IMPAC MORTGAGE HOLDINGS, INC. (dollars in thousands, except per share data or as otherwise indicated)
Unless the context otherwise requires, the terms "Company," "we," "us," and "our" refer toImpac Mortgage Holdings, Inc. (the Company or IMH), aMaryland corporation incorporated inAugust 1995 , and its direct and indirect wholly-owned operating subsidiaries,Integrated Real Estate Service Corp. (IRES),Impac Mortgage Corp. (IMC),IMH Assets Corp. (IMH Assets),Copperfield Capital Corporation (CCC) andImpac Funding Corporation (IFC).
Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "likely," "projected," "should," "could," "seem to," "anticipate," "plan," "intend," "project," "assume," or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: ongoing impact on theU.S. economy and financial markets due to the outbreak of the novel coronavirus, and any adverse impact or disruption to the Company's operations; rising interest rates and rates of inflation and the related effects on consumers and credit markets; unemployment rates; successful development, marketing, sale and financing of new and existing financial products, ability to successfully re-engage in lending activities; interest rate levels; inability to successfully reduce prepayment on our mortgage loans; ability to successfully diversify our loan products; decrease in our mortgage servicing portfolio or its market value; ability to increase our market share and geographic footprint in the various residential mortgage businesses; ability to manage and sell MSRs as needed; ability to successfully sell loans to third-party investors; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity and satisfy financial covenants; our ability to regain compliance with the listing requirements of the NYSE American for our common stock; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology including cyber risk and data security risk; ability to successfully create cost and product efficiencies through new technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing and raise additional capital, through lending and repurchase facilities, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions. For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the period endedDecember 31, 2021 , this Quarterly Report on Form 10-Q and other subsequent reports we file under the Securities Exchange Act of 1934. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements except as required by law.
The Mortgage Industry and Discussion of Relevant Fiscal Periods
The third quarter of 2022 saw trends which began in the fourth quarter of 2021, accelerate with a dramatic rise in forward interest rates and a widening of credit spreads. Due to significant inflationary pressures, theU.S. Federal Reserve raised the federal funds rate by 300 basis points throughSeptember 2022 , representing the fastest pace of credit tightening since the 1980's, and is expected to continue to raise interest rates into 2023 as well as reduce the federal government's overall portfolio ofTreasury and mortgage-backed securities. As a result, theMortgage Bankers Association is forecasting 37
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mortgage originations to decline 49% in 2022 to$2.26 trillion and declining an additional 9% in 2023 to$2.05 trillion . Refinance volumes are forecasted to decline 74% in 2022 to$0.7 trillion and an additional 24% in 2023 to$0.5 trillion . The sharp decline in originations reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and increasing affordability issues. We expect the housing inventory, affordability and intense competition in the mortgage market to continue to put pressure on originations, gain on sale margins and profitability going forward. We have and expect to continue to reduce business expenses to align with the lower projected originations for the foreseeable future. The mortgage industry is subject to current events that occur in the financial services industry including changes to regulations and compliance requirements that result in uncertainty surrounding the actions of states, municipalities and government agencies, including theConsumer Financial Protection Bureau (CFPB) andFederal Housing Finance Agency (FHFA). These events can also include changes in economic indicators, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, environmental conditions, such as hurricanes, fires and floods, and customer perception, as well as others. The factors that affect the industry change rapidly and can be unforeseeable making it difficult to predict and manage an operation in the financial services industry. Current events can diminish the relevance of "quarter over quarter" and "year-to-date over year-to-date" comparisons of financial information. In such instances, we attempt to present financial information in Management's Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to our financial information.
Selected Financial Results
For the Three Months Ended For the Nine Months Ended
September 30 , June 30 ,
2022 2022 2021 2022 2021
Revenues:
Real estate services fees, net $ 290$ 257 $ 244 $ 732 $ 932 Gain on mortgage servicing rights, net 196 45 101 351 102 Servicing fees (expense), net 32 7 (124) 27 (393) (Loss) gain on sale of loans, net (682) 179 19,608 5,452 50,432 Other 3 7 (11) 962 308 Total (expense) revenues, net (161) 495 19,818 7,524 51,381
Expenses:
Personnel expense 5,701 8,024 12,685 25,646 39,574 General, administrative and other 4,830 5,323
4,927 15,287 15,991
Business promotion 545 1,319 2,185 4,165 5,146
Total expenses 11,076 14,666 19,797 45,098 60,711Operating (loss) earnings: (11,237) (14,171) 21 (37,574) (9,330) Other (expense) income: Net interest (expense) income (1,334) (1,260) 777 (2,479) 1,996 Change in fair value of long-term debt (435) 1,980 (1,803) 3,187 638 Change in fair value of net trust assets - - 3,112 9,248 (702) Total other (expense) income, net (1,769) 720 2,086 9,956 1,932 (Loss) earnings before income taxes (13,006) (13,451) 2,107 (27,618) (7,398) Income tax expense 7 16 21 46 63 Net (loss) earnings$ (13,013) $ (13,467) $ 2,086$ (27,664) $ (7,461) Other comprehensive (loss) earnings: Change in fair value of instrument specific credit risk 3,347 10,037 631 11,115 (1,574) Total comprehensive (loss) earnings$ (9,666) $ (3,430) $
2,717
Diluted weighted average common shares 21,523 21,509 21,345 21,483 21,327
Diluted (loss) earnings per share $ (0.62)
0.08 $ (1.34) $ (0.37)
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Status of Operations
Key Metrics - Third quarter 2022
? At
For the three months ended
? million as compared to
and
For the three months ended
? origination volumes were
three months ended
(Loss) gain on sale of loans, net was
? ended
endedJune 30, 2022 and$19.6 million for the three months endedSeptember 30, 2021 .
