrease in retained deficit in 2009.Including the redemption, total basic and diluted earnings per share fromcontinuing operations available to common stockholders were $13.29 and $13.14,respectively. However, because of the special nature of the preferred stockredemption (which the Company considers an infrequently occurring item),management believes that earnings per common share excluding such transactionare more meaningful from an operations standpoint.

 

*Net Interest Income*

 

We earn net interest income primarily from mortgage assets whichinclude securitized mortgage collateral, loans held-for-sale and investmentsecurities available-for-sale, or collectively, “mortgage assets,” and, to alesser extent, interest income earned on cash and cash equivalents. Interestexpense is primarily interest paid on borrowings secured by mortgage assets,which include securitized mortgage borrowings and to a lesser extent, interestexpense paid on long-term debt and note payable. Interest income and interestexpense during the period primarily represents the effective yield, based onthe fair value of the trust assets and liabilities.

 

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The following tables summarize average balance, interest and weightedaverage yield on mortgage assets and borrowings, included within continuingoperations, for the periods indicated. Cash receipts and payments on derivativeinstruments hedging interest rate risk related to our securitized mortgageborrowings are not included in the results below. These cash receipts andpayments are included as a component of the change in fair value of net trustassets.

 
| ** **                               | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **Average**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Balance**                                  | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **ASSETS**                               |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities available-for-sale |       | $                                            | 969        |   | $ | 66 |   | 27.24 | % | $ | 950 |   | $ | 103 |   | 43.37 | % |
| Securitized mortgage collateral          |       | 6,291,034                                    |       | 248,064 |   | 15.77 | % | 6,912,164 |   | 454,044 |   | 26.28 | % |
| Other                                    |       | 6,518                                        |       | 83 |   | 5.09 | % | 36,465 |   | 111 |   | 1.22 | % |
| Total interest-earning assets            |       | $                                            | 6,298,521  |   | $ | 248,213 |   | 15.76 | % | $ | 6,949,579 |   | $ | 454,258 |   | 26.15 | % |
|                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage borrowings          |       | $                                            | 6,276,241  |   | $ | 245,280 |   | 15.63 | % | $ | 7,029,307 |   | $ | 450,449 |   | 25.63 | % |
| Long-term debt                           |       | 11,625                                       |       | 1,197 |   | 41.19 | % | 10,443 |   | 856 |   | 32.79 | % |
| Note payable                             |       | 19,677                                       |       | 181 |   | 3.68 | % | — |   | — |   | — |   |
| Total interest-bearing liabilities       |       | $                                            | 6,307,543  |   | $ | 246,658 |   | 15.64 | % | $ | 7,039,750 |   | $ | 451,305 |   | 25.64 | % |
|                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Spread (1)**              |       |                                         |       | $ | 1,555 |   | 0.12 | % |   |   | $ | 2,953 |   | 0.51 | % |
| **Net Interest Margin (2)**              |       |                                         |       |   |   | 0.10 | % |   |   |   |   | 0.17 | % |

 

----

(1)          Net interest spread iscalculated by subtracting the weighted average yield on interest-bearingliabilities from the weighted average yield on interest-earning assets.

(2)          Net interest margin iscalculated by dividing net interest spread by total average interest-earningassets.

 

Net interest income spread decreased $1.4 million for the threemonths ended June 30, 2010 to $1.6 million from $3.0 million for thecomparable 2009 period. The decrease in net interest spread was primarilyattributable to overall declines in yields between periods and the resultingdecrease in net interest income on securitized mortgage collateral andsecuritized mortgage borrowings, as well as an increase in interest expenseincurred on the note payable of $181 thousand for the quarter endedJune 30, 2010 as compared to none for the comparable 2009 period.   As a result, net interest margin decreasedfrom 0.17% for the three months ended June 30, 2009 to 0.10% for the threemonths ended June 30, 2010.

 

During the three months ended June 30, 2010, the yield oninterest-earning assets decreased to 15.76% from 26.15% in the comparable 2009period. The yield on interest-bearing liabilities decreased to 15.64% for thethree months ended June 30, 2010 from 25.64% for the comparable 2009period.  In connection with the fair valueaccounting for investment securities available-for-sale and securitizedmortgage collateral and borrowings, interest income and interest expense isrecognized using effective yields based on estimated fair values for theseinstruments.  The decrease in yield forsecuritized mortgage collateral and securitized mortgage borrowings isprimarily related to the adoption of FAS ASC 820-10-65-4, “Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,”during the second quarter of 2009.  Thefair value of the securitized mortgage collateral and securitized mortgageborrowings increased and the yields decreased as a result of the adoption whichclarified the use of quoted prices in determining fair value in markets thatare inactive, thus moderating the need to use distressed prices in valuingfinancial assets and liabilities in illiquid markets as the Company had used inprior periods.  Furthermore, the Companyadjusted the investor yield requirement assumptions for senior mortgage backedbonds during the first quarter of 2010 based on market participant expectationsfor similar mortgage backed bonds.  Thedecrease in yields resulted in an increase in fair value of both securitizedmortgage collateral and borrowings at March 31, 2010.  These increases in fair value have decreasedthe effective yields used for purposes of recognizing interest income andinterest expense on these instruments.

