UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM 10-Q





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





For
the quarterly period ended June 30, 2009





or





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





For
the transition period from
                  
to
                  .





Commission
File Number: 1-14100





IMPAC
MORTGAGE HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





Maryland
              
              33-0675505(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)





19500
Jamboree Road, Irvine, California 92612


(Address
of principal executive offices)





(949)
475-3600


(Registrant’s
telephone number, including area code)





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





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





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





Large
      accelerated filer o
              
              Accelerated
      filer xNon-accelerated
      filer o
              
              Smaller
      reporting company o





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





There
were 7,618,146 shares of common stock outstanding as of August 7,
2009.





IMPAC
MORTGAGE HOLDINGS, INC.





FORM 10-Q
QUARTERLY REPORT





TABLE
OF CONTENTS





PagePART I. FINANCIAL
      INFORMATIONITEM
      1.
                    CONSOLIDATED
      FINANCIAL STATEMENTS
                    1Consolidated
      Balance Sheets as of June 30, 2009 (unaudited) and December 31,
      2008
                    1Consolidated
      Statements of Operations for the Three and Six Months Ended June 30,
      2009 and 2008 (unaudited)
                    2Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2009 and
      2008 (unaudited)
                    3Notes
      to Unaudited Consolidated Financial Statements
                    4ITEM
      2.
                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    22Forward-Looking
      Statements
                    22The
      Mortgage Banking Industry and Discussion of Relevant Fiscal
      Periods
                    22Status
      of Operations, Liquidity and Capital Resources
                    22Market
      Conditions
                    25Critical
      Accounting Policies
                    27Fair
      Value of Financial Instruments
                    28Interest
      Income and Expense
                    30Selected
      Financial Results for the Three Months Ended June 30, 2009
                    30Selected
      Financial Results for the Six Months Ended June 30, 2009
                    30Estimated
      Taxable Income
                    31Financial
      Condition and Results of Operations
                    31ITEM
      3.
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    45ITEM
      4.
                    CONTROLS
      AND PROCEDURES
                    45PART II. OTHER
    INFORMATIONITEM
      1.
                    LEGAL
      PROCEEDINGS
                    46ITEM
      1A.
                    RISK
      FACTORS
                    46ITEM
      2.
                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                    46ITEM
      3.
                    DEFAULTS
      UPON SENIOR SECURITIES
                    46ITEM
      4.
                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                    46ITEM
      5.
                    OTHER
      INFORMATION
                    47ITEM
      6.
                    EXHIBITS
                    47SIGNATURES
                    48CERTIFICATIONS







PART I. FINANCIAL
INFORMATION





ITEM 1.     
CONSOLIDATED FINANCIAL STATEMENTS





IMPAC
MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share data)





June 30,
                        
                        
                        December 31,2009
                        
                        
                        2008(Unaudited)ASSETSCash
      and cash equivalents
                        
                        $
                        30,694
                        
                        
                        $
                        46,215Restricted  cash
                        
                        
                        1,250
                        
                        
                        
                        1,243Short-term
      investments
                        
                        
                        5,026
                        
                        
                        
                        -Trust
      assetsInvestment
      securities available-for-sale
                        
                        
                        1,332
                        
                        
                        
                        2,068Securitized
      mortgage collateral
                        
                        
                        6,018,391
                        
                        
                        
                        5,894,424Derivative
      assets
                        
                        
                        179
                        
                        
                        
                        37Real
      estate owned
                        
                        
                        274,481
                        
                        
                        
                        599,084Total
      trust assets
                        
                        
                        6,294,383
                        
                        
                        
                        6,495,613Assets
      of discontinued operations
                        
                        
                        122,734
                        
                        
                        
                        141,053Other
      assets
                        
                        
                        26,948
                        
                        
                        
                        31,393Total
      assets
                        
                        $
                        6,481,035
                        
                        
                        $
                        6,715,517LIABILITIESTrust
      liabilitiesSecuritized
      mortgage borrowings
                        
                        $
                        6,080,637
                        
                        
                        $
                        6,193,984Derivative
      liabilities
                        
                        
                        184,851
                        
                        
                        
                        273,584Total
      trust liabilities
                        
                        
                        6,265,488
                        
                        
                        
                        6,467,568Long-term
      debt
                        
                        
                        9,797
                        
                        
                        
                        15,403Liabilities
      of discontinued operations
                        
                        
                        191,909
                        
                        
                        
                        217,241Other
      liabilities
                        
                        
                        7,617
                        
                        
                        
                        6,053Total
      liabilities
                        
                        
                        6,474,811
                        
                        
                        
                        6,706,265Commitments
      and contingenciesSTOCKHOLDERS'
      EQUITYSeries
      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
      $16,904; 2,000,000 shares authorized, 676,156 noncumulative and 2,000,000
      cumulative shares issued and outstanding as of June 30, 2009 and December
      31, 2008, respectively
                        
                        
                        7
                        
                        
                        
                        20Series
      C 9.125% redeemable preferred stock, $0.01 par value; liquidation value
      $35,389; 5,500,000 shares authorized; 1,415,564 noncumulative and
      4,470,600 cumulative shares issued and outstanding as of June 30, 2009 and
      December 31, 2008, respectively
                        
                        
                        14
                        
                        
                        
                        45Common
      stock, $0.01 par value; 200,000,000 shares authorized; 7,618,146 shares
      issued and outstanding as of June 30, 2009 and December 31, 2008,
      respectively
                        
                        
                        76
                        
                        
                        
                        76Additional
      paid-in capital
                        
                        
                        1,179,440
                        
                        
                        
                        1,177,697Net
      accumulated deficit:Cumulative
      dividends declared
                        
                        
                        (822,520
                        )
                        
                        
                        (815,077
                        )Retained
      deficit
                        
                        
                        (350,793
                        )
                        
                        
                        (353,509
                        )Net
      accumulated deficit
                        
                        
                        (1,173,313
                        )
                        
                        
                        (1,168,586
                        )Total
      stockholders’ equity
                        
                        
                        6,224
                        
                        
                        
                        9,252Total
      liabilities and stockholders’ equity
                        
                        $
                        6,481,035
                        
                        
                        $
                        6,715,517





See
accompanying notes to consolidated financial statements.


1





IMPAC
MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except per share data)


(Unaudited)





For
      the Three Months
                
                
                For
      the Six MonthsEnded June 30,
                
                
                Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008INTEREST
      INCOME
                
                $
                454,258
                
                
                $
                407,855
                
                
                $
                1,166,907
                
                
                $
                679,811INTEREST
      EXPENSE
                
                
                451,305
                
                
                
                403,599
                
                
                
                1,160,312
                
                
                
                668,206Net
      interest income
                
                
                2,953
                
                
                
                4,256
                
                
                
                6,595
                
                
                
                11,605NON-INTEREST
      INCOME:Change
      in fair value of net trust assets, excluding REO
                
                
                54,912
                
                
                
                (11,161
                )
                
                
                187,842
                
                
                
                (7,633
                )Losses
      from  real estate owned
                
                
                (46,723
                )
                
                
                (4,830
                )
                
                
                (174,923
                )
                
                
                (9,086
                )Non-interest
      income - net trust assets
                
                
                8,189
                
                
                
                (15,991
                )
                
                
                12,919
                
                
                
                (16,719
                )Change
      in fair value of long-term debt
                
                
                329
                
                
                
                (997
                )
                
                
                341
                
                
                
                (5,020
                )Real
      estate advisory fees
                
                
                -
                
                
                
                4,696
                
                
                
                -
                
                
                
                8,540Mortgage
      and real estate services fees
                
                
                13,233
                
                
                
                1,612
                
                
                
                18,782
                
                
                
                4,155Other
                
                
                (185
                )
                
                
                (68
                )
                
                
                (226
                )
                
                
                (713
                )Total
      non-interest income
                
                
                21,566
                
                
                
                (10,748
                )
                
                
                31,816
                
                
                
                (9,757
                )NON-INTEREST
      EXPENSE:General
      and administrative
                
                
                6,110
                
                
                
                4,925
                
                
                
                10,449
                
                
                
                8,912Personnel
      expense
                
                
                10,359
                
                
                
                2,820
                
                
                
                16,637
                
                
                
                5,150Total
      non-interest expense
                
                
                16,469
                
                
                
                7,745
                
                
                
                27,086
                
                
                
                14,062Net
      earnings (loss) from continuing operations before income
    taxes
                
                
                8,050
                
                
                
                (14,237
                )
                
                
                11,325
                
                
                
                (12,214
                )Income
      tax expense from continuing operations
                
                
                20
                
                
                
                2,202
                
                
                
                2,018
                
                
                
                8,728Net
      earnings (loss) from continuing operations
                
                
                8,030
                
                
                
                (16,439
                )
                
                
                9,307
                
                
                
                (20,942
                )Net
      loss from discontinued operations, net of tax
                
                
                (4,195
                )
                
                
                (11,048
                )
                
                
                (6,591
                )
                
                
                (10,360
                )Net
      earnings (loss)
                
                
                3,835
                
                
                
                (27,487
                )
                
                
                2,716
                
                
                
                (31,302
                )Cash
      dividends on preferred stock
                
                
                (7,443
                )
                
                
                (3,722
                )
                
                
                (7,443
                )
                
                
                (7,443
                )Net
      loss attributable to common stockholders
                
                $
                (3,608
                )
                
                $
                (31,209
                )
                
                $
                (4,727
                )
                
                $
                (38,745
                )Net
      loss per common share - basic and diluted:Earnings
      (loss) from continuing operations
                
                $
                0.08
                
                
                $
                (2.65
                )
                
                $
                0.24
                
                
                $
                (3.73
                )Loss
      from discontinued operations
                
                
                (0.55
                )
                
                
                (1.45
                )
                
                
                (0.86
                )
                
                
                (1.36
                )Net
      loss per share attributable to common stockholders
                
                $
                (0.47
                )
                
                $
                (4.10
                )
                
                $
                (0.62
                )
                
                $
                (5.09
                )





See
accompanying notes to consolidated financial statements


2


IMPAC
MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





For
      the Six MonthsEnded June 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      earnings (loss) from continuing operations
                
                $
                9,307
                
                
                $
                (20,942
                )Losses
      from  real estate owned
                
                
                174,923
                
                
                
                9,086Amortization
      and impairment of deferred charge, net
                
                
                1,998
                
                
                
                8,728Amortization
      and impairment of  mortgage servicing rights
                
                
                -
                
                
                
                948Change
      in fair value of net trust assets, excluding REO
                
                
                (297,870
                )
                
                
                (63,734
                )Change
      in fair value of long-term debt
                
                
                (341
                )
                
                
                5,020Accretion
      of interest income and expense
                
                
                381,079
                
                
                
                (25,191
                )Stock-based
      compensation
                
                
                2,858
                
                
                
                653Net
      cash (used in) provided by operating activities of discontinued
      operations
                
                
                (1,864
                )
                
                
                91,219Net
      change in other assets and liabilities
                
                
                (63,288
                )
                
                
                (41,444
                )Net
      cash provided by (used in) operating activities
                
                
                206,802
                
                
                
                (35,657
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Net
      change in securitized mortgage collateral
                
                
                439,369
                
                
                
                1,342,015Net
      change in mortgages held-for-investment
                
                
                397
                
                
                
                22Purchase
      of premises and equipment
                
                
                (284
                )
                
                
                386Purchase
      of short-term investments
                
                
                (5,041
                )
                
                
                -Net
      principal change on investment securities
    available-for-sale
                
                
                2,593
                
                
                
                1,196Proceeds
      from the sale of real estate owned
                
                
                407,573
                
                
                
                197,796Net
      cash provided by investing activities of discontinued
      operations
                
                
                5,949
                
                
                
                11,805Net
      cash provided by investing activities
                
                
                850,556
                
                
                
                1,553,220CASH
      FLOWS FROM FINANCING ACTIVITIES:Settlement
      of trust preferred securities
                
                
                (3,900
                )
                
                
                -Repurchase
      of preferred stock
                
                
                (1,259
                )
                
                
                -Preferred
      stock dividends paid
                
                
                (7,443
                )
                
                
                (7,443
                )Repayment
      of securitized mortgage borrowings
                
                
                (1,042,689
                )
                
                
                (1,393,987
                )Net
      cash used in financing activities of discontinued
    operations
                
                
                (16,969
                )
                
                
                (116,465
                )Net
      cash used in financing activities
                
                
                (1,072,260
                )
                
                
                (1,517,895
                )Net
      change in cash and cash equivalents
                
                
                (14,902
                )
                
                
                (332
                )Cash
      and cash equivalents at beginning of period
                
                
                46,228
                
                
                
                26,462Cash
      and cash equivalents at end of period - Continuing
    Operations
                
                
                30,694
                
                
                
                25,971Cash
      and cash equivalents at end of period - Discontinued
      Operations
                
                
                632
                
                
                
                159Cash
      and cash equivalents at end of period
                
                $
                31,326
                
                
                $
                26,130NON-CASH
      TRANSACTIONS (Continuing and Discontinued Operations):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
                
                
                192,388
                
                
                
                435,038





See
accompanying notes to consolidated financial statements.


3


IMPAC
MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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





Note
A—Summary of Business, Significant Accounting Policies and Legal
Proceedings





1.
            Business
      Summary and Financial Statement
Presentation





Business
Summary





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





In the
first quarter of 2009, the Company created a new subsidiary, Integrated Real
Estate Service Corporation (IRES), which includes mortgage and real estate
related fee-based businesses and entities.





The
Company’s operations include its continuing and discontinued
operations.  The continuing operations primarily include the long-term
mortgage portfolio (residual interests in securitizations reflected as net trust
assets and liabilities in the consolidated balance sheets), and the mortgage and
real estate related fee-based businesses.  The discontinued operations
include the former non-conforming mortgage and retail operations conducted by
IFC, commercial operations conducted by ICCC, and warehouse lending operations
conducted by IWLG.





During
the first quarter of 2009, the Company revoked its election to be taxed as a
REIT, effective January 1, 2009.  As a result of revoking this
election, the Company will be subject to income taxes as a regular corporation.
As of December 31, 2008, the Company had estimated federal and California
net operating loss carryforwards of $353.6 million and $526.1 million,
respectively.  These amounts are subject to change based on the
completion and filing of the Company’s income tax returns.





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





Financial
Statement Presentation





The
accompanying unaudited consolidated financial statements of IMH and its
subsidiaries (as defined above) have been prepared in accordance with Accounting
Principles Generally Accepted in the United States of America (GAAP) for interim
financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation, have been included.
Operating results for the three and six month periods ended June 30, 2009 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.  These interim period condensed
consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements, which are included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008, filed with the United States Securities and Exchange Commission
(SEC).





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





Management
has made a number of estimates and assumptions relating to the reporting of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period to prepare these consolidated financial
statements in conformity with GAAP.  The items affected by
management’s estimates and assumptions include the valuation of trust assets and
liabilities, the valuation of repurchase liabilities related to sold loans, the
valuation of long-term debt, and the valuation of loans
held-for-sale.  Actual results could differ from those estimates and
assumptions.


4


Market
Conditions and Status of Operations





The
economy continued to contract in the first half of 2009.  Labor
markets deteriorated rapidly as U.S. firms reduced the number of jobs driving
the U.S. unemployment rate higher in June.  Higher unemployment and
weaker overall economic conditions have led to a significant increase in the
number of defaults, while continued weak housing prices have driven a
significant increase in loss severities. Defaults continue to remain elevated as
the economy and housing market continues to struggle.  The credit
performance of the Company’s long-term mortgage portfolio continues to be
negatively affected by these economic conditions.  Delinquencies and
nonperforming loans and assets continue to increase as a percentage of loans
outstanding.  Additional deterioration in the overall economic
environment, including continued deterioration in the labor market, could cause
delinquencies to increase beyond the Company’s current expectations, resulting
in additional increases in losses and reductions in fair
value.  Offsetting these losses and reductions in fair value were
increases in the fair value of the Company’s trust assets and trust liabilities
as a result of accounting guidance adopted during the quarter, which clarified
the use of quoted prices in determining fair values in markets that are
inactive, thus moderating the need to use distressed prices in valuing financial
asset and liabilities in illiquid markets as the Company had used in prior
periods.  Refer to Note A2 – Recent Accounting
Pronouncements for additional information.





During
the first quarter of 2009, the Company initiated various mortgage and real
estate related fee-based businesses, including loan modifications, real estate
disposition, monitoring and surveillance services, real estate brokerage and
lending services and escrow services, and has begun to generate revenues from
these businesses.  For the three and six month periods ended June 30,
2009, mortgage and real estate services fees were $13.2 million and $18.8
million, respectively.  However, since these businesses are newly
formed and currently generate fees primarily from the Company’s long-term
mortgage portfolio, there remains uncertainty about their future success,
including providing services to the marketplace.




In
January 2009, the Company purchased and canceled $25.0 million in
outstanding trust preferred securities of Impac Capital Trust #2 for $3.75
million and terminated the remaining debt.





In
May 2009, the Company exchanged an aggregate of $51.3 million in trust
preferred securities of Impac Capital Trusts #1 and #3 for junior subordinated
notes with an aggregate principal balance of $62.0 million, with a maturity date
in March 2034. Under the terms of the exchange, the interest rate for each
note was reduced from the original 8.01 percent to 2.00 percent through 2013
with increases of 1.00 percent per year through 2017. Starting in 2018, the
interest rates become variable at 3-month LIBOR plus 375 basis points. In
connection with the exchange, the Company paid a fee of $0.5
million.  Refer to Note H – Long-term Debt for
additional information.





In June
2009, the Company purchased and canceled $1.0 million in outstanding trust
preferred securities of Impac Capital Trust #4 for $150 thousand.





As of
July 30, 2009, the Company is current and no longer deferring interest on trust
preferred securities.





In August
2009, the Company purchased and canceled $2.5 million in outstanding trust
preferred securities of Impac Capital Trust #4 for $375 thousand, resulting in
$8.5 million in outstanding trust preferred securities.  Refer to Note
J – Subsequent Events
for additional information.





As a
result of the restructuring of $51.3 million and purchase and cancelation of
$36.5 million in outstanding trust preferred securities, the Company reduced its
annual interest expense obligation from $7.8 million to $2.0
million.  With the restructuring and purchase and cancelations of
trust preferred securities, the Company has $8.5 million in outstanding trust
preferred securities of Impac Capital Trust #4 and $62.0 million in outstanding
junior subordinated notes.




In June
2009, the Company completed the Offer to Purchase and Consent Solicitation (the
“Offer to Purchase”) of all of its 9.375% Series B Cumulative Redeemable
Preferred Stock and 9.125% Series C Cumulative Redeemable Preferred Stock. The
Series B Preferred Stock had a liquidation preference of $50 million and the
Series C Preferred Stock had a liquidation preference of $111.8 million, for a
total of $161.8 million. Upon expiration of the Offer to Purchase, holders of
approximately 67.7% of the Preferred Stock tendered an aggregate of 4,378,880
shares. Stockholders of the Company’s Series B Preferred Stock tendered
1,323,844 shares at $0.29297 per share for $388 thousand. Stockholders of the
Company’s Series C Preferred Stock tendered 3,055,036 shares at $0.28516 per
share for $871 thousand. The aggregate purchase price for the Preferred Stock
was $1.3 million. In addition, in connection with completing the Offer to
Purchase, the Company paid $7.4 million accumulated but unpaid dividends on its
Preferred Stock.  With the total cash payment of $8.7 million, the
Company eliminated $109.5 million of liquidation preference on its Preferred
Stock.  After the completion of the Offer to Purchase, the Company has
outstanding $52.3 million liquidation preference of Series B and Series C
Preferred Stock.


5


With
completion of the Offer to Purchase and modification to the terms of the Series
B Preferred Stock and Series C Preferred Stock, the Company eliminated its $14.9
million annual preferred dividend obligation.  Refer to Note I – Preferred Stock
Repurchase for additional information.





2.
            Recent
      Accounting Pronouncements





Recently
Adopted Accounting Pronouncements





In
May 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 165, Subsequent Events(SFAS
165),which establishes
general standards of and accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued.  SFAS 165 is effective for interim and annual
periods ending after June 15, 2009.  The adoption of SFAS 165 did
not have an impact on the Company’s consolidated financial
statements.





