Impac loses $1.2M throughout a troublesome 1Q

Impac Mortgage Holdings had a rocky first quarter and while the company did manage to resolve one legacy issue during the period, in the short term it will continue to face adverse conditions. 

The Irvine, Calif.-based company lost $1.2 million for the period, including an operating loss of $12.2 million. This compares with net income of $3.6 million in the fourth quarter, when it had an operating loss of $5.6 million, and a loss of $683,000 in the first quarter of 2021 with an operating loss of $714,000.

“While margin compression is typically a cyclical challenge to overcome in the mortgage industry in all cycles, the velocity in which interest rates began rising, as well as the inflationary pressures felt across the market, resulted in a sudden and dramatic impact on many lenders, irrespective of the lender size or history in the industry,” Justin Moisio, Impac’s chief administrative officer, said on the earnings call. “Not surprising the resulting decrease in loan application volume and overall origination growth was felt within our company as well.”

Those rising rates hit both sides of Impac’s business — conforming/government and non-qualified mortgages — hard. “The non-QM segment of the mortgage market experienced significant market pressure beginning in the fourth quarter of 2021, with conditions further deteriorating into the first quarter of 2022 and only recently began evidencing signs of stabilizing,” said George Mangiaracina, chairman and CEO.

Impac’s strategy has been affected because of the liquidity risk. “The company deploys a wide range of capital markets hedge and delivery mechanisms, with increased reliance over the last year of futures on Treasury swaps, forward sale agreements and best efforts deliveries in lieu of aggregating non-QM to sell in bulk offerings,” Mangiaracina said. “Operating risks cannot be effectively hedged in times of acute market dislocation and the company will continue to remain disciplined in our origination and capital markets activities.”

However, the credit markets have started to show signs of normalization in recent weeks, and as pricing eases as well, the non-QM market should expand to Impac’s benefit in terms of both volume and margin, Mangiaracina continued.

The composition of Impac’s originations shifted: it is now doing mostly non-QM loans. Of the $482.1 million it originated in the first quarter, $314.3 million was non-QM. Furthermore, its retail call center did $124.7 million of non-QM; that source had primarily been doing conforming and government loans since Impac resumed lending in June 2020.

“We are pleased with how quickly we’ve been able to shift focus and increase non-QM production in the call center,” Moisio said. “However, it is worth noting that the non-QM credit market is also subject to changing markets, including rate increases forced by changes in credit spreads among capital markets participants.”  

As a result, in April, Impac experienced a decrease in non-QM production through the call center as compared with the monthly volume in the first quarter, which was attributed to pricing changes and a decrease in credit exemptions from secondary market investors for these loans, Moisio said.

The call center also did $164.2 million of conforming and government mortgage originations.

In the fourth quarter, Impac originated $759.4 million (of which $382.1 million was non-QM) and $849.9 million during the first quarter of 2021 (when it did a scant $14.7 million of non-QM).

Impac’s wholesale operation added $193.2 million, non-QM representing all but $3.6 million of the total.

Gain-on-sale margins fell to 124 basis points in the first quarter, from 196 bps in the previous quarter and 237 bps compared to the prior year.

Despite the challenges around loan pricing and higher interest rates, “the company is committed to non-QM and believes that access to alternative credit remains a core tenet of the business,” Moisio said at the end of the call. “We will continue to support and enhance our non-QM offering while simultaneously looking for additional opportunities to drive efficiency, reduce costs, and remain agile as the market continues to evolve around liquidity, inflation and credit risk.”

Taking care of one long-term legacy issue, in March, Impac sold the remaining mortgage-backed securitization interests it owned on 37 transactions completed between 2000 and 2007 for $37.5 million in cash. Those deals had a book value of $27.9 million at the end of 2021, resulting in a fair value gain of approximately $9 million.

However, the company is dealing with another long-term issue, dating to 2008 when it suspended dividends on its Series B and Series C preferred stock. A Maryland court ruled that a subsequent bylaws change challenged by some Series B shareholders was invalid, leaving Impac on the hook for the payments.

Now, Impac is proposing an exchange offer for those classes. For the Class B shares, Impac is offering $5 cash and 20 shares of common stock, while the Class C owners will get 10 cents per share, 25 common stock shares and warrants to purchase 1.5 shares of common stock at $5 per share.

Each class must approve the deal in a two-thirds vote, while a majority of common stockholders need to vote in favor. A Securities and Exchange Commission filing said Impac reached agreements with 59.3% of Class B, 53.2% of Class C and 40.2% of common shareholders to support the transaction in advance of a special meeting.

Impac also paid $5 million of an outstanding promissory note on May 9 and agreed to pay $5 million each year on that date until 2025 if the exchange offer goes through. Otherwise, the remaining $15 million is due on Nov. 9.

“Should these contemplated transactions take effect, the company will be better positioned to engage in capital raise and corporate finance activities absent the overhang of an intractable legacy capital structure,” Mangiaracina said.

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