 

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| ** **                               | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **Average**                                | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Balance**                                | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **ASSETS**                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities available-for-sale |       | $                                          | 818        |   | $ | 113 |   | 27.63 | % | $ | 1,184 |   | $ | 233 |   | 39.36 | % |
| Securitized mortgage collateral          |       | 6,122,707                                  |       | 527,830 |   | 17.24 | % | 6,572,918 |   | 1,166,124 |   | 35.48 | % |
| Other                                    |       | 11,443                                     |       | 147 |   | 2.57 | % | 39,008 |   | 550 |   | 2.82 | % |
| Total interest-earning assets            |       | $                                          | 6,134,968  |   | $ | 528,090 |   | 17.22 | % | $ | 6,613,110 |   | $ | 1,166,907 |   | 35.29 | % |
|                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage borrowings          |       | $                                          | 6,107,655  |   | $ | 522,945 |   | 17.12 | % | $ | 6,750,866 |   | $ | 1,158,914 |   | 34.33 | % |
| Long-term debt                           |       | 11,008                                     |       | 2,362 |   | 42.91 | % | 12,600 |   | 1,398 |   | 22.19 | % |
| Note payable                             |       | 23,471                                     |       | 458 |   | 3.90 | % | — |   | — |   | — |   |
| Total interest-bearing liabilities       |       | $                                          | 6,142,134  |   | $ | 525,765 |   | 17.12 | % | $ | 6,763,466 |   | $ | 1,160,312 |   | 34.31 | % |
|                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Spread (1)**              |       |                                       |       | $ | 2,325 |   | 0.10 | % |   |   | $ | 6,595 |   | 0.98 | % |
| **Net Interest Margin (2)**              |       |                                       |       |   |   | 0.08 | % |   |   |   |   | 0.20 | % |

 

----

(1)          Net interest spread iscalculated by subtracting the weighted average yield on interest-bearingliabilities from the weighted average yield on interest-earning assets.

(2)          Net interest margin iscalculated by dividing net interest spread by total average interest-earningassets.

 

Net interest income spread decreased $4.3 million for the sixmonths ended June 30, 2010 to $2.3 million from $6.6 million for thecomparable 2009 period. The decrease in net interest spread was primarilyattributable to overall declines in yields between periods and the resultingdecrease in net interest income on securitized mortgage collateral andsecuritized mortgage borrowings, as well as an increase in interest expenseincurred on the note payable of $458 thousand for the six months endedJune 30, 2010 as compared to none for the comparable 2009 period.   As a result, net interest margin decreasedfrom 0.20% for the six months ended June 30, 2009 to 0.08% for the sixmonths ended June 30, 2010.

 

During the six months ended June 30, 2010, the yield oninterest-earning assets decreased to 17.22% from 35.29% in the comparable 2009period. The yield on interest-bearing liabilities decreased to 17.12% for thesix months ended June 30, 2010 from 34.31% for the comparable 2009period.  In connection with the fairvalue accounting for investment securities available-for-sale and securitizedmortgage collateral and borrowings, interest income and interest expense isrecognized using effective yields based on estimated fair values for theseinstruments.  The decrease in yield forsecuritized mortgage collateral and securitized mortgage borrowings isprimarily related to the adoption of FAS ASC 820-10-65-4, “Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,”during the second quarter of 2009.  Thefair value of the securitized mortgage collateral and securitized mortgageborrowings increased and the yields decreased as a result of the adoption whichclarified the use of quoted prices in determining fair value in markets thatare inactive, thus moderating the need to use distressed prices in valuingfinancial assets and liabilities in illiquid markets as the Company had used inprior periods.  Furthermore, the Companyadjusted the investor yield requirement assumptions for senior mortgage backedbonds during the first quarter of 2010 based on market participant expectationsfor similar mortgage backed bonds.  Thedecrease in yields resulted in an increase in fair value of both securitizedmortgage collateral and borrowings at March 31, 2010.  These increases in fair value have decreasedthe effective yields used for purposes of recognizing interest income andinterest expense on these instruments.

 

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*Non-Interest Income*

 

Changes in Non-InterestIncome

 
| ** **                                               | ** ** | **For the Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Change in fair value of net trust assets,  excluding REO |       | $                                            | (4,244     | ) | $ | 54,912 |   | $ | (59,156 | ) | (108 | )% |
| Gains (losses) from REO                                  |       | 4,965                                        |       | (46,723 | ) | 51,688 |   | 111 |   |
| Non-interest income - net trust assets                   |       | 721                                          |       | 8,189 |   | (7,468 | ) | (91 | ) |
| Change in fair value of long-term debt                   |       | 75                                           |       | 329 |   | (254 | ) | (77 | ) |
| Mortgage and real estate services fees                   |       | 15,677                                       |       | 13,233 |   | 2,444 |   | 18 |   |
| Other                                                    |       | (103                                         | )          | (185 | ) | 82 |   | 44 |   |
| Total non-interest income                                |       | $                                            | 16,370     |   | $ | 21,566 |   | $ | (5,196 | ) | (24 | )% |

 

