# **UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

## **FORM 10-Q**

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

**For the quarterly period ended March 31, 2007 or**

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

**For the transition period from                    to                    .**

**Commission File Number: 1-14100**

**IMPACMORTGAGE HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**19500 Jamboree Road, Irvine, California 92612**(Address of principal executiveoffices)

**(949) 475-3600**(Registrant’s telephonenumber, including area code)

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer xAccelerated filer o Non-acceleratedfiler o

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

Therewere 76,083,865 shares of common stock outstanding as of May 8, 2007.

 

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**IMPACMORTGAGE HOLDINGS, INC.**

### **FORM 10-Q QUARTERLYREPORT**

**TABLE OFCONTENTS**
|                                   | ** **                                                                                                                 | ** ** | **Page** |
|-----------------------------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I. FINANCIAL INFORMATION** |
|                              |                                                                                                                       |       |     |
| ITEM 1.                           | **CONSOLIDATED FINANCIAL STATEMENTS**                                                                                      |       |     |
|                              | Consolidated Balance Sheets as of March 31, 2007 and  December 31, 2006                                                    |       | 1        |
|                              | Consolidated  Statements of Operations and Comprehensive Earnings for the Three Months  Ended March 31, 2007 and 2006 |       | 2        |
|                              | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006                                  |       | 4        |
|                              | Notes to Consolidated Financial Statements                                                                                 |       | 6        |
|                              |                                                                                                                       |       |     |
| ITEM 2.                           | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND**                                                  |       |     |
|                              | **RESULTS OF OPERATIONS**                                                                                                  |       | 15       |
|                              | Forward-Looking Statements                                                                                                 |       | 15       |
|                              | The Mortgage Banking Industry and Discussion of  Relevant Fiscal Periods                                                   |       | 15       |
|                              | General  Overview                                                                                                          |       | 16       |
|                              | Critical Accounting Policies                                                                                               |       | 16       |
|                              | Financial Highlights for the First Quarter of 2007                                                                         |       | 16       |
|                              | First Quarter 2007 and 2006 Taxable Income                                                                                 |       | 17       |
|                              | Financial Condition and Results of Operations                                                                              |       | 19       |
|                              | Liquidity and Capital Resources                                                                                            |       | 32       |
|                              |                                                                                                                       |       |     |
| ITEM 3.                           | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK**                                                            |       | 36       |
|                              |                                                                                                                       |       |     |
| ITEM 4.                           | **CONTROLS AND PROCEDURES**                                                                                                |       | 39       |
|                              |                                                                                                                       |       |     |
| **PART  II. OTHER INFORMATION**   |
|                              |                                                                                                                       |       |     |
| ITEM  1.                          | **LEGAL  PROCEEDINGS**                                                                                                     |       | 39       |
|                              | ** **                                                                                                                 |       |     |
| ITEM 1A.                          | **RISK  FACTORS**                                                                                                          |       | 40       |
|                              | ** **                                                                                                                 |       |     |
| ITEM 2.                           | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS**                                                           |       | 40       |
|                              | ** **                                                                                                                 |       |     |
| ITEM 3.                           | **DEFAULTS UPON SENIOR SECURITIES**                                                                                        |       | 40       |
|                              | ** **                                                                                                                 |       |     |
| ITEM 4.                           | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                    |       | 40       |
|                              | ** **                                                                                                                 |       |     |
| ITEM  5.                          | **OTHER  INFORMATION**                                                                                                     |       | 40       |
|                              | ** **                                                                                                                 |       |     |
| ITEM 6.                           | **EXHIBITS**                                                                                                               |       | 41       |
|                              | ** **                                                                                                                 |       |     |
|                              | **SIGNATURES**                                                                                                             |       | 41       |
|                              | ** **                                                                                                                 |       |     |
|                              | **CERTIFICATIONS**                                                                                                         |       |     |

 

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#### **PART I. FINANCIAL INFORMATION**

#### **ITEM 1.****                                                    ****CONSOLIDATED FINANCIAL STATEMENTS**

**IMPACMORTGAGE HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****(dollar amounts in thousands, except share data)**
| ** **                                                                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                              | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                              | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                              |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                              |       | $                  | 181,202    |                  | $          | 179,677 |   |
| Restricted cash                                                                                                                                                                                                                         |       | 439                |       | 617                   |       |
| Securitized mortgage  collateral                                                                                                                                                                                                        |       | 21,462,312         |       | 21,050,829            |       |
| Finance receivables                                                                                                                                                                                                                     |       | 262,667            |       | 306,294               |       |
| Mortgages  held-for-investment                                                                                                                                                                                                          |       | 1,156              |       | 1,880                 |       |
| Allowance for loan losses                                                                                                                                                                                                               |       | (102,838           | )          | (91,775               | )          |
| Mortgages held-for-sale                                                                                                                                                                                                                 |       | 857,222            |       | 1,561,919             |       |
| Accrued interest  receivable                                                                                                                                                                                                            |       | 116,974            |       | 115,054               |       |
| Derivative assets                                                                                                                                                                                                                       |       | 102,441            |       | 147,291               |       |
| Real estate owned, net                                                                                                                                                                                                                  |       | 251,943            |       | 161,538               |       |
| Other assets                                                                                                                                                                                                                            |       | 149,767            |       | 165,631               |       |
| Total assets                                                                                                                                                                                                                            |       | $                  | 23,283,285 |                  | $          | 23,598,955 |   |
|                                                                                                                                                                                                                                    |       |               |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                         |       |               |       |                  |       |
| Securitized mortgage  borrowings                                                                                                                                                                                                        |       | $                  | 20,998,378 |                  | $          | 20,526,369 |   |
| Reverse repurchase  agreements                                                                                                                                                                                                          |       | 1,233,334          |       | 1,880,395             |       |
| Trust preferred  securities                                                                                                                                                                                                             |       | 97,863             |       | 97,661                |       |
| Other liabilities                                                                                                                                                                                                                       |       | 94,882             |       | 85,000                |       |
| Total liabilities                                                                                                                                                                                                                       |       | 22,424,457         |       | 22,589,425            |       |
|                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Minority interest                                                                                                                                                                                                                       |       | 1,000              |       | —                |       |
|                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                                                                    |       |               |       |                  |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                          |       |               |       |                  |       |
| Series-A junior  participating preferred stock, $0.01 par value; 2,500,000 shares authorized;  none issued and outstanding as of March 31, 2007 and December 31, 2006,  respectively                                                    |       | —             |       | —                |       |
| Series-B 9.375%  cumulative redeemable preferred stock, $0.01 par value; liquidation value  $50,000; 2,000,000 shares authorized, 2,000,000 shares issued and outstanding  as of March 31, 2007 and December 31, 2006, respectively     |       | 20                 |       | 20                    |       |
| Series-C 9.125%  cumulative redeemable preferred stock, $0.01 par value; liquidation value  $111,765; 5,500,000 shares authorized; 4,470,600 and 4,444,000 shares  outstanding as of March 31, 2007 and December 31, 2006, respectively |       | 45                 |       | 44                    |       |
| Common stock, $0.01 par  value; 200,000,000 shares authorized; 76,083,865 shares issued and  outstanding as of March 31, 2007 and December 31, 2006                                                                                     |       | 761                |       | 761                   |       |
| Additional paid-in  capital                                                                                                                                                                                                             |       | 1,172,261          |       | 1,170,872             |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                 |       | 1,294              |       | 2,357                 |       |
| Net accumulated  deficit:                                                                                                                                                                                                               |       |               |       |                  |       |
| Cumulative  dividends declared                                                                                                                                                                                                          |       | (792,743           | )          | (762,382              | )          |
| Retained  earnings                                                                                                                                                                                                                      |       | 476,190            |       | 597,858               |       |
| Net accumulated  deficit                                                                                                                                                                                                                |       | (316,553           | )          | (164,524              | )          |
| Total  stockholders’ equity                                                                                                                                                                                                        |       | 857,828            |       | 1,009,530             |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                        |       | $                  | 23,283,285 |                  | $          | 23,598,955 |   |

 

See accompanying notes to consolidated financialstatements.

1

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**IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATEDSTATEMENTS OF OPERATIONSAND COMPREHENSIVE EARNINGS(in thousands, except per share data)(unaudited)**

 
| ** **                                                     | ** ** | **For the Three Months** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                     | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                     | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| **INTEREST  INCOME:**                                          |       |                                    | * *   | * * | * * |
| Mortgage assets                                                |       | $                                       | 340,771    |   | $ | 333,376 |   |
| Other                                                          |       | 2,050                                   |       | 1,828 |   |
| Total interest income                                          |       | 342,821                                 |       | 335,204 |   |
|                                                           |       |                                    |       |   |   |
| **INTEREST  EXPENSE:**                                         |       |                                    |       |   |   |
| Securitized mortgage borrowings                                |       | 293,377                                 |       | 295,475 |   |
| Reverse repurchase agreements                                  |       | 33,736                                  |       | 25,873 |   |
| Other borrowings                                               |       | 2,253                                   |       | 2,382 |   |
| Total interest expense                                         |       | 329,366                                 |       | 323,730 |   |
|                                                           |       |                                    |       |   |   |
| Net interest income                                            |       | 13,455                                  |       | 11,474 |   |
| Provision for loan losses                                      |       | 29,374                                  |       | 150 |   |
| Net interest (expense) income after provision for  loan losses |       | (15,919                                 | )          | 11,324 |   |
|                                                           |       |                                    |       |   |   |
| **NON-INTEREST  INCOME:**                                      |       |                                    |       |   |   |
| Realized gain from derivative instruments                      |       | 37,459                                  |       | 40,136 |   |
| Change in fair value of derivative instruments                 |       | (58,761                                 | )          | 51,429 |   |
| Gain (loss) on sale of loans                                   |       | (9,131                                  | )          | 14,193 |   |
| Provision for repurchases                                      |       | (11,828                                 | )          | (10,336 | ) |
| Gain (loss) on lower of cost or market writedown               |       | (24,694                                 | )          | 3,496 |   |
| Amortization and impairment of mortgage servicing  rights      |       | (209                                    | )          | (351 | ) |
| Gain on sale of other real estate owned                        |       | 844                                     |       | 354 |   |
| Provision for REO losses                                       |       | (9,890                                  | )          | — |   |
| Other income                                                   |       | 5,648                                   |       | 8,821 |   |
| Total non-interest income                                      |       | (70,562                                 | )          | 107,742 |   |
|                                                           |       |                                    |       |   |   |
| **NON-INTEREST  EXPENSE:**                                     |       |                                    |       |   |   |
| Personnel expense                                              |       | 18,388                                  |       | 18,621 |   |
| General and administrative and other expense                   |       | 5,124                                   |       | 5,073 |   |
| Professional services                                          |       | 2,693                                   |       | 2,317 |   |
| Equipment expense                                              |       | 1,558                                   |       | 1,510 |   |
| Occupancy expense                                              |       | 3,820                                   |       | 1,368 |   |
| Data processing expense                                        |       | 1,738                                   |       | 1,366 |   |
| Total non-interest expense                                     |       | 33,321                                  |       | 30,255 |   |
| Net (loss) earnings before income taxes                        |       | (119,802                                | )          | 88,811 |   |
| Income tax expense                                             |       | 1,866                                   |       | 3,245 |   |
| Net (loss) earnings                                            |       | (121,668                                | )          | 85,566 |   |
| Cash dividends on cumulative redeemable preferred  stock       |       | (3,722                                  | )          | (3,672 | ) |
| Net (loss)  earnings available to common stockholders          |       | $                                       | (125,390   | ) | $ | 81,894 |   |

 

See accompanying notes to consolidated financial statements.

2

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| ** **                                             | ** ** | **For the Three Months** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **Ended March 31,**           | ** ** |
| ** **                                             | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Net (loss) earnings                                    |       | $                                       | (121,668   | ) | $ | 85,566 |   |
| Net unrealized gains (losses) on securities:           |       |                                    |       |   |   |
| Unrealized holding gains (losses) arising during  year |       | (1,063                                  | )          | 264 |   |
| Reclassification of losses included in net earnings    |       | —                                  |       | (853 | ) |
| Net unrealized losses                                  |       | (1,063                                  | )          | (589 | ) |
| Comprehensive  (loss) earnings                         |       | $                                       | (122,731   | ) | $ | 84,977 |   |
|                                                   |       |                                    |       |   |   |
| Net (loss)  earnings per share:                        |       |                                    |       |   |   |
| Basic                                                  |       | $                                       | (1.65      | ) | $ | 1.08 |   |
| Diluted                                                |       | $                                       | (1.65      | ) | $ | 1.07 |   |
| Dividends declared per  common share                   |       | $                                       | 0.10       |   | $ | 0.25 |   |

 

See accompanying notes to consolidated financial statements.

3

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**IMPACMORTGAGE HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                       | ** ** | **For the Three Months** | ** **   |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|--------------|
| ** **                                                                       | ** ** | **Ended March 31,**           | ** **   |
| ** **                                                                       | ** ** | **2007**                                | ** **   | **2006** | ** ** |
| ** **                                                                       | ** ** | ** **                              | *** *** | **restated** | *** *** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                       |       |                                    | * *     | * * | * * |
| Net (loss) earnings                                                              |       | $                                       | (121,668     | ) | $ | 85,566 |   |
| Adjustments to reconcile net earnings to net cash  used in operating activities: |       |                                    |         |   |   |
| Provision for loan losses                                                        |       | 29,374                                  |         | 150 |   |
| Amortization of deferred charge, net                                             |       | 4,101                                   |         | 5,096 |   |
| Amortization of premiums, securitization costs and  debt issuance costs          |       | 42,499                                  |         | 62,742 |   |
| Gain on sale of other real estate owned                                          |       | (844                                    | )            | (354 | ) |
| (Gain) loss on sale of loans                                                     |       | 9,131                                   |         | (14,193 | ) |
| Provision for repurchases                                                        |       | 11,828                                  |         | 10,336 |   |
| Loss (gain) on lower of cost or market writedown                                 |       | 24,694                                  |         | (3,496 | ) |
| Change in fair value of derivative instruments                                   |       | 58,761                                  |         | (51,429 | ) |
| Purchase of mortgages held-for-sale                                              |       | (2,503,337                              | )            | (2,335,169 | ) |
| Sale and principal reductions on mortgages  held-for-sale                        |       | 731,955                                 |         | 2,910,149 |   |
| Net change in deferred taxes                                                     |       | 20,060                                  |         | 84 |   |
| Stock-based compensation                                                         |       | 869                                     |         | 666 |   |
| Depreciation and amortization                                                    |       | 1,451                                   |         | 1,309 |   |
| Amortization and impairment of mortgage servicing  rights                        |       | 209                                     |         | 351 |   |
| Net change in accrued interest (receivable) payable                              |       | (1,920                                  | )            | 12,046 |   |
| Net change in restricted cash                                                    |       | 178                                     |         | (245 | ) |
| Net change in other assets and liabilities                                       |       | (25,983                                 | )            | 4,907 |   |
| Net cash used in operating activities                                            |       | (1,718,642                              | )            | (688,516 | ) |
|                                                                             |       |                                    | ** **   | ** ** | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                       |       |                                    | ** **   | ** ** | ** ** |
| Net change in securitized mortgage collateral                                    |       | 1,853,081                               |         | 2,260,335 |   |
| Finance receivable advances to customers                                         |       | (1,107,857                              | )            | (991,768 | ) |
| Repayments of finance receivables                                                |       | 1,151,484                               |         | 1,050,035 |   |
| Purchase of premises and equipment                                               |       | (1,107                                  | )            | (980 | ) |
| Minority interest                                                                |       | 1,000                                   |         | — |   |
| Net change in mortgages held-for-investment                                      |       | 346                                     |         | 26,330 |   |
| Sale of investment securities available-for-sale                                 |       | —                                  |         | 5,022 |   |
| Distribution of deferred compensation plan benefits                              |       | —                                  |         | 8,041 |   |
| Net principal reductions on investment securities  available-for-sale            |       | 593                                     |         | (638 | ) |
| Proceeds from the sale of other real estate owned                                |       | 29,952                                  |         | 14,175 |   |
| Net cash provided by used in investing activities                                |       | 1,927,492                               |         | 2,370,552 |   |
|                                                                             |       |                                    |         |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                       |       |                                    |         |   |   |
| Cash disbursements under reverse repurchase  agreements                          |       | (4,016,885                              | )            | (5,278,171 | ) |
| Cash receipts from reverse repurchase agreements                                 |       | 3,369,824                               |         | 3,840,624 |   |
| Proceeds from securitized mortgage borrowings                                    |       | 2,384,131                               |         | 919,932 |   |
| Repayment of securitized mortgage borrowings                                     |       | (1,918,567                              | )            | (2,434,672 | ) |
| Common stock dividends paid                                                      |       | (22,714                                 | )            | (15,225 | ) |
| Preferred stock dividends paid                                                   |       | (3,722                                  | )            | (3,672 | ) |
| Proceeds from sale of cumulative redeemable  preferred stock                     |       | 608                                     |         | 272 |   |
| Net cash used in financing activities                                            |       | (207,325                                | )            | (2,970,912 | ) |
|                                                                             |       |                                    |         |   |   |
| Net change in cash and cash equivalents                                          |       | 1,525                                   |         | 88,156 |   |
| Cash and cash equivalents at beginning of period                                 |       | 179,677                                 |         | 146,621 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                       | 181,202      |   | $ | 234,777 |   |

 

See accompanyingnotes to consolidated financial statements.

4

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| ** **                                                                | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                                | ** ** | ** **                              | ** ** | **restated** | ** ** |
| **SUPPLEMENTARY  INFORMATION:**                                           |       |                                    | * *   | * * | * * |
| Interest paid                                                             |       | $                                       | 387,072    |   | $ | 202,787 |   |
| Taxes paid                                                                |       | 81                                      |       | 32 |   |
|                                                                      |       |                                    |       |   |   |
| **NON-CASH  TRANSACTIONS:**                                               |       |                                    |       |   |   |
| Accumulated other comprehensive loss                                      |       | $                                       | (1,063     | ) | $ | (589 | ) |
| Dividends declared but unpaid                                             |       | 7,608                                   |       | 19,028 |   |
| Transfer of mortgages to other real estate owned                          |       | 11,761                                  |       | 1,456 |   |
| Transfer of securitized mortgage collateral to other  real estate owned   |       | 111,316                                 |       | 27,921 |   |
| Transfer of loans held-for-sale to securitized  mortgage collateral       |       | 2,430,042                               |       | 694,336 |   |
| Transfer of  loans held-for-investment to securitized mortgage collateral |       | —                                  |       | 225,764 |   |
| Transfer of securitized  mortgage collateral to loans held-for-investment |       | —                                  |       | 114,358 |   |

 

5

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

**1.****             Business Summary andFinancial Statement Presentation**

***BusinessSummary***

Impac MortgageHoldings, Inc. (the Company or IMH), is a Maryland corporationincorporated in August 1995, and has the following subsidiaries, IMHAssets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), andImpac Funding Corporation (IFC), together with its wholly-ownedsubsidiaries Impac Secured Assets Corp. (ISAC), and Impac Commercial CapitalCorporation (ICCC).