In
April 2009, the FASB issued three FASB Staff Positions (FSP) related to
fair value measurements:





·
            FSP
      No. FAS 157-4 “Determining Fair Value When the Volume and Level of
      Activity for the Asset or Liability Have Significantly Decreased and
      Identifying Transactions That Are Not Orderly” (FSP
  157-4)


·
            FSP
      No. FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of
      Financial Instruments” (FSP FAS 107-1 and APB
  28-1)


·
            FAS
      No. FAS 115-2 and FAS 124-2 “Recognition and Presentation of
      Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS
      124-2)





FSP 157-4
provides additional guidance for estimating fair value in accordance with SFAS
157 when the volume and level of market activity for the asset or liability have
significantly decreased. FSP 157-4 also includes guidance on identifying
circumstances that indicate a transaction is not orderly.  It
acknowledges that in these circumstances quoted prices may not be determinative
of fair value. This FSP emphasizes that even if there has been a significant
decrease in the volume and level of market activity for the asset or liability
and regardless of the valuation technique(s) used, the objective of a fair value
measurement remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. Prior to issuance of this
FSP 157-4, many companies, including the Company, interpreted SFAS 157 to
emphasize the use of most recently available quoted market prices in determining
fair value, regardless of whether markets had experienced a significant decline
in the volume and level of activity relative to normal conditions or increased
frequency of transactions that are not orderly.





Under the
provisions of FSP 157-4, quoted prices for assets or liabilities in inactive
markets may require adjustment due to uncertainty as to whether the underlying
transactions are orderly.  There is little information, if any, to
evaluate if individual transactions are orderly in an inactive
market.   Accordingly, the Company is required to evaluate the
facts and circumstances to determine whether the transaction is orderly based on
the weight of the evidence.  FSP 157-4 does not designate a specific
method for adjusting a transaction or quoted price, however, it does provide
guidance for determining how much weight to give a transaction or quoted
price.  Price quotes derived from transactions that are not orderly
are not considered to be determinative of fair value and should be given less
weight, if any, when measuring fair value.





FSP 157-4
is effective for interim and annual reporting periods ending after June 15,
2009, and shall be applied prospectively. The adoption of FSP 157-4 on April 1,
2009, resulted in an increase of $13.3 million included in change in
fair value of net trust assets in the accompanying consolidated statements of
operations.  Offsetting this increase at adoption were
decreases in the fair values of trust assets and trust liabilities as a result
of the Company increasing loss assumptions for its long-term mortgage portfolio
due to increases in expected defaults and loss severities related to the weak
economy and housing market.





FSP FAS
107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair
Value of Financial Instruments”, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion
No. 28, “Interim Financial Reporting”, to require those disclosures in
summarized financial information at interim reporting periods.  FSP
FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009.  The adoption of FSP FAS 107-1 and APB 28-1 did
not have a significant effect on the Company’s consolidated financial
statements.


6


FSP FAS
115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S.
GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. For debt securities, the
statement requires that an entity assess whether it (a) has the intent to
sell the debt security or (b) more likely than not will be required to sell
the debt security before its anticipated recovery.  If either of these
conditions is met, the Company would be required to recognize
other-than-temporary impairment. FSP FAS 115-2 and FAS 124-2 is effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.  The
adoption of FSP FAS 115-2 and FAS 124-2 did not have a significant effect on the
Company’s consolidated financial statements.





Effective
January 1, 2009, the Company adopted EITF No. 08-5, “Issuer’s
Accounting for Liabilities Measured at Fair Value with a Third-Party Credit
Enhancement” (EITF 08-5). EITF 08-5 addresses whether issuer’s of liabilities
should consider the effect of the third-party credit enhancement when measuring
the liability at fair value under FASB Statement No. 157 “Fair Value
Measurements” (SFAS 157). EITF 08-5 requires that the issuer of a liability with
a third-party credit enhancement that is inseparable from the liability shall
not include the effect of the credit enhancement in the fair value measurement
of the liability. The guidance in EITF 08-5 is effective in the first reporting
period beginning on or after December 15, 2008, with the effect of
initially applying its guidance being included in the change in fair value in
the period of adoption. The adoption of EITF 08-5 did not have a significant
impact on the Company’s consolidated financial statements.





Effective,
January 1, 2009, application of SFAS 157 to nonfinancial assets and
liabilities is required.  As a result of the adoption of SFAS 157 for
nonfinancial assets and liabilities, the Company has included additional
disclosures as of and for the three and six months ended June 30, 2009 for
nonrecurring fair value measurements related to its nonfinancial assets and
liabilities.





Recent
Accounting Pronouncements





In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles”—a replacement of FASB
Statement No 162(SFAS 168).Under SFAS 168, The FASB Accounting Standards Codification
(Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Statement, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative.  SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15,
2009.  The issuance of SFAS 168 will not affect GAAP, however the
Company will be required to eliminate references to the pre-codification
accounting and reporting standard references in financial
statements.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – An Amendment of FASB Statement 140” (SFAS 166) and SFAS No. 167,
“Amendments to FASB Interpretation No. 46(R)” (SFAS 167). SFAS 166 eliminates
the concept of a qualifying special purpose entity (QSPE), creates more
stringent conditions for reporting a transfer of a portion of a financial asset
as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor’s interest in transferred financial assets. Former
QSPEs will be evaluated for consolidation based on the provisions of SFAS 167,
which changes the approach to determining a VIE’s primary beneficiary and
requires companies to more frequently reassess whether they must consolidate or
deconsolidate VIEs. The Company is currently evaluating the impact of these new
pronouncements on its financial statements. While management of the Company has
not completed its evaluation, the Company may be required to deconsolidate
certain securitization trust assets and trust liabilities that are currently
consolidated within the Company’s financial statements because certain of these
trusts may be VIEs of the Company, but the Company may not be the primary
beneficiary.  In addition, the Company has two unconsolidated trusts
that may be VIEs of the Company and the Company may be the primary beneficiary,
in which case the Company would be required to consolidate the related trust
assets and liabilities.





3.
            Income
      Taxes and Deferred Charge





During
the first quarter of 2009, the Company revoked its election to be taxed as a
REIT, effective January 1, 2009.  As a result of revoking this
election, the Company will be subject to income taxes as a regular
corporation.





Prior to
January 1, 2009, the Company operated as a REIT under the requirements of
the Internal Revenue Code. Requirements for qualification as a REIT included
various restrictions on ownership of IMH’s stock, requirements concerning
distribution of taxable income and certain restrictions on the nature of assets
and sources of income.


7


As of
December 31, 2008, the Company had estimated federal and California net
operating loss carryforwards of $353.6 million and $526.1 million,
respectively.  As of December 31, 2008, the Company’s taxable
REIT subsidiary had an estimated federal net operating loss tax carryforward of
$293.4 million. The federal net operating loss carryforward of the Company’s
taxable REIT subsidiary, utilization of which may be limited to the Company’s
taxable REIT subsidiary, begins to expire in the year 2027. As of
December 31, 2008, the Company and the Company’s taxable REIT subsidiary
had net deferred tax assets of approximately $547.9 million and $100.0 million,
respectively. These amounts are subject to change based on the completion and
filing of the Company’s income tax returns.  The Company recorded a
full valuation allowance against the net deferred tax assets as it believes that
as of June 30, 2009 it is more likely than not that the net deferred tax assets
will not be recoverable.





In
accordance with Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” the Company records a deferred charge representing the
deferral of income tax expense on inter-company profits that resulted from the
sale of mortgages from taxable subsidiaries to IMH in prior years. The deferred
charge is included in other assets in the accompanying consolidated balance
sheets and is amortized as a component of income tax expense in the accompanying
consolidated statements of operations over the estimated life of the mortgages
retained in the securitized mortgage collateral. The Company recorded a tax
expense of $20 thousand and $2.0 million for the three and six months ended June
30, 2009, compared to $2.2 million and $8.7 million for the three and six months
ended June 30, 2008, respectively.  The tax expense is primarily the
result of the amount of the deferred charge amortized and/or impaired resulting
from credit losses, which does not result in any tax liability required to be
paid.





4.
            Legal
      Proceedings





The
Company is party to litigation and claims which are normal in the course of our
operations.





In June
2009, the Company entered into a settlement agreement for an insignificant
amount with plaintiffs in a purported class action matter entitled Vincent Marshell v. Impac
Funding Corporation, et al., as further described in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008, requiring that all
claims be dismissed with prejudice, with no admission of wrongdoing on the part
of any defendant.




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





We
believe that we have meritorious defenses to the above claims and intend to
defend these claims vigorously and as such the Company believes the final
outcome of such matters will not have a material adverse effect on our financial
condition or results of operations. Nevertheless, litigation is uncertain and we
may not prevail in the lawsuits and can express no opinion as to their ultimate
resolution. An adverse judgment in any of these matters could have a material
adverse effect on our financial position and results of operations.





Note
B—Fair Value of Financial Instruments





The use
of fair value to measure the Company’s financial instruments is fundamental to
its consolidated financial statements and is a critical accounting estimate
because a substantial portion of its assets and liabilities are recorded at
estimated fair value.





The
Company adopted FSP 157-4 effective April 1, 2009. FSP 157-4 addresses measuring
fair value under SFAS 157 in situations where the volume and level of market
activity has significantly decreased and transactions are not orderly. Under the
provisions of the FSP 157-4, transactions or quoted prices may not be
determinative of fair value for assets or liabilities in inactive
markets.





Prior to
adoption of the FSP 157-4, the Company used independent broker quoted prices
(unadjusted and non-binding quotes) to measure fair value for substantially all
of its securitized mortgage borrowings.  In connection with the
adoption, the Company determines when the level and volume of activity has
declined significantly in relation to normal market conditions.  FSP
157-4 guidance suggests less weight, if any, shall be applied on a transaction
or price quote based on a market that is not orderly.  Furthermore,
the nature of the quote (indicative price or binding offer) should be considered
when weighting the available evidence.  In the absence of price quotes
based on orderly transactions, the Company may use valuation techniques that
reflect market participant assumptions.


8


For
securitized mortgage collateral and securitized mortgage borrowings, the
underlying Alt-A residential and commercial loans and mortgage-backed securities
market has experienced a significant decline in market activity with a lack of
orderly transactions.  The methodology used to measure fair value
included the use of internal pricing techniques such as the net present value of
future expected cash flows (with observable market participant assumptions,
where available) discounted at a rate of return based on market participant
requirements.  The significant assumptions utilized in the internal
pricing techniques, which were based on the characteristics of the underlying
collateral, included estimated credit losses, estimated prepayment speeds and
appropriate discount rates.  For the impact of adopting FSP 157-4
to our consolidated financial statements, see Note 2 – Recent Accounting
Pronouncements.





The
following table presents the fair value of financial instruments included in the
consolidated financial statements as of the periods indicated:




June 30, 2009
                          
                          
                          December 31, 2008Carrying
                            Amount
                          
                          
                          Estimated
                            Fair Value
                          
                          
                          Carrying
                            Amount
                          
                          
                          Estimated
                            Fair ValueAssetsCash
      and cash equivalents
                          
                          $
                          30,694
                          
                          
                          $
                          30,694
                          
                          
                          $
                          46,215
                          
                          
                          
                          46,215Restricted
      cash
                          
                          
                          1,250
                          
                          
                          
                          1,250
                          
                          
                          
                          1,243
                          
                          
                          
                          1,243Short-term
      investments
                          
                          
                          5,026
                          
                          
                          
                          5,054
                          
                          
                          
                          -
                          
                          
                          
                          -Investment
      securities available-for-sale
                          
                          
                          1,332
                          
                          
                          
                          1,332
                          
                          
                          
                          2,068
                          
                          
                          
                          2,068Securitized
      mortgage collateral
                          
                          
                          6,018,391
                          
                          
                          
                          6,018,391
                          
                          
                          
                          5,894,424
                          
                          
                          
                          5,894,424Derivative
      assets
                          
                          
                          179
                          
                          
                          
                          179
                          
                          
                          
                          37
                          
                          
                          
                          37LiabilitiesSecuritized
      mortgage borrowings
                          
                          $
                          6,080,637
                          
                          
                          $
                          6,080,637
                          
                          
                          $
                          6,193,984
                          
                          
                          $
                          6,193,984Derivative
      liabilities
                          
                          
                          184,851
                          
                          
                          
                          184,851
                          
                          
                          
                          273,584
                          
                          
                          
                          273,584Long-term
      debt
                          
                          
                          9,797
                          
                          
                          
                          9,797
                          
                          
                          
                          15,403
                          
                          
                          
                          15,403




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





The
carrying amount of cash and cash equivalents and restricted cash approximates
fair value.  Short-term investments are recorded at amortized
cost.  The fair value of short-term investments is determined using
quoted prices in active markets.  Refer to Recurring fair value measurementsbelow for a description of the valuation methods used to determine the
fair value of investment securities available for sale, securitized mortgage
collateral and borrowings, derivative assets and liabilities and long-term
debt.





Recurring
fair value measurements




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





SFAS 157
specifies a hierarchy of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the Company's market assumptions. These two types of inputs create the
following fair value hierarchy:




·
                Level
      1   — Quoted prices for identical instruments in active
      markets.


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


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




9





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





The
following tables present, the Company’s assets and liabilities that are measured
at fair value on a recurring basis, including financial instruments for which
the Company has elected the fair value option at June 30, 2009 and
December 31, 2008, based on the fair value hierarchy of SFAS
157:




Recurring Fair Value
      MeasurementsAs of June 30, 2009Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3AssetsInvestment
      securities available-for-sale
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,332Securitized
      mortgage collateral
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              6,018,391Total
      assets at fair value
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              6,019,723LiabilitiesSecuritized
      mortgage borrowings
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              6,080,637Derivative
      liabilities, net (1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              184,672Long-term
      debt
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              9,797Total
      liabilities at fair value
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              6,275,106





(1)
              Derivative
      liabilities, net includes $179 thousand in derivative assets and $184.9
      million in derivative liabilities, included within trust assets and trust
      liabilities, respectively.





Recurring Fair Value
      MeasurementsAs of December 31, 2008Level 1
                                        
                                        
                                        Level 2
                                        
                                        
                                        Level 3AssetsInvestment
      securities available-for-sale
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,068Securitized
      mortgage collateral
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,894,424Total
      assets at fair value
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        5,896,492LiabilitiesSecuritized
      mortgage borrowings
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        6,193,984Derivative
      liabilities, net (1)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        273,547Long-term
      debt
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        15,403Total
      liabilities at fair value
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        6,482,934








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





As a
result of the lack of observable market data resulting from inactive markets,
the Company has classified its investment securities available-for-sale,
securitized mortgage collateral and borrowings, net derivative liabilities and
long-term debt as Level 3 fair value measurements at June 30, 2009 and December
31, 2008.  Level 3 assets and liabilities were 100 percent of total
assets and total liabilities at fair value at June 30, 2009 and December 31,
2008.





The
following tables present a reconciliation for all assets and liabilities
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the three and six months ended June 30, 2009 and
2008:





10


Level 3 Recurring Fair Value
      MeasurementsFor the three months ended June 30,
      2009Investment
                      securities
                      available-for-
                      sale
                    
                    
                    Securitized
                      mortgage
                      collateral
                    
                    
                    Securitized
                      mortgage
                      borrowings
                    
                    
                    Derivative
                      liabilities, net
                    
                    
                    Long-term
                      debtFair
      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 of net trust assets, excluding REO
                    
                    
                    805
                    
                    
                    
                    594,624
                    
                    
                    
                    (536,336
                    )
                    
                    
                    (4,181
                    )
                    
                    
                    -Change
      in fair value of long-term debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    329Total
      gains (losses) included in earnings
                    
                    
                    858
                    
                    
                    
                    828,035
                    
                    
                    
                    (953,551
                    )
                    
                    
                    (4,181
                    )
                    
                    
                    4Transfers
      in and/or out of Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Purchases,
      issuances and settlements
                    
                    
                    (848
                    )
                    
                    
                    (315,373
                    )
                    
                    
                    563,942
                    
                    
                    
                    51,829
                    
                    
                    
                    1,289Fair
      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





(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received and paid, was $3.0 million for the three months
      ended June 30, 2009, as reflected in the consolidated statements of
      operations.


(2)
            Represents
      the amount of unrealized gains (losses) relating to assets and liabilities
      classified as Level 3 that are still held at June 30,
  2009.





Level 3 Recurring Fair Value
      MeasurementsFor the three months ended June 30,
      2008Investment
                    securities
                    available-for-
                    sale
                  
                  
                  Securitized
                    mortgage
                    collateral
                  
                  
                  Securitized
                    mortgage
                    borrowings
                  
                  
                  Long-term
                    debtFair
      value, March 31, 2008
                  
                  $
                  10,621
                  
                  
                  $
                  966,958
                  
                  
                  $
                  (998,395
                  )
                  
                  $
                  (45,129
                  )Total
      gains (losses) included in earnings:Interest
      income (1)
                  
                  
                  199
                  
                  
                  
                  10,306
                  
                  
                  
                  -
                  
                  
                  
                  -Interest
      expense (1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,275
                  )
                  
                  
                  (140
                  )Change
      in fair value of net trust assets, excluding REO
                  
                  
                  (1,517
                  )
                  
                  
                  2,275
                  
                  
                  
                  (6,113
                  )
                  
                  
                  -Change
      in fair value of long-term debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (997
                  )Total
      (losses) gains included in earnings
                  
                  
                  (1,318
                  )
                  
                  
                  12,581
                  
                  
                  
                  (12,388
                  )
                  
                  
                  (1,137
                  )Transfers
      in and/or out of Level 3 (2)
                  
                  
                  -
                  
                  
                  
                  (645,986
                  )
                  
                  
                  661,157
                  
                  
                  
                  -Purchases,
      issuances and settlements
                  
                  
                  (659
                  )
                  
                  
                  (35,364
                  )
                  
                  
                  32,658
                  
                  
                  
                  -Fair
      value, June 30, 2008
                  
                  $
                  8,644
                  
                  
                  $
                  298,189
                  
                  
                  $
                  (316,968
                  )
                  
                  $
                  (46,266
                  )Unrealized
      (losses) gains still held (3)
                  
                  $
                  (2,461
                  )
                  
                  $
                  (128,861
                  )
                  
                  $
                  131,747
                  
                  
                  $
                  54,115





(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received and paid, was $4.3 million for the three months
      ended June 30, 2008, as reflected in the consolidated statements of
      operations.


(2)
            Transfers
      in and/or out of Level 3 are reflected using values as of the beginning of
      the period.


(3)
            Represents
      the amount of unrealized (losses) gains relating to assets and liabilities
      classified as Level 3 that are still held at June 30,
  2008.