*Non-interest income—net trust assets.*  Since our consolidated and unconsolidatedsecuritization trusts are nonrecourse to the Company, our economic risk islimited to our residual interests in these securitization trusts. To betterunderstand the economics on our residual interests in securitizations, it isnecessary to consider the net effect of changes in fair value of net trustassets and losses from real estate owned. All estimated future losses areincluded in the estimate of the fair value of securitized mortgage collateraland REO. Losses on REO are reported separately in the consolidated statement ofoperations as REO is a nonfinancial asset which is the only component of trustassets and liabilities that is not recorded at fair value. Therefore, REO valueat the time of sale or losses from further write-downs are recorded separatelyin the Company’s consolidated statement of operations. The net effect ofchanges in value related to our investment in all trust assets and liabilitiesis shown as non-interest income—net trust assets, which includes losses fromREO.  Non-interest income related to ournet trust assets (residual interests in securitizations) was $721 thousand forthe three months ended June 30, 2010, compared to $8.2 million in thecomparable 2009 period.  The $721thousand gain on net trust assets was primarily attributable to the gain onsale of REO during the three months ended June 30, 2010. The individual componentsof the non-interest income from net trust assets are discussed below:

 

*Change in fair value of net trust assets, excludingREO.*  For the quarter endedJune 30, 2010, the Company recognized a $4.2 million loss from the changein fair value of net trust assets, excluding REO.  The net loss recognized during the period wascomprised of losses resulting from the decrease in the fair market value ofsecuritized mortgage collateral and an increase in the fair value of netderivative liabilities of $30.6 million and $11.3 million, respectively.  Offsetting these losses were gains resultingfrom the increase in fair value of investment securities-for-sale and adecrease in the fair value of securitized mortgage borrowings of $541 thousandand $37.2 million, respectively.

 

For the quarter ended June 30,2009, the Company recognized a $54.9 million gain from the change in fair valueof net trust assets, excluding REO.  The gain was the result of theadoption of FSP 157-4, which clarified the use of quoted prices in determiningfair values in markets that are inactive, thus moderating the need to usedistressed prices in valuing financial assets and liabilities in illiquidmarkets as the Company had used in prior periods.  Offsetting thegain recognized in connection with the adoption of FSP 157-4 were declines infair value resulting from the Company increasing its loss assumptions for itslong-term mortgage portfolio due to the increase in expected defaults and lossseverities related to the weak economy and housing market.  The netgain recognized during the period was comprised of gains from the increase infair value of investment securities-for-sale and securitized mortgagecollateral of $0.8 million and $594.6 million,respectively.  Offsetting these gains were losses resulting fromincreases in the fair value of securitized mortgage borrowings and derivativeinstruments, net of $536.3 million and $4.2 million, respectively.

 

*Gains (losses) from REO.*  Gains (losses) from REO were$5.0 million for the three months ended June 30, 2010.  This gain was comprised of a$5.2 million gain on sale of REO, coupled with $200 thousand inadditional impairment write-downs during the period.  During the three months ended June 30,2010, the gain on sale of REO was attributable to mortgage insurance recoverycollected in the period as a result of our increased loss mitigation efforts ofour portfolio.  Additionally, lossseverities decreased on properties liquidated during the period as compared topreviously reserved.

 

Losses from real estateowned were $46.7 million for the three months ended June 30,2009.  This loss was comprised of a $37.6 million loss on sale ofREO, coupled with $9.1 million in additional impairment write-downs during theperiod.  During the second quarter of 2009, loss severities resultingfrom liquidations in areas where we have high concentration of foreclosedproperties (such as California and Florida) have continued to increase overprevious periods as a result of continued deterioration in the U.S. economy andreal estate markets.  These continued declines in housing prices haveresulted in liquidations of foreclosed assets at prices below expected levelsas well as additional impairment write-downs of REO since foreclosure

 

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* *

*Change in the fair value of long-term debt.*  Change in the fair value of long-term debtwas a gain of $75 thousand for the three months ended June 30, 2010,compared to a gain of $329 thousand for the comparable 2009 period.  Long-term debt (consisting of trust preferredsecurities and junior subordinated notes) is measured based upon an analysisprepared by the Company, which considers the Company’s own credit risk,including consideration of settlements with trust preferred debt holders anddiscounted cash flow analysis.

 

*Mortgage and real estate services fees.*  Revenues generated from these businesses areprimarily from the Company’s long-term mortgage portfolio. For the three monthsended June 30, 2010, mortgage and real estate services fees, whichprimarily include loan modification fees and monitoring and surveillanceservices fees, were $15.7 million compared to $13.2 million in monitoringfees in the comparable 2009 period.  Themortgage and real estate services fees of $15.7 million for the three monthsended June 30, 2010, was primarily comprised of $7.8 million inmonitoring, surveillance and recovery fees, $3.5 million in title andescrow fees, $2.7 million in loan modification fees, and $1.7 million inservicing income.

 
| ** **                                               | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Change in fair value of net trust assets,  excluding REO |       | $                                          | 3,128      |   | $ | 187,842 |   | $ | (184,714 | ) | (98 | )% |
| Gains (losses) from REO                                  |       | 3,857                                      |       | (174,923 | ) | 178,780 |   | 102 |   |
| Non-interest income - net trust assets                   |       | 6,985                                      |       | 12,919 |   | (5,934 | ) | (46 | ) |
| Change in fair value of long-term debt                   |       | (216                                       | )          | 341 |   | (557 | ) | (163 | ) |
| Mortgage and real estate services fees                   |       | 27,002                                     |       | 18,782 |   | 8,220 |   | 44 |   |
| Other                                                    |       | (95                                        | )          | (226 | ) | 131 |   | 58 |   |
| Total non-interest income                                |       | $                                          | 33,676     |   | $ | 31,816 |   | $ | 1,860 |   | 6 | % |