We are a mortgage real estateinvestment trust, or “REIT,” that is a nationwide acquirer, originator, sellerand investor of non-conforming Alt-A residential mortgages, or “Alt-Amortgages,” and to a lesser extent, small-balance, commercial and multi-familymortgages, or “commercial mortgages.” We also provide warehouse financing tooriginators of mortgages.

We operate four core businesses:

·                  theLong-Term Investment operations conducted by IMH and IMH Assets;

·                  theMortgage Operations conducted by IFC and ISAC;

·                  theCommercial Operations conducted by ICCC; and

·                  theWarehouse Lending Operations conducted by IWLG.

The long-term investmentoperations and the warehouse lending operations are conducted by IMH and IWLGat the REIT. The mortgage operations and commercial operations, which are ataxable REIT subsidiary (TRS), are conducted by IFC and ICCC, respectively.

The long-term investmentoperations generate earnings primarily from net interest income earned onmortgages held as securitized mortgage collateral and mortgagesheld-for-investment collectively (long-term mortgage portfolio) and associatedhedging derivative cash flows. The long-term mortgage portfolio as reported onthe Company’s consolidated balance sheet consists of mortgages held as securitizedmortgage collateral and mortgages held-for-investment. Investments in Alt-Amortgages and commercial mortgages are initially financed with short-termborrowings supported by reverse repurchase agreements that are subsequentlyconverted to long-term financing in the form of securitized mortgageborrowings. Cash flows from the long-term mortgage portfolio, proceeds from thesale of capital stock and the issuance of trust preferred securities alsofinance the acquisitions of new Alt-A and commercial mortgages.

The mortgage operationsacquire, originate, sell and securitize primarily Alt-A adjustable ratemortgages (ARMs) and fixed rate mortgages (FRMs) from correspondents, mortgagebrokers and retail customers. Correspondents originate and close mortgagesunder our mortgage programs and then sell the closed mortgages to the mortgageoperations on a flow (loan-by-loan basis) or through bulk sale commitments.Correspondents include savings and loan associations, commercial banks andmortgage bankers. The mortgage operations generate income by securitizing andselling mortgages to permanent investors, including the long-term investmentoperations. These operations also earn revenue from fees associated with masterservicing rights and interest income earned on mortgages held-for-sale. Themortgage operations use warehouse facilities provided by the warehouse lendingoperations to finance the acquisition and origination of mortgages.

The commercial operationsoriginate commercial mortgages, that are primarily adjustable rate mortgageswith initial fixed interest rate periods of two-, three-, five-, seven-and ten-years that subsequently convert to adjustable rate mortgages, or “hybridARMs,” with balances that generally range from $500,000 to $5.0 million orby additional underwriting exception up to $10 million. Commercialmortgages have an interest rate floor, which is the initial start rate and insome circumstances have lock out periods, and prepayment penalty periods ofthree-, five-, seven- and ten-years. These mortgages providegreater asset diversification on our balance sheet as commercial mortgageborrowers typically have higher credit scores, typically have lowerloan-to-value ratios, or “LTV ratios,” and the mortgages have longer averagelives than residential mortgages.

The warehouse lendingoperations provide short-term financing to mortgage loan originators, includingthe mortgage and commercial operations, by funding mortgages from their closingdate until sale to pre-approved investors. This business earns fees fromwarehouse transactions as well as net interest income from the differencebetween its cost of borrowings and the interest earned on warehouse advances,both of which are tied to the one-month London Inter-Bank Offered Rate (LIBOR)rate. 

6

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***Financial Statement Presentation***

Theaccompanying unaudited consolidated financial statements of IMH and oursubsidiaries (as defined above) have been prepared in accordance with GAAP forinterim financial information and with the instructions to Form 10-Q and Rule10-01 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financial statements. Inthe opinion of management, all adjustments, consisting of normal recurringadjustments considered necessary for a fair presentation, have been included. Operatingresults for the three-month period ended March 31, 2007 are not necessarilyindicative of the results that may be expected for the year ending December 31,2007.

Allsignificant inter-company balances and transactions have been eliminated inconsolidation. In addition, certain amounts in the prior periods’ consolidatedfinancial statements have been reclassified to conform to the current yearpresentation.  The ownership interest inconsolidated subsidiaries from non-controlling shareholders is reflected asminority interest.

Management has made a number of estimates andassumptions relating to the reporting of assets and liabilities, the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting periodto prepare these financial statements in conformity with GAAP.  The items affected by management’s estimatesand assumptions include allowance for loan losses, valuation of derivativefinancial instruments, repurchase liabilities related to sold loans and theamortization of various loan premiums and discounts due to prepayment estimates.Actual results could differ from those estimates.

Premiums, discounts and securitization costsassociated with the securitized mortgage collateral and securitized mortgageborrowing are amortized or accreted into interest income/expense over the projectedlives of the securitized mortgage collateral and securitized mortgageborrowings using the interest method. Our policy for estimating prepaymentspeeds for calculating the effective yield is to evaluate historicalperformance, market prepayment speeds, and current conditions. If our estimateof prepayments is incorrect, we may be required to make an adjustment to theamortization or accretion of premiums and discounts that would have an impacton future income.

**2.****             Restated ConsolidatedCash Flows for 2006 Interim Periods, and Reclassifications**

Certain interim amounts in the 2006 ConsolidatedStatement of Cash Flows have been restated to properly reflect specificintercompany activities related to cash receipts from loan sales and cashdisbursements for loan purchases between consolidated companies. Suchintercompany loan sale and purchase transaction activities had the effect ofpresenting separate cash inflows and outflows even though there was no cashinflow or outflow on a consolidated basis. This restatement serves to eliminatethis intercompany activity from its Consolidated Statements of Cash Flows andpresent them as non-cash transactions.

The correction of the error increases cash used inoperating activities and increases cash provided by investing activities. Therestatement of these transactions does not change total cash and cashequivalents as previously reported. Furthermore, the restatement has no effecton the Company’s Consolidated Statements of Operations and ComprehensiveEarnings, Consolidated Balance Sheets or Consolidated Statements of Changes inStockholders’ Equity.

The Company has reclassified the presentation of theConsolidated Statement of Operations and Comprehensive Income to reflect “Amortizationand impairment of mortgage servicing rights,” “Write-down on investmentsecurities available-for-sale,” and “Loss(gain) on disposition of real estate”as other non-interest income rather than non-interest expense, for the firstquarter of 2006 to conform to the current period presentation.  In addition, the “Amortization of deferredcharge” for 2006 was reclassified as income tax expense (benefit) rather thannon-interest expense.

Please refer to the Company’s Form 10-K for the yearended December 31, 2006, for more information regarding these reclassifications.

**3.****             Stock Options**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”). This Statementrequires companies to

7

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expensethe estimated fair value of stock options and similar equity instruments issuedto employees over the requisite service period. SFAS 123R eliminates thealternative to use the intrinsic method of accounting provided for inAccounting Principles Board Opinion No. 25, Accounting for Stock Issued toEmployees (“APB 25”), which generally resulted in no compensation expenserecorded in the financial statements related to the grant of stock options toemployees if certain conditions were met.

Effective for the first quarter of fiscal 2006, weadopted SFAS 123R using the modified prospective method, which required us torecord compensation expense for all awards granted after the date of adoption,and for the unvested portion of previously granted awards that remainedoutstanding at the date of adoption.

We continue using both the Black-Scholes-Mertonoption-pricing formula and straight-line amortization of compensation expenseover the requisite service period of the grant. We will reconsider use of theBlack-Scholes-Merton model if additional information becomes available in thefuture that indicates another model would be more appropriate for the Company,or if grants issued in future periods have characteristics that cannot bereasonably estimated using this model.

Thefollowing table presents a summary of option activity during the first quarter underthe Company’s stock option plans:
|                                           | ** ** | **Number of** | ** ** |
|-------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **Shares**         | ** ** |
| Options  outstanding at December 31, 2006 |       | 7,048,755          |       |
| Options granted                           |       | —             |       |
| Options  exercised                        |       | —             |       |
| Options  forfeited / cancelled            |       | (161,000           | )          |
| Options outstanding at  March 31, 2007    |       | 6,887,755          |       |

 

**4.****             Recent AccountingPronouncements**

In February 2007, the FASB issuedSFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”) whichprovides reporting entities an option to report selected financial assets,including investment securities designated as available for sale, andliabilities, including most insurance contracts, at fair value. SFASNo. 159 establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. The standard also requiresadditional information to aid financial statement users’ understanding of areporting entity’s choice to use fair value on its earnings and also requiresentities to display on the face of the balance sheet the fair value of thoseassets and liabilities which the reporting entity has chosen to measure at fairvalue. SFAS No. 159 is effective as of the beginning of a reporting entity’sfirst fiscal year beginning after November 15, 2007. The Company iscurrently assessing the effect that SFAS 159 will have on the consolidatedfinancial statements.

In September 2006, the SECissued Staff Accounting Bulletin No. 108, *Consideringthe Effects of Prior Year Misstatements when Qualifying Misstatements inCurrent Year Financial Statements* (“SAB 108”), which providesinterpretive guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. SAB 108 was issued to address diversity in practice inquantifying financial statement misstatements. SAB 108 is currently effectiveand did not have an effect on the consolidated financial statements.

In September 2006, the FASBissued SFAS No. 157, *Fair ValueMeasurement* (“SFAS 157”), which defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements.SFAS 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The Company is currentlyassessing the effect that SFAS 157 will have on the consolidated financialstatements.

In June 2006, the FASBissued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes,* (“FIN 48”) which expands on theaccounting guidance of FASB Statement No. 109, *Accounting for Income Taxes*. This interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. The adoption of this interpretation by the Company hasnot had a significant effect on the consolidated financial statements.

8

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In March 2006, the FASBissued SFAS No. 156, “*Accounting forServicing of Financial Assets- an amendment of FASB StatementNo. 140”* (“SFAS 156”). This statement requires an entityto recognize a servicing asset or servicing liability each time it undertakesan obligation to service a financial asset by entering into a servicingcontract. This statement also requires separate presentation of servicing assetsand servicing liabilities subsequently measured at fair value in the statementof financial position and additional disclosures for all separately recognizedservicing assets and servicing liabilities. An entity should adopt thisstatement as of the beginning of its first fiscal year that begins afterSeptember 15, 2006. The Company has adopted this statement which has nothad a material effect on the consolidated financial statements.

In February 2006, the FASBissued SFAS No. 155, *“Accounting forCertain Hybrid Financial Instruments”, “an amendment of FASB StatementsNo. 133 and SFAS No. 140”* (“SFAS 155”). Thisstatement permits fair value re-measurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation.It also clarifies which interest-only strips and principal-only strips are notsubject to FASB Statement No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”). SFAS 155 is effective for allfinancial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006.  The adoption of this statement has not had amaterial effect on the consolidated financial statements.

**5.****             Legal Proceedings**

The Company isparty to litigation and claims which are normal in the course of ouroperations.  While the results of suchlitigation and claims can not be predicted with certainty, the Company believesthe final outcome of such matters will not have a material adverse effect onour financial condition or results of operations.

**Note B—Reconciliation of EarningsPer Share**

The followingtable presents the computation of basic and diluted net earnings per shareincluding the dilutive effect of stock options and cumulative redeemablepreferred stock outstanding for the periods indicated:
|                                                                                 | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                      | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| **Numerator for basic earnings per share:**                                     | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net (loss) earnings                                                             |       | $                                       | (121,668   | ) | $ | 85,566 |   |
| Less: Cash dividends on cumulative redeemable  preferred stock                  |       | (3,722                                  | )          | (3,672 | ) |
| Net (loss) earnings available to common stockholders                            |       | $                                       | (125,390   | ) | $ | 81,894 |   |
| **Denominator for basic earnings per share:**                                   | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Basic weighted average number of common shares outstanding  during the period   |       | 76,084                                  |       | 76,113 |   |
| **Denominator for diluted earnings per share:**                                 | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Diluted weighted average number of common shares outstanding  during the period |       | 76,084                                  |       | 76,113 |   |
| Net effect of dilutive stock options                                            |       | —                                  |       | 266 |   |
| Diluted weighted  average common shares                                         |       | 76,084                                  |       | 76,379 |   |
|                                                                            |       |                                    |       |   |   |
| Net (loss) earnings per share:                                                  |       |                                    |       |   |   |
| Basic                                                                           |       | $                                       | (1.65      | ) | $ | 1.08 |   |
| Diluted                                                                         |       | $                                       | (1.65      | ) | $ | 1.07 |   |

 

Forthe three month periods ended March 31, 2007 and 2006, stock options topurchase 6.9 million and 4.4 million shares, respectively, were outstanding butnot included in the above weighted average calculations because they wereanti-dilutive.

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**Note C—Segment Reporting**

Thefollowing tables present reporting segments for the three month periods endedMarch 31, 2007 and 2006:
| ** **                                                         | ** ** | **Reporting Segments as of and for the Three Months** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Ended March 31, 2007**                                                       | ** ** |
| ** **                                                         | ** ** | **Long-Term**                                                                                 | ** ** | **Warehouse** | ** ** | **Mortgage** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Investment**                                                                                | ** ** | **Lending** | ** ** | **Operations** | ** ** | **Commercial** | ** ** | **Inter-** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Operations**                                                                                | ** ** | **Operations** | ** ** | **(IFC)** | ** ** | **Operations** | ** ** | **Company (1)** | ** ** | **Consolidated** | ** ** |
| **Balance  Sheet Items:**                                          | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securitized  mortgage collateral and mortgages held-for-investment |       | $                                                                                             | 21,505,411 |   | $ | — |   | $ | 94,160 |   | $ | — |   | $ | (136,103 | ) | $ | 21,463,468 |   |
| Mortgages  held-for-sale                                           |       | —                                                                                        |       | — |   | 719,938 |   | 137,284 |   | — |   | 857,222 |   |
| Finance  receivables                                               |       | —                                                                                        |       | 1,075,582 |   | — |   | — |   | (812,915 | ) | 262,667 |   |
| Total assets                                                       |       | 22,006,915                                                                                    |       | 1,296,544 |   | 857,049 |   | 129,539 |   | (1,006,762 | ) | 23,283,285 |   |
| Total  stockholders’ equity                                   |       | 735,062                                                                                       |       | 256,314 |   | 22,424 |   | (9,688 | ) | (146,284 | ) | 857,828 |   |
|                                                               |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| **Income  Statement Items:**                                       | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income                                               |       | $                                                                                             | (1,627     | ) | $ | 8,451 |   | $ | (4,331 | ) | $ | (314 | ) | $ | 11,276 |   | $ | 13,455 |   |
| Provision for  loan losses                                         |       | 28,849                                                                                        |       | (287 | ) | 812 |   | — |   | — |   | 29,374 |   |
| Realized gain  from derivatives                                    |       | 36,624                                                                                        |       | — |   | 740 |   | 95 |   | — |   | 37,459 |   |
| Change in fair  value of derivatives                               |       | (54,623                                                                                       | )          | — |   | (2,549 | ) | (1,589 | ) | — |   | (58,761 | ) |
| Other  non-interest income                                         |       | (9,985                                                                                        | )          | 740 |   | (26,161 | ) | (38 | ) | (13,816 | ) | (49,260 | ) |
| Non-interest  expense and income taxes                             |       | 5,199                                                                                         |       | 2,294 |   | 21,033 |   | 2,674 |   | (3,987 | ) | 35,187 |   |
|                                                               |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                |       | $                                                                                             | (63,659    | ) | $ | 7,184 |   | $ | (54,146 | ) | $ | (4,520 | ) | $ | (6,527 | ) | $ | (121,668 | ) |

 

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(1)                                  Corporate overhead expenses are allocated tothe segments based on percentage of time devoted to the segment, headcount,loan production, or other relevant measures. Income statement items include inter-company loan sale transactions andthe elimination of related gains.
| ** **                                                         | ** ** | **Reporting Segments as of and for the Three Months** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Ended March 31, 2006**                                                       | ** ** |
| ** **                                                         | ** ** | **Long-Term**                                                                                 | ** ** | **Warehouse** | ** ** | **Mortgage** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Investment**                                                                                | ** ** | **Lending** | ** ** | **Operations** | ** ** | **Commercial** | ** ** | **Inter-** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Operations**                                                                                | ** ** | **Operations** | ** ** | **(IFC)** | ** ** | **Operations** | ** ** | **Company (1)** | ** ** | **Consolidated** | ** ** |
| **Balance  Sheet Items:**                                          | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Securitized  mortgage collateral and mortgages held-for-investment |       | $                                                                                             | 23,106,162 |   | $ | — |   | $ | — |   | $ | 120 |   | $ | (127,956 | ) | $ | 22,978,326 |   |
| Mortgages held-for-sale                                            |       | —                                                                                        |       | — |   | 712,632 |   | 88,466 |   | — |   | 801,098 |   |
| Finance  receivables                                               |       | —                                                                                        |       | 1,063,883 |   | — |   | — |   | (771,933 | ) | 291,950 |   |
| Total assets                                                       |       | 23,384,829                                                                                    |       | 1,193,782 |   | 837,754 |   | 92,607 |   | (666,674 | ) | 24,842,298 |   |
| Total  stockholders’ equity                                   |       | 1,030,473                                                                                     |       | 225,023 |   | 107,464 |   | 1,385 |   | (149,424 | ) | 1,214,921 |   |
|                                                               |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| **Income  Statement Items:**                                       | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income                                               |       | $                                                                                             | (12,088    | ) | $ | 7,691 |   | $ | 1,277 |   | $ | 134 |   | $ | 14,460 |   | $ | 11,474 |   |
| Provision for  loan losses                                         |       | 150                                                                                           |       | — |   | — |   | — |   | — |   | 150 |   |
| Realized from  derivatives                                         |       | 40,136                                                                                        |       | — |   | — |   | — |   | — |   | 40,136 |   |
| Change in fair  value of derivatives                               |       | 46,963                                                                                        |       | — |   | 3,625 |   | 841 |   | — |   | 51,429 |   |
| Other  non-interest income                                         |       | 90                                                                                            |       | 797 |   | 19,355 |   | 1,036 |   | (5,101 | ) | 16,177 |   |
| Non-interest  expense and income taxes                             |       | 4,392                                                                                         |       | 1,874 |   | 22,004 |   | 2,410 |   | 2,820 |   | 33,500 |   |
|                                                               |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                |       | $                                                                                             | 70,559     |   | $ | 6,614 |   | $ | 2,253 |   | $ | (399 | ) | $ | 6,539 |   | $ | 85,566 |   |

 

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(1)                                  Corporate overhead expenses are allocated tothe segments based on percentage of time devoted to the segment, headcount,loan production, or other relevant measures. Income statement items include inter-company loan sale transactions andthe elimination of related gains.

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**NoteD—Mortgages Held-for-Sale**

Mortgagesheld-for-sale for the periods indicated consisted of the following:
|                                                        | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                             | ** ** | **2007**                   | ** ** | **2006**                      | ** ** |
| Mortgages  held-for-sale - residential                 |       | $                          | 757,591    |                          | $          | 1,384,136 |   |
| Mortgages  held-for-sale - commercial                  |       | 136,439                    |       | 177,619                       |       |
| Change in fair  value of mortgages held-for-sale       |       | (43,796                    | )          | (18,717                       | )          |
| Net premiums on  mortgages held-for-sale - residential |       | 6,550                      |       | 18,024                        |       |
| Net premiums on  mortgages held-for-sale - commercial  |       | 438                        |       | 857                           |       |
| Total mortgages  held-for-sale                         |       | $                          | 857,222    |                          | $          | 1,561,919 |   |

 

Mortgage loans held-for-sale are recorded at the lowerof cost or market determined on an aggregate basis. The change in fair value ofthe loans held-for-sale is recorded as an increase or decrease to non-interestincome.