Operating expenses (personnel, business promotion and general, administrative
? and other) for the three months ended
million from
million for the three months ended
On
Series B Preferred and Series C Preferred exchange offers, allowing us to
exchange all outstanding Series B Preferred stock and Series C Preferred stock
? participating in the exchange offers and subsequently redeem all remaining
outstanding Series B Preferred and Series C Preferred stock, liquidation
preference and cumulative dividends in arrears for common stock, warrants and
new Preferred D stock. See Liquidity and Capital Resources below, for a
description of the exchange offers.
For the three months endedSeptember 30, 2022 , we reported a net loss of$13.0 million , or$0.62 per diluted common share, as compared to a net earnings of$2.1 million , or$0.08 per diluted common share, for the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 , adjusted loss before tax (as defined below in Non-GAAP Financial Measures) was$12.6 million , or$0.59 per diluted common share, as compared to an adjusted earnings before tax of$810 thousand , or$0.04 per diluted common share, for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , we reported a net loss of$27.7 million , or$1.34 per diluted common share, as compared to a net loss of$7.5 million , or$0.37 per diluted common share, for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , adjusted loss before tax (as defined below in Non-GAAP Financial Measures) was$41.0 million , or$1.91 per diluted common share, as compared to an adjusted loss before tax of$6.5 million , or$0.31 per diluted common share, for the nine months endedSeptember 30, 2021 . Net (loss) earnings for the three months endedSeptember 30, 2022 , was a loss of$13.0 million as compared to earnings of$2.1 million for the three months endedSeptember 30, 2021 . The quarter over quarter increase in net loss was primarily due to a$20.3 million decrease in gain on sale of loans, net, coupled with a$3.9 million decrease in other income, partially offset by an$8.7 million decrease in operating expenses. The sharp and unexpected decline in gain on sale of loans, net reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in customer affordability issues. As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads, which accelerated into the third quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the 39
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third quarter of 2022. For the three months ended
Other income decreased$3.9 million to a$1.8 million expense for the three months endedSeptember 30, 2022 as a result of a$3.1 million reduction in trust gains and a$2.1 million reduction in net interest income both as a result of the sale of the legacy securitization portfolio during the first quarter of 2022 partially offset by a$1.4 million increase in fair value of our long-term debt.
Offsetting the decrease in other income was an
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles inthe United States (GAAP), we use the following non-GAAP financial measures: adjusted (loss) earnings before tax and diluted adjusted (loss) earnings per common share before tax. Adjusted (loss) earnings and diluted adjusted (loss) earnings per common share are financial measurements calculated by adjusting GAAP net loss before tax to exclude certain non-cash items, such as fair value adjustments and mark-to-market of mortgage servicing rights (MSRs), and legacy non-recurring expenses. We believe adjusted (loss) earnings provides useful information to investors regarding our results of operations as it assists both investors and management in analyzing and benchmarking the performance and value of our core business of mortgage lending over multiple periods. Adjusted (loss) earnings facilitates company-to-company operating performance comparisons by backing out potential non-cash differences caused by variations in hedging strategies and changes in valuations for long-term debt and net trust assets, which may vary for different companies for reasons unrelated to operating performance, as well as certain historical cost (benefit) items which may vary for different companies for reasons unrelated to operating performance. These non-GAAP financial measures are not intended to be considered in isolation and should not be a substitute for net (loss) earnings before income taxes, net (loss) earnings or diluted (loss) earnings per common share (EPS) or any other operating performance measure calculated in accordance with GAAP, and may not be comparable to a similarly titled measure reported by other companies. The tables below provide a reconciliation of net (loss) earnings before tax and diluted (loss) earnings per common share to non-GAAP adjusted (loss) earnings before tax and non-GAAP diluted adjusted (loss) earnings per common share before tax: 40 Table of Contents For the Three Months Ended For the Nine Months EndedSeptember 30 ,June 30 ,
2022 2021 2022 2021
(Loss) earnings before income taxes:
Change in fair value of mortgage servicing rights (223) (89) (150) (454) (190) Change in fair value of long-term debt 435 (1,980) 1,803 (3,187) (638) Change in fair value of net trust assets, including trust REO (losses) gains - - (3,112) (9,248) 702 Legal settlements and professional fees, for legacy matters (1) - - - - 1,000 Legacy corporate-owned life insurance (2) 177 157 162 (482) 2
Adjusted (loss) earnings before tax
810 $ (40,989) $ (6,522)
Diluted weighted average common
shares 21,523 21,509 21,345 21,483 21,327
Diluted adjusted (loss) earnings per
common share before tax $ (0.59) $ (0.71) $ 0.04 $ (1.91) $ (0.31)
Diluted (loss) earnings per common $
share (0.62) $ (0.64) $ 0.08 $ (1.34) $ (0.37)
Adjustments:
Cumulative non-declared dividends on preferred stock 0.02 0.02 0.02 0.05 0.02 Change in fair value of mortgage servicing rights (0.01) (0.01) (0.01) (0.02) (0.01) Change in fair value of long-term debt 0.01 (0.09) 0.08 (0.15) (0.03) Change in fair value of net trust assets, including trust REO gains (losses) - - (0.14) (0.43) 0.03 Legal settlements and professional fees, for legacy matters - - - - 0.05 Legacy corporate-owned life insurance 0.01 0.01 0.01 (0.02) - Diluted adjusted (loss) earnings per common share before tax $ (0.59)$ (0.71) $ 0.04$ (1.91) $ (0.31)
(1) Included in general, administrative and other expense in the accompanying
consolidated statements of operations and comprehensive (loss) earnings.