 

*Non-interest income—net trust assets.*  Since our consolidated and unconsolidatedsecuritization trusts are nonrecourse to the Company, our economic risk islimited to our residual interests in these securitization trusts. To betterunderstand the economics on our residual interests in securitizations, it isnecessary to consider the net effect of changes in fair value of net trustassets and losses from real estate owned. All estimated future losses areincluded in the estimate of the fair value of securitized mortgage collateraland REO. Losses on REO are reported separately in the consolidated statement ofoperations as REO is a nonfinancial asset which is the only component of trustassets and liabilities that is not recorded at fair value. Therefore, REO valueat the time of sale or losses from further write-downs are recorded separatelyin the Company’s consolidated statement of operations. The net effect ofchanges in value related to our investment in all trust assets and liabilitiesis shown as non-interest income—net trust assets, which includes losses fromREO.  Non-interest income related to ournet trust assets (residual interests in securitizations) was $7.0 millionfor the six months ended June 30, 2010, compared to $12.9 million inthe comparable 2009 period.  The$7.0 million gain on net trust assets was primarily attributable toincreased expected net interest spread as a result of a downward shift in theforward LIBOR curve during the six months ended June30, 2010. The individualcomponents of the non-interest income from net trust assets are discussedbelow:

 

*Change in fair value of net trust assets, excludingREO.*  For the six months ended June 30,2010, the Company recognized a $3.1 million gain from the change in fair valueof net trust assets, excluding REO.  Thenet gain recognized during the period was comprised of gains resulting from theincrease in fair value of investment securities-for-sale and securitizedmortgage collateral of $718 thousand and $650.8 million, respectively.Offsetting these gains were losses resulting from increases in the fair valueof securitized mortgage borrowings and net derivative liabilities of $619.0million and $29.3 million, respectively.

 

For the six months ended June 30, 2009, the Company recognized a$187.8 million gain from the change in fair value of net trust assets,excluding REO.  The gain was the result of the adoption of FASB ASC820-10-65-4, which clarified the use of quoted prices in determining fairvalues in markets that are inactive, thus moderating the need to use distressedprices in valuing financial assets and liabilities in illiquid markets as theCompany had used in prior periods.  Offsetting the gain recognized inconnection with the adoption of FASB ASC 820-10-65-4 were declines in fairvalue resulting from the Company increasing its loss assumptions for itslong-term mortgage portfolio due to the increase in expected defaults and lossseverities related to the weak economy and housing market.  The netgain recognized during the period comprised of gains resulting from theincrease in fair value of investment securities-for-sale and securitizedmortgage collateral and a reduction in the fair value of securitized mortgageborrowings of $1.7 million, $45.6 million and $160.9 million,respectively.  Offsetting these gains were losses from the change infair value of derivative instruments, net of $20.3 million.

 

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*Gains (losses) from REO.*  Gains (losses) from REO were$3.9 million for the six months ended June 30, 2010. This gain wascomprised of a $3.4 million gain on sale of REO, coupled with$473 thousand in recovery of the net realizable value during theperiod.  During the six months ended June 30,2010, the gain on sale of REO was attributable to mortgage insurance recoverycollected in the period as a result of our increased loss mitigation efforts ofour portfolio.  Additionally, lossseverities decreased on properties liquidated during the period as compared topreviously reserved.

 

Losses from REO were $174.9 million for the six months ended June 30,2009.  This loss was comprised of an $81.6 million loss on sale ofREO, coupled with $93.3 million in additional impairment write-downs during theperiod.  During the first six months of 2009, loss severitiesresulting from liquidations in areas where we have high concentration offoreclosed properties (such as California and Florida) have continued toincrease significantly over previous periods as a result of continueddeterioration in the U.S. economy and real estate markets.  Thesecontinued declines in housing prices have resulted in liquidations offoreclosed assets at prices below expected levels as well as additionalimpairment write-downs of REO since foreclosure.

 

*Change in the fair value of long-term debt.*  Change in the fair value of long-term debtwas a loss of $216 thousand for the six months ended June 30, 2010,compared to a gain of $341 thousand for the comparable 2009 period.  Long-term debt (consisting of trust preferredsecurities and junior subordinated notes) is measured based upon an analysisprepared by the Company, which considers the Company’s own credit risk,including consideration of settlements with trust preferred debt holders anddiscounted cash flow analysis.

 

*Mortgage and real estate services fees.*  Revenues generated from these businesses areprimarily from the Company’s long-term mortgage portfolio. For the six monthsended June 30, 2010, mortgage and real estate services fees, whichprimarily include loan modification fees and monitoring and surveillanceservices fees, were $27.0 million compared to $18.8 million inmonitoring fees in the comparable 2009 period. The mortgage and real estate services fees of $27.0 million for the sixmonths ended June 30, 2010, was primarily comprised of $12.8 millionin monitoring, surveillance and recovery fees, $6.0 million in title andescrow fees, $5.8 million in loan modification fees, and $2.4 million inservicing income.