11




Level 3 Recurring Fair Value
      MeasurementsFor the six months ended June 30,
      2009Investment
                    securities
                    available-for-
                    sale
                  
                  
                  Securitized
                    mortgage
                    collateral
                  
                  
                  Securitized
                    mortgage
                    borrowings
                  
                  
                  Derivative
                    liabilities,net
                  
                  
                  Long-term
                    debtFair
      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 of net trust assets, excluding REO
                  
                  
                  1,710
                  
                  
                  
                  45,603
                  
                  
                  
                  160,867
                  
                  
                  
                  (20,338
                  )
                  
                  
                  -Change
      in fair value of long-term debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  341Total
      gains (losses) included in earnings
                  
                  
                  1,857
                  
                  
                  
                  755,724
                  
                  
                  
                  (930,155
                  )
                  
                  
                  (20,338
                  )
                  
                  
                  16Transfers
      in and/or out of Level 3
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Purchases,
      issuances and settlements
                  
                  
                  (2,593
                  )
                  
                  
                  (631,757
                  )
                  
                  
                  1,043,502
                  
                  
                  
                  109,213
                  
                  
                  
                  5,590Fair
      value, June 30, 2009
                  
                  $
                  1,332
                  
                  
                  $
                  6,018,391
                  
                  
                  $
                  (6,080,637
                  )
                  
                  $
                  (184,672
                  )
                  
                  $
                  (9,797
                  )





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




Level 3 Recurring Fair Value
      MeasurementsFor the six months ended June 30,
      2008Investment
                    securities
                    available-for-sale
                  
                  
                  Securitized
                    mortgage
                    collateral
                  
                  
                  Securitized
                    mortgage
                    borrowings
                  
                  
                  Long-term
                    debtFair
      value, January 1, 2008
                  
                  $
                  15,248
                  
                  
                  $
                  782,574
                  
                  
                  $
                  (767,704
                  )
                  
                  $
                  (40,952
                  )Total
      gains (losses) included in earnings:Interest
      income (1)
                  
                  
                  399
                  
                  
                  
                  10,217
                  
                  
                  
                  -
                  
                  
                  
                  -Interest
      expense (1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (15,176
                  )
                  
                  
                  (294
                  )Change
      in fair value of net trust assets, excluding REO
                  
                  
                  (5,807
                  )
                  
                  
                  (246,707
                  )
                  
                  
                  280,991
                  
                  
                  
                  -Change
      in fair value of long-term debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,020
                  )Total
      (losses) gains included in earnings
                  
                  
                  (5,408
                  )
                  
                  
                  (236,490
                  )
                  
                  
                  265,815
                  
                  
                  
                  (5,314
                  )Transfers
      in and/or out of Level 3 (2)
                  
                  
                  -
                  
                  
                  
                  (119,516
                  )
                  
                  
                  98,688
                  
                  
                  
                  -Purchases,
      issuances and settlements
                  
                  
                  (1,196
                  )
                  
                  
                  (128,379
                  )
                  
                  
                  86,233
                  
                  
                  
                  -Fair
      value, June 30, 2008
                  
                  $
                  8,644
                  
                  
                  $
                  298,189
                  
                  
                  $
                  (316,968
                  )
                  
                  $
                  (46,266
                  )







(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received and paid, was $11.6 million for the six months
      ended June 30, 2008, as reflected in the consolidated statements of
      operations.


(2)
            Transfers
      in and/or out of Level 3 are reflected using values as of the beginning of
      the period.





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





Investment securities
available-for-sale— The Company elected to carry all of its investment
securities available-for-sale at fair value. The investment securities consist
primarily of non-investment grade mortgage-backed securities. The fair value of
the investment securities are measured based upon the Company’s expectation of
inputs that other market participants would use. Such assumptions include
judgments about the underlying collateral, prepayment speeds, credit losses,
forward interest rates and certain other factors. Given the market disruption
and lack of observable market data as of June 30, 2009 and December 31,
2008, the fair value of the investment securities available-for-sale were
measured using significant internal expectations of market participants’
assumptions.





12




Securitized mortgage
collateral — The Company elected to carry all of its securitized mortgage
collateral at fair value. These assets consist primarily of non-conforming
mortgage loans securitized between 2002 and 2007. Fair value measurements are
based on the Company’s internal models used to compute the net present value of
future expected cash flows, with observable market participant assumptions,
where available. The Company’s assumptions include its expectations of inputs
that other market participants would use in pricing these assets. These
assumptions include judgments about the underlying collateral, prepayment
speeds, estimated future credit losses, forward interest rates, investor yield
requirements and certain other factors.  As of June 30, 2009,
securitized mortgage collateral had an unpaid principal balance of $13.1
billion, compared to an estimated fair value of $6.0 billion. The aggregate
unpaid principal balance exceeds the fair value by $7.1 billion at June 30,
2009.  As of June 30, 2009, the unpaid principal balance of loans 90
days or more past due was $2.9 billion compared to an estimated fair value of
$0.9 billion. The aggregate unpaid principal balances of loans 90 days or more
past due exceed the fair value by $2.0 billion at June 30, 2009.





Securitized mortgage
borrowings — The Company elected to carry all of its securitized mortgage
borrowings at fair value. These borrowings consist of individual tranches of
bonds issued by securitization trusts and are primarily backed by non-conforming
mortgage loans. Fair value measurements include the Company’s judgments about
the underlying collateral assumptions such as prepayment speeds, estimated
future credit losses, forward interest rates, investor yield requirements and
certain other factors. As of June 30, 2009, securitized mortgage borrowings had
an outstanding principal balance of $13.8 billion compared to an estimated fair
value of $6.1 billion. The aggregate outstanding principal balance exceeds the
fair value by $7.7 billion at June 30, 2009.





Long-term debt — The Company
elected to carry all of its long-term debt (consisting of trust preferred
securities and junior subordinated notes) at fair value. These securities were
measured based upon an analysis prepared by the Company, which considered the
Company’s own credit risk, including consideration of recent settlements with
trust preferred debt holders and discounted cash flow analysis of junior
subordinated notes.  As of June 30, 2009, long-term debt had an unpaid
principal balance of $73.6 million compared to an estimated fair value of $9.8
million. The aggregate unpaid principal balance exceeds the fair value by $63.8
million at June 30, 2009.





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





The following tables present changes in
fair value of recurring fair value measurements for the three and six months
ended June 30, 2009 and 2008, respectively:





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







(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received and paid, was $3.0 million for the three months
      ended June 30, 2009, as reflected in the consolidated statements 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 trusts for the three months ended June 30,
      2009.




13




Recurring Fair Value
      MeasurementsChanges in Fair Value Included in Net
      LossFor the three months ended June 30,
      2008Change in Fair Value ofInterest Income (1)
                      
                      
                      Interest Expense (1)
                      
                      
                      Net Trust Assets
                      
                      
                      Long-term Debt
                      
                      
                      TotalInvestment
      securities available-for-sale
                      
                      $
                      198
                      
                      
                      $
                      -
                      
                      
                      $
                      (1,517
                      )
                      
                      $
                      -
                      
                      
                      $
                      (1,319
                      )Securitized
      mortgage collateral
                      
                      
                      125,700
                      
                      
                      
                      -
                      
                      
                      
                      (19,062
                      )
                      
                      
                      -
                      
                      
                      
                      106,638Securitized
      mortgage borrowings
                      
                      
                      -
                      
                      
                      
                      (269,159
                      )
                      
                      
                      (88,886
                      )
                      
                      
                      -
                      
                      
                      
                      (358,045
                      )Derivative
      instruments, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      98,304
                      (2)
                      
                      
                      -
                      
                      
                      
                      98,304Long-term
      debt
                      
                      
                      -
                      
                      
                      
                      (140
                      )
                      
                      
                      -
                      
                      
                      
                      (997
                      )
                      
                      
                      (1,137
                      )Total
                      
                      $
                      125,898
                      
                      
                      $
                      (269,299
                      )
                      
                      $
                      (11,161
                      )
                      
                      $
                      (997
                      )
                      
                      $
                      (155,559
                      )


(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received and paid, was $4.3 million for the three months
      ended June 30, 2008, as reflected in the consolidated statements of
      operations.


(2)
            Included
      in this amount is $143.8 million in changes in the fair value of
      derivative instruments offset by $45.5 million in cash payments from the
      securitization trusts for the three months ended June 30,
      2008.





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







(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received 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 in changes in the fair value of
      derivative instruments, offset by $110.0 million in cash payments from the
      securitization trusts for the six months ended June 30,
    2009.


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





Recurring Fair Value
      MeasurementsChanges in Fair Value Included in Net
      LossFor the six months ended June 30,
      2008Change in Fair Value ofInterest Income (1)
                      
                      
                      Interest Expense (1)
                      
                      
                      Net Trust Assets
                      
                      
                      Long-term Debt
                      
                      
                      TotalInvestment
      securities available-for-sale
                      
                      $
                      399
                      
                      
                      $
                      -
                      
                      
                      $
                      (5,807
                      )
                      
                      $
                      -
                      
                      
                      $
                      (5,408
                      )Securitized
      mortgage collateral
                      
                      
                      96,908
                      
                      
                      
                      -
                      
                      
                      
                      (3,248,563
                      )
                      
                      
                      -
                      
                      
                      
                      (3,151,655
                      )Securitized
      mortgage borrowings
                      
                      
                      -
                      
                      
                      
                      (345,675
                      )
                      
                      
                      3,330,248
                      
                      
                      
                      -
                      
                      
                      
                      2,984,573Derivative
      instruments, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (83,511
                      )(2)
                      
                      
                      -
                      
                      
                      
                      (83,511
                      )Long-term
      debt
                      
                      
                      -
                      
                      
                      
                      (294
                      )
                      
                      
                      -
                      
                      
                      
                      (5,020
                      )
                      
                      
                      (5,314
                      )Total
                      
                      $
                      97,307
                      
                      
                      $
                      (345,969
                      )
                      
                      $
                      (7,633
                      )(3)
                      
                      $
                      (5,020
                      )
                      
                      $
                      (261,315
                      )







(1)
            Amounts
      primarily represent accretion to recognize interest income and interest
      expense using effective yields based on estimated fair values for trust
      assets and trust liabilities.  The total net interest income,
      including cash received and paid, was $11.6 million for the six months
      ended June 30, 2008, as reflected in the consolidated statements of
      operations.


(2)
            Included
      in this amount is $12.2 million in changes in the fair value of
      derivative instruments and $71.3 million in cash payments from the
      securitization trusts for the six months ended June 30,
    2009.


(3)
            For
      the six months ended June 30, 2008, change in the fair value of trust
      assets, excluding REO was ($7.6) million.  Excluded from the
      $63.7 million change in fair value of net trust assets, excluding
      REO, in the accompanying consolidated statement of cash flows is $71.3
      million in cash payments from the securitization trusts related to the
      Company’s net derivative
liabilities.





14




In
connection with the fair value option election for investment securities
available-for-sale and securitized mortgage collateral and borrowings, interest
income and interest expense is recognized using effective yields basedon
estimated fair values for these instruments.  As the market’s
expectation of future credit losses has increased between periods, market
participants have demanded higher yields, which have resulted in significant
reductions in the fair values of these instruments.  These reductions
in fair value have significantly increased the effective yields used for
purposes of recognizing interest income and interest expense on these
instruments.





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





Non-recurring
fair value measurements





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





Loans held-for-sale -Loans
held-for-sale for which the fair value option was not elected are carried at
lower of cost or market (LOCOM). When available, such measurements are based
upon what secondary markets offer for portfolios with similar characteristics,
and are considered Level 2 measurements. If market pricing is not available,
such measurements are significantly impacted by the Company’s expectations of
other market participants’ assumptions, and are considered Level 3 measurements.
The Company utilizes internal pricing processes to estimate the fair value of
loans held-for-sale, which is based on recent loan sales and estimates of the
fair value of the underlying collateral. Loans held-for-sale, which are
primarily included in assets of discontinued operations, are considered Level 3
fair value measurements at June 30, 2009 and December 31, 2008 based on the
lack of observable market inputs.





Real estate owned -REO
consists of residential real estate acquired in satisfaction of
loans.  Upon foreclosure, REO is adjusted to the estimated fair value
of the residential real estate less estimated selling and holding costs, offset
by expected mortgage insurance proceeds to be received, if
any.  Subsequently, REO is recorded at the lower of carrying value or
estimated fair value less costs to sell.  Fair values of REO are
generally based on appraisals or market prices, and considered Level 2
measurements at June 30, 2009 and December 31, 2008.





Lease liability — In
connection with the discontinuation of our non-conforming mortgage, retail
mortgage, warehouse lending and commercial operations, a significant amount of
office space that was previously occupied is no longer being used by the
Company. The Company has subleased a significant amount of this office
space.  The Company has recorded a liability, included within
discontinued operations, representing the present value of the minimum lease
payments over the remaining life of the lease, offset by the expected proceeds
from sublet revenue related to this office space.  This liability is
based on the present value techniques that incorporate the Company’s judgments
about estimated sublet revenue and discount rates.  Therefore, this
liability is considered a Level 3 measurement at June 30, 2009 and
December 31, 2008.





The
following tables present the fair values of those financial assets measured at
fair value on a non-recurring basis at June 30, 2009 and December 31,
2008:





Non-recurring
      Fair Value Measurements
                      
                      
                      Total
      Gains (Losses)As
      of June 30, 2009
                      
                      
                      For
      the Three Months Ended
                      
                      
                      For
      the Six Months EndedLevel
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      June
      30, 2009
                      
                      
                      June
      30, 2009Loans
      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







(1)
            Includes
      $0.3 million and $84.9 million of loans held-for-sale within continuing
      and discontinued operations, respectively at June 30,
  2009.


(2)
            Includes
      $167.3 million and $4.7 million in REO within continuing and discontinued
      operations, respectively at June 30, 2009 which had additional impairment
      write-downs subsequent to the date of foreclosure.  For the
      three months ended June 30, 2009, the $9.6 million loss related to
      additional impairment write-downs during the period included $9.1 million
      and $0.5 million within 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 the period
      included $93.3 million and $1.9 million within continuing and discontinued
      operations, respectively.


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




15




Non-recurring Fair Value
      Measurements
                    
                    
                    Total
      LossesAs of December 31, 2008
                    
                    
                    For
      the Year EndedLevel 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    December 31, 2008Loans
      held-for-sale (1)
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    108,223
                    
                    
                    $
                    45,960





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





Note
C— Stock Options





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





Six
      MonthsEnded June 30,2009
                    
                    
                    2008Risk-free
      interest rate
                    
                    
                    2.86
                    %
                    
                    1.88%
      to 2.13
                    %Expected
      lives (in years)
                    
                    
                    5.50
                    
                    
                    
                    3.25Expected
      volatility (1)
                    
                    
                    259.16
                    %
                    
                    
                    87.3%
      - 89.9
                    %Expected
      dividend yield (2)
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %Grant
      date fair value of share options
                    
                    $
                    0.53
                    
                    
                    $
                    7.14
      - 7.76








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


(2)
            Expected
      dividend yield is zero because a dividend on the common stock was not
      probable over the expected life of the options granted during the six
      months ended June 30, 2009 and
2008.





The
following table summarizes activity, pricing and other information for the
Company’s stock options for the six months ended June 30,
2009:





Weighted-AverageNumber
      of
                  
                  
                  ExerciseShares
                  
                  
                  Price ($)Options
      outstanding at January 1, 2009
                  
                  
                  1,140,186
                  
                  
                  $
                  37.18Options
      granted
                  
                  
                  842,300
                  
                  
                  
                  0.53Options
      exercised
                  
                  
                  -
                  
                  
                  
                  -Options
      forfeited / cancelled
                  
                  
                  (599,300
                  )
                  
                  
                  27.62Options
      outstanding at June 30, 2009
                  
                  
                  1,383,186
                  
                  
                  $
                  19.00Options
      exercisable at June 30, 2009
                  
                  
                  221,097
                  
                  
                  $
                  81.20




As of
June 30, 2009, there was approximately $1.3 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the plan. This cost is expected to be recognized over a weighted
average period of 0.8 years.





In April
2009, the Company’s officers and directors gave notice of the surrender of an
aggregate of 581,000 options and the Board accepted and approved the
cancellation of those listed options.  In connection with the
cancellation of these options, the Company recognized non-cash compensation
expense of approximately $1.7 million during the second quarter.





Note
D—Reconciliation of Earnings Per Share





The
following table presents the computation of basic and diluted net earnings per
share including the dilutive effect of stock options and preferred stock
outstanding for the periods indicated:




16




For
      the Three Months
                      
                      
                      For
      the Six MonthsEnded June 30,
                      
                      
                      Ended June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Numerator
      for basic earnings per share:Net
      earnings (loss) from continuing operations
                      
                      $
                      8,030
                      
                      
                      $
                      (16,439
                      )
                      
                      $
                      9,307
                      
                      
                      $
                      (20,942
                      )Net
      loss from discontinued operations
                      
                      
                      (4,195
                      )
                      
                      
                      (11,048
                      )
                      
                      
                      (6,591
                      )
                      
                      
                      (10,360
                      )Less:
      Cash dividends on preferred stock
                      
                      
                      (7,443
                      )
                      
                      
                      (3,722
                      )
                      
                      
                      (7,443
                      )
                      
                      
                      (7,443
                      )Net
      loss attributable to common stockholders
                      
                      $
                      (3,608
                      )
                      
                      $
                      (31,209
                      )
                      
                      $
                      (4,727
                      )
                      
                      $
                      (38,745
                      )Denominator
      for basic earnings per share:Basic
      weighted average number of common sharesoutstanding
      during the period
                      
                      
                      7,618
                      
                      
                      
                      7,610
                      
                      
                      
                      7,618
                      
                      
                      
                      7,610Denominator
      for diluted earnings per share:Diluted
      weighted average number of common sharesoutstanding
      during the period
                      
                      
                      7,618
                      
                      
                      
                      7,610
                      
                      
                      
                      7,618
                      
                      
                      
                      7,610Net
      effect of dilutive stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Diluted
      weighted average common shares
                      
                      
                      7,618
                      
                      
                      
                      7,610
                      
                      
                      
                      7,618
                      
                      
                      
                      7,610Net
      loss per common share - basic and diluted:Earnings
      (loss) from continuing operations
                      
                      $
                      0.08
                      
                      
                      $
                      (2.65
                      )
                      
                      $
                      0.24
                      
                      
                      $
                      (3.73
                      )Loss
      from discontinued operations
                      
                      
                      (0.55
                      )
                      
                      
                      (1.45
                      )
                      
                      
                      (0.86
                      )
                      
                      
                      (1.36
                      )Net
      loss per share attributable to common stockholders
                      
                      $
                      (0.47
                      )
                      
                      $
                      (4.10
                      )
                      
                      $
                      (0.62
                      )
                      
                      $
                      (5.09
                      )




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





For the
three and six months ended June 30, 2008, stock options to purchase 1.3
million shares were outstanding but not included in the above weighted average
calculations because they were anti-dilutive.





Note
E—Segment Reporting





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





Continuing OperationsMortgage
      andLong-term
                  
                  
                  Real
      Estate
                  
                  
                  DiscontinuedPortfolio
                  
                  
                  Services
                  
                  
                  Operations
                  
                  
                  ConsolidatedBalance
      Sheet Items as of June 30, 2009:Securitized
      mortgage collateral
                  
                  $
                  6,018,391
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,018,391Total
      assets
                  
                  
                  6,332,286
                  
                  
                  
                  26,015
                  
                  
                  
                  122,734
                  
                  
                  
                  6,481,035Total
      liabilities
                  
                  
                  6,280,507
                  
                  
                  
                  2,395
                  
                  
                  
                  191,909
                  
                  
                  
                  6,474,811Total
      stockholders’ equity (deficit)
                  
                  
                  51,779
                  
                  
                  
                  23,620
                  
                  
                  
                  (69,175
                  )
                  
                  
                  6,224Balance
      Sheet Items as of December 31, 2008:Securitized
      mortgage collateral
                  
                  $
                  5,894,424
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  5,894,424Total
      assets
                  
                  
                  6,574,464
                  
                  
                  
                  -
                  
                  
                  
                  141,053
                  
                  
                  
                  6,715,517Total
      liabilities
                  
                  
                  6,489,024
                  
                  
                  
                  -
                  
                  
                  
                  217,241
                  
                  
                  
                  6,706,265Total
      stockholders’ equity (deficit)
                  
                  
                  85,440
                  
                  
                  
                  -
                  
                  
                  
                  (76,188
                  )
                  
                  
                  9,252





17




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





Continuing OperationsMortgage
      andLong-term
                
                
                Real
      Estate
                
                
                DiscontinuedPortfolio
                
                
                Services
                
                
                Operations
                
                
                Reclassifications (1)
                
                
                ConsolidatedStatement
      of Operations Itemsfor
      the three months ended June 30, 2008:Net
      interest income
                
                $
                4,256
                
                
                $
                -
                
                
                $
                1,543
                
                
                $
                (1,543
                )
                
                $
                4,256Non-interest
      income- net trust assets
                
                
                (15,991
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (15,991
                )Mortgage
      and real estate services fees
                
                
                -
                
                
                
                1,612
                
                
                
                -
                
                
                
                -
                
                
                
                1,612Other
      non-interest income (expense)
                
                
                4,464
                
                
                
                (833
                )
                
                
                (8,354
                )
                
                
                8,354
                
                
                
                3,631Non-interest
      expense and income taxes
                
                
                (9,535
                )
                
                
                (412
                )
                
                
                (4,237
                )
                
                
                4,237
                
                
                
                (9,947
                )Net
      (loss) earnings from continuing operations
                
                $
                (16,806
                )
                
                $
                367
                
                
                
                -
                
                
                
                -
                
                
                $
                (16,439
                )Net
      loss from discontinued operations, net of tax
                
                $
                -
                
                
                $
                -
                
                
                $
                (11,048
                )
                
                
                -
                
                
                $
                (11,048
                )Net
      (loss) earnings
                
                $
                (16,806
                )
                
                $
                367
                
                
                
                
                
                
                
                (11,048
                )
                
                $
                (27,487
                )Statement of Operations Itemsfor
      the six months ended June 30, 2008:Net
      interest income (expense)
                
                $
                11,610
                
                
                $
                (5
                )
                
                $
                3,213
                
                
                $
                (3,213
                )
                
                $
                11,605Non-interest
      income- net trust assets
                
                
                (16,719
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (16,719
                )Mortgage
      and real estate services fees
                
                
                -
                
                
                
                4,155
                
                
                
                -
                
                
                
                -
                
                
                
                4,155Other
      non-interest income
                
                
                2,794
                
                
                
                13
                
                
                
                979
                
                
                
                (979
                )
                
                
                2,807Non-interest
      expense and income taxes
                
                
                (21,922
                )
                
                
                (868
                )
                
                
                (14,552
                )
                
                
                14,552
                
                
                
                (22,790
                )Net
      (loss) earnings from continuing operations
                
                $
                (24,237
                )
                
                $
                3,295
                
                
                
                -
                
                
                
                -
                
                
                $
                (20,942
                )Net
      loss from discontinued operations, net of tax
                
                $
                -
                
                
                $
                -
                
                
                $
                (10,360
                )
                
                
                -
                
                
                $
                (10,360
                )Net
      (loss) earnings
                
                $
                (24,237
                )
                
                $
                3,295
                
                
                
                
                
                
                
                (10,360
                )
                
                $
                (31,302
                )





(1)
            Amounts
      represent reclassifications of activity in the discontinued operations
      segment into net loss from discontinued operations, net of tax as
      presented in the consolidated statements of
  operations.