Amounts included in other revenues, general, administrative and other expense
and net interest income for amounts associated with the cash surrender value (2) of corporate-owned life insurance trusts, premiums associated with the
corporate-owned life insurance trusts liabilities, and interest expense on
the corporate-owned life insurance trusts, respectively, in the accompanying
consolidated statements of operations and comprehensive (loss) earnings.
Originations by Channel:
For the Three Months Ended
September 30, June 30, % September 30, %
(in millions) 2022 2022 Change 2021 Change
Retail $ 33.1 $ 93.0 (64) % $ 533.7 (94) %
Wholesale 28.9 35.1 (18) 148.9 (81)Total originations $ 62.0$ 128.1 (52) % $ 682.6 (91) % During the third quarter of 2022, total originations were$62.0 million as compared to$128.1 million in the second quarter of 2022 and$682.6 million in the third quarter of 2021. The decrease in originations as compared to the second quarter of 2022, was due to the continued increase in interest rates which began in the fourth quarter of 2021, resulting in a reduction in purchase loans due to a decrease in home purchase affordability and in refinance volume due to the number of loans that had previously refinanced during the preceding historically low interest rate environment. While we began to shift our origination focus away from more rate and margin sensitive conventional originations during the first quarter of 2021, the increase in interest rates which began in the fourth quarter of 2021 and has accelerated through the third 41 Table of Contents
quarter of 2022, caused a significant increase in credit spreads, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminished capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022, which significantly reduced our origination volumes during the third quarter of 2022 as compared to the third quarter of 2021. We continue to manage our headcount, pipeline and capacity to balance the risks inherent in an aggregation execution model.
Our loan products primarily include conventional loans eligible for sale to
Fannie Mae and Freddie Mac, NonQM mortgages and loans eligible for government
insurance (government loans) by the
Originations by Loan Type:
For the Three Months Ended September 30, For the Nine Months Ended September 30,
(in millions) 2022 2021 % Change 2022 2021 % Change
Conventional $ 10.6 $ 467.1 (98) % $ 209.3 $ 1,746.2 (88) %
NonQM 49.6 186.2 (73) 444.1 301.5 47
Jumbo - 7.5 (100) 5.5 58.7 (91)
Government (1) 1.8 21.8 (92) 13.3 37.6 (65)
Total originations $ 62.0 $ 682.6 (91) % $ 672.2 $ 2,144.0 (69) %
(1) Includes all government-insured loans including FHA,
We continue to believe there is an underserved mortgage market for borrowers with strong credit who may not meet the qualified mortgage (QM) guidelines set out by theConsumer Financial Protection Bureau . During the fourth quarter of 2021, we originated$382.1 million in NonQM loans and were on pace to exceed our fourth quarter 2021 NonQM originations during the first quarter of 2022, prior to the dislocation in NonQM pricing as a result of widening credit spreads.
As
described above, as a result of the market dislocation we have further backed off NonQM production during the second and third quarters of 2022 with NonQM originations decreasing to$49.6 million in the third quarter of 2022, from$80.2 million in the second quarter of 2022 and$314.3 million during the first quarter of 2022, and down from$186.2 million during the third quarter of 2021. During the third quarter of 2022, NonQM originations represented 80% of our total originations, which was an increase over the second quarter of 2022 which represented 63% of our total originations and up from 27% of our total originations during the third quarter of 2021. The increase in the percentage NonQM originations is the result of the dramatic decline in conventional originations as a result of the aforementioned intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in customer affordability issues. In the third quarter of 2022, our NonQM originations had a weighted averageFair Isaac Company credit score (FICO) of 738 and a weighted average LTV ratio of 70%. For the year endedDecember 31, 2021 , our NonQM originations had a weighted average FICO of 747 and a weighted average LTV of 65%.
Originations by Purpose:
For the Three Months Ended September 30, For the Nine Months Ended September 30,
(in millions) 2022 % 2021 % 2022 % 2021 %
Refinance $ 36.0 58 % $ 596.6 87 % $ 492.4 73 % $ 1,982.2 92 %
Purchase 26.0 42 86.0 13 179.8 27 161.8 8
Total originations $ 62.0 100 % $ 682.6 100 % $ 672.2 100 % $ 2,144.0 100 %
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During the third quarter of 2022, refinance volume decreased 94% to $36.0
million as compared to $596.6 million in the third quarter of 2021. The decrease
in originations was due to the aforementioned significant increase in interest
rates as compared to the third quarter of 2021. We continue to manage our
headcount, pipeline and capacity to balance the risks inherent in an aggregation
execution model.