 

*Non-Interest Expense*

 

Changes in Non-InterestExpense

 
| ** **                  | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                  | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| General  and administrative |       | $                                            | 4,630      |   | $ | 6,110 |   | $ | (1,480 | ) | (24 | )% |
| Personnel  expense          |       | 10,768                                       |       | 10,359 |   | 409 |   | 4 |   |
| Total  operating expense    |       | $                                            | 15,398     |   | $ | 16,469 |   | $ | (1,071 | ) | (7 | )% |

 

Total non-interest expense was $15.4 million for the three monthsended June 30, 2010, compared to $16.5 million for the comparableperiod of 2009.  The $1.1 milliondecrease in non-interest expense was primarily attributable to a$1.5 million decrease in general and administrative expenses associatedwith a $917 thousand reduction in legal and professional fees.

 
| ** **                 | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                 | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| General and administrative |       | $                                          | 9,409      |   | $ | 10,449 |   | $ | (1,040 | ) | (10 | )% |
| Personnel expense          |       | 20,449                                     |       | 16,637 |   | 3,812 |   | 23 |   |
| Total operating expense    |       | $                                          | 29,858     |   | $ | 27,086 |   | $ | 2,772 |   | 10 | % |

 

Total non-interest expense was $29.9 million for the six monthsended June 30, 2010, compared to $27.1 million for the comparableperiod of 2009.  The $2.8 millionincrease in non-interest expense was primarily attributable to a$3.8 million increase in personnel expense over the previous period as aresult of increases in personnel and related costs associated with theinitiation of our new mortgage and real estate fee-based business activities.  Offsetting the increase in personnel expenseswas a $1.0 million reduction in general and administrative expenses associatedwith a $992 thousand reduction in legal and professional fees.

 

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***Results of Operations by BusinessSegment***

 

***Mortgage and Real Estate Services***

 

During 2009, the Company initiated various mortgage and real estatefee-based business activities, including loan modifications, real estatedisposition, monitoring and surveillance services, real estate brokerage,mortgage lending and title and escrow services. Although the Company intends togenerate fees by providing these services to third parties in the marketplace,the revenues from these business activities have primarily been generated fromthe Company’s long-term mortgage portfolio. Furthermore, since these businessactivities are recently formed there remains uncertainty about their futuresuccess.

 

Condensed Statements ofOperations Data

 
| ** **                             | ** ** | **For the Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income (expense)          |       | $                                            | 6          |   | $ | (8 | ) | $ | 14 |   | 175 | % |
|                                   |       |                                         |       |   |   |   |   |   |   |
| Mortgage and real estate services fees |       | 15,677                                       |       | 13,233 |   | 2,444 |   | 18 |   |
| Other non-interest income              |       | (5                                           | )          | (157 | ) | 152 |   | 97 |   |
| Total non-interest income              |       | 15,672                                       |       | 13,076 |   | 2,596 |   | 20 |   |
|                                   |       |                                         |       |   |   |   |   |   |   |
| Personnel expense                      |       | 8,830                                        |       | 5,727 |   | 3,103 |   | 54 |   |
| Non-interest expense and income taxes  |       | 2,039                                        |       | 1,770 |   | 269 |   | 15 |   |
| Net earnings                           |       | $                                            | 4,809      |   | $ | 5,571 |   | $ | (762 | ) | (14 | )% |

 

For the three months ended June 30, 2010, mortgage and real estateservices fees were $15.7 million compared to $13.2 million in thecomparable period for 2009.   Themortgage and real estate services fees of $15.7 million for the three monthsended June 30, 2010, was primarily comprised of $7.8 million inmonitoring, surveillance and recovery fees, $3.5 million in title andescrow fees, $2.7 million in loan modification fees, and $1.7 million inservicing income.

 

For the three months ended June 30, 2010, personnel expenseincreased $3.1 million to $8.8 million as a result of increases inpersonnel and related costs associated with the initiation of the new mortgageand real estate fee-based business activities.

 
| ** **                             | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income (expense)          |       | $                                          | 11         |   | $ | (6 | ) | $ | 17 |   | 283 | % |
|                                   |       |                                       |       |   |   |   |   |   |   |
| Mortgage and real estate services fees |       | 27,002                                     |       | 18,782 |   | 8,220 |   | 44 |   |
| Other non-interest income              |       | 2                                          |       | (186 | ) | 188 |   | 101 |   |
| Total non-interest income              |       | 27,004                                     |       | 18,596 |   | 8,408 |   | 45 |   |
|                                   |       |                                       |       |   |   |   |   |   |   |
| Personnel expense                      |       | 16,440                                     |       | 8,602 |   | 7,838 |   | 91 |   |
| Non-interest expense and income taxes  |       | 4,329                                      |       | 2,963 |   | 1,366 |   | 46 |   |
| Net earnings                           |       | $                                          | 6,246      |   | $ | 7,025 |   | $ | (779 | ) | (11 | )% |

 

For the six months ended June 30, 2010, mortgage and real estateservices fees were $27.0 million compared to $18.8 million in thecomparable period for 2009.   Themortgage and real estate services fees of $27.0 million for the six monthsended June 30, 2010, was primarily comprised of $12.8 million inmonitoring, surveillance and recovery fees, $6.0 million in title andescrow fees, $5.8 million in loan modification fees, and $2.4 million inservicing income.