Note F—Real
Estate Owned (REO)





Activity
for the Company’s REO consisted of the following:




18




At June 30, 2009
                  
                  
                  At December 31, 2008REO
                  
                  $
                  338,614
                  
                  
                  $
                  635,285Impairment
      (1)
                  
                  
                  (63,567
                  )
                  
                  
                  (35,533
                  )Ending
      balance
                  
                  $
                  275,047
                  
                  
                  $
                  599,752REO
      inside trusts
                  
                  $
                  274,481
                  
                  
                  $
                  599,084REO
      outside trusts (2)
                  
                  
                  566
                  
                  
                  
                  668Total
                  
                  $
                  275,047
                  
                  
                  $
                  599,752





(1)
            Impairment
      represents the cumulative write-downs of net realizable value subsequent
      to foreclosure.


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





Note G—
Restructured Financing (Discontinued Operations)





The
Company’s reverse repurchase financing, included in discontinued operations, is
secured by the Company’s mortgage loans held-for-sale with an unpaid principal
balance of $184.7 million, restricted cash of $19.9 million and certain
REOs.  The following table presents the outstanding balance of the
Company’s Restructured Financing as of the dates indicated:





Discontinued
      Operationsas
      of June 30,
                  
                  
                  as
      of December 31,2009
                  
                  
                  2008Reverse
      repurchase line (1)
                  
                  $
                  171,708
                  
                  
                  $
                  188,677





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





In
September 2008, the Company entered into an agreement to restructure its
reverse repurchase line (Restructured Financing) with its remaining lender. The
balance of this Restructured Financing was $171.7 million at June 30, 2009 and
collateralized by loans held-for-sale within discontinued operations. The
agreement removed all technical defaults from financial covenant noncompliance
and any associated margin calls for the term of the agreement. The agreement
calls for certain targets including a reduction of the borrowings balance to
$100 million by March 2010 with an advance rate of no more than 65 percent of
the outstanding principal balance and $50 million by September 2010 with an
advance rate of no more than 55 percent of the outstanding principal balance. By
meeting these targets, the agreement term can extend to March 2011. At June 30,
2009, the advance rate was 78 percent. The agreement also calls for monthly
payments of $1.5 million until the earlier of the Company raising capital or the
end of the agreement term. If the Company is successful in raising capital,
approximately 10 percent of the gross proceeds will be required to be paid as an
additional payment and the monthly payment would then be reduced to $750,000.
The interest rate is LIBOR plus 325 basis points, and all cash collected from
the securing mortgage loans is required to be paid to the lender. To the extent
the cash collected from the collateral is not adequate to pay the interest
expense due on the borrowings, interest expense would be paid to the lender from
the Company’s restricted cash account included in assets of discontinued
operations or the Company’s cash balances. Accomplishing the restructuring of
this reverse repurchase line allows the Company to timely manage the remaining
loans on the line for the eventual collection, refinance, sale or securitization
without the risk of receiving margin calls. Upon an event of default, the
Company is responsible for any shortfall if the value of the loans securing the
financing is insufficient to repay the outstanding balance.  During
the three and six months ended June 30, 2009, the Company paid an additional
$4.5 million and $9.0 million, respectively in payments, used by the lender to
offset interest and settlement shortfalls, as required under the restructured
terms.





Note
H—Long-term Debt





The
following table shows the composition of long-term debt as of the dates
indicated:




19




June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Trust
      preferred securities:Outstanding
      balance
                  
                  $
                  11,000
                  
                  
                  $
                  88,250Common
      securities
                  
                  
                  620
                  
                  
                  
                  2,994Fair
      value adjustment
                  
                  
                  (9,511
                  )
                  
                  
                  (75,841
                  )Total
      trust preferred securities
                  
                  
                  2,109
                  
                  
                  
                  15,403Junior
      subordinated notes:Outstanding
      balance
                  
                  
                  62,000
                  
                  
                  
                  -Fair
      value adjustment
                  
                  
                  (54,312
                  )
                  
                  
                  -Total
      junior subordinated notes
                  
                  
                  7,688
                  
                  
                  
                  -Total
      long-term debt
                  
                  $
                  9,797
                  
                  
                  $
                  15,403




In
January 2009, the Company purchased and canceled $25.0 million in
outstanding trust preferred securities of Impac Capital Trust #2 for $3.75
million and terminated the remaining debt.





In
May 2009, the Company exchanged an aggregate of $51.3 million in trust
preferred securities of Impac Capital Trusts #1 and #3 for junior subordinated
notes with an aggregate principal balance of $62.0 million, with a maturity date
in March 2034. Under the terms of the exchange, the interest rate for each
note was reduced from the original 8.01 percent to 2.00 percent through 2013
with increases of 1.00 percent per year through 2017. Starting in 2018, the
interest rates become variable at 3-month LIBOR plus 375 basis points. In
connection with the exchange, the Company paid a fee of $0.5
million.





In June
2009, the Company purchased and canceled $1.0 million in outstanding trust
preferred securities of Impac Capital Trust #4 for $150 thousand.





As of
July 30, 2009, the Company is current and no longer deferring interest on trust
preferred securities.





In August
2009, the Company purchased and canceled $2.5 million in outstanding trust
preferred securities of Impac Capital Trust #4 for $375 thousand, resulting in
$8.5 million in outstanding trust preferred securities.





As a
result of the restructuring of $51.3 million and purchase and cancelation of
$36.5 million in outstanding trust preferred securities, the Company reduced its
annual interest expense obligation from $7.8 million to $2.0 million. With the
restructuring and purchase and cancelations of trust preferred securities, the
Company has $8.5 million in outstanding trust preferred securities of Impac
Capital Trust #4 and $62.0 million in outstanding junior subordinated
notes.





Note
I—Preferred Stock Repurchase





In June
2009, the Company completed the Offer to Purchase and Consent Solicitation (the
“Offer to Purchase”) of all of its 9.375% Series B Cumulative Redeemable
Preferred Stock and 9.125% Series C Cumulative Redeemable Preferred Stock. The
Series B Preferred Stock had a liquidation preference of $50 million and the
Series C Preferred Stock had a liquidation preference of $111.8 million, for a
total of $161.8 million. Upon expiration of the Offer to Purchase, holders of
approximately 67.7% of the Preferred Stock tendered an aggregate of 4,378,880
shares. Stockholders of the Company’s Series B Preferred Stock tendered
1,323,844 shares at $0.29297 per share for $388 thousand. Stockholders of the
Company’s Series C Preferred Stock tendered 3,055,036 shares at $0.28516 per
share for $871 thousand. The aggregate purchase price for the Preferred Stock
was $1.3 million. In addition, in connection with completing the offer to
purchase the Company paid $7.4 million accumulated but unpaid dividends on its
Preferred Stock.  With the total cash payment of $8.7 million, the
Company eliminated $109.5 million of liquidation preference on its Preferred
Stock.  After the completion of the Offer to Purchase, the Company has
outstanding $52.3 million liquidation preference of Series B and Series C
Preferred Stock.





With
completion of the Offer to Purchase and modification to the terms of the Series
B Preferred Stock and Series C Preferred Stock, the Company eliminated its $14.9
million annual preferred dividend obligation.  Refer to Note I – Preferred Stock
Repurchase for additional information.





20




As a
condition to completing the offer to purchase, the common stockholders and
preferred stockholders approved and consented to modify the terms of each of the
Series B Cumulative Preferred Stock and Series C Preferred Stock to (i) make
dividends, if any, non-cumulative, (ii) eliminate the provisions prohibiting the
payment of dividends on junior stock and prohibiting the purchase or redemption
of junior or parity stock if full cumulative dividends for all past dividend
periods are not paid or declared and set apart for payment, (iii) eliminate any
premiums payable upon the liquidation, dissolution or winding up of the Company,
(iv) eliminate the provision prohibiting the Company from electing to redeem
Preferred Stock prior to the fifth year anniversary of the issuance of such
preferred stock, (v) eliminate the provision prohibiting the Company from
redeeming less than all of the outstanding Preferred Stock if full cumulative
dividends for all past dividend periods have not been paid or declared and set
apart for payment, (vi) eliminate the right of holders of Preferred Stock to
elect two directors if dividends are in arrears for six quarterly periods and
(vii) eliminate the right of holders of Preferred Stock to consent to or approve
the authorization or issuance of preferred stock senior to the Preferred
Stock.  The holders of each series of Preferred Stock retain the right
to a $25.00 liquidation preference in the event of a liquidation of the Company
and the right to receive dividends on the Preferred Stock if any such dividends
are declared.





Note
J—Subsequent Events





Subsequent
events have been evaluated through August 10, 2009, the date these financial
statements were issued.





As
discussed in Note H – Long-term Debt, in August
2009, the Company purchased and canceled $2.5 million in outstanding trust
preferred securities of Impac Capital Trust #4 for $375
thousand.


21





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


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





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





Forward-Looking
Statements





This
report on Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements, some of
which are based on various assumptions and events that are beyond our control,
may be identified by reference to a future period or periods or by the use of
forward-looking terminology, such as “may,” “will,” “believe,” “expect,”
“likely,” “should,” “could,” “anticipate,” or similar terms or variations on
those terms or the negative of those terms. The forward-looking statements are
based on current management expectations. Actual results may differ materially
as a result of several factors, including, but not limited to the following: the
ongoing volatility in the mortgage industry; our ability to successfully manage
through the current market environment; our ability to meet liquidity needs from
current cash flows or generate new sources of revenue; management’s ability to
successfully initiate and continue mortgage and real estate related fee-based
business strategies; the ability to make interest and dividend payments;
increases in default rates and mortgage related losses; potential difficulties
in satisfying conditions (payment and covenants) in the Restructured Financing;
our ability to obtain additional financing and the terms of any financing that
we do obtain; inability to effectively liquidate properties to mitigate losses;
increase in loan repurchase requests and ability to adequately settle repurchase
obligations; decreases in value of our residual interests that differ from our
assumptions; the ability of our common stock to continue trading in an active
market; the outcome of litigation or regulatory actions pending against us or
other legal contingencies; and our compliance with applicable local, state and
federal laws and regulations and other general market and economic
conditions.





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





The
Mortgage Banking Industry and Discussion of Relevant Fiscal Periods





The
mortgage banking industry is continually vulnerable to current events that occur
in the financial services industry. These events include changes in economic
indicators, government regulation, interest rates, price competition, geographic
shifts, disposable income, housing prices, market liquidity, market
anticipation, and customer perception, as well as others. The factors that
affect the industry change rapidly and 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 such instances, the
Company attempts to present financial information in its Management’s Discussion
and Analysis of Financial Condition and Results of Operations that is the most
relevant to its financial information.





Status
of Operations, Liquidity and Capital Resources





Long-term
mortgage portfolio





During
the first half of 2009, the Company continues to be significantly and negatively
affected by the deteriorating real estate market and the weak economic
environment. These factors have led to continued deterioration in the quality of
the Company’s long-term mortgage portfolio, as evidenced by the continued
increases in delinquencies, foreclosures and credit losses. Existing conditions
are unprecedented and inherently involve significant risks and uncertainty to
the Company.  The current market conditions have led to fewer sources
of liquidity available to the Company to operate its business.  These
conditions continue to have an adverse effect on the performance of the
Company’s long-term mortgage portfolio, including significant losses on real
estate owned.  The Company has increased its loss assumptions for its
long-term mortgage portfolio due to the increase in expected defaults and loss
severities related to the weak economy and housing market.





22




Mortgage
and real estate services





During
the first quarter of 2009, the Company initiated various mortgage and real
estate related fee-based businesses, including loan modifications, real estate
disposition, monitoring and surveillance services, real estate brokerage and
lending services and escrow services, and has begun to generate revenues from
these businesses.  For the three and six month periods ended June 30,
2009, mortgage and real estate services fees were $13.2 million and $18.8
million, respectively.  However, since these businesses are newly
formed and currently generate fees primarily from the Company’s long-term
mortgage portfolio, there remains uncertainty about their future success,
including providing services to the marketplace.





Liquidity
and capital resources





During
the first six months of 2009, the Company continued to fund its operations
primarily from the cash flows from its long-term mortgage portfolio and mortgage
and real estate related fee-based businesses.





In
January 2009, the Company purchased and canceled all of the $25.0 million
in outstanding trust preferred securities of Impac Capital Trust #2 for $3.75
million and terminated the remaining debt.





In
May 2009, the Company exchanged an aggregate of $51.3 million in trust
preferred securities of Impac Capital Trusts #1 and #3 for junior subordinated
notes with an aggregate principal balance of $62.0 million, with a maturity date
in March 2034. Under the terms of the exchange, the interest rate for each
note was reduced from the original 8.01 percent to 2.00 percent through 2013
with increases of 1.00 percent per year through 2017. Starting in 2018, the
interest rates become variable at 3-month LIBOR plus 375 basis points. In
connection with the exchange, the Company paid a fee of $0.5
million.








As of
July 30, 2009, the Company is current and no longer deferring interest on trust
preferred securities.





In August
2009, the Company purchased and canceled $2.5 million in outstanding trust
preferred securities of Impac Capital Trust #4 for $375 thousand.





For the
three and six months ended June 30, 2009 and 2008, the Company paid
$0.8 million and $1.2 million, respectively in interest on trust preferred
securities.





As a
result of the restructuring of $51.3 million and the purchase and cancelation of
$36.5 million in outstanding trust preferred securities, the Company reduced its
annual interest expense obligation from $7.8 million to $2.0
million.  With the restructuring and purchase and cancelations of
trust preferred securities, the Company has $8.5 million in outstanding trust
preferred securities of Impac Capital Trust #4 and $62.0 million in outstanding
junior subordinated notes.





In June
2009, the Company completed the Offer to Purchase and Consent Solicitation (the
“Offer to Purchase”) of all of its 9.375% Series B Cumulative Redeemable
Preferred Stock and 9.125% Series C Cumulative Redeemable Preferred Stock. The
Series B Preferred Stock had a liquidation preference of $50 million and the
Series C Preferred Stock had a liquidation preference of $111.8 million, for a
total of $161.8 million. Upon expiration of the Offer to Purchase, holders of
approximately 67.7% of the Preferred Stock tendered an aggregate of 4,378,880
shares. Stockholders of the Company’s Series B Preferred Stock tendered
1,323,844 shares at $0.29297 per share for $388 thousand. Stockholders of the
Company’s Series C Preferred Stock tendered 3,055,036 shares at $0.28516 per
share for $871 thousand. The aggregate purchase price for the Preferred Stock
was $1.3 million. In addition, in connection with the completion of the offer to
purchase the Company paid $7.4 million accumulated but unpaid dividends on its
Preferred Stock.  With the total cash payment of $8.7 million, the
Company eliminated $109.5 million of liquidation preference on its Preferred
Stock.  After the completion of the Offer to Purchase, the Company has
outstanding $52.3 million liquidation preference of Series B and Series C
Preferred Stock.





In
connection with the Offer to Purchase, the Company filed Articles of Amendment
to its charter with the State Department of Assessments and Taxation of Maryland
to modify the terms of each of its 9.375% Series B Cumulative Redeemable
Preferred Stock and 9.125% Series C Cumulative Redeemable Preferred Stock to (i)
make dividends, if any, non-cumulative, (ii) eliminate the provisions
prohibiting the payment of dividends on junior stock and prohibiting the
purchase or redemption of junior or parity stock if full cumulative dividends
for all past dividend periods are not paid or declared and set apart for
payment, (iii) eliminate any premiums payable upon the liquidation, dissolution
or winding up of the Company, (iv) eliminate the provision prohibiting the
Company from electing to redeem Preferred Stock prior to the fifth year
anniversary of the issuance of such Preferred Stock, (v) eliminate the provision
prohibiting the Company from redeeming less than all of the outstanding
Preferred Stock if full cumulative dividends for all past dividend periods have
not been paid or declared and set apart for payment, (vi) eliminate the right of
holders of preferred stock to elect two directors if dividends are in arrears
for six quarterly periods and (vii) eliminate the right of holders of Preferred
Stock to consent to or approve the authorization or issuance of Preferred Stock
senior to the preferred stock.





23




With
completion of the Offer to Purchase and modification to the terms of the Series
B Preferred Stock and Series C Preferred Stock, the Company eliminated its $14.9
million annual preferred dividend obligation.








The
primary use of liquidity within discontinued operations continues to be the
Company’s restructured reverse repurchase financing (Restructured
Financing).  As of June 30, 2009, the balance of the Restructured
Financing was $171.7 million secured by loans held for sale with an unpaid
principal balance of $184.7 million, restricted cash of $19.9 million and
certain real estate owned.  Principal and interest received on the
underlying collateral is remitted to the lender monthly.  During the
three and six month periods ended June 30, 2009, the Company paid an additional
$4.5 million and $9.0 million in payments, used by the lender to offset interest
and settlement shortfalls, as required under the restructured
terms.





If we are
not successful in (i) realizing cash flows from our residual interests in
securitizations and (ii) realizing cash flows from new mortgage and real
estate related fee-based businesses, we may not be able to satisfy our
contractual obligations for 2010 and subsequent years, including repayment of
the Restructured Financing and interest payments on long-term debt (which
consists of trust preferred securities and junior subordinated
notes).