Mortgage Servicing Portfolio:
September 30, December 31, % September 30, %
(Unpaid principal balance
(UPB), in millions) 2022 2021 Change 2021 ChangeMortgage servicing portfolio $ 69.6 $ 71.8 (3.1) % $ 65.1 7 % The mortgage servicing portfolio was relatively flat at$69.6 million atSeptember 30, 2022 as compared to$71.8 million atDecember 31, 2021 and$65.1 million atSeptember 30, 2021 . We continue to sell whole loans on a servicing released basis to investors and selectively retain GNMA mortgage servicing. The servicing portfolio generated net servicing income of$32 thousand in the third quarter of 2022, as compared to net servicing expense of$124 thousand in the third quarter of 2021. We will continue to recognize an immaterial amount of net servicing fees or a net servicing expense related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio. The following table includes information about our mortgage servicing portfolio: At September 30, % 60+ days At December 31, % 60+ days (in millions) 2022 delinquent (1) 2021 delinquent (1) Ginnie Mae $ 69.6 1.53 % $ 71.8 2.00 % Freddie Mac - - - - Fannie Mae - - - - Total servicing portfolio $ 69.6 1.53 % $ 71.8 2.00 %
(1) Based on loan count.
For the third quarter of 2022, real estate services fees, net were$290 thousand as compared to$257 thousand in the second quarter of 2022 and$244 thousand in the third quarter of 2021. Real estate services fees, net is generated from our former long-term mortgage portfolio which continued to decline in size. Additionally, as previously noted, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entails the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees, net generated from the long-term mortgage portfolio will decline in future periods as the securitizations are called or collapsed by the purchaser. As previously noted, in the first quarter of 2022, we sold the legacy securitization portfolio which, in accordance with FASB ASC 810-10-25, resulted in deconsolidation of the securitized mortgage trust assets totaling approximately$1.6 billion and trust liabilities of$1.6 billion as of the sale date as we were no longer the primary beneficiary of the consolidated securitization trusts. We will remain as the master servicer with respect to all of the securitizations until such time that the deals are collapsed or payoff. Prior to the aforementioned sale and transfer of the legacy securitization portfolio inMarch 2022 , the residual interests generated cash flows of$1.1 million in the first quarter of 2022 prior to the sale as compared to$2.2 million for the first nine months of 2021.
For additional information regarding the long-term mortgage portfolio, refer to Financial Condition and Results of Operations below.
Liquidity and Capital Resources
During the nine months endedSeptember 30, 2022 , we funded our operations primarily from the sale of our legacy securitization portfolio, mortgage lending revenues and, to a lesser extent, real estate services fees and cash flows from our residual interests in securitizations. Mortgage lending revenues include gain on sale of loans, net and other mortgage related income. We funded mortgage loan originations using warehouse facilities, which are repaid once the loan is sold. We intend to raise additional capital by issuing debt or equity securities within the next year to support our operations but cannot provide any assurance that our capital raise efforts will be successful. 43
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Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, as well as the broader financial markets and the general economy. Concerns over economic recession, geopolitical issues, inflation and interest rates, unemployment, the availability and cost of financing, the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing or raise capital on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing and profitable and stable capital market distribution exits. As previously discussed, the sharp and unexpected decline in gain on sale of loans, net reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and a significant increase in mortgage interest rates resulting in customer home purchase affordability issues. The increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which has continued to accelerate into the third quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022. During the nine months endedSeptember 30, 2022 , we have reduced our warehouse lending capacity to$325.0 million from$615.0 atDecember 31, 2021 , as we did not renew the$65.0 million facility that expired inMay 2022 , reduced the$200.0 million facility to$50.0 million inJuly 2022 and did not renew the facility at itsSeptember 2022 expiration; additionally we reduced the capacity of the$50.0 million funding facility to$25.0 million and the maturity of the line was moved up toDecember 31, 2022 . In October we entered into a$1.0 million committed facility which expires inOctober 2023 . InNovember 2022 , we expect to further reduce our warehouse lending capacity to$41.0 million , reducing the$300.0 million funding facility to$15.0 million upon renewal of the line as the line was predominately used for conventional and government insured originations. As ofSeptember 30, 2022 , we were not in compliance with certain warehouse lending related covenants, and received the necessary waivers. InMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights relating to 37 securitizations that closed between 2000 and 2007, which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. Pursuant to the terms of the Sale Agreement, the purchaser paid the Company an aggregate cash purchase price of$37.5 million . InMarch 2022 , we recorded a$9.2 million increase in fair value, net of$277 thousand in transaction costs related to the transfer of the legacy securitization portfolio. OnApril 29, 2022 , we entered into an agreement to repay$5.0 million of our outstanding convertible promissory notes (the Notes) onMay 9, 2022 , the date of maturity of such Notes, and extend the maturity date of the Notes upon conclusion of the term onMay 9, 2022 . We decreased the aggregate principal amount of the new Notes to$15.0 million , following the pay-down of$5.0 million in principal of the Notes onMay 9, 2022 (Third Amendment). The new Notes shall be due and payable in three equal installments of$5.0 million on each ofMay 9, 2023 ,May 9, 2024 and the Stated Maturity Date ofMay 9, 2025 , provided we complete the contemplated Exchange Offer and provide notice of redemption of our remaining outstanding Series B Preferred Stock and Series C Preferred Stock byOctober 31, 2022 , as described below. If we are not able to complete the Exchange Offer, then the Stated Maturity Date of the Notes shall meanNovember 9, 2022 . OnOctober 20, 2022 , we received approval for the exchange of its Series B Preferred Stock and Series C Preferred Stock, as further described below. As a result, the Notes are due and payable in three equal installments of$5.0 million on each ofMay 9, 2023 ,May 9, 2024 and the stated maturity date ofMay 9, 2025 . The interest rate on the Notes remains at 7.0% per annum. We originate loans which are intended to be eligible for sale to Fannie Mae, Freddie Mac, (together, the GSEs), government insured or guaranteed loans, such as FHA,VA andUSDA loans, and loans eligible forGinnie Mae securities issuance (collectively, the Agencies), in addition to other investors and counterparties (collectively, the Counterparties). It is important for us to sell or securitize the loans we originate and, when doing so, maintain the option to also sell the related MSRs associated with these loans. Prepayment speeds on loans generated through our retail direct channel have been a concern for some investors dating back to 2016 which has resulted and could further result in adverse pricing or delays in our ability to sell or securitize loans and related MSRs on a timely and profitable basis. During the fourth quarter of 2017, Fannie Mae sufficiently limited the manner and volume for our deliveries of eligible loans such that we elected to cease 44 Table of Contents
deliveries to them and we expanded our whole loan investor base for these loans.