During the first quarter of 2007 the Company recordeda charge to earnings for the change in fair value of loans held-for-saleprimarily due to an increase in non-performing loans held-for-sale to $92.7million from $66.2 million at year end, primarily related to the amount ofnon-performing loans and the reduction in market prices of non-performing loansduring the first quarter.

**Note E—****Securitized Mortgage Collateral**

Securitizedmortgage collateral consisted of the following:
|                                                             | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **2007**                   | ** ** | **2006**                      | ** ** |
| Mortgages  secured by single-family residential real estate |       | $                          | 19,334,022 |                          | $          | 19,118,064 |   |
| Mortgages secured  by commercial real estate                |       | 1,920,707                  |       | 1,728,240                     |       |
| Net unamortized  premiums on mortgages - residential        |       | 180,753                    |       | 186,563                       |       |
| Net unamortized  premiums on mortgages - commercial         |       | 26,830                     |       | 17,962                        |       |
| Total  securitized mortgage collateral                      |       | $                          | 21,462,312 |                          | $          | 21,050,829 |   |

 

**Note F—Allowance for Loan Losses**

The allowance forloan losses is comprised of the following:
|                                                                    | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                         | ** ** | **2007**                   | ** ** | **2006**                      | ** ** |
| Securitized  mortgage collateral and mortgages held-for-investment |       | $                          | 90,465     |                          | $          | 71,993 |   |
| Specific reserve  for securitized mortgage collateral              |       | 1,501                      |       | —                        |       |
| Specific reserve  for finance receivables                          |       | 3,055                      |       | 10,598                        |       |
| Specific reserve  for mortgage operations                          |       | 2,794                      |       | 3,492                         |       |
| Specific reserve  for estimated hurricane losses                   |       | 5,023                      |       | 5,692                         |       |
| Total allowance for  loan losses                                   |       | $                          | 102,838    |                          | $          | 91,775 |   |

 

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Activity forallowance for loan losses for the periods indicated was as follows:
|                                  | ** ** | **At March 31,** | ** ** | **At March 31,** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **2007**                   | ** ** | **2006**                   | ** ** |
| Beginning  balance               |       | $                          | 91,775     |                       | $          | 78,514 |   |
| Provision for  loan losses       |       | 29,374                     |       | 150                        |       |
| Charge-offs, net  of recoveries  |       | (18,311                    | )          | (4,406                     | )          |
| Total allowance  for loan losses |       | $                          | 102,838    |                       | $          | 74,258 |   |

 

During the first quarter of 2007 the Company receivedsettlement funds related to a specific finance receivable reserve, in which itcollected $0.3 million in excess of the $3.5 million net receivable at December31, 2006. As of December 31, 2006 the specific finance receivable balance was$11.2 million before the valuation allowance of $7.7 million. Charge-offs, netof recoveries, includes this $7.7 million.

**NoteG—Other Assets**

Other assets forthe periods indicated consisted of the following:
|                                           | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2007**                   | ** ** | **2006**                      | ** ** |
| Deferred charge,  net                     |       | $                          | 48,285     |                          | $          | 52,272 |   |
| Investment  securities available-for-sale |       | 29,976                     |       | 31,628                        |       |
| Prepaid and  other assets                 |       | 35,664                     |       | 24,395                        |       |
| Cash margin  balances                     |       | 18,087                     |       | 19,112                        |       |
| Premises and  equipment, net              |       | 15,178                     |       | 15,526                        |       |
| Deferred income  taxes, net               |       | —                     |       | 20,060                        |       |
| Investment in  Impac Capital Trusts       |       | 2,577                      |       | 2,638                         |       |
| Total other  assets                       |       | $                          | 149,767    |                          | $          | 165,631 |   |

 

**Note H—RealEstate Owned (REO)**

Real estate owned, which consists of residential realestate acquired in satisfaction of loans, is carried at net realizable valueless estimated selling and holding costs, offset by expected mortgage insuranceproceeds to be received. Adjustments to the loan carrying value required at thetime of foreclosure are charged to the allowance for loan losses. Gains orlosses from the ultimate disposition of real estate owned are recorded as(gain) loss on sale of other real estate owned in the consolidated statementsof operations. The Company maintains an allowance against the REO for anychanges in the value of the real estate subsequent to the initial transfer toREO. As of March 31, 2007, the Company maintained an allowance of$15.7 million, compared to $8.5 million at December 31, 2006. Theallowance for changes in the net realizable value of the real estate owned isincluded in the REO balance. As of March 31, 2007, $7.4 million of REO’swere not financed and approximately $20.7 million that were not part ofthe securitized mortgage collateral.

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**Note I— Securitized Mortgage Borrowings**

The following is selectedinformation on securitized mortgage borrowings for the periods indicated (dollarsin millions):
| ** **                                | ** ** | ** **                         | ** ** | ** **                                    | ** ** | ** **                      | ** ** | **Range of Percentages:**           | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | ** **                         | ** ** | ** **                                    | ** ** | ** **                      | ** ** | ** **                                    | ** ** | **Interest Rate** | ** ** | **Interest Rate** | ** ** |
| ** **                                | ** ** | **Original**                       | ** ** | **Securitized mortgage borrowings** | ** ** | ** **                      | ** ** | **  Margins over  ** | ** ** | **  Margins after  ** | ** ** |
| ** **                                | ** ** | **Issuance**                       | ** ** | **outstanding as of**               | ** ** | **Fixed Interest**         | ** ** | **One-Month**                                 | ** ** | **Adjustment** | ** ** |
| **Year of Issuance**            | ** ** | **  Amount  ** | ** ** | **March 31, 2007**                  | ** ** | **December 31, 2006** | ** ** | **Rates**                                     | ** ** | **LIBOR (1)** | ** ** | **Date (2)** | ** ** |
| 2002                                      |       | $                                  | 3,876.1    |                                          | $          | 48.7                            |       | $                                             | 52.0       |   | 5.25  - 12.00 |   | 0.27  - 2.75 |   | 0.54  - 3.68 |   |
| 2003                                      |       | 5,966.1                            |       | 809.3                                         |       | 906.7                           |       | 4.34  - 12.75                                 |       | 0.27  - 3.00 |   | 0.54  - 4.50 |   |
| 2004                                      |       | 17,710.7                           |       | 4,496.5                                       |       | 5,230.8                         |       | 3.58  - 5.56                                  |       | 0.25  - 2.50 |   | 0.50  - 3.75 |   |
| 2005                                      |       | 13,387.7                           |       | 7,746.5                                       |       | 8,578.1                         |       | —                                        |       | 0.24  - 2.90 |   | 0.48  - 4.35 |   |
| 2006                                      |       | 6,079.1                            |       | 5,553.5                                       |       | 5,794.7                         |       | 6.25                                          |       | 0.10  - 2.75 |   | 0.20  - 4.125 |   |
| 2007                                      |       | 2,385.0                            |       | 2,371.6                                       |       | —                          |       | —                                        |       | 0.06  - 2.00 |   | 0.12  - 3.00 |   |
| Subtotal  securitized mortgage borrowings |       |                               |       | 21,026.1                                      |       | 20,562.3                        |       |                                          |       |   |   |   |   |
| Accrued interest  expense                 |       |                               |       | 21.3                                          |       | 22.8                            |       |                                          |       |   |   |   |   |
| Unamortized  securitization costs         |       |                               |       | (49.0                                         | )          | (58.7                           | )          |                                          |       |   |   |   |   |
| Total securitized  mortgage borrowings    |       |                               |       | $                                             | 20,998.4   |                            | $          | 20,526.4                                      |       |   |   |   |   |   |   |
|                                           |            |                                    |            |                                               |            |                                 |            |                                               |            |  |  |  |  |  |  |  |

 

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(1)           One-month LIBOR was5.3195% as of March 31, 2007.

(2)                                  Interest rate margins aregenerally adjusted when the unpaid principal balance is reduced to less than10-20% of the original issuance amount.

**NoteJ—Reverse Repurchase Agreements**

Reverserepurchase facilities are entered into to finance our warehouse lendingoperations and to fund and purchase mortgages by the mortgage operations. Duringthe first quarter of 2007, these facilities amounted to $6.0 billion, of which$1.2 billion of borrowings were outstanding at March 31, 2007. These facilitiesconsist of uncommitted lines, which may be withdrawn at any time by the lender,and committed lines. At March 31, 2007, the Company obtained required waiversof non-compliance with the financial covenants related to GAAP earnings inthree of the reverse repurchase agreements. One reverse repurchase facilitywhich provides borrowings of up to $1.5 billion and was set to expire in March2007, was extended until March 2008.

**Note K—RepurchaseReserve**

The liability for mortgage repurchases is maintainedfor the purpose of repurchasing previously sold mortgages, for various reasons,including early payment defaults or breach of representations or warranties.The repurchase reserve is to provide for losses from repurchased loans whenthey are subsequently resold or repriced. In determining the adequacy of thereserve for mortgage repurchases, management considers such factors as specificrequests for repurchase, known problem loans, underlying collateral values,recent sales activity of similar loans and other appropriate information. Therepurchase requests were $126.7 million at March 31, 2007 as compared to$182.0 million at December 31, 2006. For the quarter ended March 31, 2007, theCompany recorded a provision for repurchases of $11.8 million compared toa provision of $10.3 million for the same period in 2006, included innon-interest income. The provision for repurchases increased as a result of anincrease in estimated losses associated with outstanding repurchase requests. 

During the quarter ended March 31, 2007, theCompany sold $709.7 million in whole loan sales compared to$2.8 billion during the same period in 2006. The Company maintains a$17.1 million reserve related to the representations and warranties,associated with these sales as of March 31, 2007 compared to $15.3 millionat December 31, 2006, which is included in other liabilities.

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**NoteL—Income Taxes**

**Duringthe quarter ended March 31, 2007, income tax expense was $1.9 million ascompared to $3.2 million during the same period in 2006. The amount of incometax expense for quarter ended March 31, 2007 was primarily due to therecognition of $4.1 million of tax expense related to the amortization of thebeginning of the year deferred charge balance plus a $0.9 million increase inthe valuation allowance for deferred tax assets, partially offset by a $3.1million tax benefit arising from the refund of taxes paid attributable to thecarryback of the 2007 net operating losses. The Company makes an estimate ofthe effective tax rate expected to be applicable for the fiscal year whenproviding for income tax expense. The Company has reserved all tax benefitsthat cannot be utilized by carrying losses back to years in which tax paymentswere made. During the quarter ended March 31, 2007 the total amount of benefitsthat have not been recognized totalled $27.3 million, based on the Company’scombined effective tax rate. Management has determined these benefits do notmeet the more-likely-than-not recognition threshold under FIN 48 and this tax benefithas not been recognized in the Company’s financial statements. Additionally theCompany paid $9 thousand and $43 thousand of interest and penalties related totaxes during the first quarter of fiscal 2007 and 2006, respectively, includedin other expenses.**

**NoteM—Subsequent Events**

InApril 2007, the Company entered into a preliminary agreement to settle thepending federal and state derivative class action cases against the Company. Thesettlement is subject to certain conditions including the execution of adefinitive agreement and court approval. Under the settlement, all claimsasserted against the officers and directors named as defendants in thoseactions will be dismissed, with no admission of wrongdoing on the part of anydefendant and the Company will agree to certain corporate governance practices.In addition, the proposed settlement will provide for an aggregate cash paymentof up to $300,000 in attorney’s fees subject to the plaintiff’s application toand approval by the court.  There are noother fees the Company expects to incur to settle these cases  This amount will be paid by the Company’sinsurance carriers and will have no effect on the Company’s consolidatedstatement of operations or consolidated statement of financial position.

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**ITEM 2:**                           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, the terms “Company,”“we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Companyor IMH), a Maryland corporation incorporated in August 1995, and itssubsidiaries, IMH Assets Corp. (IMH Assets), Impac Warehouse LendingGroup, Inc. (IWLG), and Impac Funding Corporation (IFC), together with itswholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), and Impac CommercialCapital Corporation (ICCC).

**Forward-Looking Statements**

Thisreport on Form 10-Q contains certain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934. Forward-lookingstatements, some of which are based on various assumptions and events that arebeyond our control, may be identified by reference to a future period orperiods or by the use of forward-looking terminology, such as “may,” “will,”“believe,” “expect,” “likely,” “should,” “could,” “anticipate,“ or similarterms or variations on those terms or the negative of those terms. The forward-lookingstatements are based on current management expectations. Actual results maydiffer materially as a result of several factors, including, but not limitedto, failure to achieve projected earnings levels; unexpected or greater thananticipated increases in credit and bond spreads; the ability to generatesufficient liquidity; the ability to access the equity markets; increasedoperating expenses and mortgage origination or purchase expenses that reducecurrent liquidity position more than anticipated; continued increase in pricecompetition; risks of delays in raising, or the inability to raise onacceptable terms, additional capital, either through equity offerings, lines ofcredit or otherwise; the ability to generate taxable income and to paydividends; interest rate fluctuations on our assets that unexpectedly differfrom those on our liabilities; unanticipated interest rate fluctuations;changes in expectations of future interest rates; unexpected increase in ourloan repurchase obligations; unexpected increase in prepayment rates on ourmortgages; changes in assumptions regarding estimated loan losses or an increasein loan losses; continued ability to access the securitization markets or otherfunding sources, the availability of financing and, if available, the terms ofany financing; changes in markets which the Company serves, such as mortgagerefinancing activity and housing price appreciation; the inability to agreeupon or the court’s rejection of any proposed settlement in pending federal andstate derivative class action cases against the Company; the Company’s orplaintiff’s inability or unwillingness to satisfy conditions to the proposedsettlement; the adoption of new laws that affect our business or the businessof people with whom we do business; changes in laws that affect our productsand our business; and other general market and economic conditions.

Fora discussion of these and other risks and uncertainties that could cause actualresults to differ from those contained in the forward-looking statements, see “RiskFactors” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s Annual Report on Form 10-K for theperiod ended December 31, 2006, the other reports we file under the Securitiesand Exchange Act of 1934, and the additional risk factors set forth below inthis quarterly report. This document speaks only as of its date and we do notundertake, and specifically disclaim any obligation, to publicly release theresults of any revisions that may be made to any forward-looking statements toreflect the occurrence of anticipated or unanticipated events or circumstancesafter the date of such statements.

**The Mortgage Banking Industry and Discussion of RelevantFiscal Periods**

Themortgage banking industry is continually subject to current events that occurin the financial services industry. Such events include changes in economicindicators, government regulation, interest rates, price competition,geographic shifts, disposable income, market anticipation, and customerperception as well as others. The factors that affect the industry change rapidly.

Inthis environment, mortgage banking companies generally anticipate the futuremarketplace, engage in hedging activities and continuously reassess businessplans and strategies to effectively position themselves in the marketplace.

As aresult, current events can diminish the relevance of “quarter over quarter” and“year-to-date over year-to-date” comparisons of financial information. In suchinstances, the Company intends to present financial information in itsManagement Discussion and Analysis that is the most relevant to its financialinformation.

15

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**General Overview**

We are a mortgage real estateinvestment trust, or “REIT,” that is a nationwide acquirer, originator, sellerand investor of non-conforming Alt-A residential mortgages, or “Alt-A mortgages,”and to a lesser extent, small-balance, commercial mortgages and multi-family,or “commercial mortgages.” We also provide warehouse financing to originatorsof mortgages.

We operate four core businesses:

·                  theLong-Term Investment Operations conducted by IMH and IMH Assets;

·                  theMortgage Operations conducted by IFC and ISAC;

·                  theCommercial Operations conducted by ICCC; and

·                  theWarehouse Lending Operations conducted by IWLG.

The REIT (IMH) is comprised ofthe long-term investment operations and the warehouse lending operations. TheTaxable REIT Subsidiaries (TRS) include the Mortgage Operations and CommercialOperations which are subsidiaries of the REIT.

During the first quarter, themarket conditions required us to focus on preserving liquidity. As such, wehave taken steps to preserve liquidity in the first quarter and as a resulthave maintained liquidity levels consistent with year-end balances.  Weaggressively settled repurchase request claims.  We have closely monitoredour reverse repurchase facilities to manage our margin call exposure. Additionallywe have decreased the period of time which the loans are outstanding on thefacilities by selling loans more frequently.  During the first quarter of2007, we liquidated $52.0 million in delinquent loans to both manage any margincall exposure on our reverse repurchase facilities as well as convert mortgageloans into cash.

Also, as discussed in our Form 10-K,in the first quarter, we added a new reverse repurchase facility with $1.0billion in capacity and we renewed another reverse repurchase facility with$1.5 billion capacity extending the maturity to March 2008.  We continueto complete securitizations, totaling $2.4 billion in the first quarter, tominimize exposure to margin calls and keep inventory low on thesefacilities. The reverse repurchase balance at March 31, 2007 was $1.2billion with a total capacity of $6.0 billion as compared to $1.9 billionoutstanding and $5.7 billion in capacity at December 31, 2006.

Although we expect reduced loanvolume as compared to 2006, current market conditions have created otheropportunties for the Company. We have continued to price our loans for profitabilitywhich has resulted in reduced production volumes from the fourth quarter of2006. We have also seen improvements in our adjusted net interest margin as aresult of decreased amortizations due to lower actual and expected prepaymentsand longer duration of the loans in the portfolio offset by increased creditlosses. In addition, to take advantage of what we believe will be attractivereturns in the distressed loan market, we have invested in an asset managementgroup that will purchase and liquidate distressed assets. In addition, we arereviewing other strategies to protect our adjusted net interest margin, reduceproduction costs and selectively maintain our mortgage operationsinfrastructure in preparation for when the market becomes more favorable.

**Critical Accounting Policies**

We define critical accountingpolicies as those that are important to the portrayal of our financialcondition and results of operations and require estimates and assumptions basedon our judgment of changing market conditions and the performance of our assetsand liabilities at any given time. In determining which accounting policiesmeet this definition, we considered our policies with respect to the valuationof our assets and liabilities and estimates and assumptions used in determiningthose valuations. We believe the most critical accounting issues that requirethe most complex and difficult judgments and that are particularly susceptibleto significant change to our financial condition and results of operationsinclude the allowance for loan losses, derivative financial instruments,securitization of financial assets as financing versus sale, calculation ofrepurchase reserve, and amortization of loan premiums and securitization costs.

**Allowance for REO Losses**

We provide an allowance for REOlosses for mortgages held as real estate owned. In evaluating the adequacy of the allowance for the REO losses,management takes several items into consideration.  When real estate is acquired in settlement ofloans, or other real estate owned, the mortgage is written-down to a percentageof the property’s appraised value or broker’s price opinion less anticipatedselling costs and including the mortgage insurance expected to bereceived.  Subsequent changes in the netrealizable value of the real estate owned is reflected as an allowance for REOlosses.