To
understand the financial position of the Company better, we believe it is
important to understand the composition of the Company’s stockholders’ equity
(deficit) and to which component of the business it relates.  At June
30, 2009, the equity (deficit) within our continuing and discontinued operations
was comprised of the following significant assets and liabilities:





Condensed
      Components of Stockholders' Equity (Deficit)As
      of June 30, 2009Continuing
                  
                  
                  DiscontinuedOperations
                  
                  
                  Operations
                  
                  
                  TotalCash
                  
                  $
                  30,694
                  
                  
                  $
                  632
                  
                  
                  $
                  31,326Short-term
      investments
                  
                  
                  5,026
                  
                  
                  
                  -
                  
                  
                  
                  5,026Residual
      interests in securitizations
                  
                  
                  28,895
                  
                  
                  
                  -
                  
                  
                  
                  28,895Long-term
      debt ($73,620 par)
                  
                  
                  (9,797
                  )
                  
                  
                  -
                  
                  
                  
                  (9,797
                  )Repurchase
      liabilities (1)
                  
                  
                  -
                  
                  
                  
                  (68,495
                  )
                  
                  
                  (68,495
                  )Lease
      liability (2)
                  
                  
                  -
                  
                  
                  
                  (3,935
                  )
                  
                  
                  (3,935
                  )Deferred
      charge
                  
                  
                  13,144
                  
                  
                  
                  -
                  
                  
                  
                  13,144Net
      other assets
                  
                  
                  7,437
                  
                  
                  
                  2,623
                  
                  
                  
                  10,060Stockholders'
      equity (deficit)
                  
                  $
                  75,399
                  
                  
                  $
                  (69,175
                  )
                  
                  $
                  6,224








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


(2)
            Guaranteed
      by IMH.





Continuing
operations





At June
30, 2009, cash within our continuing operations decreased to $30.7 million from
$46.2 million at December 31, 2008.  The primary components of
the change in cash between periods were the Company’s $5.0 million investment in
highly liquid short-term investments during the first quarter of 2009 and its
repurchase of preferred stock of $1.3 million and payment of $7.4 million in
accumulated preferred stock dividends during the second quarter of
2009.  Additionally, the Company paid $3.9 million to
purchase and cancel $26.0 million in trust preferred
securities.





Since our
consolidated and unconsolidated securitization trusts are non-recourse, we have
netted trust assets and liabilities to present the Company’s interest in these
trusts more simply, which are considered our residual interests in
securitizations. For unconsolidated securitizations our residual interests
represent the fair value of investment securities available-for-sale. For
consolidated securitizations, our residual interests are represented by the fair
value of securitized mortgage collateral and real estate owned, offset by the
fair value of securitized mortgage borrowings and net derivative liabilities. We
receive cash flows from our residual interests in securitizations to the extent
they are available after required distributions to bondholders and maintaining
overcollateralization levels within the trusts. The estimated fair value of the
residual interests, represented by the difference in the fair value of trust
assets and trust liabilities, was $28.9 million at June 30, 2009, compared to
$28.0 million at December 31, 2008.





24




At June
30, 2009, we had deferred charges of $13.1 million, which is amortized as a
component of income tax expense in the consolidated statements of operations
over the estimated life of the mortgages retained in the securitized mortgage
collateral. The deferred charges represent the deferral of income tax expense on
inter-company profits that resulted from the sale of mortgages from taxable
subsidiaries to IMH in prior years. This balance is recorded as required by
accounting principles generally accepted in the United States of America (GAAP)
and does not have any realizable cash value.





Net other
assets include $2.5 million in premises and equipment, $0.5 million in
investment in capital trusts, $1.3 million in restricted cash and $1.5 million
in prepaid expenses.




Discontinued
operations





The
Company’s most significant liabilities at June 30, 2009 relate to its repurchase
liabilities and a lease liability within discontinued operations.





The
repurchase liabilities consist of a repurchase reserve and the net amount owed
to our lender for the Restructured Financing, which is collateralized by loans
held-for-sale, restricted cash balances and certain real estate owned. The
balance of the Restructured Financing was approximately $171.7 million at June
30, 2009. We are currently distributing all principal and interest received from
the collateral securing the Restructured Financing to the
lender.  Additionally, the Restructured Financing calls for monthly
payments of $1.5 million.





We were
required to make normal and customary representations and warranties about the
loans we had previously sold to investors. Our whole loan sale agreements
generally required us to repurchase loans if we breached a representation or
warranty given to the loan purchaser. In addition, we also could be required to
repurchase loans as a result of borrower fraud or if a payment default occurs on
a mortgage loan shortly after its sale. The repurchase reserve is an estimate of
losses from expected repurchases, and is based, in part, on the recent
settlement of claims.  At June 30, 2009, the repurchase reserve was
$11.2 million.





In
connection with the discontinuation of our non-conforming mortgage, retail
mortgage, warehouse lending and commercial operations, a significant amount of
office space that was previously occupied is no longer being used by the
Company. The Company has subleased a significant amount of this office space. At
June 30, 2009, the Company had a liability of $3.9 million included within
discontinued operations, representing the present value of the minimum lease
payments over the remaining life of the lease, offset by the expected proceeds
from sublet revenue related to this office space.





Market
Conditions





The
economy continued to contract in the first half of 2009.  Labor
markets deteriorated rapidly as U.S. firms reduced the number of jobs driving
the U.S. unemployment rate higher in June.  Higher unemployment and
weaker overall economic conditions have led to a significant increase in the
number of defaults, while continued weak housing prices have driven a
significant increase in loss severities. Defaults continue to remain elevated as
the economy and housing market continues to struggle.  The credit
performance of the Company’s long-term mortgage portfolio continues to be
negatively affected by these economic conditions.  Delinquencies and
nonperforming loans and assets continue to increase as a percentage of loans
outstanding.  Additional deterioration in the overall economic
environment, including continued deterioration in the labor market, could cause
delinquencies to increase beyond the Company’s current expectations, resulting
in additional increases in losses and reductions in fair value.


25





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











Effects
of Recent Market Activity





As a
result of the Company’s inability to sell or securitize non-conforming loans
during the second half of 2007, the Company discontinued funding loans. As a
result, the Company discontinued substantially all of its mortgage
(non-conforming single-family loans and commercial loans, which consist
primarily of multi-family loans) and warehouse lending
operations.  Market conditions deteriorated in 2008 and continue to be
depressed in 2009. As a result, the Company’s investment in securitized
non-conforming loans (residual interests) has been affected by the increase in
estimated defaults and severities, evidenced by significant home price
depreciation. The decline in single-family home prices can be seen in the chart
below.


26











As
depicted in the chart above, average home prices peaked in June 2006 at
226.29 and continued their dramatic decline through
May 2009.  The Standard & Poor’s Case-Shiller 10-City
Composite Home Price Index (the Index) for May 2009 was 151.0 (with the
base of 100.00 for January 2000) and hasn’t been this low since
June 2003 when the Index was 149.7. Beginning in the third quarter of 2007,
the Company believes there is a correlation between the borrowers’ perceived
equity in their homes and defaults. The original loan-to-value (defined as loan
amount as a percentage of collateral value, “LTV”) and original combined
loan-to-value (defined as first lien plus total subordinate liens to collateral
value, “CLTV”) ratios of single-family mortgages remaining in the Company’s
securitized mortgage collateral as of June 30, 2009 was 72 percent and 81
percent, respectively. The current LTV and CLTV ratios likely increased from
origination date as a result of the deterioration in the real estate market. We
believe that home prices that have declined below the borrower’s original
purchase price have a higher risk of default within our portfolio. Based on the
Index, home prices have declined 33 percent through May 2009 from the 2006
peak. Further, we believe the home prices in California and Florida, the states
with the highest concentration of our mortgages, have declined even further than
the Index. We have considered the deterioration in home prices in our loss
estimates, which are a primary assumption used in the valuation of securitized
mortgage collateral and borrowings.





Critical
Accounting Policies





Several
of the critical accounting policies important to the portrayal of our financial
condition and results of operations require management to make difficult and
complex judgments that rely on estimates about the effect of matters that are
inherently uncertain due to the affect of changing market conditions and/or
consumer behavior. We believe our most critical accounting policies relate to
the valuation of: (1) assets and liabilities that are highly dependent on
internal valuation models and assumptions rather than market quotations (see
Fair Value of Financial Instruments discussion below); (2) derivatives and
other hedging instruments; (3) real estate owned and loans held-for-sale,
including estimates of fair value, and related lower of cost or market (LOCOM)
valuation reserve; and (4) repurchase reserve (included in liabilities of
discontinued operations). Refer to our report on Form 10-K for the year
ended December 31, 2008 for further discussion of our critical accounting
policies and judgments.


27





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





Fair
Value of Financial Instruments





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





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





As a
result of the lack of observable market data resulting from inactive markets,
the Company has classified all its investment securities available-for-sale,
securitized mortgage collateral and borrowings, net derivative liabilities and
long-term debt as Level 3 fair value measurements at June 30, 2009 and
December 31, 2008. Level 3 assets and liabilities were 100 percent of total
assets and liabilities at fair value at June 30, 2009 and December 31,
2008.





The
Company adopted FSP No. SFAS 157-4 “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP 157-4) effective April 1,
2009.  The FSP addresses measuring fair value under SFAS 157 in
situations where the volume and level of market activity has significantly
decreased and transactions are not orderly. Under the provisions of the FSP,
transactions or quoted prices may not be determinative of fair value for assets
or liabilities in inactive markets.





There is
little information, if any, to evaluate if individual transactions are orderly
in an inactive market.   Accordingly, the Company is required to
evaluate the facts and circumstances to determine whether the transaction is
orderly based on the weight of the evidence.  The FSP does not
designate a specific method for adjusting a transaction or quoted price,
however, it does provide guidance for determining how much weight to give a
transaction or quoted price.  Price quotes derived from transactions
that are not orderly are not considered to be determinative of fair value and
should be given less weight, if any, when measuring fair value.





FSP 157-4
is effective for interim and annual reporting periods beginning April 1, 2009,
and shall be applied prospectively. The adoption of FSP 157-4 on April 1, 2009,
resulted in a positive net change of $13.3 million included in change in fair
value of net trust assets in the consolidated statements of
operations.  Offsetting the positive net change at adoption were
decreases in the fair values of trust assets and trust liabilities as a result
of the Company increasing loss assumptions for its long-term mortgage portfolio
due to increases in expected defaults and loss severities related to the weak
economy and housing market.





Recurring
basis





Investment securities
available-for-sale—The Company elected to carry all of its investment
securities available-for-sale at fair value. The investment securities consist
primarily of non-investment grade mortgage-backed securities. The fair value of
the investment securities are measured based upon our expectation of inputs that
other market participants would use. Such assumptions include our judgments
about the underlying collateral, prepayment speeds, credit losses, and certain
other factors. Given the market disruption and lack of observable market data as
of June 30, 2009, the fair value of the investment securities available-for-sale
were measured using significant internal expectations of market participants’
assumptions.


28





Securitized mortgage
collateral—The Company elected to carry all of its securitized mortgage
collateral at fair value. These assets consist primarily of non-conforming
single-family residential and multi-family mortgage loans securitized between
2002 and 2007. Fair value measurements are based on the Company’s internal
models used to compute the net present value of future expected cash flows with
market participant assumptions, where available. The Company’s assumptions
include our expectations of inputs that other market participants would use in
pricing these assets. These assumptions include our judgments about the
underlying collateral, prepayment speeds, estimated future credit losses,
forward interest rates, investor yield requirements and certain other
factors.





Securitized mortgage
borrowings—The Company elected to carry all of its securitized mortgage
borrowings at fair value. These borrowings consist of individual tranches of
bonds issued by securitization trusts and are primarily backed by non-conforming
mortgage loans. Fair value measurements include our judgments about the
underlying collateral assumptions such as prepayment speeds, estimated future
credit losses, forward interest rates, investor yield requirements and certain
other factors.





Long-term debt— The Company
elected to carry all of its long-term debt (consisting of trust preferred
securities and junior subordinated notes) at fair value. These securities were
measured based upon an analysis prepared by the Company, which considered the
Company’s own credit risk, including consideration of recent settlements with
trust preferred debt holders and discounted cash flow analysis of junior
subordinated notes.





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





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





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





On
September 15, 2008, Lehman Brothers Holdings Inc. (LBHI) filed a petition
for protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date,
LBHI, through affiliated companies, was an interest rate swap counterparty to
several of the Company’s CMO and REMIC securitizations. At June 30, 2009, the
estimated value of derivative liabilities to LBHI, through its affiliated
companies was approximately $78.0 million and is included in derivative
liabilities in the consolidated balance sheet. As the related securitization
trusts are non-recourse to the Company, the Company is not required to replace
or otherwise settle any derivative positions affected by counterparty default
within the consolidated trusts.





Non-recurring
basis





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





Loans held-for-sale -Loans
held-for-sale for which the fair value option was not elected are carried at
lower of cost or market (LOCOM). When available, such measurements are based
upon what secondary markets offer for portfolios with similar characteristics,
and are considered Level 2 measurements. If market pricing is not available,
such measurements are significantly impacted by the Company’s expectations of
other market participants’ assumptions, and are considered Level 3 measurements.
The Company utilizes internal pricing processes to estimate the fair value of
loans held-for-sale, which is based on recent loan sales and estimates of the
fair value of the underlying collateral. Loans held-for-sale, which are
primarily included in assets of discontinued operations, are considered Level 3
fair value measurements at June 30, 2009 and December 31, 2008 based on the
lack of observable market inputs.


29


Real estate owned -REO,
which consists of residential real estate acquired in satisfaction of loans, is
carried at net realizable value.  Upon foreclosure, REO is adjusted to
the estimated fair value of the residential real estate less estimated selling
and holding costs, offset by expected mortgage insurance proceeds to be
received, if any.  Subsequently, REO is recorded at the lower of
carrying value or estimated fair value less costs to sell.  Fair
values of REO are generally based on appraisals or market prices, and considered
Level 2 measurements at June 30, 2009 and December 31, 2008.





Lease liability – In
connection with the discontinuation of our non-conforming mortgage, retail
mortgage, warehouse lending and commercial operations, a significant amount of
office space that was previously occupied is no longer being used by the
Company. The Company has subleased a significant amount of this office
space.  The Company has recorded a liability, included within
discontinued operations, representing the fair value of the minimum lease
payments over the remaining life of the lease, offset by the expected proceeds
from sublet revenue related to this office space.  This liability is
based on the present value techniques that incorporate the Company’s judgments
about estimated sublet revenue and discount rates.  Therefore, this
liability is considered a Level 3 measurement at June 30, 2009 and
December 31, 2008.





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





Interest
Income and Expense





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





Selected
Financial Results for the Three Months Ended June 30, 2009





Continuing
Operations





·
            Net
      earnings of $8.0 million for the second quarter of 2009, compared to a net
      loss of $16.4 million for the comparable 2008
  period.





·
            Net
      interest income of $3.0 million for the second quarter of 2009, primarily
      from our long-term mortgage portfolio, compared to net interest income of
      $4.3 million for the comparable 2008
period.





·
            Non-interest
      income - net trust assets of $8.2 million for the second quarter of 2009,
      compared to $(16.0) million for the comparable 2008
  period.





·
            Mortgage
      and real estate services fees of $13.2 million for the second quarter of
      2009, compared to $1.6 million for the comparable 2008
    period.





Discontinued
Operations





·
            Net
      loss of $4.2 million for the second quarter of 2009, compared to $11.0
      million for the comparable 2008
period.





·
            Restructured
      Financing was $171.7 million at June 30, 2009, compared to $188.7 million
      at December 31, 2008.





·
            Loans
      held-for-sale were $84.9 million, including a fair value adjustment of
      $100.6 million at June 30, 2009, compared to loans held-for-sale of $107.8
      million, including a $109.1 million fair value adjustment at
      December 31, 2008.





Selected
Financial Results for the Six Months Ended June 30, 2009





Continuing
Operations





·
            Net
      earnings of $9.3 million for the six months ended June 30, 2009, compared
      to a net loss of $20.9 million for the comparable 2008
    period.


30


·
            Net
      interest income of $6.6 million for the six months ended June 30, 2009,
      primarily from our long-term mortgage portfolio, compared to net interest
      income of $11.6 million for the comparable 2008
  period.





·
            Non-interest
      income - net trust assets of $12.9 million for the six months ended June
      30, 2009, compared to $(16.7) million for the comparable 2008
      period.





·
            Mortgage
      and real estate services fees of $18.8 million for the six months ended
      June 30, 2009, compared to $4.2 million for the comparable 2008
      period.





Discontinued
Operations





·
            Net
      loss of $6.6 million for the six months ended June 30, 2009, compared to
      $10.4 million for the comparable 2008
period.








Estimated
Taxable Income





While the
Company has generated significant net operating loss carryforwards in recent
periods, we do not expect to generate sufficient taxable income in future
periods to be able to realize these tax benefits.  Therefore, we have
recorded a full valuation allowance against the net deferred tax assets as we
believe that as of June 30, 2009 it is more likely than not that the net
deferred tax assets will not be recoverable.


.


Financial
Condition and Results of Operations





Financial
Condition





Condensed
Balance Sheet Data





June
      30,
                        
                        
                        December
      31,
                        
                        
                        Increase
                        
                        %2009
                        
                        
                        2008
                        
                        
                        (Decrease)
                        
                        ChangeInvestment
      securities available-for-sale
                        
                        $
                        1,332
                        
                        
                        $
                        2,068
                        
                        
                        $
                        (736
                        )
                        (36
                        )%Securitized
      mortgage collateral
                        
                        
                        6,018,391
                        
                        
                        
                        5,894,424
                        
                        
                        
                        123,967
                        
                        2Derivative
      assets
                        
                        
                        179
                        
                        
                        
                        37
                        
                        
                        
                        142
                        
                        384Real
      estate owned
                        
                        
                        274,481
                        
                        
                        
                        599,084
                        
                        
                        
                        (324,603
                        )
                        (54
                        )Total
      trust assets
                        
                        
                        6,294,383
                        
                        
                        
                        6,495,613
                        
                        
                        
                        (201,230
                        )
                        (3
                        )Assets
      of discontinued operations
                        
                        
                        122,734
                        
                        
                        
                        141,053
                        
                        
                        
                        (18,319
                        )
                        (13
                        )Other
      assets
                        
                        
                        63,918
                        
                        
                        
                        78,851
                        
                        
                        
                        (14,933
                        )
                        (19
                        )Total
      assets
                        
                        $
                        6,481,035
                        
                        
                        $
                        6,715,517
                        
                        
                        $
                        (234,482
                        )
                        (3
                        )%Securitized
      mortgage borrowings
                        
                        $
                        6,080,637
                        
                        
                        $
                        6,193,984
                        
                        
                        $
                        (113,347
                        )
                        (2
                        )%Derivative
      liabilities
                        
                        
                        184,851
                        
                        
                        
                        273,584
                        
                        
                        
                        (88,733
                        )
                        (32
                        )Total
      trust liabilities
                        
                        
                        6,265,488
                        
                        
                        
                        6,467,568
                        
                        
                        
                        (202,080
                        )
                        (3
                        )Liabilities
      of discontinued operations
                        
                        
                        191,909
                        
                        
                        
                        217,241
                        
                        
                        
                        (25,332
                        )
                        (12
                        )Other
      liabilities
                        
                        
                        17,414
                        
                        
                        
                        21,456
                        
                        
                        
                        (4,042
                        )
                        (19
                        )Total
      liabilities
                        
                        
                        6,474,811
                        
                        
                        
                        6,706,265
                        
                        
                        
                        (231,454
                        )
                        (3
                        )Total
      stockholders' equity
                        
                        
                        6,224
                        
                        
                        
                        9,252
                        
                        
                        
                        (3,028
                        )
                        (33
                        )Total
      liabilities and stockholders' equity
                        
                        $
                        6,481,035
                        
                        
                        $
                        6,715,517
                        
                        
                        $
                        (234,482
                        )
                        (3
                        )%





Total
assets and total liabilities were $6.5 billion at June 30, 2009 as compared
to $6.7 billion at December 31, 2008.  The decrease in total
assets and liabilities are primarily attributable to decreases in the Company’s
trust assets and trust liabilities as summarized below:


31


·
            Securitized
      mortgage collateral increased $124.0 million during the six months ended
      June 30, 2009.  The increase in securitized mortgage collateral
      from $5.9 billion at December 31, 2008 to $6.0 billion at June 30, 2009
      was primarily due to the adoption of FSP 157-4, which clarified the use of
      quoted prices in determining fair values in markets that are inactive,
      thus moderating the need to use distressed prices in valuing financial
      assets and liabilities in illiquid markets as the Company had used in
      prior periods.  The increase in fair value was offset by
      increased loss assumptions and reductions in principal balances during the
      period.  For the six months ended June 30, 2009, increases in
      fair value totaled $755.7 million, offset by reductions in principal
      balances (resulting from transfers to REO and principal paydowns) of
      $631.8 million.