In 2019, with the creation of the uniform mortgage-backed securities (UMBS) market, which was intended to improve liquidity and align prepayment speeds across Fannie Mae and Freddie Mac securities, Freddie Mac raised concerns about the high prepayment speeds of our loans generated through our retail direct channel. We expanded our investor base and completed servicing released loan sales to non-GSE whole loan investors and expect to continue to utilize these alternative exit strategies for Fannie Mae and Freddie Mac eligible loans. InJuly 2020 , we received notification from Freddie Mac that our eligibility to sell whole loans to Freddie Mac was suspended, without cause. While we believe that the overall volume delivered under purchase commitments to the GSEs was immaterial prior to the notification, we are committed to operating actively and in good standing with our broad range of capital markets counterparties. We continue to take steps to manage our prepayment speeds to be more consistent with our industry peers and to reestablish the full confidence and delivery mechanisms to our investor base. We seek to satisfy the requirements as outlined by Freddie Mac to achieve reinstatement, while we continue to satisfy our obligations on a timely basis to our other counterparties, as we have done without exception. Despite being in a suspended status with Freddie Mac, we remain an approved originator and/or seller/servicer with the GSEs, Agencies and Counterparties for agency, non-agency, and government insured or guaranteed loan programs. As discussed within Note 11.-Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, onJuly 15, 2021 , theMaryland Court of Appeals issued its decision affirming the decisions of theMaryland Circuit Court (theCircuit Court ) and theCourt of Special Appeals granting summary judgment in favor of the plaintiffs on the Series B Preferred voting rights language interpretation. Accordingly, the 2009 Article Amendments to the 2004 Series B Articles Supplementary were not validly adopted and the 2004 Series B Articles Supplementary remained in effect. As a result, as ofSeptember 30, 2022 , the Company has cumulative undeclared dividends in arrears of approximately$20.3 million , or approximately$30.47 per outstanding share of Series B Preferred, thereby increasing the liquidation value to approximately$55.47 per share. Additionally, every quarter the cumulative undeclared dividends in arrears will increase by$0.5859 per Series B Preferred share, or approximately$390 thousand . The accrued and unpaid dividends on the Series B Preferred are payable only upon declaration by the Board of Directors, and the liquidation preference, inclusive of Series B Preferred cumulative undeclared dividends in arrears, is only payable upon voluntary or involuntary liquidation, dissolution or winding up of the Company's affairs. In addition, the Company is required to pay an amount equal to three quarters of dividends on the Series B Preferred stock under the 2004 Series B Preferred Articles Supplementary (approximately$1.2 million , which had been previously accrued for (such amount, the 2009 Dividend Amount) to Series B Preferred shareholders as ofAugust 15, 2022 , into the registry of theCircuit Court no later thanAugust 19, 2022 , to be held pending final resolution of all issues and final determination by theCircuit Court of the appropriate distribution of those funds. The Company deposited the 2009 Dividend Amount onAugust 18, 2022 . AtSeptember 30, 2022 , the Company had$72.0 million in outstanding liquidation preference of Series B Preferred and Series C Preferred stock (including cumulative unpaid dividends in the case of the Series B Preferred stock). The holders of each series of Preferred Stock, which carry limited voting rights and are redeemable at the option of the Company, retain the right to a$25.00 per share liquidation preference (plus cumulative unpaid dividends in the case of the Series B Preferred stock) in the event of a liquidation of the Company and the right to receive dividends on the Preferred Stock if any such dividends are declared (and, in the case of the Series B Preferred stock, before any dividends or other distributions are made to holders of junior stock, including the Company's common stock). However as further discussed below, holders of Preferred B stock and Preferred C stock in connection with the Exchange Offers and the Redemption will only receive the applicable consideration payable therein and are not entitled to any other payment with respect to the liquidation preference of, or any accrued and unpaid dividends on, any shares of Preferred Stock, other than the rights of holders of Preferred B stock to receive the 2009 Dividend Amount, based upon final determinations as to entitlement to such amounts by theCircuit Court . OnSeptember 14, 2022 , the Company commenced exchange offers (the Exchange Offers) and a consent solicitation for its outstanding shares of Series B Preferred stock and Series C Preferred stock. OnOctober 20, 2022 (the Expiration Date), the exchange offers and consent solicitation expired with approximately 69% of the Series B Preferred stock and approximately 67% of the Series C Preferred stock tendering their shares and voting in favor of certain amendments to the Company's charter as discussed in further detail below. Holders of Series B Preferred are entitled to receive (the Series B Consideration), for each share of Series B Preferred tendered, (i) 13.33 shares of newly issued common stock and (ii) thirty (30) shares of newly issued 8.25% Series D Cumulative Redeemable Preferred Stock (Preferred D stock). Holders of Series C Preferred are entitled to receive (the Series C Consideration), for each share of 45 Table of Contents Preferred D tendered, (i) 1.25 shares of newly issued common stock, (ii) 1.5 warrants to purchase an equal number of shares of common stock at an exercise price of$5.00 per share and (iii) one (1) share of Preferred D stock. In connection with the closing of the Exchange Offers, the Company issued onOctober 26, 2022 , a total of 7,330,319 shares of newly issued common stock, 14,773,811 shares of Preferred D stock and 1,425,695 warrants to purchase an equal number