**Financial Highlights for the First Quarter of 2007**

·                   Estimatedtaxable income per diluted share was $0.25 compared to $0.19 for the fourthquarter of 2006 and $0.36 for the first quarter of 2006;

·                   Cashdividends declared per common share were $0.10 for the first quarter of 2007compared to $0.25 for the fourth quarter of 2006 and $0.25 for the firstquarter of 2006;

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·                   Totalassets were $23.3 billion as of March 31, 2007 compared to $23.6 billion as ofDecember 31, 2006 and $24.8 billion as of March 31, 2006;

·                   Bookvalue per common share was $9.15 as of March 31, 2007 compared to $11.15 as ofDecember 31, 2006 and $13.87 as of March 31, 2006;

·                   Themortgage operations acquired and originated $2.2 billion of primarily Alt-Amortgages compared to $4.1 billion for the fourth quarter of 2006 and $2.1billion for the first quarter of 2006;

·                   Thecommercial mortgage operations originated $196.9 million of commercialmortgages compared to $269.6 million for the fourth quarter of 2006 and $202.8million for the first quarter of 2006; and

·                   Thelong-term investment operations retained for investment $2.2 billion ofprimarily Alt-A mortgages and $234.9 million of commercial mortgages comparedto $2.7 billion of primarily Alt-A mortgages and $411.9 million of commercialmortgages for the fourth quarter of 2006 and $579.7 million of primarily Alt-Amortgages and $114.7 million of commercial mortgages for the first quarter of2006.

**First Quarter 2007 vs. Fourth Quarter 2006 GAAP Net Earnings**
| ** **                                           | ** ** | **For the Three Months Ended,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **March 31,  2007**                            | ** ** | **December 31,  2006** | ** ** | **Increase  (Decrease)** | ** ** | **%  Change** | ** ** |
| Interest income                                      |       | $                                                   | 342,821    |   | $ | 327,484 |   | $ | 15,337 |   | 5 | % |
| Interest expense                                     |       | 329,366                                             |       | 334,393 |   | (5,027 | ) | (2 | ) |
| Net interest income                                  |       | 13,455                                              |       | (6,909 | ) | 20,364 |   | 295 |   |
| Provision for loan losses                            |       | 29,374                                              |       | 44,038 |   | (14,664 | ) | (33 | ) |
| Net interest expense after provision for loan losses |       | (15,919                                             | )          | (50,947 | ) | 35,028 |   | 69 |   |
| Total non-interest income                            |       | (70,562                                             | )          | 15,772 |   | (84,334 | ) | (547 | ) |
| Total non-interest expense                           |       | 33,321                                              |       | 30,434 |   | 2,887 |   | 9 |   |
| Income tax (benefit) expense                         |       | 1,866                                               |       | (6,104 | ) | 7,970 |   | 131 |   |
| Net loss                                             |       | $                                                   | (121,668   | ) | $ | (59,505 | ) | $ | (62,163 | ) | (104 | )% |
| Net loss per share — diluted                    |       | $                                                   | (1.65      | ) | $ | (0.83 | ) | $ | (0.82 | ) | (99 | )% |
| Dividends  declared per common share                 |       | $                                                   | 0.10       |   | $ | 0.25 |   | $ | (0.15 | ) | (60 | )% |

 

Theresults of operations for the first quarter of 2007 resulted in a net loss of$121.7 million or $1.65 per share as compared to a net loss of $59.5 million or$0.83 per share, for the fourth quarter of 2006. The decrease was primarily dueto the $38.3 million decrease in the change in fair value of the derivativeinstruments, a $16.7 million decrease in gains from the selling of loans, an$11.7 million increase in the provision for repurchases, offset by an increasein net interest income of $20.4 million.

Includedin net earnings was a mark-to-market loss in the fair value of derivativeinstruments. During the first quarter of 2007 the loss increased to $58.7million as compared to a loss of $20.4 million during the fourth quarter2006.  The change in the fair value ofthe derivative instruments was primarily the result of $37.5 million in cashreceipts from derivatives and partially the result of changes in theexpectation of future interest rates.

Thedecrease in gains from the sale of loans was the result of a decrease in theexecution price of loans sold, as a result of unfavorable market conditions andan increase in the volume of loans for sale in the marketplace. The increase inthe provision for repurchases is due to an increase in the actual lossesexperienced in the first quarter on loans re-sold or re-priced. The decrease inthe value of loans is a result of the saturation of loans for sale combinedwith the decreases in the value of the underlying collateral, as home prices inmany regions continued to fall from the fourth quarter of 2006.  Also affecting the value of the loans held-for-saleis the level of non-performing loans and the level of pending foreclosureswhich makes additional home value decreases more likely.

Netinterest income increased primarily as a result of the increases to theinterest rates on our adjustable rate mortgages as well as an approximate $9.4million increase to interest income, resulting from a decrease in theamortization of loan premiums. The amortization of loan premiums decreased as theCompany adjusted the amortization based upon the actual prepayments for thefirst quarter and reduced its expected prepayments for future periods.

**Estimated Taxable Income**

Becausedividend payments are based on estimated taxable income, dividends may be moreor less than net earnings. As such, we believe that the disclosure of estimatedtaxable income available to common stockholders, which is a non-generallyaccepted accounting principle, or “non-GAAP,” financial measurement, is usefulinformation for our investors.

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Thefollowing table presents a reconciliation of net (loss) earnings (GAAP) toestimated taxable income available to common stockholders for the periodsindicated (in thousands, except per share amounts):
|                                                                       | ** ** | **For the Three Months Ended (1)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**                                          | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                            | ** ** | **2007**                                                    | ** ** | **2006** | ** ** | **2006** | ** ** |
| Net (loss) earnings                                                   |       | $                                                           | (121,668   | ) | $ | (50,550 | ) | $ | 85,566 |   |
| Adjustments to net (loss) earnings: (2)                               |       |                                                        |       |   |   |   |   |
| Loan loss provision (3)                                               |       | 38,734                                                      |       | 39,766 |   | 150 |   |
| Tax deduction for actual loan losses (3)                              |       | (11,262                                                     | )          | (11,070 | ) | (4,406 | ) |
| GAAP earnings on REMICs (4)                                           |       | (14,932                                                     | )          | (11,766 | ) | (1,377 | ) |
| Taxable income on REMICs (5)                                          |       | 12,843                                                      |       | 15,685 |   | 6,098 |   |
| Change in fair value of derivatives (6)                               |       | 54,623                                                      |       | 19,305 |   | (46,963 | ) |
| Dividends on preferred stock                                          |       | (3,722                                                      | )          | (3,682 | ) | (3,672 | ) |
| Net loss (earnings) of taxable REIT subsidiaries (7)                  |       | 58,667                                                      |       | 14,997 |   | (1,854 | ) |
| Dividend from taxable REIT subsidiaries (8)                           |       | —                                                      |       | — |   | — |   |
| Elimination of inter-company loan sales transactions  (9)             |       | 5,471                                                       |       | 1,960 |   | (6,539 | ) |
| Miscellaneous adjustments                                             |       | 108                                                         |       | (169 | ) | 120 |   |
| Estimated taxable income available to common  stockholders’ (10) |       | $                                                           | 18,862     |   | $ | 14,476 |   | $ | 27,123 |   |
| Estimated taxable income per diluted common share  (10)               |       | $                                                           | 0.25       |   | $ | 0.19 |   | $ | 0.36 |   |
| Diluted weighted  average common shares outstanding                   |       | 76,084                                                      |       | 76,084 |   | 76,379 |   |

 

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(1)                      Estimated taxable income includes estimates ofbook to tax adjustments and can differ from actual taxable income as calculatedwhen we file our annual corporate tax return. Since estimated taxable income isa non-GAAP financial measurement, the reconciliation of estimated taxableincome available to common stockholders to net earnings is intended to meet therequirements of Regulation G as promulgated by the SEC for the presentation ofnon-GAAP financial measurements. To maintain our REIT status, we are requiredto distribute a minimum of 90% of our annual taxable income to ourstockholders.

(2)                      Certain adjustments are made to net earningsin order to calculate estimated taxable income due to differences in the wayrevenues and expenses are recognized under the two methods.

(3)                      To calculate estimated taxable income, actualloan losses are deducted. For the calculation of net earnings, GAAP requires adeduction for estimated losses inherent in our mortgage portfolios in the formof a provision for loan losses, which are generally not deductible for taxpurposes. Therefore, as the estimated losses provided for GAAP are realized,the losses will negatively and may materially impact future taxable income.

(4)                      Includes GAAP amounts related to the REMICsecuritizations, which were treated as secured borrowings for GAAP purposes andsales for tax purposes. The REMIC GAAP income excludes the provision for loanlosses recorded that may relate to the REMIC collateral included in securitizedmortgage collateral. The Company does not have any specific valuationallowances recorded as an offset to the REMIC collateral.

(5)                      Includes amounts that are taxable to theCompany related to its residual interest in the securitizations, as the REMICsare accounted for as sales in its tax filings.

(6)                      The mark-to-market change for the valuation ofderivatives at IMH is income or expense for GAAP financial reporting but is notincluded as an addition or deduction for taxable income calculations, untilrealized.

(7)                      Represents net earnings of IFC and ICCC, ourtaxable REIT subsidiaries (TRS), which may not necessarily equal taxableincome.

(8)                      Any dividends paid to IMH by the TRS in excessof their cumulative undistributed taxable income would be recognized as returnof capital by IMH to the extent of IMH’s capital investment in the TRS.Distributions from the TRS to IMH may not equal the TRS net earnings, however,IMH can only recognize dividend distributions received from the TRS as taxableincome to the extent that the TRS distributions are from current or priorperiod undistributed taxable income. Any distributions by the TRS in excess ofIMH’s capital investment in the TRS would be taxed as capital gains.

(9)                      Includes the effects to taxable incomeassociated with the elimination of gains from inter-company loan sales andother intercompany transactions between IFC, ICCC,  and IMH, net of tax and the relatedamortization of the deferred charge.

(10)                Excludes the deduction for common stockdividends paid and the availability of a deduction attributable to netoperating loss carry-forwards. As of December 31, 2006, the Company hadestimated Federal net operating loss carry-forwards of $8.2 million that areexpected to be utilized prior to their expiration in the year 2020.

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***First Quarter 2007 vs. Fourth Quarter 2006***

Estimatedtaxable income increased $4.4 million to $18.9 million, or $0.25 per dilutedcommon share, for the first quarter 2007, compared to $14.5 million or $0.19per diluted common share, for the fourth quarter 2006.  The increase in estimated taxable income wasmainly attributable to an increase in adjusted net interest margin at IMH. The$6.7 million increase in adjusted net interest margin at IMH was primarily theresult of a decrease in premium amortization, due to lower prepayments. Adecrease in actual prepayments increased interest income and estimated taxableincome $4.7 million and a decrease in projected prepayments also increasedinterest income and estimated taxable income $4.7 million, compared to theamortization rates used in the fourth quarter of 2006. Offsetting the increaseto interest income was a non-recurring decrease in estimated taxable incomefrom REMICs of $2.8 million which was primarily related to a change in the taxaccounting for the REMICs from an accrual basis to a cash basis which creates atiming difference between the amounts recorded for GAAP purposes, compared tothe amounts recorded for tax purposes.

**FinancialCondition and Results of Operations**

*FinancialCondition*

Condensed BalanceSheet Data(dollars in thousands)
| ** **                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **2007**           | ** ** | **2006**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Securitized  mortgage collateral                     |       | $                  | 21,462,312 |                  | $          | 21,050,829     |       | $          | 411,483    |   | 2 | % |
| Mortgages held-for-investment                        |       | 1,156              |       | 1,880                 |       | (724           | )          | (39        | )          |
| Finance  receivables                                 |       | 262,667            |       | 306,294               |       | (43,627        | )          | (14        | )          |
| Allowance for  loan losses                           |       | (102,838           | )          | (91,775               | )          | 11,063         |       | 12         |       |
| Mortgages  held-for-sale                             |       | 857,222            |       | 1,561,919             |       | (704,697       | )          | (45        | )          |
| Derivatives                                          |       | 102,441            |       | 147,291               |       | (44,850        | )          | (30        | )          |
| Real estate owned,  net                              |       | 251,943            |       | 161,538               |       | 90,405         |       | 56         |       |
| Other assets                                         |       | 448,382            |       | 460,979               |       | (12,597        | )          | (3         | )          |
| **Total assets**                                     |       | $                  | 23,283,285 |                  | $          | 23,598,955     |       | $          | (315,670   | ) | (1 | )% |
|                                                 |       |               |       |                  |       |           |       |       |       |
| Securitized  mortgage borrowings                     |       | $                  | 20,998,378 |                  | $          | 20,526,369     |       | $          | 472,009    |   | 2 | % |
| Reverse  repurchase agreements                       |       | 1,233,334          |       | 1,880,395             |       | (647,061       | )          | (34        | )          |
| Other  liabilities                                   |       | 192,745            |       | 182,661               |       | 10,084         |       | 6          |       |
| Total liabilities                                    |       | 22,424,457         |       | 22,589,425            |       | (164,968       | )          | (1         | )          |
| Minority interest                                    |       | 1,000              |       | —                |       | —         |       | —     |       |
| Total stockholders’ equity                      |       | 857,828            |       | 1,009,530             |       | (151,702       | )          | (15        | )          |
| **Total  liabilities and stockholders’ equity** |       | $                  | 23,283,285 |                  | $          | 23,598,955     |       | $          | (315,670   | ) | (1 | )% |

 

Total assets were$23.3 billion as of March 31, 2007 as compared to $23.6 billionas of December 31, 2006, as the long-term investment operations retained $2.2billion of primarily Alt-A mortgages and $234.9 million of commercial mortgagesoffset by $709.7 million in whole loan sales and $1.8 billion in totalprepayments.

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Thefollowing table presents selected information about mortgages held assecuritized mortgage collateral as of the dates indicated:
| ** **                                    | ** ** | **Residential**    | ** ** | **Commercial**        | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **As of**     | ** ** | **As of**        | ** ** |
| ** **                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2006** | ** ** |
| Percent of Alt-A  mortgages                   |       | 99                 | %          | 99                    | %          | 99 | % | N/A |   | N/A |   | N/A |   |
| Percent of  non-hybrid ARMs                   |       | 6                  | %          | 7                     | %          | 12 | % | 1 | % | 2 | % | 3 | % |
| Percent of  hybrid ARMs                       |       | 72                 | %          | 73                    | %          | 75 | % | 99 | % | 98 | % | 97 | % |
| Percent of FRMs                               |       | 22                 | %          | 20                    | %          | 13 | % | 0 | % | 0 | % | 0 | % |
| Percent of  interest-only                     |       | 72                 | %          | 72                    | %          | 72 | % | 15 | % | 14 | % | 12 | % |
| Weighted average  coupon                      |       | 6.83               | %          | 6.75                  | %          | 6.19 | % | 6.21 | % | 6.15 | % | 5.79 | % |
| Weighted average  margin                      |       | 3.51               | %          | 3.60                  | %          | 3.80 | % | 2.67 | % | 2.68 | % | 2.69 | % |
| Weighted average  original LTV                |       | 74                 |       | 74                    |       | 75 |   | 66 |   | 66 |   | 67 |   |
| Weighted average  original credit score       |       | 698                |       | 697                   |       | 696 |   | 730 |   | 730 |   | 730 |   |
| Percent with  original prepayment penalty     |       | 66                 | %          | 68                    | %          | 75 | % | 100 | % | 100 | % | 100 | % |
| Prior 3-month  constant prepayment rate       |       | 32                 | %          | 39                    | %          | 36 | % | 8 | % | 6 | % | 8 | % |
| Prior 12-month  prepayment rate               |       | 37                 | %          | 38                    | %          | 39 | % | 8 | % | 8 | % | 9 | % |
| Lifetime  prepayment rate                     |       | 29                 | %          | 29                    | %          | 26 | % | 6 | % | 6 | % | 5 | % |
| Weighted average  debt service coverage ratio |       | N/A                |       | N/A                   |       | N/A |   | 1.27 |   | 1.27 |   | 1.24 |   |
| Percent of  mortgages in California           |       | 51                 | %          | 51                    | %          | 54 | % | 62 | % | 63 | % | 66 | % |
| Percent of  purchase transactions             |       | 56                 | %          | 58                    | %          | 60 | % | 50 | % | 51 | % | 52 | % |
| Percent of owner  occupied                    |       | 78                 | %          | 78                    | %          | 80 | % | N/A |   | N/A |   | N/A |   |
| Percent of first lien                         |       | 98                 | %          | 99                    | %          | 99 | % | 100 | % | 100 | % | 100 | % |

 

The following tablepresents selected financial data as of the dates indicated (dollars inthousands, except per share data):
|                                         | ** ** | **As of and Year-to-Date Ended,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **March 31,**                                    | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| ** **                              | ** ** | **2007**                                              | ** ** | **2006** | ** ** | **2006** | ** ** |
| Book value per  share                   |       | $                                                     | 9.15       |   | $ | 11.15 |   | $ | 13.87 |   |
| Return on  average assets               |       | (2.06                                                 | )%         | (0.31 | )% | 1.30 | % |
| Return on  average equity               |       | (48.76                                                | )%         | (6.38 | )% | 29.18 | % |
| Assets to equity  ratio                 |       | 27.14:1                                               |       | 23.38:1 |   | 20.45:1 |   |
| Debt to equity  ratio                   |       | 26.03:1                                               |       | 22.29:1 |   | 19.41:1 |   |
| Mortgages owned  60+ days delinquent    |       | $                                                     | 1,416,379  |   | $ | 1,229,270 |   | $ | 764,787 |   |
| 60+ day delinquency of  mortgages owned |       | 6.50                                                  | %          | 5.64 | % | 3.37 | % |

 

Webelieve that in order for us to generate positive cash flows and earnings wemust successfully manage the following primary operational and market risks:

·                 liquidity risk;

·                 credit risk;

·                 interest rate risk; and

·                 prepayment risk.

*Liquidity Risk. *Weemploy a leverage strategy to increase assets by financing our long-termmortgage portfolio primarily with securitized mortgage borrowings, reverserepurchase agreements and capital, then using cash proceeds from theseborrowings to acquire additional mortgage assets. We retain ARMs andFRMs that are acquired from and originated by 

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the mortgage and commercial operations and finance theacquisition of those mortgages, during this accumulation period, with reverserepurchase agreements and capital. After accumulating a pool of mortgages,generally between $200 million and $2.5 billion, we sell themortgages in the form of collateralized mortgage obligations, whole loan salesor REMICs. REMICs may be on balance sheet or off balance sheet. Under eitheraccounting method our cash invested on the date of securitization is generallybetween 3 percent and 5 percent of the collateral. Our strategy is tosell or securitize our mortgages within 90 days of originations orpurchases in order to reduce the accumulation period that mortgages areoutstanding on short-term reverse repurchase facilities, which reduces ourexposure to margin calls and reduces spread risk on these facilities.Securitized mortgage borrowings are classes of bonds that are sold to investorsof mortgage-backed securities and as such are not subject to margincalls. In addition, the securitized mortgage borrowings generally require asmaller initial cash investment as a percentage of mortgages financed than doesinterim reverse repurchase financing. Additionally, as interest rates declineour requirement to maintain certain cash margin balances related to ourderivatives increases, which reduces our cash and cash equivalents availablefor use in operations. As of March 31, 2007 our cash collateral balancetotaled $18.1 million, as compared to $19.1 million as ofDecember 31, 2006.