·
            REO
      within the Company’s securitization trusts decreased $324.6 million to
      $274.5 million at June 30, 2009.  Increases in REO from
      foreclosures totaled $192.0 million.  Offsetting the increase in
      REO from foreclosures were $423.3 million in liquidations and $93.3
      million in additional lower of cost or market write-downs subsequent to
      foreclosure.


·
            Securitized
      mortgage borrowings decreased $113.3 million to $6.1 billion at June 30,
      2009.  The decrease in securitized mortgage borrowings was
      primarily due to the adoption of FSP 157-4, which clarified the use of
      quoted prices in determining fair values in markets that are inactive,
      thus moderating the need to use distressed prices in valuing financial
      asset and liabilities in illiquid markets as the Company had used in prior
      periods.  The increase in fair value was offset by increased
      loss assumptions and reductions in principal balances during the
      period.  For the six months ended June 30, 2009, increases in
      fair value totaled $930.2 million, offset by reductions in outstanding
      balances of $1.0 billion.


·
            Derivative
      liabilities, net decreased $88.9 million during the quarter to $184.7
      million at June 30, 2009.  The decrease is the result of a $20.3
      million negative change in fair value, offset by cash payments from the
      securitization trusts of $109.2
million.





Since our
consolidated and unconsolidated securitization trusts are non-recourse to the
Company, our economic risk is limited to our residual interests in these
securitization trusts. Therefore, in the following table we have netted trust
assets and trust liabilities to present these residual interests more simply.
Our residual interests in securitizations are segregated between our
single-family (SF) residential and multi-family (MF) residential portfolios and
are represented by the difference between trust assets and trust liabilities.
For unconsolidated securitizations, our residual interests represent the fair
value of investment securities available-for-sale. For consolidated
securitizations, our residual interests are represented by the fair value of
securitized mortgage collateral and net realizable value of real estate owned,
offset by the fair value of securitized mortgage borrowings and net derivative
liabilities. The following tables present the estimated fair value of our
residual interests by securitization vintage year and other related assumptions
used to derive these values at June 30, 2009:





Estimated Fair Value of
              Residual Interests by Vintage
      YearSF
            
            
            MF
            
            
            Total2002-2003
            
            
            (1
            )
            
            $
            10,079
            
            
            $
            6,683
            
            
            $
            16,7622004
            
            
            
            
            
            
            4,076
            
            
            
            6,751
            
            
            
            10,8272005
            
            
            (2
            )
            
            
            32
            
            
            
            393
            
            
            
            4252006
            
            
            (2
            )
            
            
            -
            
            
            
            881
            
            
            
            8812007
            
            
            (2
            )
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            
            
            
            $
            14,187
            
            
            $
            14,708
            
            
            $
            28,895




Weighted
      avg. prepayment rate
            
            
            8
            %
            
            
            19
            %
            
            
            9
            %Weighted
      avg. discount rate
            
            
            30
            %
            
            
            21
            %
            
            
            25
            %







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


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





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


32





Estimated Future Losses (1)
            
            
            Investor Yield Requirement
    (2)SF
            
            
            MF
            
            
            SF
            
            
            MF2002-2003
            
            
            7
            %
            
            
            2
            %
            
            
            14
            %
            
            
            14
            %2004
            
            
            19
            %
            
            
            2
            %
            
            
            16
            %
            
            
            13
            %2005
            
            
            36
            %
            
            
            8
            %
            
            
            25
            %
            
            
            19
            %2006
            
            
            47
            %
            
            
            18
            %
            
            
            24
            %
            
            
            21
            %2007
            
            
            43
            %
            
            
            15
            %
            
            
            25
            %
            
            
            20
            %








(1)
            Estimated
      future losses derived by dividing future projected losses by unpaid
      principal balances at June 30,
2009.


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





The
adoption of FSP 157-4 clarified the use of quoted prices in determining fair
value for assets and liabilities in inactive markets.  Fair value is
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction.  Upon adoption and at June 30,
2009, the Company relied on observable market participant assumptions for
investor yield requirements resulting in an overall decrease in weighted average
yield requirements as compared to prior periods.  The increases in
fair value as a result of decreased yield requirements was offset by increased
loss assumptions due to increases in expected defaults and severities related to
the weak economy and housing market.





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





As of and Year-to-Date
    Ended,June
      30,
              
              
              March
      31,
              
              
              December
      31,2009
              
              
              2009
              
              
              2008Prior
      12-month constant prepayment rate (CPR) - Residential
              
              
              12
              %
              
              
              11
              %
              
              
              11
              %Prior
      12-month constant prepayment rate (CPR) - Commercial
              
              
              8
              %
              
              
              10
              %
              
              
              10
              %Total
      non-performing loans
              
              $
              3,166,056
              
              
              $
              3,278,977
              
              
              $
              3,040,291Total
      non-performing loans to total loans
              
              
              22.4
              %
              
              
              21.8
              %
              
              
              19.4
              %Total
      non-performing assets (1)
              
              $
              3,450,125
              
              
              $
              3,727,684
              
              
              $
              3,646,742Total
      non-performing assets to total assets (2)
              
              
              20.1
              %
              
              
              25.4
              %
              
              
              25.8
              %








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


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





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





·      liquidity
risk;





·      credit
risk;





·      interest
rate risk; and





·      prepayment
risk.





Liquidity
Risk.Refer to “Status of Operations, Liquidity and Capital
Resources.”





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


33


As of
June 30, 2009, single-family and multi-family securitized mortgage collateral
had an original weighted average credit score of 701 and 731, an original
weighted average LTV ratio of 73 and 66 percent and an original CLTV of 83
percent and 66 percent, respectively. The current LTV and CLTV ratios likely
have increased from origination date as a result of the deterioration of the
real estate market.





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





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





We use
the Mortgage Bankers Association (MBA) method to define delinquency as a
contractually required payment being 30 days or more past due. We measure
delinquencies from the date of the last payment due date in which a payment was
received. Delinquencies for loans 60 days late or greater, foreclosures and
delinquent bankruptcies were $3.5 billion or 24.9 percent as of June 30,
2009.





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





At
      June 30,
                            
                            
                            
                            
                            At
      December 31,2009
                            
                            %
                            
                            
                            2008
                            
                            
                            %Loans held for sale (1)60
      - 89 days delinquent
                            
                            $
                            5,904
                            
                            0.0
                            %
                            
                            $
                            13,694
                            
                            
                            
                            0.1
                            %90
      or more days delinquent
                            
                            
                            61,705
                            
                            0.4
                            %
                            
                            
                            63,541
                            
                            
                            
                            0.4
                            %Foreclosures
      (2)
                            
                            
                            70,501
                            
                            0.5
                            %
                            
                            
                            65,661
                            
                            
                            
                            0.4
                            %Total
      60+ days delinquent loans held-for-sale
                            
                            
                            138,110
                            
                            1.0
                            %
                            
                            
                            142,896
                            
                            
                            
                            0.9
                            %Securitized mortgage
    collateral60
      - 89 days delinquent
                            
                            $
                            342,102
                            
                            2.4
                            %
                            
                            $
                            494,960
                            
                            
                            
                            3.2
                            %90
      or more days delinquent
                            
                            
                            1,115,239
                            
                            7.9
                            %
                            
                            
                            1,096,366
                            
                            
                            
                            7.0
                            %Foreclosures
      (2)
                            
                            
                            1,656,515
                            
                            11.7
                            %
                            
                            
                            1,614,472
                            
                            
                            
                            10.3
                            %Delinquent
      bankruptcies (3)
                            
                            
                            262,096
                            
                            1.9
                            %
                            
                            
                            200,251
                            
                            
                            
                            1.3
                            %Total
      60+ days delinquent long-term mortgage portfolio
                            
                            
                            3,375,952
                            
                            23.9
                            %
                            
                            
                            3,406,049
                            
                            
                            
                            21.7
                            %Total
      60 or more days delinquent
                            
                            $
                            3,514,062
                            
                            24.9
                            %
                            
                            $
                            3,548,945
                            
                            
                            
                            22.7
                            %Total
      collateral
                            
                            $
                            14,105,650
                            
                            
                            
                            
                            $
                            15,666,243





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




34




(2)
            Represents
      properties in the process of
foreclosure.


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


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





At
      June 30,
                  
                  
                  
                  
                  
                  At
      December 31,2009
                  
                  
                  %
                  
                  
                  2008
                  
                  
                  %90
      or more days delinquent, foreclosures and delinquent
      bankruptcies
                  
                  $
                  3,166,056
                  
                  
                  
                  92
                  %
                  
                  $
                  3,040,291
                  
                  
                  
                  83
                  %Real
      estate owned
                  
                  
                  284,069
                  
                  
                  
                  8
                  %
                  
                  
                  606,451
                  
                  
                  
                  17
                  %Total
      non-performing assets
                  
                  $
                  3,450,125
                  
                  
                  
                  100
                  %
                  
                  $
                  3,646,742
                  
                  
                  
                  100
                  %





Non-performing
assets consist of non-performing loans (mortgages that are 90 days or more
delinquent, including loans in foreclosure and delinquent bankruptcies) plus
REO. It is our policy to place a mortgage on non-accrual status when it becomes
90 days delinquent and to reverse from revenue any accrued interest, except for
interest income on securitized mortgage collateral when the scheduled payment is
received from the servicer. The servicers are required to advance principal and
interest on loans within the securitization trusts to the extent the advances
are considered recoverable.  As of June 30, 2009, non-performing
assets (representing the fair value of loans 90 or more days delinquent,
foreclosures and delinquent bankruptcies plus REO) as a percentage of the total
assets was 20 percent.  At December 31, 2008, non-performing
assets to total assets was 26 percent.





REO,
which consists of residential real estate acquired in satisfaction of loans, is
carried at the lower of cost or net realizable value less estimated selling
costs. Adjustments to the carrying value of REO at the time of foreclosure are
included in the change in the fair value of net trust assets. Changes in the
Company’s estimates of net realizable value subsequent to the time of
foreclosure and through the time of ultimate disposition are recorded as gains
or losses from real estate owned in the consolidated statements of operations.
REO, for continuing and discontinued operations, at June 30, 2009 decreased
$324.7 million or 54 percent from December 31, 2008 as a result of
increased liquidations during the six month period ended June 30,
2009.  Foreclosures continue to increase resulting from higher
delinquencies and deterioration in the prevailing real estate market and, in
part, due to borrowers’ inability to obtain replacement financing.





We
realized a loss on sale of real estate owned in the amount $37.6 million and
$81.6 million for the three and six months ended June 30, 2009,
respectively,  compared to gains of $1.8 million and $5.2 million,
respectively for the comparable 2008 periods.  Additionally, during
the three and six month ended June 30, 2009, the Company recorded write-downs of
the net realizable value of the REO in the amount of $9.1 million and $93.3
million, respectively, compared to $6.6 million and $14.3 million, respectively
for the comparable 2008 periods.  These write-downs of the net
realizable value reflect declines in value of the REO subsequent to foreclosure
date.





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





At June 30, 2009
                  
                  
                  At December 31, 2008REO
                  
                  $
                  338,614
                  
                  
                  $
                  635,285Impairment
      (1)
                  
                  
                  (63,567
                  )
                  
                  
                  (35,533
                  )Ending
      balance
                  
                  $
                  275,047
                  
                  
                  $
                  599,752REO
      inside trusts
                  
                  $
                  274,481
                  
                  
                  $
                  599,084REO
      outside trusts (2)
                  
                  
                  566
                  
                  
                  
                  668Total
                  
                  $
                  275,047
                  
                  
                  $
                  599,752








(1)
            Impairment
      represents the cumulative write-downs of net realizable value subsequent
      to foreclosure.


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


35


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





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





Interest Rate Risk.Refer to
Item 3. “Quantitative and Qualitative Disclosures About Market
Risk.”





Prepayment Risk. The Company
historically used prepayment penalties as a method of partially mitigating
prepayment risk for those borrowers that have the ability to refinance. Mortgage
industry evidence suggests that changes in home appreciation rates and lower
payment option mortgage products had been a significant factor affecting
borrowers refinancing decisions. However, the recent economic downturn, lack of
available credit and decline in property values has limited borrowers’ ability
to refinance. Additionally, as mortgage rates increase and housing prices
decline, borrowers will find it more difficult to refinance to obtain cheaper
financing. If borrowers are unable to pay their mortgage payments at the
adjusted rate, delinquencies may increase. The three-month average combined
voluntary prepayment rate of single-family and multi-family loans held as
securitized mortgage collateral increased to 14 percent at June 30, 2009 from 10
percent as of December 31, 2008.





Results
of Operations





For
the Three and Six Months Ended June 30, 2009 compared to the Three and Six
Months Ended June 30, 2008





Condensed
Statements of Operations Data





For the Three Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeInterest
      income
                  
                  $
                  454,258
                  
                  
                  $
                  407,855
                  
                  
                  $
                  46,403
                  
                  
                  
                  11
                  %Interest
      expense
                  
                  
                  451,305
                  
                  
                  
                  403,599
                  
                  
                  
                  47,706
                  
                  
                  
                  12Net
      interest income
                  
                  
                  2,953
                  
                  
                  
                  4,256
                  
                  
                  
                  (1,303
                  )
                  
                  
                  (31
                  )Total
      non-interest income
                  
                  
                  21,566
                  
                  
                  
                  (10,748
                  )
                  
                  
                  32,314
                  
                  
                  
                  301Total
      non-interest expense
                  
                  
                  16,469
                  
                  
                  
                  7,745
                  
                  
                  
                  8,724
                  
                  
                  
                  113Income
      tax expense
                  
                  
                  20
                  
                  
                  
                  2,202
                  
                  
                  
                  (2,182
                  )
                  
                  
                  (99
                  )Net
      earnings (loss) from continuing operations
                  
                  
                  8,030
                  
                  
                  
                  (16,439
                  )
                  
                  
                  24,469
                  
                  
                  
                  149Net
      loss from discontinued operations, net of tax
                  
                  
                  (4,195
                  )
                  
                  
                  (11,048
                  )
                  
                  
                  6,853
                  
                  
                  
                  62Net
      earnings (loss)
                  
                  $
                  3,835
                  
                  
                  $
                  (27,487
                  )
                  
                  $
                  31,322
                  
                  
                  
                  114Cash
      dividends on preferred stock
                  
                  $
                  (7,443
                  )
                  
                  $
                  (3,722
                  )
                  
                  $
                  (3,721
                  )
                  
                  
                  (100
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (3,608
                  )
                  
                  $
                  (31,209
                  )
                  
                  $
                  27,601
                  
                  
                  
                  88
                  %Net
      loss per common share - basic and diluted:
                  
                  $
                  (0.47
                  )
                  
                  $
                  (4.10
                  )
                  
                  $
                  3.63
                  
                  
                  
                  88
                  %


36





For the Six Months Ended June
      30,Increase
                      
                      %2009
                      
                      
                      2008
                      
                      
                      (Decrease)
                      
                      ChangeInterest
      income
                      
                      $
                      1,166,907
                      
                      
                      $
                      679,811
                      
                      
                      $
                      487,096
                      
                      
                      72
                      %Interest
      expense
                      
                      
                      1,160,312
                      
                      
                      
                      668,206
                      
                      
                      
                      492,106
                      
                      
                      74Net
      interest income
                      
                      
                      6,595
                      
                      
                      
                      11,605
                      
                      
                      
                      (5,010
                      )
                      
                      (43
                      )Total
      non-interest income
                      
                      
                      31,816
                      
                      
                      
                      (9,757
                      )
                      
                      
                      41,573
                      
                      
                      426Total
      non-interest expense
                      
                      
                      27,086
                      
                      
                      
                      14,062
                      
                      
                      
                      13,024
                      
                      
                      93Income
      tax expense
                      
                      
                      2,018
                      
                      
                      
                      8,728
                      
                      
                      
                      (6,710
                      )
                      
                      (77
                      )Net
      earnings (loss) from continuing operations
                      
                      
                      9,307
                      
                      
                      
                      (20,942
                      )
                      
                      
                      30,249
                      
                      
                      144Net
      loss from discontinued operations, net of tax
                      
                      
                      (6,591
                      )
                      
                      
                      (10,360
                      )
                      
                      
                      3,769
                      
                      
                      36Net
      earnings (loss)
                      
                      $
                      2,716
                      
                      
                      $
                      (31,302
                      )
                      
                      $
                      34,018
                      
                      
                      109Cash
      dividends on preferred stock
                      
                      $
                      (7,443
                      )
                      
                      $
                      (7,443
                      )
                      
                      $
                      -
                      
                      
                      -Net
      loss attributable to common stockholders
                      
                      $
                      (4,727
                      )
                      
                      $
                      (38,745
                      )
                      
                      $
                      34,018
                      
                      
                      88
                      %Net
      loss per common share - basic and diluted:
                      
                      $
                      (0.62
                      )
                      
                      $
                      (5.09
                      )
                      
                      $
                      4.47
                      
                      
                      88
                      %





Net
Interest Income





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





The
following tables summarize average balance, interest and weighted average yield
on mortgage assets and borrowings, included within continuing and discontinued
operations, for the periods indicated.  Cash receipts and payments on
derivative instruments hedging interest rate risk related to our securitized
mortgage borrowings are not included in the results below. These cash receipts
and payments are included as a component of the change in fair value of net
trust assets.





For the Three Months Ended June
      30,2009
                                  
                                  
                                  2008Average
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  AverageBalance
                                  
                                  
                                  Interest
                                  
                                  Yield
                                  
                                  
                                  Balance
                                  
                                  Interest
                                  
                                  YieldMORTGAGE
    ASSETSInvestment
      securities, available-for-sale
                                  
                                  $
                                  950
                                  
                                  
                                  $
                                  103
                                  
                                  
                                  43.37
                                  %
                                  
                                  $
                                  10,333
                                  
                                  $
                                  687
                                  
                                  
                                  26.59
                                  %Securitized
      mortgage collateral
                                  
                                  
                                  6,912,164
                                  
                                  
                                  
                                  454,044
                                  
                                  
                                  26.28
                                  %
                                  
                                  
                                  11,344,758
                                  
                                  
                                  406,988
                                  
                                  
                                  14.35
                                  %Loans
      held-for-investment and held-for-sale (1)
                                  
                                  
                                  196,072
                                  
                                  
                                  
                                  776
                                  
                                  
                                  1.58
                                  %
                                  
                                  
                                  288,723
                                  
                                  
                                  3,193
                                  
                                  
                                  4.42
                                  %Total mortgage assets\ interest
      income
                                  
                                  $
                                  7,109,186
                                  
                                  
                                  $
                                  454,923
                                  
                                  
                                  25.60
                                  %
                                  
                                  $
                                  11,643,814
                                  
                                  $
                                  410,868
                                  
                                  
                                  14.11
                                  %BORROWINGSSecuritized mortgage
      borrowings
                                  
                                  $
                                  7,029,307
                                  
                                  
                                  $
                                  450,429
                                  
                                  
                                  25.63
                                  %
                                  
                                  $
                                  11,645,457
                                  
                                  $
                                  401,432
                                  
                                  
                                  13.79
                                  %Reverse repurchase
      agreements
                                  
                                  
                                  176,736
                                  
                                  
                                  
                                  1,618
                                  
                                  
                                  3.66
                                  %
                                  
                                  
                                  231,489
                                  
                                  
                                  1,797
                                  
                                  
                                  3.11
                                  %Total borrowings on mortgageassets\ interest
      expense
                                  
                                  $
                                  7,206,043
                                  
                                  
                                  $
                                  452,047
                                  
                                  
                                  25.09
                                  %
                                  
                                  $
                                  11,876,946
                                  
                                  $
                                  403,229
                                  
                                  
                                  13.58
                                  %Net
      Interest Spread (2)
                                  
                                  
                                  
                                  
                                  
                                  $
                                  2,876
                                  
                                  
                                  0.51
                                  %
                                  
                                  
                                  
                                  
                                  $
                                  7,639
                                  
                                  
                                  0.53
                                  %Net
      Interest Margin (3)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  0.16
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  0.26
                                  %





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


(2)
            Net
      interest spread on mortgage assets is calculated by subtracting the
      weighted average yield on total borrowings on mortgage assets from the
      weighted average yield on total mortgage
assets.