of shares of common stock. Concurrently with the Exchange Offers, the Company received the requisite consent from the requisite holders of each of its outstanding Series B Preferred stock and its outstanding Series C Preferred stock to amend its charter to (i) make all shares of Series B Preferred stock that remain outstanding after the closing of the Exchange Offers redeemable for the same consideration as the Series B Consideration and (ii) make all shares of Series C Preferred stock that remain outstanding after the closing of the Exchange Offers redeemable for the same consideration as the Series C Consideration. OnOctober 27, 2022 , the Company provided notice to holders of Series B Preferred stock and Series C Preferred stock that such shares will be redeemed (the Redemption) onNovember 15, 2022 after which holders of Series B Preferred stock and Series C Preferred stock will only be entitled to receive the Series B Consideration and the Series C Consideration, as the case may be. In connection with the Redemption, the Company anticipates issuing approximately 3,298,439 shares of newly issued common stock, 6,599,035 shares of Preferred D stock and 681,923 warrants to purchase an equal number of shares of common stock. All holders of Series B Preferred stock and Series C Preferred stock in connection with the Exchange Offers and the Redemption will only receive the applicable consideration payable therein and are not entitled to any other payment with respect to the liquidation preference of, or any accrued and unpaid dividends on, any shares of Preferred Stock (whether or not such dividends have accumulated and whether or not such dividends accrued before or after completion of the Exchange Offers), other than the rights of holders of Series B Preferred stock to receive the 2009 Dividend Amount, based upon final determinations as to entitlement to such amounts by theCircuit Court . In addition, onAugust 25, 2022 , theCircuit Court issued an Order to Segregate Funds and/or Stock (Segregation Order), directing the Company, if the Exchange Offer for the Preferred B stock is completed prior toDecember 5, 2022 , to deposit 13,311,840 shares of Preferred D stock, plus, in either event, 4,437,280 shares of newly issued common stock (collectively, theSeries B Common Fund ) in the custody of a third party custodian or escrow agent approved by class counsel. Allocation of thisSeries B Common Fund will be made byCircuit Court upon final disposition of the certain plaintiff award motions (the Plaintiff Series B Award Motions), which will include disposition of any excess funds not awarded to the plaintiffs and plaintiffs' counsel. Once deposited, the Company will have no further right or obligation with respect to thePlaintiff Series B Common Fund , except as necessary to carry out the final orders of theCircuit Court . The Plaintiff Series B Award Motions seek awards out of the Series B Consideration in excess of the amount of theSeries B Common Fund . If all Plaintiff Series B Award Motions are granted by theCircuit Court in full, after notice to class members in the manner approved by theCircuit Court and opportunity to object before a final hearing, no amounts will remain from theSeries B Common Fund for distribution to former holders of Series B Preferred Stock. Holders of Series B Preferred Stock who participate in the Exchange Offer or whose shares are redeemed pursuant to the Special Redemption will only receive any amounts from theSeries B Common Fund if and to the extent that theCircuit Court determines to reduce the amounts requested in the Plaintiff Series B Award Motions, and then only if they held shares of Series B Preferred Stock as of the Expiration Date or such other date determined by theCircuit Court . Distribution of the portion, if any, that may remain from theSeries B Common Fund after final decision on the Plaintiff Series B Award Motions is subject compliance with all applicable law. The Preferred D stock (w) ranks senior to the Series B Preferred stock and Series C Preferred stock as to dividends and upon liquidation; (x) is non-participating, and bears a cumulative cash dividend from and including the original issue date at a fixed rate equal to 8.25% per annum (equivalent to a fixed annual amount of$.00825 per share of the Preferred D stock); (y) bears an initial liquidation preference of$0.10 per share and (z) is mandatorily redeemable by the Company for cash at a redemption price of$0.10 per share, plus any accrued and unpaid dividends (whether or not declared) on (A) the 60th day, or such earlier date as the Company may fix, after the date of any public announcement by the Company of annual or quarterly financial statements that indicate that payment of the redemption price would not cause the Company to violate the restrictions on payment of distributions to stockholders under section 2-311 of the Maryland General Corporation Law (the MGCL) unless, before such redemption date, the Company's Board of Directors determines in good faith that the payment by the Company of the redemption price for the Preferred D stock and for any stock ranking on parity with the Preferred D stock with respect to redemption 46 Table of Contents
and which have become redeemable as of the applicable redemption date would cause us to violate the Cash Consideration Restrictions, as defined below, or (B) any date we fix not more than sixty (60) days after any determination by our Board of Directors (which the Board, or a committee thereof, is obligated to undertake after the release of annual and quarterly financial statements and upon any capital raise) in good faith that the payment by us of the redemption price for the Preferred D stock and any stock ranking on parity with the Preferred D stock with respect to redemption rights that have become redeemable as of such redemption date would not cause us to violate the Cash Consideration Restrictions. A violation of the "Cash Consideration Restrictions" will occur if the occurrence of an action would cause (i) the Company to violate the restrictions on payment of distributions to stockholders under section 2-311 of the MGCL, (ii) any material breach of or default under the terms and conditions of any