Becauseof the historically favorable loss rates of our Alt-A mortgages, we havegenerally received favorable credit ratings on our securitized mortgageborrowings from credit rating agencies, which has decreased our initial capitalinvestment, in the form of over collateralization. The ratio of total assets tototal equity, or “leverage ratio,” was 27.14 to 1 as of March 31, 2007 ascompared to 23.38 to 1 as of December 31. 2006. The use of leverage atthese levels allows us to grow our balance sheet by efficiently employingavailable capital. We continually monitor our leverage ratio and liquiditylevels to attempt to insure that we are adequately protected against adversechanges in market conditions. For additional information regarding liquidityrefer to “Liquidity and Capital Resources.”

*Credit Risk.*We manage credit risk by retaining high creditquality Alt-A mortgages and commercial mortgages from our customers, adequatelyproviding for loan losses and actively managing delinquencies anddefaults.  During first quarter 2007 weretained primarily Alt-A mortgages with an original weighted average creditscore of 706 and an original weighted average LTV ratio of 71 percent.Alt-A mortgages are primarily first lien mortgages made to borrowers whosecredit is generally within typical Fannie Mae and Freddie Mac guidelines, butthat have loan characteristics including higher loan balances, higherloan-to-value ratios or lower documentation requirements, that may make themnon-conforming under those guidelines. We primarily acquire non-conforming “A”or “A-” credit quality mortgages, collectively, Alt-A mortgages.

As of March 31, 2007, the original weighted averagecredit score of mortgages held as residential and commercial securitizedmortgage collateral was 698 and 730 and original weighted average LTV ratio of74 and 66 percent, respectively. For additional information regarding thelong-term mortgage portfolio refer to “Note E—Securitized MortgageCollateral” in the accompanying notes to the consolidated financial statements.

We believe that we have adequately provided for loanlosses. The allowance for loan losses increased to $102.8 million as ofMarch 31, 2007 as compared to $91.8 million as of December 31, 2006.Actual loan charge-offs net of recoveries on mortgages in the mortgageportfolio and finance receivables increased to $18.3 million for firstquarter 2007 as compared to $4.4 million for the first quarter of 2006.   The $18.3 million includes a $7.7 millioncharge-off related to an IWLG specific finance receivable balance that wasreserved at December 31, 2006.

We monitor our sub-servicers to attempt to ensure thatthey perform loss mitigation, foreclosure and collection functions according toour servicing guide.  This includes aneffective and aggressive collection effort in order to minimize the number ofmortgages which become seriously delinquent. When resolving delinquentmortgages, sub-servicers are required to take timely and aggressive action. Thesub-servicer is required to determine payment collection under variouscircumstances, which will result in the maximum financial benefit. This isaccomplished by either working with the borrower to bring the mortgage currentor by foreclosing and liquidating the property. We perform an ongoing review ofmortgages that display weaknesses and believe that we maintain an adequate loanloss allowance on our mortgages. When a borrower fails to make requiredpayments on a mortgage and does not cure the delinquency within 60 days,we generally record a notice of default and commence foreclosure proceedings.If the mortgage is not reinstated within the time permitted by law forreinstatement, the property may then be sold at a foreclosure sale. At foreclosuresales, we generally acquire title to the property. As of March 31, 2007,our long-term mortgage portfolio included 6.50 percent of mortgages thatwere 60 days or more delinquent as compared to 5.64 percent as ofDecember 31, 2006.

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Thefollowing table summarizes non-performing loans that we own, includingsecuritized mortgage collateral, mortgages held for long-term investment andmortgages held-for-sale, that were 60 or more days delinquent for the periodsindicated (in thousands):
| ** **                                              | ** ** | **At March 31,** | ** ** | ** ** | ** ** | **At December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2007**                   | ** ** | **%**      | ** ** | **2006**                      | ** ** | **%**      | ** ** |
|                                                    |       |                       |       |       |       |                          |       |       |       |
| Loans  held-for-sale                                    |       |                       |       |       |       |                          |       |       |       |
| 60 - 89 days delinquent                                 |       | $                          | 18,938     |       | 1          | %                             | $          | 11,107     |       | 1 | % |
| 90 or more days delinquent                              |       | 57,212                     |       | 4          | %          | 34,598                        |       | 3          | %          |
| Foreclosures                                            |       | 12,368                     |       | 1          | %          | 13,267                        |       | 1          | %          |
| Delinquent bankruptcies                                 |       | —                     |       | 0          | %          | —                        |       | 0          | %          |
| Total 60+ days delinquent loans held-for-sale           |       | 88,518                     |       | 6          | %          | 58,972                        |       | 5          | %          |
|                                                    |       |                       |       |       |       |                          |       |       |       |
| Long term  mortgage portfolio                           |       |                       |       |       |       |                          |       |       |       |
| 60 - 89 days delinquent                                 |       | $                          | 330,793    |       | 23         | %                             | $          | 373,238    |       | 30 | % |
| 90 or more days delinquent                              |       | 354,186                    |       | 25         | %          | 275,089                       |       | 22         | %          |
| Foreclosures                                            |       | 513,858                    |       | 36         | %          | 403,489                       |       | 33         | %          |
| Delinquent bankruptcies                                 |       | 129,024                    |       | 9          | %          | 118,482                       |       | 10         | %          |
| Total 60+ days delinquent long term mortgage  portfolio |       | 1,327,861                  |       | 94         | %          | 1,170,298                     |       | 95         | %          |
|                                                    |       |                       |       |       |       |                          |       |       |       |
| Total 60 or more  days delinquent                       |       | $                          | 1,416,379  |       | 100        | %                             | $          | 1,229,270  |       | 100 | % |

 

We believe the Mortgage Bankers Association (MBA) methodis most consistent with the SEC proposal of defining delinquency as acontractually required payment being 30 days or more past due, compared to theOffice of Thrift Supervision (OTS) method. It is our view that the MBAmethodology provides a more accurate reading on delinquency. The OTSmethodology lags the MBA approach in reporting delinquencies by an additional30 days. We measure delinquencies from the date of the last payment due date inwhich a payment was received, rather than starting the days on the date thepayment was not made.  If the Company hadreported delinquencies under the OTS method total 60 days delinquent would havebeen $1,066.6 million, or 4.89% at March 31, 2007.

The Company determined that theamounts previously reported as 90 or more days delinquent in the non-performingloans table above, and in the non-performing assets table below inadvertentlyincluded the real estate owned in the trusts. As a result of this determination, the prior year amounts have beenrevised downward to reflect a correction of this overstatement.  In an effort to maintain consistent reportingof the non-performing loans included in the long term mortgage portfolio andthe loans held-for-sale we revised the December 31, 2006 non-performing loansheld-for-sale to report them under the MBA method.  Under the OTS method, total 60 days or moredelinquent loans held-for-sale was $70.3 million or 0.8 percent of loansheld-for-sale at March 31, 2007.

Non-performing assets consist ofmortgages that are 90 days or more delinquent, including loans inforeclosure and delinquent bankruptcies. It is our policy to place a mortgageon non-accrual status when it becomes 90 days delinquent and to reversefrom revenue any accrued interest, except for interest income on securitizedmortgage collateral whereby the scheduled payment is received from the servicerwhether or not the borrower makes the payment. As of March 31, 2007, non-performing assets as a percentage oftotal assets was 5.66 percent compared to 4.26 percent as of year-end2006. 

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Thefollowing table summarizes mortgages that we own, including securitizedmortgage collateral, mortgages held for long-term investment, mortgagesheld-for-sale, and real estate owned that were non-performing for the periodsindicated (in thousands):
| ** **                                                            | ** ** | **At March 31,** | ** ** | ** ** | ** ** | **At December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **2007**                   | ** ** | **%**      | ** ** | **2006**                      | ** ** | **%**      | ** ** |
| 90 or more days  delinquent, foreclosures and delinquent bankruptcies | ** ** | $                          | 1,066,648  | ** ** | 81         | %                             | $          | 844,925    | ** ** | 84 | % |
| Other real  estate owned                                              |       | 251,943                    |       | 19         | %          | 161,538                       |       | 16         | %          |
| Total  non-performing assets                                          |       | $                          | 1,318,591  |       | 100        | %                             | $          | 1,006,463  |       | 100 | % |

 

Realestate owned, which consists of residential real estate acquired insatisfaction of loans, is carried at the lower of cost or estimated fair valueless estimated selling costs. Adjustments to the loan carrying value requiredat the time of foreclosure are charged against the allowance for loan losses.Losses or gains from the ultimate disposition of real estate owned are recordedas (gain) loss on sale of other real estate owned in the consolidated statementof operations. Subsequent adjustments to the carrying value after foreclosureare recorded as increases to the valuation allowance against the REObalance.  At March 31, 2007, theallowance against REO was $15.7 million, as compared to $8.5 million atDecember 31, 2006.  Real estate owned atMarch 31, 2007 was $251.9 million, or 56 percent, higher than atDecember 31, 2006 as a result of an increase in foreclosures, and a decrease inthe percentage of real estate liquidated, as a result of a seasoning of theloan portfolio, as well as slowing home price appreciation. We have realized again on disposition of real estate owned in the amount of $844 thousandfor the quarter ended March 31, 2007, as compared to $354 thousand for thequarter ended March 31, 2006.

Thefollowing table presents a rollforward of the real estate owned (in thousands):
|                          | ** ** | **For the quarter ended March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                                     | ** ** | **2006** | ** ** |
| Beginning  balance       |       | $                                                            | 161,538    |   | $ | 46,351 |   |
| Foreclosures             |       | 123,077                                                      |       | 29,377 |   |
| Liquidations             |       | (29,108                                                      | )          | (13,821 | ) |
| Net other change  in REO |       | (3,564                                                       | )          | (2,350 | ) |
| Ending balance           |       | $                                                            | 251,943    |   | $ | 59,557 |   |

 

Thefollowing table presents a rollforward of the allowance on the real estateowned (in thousands):
|                    | ** ** | **For the quarter ended March 31,** | ** ** |
|--------------------|------------|--------------------------------------------------------------|------------|
| ** **         | ** ** | **2007**                                                     | ** ** | **2006** | ** ** |
| Beginning  balance |       | $                                                            | 8,539      |   | $ | — |   |
| Provision          |       | 9,890                                                        |       | — |   |
| Charge-offs        |       | (2,757                                                       | )          | — |   |
| Ending balance     |       | $                                                            | 15,672     |   | $ | — |   |

 

Inaddition to the allowance for REO losses the Company maintains an allowance forloan losses. In evaluating the adequacy of the allowance for loan losses, adetailed analysis of historical loan performance data is accumulated andreviewed, including the delinquency rates. This data is analyzed for lossperformance and prepayment performance by product type, and vintage. Theresults of that analysis are then applied to the current mortgage portfolio andan estimate is calculated. We believe that pooling of mortgages with similarcharacteristics is an appropriate methodology in which to evaluate theallowance for loan losses. Management also recognizes that there arequalitative and quantitative factors that must be taken into consideration whenevaluating and measuring inherent loss in our loan portfolios. These itemsinclude, but are not limited to, economic indicators that may affect theborrower’s ability to pay, changes in value of collateral, political factors,trends in, and amount of non-performing loans and industry statistics. TheCompany provides loan losses in accordance with its policies that include ananalysis of the loan portfolio to determine estimated loan losses in the next12 to 18 months.  The analysis includes adetailed analysis of historical loan performance, an analysis based on theestimated value of the underlying property and a non-performing loans trendanalysis.  While our delinquency rateshave increased, we believe our total allowance for loan losses is adequate toabsorb losses inherent in our mortgage portfolio as of March 31, 2007.

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*Interest Rate Risk.*Refer to Item 3. “Quantitativeand Qualitative Disclosures About Market Risk.”

*Prepayment Risk.*The Company uses prepayment penalties as a method of partiallymitigating prepayment risk. Mortgage industry evidence suggests that theincrease in home appreciation rates and lower payment option mortgage productsover the last three years has been a significant factor affecting borrowersrefinancing decisions. As rates increase, borrowers will find it more difficultto refinance to a lower rate at the reset dates. If borrowers are unable to paytheir mortgage payments at the adjusted rate, delinquencies may increase. Thethree-month constant prepayment rate (CPR) decreased to 30 percentat March 31, 2007 from 36 percent as of December 31, 2006.  This reduction in prepayment rates hasresulted in an increase in the amortization period for premiums paid to acquireloans, which has increased interest income, as described under “EstimatedTaxable Income.”

Duringthe quarter ended March 31, 2007, 63% of Alt-A mortgages acquired by thelong-term investment operations from the mortgage operations had prepaymentpenalty features ranging from six-months to five years.  As of March 31, 2007, 66% and 100% ofmortgages held as residential and commercial securitized mortgage collateral hadprepayment penalties, respectively. As of March 31, 2007, the twelve-monthCPR of mortgages held as securitized mortgage collateral was 35% as compared toa 36% twelve-month CPR as of December 31, 2006. Prepayment penaltiesare charged to borrowers for mortgages that are paid early and recorded asinterest income on our consolidated financial statements. Interest income fromprepayment penalties helps offset amortization of loan premiums andsecuritization costs. During the first quarter of 2007 prepayment penaltiesreceived from borrowers were recorded as interest income and increased theyield on average mortgage assets by 11 basis points as compared to 19 basispoints for the same period in 2006.

*Resultsof Operations*

*Forthe Three Months Ended March 31, 2007 compared to the Three Months Ended March31, 2006*

CondensedStatements of Operations Data(dollars in thousands, except share data)
|                                                                | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income                                                |       | $                                                                      | 342,821    |   | $ | 335,204 |   | $ | 7,617 |   | 2 | % |
| Interest expense                                               |       | 329,366                                                                |       | 323,730 |   | 5,636 |   | 2 |   |
| Net interest income                                            |       | 13,455                                                                 |       | 11,474 |   | 1,981 |   | 17 |   |
| Provision for  loan losses                                     |       | 29,374                                                                 |       | 150 |   | 29,224 |   | 19,483 |   |
| Net interest income (expense) after provision for  loan losses |       | (15,919                                                                | )          | 11,324 |   | (27,243 | ) | (241 | ) |
| Total  non-interest income                                     |       | (70,562                                                                | )          | 107,742 |   | (178,304 | ) | (165 | ) |
| Total  non-interest expense                                    |       | 33,321                                                                 |       | 30,255 |   | 3,066 |   | 10 |   |
| Income tax  (benefit) expense                                  |       | 1,866                                                                  |       | 3,245 |   | (1,379 | ) | (42 | ) |
| Net (loss) earnings                                            |       | $                                                                      | (121,668   | ) | $ | 85,566 |   | $ | (207,234 | ) | (242 | )% |
|                                                           |       |                                                                   |       |   |   |   |   |   |   |
| Net (loss)  earnings per share - diluted                       |       | $                                                                      | (1.65      | ) | $ | 1.07 |   | $ | (2.72 | ) | (254 | )% |
| Dividends declared per  common share                           |       | $                                                                      | 0.10       |   | $ | 0.25 |   | $ | (0.15 | ) | (60 | )% |

 

*NetInterest Income*

We earn net interest income primarilyfrom mortgage assets which include securitized mortgage collateral, mortgagesheld-for-investment, mortgages held-for-sale, finance receivables andinvestment securities available-for-sale, or collectively, “mortgage assets,”and, to a lesser extent, interest income earned on cash and cash equivalents.Interest expense is primarily interest paid on borrowings on mortgage assets,which include securitized mortgage borrowings, reverse repurchase agreementsand borrowings secured by investment securities available-for-sale. Netinterest income also includes (1) amortization of acquisition costs onmortgages acquired from the mortgage operations, (2) accretion of loandiscounts, which primarily represents the amount allocated to mortgage servicingrights when they are sold to third parties and mortgages are transferred to thelong-term investment operations from the mortgage operations and retained forlong-term investment, (3) amortization of securitized mortgagesecuritization expenses and, to a lesser extent, (4) amortization ofsecuritized mortgage bond discounts.

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Thefollowing table summarizes average balance, interest and weighted average yieldon mortgage assets and borrowings on mortgage assets for the periods indicated(dollars in thousands):
| ** **                                                            | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **Average**                                                            | ** ** | ** ** | ** ** | **(8)** | ** ** | **Average** | ** ** | ** ** | ** ** | **(8)** | ** ** |
| ** **                                                            | ** ** | **Balance**                                                            | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **MORTGAGE  ASSETS**                                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Subordinated  securities collateralized by mortgages                  |       | $                                                                      | 30,813     |   | $ | 1,597 |   | 20.73 | % | $ | 40,159 |   | $ | 720 |   | 7.17 | % |
| Securitized  mortgage collateral (1)                                  |       | 20,672,576                                                             |       | 303,602 |   | 5.87 | % | 23,507,250 |   | 297,509 |   | 5.06 | % |
| Mortgages  held-for-investment and held-for-sale                      |       | 1,963,010                                                              |       | 30,345 |   | 6.18 | % | 1,776,874 |   | 30,372 |   | 6.84 | % |
| Finance  receivables                                                  |       | 272,866                                                                |       | 5,227 |   | 7.66 | % | 301,009 |   | 4,775 |   | 6.35 | % |
| Total mortgage  assets\ interest income                               |       | $                                                                      | 22,939,265 |   | $ | 340,771 |   | 5.94 | % | $ | 25,625,292 |   | $ | 333,376 |   | 5.20 | % |
|                                                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| **BORROWINGS**                                                        |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Securitized  mortgage borrowings                                      |       | $                                                                      | 20,183,144 |   | $ | 293,377 |   | 5.81 | % | $ | 23,015,890 |   | $ | 295,475 |   | 5.14 | % |
| Reverse  repurchase agreements                                        |       | 2,241,789                                                              |       | 33,736 |   | 6.02 | % | 1,919,992 |   | 25,873 |   | 5.39 | % |
| Total borrowings  on mortgage assets\ interest expense                |       | $                                                                      | 22,424,933 |   | $ | 327,113 |   | 5.83 | % | $ | 24,935,882 |   | $ | 321,348 |   | 5.15 | % |
|                                                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Net  Interest Spread (2)**                                          |       |                                                                   |       |   |   | 0.11 | % |   |   |   |   | 0.05 | % |
| **Net  Interest Margin (3)**                                          |       |                                                                   |       |   |   | 0.24 | % |   |   |   |   | 0.19 | % |
|                                                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income on mortgage assets                               |       |                                                                   |       | $ | 13,658 |   | 0.24 | % |   |   | $ | 12,028 |   | 0.19 | % |
| Less: Accretion  of loan discounts (4)                                |       |                                                                   |       | (13,335 | ) | (0.23 | )% |   |   | (15,920 | ) | (0.25 | )% |
| Adjusted by net  cash receipts on derivatives (5)                     |       |                                                                   |       | 37,459 |   | 0.65 | % |   |   | 40,136 |   | 0.63 | % |
| **Adjusted  Net Interest Margin (6)**                                 |       |                                                                   |       | $ | 37,782 |   | 0.66 | % |   |   | $ | 36,244 |   | 0.57 | % |
|                                                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Effect of amortization  of loan premiums and securitization costs (7) | ** ** | ** **                                                             | ** ** | $ | 42,296 | ** ** | (0.74 | )% | ** ** | ** ** | $ | 62,499 | ** ** | (0.98 | )% |

 

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(1)                      Interest on securitizedmortgage collateral includes amortization of acquisition cost on mortgagesacquired from the mortgage operations and accretion of loan discounts.