 

For the six months ended June 30, 2010, personnel expense increased$7.8 million to $16.4 million as a result of increases in personneland related costs associated with the initiation of the new mortgage and realestate fee-based business activities.

 

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For the six months ended June 30, 2010, non-interest expense andincome taxes increased $1.4 million to $4.3 million. The increase isrelated to higher business promotion and equipment expenses associated with thenew mortgage and real estate fee-based business activities.

 

***Long-term Portfolio***

 

Condensed Statements ofOperations Data

 
| ** **                                               | ** ** | **For the Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income                                      |       | $                                            | 1,549      |   | $ | 2,961 |   | $ | (1,412 | ) | (48 | )% |
|                                                     |       |                                         |       |   |   |   |   |   |   |
| Change in fair value of net trust assets,  excluding REO |       | (4,244                                       | )          | 54,912 |   | (59,156 | ) | (108 | ) |
| Gains (losses) from REO                                  |       | 4,965                                        |       | (46,723 | ) | 51,688 |   | 111 |   |
| Non-interest income- net trust assets                    |       | 721                                          |       | 8,189 |   | (7,468 | ) | (91 | ) |
| Change in fair value of long-term debt                   |       | 75                                           |       | 329 |   | (254 | ) | (77 | ) |
| Other non-interest income                                |       | (98                                          | )          | (28 | ) | (70 | ) | (250 | ) |
| Total non-interest income                                |       | 698                                          |       | 8,490 |   | (7,792 | ) | (92 | ) |
|                                                     |       |                                         |       |   |   |   |   |   |   |
| Personnel expense                                        |       | 1,938                                        |       | 4,632 |   | (2,694 | ) | (58 | ) |
| Non-interest expense and income taxes                    |       | 2,636                                        |       | 4,360 |   | (1,724 | ) | (40 | ) |
| Net (loss) earnings                                      |       | $                                            | (2,327     | ) | $ | 2,459 |   | $ | (4,786 | ) | (195 | )% |

 

Net (loss) earnings for the long-term portfolio was a loss of $2.3million for the three months ended June 30, 2010, compared to earnings of$2.5 million for the comparable period of 2009. The decrease in net earnings is primarily attributable to a $7.5 milliondecrease in non-interest income-net trust assets, and a $1.4 milliondecrease in net interest income, partially offset by a $2.7 millionreduction in personnel expense and a $1.7 million reduction in non-interestexpense and income taxes.

 

Non-interestincome-net trust assets decreased $7.5 million primarily due to a decrease inthe change in fair value of net trust assets partially offset by a decrease inREO losses.  The decrease in the fair value of net trust assets wasprimarily the result of the adoption of FASB ASC 820-10-65-4 during the secondquarter of 2009.  This clarified the useof quoted prices in determining fair values in markets that are inactive, thusmoderating the need to use distressed prices in valuing financial assets andliabilities in illiquid markets as the Company used in prior periods.  The Company recorded a significant increase inthe fair value of net trust assets as a result of the adoption of ASC820-10-65-4 during June of 2009. The decrease in REO losses were attributable to higher mortgageinsurance recoveries collected in the period, reduction in loss severities onREO liquidations and a decrease in REO liquidations during the second quarterof 2010 compared to 2009.

 

Personnel expense decreased $2.7 million during the three monthsended June 30, 2010 as a result of reduced personnel associated with thelong-term portfolio segment of the Company.

 

Non-interest expense and income taxes decreased $1.7 million.  The decrease is primarily attributable to a$959 thousand reduction in legal and professional fees as well as an $801thousand decrease in general and administrative expenses.

 

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| ** **                                               | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income                                      |       | $                                          | 2,314      |   | $ | 6,601 |   | $ | (4,287 | ) | (65 | )% |
|                                                     |       |                                       |       |   |   |   |   |   |   |
| Change in fair value of net trust assets,  excluding REO |       | 3,128                                      |       | 187,842 |   | (184,714 | ) | (98 | ) |
| Gains (losses) from REO                                  |       | 3,857                                      |       | (174,923 | ) | 178,780 |   | 102 |   |
| Non-interest income- net trust assets                    |       | 6,985                                      |       | 12,919 |   | (5,934 | ) | (46 | ) |
| Change in fair value of long-term debt                   |       | (216                                       | )          | 341 |   | (557 | ) | (163 | ) |
| Other non-interest income                                |       | (97                                        | )          | (40 | ) | (57 | ) | (143 | ) |
| Total non-interest income                                |       | 6,672                                      |       | 13,220 |   | (6,548 | ) | (50 | ) |
|                                                     |       |                                       |       |   |   |   |   |   |   |
| Personnel expense                                        |       | 4,009                                      |       | 8,035 |   | (4,026 | ) | (50 | ) |
| Non-interest expense and income taxes                    |       | 5,209                                      |       | 9,504 |   | (4,295 | ) | (45 | ) |
| Net (loss) earnings                                      |       | $                                          | (232       | ) | $ | 2,282 |   | $ | (2,514 | ) | (110 | )% |

 

Net (loss) earnings for the long-term portfolio was a loss of $232thousand for the six months ended June 30, 2010, compared to earnings of$2.3 million for the comparable period of 2009. This decrease in net earnings is primarily attributable to a $5.9million decrease in non-interest income-net trust assets and a $4.3 milliondecrease in net interest income, offset by a $4.3 million reduction innon-interest expense and income taxes and a $4.0 million reduction in personnelexpense.