obligation of the Company, including any agreement relating to its indebtedness, or (iii) the Company to violate any restriction or prohibition of any law rule or regulation applicable to the Company or of any order, judgment or decree of any court or administrative agency. As a result of receiving the requisite stockholder consents on the Exchange Offers onOctober 20, 2022 and following the redemption of any Series B Preferred stock after completion of the exchange offer, the cumulative undeclared dividends in arrears of approximately$20.3 million , or approximately$30.47 per outstanding share of Series B Preferred, outstanding atSeptember 30, 2022 , will be exchanged and will no longer be considered in the earnings per share calculation. In the event we are not able to satisfy the new dividend payment as a result of the aforementioned Cash Consideration Restrictions or do not otherwise declare and pay the 8.25% dividend on the Preferred D Stock, every quarter the cumulative undeclared dividends in arrears will accumulate by approximately$0.0021 per Preferred D share, or approximately$72 thousand , increasing the new Preferred D liquidation preference. We believe the mortgage and real estate services market is volatile, highly competitive and subject to increased regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions and other finance companies which operate in our market area as well as throughoutthe United States . We compete for loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of services we provide to borrowers, brokers and sellers. We believe that current cash balances, cash flows from our mortgage lending operations, real estate services fees generated from our former long-term mortgage portfolio and availability on our warehouse lines of credit are adequate for our current operating needs based on the current operating environment, however we intend to raise additional capital by issuing debt or equity securities within the next year to support our operations. We cannot provide any assurance that such capital raise efforts will be successful. While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-term obligations is dependent upon our ability to successfully operate our mortgage lending and real estate services segment. Our future financial performance and profitability are dependent in large part upon the ability to expand our mortgage lending platform successfully.
Critical Accounting Policies
We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include those issues included in Management's Discussion and Analysis of Results of Operations in IMH's report on Form 10-K for the year endedDecember 31, 2021 . There have been no material changes to the information on critical accounting estimates described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , except those described below.
Variable Interest Entities and Transfers of Financial Assets and Liabilities
Historically, we securitized mortgages in the form of collateralized mortgage
obligations (CMO) and real estate mortgage investment conduits (REMICs),
(collectively, securitizations), which were either consolidated or
unconsolidated depending on the design of the securitization structure. These
securitizations were evaluated for consolidation in accordance with the variable
interest model of FASB ASC 810-10-25. A variable interest entity (VIE) is
consolidated in
47
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the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We consolidated certain VIEs where we are both the primary beneficiary of the residual interests in the securitization trusts as well as the master servicer. Being the master servicer provides control over the collateral through the ability to direct the servicers to take specific loss mitigation efforts. As noted below, in the first quarter of 2022, we sold the legacy securitization portfolio. Prior to the sale of the legacy securitization portfolio, the assets and liabilities that were included in the consolidated VIEs included the mortgage loans and real estate owned collateralizing the debt securities which were included in securitized mortgage trust assets on our consolidated balance sheets and the debt securities payable to investors which were included in securitized mortgage trust liabilities on our accompanying consolidated balance sheets. InMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result of the sale, in accordance with FASB ASC 810-10-25, we deconsolidated the securitized mortgage trust assets totaling approximately$1.6 billion and trust liabilities of$1.6 billion as of the sale date as the Company was no longer the primary beneficiary of the consolidated securitization trusts. The Company shall remain the master servicer with respect to all of the securitizations until such time that the securitization trusts are collapsed or payoff.
Financial Condition and Results of Operations
Financial Condition
As of
The following table shows the condensed consolidated balance sheets for the following periods:
(in thousands, except per share
data) September 30, December 31, $ %
2022 2021 Change Change
ASSETS
Cash $ 44,008 $ 29,555 $ 14,453 49 %
Restricted cash 4,173 5,657 (1,484) (26)
Mortgage loans held-for-sale 18,443 308,477 (290,034) (94)
Mortgage servicing rights 865 749 116 15Securitized mortgage trust assets - 1,642,730
(1,642,730) (100) Other assets 26,096 35,603 (9,507) (27) Total assets $ 93,585$ 2,022,771 $ (1,929,186) (95) % LIABILITIES & (DEFICIT) EQUITY Warehouse borrowings $ 13,292$ 285,539 $ (272,247) (95) % Convertible notes 15,000 20,000 (5,000) (25) Long-term debt (Par value;$62,000 ) 33,264 46,536 (13,272) (29) Securitized mortgage trust liabilities - 1,614,862 (1,614,862) (100) Repurchase reserve 6,190 4,744 1,446 30 Other liabilities 31,910 41,154 (9,244) (22) Total liabilities 99,656 2,012,835 (1,913,179) (95) Total (deficit) equity (6,071) 9,936 (16,007) (161) Total liabilities and