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

(3)                      Net interest margin onmortgage assets is calculated by subtracting interest expense on totalborrowings on mortgage assets from interest income on total mortgage assets andthen dividing by total average mortgage assets and annualizing the quarterlymargin.

(4)                      Yield represents incomefrom the accretion of loan discounts, included in (1) above, divided bytotal average mortgage assets.

(5)                      Yield represents net cashreceipts on derivatives divided by total average mortgage assets.

(6)                      Adjusted net interestmargin on mortgage assets is calculated by subtracting interest expense ontotal borrowings on mortgage assets, accretion of loan discounts and net cashreceipts on derivatives from interest income on total mortgage assets dividedby total average mortgage assets. Net cash receipts on derivatives are acomponent of realized gain on derivative instruments on the consolidatedstatements of operations. Adjusted net interest margin on mortgage assets is anon-GAAP financial measurement, however, the reconciliation provided in thistable is intended to meet the requirements of Regulation G as promulgatedby the SEC for the presentation of non-GAAP financial measurements. We believethat the presentation of adjusted net interest margin on mortgage assets is auseful operating performance measure for our investors as it more closelyreflects the economics of net interest margins on mortgage assets by providinginformation to evaluate net interest income attributable to net investments.

(7)                      The amortization of loanpremiums and securitization costs are components of interest income andinterest expense, respectively. Yield represents the cost of amortization ofnet loan premiums and securitization costs divided by total average mortgageassets.

(8)                    The yields representannualized yields based on the results for the quarter.

25

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*For the three months-endedMarch 31, 2007 compared to the three months ended March 31, 2006*

Increases in net interest income were primarily due toan improvement in net interest margins on mortgage assets primarily caused bythe following:

·                  theCompany increased the amortization period in which loan premiums paid for loansthat are retained are amortized to interest income, and the periodsecuritization costs are amortized to interest expense;

·                  theyield on borrowing costs has increased less during the first quarter 2007 as comparedto the first quarter 2006, while our mortgages have re-price upward faster thanthe increase in borrowing costs on the underlying borrowings; and

·                  prepaymentshave decreased, which extends the duration of higher yielding loans in theportfolio, as higher yielding loans tend to prepay at a faster rate than loweryielding loans.

Netinterest income for the first quarter of 2007 increased $2.0 million (17percent) as compared to 2006. The increase was primarily due to net interestmargins on mortgage assets increasing by 5 basis points to 0.24% for 2007 ascompared to 0.19% for 2006.  The increase in adjusted net interest margins onmortgage assets was primarily due to a positive variance of 81 basis points inyield on mortgage assets, as coupons have adjusted, partially offset by anunfavorable variance of 68 basis points in borrowing costs as the one-monthLIBOR, which is tied to the interest rate on our borrowings, rose 49 basispoints from March 31, 2006 to March 31, 2007, and realized gains from derivativeassets had a favorable variance of 2 basis points.

Alongwith an increase in short-term interest rates, our expectation, based on pastexperience, was that we would see a corresponding decline in mortgageprepayment speeds which we have started to observe in our portfolio. However,mortgage prepayment speeds continue at heightened levels. As home prices havebegun to stabilize and interest rates have remained flat, our securitizedmortgage collateral reflects some degree of reduced prepayments with thethree-month CPR rate declining to 30% as of March 31, 2007 from 36% as ofDecember 31, 2006.

Amortizationof loan premiums and securitization expenses decreased by 24 basis points to0.74% of average mortgage assets during the first quarter of 2007 as comparedto 0.98% of average mortgage assets during the same period in 2006.   The decrease in amortization of premiums andsecuritization expenses was the result of a decrease in actual prepayments,which has increased the number of months in which the Company amortizes thepremiums, therefore increasing interest income.

Asubstantial portion of our long-term mortgage investment portfolio consists ofmortgages with prepayment penalty features that are primarily designed to helpminimize the rate of early mortgage prepayments.  However, if borrowers do prepay on mortgages,a prepayment penalty is charged which helps partially offset additionalamortization of loan premiums and securitization costs related to the prepaidmortgages. During the first quarter of 2007, prepayment penalties received fromborrowers were recorded as interest income and decreased 8 basis points to 11basis points of mortgage assets as compared to 19 basis points of mortgageassets in the first quarter of 2006.

Duringthe first quarter of 2007, adjusted net interest margins on mortgage assets,which is a non-GAAP financial measurement as indicated in the yield tableabove, increased by 9 basis points as compared to an increase of 5 basis pointson net interest margin on mortgage assets. Adjusted net interest margin on mortgage assets increased more than netinterest margin on mortgage assets due to a 2 basis point increase in realizedgains from derivative instruments and a 2 basis point decrease on accretion ofloan discounts. 

Adjusted netinterest margins were also affected during the first quarter of 2007 by ourinterest rate risk management policies which include the employment of balanceguarantees that limit our derivatives to no more than 100% coverage of theprincipal amount outstanding on certain securitized mortgage borrowings at anygiven time. Our interest rate risk management policies are formulated with theintent to offset the potential adverse effects of changing interest ratesprimarily associated with cash flows on adjustable rate securitized mortgageborrowings. By design, our current interest rate risk management program typicallyprovides 20% to 25% coverage of the outstanding principal balance of our sixmonth LIBOR ARMs and generally 80% to no more than 98% coverage of theoutstanding principal balance of intermediate, or hybrid, ARMs at thepoint in time that we securitize the mortgages.

Forfurther information on our interest rate risk management policies refer to Item3. “Quantitative and Qualitative Disclosures About Market Risk.”

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*Provision for Loan Losses*

TheCompany provides loan losses in accordance with its policies that include ananalysis of the loan portfolio to determine estimated loan loses expected inthe next 12 to 18 months.  The analysisincludes a detailed analysis of historical loan performance, an analysis basedon the estimated value of the underlying property and a non performing loanstrend analysis.  The results of thatanalysis are then applied to the current mortgage portfolio and an estimate iscreated.

The allowance for loan losses of $102.8 million atMarch 31, 2007 was comprised of specific reserves for estimated hurricanelosses of $5.0 million, for finance receivables of $4.6 million, for themortgage operations of $2.8 million and a loan portfolio reserve of $90.5million. During the quarter ended March 31, 2007, specific reserves on financereceivables decreased by $6.0 million. The decrease in the specific reserve forfinance receivables was due to a settlement of a receivable that had a $7.7million specific reserve. Exclusive of specific reserves, the Companymaintained an allowance for securitized mortgage collateral and mortgage loanheld-for-investment for loan losses of 42 basis points at March 31, 2007compared to 34 basis points at December 31, 2006. The ratio of loanportfolio reserve to annualized loan losses, which excludes the financereceivable charge off previously reserved, was 2.12 at March 31, 2007. TheCompany believes the total allowance for loan losses is adequate to absorblosses inherent in the loan portfolio at March 31, 2007.

For further information on delinquencies in ourlong-term investment portfolio and non-performing assets refer to “FinancialCondition and Results of Operations—Credit Risk.”

*Non-InterestIncome*

*Forthe Three Months Ended March 31, 2007 compared to the Three Months Ended March31, 2006:*

Changes inNon-Interest Income(dollars in thousands)
| ** **                                                | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Realized gain from  derivative instruments                |       | $                                                                      | 37,459     |   | $ | 40,136 |   | $ | (2,677 | ) | (7 | )% |
| Change in fair value of  derivative instruments           |       | (58,761                                                                | )          | 51,429 |   | (110,190 | ) | (214 | ) |
| Gain(loss) on sale of  loans                              |       | (9,131                                                                 | )          | 14,193 |   | (23,324 | ) | (164 | ) |
| Provision for  repurchases                                |       | (11,828                                                                | )          | (10,336 | ) | (1,492 | ) | (14 | ) |
| Loss on lower of cost  or market writedown                |       | (24,694                                                                | )          | 3,496 |   | (28,190 | ) | (806 | ) |
| Amortization and  impairment of mortgage servicing rights |       | (209                                                                   | )          | (351 | ) | 142 |   | 40 |   |
| Gain on sale of real  estate owned                        |       | 844                                                                    |       | 354 |   | 490 |   | 138 |   |
| Provision for REO  losses                                 |       | (9,890                                                                 | )          | — |   | (9,890 | ) | (100 | ) |
| Other income                                              |       | 5,648                                                                  |       | 8,821 |   | (3,173 | ) | (36 | ) |
| Total non-interest  income                                |       | $                                                                      | (70,562    | ) | $ | 107,742 |   | $ | (178,304 | ) | (165 | )% |

 

*Realized Gain from DerivativeInstruments*. Realized gains from derivatives decreased by$2.7 million (7 percent) during the first quarter of 2007 as compared to thefirst quarter of 2006, or 65 basis points of total average mortgage assetsduring the first quarter of 2007 as compared to 63 basis points of totalaverage mortgage assets during the first quarter of 2006.  Realized gains from derivatives are recordedas current period expense or revenue on our consolidated financial statementsand are included in the calculation of taxable income. Realized gains exclude the mark to market gains or losses that arerealized for tax purposes at the taxable REIT subsidiaries when the loansheld-for-sale are deposited into the securitization trust, and the relatedderivatives are deposited into a swap trust. These gains are not realized forGAAP purposes, as the deposit of the derivatives into the swap trust areconsidered an inter-company transfer, as the REIT consolidates the swaptrust. For GAAP purpose, these gains and losses are included in change in fairvalue of derivative instruments.

*Change in Fair Value of Derivative Instruments.* The change in fair value of derivativeinstruments decreased by $110.2 million (214 percent) during the first quarterof 2007 as compared to the first quarter of 2006.  The amount of market valuation adjustment isprimarily the result of actual cash receipts on derivative instruments, andpartially the result of changes in the expectation of future interest rates. Weprimarily enter into derivative contracts to offset a portion of the changes incash flows 

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associated withsecuritized mortgage borrowings. We record a market valuation adjustment forthese derivatives, as well as other derivatives used by the mortgage operationsto hedge our loan pipeline and mortgage loans held for sale, as current periodexpense or revenue.  Changes in fair value of derivatives at IMH areincluded in GAAP net earnings and backed out for purposes of calculatingestimated taxable income.

*Gain on Sale of Loans. *Gain on sale of loansdecreased $23.3 million (164 percent) during the first quarter of 2007 ascompared to the first quarter of 2006. The decrease was primarily due to a $2.1billion (75 percent) decrease in whole loan sales as well as a reduction inexecution price mainly due to the disposition of non-performing loans and thereduction in market prices of non-performing loans during the first quarter. Alsothe market value of performing and non-performing loans decreased, due to thesaturation of loans for sale in the marketplace, compounded by decreasing homeprices, which decreases the effective loan-to-value ratio.* *Weuse derivatives to protect the market value of mortgages from the point in timewhen we establish an interest rate lock commitment on a particular mortgageprior to its close until the eventual sale or securitization. Any changes ininterest rates on mortgages that we have committed to acquire at a particularrate until we sell or securitize the mortgage generally results in an increaseor decrease in the market value of the related derivative.  For the quarter-ended March 31, 2007, werecorded a $660.7 thousand loss from the settlement of these derivativesas compared to a loss of $3.1 million for the quarter-ended March 31, 2006.

*Provision for Repurchases.*  Provisionfor repurchases increased $1.5 million (14 percent) during the firstquarter of 2007 as compared to the first quarter of 2006. The increase in theprovision for repurchases was primarily due to an increase in actual losses,which resulted from a decrease in the credit quality of the loans subject torepurchase.  At the end of the firstquarter of 2007, outstanding loan repurchase requests were $100.5 million, netof negotiated indemnifications, and requests that were inactive, which were$26.2 million compared to $177.2 million as of December 31, 2006, net of $4.8million in inactive requests.

*Loss on Lower of Cost or MarketWritedown.*  The loss on lower of cost or market (“LOCOM”)writedown increased $28.2 million (806 percent), primarily due to anincrease in non-performing loans held-for-sale to $92.7 million from $66.2million at year end, primarily related to repurchased loans.  Also, the fair value in the marketplace ofnon-performing loans decreased, as investors require a higher yield, whichreduced the fair value of our loans held-for-sale.

*Provision for REO loss. *During thefirst quarter of 2007 the Company recorded a provision for REO losses in theamount of $9.9 million as a result of changes in the net realizable value ofthe real estate owned subsequent to the foreclosure date.

*Non-InterestExpense*

Changes inNon-Interest Expense(dollars in thousands)
| ** **                                    | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                    | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Personnel  expense                            |       | $                                                                      | 18,388     |   | $ | 18,621 |   | $ | (233 | ) | (1 | )% |
| General and  administrative and other expense |       | 5,124                                                                  |       | 5,073 |   | 51 |   | 1 |   |
| Professional  services                        |       | 2,693                                                                  |       | 2,317 |   | 376 |   | 16 |   |
| Equipment  expense                            |       | 1,558                                                                  |       | 1,510 |   | 48 |   | 3 |   |
| Occupancy  expense                            |       | 3,820                                                                  |       | 1,368 |   | 2,452 |   | 179 |   |
| Data processing  expense                      |       | 1,738                                                                  |       | 1,366 |   | 372 |   | 27 |   |
| Total operating  expense                      |       | $                                                                      | 33,321     |   | $ | 30,255 |   | $ | 3,066 |   | 10 | % |

 

Totalnon-interest expenses increased $3.1 million (10 percent) on aquarter-over-quarter basis as occupancy expense increased $2.5 million (179percent) during the first quarter of 2007 as compared to same period in2006.  In compliance with Financial AccountingStandard No. 146 “Accounting for Costs Associated with Exit or DisposalActivities,” an additional $1.0 million of costs relating to the Company’sceased use of the buildings leased in Newport Beach, California were recordedin the first quarter of 2007, due to a decrease in the estimate of futuresublet income. The other $1.5 million increase is the result of higher leaserates at the Company’s new headquarters in Irvine, California.  However, the combining of operations into onelocation will increase operational efficiencies in the future.

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*MortgageAcquisitions and Originations by Channel*

Thefollowing table summarizes the principal balance of mortgage acquisitions andoriginations for the periods indicated (in thousands):
|                                        | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **Principal**                                                          | ** ** | ** ** | ** ** | **Principal** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Balance**                                                            | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** |
| By Production  Channel:                | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Correspondent acquisitions:            | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Flow                                   |       | $                                                                      | 206,602    |   | 8 |   | $ | 1,422,434 |   | 62 |   |
| Bulk                                   |       | 944,929                                                                |       | 39 |   | 132,151 |   | 6 |   |
| Total correspondent acquisitions       |       | 1,151,531                                                              |       | 47 |   | 1,554,585 |   | 67 |   |
| Wholesale and retail originations      |       | 1,097,663                                                              |       | 45 |   | 549,549 |   | 24 |   |
| Total mortgage operations acquisitions |       | 2,249,194                                                              |       | 92 |   | 2,104,134 |   | 91 |   |
| Commercial Mortgage Operations         |       | 196,895                                                                |       | 8 |   | 202,780 |   | 9 |   |
| Total  acquisitions and originations   |       | $                                                                      | 2,446,089  |   | 100 |   | $ | 2,306,914 |   | 100 |   |

 

Acquisitionsand originations remained flat, increasing to $2.4 billion for the firstquarter of 2007 as compared to $2.3 billion for the same period in 2006.  Commercial originations decreased 3% to$196.9 million for the first quarter of 2007 as compared to $202.8 million forthe same period in 2006. Pricing and underwriting guideline strategy revisionsand an increasingly competitive market are the primary reasons acquisitions andoriginations have remained relatively flat.

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

***Long-Term Investment Operations***

CondensedStatements of Operations Data(dollars in thousands)

|                                                     | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  expense                               |       | $                                                                      | (1,627     | ) | $ | (12,088 | ) | $ | 10,461 |   | (87 | )% |
| Provision for  loan losses                          |       | 28,849                                                                 |       | 150 |   | 28,699 |   | 19,133 |   |
| Net interest income after provision for loan losses |       | (30,476                                                                | )          | (12,238 | ) | (18,238 | ) | (149 | ) |
|                                                |       |                                                                   |       |   |   |   |   |   |   |
| Realized gain  from derivative instruments          |       | 36,624                                                                 |       | 40,136 |   | (3,512 | ) | (9 | ) |
| Change in fair  value of derivative instruments     |       | (54,623                                                                | )          | 46,963 |   | (101,586 | ) | (216 | ) |
| Other  non-interest income                          |       | (9,985                                                                 | )          | 90 |   | (10,075 | ) | (11194 | ) |
| Total non-interest income                           |       | (27,984                                                                | )          | 87,189 |   | (115,173 | ) | (132 | ) |
|                                                |       |                                                                   |       |   |   |   |   |   |   |
| Non-interest  expense                               |       | 5,199                                                                  |       | 4,392 |   | 807 |   | 18 |   |
| Net (loss)  earnings                                |       | $                                                                      | (63,659    | ) | $ | 70,559 |   | $ | (134,218 | ) | (190 | )% |

 

Net(loss) earnings for the quarter ended March 31, 2007 decreased $134.2 million(190 percent) as compared to the first quarter of 2006.  The quarter-over-quarter decrease in netearnings was primarily due to the change in fair value on derivativeinstruments which decreased $101.6 million (216 percent) for the first quarterof 2007 as compared to the first quarter of 

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2006.  The market valuation adjustment is the resultof changes in the expectation of future interest rates and an inversion in theforward yield curve. Additionally, net interest income increased $10.5 million(87 percent), primarily due to a reduction in premium amortization, as a resultof lower actual and projected prepayment speeds.  The Company’s adjusted coupon rates haveincreased in excess of the increase in borrowing costs, compared to the prioryear first quarter, partially offset by realized gain (loss) from derivativeswhich decreased to $36.6 million for the first quarter of 2007 compared to$40.1 for the first quarter of 2006. Together, net interest income and realizedgain (loss) from derivative instruments increased 25% to $35.0 million for thethree months ended March 31, 2007 compared to $28.0 million for the threemonths ended March 31, 2006.  Thisincrease is primarily attributable to the aforementioned reduction in premium amortization.

***Mortgage Operations***

CondensedStatements of Operations Data(dollars in thousands)
|                                                               | ** ** | **For the Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                    | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  income (expense)                                |       | $                                                                      | (4,331     | ) | $ | 1,277 |   | $ | (5,608 | ) | (439 | )% |
| Provision for  loan losses                                    |       | 812                                                                    |       | — |   | 812 |   | 100 |   |
| Net interest income (expense) after provison for  loan losses |       | $                                                                      | (5,143     | ) | $ | 1,277 |   | $ | (6,420 | ) | (503 | ) |
|                                                          |       |                                                                   |       |   |   |   |   |   |   |
| Gain on sale of  loans                                        |       | 5,248                                                                  |       | 19,948 |   | (14,700 | ) | (74 | ) |
| Provision for  repurchases                                    |       | (11,828                                                                | )          | (10,336 | ) | (1,492 | ) | (14 | ) |
| Loss on lower of  cost or market writedown                    |       | (24,694                                                                | )          | 3,497 |   | (28,191 | ) | (806 | ) |
| Other income                                                  |       | 3,304                                                                  |       | 9,871 |   | (6,567 | ) | (67 | ) |
| Non-interest  expense and income taxes                        |       | 21,033                                                                 |       | 22,004 |   | (971 | ) | (4 | ) |
| Net (loss)  earnings                                          |       | $                                                                      | (54,146    | ) | $ | 2,253 |   | $ | (56,399 | ) | (2,503 | )% |

 

The mortgage operations generates income bysecuritizing or selling mortgages to permanent investors, including thelong-term investment operations and, to a lesser extent, earns revenue fromfees associated with mortgage servicing rights, master servicing agreements andinterest income earned on mortgages held-for-sale.