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


37


Net
interest income spread for the three months ended June 30, 2009 decreased $4.7
million to $2.9 million from $7.6 million for the three months ended June 30,
2008.  The decrease in net interest spread was primarily attributable
to overall declines in averages balances between periods, coupled with a
decrease in the net interest margin from 0.26 percent for the three months ended
June 30, 2008 to 0.16 percent for the three months ended June 30,
2009.





During
the three months ended June 30, 2009, the yield on mortgage assets increased to
25.60 percent from 14.11 percent in the comparable 2008 period.  The
yield on total borrowings increased to 25.09 percent for the three months ended
June 30, 2009 from 13.58 percent for comparable 2008 period.  In
connection with the fair value accounting for investment securities
available-for-sale and securitized mortgage collateral and borrowings, interest
income and interest expense is recognized using effective yields based on
estimated fair values for these instruments.  As the market’s
expectation of future credit losses has increased between periods, market
participants have demanded higher yields, which have resulted in significant
reductions in the fair values of these instruments.  These reductions
in fair value have significantly increased the effective yields used for
purposes of recognizing interest income and interest expense on these
instruments.





For the Six Months Ended June
      30,2009
                                  
                                  
                                  2008Average
                                  
                                  
                                  
                                  
                                  
                                  
                                  AverageBalance
                                  
                                  Interest
                                  
                                  Yield
                                  
                                  
                                  Balance
                                  
                                  Interest
                                  
                                  YieldMORTGAGE
    ASSETSInvestment
      securities, available-for-sale
                                  
                                  $
                                  1,184
                                  
                                  $
                                  233
                                  
                                  
                                  39.36
                                  %
                                  
                                  $
                                  12,738
                                  
                                  $
                                  1,420
                                  
                                  
                                  22.30
                                  %Securitized
      mortgage collateral
                                  
                                  
                                  6,572,918
                                  
                                  
                                  1,166,124
                                  
                                  
                                  35.48
                                  %
                                  
                                  
                                  13,383,352
                                  
                                  
                                  676,886
                                  
                                  
                                  10.12
                                  %Loans
      held-for-investment and held-for-sale (1)
                                  
                                  
                                  204,936
                                  
                                  
                                  1,905
                                  
                                  
                                  1.86
                                  %
                                  
                                  
                                  308,866
                                  
                                  
                                  7,448
                                  
                                  
                                  4.82
                                  %Total mortgage assets\ interest
      income
                                  
                                  $
                                  6,779,038
                                  
                                  $
                                  1,168,262
                                  
                                  
                                  34.47
                                  %
                                  
                                  $
                                  13,704,956
                                  
                                  $
                                  685,754
                                  
                                  
                                  10.01
                                  %BORROWINGSSecuritized mortgage
      borrowings
                                  
                                  $
                                  6,750,866
                                  
                                  $
                                  1,158,894
                                  
                                  
                                  34.33
                                  %
                                  
                                  $
                                  13,686,955
                                  
                                  $
                                  663,248
                                  
                                  
                                  9.69
                                  %Reverse repurchase
      agreements
                                  
                                  
                                  180,799
                                  
                                  
                                  3,333
                                  
                                  
                                  3.69
                                  %
                                  
                                  
                                  258,649
                                  
                                  
                                  5,159
                                  
                                  
                                  3.99
                                  %Total
      borrowings on mortgageassets\ interest
      expense
                                  
                                  $
                                  6,931,665
                                  
                                  $
                                  1,162,227
                                  
                                  
                                  33.53
                                  %
                                  
                                  $
                                  13,945,604
                                  
                                  $
                                  668,407
                                  
                                  
                                  9.59
                                  %Net
      Interest Spread (2)
                                  
                                  
                                  
                                  
                                  $
                                  6,035
                                  
                                  
                                  0.94
                                  %
                                  
                                  
                                  
                                  
                                  $
                                  17,347
                                  
                                  
                                  0.42
                                  %Net
      Interest Margin (3)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  0.18
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  0.25
                                  %





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


(2)
            Net
      interest spread on mortgage assets is calculated by subtracting the
      weighted average yield on total borrowings on mortgage assets from the
      weighted average yield on total mortgage
assets.


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





Net
interest income spread for the six months ended June 30, 2009 decreased $11.3
million to $6.0 million from $17.3 million for the six months ended June 30,
2008.  The decrease in net interest spread was primarily attributable
to overall declines in averages balances between periods, coupled with a
decrease in the net interest margin from 0.25 percent for the six months ended
June 30, 2008 to 0.18 percent for the six months ended June 30,
2009.





During
the six months ended June 30, 2009, the yield on mortgage assets increased to
34.47 percent from 10.01 percent in the comparable 2008 period.  The
yield on total borrowings increased to 33.53 percent for the six months ended
June 30, 2009 from 9.59 percent for comparable 2008 period.  In
connection with the fair value accounting for investment securities
available-for-sale and securitized mortgage collateral and borrowings, interest
income and interest expense is recognized using effective yields based on
estimated fair values for these instruments.  As the market’s
expectation of future credit losses has increased between periods, market
participants have demanded higher yields, which have resulted in significant
reductions in the fair values of these instruments.  These reductions
in fair value have significantly increased the effective yields used for
purposes of recognizing interest income and interest expense on these
instruments.


38


Non-Interest
Income





Changes
in Non-Interest Income





For the Three Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeChange
      in fair value of net trust assets, excluding REO
                  
                  $
                  54,912
                  
                  
                  $
                  (11,161
                  )
                  
                  $
                  66,073
                  
                  
                  
                  592
                  %Losses
      from  real estate owned
                  
                  
                  (46,723
                  )
                  
                  
                  (4,830
                  )
                  
                  
                  (41,893
                  )
                  
                  
                  (867
                  )Non-interest
      income - net trust assets
                  
                  
                  8,189
                  
                  
                  
                  (15,991
                  )
                  
                  
                  24,180
                  
                  
                  
                  151Change
      in fair value of long-term debt
                  
                  
                  329
                  
                  
                  
                  (997
                  )
                  
                  
                  1,326
                  
                  
                  
                  133Real
      estate advisory fees
                  
                  
                  -
                  
                  
                  
                  4,696
                  
                  
                  
                  (4,696
                  )
                  
                  
                  (100
                  )Mortgage
      and real estate services fees
                  
                  
                  13,233
                  
                  
                  
                  1,612
                  
                  
                  
                  11,621
                  
                  
                  
                  721Other
                  
                  
                  (185
                  )
                  
                  
                  (68
                  )
                  
                  
                  (117
                  )
                  
                  
                  (172
                  )Total
      non-interest income
                  
                  $
                  21,566
                  
                  
                  $
                  (10,748
                  )
                  
                  $
                  32,314
                  
                  
                  
                  301
                  %





Non-interest
income – net trust assets.Since our consolidated and
unconsolidated securitization trusts are non-recourse to the Company, our
economic risk is limited to our residual interests in these securitization
trusts. To better understand the economics on our residual interests in
securitizations, it is necessary to consider the net effect of changes in fair
value of net trust assets and losses from real estate owned.  All
estimated future losses are included in the estimate of the fair value of
securitized mortgage collateral and REO.  Losses on REO are reported
separately in the consolidated statement of operations as REO is a nonfinancial
asset which is the only component of trust assets and liabilities that is not
recorded at fair value.  Therefore, REO value at the time of sale or
losses from further write-downs are recorded separately in the Company’s
consolidated statement of operations.  The net effect of changes in
value related to our investment in all trust assets and liabilities is shown as
non-interest income—net trust assets, which includes losses from real estate
owned.  Non-interest income related to our net trust assets (residual
interests in securitizations) was $8.2 million for the three months ended June
30, 2009, compared to a loss of $16.0 million in the comparable 2008
period.  The individual components of the non-interest income from net
trust assets were comprised of:





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





For the
quarter ended June 30, 2008, the Company recognized an $11.2 million loss from
the change in fair value of net trust assets, excluding REO.  This
loss was comprised of reductions in the fair value of investment securities
available-for-sale and securitized mortgage collateral of $1.5 million and $19.1
million, respectively and increases in the fair value of securitized mortgage
borrowings of $88.9 million.  Offsetting these losses was a gain of
$98.3 million resulting from changes in the fair value of derivative
instruments.  The overall losses were related to decreases in fair
values resulting from increased investor yield requirements and estimated
losses.





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





Losses
from real estate owned were $4.8 million for the three months ended
June 30, 2008, comprised of $1.8 million in gains from the sale of real
estate owned, offset by $6.6 million in additional impairment
write-downs.


39


Change
in the fair value of long-term debt.Change in the
fair value of long-term debt was a gain of $329 thousand for the three months
ended June 30, 2009, compared to a loss of $1.0 million for the comparable 2008
period.  Long-term debt (consisting of trust preferred securities and
junior subordinated notes) is measured based upon an analysis prepared by the
Company, which considers the Company’s own credit risk, including consideration
of recent settlements with trust preferred debt holders and discounted cash flow
analysis of junior subordinated notes.  The $329 thousand and $(1.0)
million change in fair value of long-term debt for the three months ended June
30, 2009 and 2008, respectively, was attributable to changes in overall
estimated fair value for the securities during the periods.





Mortgage
and real estate services fees.During the first
quarter of 2009, the Company initiated various mortgage and real estate related
fee-based businesses.  The Company has begun to generate revenues from
these businesses primarily from the Company’s long-term mortgage
portfolio.  For the three months ended June 30, 2009, mortgage and
real estate services fees, which primarily include loan modification fees and
monitoring and surveillance services fees, were $13.2 million compared to $1.6
million in monitoring fees in the comparable 2008 period.





Changes
in Non-Interest Income





For the Six Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeChange
      in fair value of net trust assets, excluding REO
                  
                  $
                  187,842
                  
                  
                  $
                  (7,633
                  )
                  
                  $
                  195,475
                  
                  
                  
                  2,561
                  %Losses
      from  real estate owned
                  
                  
                  (174,923
                  )
                  
                  
                  (9,086
                  )
                  
                  
                  (165,837
                  )
                  
                  
                  (1,825
                  )Non-interest
      income - net trust assets
                  
                  
                  12,919
                  
                  
                  
                  (16,719
                  )
                  
                  
                  29,638
                  
                  
                  
                  177Change
      in fair value of long-term debt
                  
                  
                  341
                  
                  
                  
                  (5,020
                  )
                  
                  
                  5,361
                  
                  
                  
                  107Real
      estate advisory fees
                  
                  
                  -
                  
                  
                  
                  8,540
                  
                  
                  
                  (8,540
                  )
                  
                  
                  (100
                  )Mortgage
      and real estate services fees
                  
                  
                  18,782
                  
                  
                  
                  4,155
                  
                  
                  
                  14,627
                  
                  
                  
                  352Other
                  
                  
                  (226
                  )
                  
                  
                  (713
                  )
                  
                  
                  487
                  
                  
                  
                  68Total
      non-interest income
                  
                  $
                  31,816
                  
                  
                  $
                  (9,757
                  )
                  
                  $
                  41,573
                  
                  
                  
                  426
                  %





Non-interest
income – net trust assets.Since our consolidated and
unconsolidated securitization trusts are non-recourse to the Company, our
economic risk is limited to our residual interests in these securitization
trusts. To better understand the economics on our residual interests in
securitizations, it is necessary to consider the net effect of changes in fair
value of net trust assets and losses from real estate owned.  All
estimated future losses are included in the estimate of the fair value of
securitized mortgage collateral and REO.  Losses on REO are reported
separately in the consolidated statement of operations as REO is a nonfinancial
asset which is the only component of trust assets and liabilities that is not
recorded at fair value.  Therefore, REO value at the time of sale or
losses from further write-downs are recorded separately in the Company’s
consolidated statement of operations.  The net effect of changes in
value related to our investment in all trust assets and trust liabilities is
shown as non-interest income—net trust assets, which includes losses from real
estate owned.  Non-interest income related to our net trust assets
(residual interests in securitizations) was $12.9 million for the six months
ended June 30, 2009, compared to a loss of $16.7 million in the comparable 2008
period.  The individual components of the non-interest income from net
trust assets were comprised of:





Change
in fair value of net trust assets, excluding REO.  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 FSP 157-4, which clarified the use of quoted
prices in determining fair values in markets that are inactive, thus moderating
the need to use distressed prices in valuing financial assets and liabilities in
illiquid markets as the Company had used in prior periods.  Offsetting
the gain recognized in connection with the adoption of FSP 157-4 were declines
in fair value resulting from the Company increasing its loss assumptions for its
long-term mortgage portfolio due to the increase in expected defaults and loss
severities related to the weak economy and housing market.  The net
gain recognized during the period comprised of gains resulting from the increase
in fair value of investment securities-for-sale and securitized mortgage
collateral and a reduction in the fair value of securitized mortgage borrowings
of $1.7 million, $45.6 million and $160.9 million,
respectively.  Offsetting these gains were losses from the change in
fair value of derivative instruments, net of $20.3 million.


40


For the
six months ended June 30, 2008, the Company recognized a $7.6 million loss from
the change in fair value of net trust assets, excluding REO.  This
loss was comprised of losses resulting from the reductions in the fair value of
investment securities available for sale, securitized mortgage collateral and
derivative instruments of $5.8 million, $3.2 billion and $83.5 million,
respectively.  Offsetting these losses were gains from reductions in
the fair value of securitized mortgage borrowings of $3.3
billion.  The overall losses were related to decreases in fair values
resulting from increased investor yield requirements and estimated
losses.





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





Losses
from real estate owned were $9.1 million for the six months ended June 30, 2008,
comprised of $5.2 million in gains from the sale of real estate owned, offset by
$14.3 million in additional impairment write-downs.





Change
in the fair value of long-term debt.Change in the
fair value of long-term debt was a gain of $341 thousand for the six months
ended June 30, 2009, compared to a loss of $5.0 million for the comparable 2008
period.  Long-term debt (consisting of trust preferred securities and
junior subordinated notes) is measured based upon an analysis prepared by the
Company, which considers the Company’s own credit risk, including consideration
of recent settlements with trust preferred debt holders and discounted cash flow
analysis of junior subordinated notes.  The $341 thousand and $5.0
million change in fair value of long-term debt for the six months ended June 30,
2009 and 2008, respectively, was attributable to changes in overall estimated
fair value for the securities during the periods.





Mortgage
and real estate services fees.During the first
quarter of 2009, the Company initiated various mortgage and real estate related
fee-based businesses.  The Company has begun to generate revenues from
these businesses primarily from the Company’s long-term mortgage
portfolio.  For the six months ended June 30, 2009, mortgage and real
estate services fees, which primarily include loan modification fees and
monitoring and surveillance services fees, were $18.8 million compared to $4.2
million in monitoring fees in the comparable 2008 period.





Non-Interest
Expense





Changes
in Non-Interest Expense





For the Three Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeGeneral
      and administrative
                  
                  $
                  6,110
                  
                  
                  $
                  4,925
                  
                  
                  $
                  1,185
                  
                  
                  
                  24
                  %Personnel
      expense
                  
                  
                  10,359
                  
                  
                  
                  2,820
                  
                  
                  
                  7,539
                  
                  
                  
                  267Total
      operating expense
                  
                  $
                  16,469
                  
                  
                  $
                  7,745
                  
                  
                  $
                  8,724
                  
                  
                  
                  113
                  %





Total
non-interest expense was $16.5 million for the three months ended June 30, 2009,
compared to $7.7 million for the comparable period of 2008.  The $8.7
million increase in non-interest expense was primarily attributable to a $7.5
million increase in personnel expense over the previous period.  The
increase in personnel expense is attributable to a greater amount of the
Company’s personnel being utilized within the continuing operations versus
discontinued operations, as a result of our new mortgage and real estate related
fee-based businesses.  Additionally, in April 2009, the Company’s
officers and directors gave notice of the surrender of an aggregate of 581,000
options and the Board accepted and approved the cancellation of those listed
options.  In connection with the cancellation of these options, the
Company recognized non-cash compensation expense of approximately $1.7 million
during the second quarter.


41





For the Six Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeGeneral
      and administrative
                  
                  $
                  10,449
                  
                  
                  $
                  8,912
                  
                  
                  $
                  1,537
                  
                  
                  
                  17
                  %Personnel
      expense
                  
                  
                  16,637
                  
                  
                  
                  5,150
                  
                  
                  
                  11,487
                  
                  
                  
                  223Total
      operating expense
                  
                  $
                  27,086
                  
                  
                  $
                  14,062
                  
                  
                  $
                  13,024
                  
                  
                  
                  93
                  %





Total
non-interest expense was $27.1 million for the six months ended June 30, 2009,
compared to $14.1 million for the comparable period of 2008.  The
$13.0 million increase in non-interest expense was primarily attributable to an
$11.5 million increase in personnel expenses over the previous
period.  The increase in personnel expense is attributable to a
greater amount of the Company’s personnel being utilized within the continuing
operations versus discontinued operations, as a result of our new mortgage and
real estate related fee-based businesses.  Additionally, in April
2009, the Company’s officers and directors gave notice of the surrender of an
aggregate of 581,000 options and the Board accepted and approved the
cancellation of those listed options.  In connection with the
cancellation of these options, the Company recognized non-cash compensation
expense of approximately $1.7 million during the second quarter.





Results
of Operations by Business Segment





Long-term
Portfolio





Condensed
Statements of Operations Data





For the Three Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeNet
      interest income
                  
                  $
                  2,961
                  
                  
                  $
                  4,256
                  
                  
                  $
                  (1,295
                  )
                  
                  
                  (30
                  )%Change
      in fair value of net trust assets, excluding REO
                  
                  
                  54,912
                  
                  
                  
                  (11,161
                  )
                  
                  
                  66,073
                  
                  
                  
                  592Losses
      from  real estate owned
                  
                  
                  (46,723
                  )
                  
                  
                  (4,830
                  )
                  
                  
                  (41,893
                  )
                  
                  
                  (867
                  )Non-interest
      income- net trust assets
                  
                  
                  8,189
                  
                  
                  
                  (15,991
                  )
                  
                  
                  24,180
                  
                  
                  
                  151Change
      in fair value of long-term debt
                  
                  
                  329
                  
                  
                  
                  (997
                  )
                  
                  
                  1,326
                  
                  
                  
                  133Other
      non-interest income
                  
                  
                  (28
                  )
                  
                  
                  5,461
                  
                  
                  
                  (5,489
                  )
                  
                  
                  (101
                  )Total
      non-interest income
                  
                  
                  8,490
                  
                  
                  
                  (11,527
                  )
                  
                  
                  20,017
                  
                  
                  
                  174Non-interest
      expense and income taxes
                  
                  
                  8,992
                  
                  
                  
                  9,535
                  
                  
                  
                  (543
                  )
                  
                  
                  (6
                  )Net
      earnings (loss)
                  
                  $
                  2,459
                  
                  
                  $
                  (16,806
                  )
                  
                  $
                  19,265
                  
                  
                  
                  115
                  %





Net
earnings for the three months ended June 30, 2009 increased $19.3 million to net
earnings of $2.5 million from a net loss of $16.8 million for the comparable
period of 2008.  This increase is primarily attributable to a $20.0
million increase in total non-interest income.  Non-interest income
from net trust assets increased $24.2 million to an $8.2 million gain in the
three months ended June 30, 2009, compared to a loss of $16.0 million for the
comparable period in 2008.  The increase in the fair value of net
trust assets was primarily due to the adoption of FSP 157-4, which clarified the
use of quoted prices in determining fair values in markets that are inactive,
thus moderating the need to use distressed prices in valuing financial assets
and liabilities in illiquid markets as the Company had used in prior periods.
The increase in fair value was offset by increased loss assumptions and
reductions in principal balances during the period.  Other
non-interest income decreased $5.5 million during the three months ended June
30, 2009 to $(28) thousand from $5.5 million.  The decrease is
attributable to the elimination of real estate advisory fees that were
terminated during the fourth quarter of 2008.