 

Non-interestincome-net trust assets decreased $5.9 million primarily due to a decrease inthe change in fair value of net trust assets partially offset by a decrease inREO losses.  The decrease in the fair value of net trust assets wasprimarily the result of the adoption of FASB ASC 820-10-65-4 during the secondquarter of 2009.  This clarified the useof quoted prices in determining fair values in markets that are inactive, thus moderatingthe need to use distressed prices in valuing financial assets and liabilitiesin illiquid markets as the Company used in prior periods.  The Company recorded a significant increasein the fair value of net trust assets as a result of the adoption of ASC820-10-65-4 during June of 2009. The decrease in REO losses were attributable to higher mortgageinsurance recoveries collected in the period, reduction in loss severities onREO liquidations and a decrease in REO liquidations during the six months endedJune 30, 2010 compared to 2009.

 

Personnel expense decreased $4.0 million during the six monthsended June 30, 2010 as a result of reduced personnel associated with thelong-term portfolio segment of the Company.

 

Non-interest expense and income taxes decreased $4.3 million.  The decrease is primarily attributable to a$1.2 million reduction in legal and professional fees as well as a $1.1 milliondecrease in general and administrative expenses.

 

***Discontinued Operations***

 

Condensed Statements ofOperations Data

 
| ** **                             | ** ** | **For the Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income (expense)          |       | $                                            | 17         |   | $ | (665 | ) | $ | 682 |   | 103 | % |
|                                   |       |                                         |       |   |   |   |   |   |   |
| Loss on sale of loans                  |       | (111                                         | )          | (8,052 | ) | 7,941 |   | 99 |   |
| (Provision) recoveries for repurchases |       | (416                                         | )          | 1,932 |   | (2,348 | ) | (122 | ) |
| Other non-interest income              |       | 575                                          |       | (739 | ) | 1,314 |   | 178 |   |
| Total non-interest income              |       | 48                                           |       | (6,859 | ) | 6,907 |   | 101 |   |
|                                   |       |                                         |       |   |   |   |   |   |   |
| Lease impairment adjustment            |       | (554                                         | )          | (2,610 | ) | 2,056 |   | 79 |   |
| Non-interest expense and income taxes  |       | (185                                         | )          | (719 | ) | 534 |   | 74 |   |
| Net earnings (loss)                    |       | $                                            | 804        |   | $ | (4,195 | ) | $ | 4,999 |   | 119 | % |

 

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Net earnings from discontinued operations was $804 thousand forthe three months ended June 30, 2010, compared to a loss of$4.2 million for the comparable period in 2009.  Net interest income increased $682 thousandto $17 thousand as a result of reductions in overall interest expense fromthe previous reverse repurchase facility that was settled as a result of theSettlement Agreement reached in October 2009.

 

Loss on sale of loans decreased $7.9 million during the quarter toa loss of $111 thousand as compared to a loss of $8.1 million in thecomparable period in 2009.   The decreasein loss on sale of loans was the result of reductions in lower of cost ormarket (LOCOM) adjustment against loans held-for-sale between periods resultingfrom the Settlement Agreement in October 2009 with its reverse repurchasefacility lender which removed the exposure associated with the loans held forsale that secured the line.

 

(Provision) recoveries for repurchases decreased $2.3 million to aprovision of $416 thousand for the three months ended June 30, 2010,compared to a recovery of $1.9 million for the same period in 2009. The$2.3 million decrease is the result of settlements reached with whole-loaninvestors during 2009, coupled with increases in estimated repurchaseobligations during 2010.

 

The $1.3 million increase in other non-interest income is the result ofgains of $575 thousand on sales of REO properties not in trusts during thethree months ended June 30, 2010 as compared to loss on sale of REOproperties and write-downs of REO totaling $742 thousand for the comparableperiod in 2009.

 

The $2.1 million increase inlease impairment adjustment during the three months ended June 30, 2010over the comparable period was primarily attributable to a $2.6 million gain inthe second quarter of 2009 resulting from reduction in the lease liabilities asa result of changes in our expected minimum future lease payments.