Net earnings forthe mortgage operations decreased $56.4 million (2,503 percent)primarily due to the following changes:

·                  decreaseof $5.6 million in net interest income (expense);

·                  decreaseof $14.7 million in gains from the sale of loans;

·                  increasein charges to expense of $28.2 million for the change in valuation ofloans held-for-sale; and

·                  adecrease in other income of $6.6 million.

Net interest income dropped $5.6 million as theyields on borrowings to finance mortgage loans held-for-sale increased 63 basispoints for the first quarter of 2007, primarily the result of a 49 basis pointincrease in the one-month LIBOR since the end of the first quarter of 2006.

Gains from the sale of loans decreased$14.7 million as a result of lower volumes of mortgages sold to thirdparty investors which resulted in a decrease in gain (loss) on sale of loans.The decrease was primarily due to a $2.1 billion (75 percent) decrease in wholeloan sales as well as a reduction in execution price mainly due to thedisposition of non-performing loans, which decreased as a result of thesaturation of loans for sale and the uncertainty in the real estate market.

The Company recorded loans held-for-sale at the lowerof cost or market resulting in a $28.2 million increase in the write-downof loans held-for-sale as current market conditions, such as the widening ofcredit and bond spreads and a lack of demand for mortgage product forced theloans to drop in value prior to securitization, sale or transfer. The$24.7 million write-down was primarily attributable to loans repurchasedduring the first quarter of 2007 and fourth quarter of 2006. The mortgageoperations are reflected as a stand-alone entity for segment financialreporting purposes; however, on the consolidated financial statements inter-companyloan sales and related gains are eliminated.

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Other income decreased $6.6 million which wasprimarily the result of an unfavorable mark to market adjustment on thederivatives at the mortgage operations. The mark to market adjustment for thefirst quarter of 2007 decreased $6.1 million to a loss of $2.5 million as aresult of changes in the fair value of the derivative instruments due to theexpectation of future interest rates.

***Commercial Operations***

CondensedStatements of Operations Data(dollars in thousands)
|                                        | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  income (expense)         |       | $                                                                      | (314       | ) | $ | 134 |   | $ | (448 | ) | (334 | )% |
| Non-interest  income                   |       | (1,532                                                                 | )          | 1,877 |   | (3,409 | ) | (182 | ) |
| Non-interest  expense and income taxes |       | 2,674                                                                  |       | 2,410 |   | 264 |   | 11 |   |
| Net (loss)  earnings                   |       | $                                                                      | (4,520     | ) | $ | (399 | ) | $ | (4,121 | ) | (1033 | )% |

 

Net (loss) earnings for the commercial operations was$4.1 million (1,033 percent) lower for the first quarter of 2007.  Gain on sale of loans resulted in a loss of$2.9 million, including the cost, and change in the fair value of derivativesdeposited into the trust, primarily as a result of the losses incurred duringthe first quarter in conjunction with the REMIC 07-2 securitization, as aresult of bond proceeds and cash from selling the mortgage servicing, at lessthan the securitization and derivative costs included in the transaction.Non-interest income was $3.4 million (182 percent) lower in the first quarterof 2007 primarily due to the decrease in gain on sale of loans of $1.1 millionand the change in fair value of derivative instruments of $2.4 million.  The commercial operations are reflected as astand-alone entity for segment financial reporting purposes. However, on theconsolidated financial statements inter-company loan sales and related gainsare eliminated.

***Warehouse Lending Operations***

CondensedStatements of Operations Data(dollars in thousands)
|                                        | ** ** | **For the Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  income                   |       | $                                                                      | 8,451      |   | $ | 7,691 |   | $ | 760 |   | 10 | % |
| Recovery of loan  losses               |       | (287                                                                   | )          | — |   | (287 | ) | (100 | ) |
| Non-interest  income                   |       | 740                                                                    |       | 797 |   | (57 | ) | (7 | ) |
| Non-interest  expense and income taxes |       | 2,294                                                                  |       | 1,874 |   | 420 |   | 22 |   |
| Net earnings                           |       | $                                                                      | 7,184      |   | $ | 6,614 |   | $ | 570 |   | 9 | % |

 

Netearnings for the quarter ended March 31, 2007 increased $570 thousand (9 percent)as compared to the first quarter of 2006. The increase in net earnings was primarily due to an increase of $760thousand (10 percent) in net interest income, as a result of a 131 basis pointincrease in the yield from finance receivables despite the average balance onfinance receivables declining by 9 percent quarter-over-quarter. Additionally,a recovery from loan losses was recorded which increased net earnings by $287thousand. Non-interest expense and income taxes increased $420 thousand quarterover quarter due to an increase in legal and professional expense. For thethree months ended March 31, 2007 and March 31, 2006, no provision for loanloss was recorded. The warehouse lending operations is reflected as astand-alone entity for segment financial reporting purposes. However, on theconsolidated financial statements inter-company finance receivables andborrowings are eliminated.

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**Liquidity and Capital Resources**

 

Werecognize the need to have funds available for our operating businesses and ourcustomers’ demands for obtaining short-term warehouse financing until thesettlement or sale of mortgages with us or with other investors. It is ourpolicy to have adequate liquidity at all times to cover normal cyclical swingsin funding availability and mortgage demand and to allow us to meet abnormaland unexpected funding requirements. We plan to meet liquidity through normaloperations with the goal of avoiding unplanned sales of assets or emergencyborrowing of funds. Toward this goal, our asset/liability committee, or “ALCO,”is responsible for monitoring our liquidity position and funding needs.

ALCOparticipants include senior executives of the long-term investment operations,the mortgage operations, the commercial operations, and warehouse lendingoperations. ALCO meets on a weekly basis to review current and projectedsources and uses of funds. ALCO monitors the composition of the balance sheetfor changes in the liquidity of our assets. Our primary liquidity consists ofcash and cash equivalents; short-term securities available for sale, andmaturing mortgages, or “liquid assets.”

Webelieve that current cash balances, short-term investments, currently availablefinancing facilities, capital raising capabilities and excess cash flows generatedfrom our long-term mortgage portfolio will adequately provide for projectedfunding needs and limited asset growth.

Ouroperating businesses primarily use available funds as follows:

·                 acquisition and origination ofmortgages by the mortgage, commercial, and long-term investment operations;

·                 long-term investment in mortgages andmortgage backed securities by the long-term investment operations;

·                 provide short-term warehouse advancesby the warehouse lending operations;

·                 pay interest on debt;

·                 distribute common and preferred stockdividends;

·                 pay operating and non-operatingexpenses; and,

·                 repurchase loans under normalcontractual representations and warranties.

*Acquisition and origination of mortgages by the mortgage,commercial, and long-term investment operations*. During thefirst quarter of 2007 $2.4 billion was acquired by the long-term investmentoperations for long-term investment which includes $2.2 billion of primarilyAlt-A mortgages originated by the mortgage operations, and $234.0 million ofcommercial mortgages originated or acquired by the commercial operations.Capital invested in mortgages is outstanding until we sell or securitizemortgages, which is one of the reasons we attempt to sell or securitizemortgages within 90 days of acquisition or origination. Initial capitalinvested in mortgages includes premiums paid when mortgages are acquired andoriginated and our capital investment, or “haircut,” required upon financing,which is generally determined by the type of collateral provided. The mortgageoperations acquired and originated mortgages which were financed with warehouseborrowings from the warehouse lending operations at a haircut generally between2% to 15% of the outstanding principal balance of the mortgages. In addition,ICCC originated $196.9 million of commercial mortgages which were initiallyfinanced with short-term warehouse financing from the warehouse lendingoperations at a haircut of generally 3% of the outstanding principal balance ofthe mortgages.

*Long-term investment in mortgages bythe long-term investment operations.*  The long-term investmentoperations acquire primarily Alt-A mortgages from the mortgage and commercialoperations and finance them with reverse repurchase borrowings from thewarehouse lending operations at substantially the same terms as the mortgageand commercial operations. When the long-term investment operations financemortgages with long-term securitized mortgage borrowings, short-term reverserepurchase financing is repaid. Then, depending on credit ratings from nationalcredit rating agencies on our securitized mortgages, we are generally requiredto provide an over-collateralization, or “OC”, of 0.35 percent to1 percent of the principal balance of mortgages securing securitizedmortgage financing as compared to a haircut of 2 percent to10 percent of the principal balance of mortgages securing short-termreverse repurchase financing. Our total capital investment in securitizedmortgages generally ranges from approximately 2 percent to 5 percentof the principal balance of 

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mortgagessecuring securitized mortgage borrowings which includes premiums paid uponacquisition of mortgages from the mortgage operations, costs paid forcompletion of securitized mortgages, costs to acquire derivatives and OCrequired to achieve desired credit ratings. Commercial mortgages are financedon a long-term basis with securitized mortgage borrowings at substantially thesame rates and terms as Alt-A mortgages. Commercial loans generally have a3 percent haircut on reverse repurchase lines and initial overcollateralization target of 2.75 percent to 3.37 percent

*Provide short-term warehouse advances by the warehouse lendingoperations.*We utilize committed and uncommitted reverserepurchase facilities with various lenders to provide short-term warehousefinancing to affiliates and non-affiliated clients of the warehouse lendingoperations. The warehouse lending operations provides short-term financing tothe mortgage operations and non-affiliated clients from the closing ofmortgages to their sale or other settlement with investors. The warehouselending operations generally finances between 90% and 98% of the fair marketvalue of the principal balance of mortgages, which equates to a haircutrequirement of between 10% and 2%, respectively, at one-month LIBOR, plus aspread. The mortgage operations have uncommitted warehouse line agreements toobtain financing from the warehouse lending operations at one-month LIBOR plusa spread during the period that the mortgage operation accumulates mortgagesuntil the mortgages are securitized or sold. As of March 31, 2007, themortgage and commercial operations had $677.3 million and $135.5 million,respectively, of warehouse advances outstanding with the warehouse lendingoperations.  In addition, as of March 31,2007, the warehouse lending operations had $700.5 million of approved warehouselines available to non-affiliated clients, of which $205.7 million wasoutstanding.

Ourability to meet liquidity requirements and the financing needs of our customersis subject to the renewal of our credit and repurchase facilities or obtainingother sources of financing, if required, including additional debt or equityfrom time to time. Any decision our lenders or investors make to provideavailable financing to us in the future will depend upon a number of factors,including:

·                 our compliance with the terms of ourexisting credit arrangements, including any financial covenants;

·                 our financial performance;

·                 industry and market trends in ourvarious businesses;

·                 the general availability of, and ratesapplicable to, financing and investments;

·                 our lenders or investors resources andpolicies concerning loans and investments; and

·                 the relative attractiveness ofalternative investment or lending opportunities.

*Distribute common and preferred stock dividends*.We are required to distribute a minimum of 90% of our taxable income to ourstockholders in order to maintain our REIT status, exclusive of the applicationof any tax loss carry forwards that may be used to offset current periodtaxable income. Because we pay dividends based on taxable income, dividends maybe more or less than net earnings. We declared cash dividends of $0.10 peroutstanding common share for the first quarter of 2007 on estimated taxableincome of $0.25 per diluted common share and paid cash dividends of $0.25 peroutstanding common share for the fourth and first quarters of 2006.  In addition, we paid cash dividends of $3.7million on preferred stock during the first quarter of 2007.

Aportion of dividends paid to IMH’s stockholders can come from dividenddistributions from the mortgage operations and commercial operations, ourtaxable REIT subsidiaries, to IMH. During the first quarter of 2007, themortgage and commercial operations provided no dividend distributions to IMH.The mortgage and commercial operations may seek to retain earnings to fund theacquisition and origination of mortgages, to expand the mortgage operations, orto fund operating losses. The board of directors of our taxable REITsubsidiaries, which is different from the board of directors of the registrant,may decide that the mortgage and/or commercial operations should cease makingdividend distributions in the future. This could reduce the amount of taxableincome that would be distributed to IMH stockholders in the form of commonstock dividend payment amounts.

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Duringthe first quarter of 2007, our operating businesses were primarily funded asfollows:

·          Securitized mortgageborrowings and reverse repurchase agreements;

·          excess cash flows fromour long-term mortgage portfolio; and

·          sale and securitizationof mortgages.

*Reverse repurchase agreements andsecuritized mortgage borrowings.*We use reverse repurchaseagreements to fund substantially all financing to affiliates and non-affiliatedclients and for the acquisition and origination of Alt-A and commercialmortgages. As we accumulate mortgages, we finance the acquisition of mortgagesprimarily through borrowings on reverse repurchase facilities with third partylenders. We primarily use uncommitted and committed facilities with majorinvestment banks to finance substantially all warehouse financing, asneeded.  During the first quarter of 2007the warehouse facilities amounted to $6.0 billion, of which $1.2 billion wasoutstanding at March 31, 2007. The warehouse facilities provide us with ahigher aggregate credit limit to fund the acquisition and origination ofmortgages at terms comparable to those we have received in the past. Thesewarehouse facilities may have certain covenant tests which we are required tosatisfy. For a discussion of the Company’s compliance with its financialcovenants see “Note J—Reverse Repurchase Agreements” in the accompanyingnotes to the consolidated financial statements. From time to time, we may alsoreceive additional uncommitted interim financing from our lenders in excess ofour permanent borrowing limits to finance mortgages during the accumulationphase and prior to securitizations or dispositions in the form of whole loansales.

From time to time, we may also utilize term reverserepurchase financing provided to us by underwriters who underwrite some of oursecuritizations. The term reverse repurchase financing funds mortgages that arespecifically allocated to securitization transactions, which allows us toreduce overall borrowings outstanding on reverse repurchase agreements withother lenders during the period immediately prior to the settlement of thesecuritization. Terms and interest rates on the term reverse repurchasefacilities are generally lower than on other reverse repurchase agreements.Term reverse repurchase financing are generally repaid within 30 days fromthe date funds are advanced.

We expect to continue to use short-term reverserepurchase facilities to fund the acquisition of mortgages. If we cannot renewor replace maturing borrowings, we may have to sell, on a whole loan basis, themortgages securing these facilities, which, depending upon market conditionsmay result in substantial losses. Additionally, if for any reason the marketvalue of our mortgages securing reverse repurchase facilities decline, ourlenders may require us to provide them with additional equity or collateral tosecure our borrowings, which may require us to sell mortgages at substantiallosses.

In order to mitigate the liquidity risk associated withreverse repurchase agreements, we attempt to sell or securitize our mortgageswithin 90 days from acquisition or origination. Although securitizingmortgages more frequently adds operating and securitization costs, we believethe added cost is offset as liquidity is provided more frequently with lessinterest rate and price volatility, as the accumulation and holding period ofmortgages is shortened. When we have accumulated a sufficient amount ofmortgages, we seek to issue securitized mortgages and convert short-termadvances under reverse repurchase agreements to long-term securitized mortgageborrowings. The use of securitized mortgage borrowings provides the followingbenefits:

·                  allows us to uselong-term financing for the duration of the securitized mortgage asset securedby the underlying mortgages; and

·                  eliminates margincalls on the borrowings that are converted from reverse repurchase agreementsto securitized mortgage borrowings.

During the first quarter of 2007, we completed $2.4billion of securitized mortgage borrowings to provide long-term financing for$2.4 billion of primarily Alt-A and commercial mortgages. Because of thecredit profile, historical loss performance and prepayment characteristics ofour Alt-A and commercial mortgages, we have been able to borrow a higherpercentage against the principal balance of mortgages held as securitizedmortgage collateral, which means that we have to provide less initial capitalupon completion of securitized mortgage borrowings. Capital investment in thesecuritized mortgage borrowings is established at the time securitized mortgageborrowings are issued at levels sufficient to achieve desired credit ratings onthe securities from credit rating agencies.

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*Excess cash flows from ourlong-term mortgage portfolio*. We receive excess cash flows onmortgages held as securitized mortgage collateral after distributions are madeto investors on securitized mortgage borrowings to the extent cash or othercollateral required to maintain desired credit ratings on the securitizedmortgage borrowings is fulfilled and can be used to provide funding for some ofthe long-term investment operations’ activities. Excess cash flows representthe difference between principal and interest payments on the underlyingmortgages, adjusted by the following:

·                  servicing andmaster servicing fees paid;

·                  premiums paid tomortgage insurers;

·                  cash payments /receipts on derivatives;

·                  interest paid onsecuritized mortgage borrowings;

·                  pro-rata earlyprincipal prepayments paid on securitized mortgage borrowings;

·                  OC requirements;

·                  actual losses,net of any gains incurred upon disposition of other real estate owned oracquired in settlement of defaulted mortgages;

·                  unpaid interestshortfall;

·                  basis riskshortfall;

·                  bond writedownsreinstated; and

·                  residualcashflow.

*Sale and securitization of mortgages.*  Wesell and securitize loans in the following ways:

·                  When the mortgage and commercial operationsaccumulate a sufficient amount of mortgages that are intended to be depositedinto a securitized mortgage trust, it sells the mortgages to the long-terminvestment operations; and

·                  When selling mortgages on a whole loan basis,the mortgage operations will accumulate mortgages and enter into sales transactionswith third party investors on a monthly basis.

Themortgage and commercial operations sold $2.4 billion of mortgages to thelong-term investment operations during the first quarter of 2007 and sold$709.7 million of mortgages to third party investors through whole loansales. Generally, the mortgage operations sold mortgage servicing rights on allmortgages sold during the first quarter of 2007, but retained all masterservicing rights. The sale of mortgage servicing rights generated substantiallyall cash, which was used to acquire and originate additional mortgage assets.

Sincewe rely significantly upon sales and securitizations to generate cash proceedsto repay borrowings and to create credit availability, any disruption in ourability to complete sales and securitizations may require us to utilize othersources of financing, which, if available at all, may be on less favorableterms. In addition, delays in closing sales and securitizations of ourmortgages increase our risk by exposing us to credit and interest rate risk forthis extended period of time.

*Issuance ofCommon and Preferred Stock. *We have a shelf registration statement that allowsus to sell up to $1.0 billion of securities, including common stock,preferred stock, debt securities and warrants. By issuing new sharesperiodically throughout the year, we believe that we were able to utilize newcapital more efficiently and profitably.

OnSeptember 30, 2005, the Company entered into a common stock sales agreementwith Brinson Patrick Securities Corporation (Brinson Patrick) for the sale ofup to 7.5 million shares of its common stock from time to time through BrinsonPatrick as sales agent.  No shares ofcommon stock were sold during the first quarter of 2007.