42





For the Six Months Ended June
      30,Increase
                      
                      
                      %2009
                      
                      
                      2008
                      
                      
                      (Decrease)
                      
                      
                      ChangeNet
      interest income
                      
                      $
                      6,601
                      
                      
                      $
                      11,610
                      
                      
                      $
                      (5,009
                      )
                      
                      
                      (43
                      )%Change
      in fair value of net trust assets, excluding REO
                      
                      
                      187,842
                      
                      
                      
                      (7,633
                      )
                      
                      
                      195,475
                      
                      
                      
                      2,561Losses
      from  real estate owned
                      
                      
                      (174,923
                      )
                      
                      
                      (9,086
                      )
                      
                      
                      (165,837
                      )
                      
                      
                      (1,825
                      )Non-interest
      income- net trust assets
                      
                      
                      12,919
                      
                      
                      
                      (16,719
                      )
                      
                      
                      29,638
                      
                      
                      
                      177Change
      in fair value of long-term debt
                      
                      
                      341
                      
                      
                      
                      (5,020
                      )
                      
                      
                      5,361
                      
                      
                      
                      107Other
      non-interest income
                      
                      
                      (40
                      )
                      
                      
                      7,814
                      
                      
                      
                      (7,854
                      )
                      
                      
                      (101
                      )Total
      non-interest income
                      
                      
                      13,220
                      
                      
                      
                      (13,925
                      )
                      
                      
                      27,145
                      
                      
                      
                      195Non-interest
      expense and income taxes
                      
                      
                      17,539
                      
                      
                      
                      21,922
                      
                      
                      
                      (4,383
                      )
                      
                      
                      (20
                      )Net
      earnings (loss)
                      
                      $
                      2,282
                      
                      
                      $
                      (24,237
                      )
                      
                      $
                      26,519
                      
                      
                      
                      109
                      %





Net
earnings for the six months ended June 30, 2009 increased $26.5 million to net
earnings of $2.3 million from a net loss of $24.2 million for the comparable
period of 2008.  This increase is primarily attributable to a $27.1
million increase in total non-interest income offset by a $4.4 million decrease
in non-interest expense.  Non-interest income from net trust assets
increased $29.6 million to a $12.9 million gain in the six months ended June 30,
2009, compared to a loss of $16.7 million for the comparable period in
2008.  The increase in the fair value of net trust assets was due to
the adoption of FSP 157-4, which clarified the use of quoted prices in
determining fair values in markets that are inactive, thus moderating the need
to use distressed prices in valuing financial assets and liabilities in illiquid
markets as the Company had used in prior periods. The increase in fair value was
offset by increased loss assumptions and reductions in principal balances during
the period.  Other non-interest income decreased $7.9 million during
the three months ended June 30, 2009 to $(40) thousand, from $7.8 million in the
comparable period.  The change in other non-interest income is
attributable to real estate advisory fees that were terminated during the fourth
quarter of 2008.   Non-interest expense and income taxes
decreased $4.4 million to $17.5 million, primarily attributable to the reduction
in the amortization of the deferred charge.





Mortgage and Real Estate
Services





During
the first quarter of 2009, the Company initiated various mortgage and real
estate related fee-based businesses, including loan modifications, real estate
disposition, monitoring and surveillance services, real estate brokerage and
lending services and escrow services, and has begun to generate revenues from
these businesses.  These businesses are newly formed and currently
generate fees primarily from the Company’s long-term mortgage portfolio, there
remains uncertainty about their future success, including providing services to
the marketplace.





Condensed
Statements of Operations Data





For the Three Months Ended June
      30,Increase
                    
                    
                    %2009
                    
                    
                    2008
                    
                    
                    (Decrease)
                    
                    
                    ChangeNet
      interest expense
                    
                    $
                    (8
                    )
                    
                    $
                    -
                    
                    
                    $
                    (8
                    )
                    
                    
                    N/A
                    %Mortgage
      and real estate services fees
                    
                    
                    13,233
                    
                    
                    
                    1,612
                    
                    
                    
                    11,621
                    
                    
                    
                    721Other
      non-interest income
                    
                    
                    (157
                    )
                    
                    
                    (833
                    )
                    
                    
                    676
                    
                    
                    
                    81Total
      non-interest income
                    
                    
                    13,076
                    
                    
                    
                    779
                    
                    
                    
                    12,297
                    
                    
                    
                    1,579Personnel
      expense
                    
                    
                    (5,727
                    )
                    
                    
                    (286
                    )
                    
                    
                    (5,441
                    )
                    
                    
                    (1,902
                    )Non-interest
      expense and income taxes
                    
                    
                    (1,770
                    )
                    
                    
                    (126
                    )
                    
                    
                    (1,644
                    )
                    
                    
                    (1,305
                    )Net
      earnings
                    
                    $
                    5,571
                    
                    
                    $
                    367
                    
                    
                    $
                    5,204
                    
                    
                    
                    1,418
                    %








For the
three months ended June 30, 2009, mortgage and real estate services fees were
$13.2 million compared to $1.6 million in the comparable period for
2008.  For the three months ended June 30, 2009, mortgage and real
estate services fees primarily includes  loan modification fees and
monitoring and surveillance services fees generated primarily from the Company’s
long-term mortgage portfolio.  In 2008, mortgage and real estate
services fees represented monitoring fees.


43


For the
three months ended June 30, 2009, personnel expense increased $5.4 million to
$5.7 million as a result of the initiation of the new mortgage and real estate
related fee-based businesses.





For the Six Months Ended June
      30,Increase
                    
                    
                    %2009
                    
                    
                    2008
                    
                    
                    (Decrease)
                    
                    
                    ChangeNet
      interest expense
                    
                    $
                    (6
                    )
                    
                    $
                    (5
                    )
                    
                    $
                    (1
                    )
                    
                    
                    (20
                    )%Mortgage
      and real estate services fees
                    
                    
                    18,782
                    
                    
                    
                    4,155
                    
                    
                    
                    14,627
                    
                    
                    
                    352Other
      non-interest income
                    
                    
                    (186
                    )
                    
                    
                    13
                    
                    
                    
                    (199
                    )
                    
                    
                    (1,531
                    )Total
      non-interest income
                    
                    
                    18,596
                    
                    
                    
                    4,168
                    
                    
                    
                    14,428
                    
                    
                    
                    346Personnel
      expense
                    
                    
                    (8,602
                    )
                    
                    
                    (623
                    )
                    
                    
                    (7,979
                    )
                    
                    
                    (1,281
                    )Non-interest
      expense and income taxes
                    
                    
                    (2,963
                    )
                    
                    
                    (245
                    )
                    
                    
                    (2,718
                    )
                    
                    
                    (1,109
                    )Net
      earnings
                    
                    $
                    7,025
                    
                    
                    $
                    3,295
                    
                    
                    $
                    3,730
                    
                    
                    
                    113
                    %





For the
six months ended June 30, 2009, mortgage and real estate services fees were
$18.8 million compared to $4.2 million in the comparable period for
2008.  For the six months ended June 30, 2009, mortgage and real
estate services fees primarily includes loan modification fees and monitoring
and surveillance services fees generated primarily from the Company’s long-term
mortgage portfolio.  In 2008, mortgage and real estate services fees
represented monitoring fees.





For the
six months ended June 30, 2009, personnel expense increased $8.0 million to $8.6
million as a result of the initiation of the new mortgage and real estate
related fee-based businesses.








Discontinued
Operations





Condensed
Statements of Operations Data





For the Three Months Ended June
      30,Increase
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  (Decrease)
                  
                  
                  ChangeNet
      interest (expense) income
                  
                  $
                  (665
                  )
                  
                  $
                  1,543
                  
                  
                  $
                  (2,208
                  )
                  
                  
                  (143
                  )%Loss
      on sale of loans
                  
                  
                  (8,052
                  )
                  
                  
                  (8,246
                  )
                  
                  
                  194
                  
                  
                  
                  2Recovery
      (provision)  for repurchases
                  
                  
                  1,932
                  
                  
                  
                  (1,823
                  )
                  
                  
                  3,755
                  
                  
                  
                  206Other
      non-interest income
                  
                  
                  (739
                  )
                  
                  
                  1,715
                  
                  
                  
                  (2,454
                  )
                  
                  
                  (143
                  )Total
      non-interest income
                  
                  
                  (6,859
                  )
                  
                  
                  (8,354
                  )
                  
                  
                  1,495
                  
                  
                  
                  18Personnel
      expense
                  
                  
                  (158
                  )
                  
                  
                  (3,680
                  )
                  
                  
                  3,522
                  
                  
                  
                  96Non-interest
      expense and income taxes
                  
                  
                  3,487
                  
                  
                  
                  (557
                  )
                  
                  
                  4,044
                  
                  
                  
                  726Net
      loss
                  
                  $
                  (4,195
                  )
                  
                  $
                  (11,048
                  )
                  
                  $
                  6,853
                  
                  
                  
                  62
                  %





Net loss
for the discontinued operations was $4.2 million for the three months ended June
30, 2009, compared to a net loss of $11.0 million for the comparable period in
2008.  Net interest income decreased $2.2 million to net interest
expense of $665 thousand as a result of deterioration in loans held for sale and
the resulting decreases in interest income.  Provision for repurchases
decreased $3.8 million to a recovery of $1.9 million for the three months ended
June 30, 2009, compared to a provision for repurchases of $1.8 million in the
comparable period of 2008.  The $3.8 million decrease is the result of
changes in estimated repurchase obligations between periods. The $3.5 million
decrease in personnel expense during the three months ended June 30, 2009 over
the comparable period was a result of a greater amount of the Company’s
personnel being utilized within the continuing operations versus discontinued
operations.  The $4.0 million decrease in non-interest expense and
income taxes is primarily attributable to a $2.5 million gain resulting from
reduction in the lease liabilities as a result of changes in our expected
minimum future lease payments.


44





For the Six Months Ended June
      30,Increase
                    
                    
                    %2009
                    
                    
                    2008
                    
                    
                    (Decrease)
                    
                    
                    ChangeNet
      interest (expense) income
                    
                    $
                    (1,078
                    )
                    
                    $
                    3,213
                    
                    
                    $
                    (4,291
                    )
                    
                    
                    (134
                    )%Loss
      on sale of loans
                    
                    
                    (8,010
                    )
                    
                    
                    (8,711
                    )
                    
                    
                    701
                    
                    
                    
                    8Recovery
      for repurchases
                    
                    
                    1,176
                    
                    
                    
                    8,435
                    
                    
                    
                    (7,259
                    )
                    
                    
                    (86
                    )Other
      non-interest income
                    
                    
                    (1,946
                    )
                    
                    
                    1,255
                    
                    
                    
                    (3,201
                    )
                    
                    
                    (255
                    )Total
      non-interest income
                    
                    
                    (8,780
                    )
                    
                    
                    979
                    
                    
                    
                    (9,759
                    )
                    
                    
                    (997
                    )Personnel
      expense
                    
                    
                    (505
                    )
                    
                    
                    (8,973
                    )
                    
                    
                    8,468
                    
                    
                    
                    94Non-interest
      expense and income taxes
                    
                    
                    3,772
                    
                    
                    
                    (5,579
                    )
                    
                    
                    9,351
                    
                    
                    
                    168Net
      loss
                    
                    $
                    (6,591
                    )
                    
                    $
                    (10,360
                    )
                    
                    $
                    3,769
                    
                    
                    
                    36
                    %





Net loss
for discontinued operations was $6.6 million for the six months ended June 30,
2009, compared to a net loss of $10.4 million for the comparable period in
2008.  Net interest income decreased $4.3 million to net interest
expense of $1.1 million as a result of deterioration in loans held for sale and
the resulting decreases in interest income.  Recovery from repurchases
decreased $7.3 million to $1.2 million for the six months ended June 30, 2009,
compared to $8.4 million in the comparable period of 2008.  The $7.3
million decrease is the result of changes in estimated repurchase obligations
between periods, primarily related to favorable settlements of repurchase
obligation during the first six months of 2008.  The $8.5 million
decrease in personnel expense during the six months ended June 30, 2009 over the
comparable period was a result of a greater amount of the Company’s personnel
being utilized within the continuing operations versus discontinued
operations.  As a result of the discontinuation of certain operations,
non-interest expense and income taxes decreased $9.4 million between periods
primarily due to a reductions of $4.2 million in occupancy expense (primarily
composed of $2.6 million in gains resulting from the reduction in the lease
liabilities as a result of changes in our expected minimum future lease
payments), $2.4 million in legal and professional expense and $3.0 million in
general and administrative expenses.





ITEM 3:         QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





For
quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative
Disclosures About Market Risk,” included in our annual report on
Form 10-K for the year ended December 31, 2008.  Our
exposures to market risks have not changed materially since December 31,
2008.





ITEM 4:         CONTROLS
AND PROCEDURES





Evaluation of Disclosure
Controls and Procedures





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





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


45


Changes in Internal Control
Over Financial Reporting





There has
been no change in the Company’s internal control over financial reporting during
the Company’s quarter ended June 30, 2009, that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





PART II. OTHER
INFORMATION





ITEM 1:         LEGAL
PROCEEDINGS





The
Company is party to litigation and claims which are normal in the course of our
operations.





In June
2009, the Company entered into a settlement agreement for an insignificant
amount with plaintiffs in a purported class action matter entitled Vincent Marshell v. Impac
Funding Corporation, et al., as further described in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008, requiring that all
claims be dismissed with prejudice, with no admission of wrongdoing on the part
of any defendant.




In the
matter of Sheldon Pittleman v. Impac Mortgage Holdings, Inc. et al filed in the
United States district Court, Central district California against IMH and
several of its senior officers a Third Amended Complaint was filed. A motion to
dismiss was filed by the defendants on December 15, 2008. On March 10, 2009, the
court sustained the defendants’ motion to dismiss without leave to
amend.  The Plaintiffs have filed a Notice of Appeal of the Order
Granting the Motion to Dismiss With Prejudice and the Judgment thereon on April
7, 2009.





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





We
believe that we have meritorious defenses to the above claims and intend to
defend these claims vigorously and as such the Company believes the final
outcome of such matters will not have a material adverse effect on our financial
condition or results of operations. Nevertheless, litigation is uncertain and we
may not prevail in the lawsuits and can express no opinion as to their ultimate
resolution. An adverse judgment in any of these matters could have a material
adverse effect on us.





ITEM 1A:      RISK
FACTORS





There
have been recent reports of litigation in the mortgage industry related to
securitizations.
 
 As
defaults, delinquencies, foreclosures, and  continuing losses in the
real estate market continue, there have been recent lawsuits  by various
investors, insurers, underwriters and others against various participants in
securitizations, such as sponsors, depositors, underwriters, and loan
sellers.  Some lawsuits have alleged that the mortgage loans had
origination defects, that there were misrepresentations made about the mortgage
loans and the parties failed to repurchase defective loans.  Historically,
we both securitized and sold mortgage loans to third parties that may have been
deposited or included in pools for securitizations.  In connection with
these lawsuits, we may be asked to repurchase these mortgage loans, provide
indemnification against such claims or we may become subject to litigation
related to the securitizations.  As a result, we may incur significant
legal and other expenses in defending against claims and litigation and we may
be required to pay settlement costs, damages, penalties or other charges which
could adversely affect our financial results.
  Our
Annual Report on Form 10-K for the year ended December 31, 2008
includes a detailed discussion of our risk factors.  The information
presented below updates and should be read in conjunction with the risk factors
and information disclosed in that Form 10-K.





ITEM 2:         UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None.





ITEM 3:         DEFAULTS
UPON SENIOR SECURITIES





None.





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





Special
Meeting of Common Stockholders


46


The
Company held a special meeting of common stockholders on June 29, 2009 to
approve amendments to the Company’s Charter to modify the preferential terms of
the Series B Preferred Stock and Series C Preferred Stock, including
modifications to dividend, liquidation premium and voting rights, as more fully
described in the proxy statement dated May 29, 2009. The common stockholders
voted on the matter as follows:




FOR
                            
                            WITHELD
                            
                            ABSTENTIONS
                            
                            BROKER NON-VOTES3,892,289
                            
                            237,351
                            
                            73,905
                            
                            —




Consent
Solicitation of Preferred Stockholders




In
connection with the Company’s offer to purchase share of its Series B Preferred
Stock and Series C Preferred Stock, the Company also solicited consents from the
holders of Preferred Stock to modify the preferential terms of each series of
Preferred Stock, including modifications to dividend, liquidation premium and
voting rights, as more fully described in the offering circular dated May 29,
2009.  On June 29, 2009, voting together as a class, 4,378,880 shares
of Preferred Stock provided consent approving the modifications to the terms of
the Preferred Stock.




The
Articles of Amendment to the Series B Preferred Stock and Series C Preferred
Stock are filed as exhibits to the Company’s Current Report on Form 8-K filed
with the SEC on June 30, 2009.





ITEM 5:         OTHER
INFORMATION





Amendment
to Declaration of Trust #4 and Supplement to Indenture




On July
14, 2009, the Company, Wilmington Trust Company, as institutional trustee, and
holders of capital securities of Impac Capital Trust #4 (“Trust #4”) entered
into Amendment No. 1 to the Amended and Restated Declaration of Trust #4 dated
October 18, 2005 in order to (a) allow for the surrender of (i) Capital
Securities of Trust #4 held by the Company or any of its affiliates, and (ii)
Common Securities of Trust #4 proportionate to the Capital Securities
surrendered, and in exchange receive a principal amount of debentures equal to
the respective liquidation amount of the Capital Securities and Common
Securities so surrendered so that the principal amount of debentures so issued
in exchange may then be surrendered to the trustee for cancellation; (b) allow
the holder of the Common Securities or the obligor under the
Indenture  to purchase outstanding Capital Securities; and
(c)terminate any right by the Company to defer interest payments on the Capital
Securities of Trust #4.




On July
14, 2009, the Company and Wilmington Trust Company also entered into a First
Supplemental Indenture to the Indenture dated October 18, 2005 to amend the
Indenture to terminate the Company’s right to defer interest payments on the
debt securities.




The above
information included in this Item 5 is provided in accordance with Item 1.01 of
Form 8-K.




Other




The
information in Part II, Item 5 of the Company’s Form 10-Q for the period ended
March 31, 2009 relating to Amendment No. 4 to 2001 Stock Plan, Option
Cancellations, and Exchange of Trust Preferred Securities for Notes is hereby
incorporated by reference into this Item 5.







ITEM 6:         EXHIBITS





(a)  Exhibits:




4.1
              
              First
      Supplemental Indenture dated as of July 14, 2009 between Wilmington Trust
      Company and Impac Mortgage Holdings, Inc. to Indenture dated October 18,
      2005.10.1
              
              Amendment
      No. 1 dated as of July 14, 2009 among Wilmington Trust Company, Impac
      Mortgage Holdings, Inc. and holders of Capital Securities to Amended and
      Restated Declaration of Trust dated October 18, 2005.10.2
              
              Exchange
      Agreement dated May 8, 2009 between Impac Mortgage Holdings,
      Inc., Taberna Preferred Funding I, Ltd., and Taberna Preferred
      Funding II, Ltd.10.3
              
              Junior
      Subordinated Indenture dated May 8, 2009 between Impac Mortgage Holdings,
      Inc. and The Bank of New York Mellon Trust Company, National Association,
      as trustee, related to Junior Subordinated Note due 2034 in the principal
      amount of $30,244,000.10.4
              
              Junior
      Subordinated Indenture dated May 8, 2009 between Impac Mortgage Holdings,
      Inc. and The Bank of New York Mellon Trust Company, National Association,
      as trustee, related to Junior Subordinated Note due 2034 in the principal
      amount of $31,756,000.21.1
              
              Subsidiaries
      of the Company.31.1
              
              Certification
      of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1*
              
              Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.







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


47


SIGNATURES





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





IMPAC
MORTGAGE HOLDINGS, INC.





/s/
      Todd R. TaylorTodd
      R. TaylorChief
      Financial Officer(authorized
      officer of registrant and principal financial officer)





August 10,
2009


48