 

Condensed Statements ofOperations Data

 
| ** **                             | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest income (expense)          |       | $                                          | 44         |   | $ | (1,078 | ) | $ | 1,122 |   | 104 | % |
|                                   |       |                                       |       |   |   |   |   |   |   |
| Gain (loss) on sale of loans           |       | 85                                         |       | (8,010 | ) | 8,095 |   | 101 |   |
| (Provision) recoveries for repurchases |       | (363                                       | )          | 1,176 |   | (1,539 | ) | (131 | ) |
| Other non-interest income              |       | 2,411                                      |       | (1,946 | ) | 4,357 |   | 224 |   |
| Total non-interest income              |       | 2,133                                      |       | (8,780 | ) | 10,913 |   | 124 |   |
|                                   |       |                                       |       |   |   |   |   |   |   |
| Lease impairment adjustment            |       | (554                                       | )          | (2,944 | ) | 2,390 |   | 81 |   |
| Non-interest expense and income taxes  |       | (459                                       | )          | (323 | ) | (136 | ) | (42 | ) |
| Net earnings (loss)                    |       | $                                          | 3,190      |   | $ | (6,591 | ) | $ | 9,781 |   | 148 | % |

 

Net earnings from discontinued operations was $3.2 million for thesix months ended June 30, 2010, compared to a loss of $6.6 millionfor the comparable period in 2009.  Netinterest income increased $1.1 million to $44 thousand as a result ofreductions in overall interest expense from the previous reverse repurchasefacility that was settled as a result of the Settlement Agreement reached in October 2009.

 

Loss on sale of loans decreased $8.1 million to a gain of $85 thousandfor the six months ended June 30, 2010 as compared to a loss of $8.0million in the comparable period in 2009.  The decrease in loss on sale of loans was the result of reductions inLOCOM adjustments against loans held-for-sale between periods resulting fromthe Settlement Agreement in October 2009 with its reverse repurchasefacility lender which removed the exposure associated with the loans held forsale that secured the line.

 

(Provision) recoveries for repurchases decreased $1.5 million to aprovision of $363 thousand for the six months ended June 30, 2010,compared to a recovery of $1.2 million for the same period in 2009. The$1.5 million decrease is the result of settlements reached with whole-loaninvestors during 2009, coupled with increases in estimated repurchaseobligations during 2010.

 

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The $4.4 million increase in other non-interest income is primarily theresult of gains of $1.7 million on sales of REO properties not in trusts andrecovery of REO write-downs during the six months ended June 30, 2010 ascompared to loss on sale of REO and write-downs of REO totaling $1.9 millionfor the comparable period in 2009.

 

The $2.4 million increase inlease impairment adjustment during the six months ended June 30, 2010 overthe comparable period was primarily attributable to a $2.9 million gain in thesecond quarter of 2009 resulting from reduction in the lease liabilities as aresult of changes in our expected minimum future lease payments.

 

**ITEM3:  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

As a smaller reporting company, we are not required to provide theinformation required by this Item.

 

**ITEM4:  CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

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

 

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

 

***Changes in Internal Control Over Financial Reporting***

 

There has been no change in the Company’s internal control overfinancial reporting during the Company’s quarter ended June 30, 2010, thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

***PART II. OTHER INFORMATION***

 

**ITEM1:  LEGAL PROCEEDINGS**

 

The Company is party to litigation and claims which arise in theordinary course of business.

 

Withrespect to Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al,which is further described in the Company’s Form 10-K for the year ended December 31,2009, on June 29, 2010, the United States Court of Appeals for theNinth Circuit affirmed the District’s Court’s dismissal of the plaintiff’sThird Amended Complaint.

 

Please refer to IMH’s reports on Form 10-K for the year endedDecember 31, 2009 and Form 10-Q for the quarter ended March 31,2010 for a description of other litigation and claims.

 

**ITEM1A:  RISK FACTORS**

 

Our Annual Report on Form 10-K for the year endedDecember 31, 2009 and our quarterly reports on Form 10-Q for theperiod ended March 31, 2010, include a detailed discussion of our riskfactors.  The information presented below updates andshould be read in conjunction with the risk factors and information disclosedin that Form 10-K.

 

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**ITEM2:  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

On April 23, 2010, the Company issued 30,000 shares of commonstock in connection 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.

 

**ITEM3:  DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM4:  RESERVED**

 

None.

 

**ITEM5:  OTHER INFORMATION**

 

OnJune 24, 2010, the Company, through IRES and its subsidiaries, enteredinto a Master Repurchase Agreement with East West Bank providing a$10 million warehouse facility. The warehouse facility will be used to fund andwill be secured by single family residential mortgage loans that are held forsale. As of June 30, 2010, there were no borrowings against thisfacility. The agreement expires June 2011. The rate range in excess of onemonth LIBOR is 4.00%, with a floor no less than 5.00%.  Under the terms ofthe warehouse facility, IRES and its subsidiaries are required tomaintain various financial and other covenants, including maintaining aminimum tangible net worth of $17.0 million and cash or cash equivalents of atleast $5.0 million.

 

The above informationincluded in this Item 5 is provided in accordance withItems 1.01 and 2.03 of Form 8-K.

 

**ITEM6:  EXHIBITS**

 

(a)                                  Exhibits:

 
| 10.1  |   | Master Repurchase  Agreement dated as of June 24, 2010 between East West bank and Synergy  Capital Mortgage Corp. and Excel Mortgage Servicing, Inc., and  Integrated Real Estate Service Corp., as Guarantor. |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                              |

 

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*                                         This exhibit shall not bedeemed “filed” for purposes of Section 18 of the Securities Exchange Actof 1934 or otherwise subject to the liabilities of that section, nor shall itbe deemed incorporated by reference in any filing under the Securities Act of1933 or the Securities Exchange Act of 1934, whether made before or after thedate hereof and irrespective of any general incorporation language in anyfilings.

 

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** **

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, 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)* | * *   |

 

August 16, 2010

 

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