OnSeptember 30, 2005, the Company entered into a Preferred Stock sales agreementwith Brinson Patrick, for the sale of up to 800,000 shares of its 9.125% SeriesC Cumulative Redeemable Preferred Stock (Series C Preferred Stock) from time totime through Brinson Patrick as sales agent. During the three months endedMarch 31, 2007, we sold 24,700 shares of Series C Preferred Stock and receivednet proceeds of approximately $565,281. Brinson Patrick received a commissionof 3% of the gross sales price per share of the shares of preferred stock soldpursuant to the sales agreement, which amounted to an aggregate commission of$17,501.

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Forthe three months ended March 31, 2007, the ratio of earnings to fixed chargesand ratio of earnings to combined fixed charges and preferred stock dividendswas 0.64x and 0.63x, respectively. Earnings used in computing the ratio ofearnings to fixed charges consist of net earnings before income taxes plusfixed charges. Fixed charges include interest expense on debt and the portionof rental expense deemed to represent the interest factor. The amount of theshortfall of earnings to fixed charges for the first quarter of 2007 was $119.8million, which represents losses before taxes.

*Inflation/Deflation*

Theconsolidated financial statements and corresponding notes to the consolidatedfinancial statements have been prepared in accordance with GAAP, which requirethe measurement of financial position and operating results in terms ofhistorical dollars without considering the changes in the relative purchasingpower of money over time due to inflation. The impact of inflation is reflectedin the increased costs of our operations. Unlike industrial companies, nearlyall of our assets and liabilities are monetary in nature. As a result, interestrates have a greater impact on our performance than do the effects of generallevels of inflation. Inflation affects our operations primarily through itseffect on interest rates, since interest rates normally increase during periodsof high inflation and decrease during periods of low inflation. During periodsof increasing interest rates, demand for mortgages and a borrower’s ability toqualify for mortgage financing in a purchase transaction may be adverselyaffected. During periods of decreasing interest rates and housing priceappreciation, borrowers may prepay their mortgages, which in turn may adverselyaffect our yield and subsequently the value of our portfolio of mortgageassets.

**OffBalance Sheet Arrangements**

Inthe ordinary course of business, we sold whole pools of loans with recourse forborrower defaults. When whole pools are sold as opposed to securitized, thethird party has recourse against us for certain borrower defaults. Because theloans are no longer on our balance sheet, the recourse component is considereda guarantee. During the first quarter of 2007, we sold $657.7 million of loanswith recourse for borrower defaults compared to $977.8 million in the fourthquarter of 2006. We maintained a $17.1 million reserve related to these guaranteesas of March 31, 2007 compared with a reserve of $15.3 million as ofDecember 31, 2006. During the first quarter of 2007 we paid$57.2 million in cash to repurchase loans sold to third parties ascompared to $39.6 million during the fourth quarter of 2006.

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

**GeneralOverview**

We manage credit, prepayment andliquidity risk in the normal course of business. Since a significant portion ofour revenues and earnings are derived from net interest income, we strive tomanage our interest-earning assets and interest-bearing liabilitiesto generate what we believe to be an appropriate contribution from net interestincome. When interest rates fluctuate, profitability can be adversely affectedby changes in the fair market value of our assets and liabilities and by theinterest spread earned on interest-earning assets and interest-bearingliabilities. We derive income from the differential spread between interestearned on interest-earning assets and interest paid on interest-bearingliabilities. Any change in interest rates affects income received and incomepaid from assets and liabilities in varying and typically in unequal amounts.Changing interest rates may compress or widen our interest rate margins andaffect overall earnings.

Interest rate risk management isthe responsibility of the Asset Liability Committee (ALCO), which is comprisedof senior management and reports results of interest rate risk analysis to theIMH board of directors on at least a quarterly basis. ALCO establishes policiesthat monitor and coordinate sources, uses and pricing of funds. ALCO alsoattempts to reduce the volatility in net interest income by managing therelationship of interest rate sensitive assets to interest rate sensitiveliabilities. In addition, various modeling techniques are used to valueinterest sensitive mortgage-backed securities. The value of investmentsecurities available-for-sale is determined using a discounted cash flow modelusing prepayment rate, discount rate and credit loss assumptions. Ourinvestment securities portfolio is available-for-sale, which requires us toperform market valuations of the securities in order to properly record theportfolio. We continually monitor interest rates of our investment securitiesportfolio as compared to prevalent interest rates in the market. We do notcurrently maintain a securities trading portfolio and are not exposed to marketrisk as it relates to speculative trading activities.

**Changesin Interest Rates**

Interestrate risk management policies intended to limit our exposure to changes ininterest rates primarily associated with cash flows on our adjustable ratesecuritized mortgage borrowings. Our primary objective is to limit our exposureto the variability in future cash flows attributable to the variability ofone-month LIBOR, which is the underlying index of our adjustable ratesecuritized mortgage borrowings. We also monitor on an ongoing basis theprepayment risks that arise in fluctuating interest rate environments. Ourinterest rate risk management policies are formulated with the intent to offsetpotential adverse effects of changing interest rates on cash flows onadjustable rate securitized mortgage borrowings.

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Weprimarily acquire for long-term investment ARMs and hybrid ARMs and, to alesser extent, FRMs. ARMs are generally subject to periodic and lifetimeinterest rate caps. This means that the interest rate of each ARM is limited toupwards or downwards movements on its periodic interest rate adjustment date,generally six months, or over the life of the mortgage. Periodic caps limit themaximum interest rate change, which can occur on any interest rate change dateto generally a maximum of 1% per semiannual adjustment. Also, each ARM has a maximumlifetime interest rate cap. Generally, borrowings are not subject to the sameperiodic or lifetime interest rate limitations. During a period of rapidlyincreasing or decreasing interest rates, financing costs could increase ordecrease at a faster rate than the periodic interest rate adjustments onmortgages would allow, which could affect net interest income. In addition, ifmarket rates were to exceed the maximum interest rate limits of our ARMs,borrowing costs could increase while interest rates on ARMs would remainconstant. We also acquire hybrid ARMs that have initial fixed interest rateperiods generally ranging from two to seven years which subsequently convert toARMs. During a rapidly increasing or decreasing interest rate environment financingcosts would increase or decrease more rapidly than would interest rates onmortgages, which would remain fixed until their next interest rate adjustmentdate. In order to provide protection against potential resulting basis riskshortfall on the related liabilities, we purchase derivatives.

The use of derivatives to managerisk associated with changes in interest rates is an integral part of ourstrategy. The amount of cash payments or cash receipts on derivatives isdetermined by (1) the notional amount of the derivative and(2) current interest rate levels in relation to the various strikes orcoupons of derivatives during a particular time period. As of March 31,2007 and December 31, 2006, we had notional balances of interest rate swaps,caps, and floors of $19.7 billion and $19.5 billion, respectively, withnet fair values of $78.1 million and $132.5 million, respectively,pertaining to our current and pending securitizations. By using derivatives, weattempt to minimize the effect of both upward and downward interest ratechanges on our long-term mortgage portfolio. Our goal is to moderatesignificant changes to base case net interest income, including net cash flowsfrom derivatives, as interest rates change. We primarily acquire swaps, and toa lesser extent caps, to essentially convert our adjustable rate securitizedmortgage borrowings into fixed rate borrowings. For instance, we receiveone-month LIBOR on swaps, which offsets interest expense on adjustable ratesecuritized mortgage borrowings, and we pay a fixed interest rate.

The interest rate risk profile ofour balance sheet is more sensitive to changes in interest rates related to ourliabilities. We use derivatives extensively in order to manage the interestrate, or price risk, inherent in our assets, liabilities and loan commitments.Our main objective in managing interest rate risk is to moderate the effect ofchanges in interest rates on our earnings over time. Our interest rate riskmanagement strategies may result in significant earnings volatility in theshort term. The success of our interest rate risk management strategy islargely dependent on our ability to predict the earnings sensitivity of ourloan production operation and long-term investment operations in variousinterest rate environments. There are many market factors that affect theperformance of our interest rate risk management activities including interestrate volatility, prepayment behavior, the shape of the yield curve and thespread between mortgage interest rates and treasury or swap rates. The successof this strategy affects our net earnings. This effect, which can be eitherpositive or negative, can be material.

Wemeasure the sensitivity of our net interest income to changes in interest ratesaffecting interest sensitive assets and liabilities using various simulations.These simulations take into consideration changes that may occur in investmentand financing strategies, the forward yield curve, interest rate riskmanagement strategies, mortgage prepayment speeds and the volume of mortgageacquisitions and originations. As part of various interest rate simulations, wecalculate the effect of potential changes in interest rates on ourinterest-earning assets and interest-bearing liabilities and their affect on overallearnings. The simulations assume instantaneous and parallel shifts in interestrates and to what degree those shifts affect net interest income.

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The following table estimates thefinancial effect to base case, including net cash flow from derivatives, fromvarious instantaneous and parallel shifts in interest rates based on both ourconsolidated structure and un-consolidated structure, which refers to thenotional amount of derivatives that are not recorded on our balance sheet as ofFebruary 28, 2007 (dollar amounts in millions):
|                                                                                                | ** ** | **Changes in base case as of February 28, 2007 (1)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **Excluding net   cash flow on derivatives**                             | ** ** | **Net cash flow   on derivatives** | ** ** | **Including net cash   flow on derivatives** | ** ** |
| **Instantaneous and Parallel Change in Interest Rates (2)** | ** ** | **$**                                                                                             | ** ** | **(%)** | ** ** | **$** | ** ** | **$** | ** ** | **(%)** | ** ** |
| Up 300 basis  points, or 3% (3)                                                                |       | (375                                                                                              | )          | (615 | ) | 357 |   | (18 | ) | (12 | ) |
| Up 200 basis  points, or 2%                                                                    |       | (237                                                                                              | )          | (389 | ) | 238 |   | 1 |   | 1 |   |
| Up 100 basis  points, or 1%                                                                    |       | (112                                                                                              | )          | (184 | ) | 119 |   | 7 |   | 5 |   |
| Down 100 basis  points or 1%                                                                   |       | 93                                                                                                |       | 152 |   | (112 | ) | (19 | ) | (12 | ) |
| Down 200 basis  points or 2%                                                                   |       | 181                                                                                               |       | 297 |   | (222 | ) | (41 | ) | (27 | ) |
| Down 300 basis points  or 3%                                                                   |       | 261                                                                                               |       | 428 |   | (329 | ) | (68 | ) | (44 | ) |

 

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(1)                      The dollarand percentage changes represent base case for the next twelve months versusthe change in base case using various instantaneous and parallel interest ratechange simulations, excluding the effect of amortization of loan discounts tobase case.

(2)                      Instantaneousand parallel interest rate changes over and under the projected forward yieldcurve.

(3)                      This simulationwas added to our analysis as it is relevant in light of the interest rateenvironment as of February 28, 2007 and the projected forward yield curve for2007 and 2008.

In the previous table, the up 100 basis point scenarioas of February 28, 2007 represents our projection of the net change from basecase net interest income, which is derived from assumptions as previouslydiscussed, if market interest rates were to immediately rise by 100 basispoints. This means that we increase interest rates at all data points along ourprojected forward yield curve by 100 basis points and recalculate ourprojection of net interest income over the next 12 months. In addition, basedon changes in interest rates, or changes in our forward yield curve, our model adjustsmortgage prepayment rates and recalculates amortization of acquisition andsecuritization costs and net cash receipts or payments on derivatives as partof the calculation of net interest income. Thus, if a 100 basis point interestrate increase occurred, the projected volatility to net interest income ispositively impacted through our use of derivatives.

Weestimate net interest income along with net cash flows from derivatives for thenext twelve months using balance sheet data and the notional amount ofderivatives as of February 28, 2007 and 12-month projections of the followingprimary drivers affecting net interest income:

·                   futureinterest rates using forward yield curves, which are considered marketconsensus estimates of future interest rates;

·                 mortgage acquisitions andoriginations;

·                 mortgage prepayment rate assumptions;and

·                 forward swap rates.

Werefer to the 12-month projection of net interest income along with the 12-monthprojection of net cash flows from derivatives as the “base case.” For financialreporting purposes, net cash flows from derivatives are included in realizedgain (loss) from derivative instruments on the consolidated financialstatements. However, for purposes of interest rate risk analysis we include netcash flows from derivatives in our base case simulations as we acquirederivatives to offset the effect that changes in interest rates have onvariable borrowing costs, such as securitized mortgage and warehouseborrowings. We believe that including net cash flows from derivatives in ourinterest rate risk analysis presents a more useful simulation of the effect ofchanging interest rates on net cash flows generated by our long-term mortgageportfolio.

Oncethe base case has been established, we “shock” the base case with instantaneousand parallel shifts in interest rates in 100 basis point increments upward anddownward. Calculations are made for each of the defined instantaneous andparallel shifts in interest rates over or under the forward yield curve used todetermine the base case and include any associated changes in projectedmortgage prepayment rates caused by changes in interest rates. The results ofeach 100 basis point change in interest rates are then compared against thebase case to determine the estimated dollar and percentage change to base case.The simulations consider the affect of interest rate changes on interestsensitive assets and liabilities as well as derivatives. The simulations alsoconsider the impact that instantaneous and parallel shift in interest rateshave on prepayment rates and the resulting affect of accelerating ordecelerating amortization of premium and securitization costs.

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Usinginformation as presented above, and other analysis, the Company reviews itsinterest rate risk profile.  Based onthis review, the Company makes certain decisions on how to mitigate itsinterest rate risk.

**ITEM 4:          CONTROLSAND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

We are committed to maintaining disclosure controlsand procedures (as defined in the Securities Exchange Act of 1934 Risks 13-a-15(e)or 15d – 15 (e)) designed to ensure that information required to be disclosedin our periodic reports filed under the Securities Exchange Act of 1934, asamended, or the Exchange Act, is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer (CEO) and Chief Financial Officer (CFO), asappropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily is required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures and implementing controls and procedures based on the application ofmanagement’s judgment.

As required by Rules 13a-15 and 15d-15 under theExchange Act, in connection with the filing of this Quarterly Report onForm 10-Q, our management, under the supervision and with theparticipation of our CEO and CFO, conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e).Based on this evaluation, which included the findings of the restatementdescribed herein, and the remediation of the material weakness as of December31, 2006 described below, our principal executive officer and our principalfinancial officer concluded that our disclosure controls and procedures wereeffective at a reasonable assurance level at March 31, 2007.

**Material Weakness**

In connection with its assessment of the Company’sinternal control over financial reporting as of December 31, 2006, managementidentified a material weakness related to our design and maintenance ofadequate controls over the preparation, review, presentation and disclosure ofamounts included in our consolidated statements of cash flows, which resultedin misstatements therein. Cash inflows and outflows related to certainintercompany mortgage loan sales and purchases were inappropriately classifiedas operating cash flows and investing cash flows rather than non-cash transfersin the consolidated statements of cash flows.  The restatement had no effect on the Company’scash position, taxable income, Consolidated Statements of Operations andComprehensive Earnings, Consolidated Balance Sheets or Consolidated Statementsof Changes in Stockholders’ Equity.

**Remediation**

The Company’s management remediated the materialweakness identified in Management’s Report on Internal Control over FinancialReporting as of December 31, 2006, through the design and implementation ofenhanced controls to aid in the timeliness of the financial statement closeprocess leading to the correct preparation, review, presentation and disclosuresof our consolidated statements of cash flows.

Changesin Internal Control Over Financial Reporting

Except as noted above, there has been no change in theCompany’s internal control over financial reporting during the Company’squarter ended March 31, 2007, that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

**PART II. OTHER INFORMATION**

**ITEM 1:****                               LEGALPROCEEDINGS**

TheCompany’s 2006 10-K reported shareholder derivative actions filed against theCompany and its senior officers and directors in the U.S. District Court,Central District of California and Orange County Superior Court.  In April2007, the Company entered into a preliminary agreement to settle the currentlypending federal and state derivative actions against the Company and its seniorofficers and directors. The settlement is subject to certain conditionsincluding the execution of a definitive agreement and court approval. Under theproposed settlement, all claims asserted against the officers and directors 

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named asdefendants in those actions will be dismissed with prejudice with no admissionof wrongdoing on the part of any defendant and the Company will agree tocertain corporate governance practices. In addition, the proposed settlementwill provide for an aggregate cash payment of up to $300,000 in attorney’s feessubject to plaintiff’s application to and approval by the court, which will bepaid entirely by the Company’s insurance carriers and will have no effect onthe financial position of the Company.

Please refer to IMH’s report on Form 10-K for the yearended December 31, 2006 regarding other litigation and claims.

We believe that we have meritorious defenses to theabove claims and intend to defend these claims vigorously. Nevertheless,litigation is uncertain and we may not prevail in the lawsuits and can expressno opinion as to their ultimate resolution. An adverse judgment in any of thesematters could have a material adverse effect on us.

**ITEM 1A:****                      RISK FACTORS**

Our Annual Report on Form10-K for the year ended December 31, 2006 includes a detailed discussion of ourrisk factors. The information presented below updates and should be read inconjunction with the risk factors and information disclosed in that Form 10-K.

**Recent Developments in theResidential Mortgage Market May Adversely Affect the Market Value of OurAssets.**

Theresidential mortgage market has recently encountered difficulties which mayadversely affect the performance or market value of our assets. In recentmonths, delinquencies and losses with respect to residential mortgage loansgenerally have increased and may continue to increase, particularly in thenon-prime sector. Even though we believe our exposure to non-prime products isminimal and is less than 0.2% of our assets, this may affect our operations andassets. In addition, in recent months residential property values in manystates have declined or remained stable, after extended periods during whichthose values appreciated. A continued decline or a lack of increase in thosevalues may result in additional increases in delinquencies and losses onresidential mortgage loans generally, especially with respect to second homesand investor properties, and with respect to any residential mortgage loanswhere the aggregate loan amounts (including any subordinate loans) are close toor greater than the related property values. Another factor that may havecontributed to, and may in the future result in, higher delinquency rates isthe increase in monthly payments on adjustable rate mortgage loans. Anyincrease in prevailing market interest rates may result in increased paymentsfor borrowers who have adjustable rate mortgage loans. Moreover, with respectto hybrid mortgage loans after their initial fixed rate period, and withrespect to mortgage loans with a negative amortization feature which reachtheir negative amortization cap, borrowers may experience a substantialincrease in their monthly payments even without an increase in prevailingmarket interest rates. These general market conditions may affect theperformance of our mortgage loans or mortgage operations.

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

None.

**ITEM 3:****                               DEFAULTSUPON SENIOR SECURITIES**

None.

**ITEM 4:****                               SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

None

**ITEM 5:****                               OTHERINFORMATION**

None

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

(a)         Exhibits:
| 10.1  | Employment Agreement between Andrew McCormick and  Impac Mortgage Holdings, Inc. dated November 13, 2006.                                                                        |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1  | Statements re: computation of ratios                                                                                                                                             |
| 31.1  | Certification of Chief Executive Officer pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                  |
| 31.2  | Certification of Chief Financial Officer pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                  |
| 32.1* | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

**IMPACMORTGAGE HOLDINGS, INC.**
| /s/ Gretchen D. Verdugo                                             |   |   |
|---------------------------------------------------------------------|--------|--------|
| by: Gretchen D.  Verdugo                                            |
| Executive Vice  President                                           |
| and Chief  Financial Officer                                        |
| (authorized  officer of registrant and principal financial officer) |

 

Date: May 10, 2007

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