stockholders' (deficit) equity $ 93,585$ 2,022,771 $ (1,929,186) (95) % Book and tangible book value per share $ (0.28) $ 0.47$ (0.75) (161) % 48 Table of Contents AtSeptember 30, 2022 , cash increased$14.4 million to$44.0 million from$29.6 million atDecember 31, 2021 . Cash balances increased primarily due to the aforementioned$37.5 million sale and transfer of the legacy securitization portfolio during the first quarter of 2022, partially offset by operating losses for the nine months endedSeptember 30, 2022 . LHFS decreased$290.1 million to$18.4 million atSeptember 30, 2022 as compared to$308.5 million atDecember 31, 2021 . During the nine months endedSeptember 30, 2022 , we had originations of$672.2 million offset by$950.9 million in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months. Mortgage servicing rights increased to$865 thousand atSeptember 30, 2022 as compared to$749 thousand atDecember 31, 2021 . The increase was due to additions of$46 thousand from servicing retained loan sales of$4.5 million in UPB as well as a mark-to-market increase in fair value of$70 thousand . AtSeptember 30, 2022 andDecember 31, 2021 , we serviced$69.6 million and$71.8 million , respectively, in UPB for others. Warehouse borrowings decreased$272.2 million to$13.3 million atSeptember 30, 2022 as compared to$285.5 million atDecember 31, 2021 . The decrease was due to a$290.1 million decreased in LHFS atSeptember 30, 2022 . As ofSeptember 30, 2022 , our total warehouse lending capacity was$325.0 million spread amongst two warehouse counterparties. During the nine months endedSeptember 30, 2022 , we did not renew the$65.0 million facility that expired inMay 2022 , reduced the$200.0 million facility to$50.0 million inJuly 2022 and did not renew the facility at itsSeptember 2022 expiration; additionally we reduced the capacity of the$50.0 million funding facility to$25.0 million and the maturity of the line was moved up toDecember 31, 2022 . InNovember 2022 , we further reduced our warehouse lending capacity to$40.0 million , reducing the$300.0 million funding facility to$15.0 million upon renewal of the line as the line was predominately used for conventional and government insured originations. As ofSeptember 30, 2022 , we were not in compliance with certain warehouse lending related covenants, and received the necessary waivers. Repurchase reserve increased$1.5 million to$6.2 million atSeptember 30, 2022 as compared to$4.7 million atDecember 31, 2021 . The increase was due to a$3.0 million provision for repurchases as a result of an increase in expected future losses on repurchase requests during 2022 partially offset by$1.5 million in settlements primarily related to repurchased loans as well as refunds of premiums to investors for early payoffs on loans sold. Book value per share decreased 161%, or$0.75 , to ($0.28 ) atSeptember 30, 2022 as compared to$0.47 atDecember 31, 2021 . Book value per common share decreased 37% to ($2.69 ) as ofSeptember 30, 2022 , as compared to ($1.96 ) as ofDecember 31, 2021 (inclusive of the remaining$51.8 million of liquidation preference on our preferred stock). Inclusive of the Series B Preferred stock cumulative undeclared dividends in arrears of$20.3 million (as discussed further in Note 11 - Commitments and Contingencies of the "Notes to Unaudited Consolidated Financial Statements"), book value per common share was ($3.63 ) atSeptember 30, 2022 . As previously disclosed, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights relating to 37 securitizations that closed between 2000 and 2007, which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result of the sale, in accordance with FASB ASC 810-10-25, we deconsolidated the securitized mortgage trust assets totaling approximately$1.6 billion and trust liabilities of$1.6 billion as of the sale date as the Company was no longer the primary beneficiary of the consolidated securitization trusts. We will remain as the master servicer with respect to all of the securitizations until such time that the deals are collapsed or payoff.
The change in our trust assets and trust liabilities is summarized below.
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September 30, December 31, $ %
2022 2021 Change ChangeSecuritized mortgage collateral $ -$ 1,639,251
$ (1,639,251) (100) % Real estate owned (REO) - 3,479 (3,479) (100) Total trust assets (1) - 1,642,730 (1,642,730) (100)
Securitized mortgage borrowings $ -$ 1,614,862 $ (1,614,862) (100) % Total trust liabilities (1) - 1,614,862 (1,614,862) (100) Residual interests in securitizations $ -$ 27,868
(1) At
approximately
Prior to the sale of the legacy securitization trusts, we estimated fair value of the assets and liabilities within the securitization trusts each reporting period, management used an industry standard valuation and analytical model that was updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employed an internal process to validate the accuracy of the model as well as the data within this model. We used the valuation model to generate the expected cash flows to be collected from the trust assets and the expected required bondholder distribution (trust liabilities). To the extent that the trusts were over collateralized, we may have received the excess interest as the holder of the residual interest. The information above provided us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings and the residual interests. To determine the discount rates applied to these cash flows, we gathered information from the bond pricing services and other market participants regarding estimated investor required yields for each bond tranche. Based on that information and the collateral type and vintage, we determined an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We used the blended yield of the bond tranches together with the residual interests to determine an appropriate yield for the securitized mortgage collateral in each securitization.
The following table presents changes in the trust assets and trust liabilities
for the nine months ended
TRUST ASSETS TRUST LIABILITIES
Level 3 Recurring Fair
Value Measurement Level 3 Recurring Fair
NRV Value Measurement
Securitized Real Securitized Net
mortgage estate Total trust mortgage trust
collateral owned assets borrowings assets
Recorded fair value at December 31, 2021 $ 1,639,251 $ 3,479 $ 1,642,730 $ (1,614,862) $ 27,868
Total gains/(losses) included in earnings: Interest income 2,019 - 2,019 - 2,019 Interest expense - - - (7,564) (7,564) Change in FV of net trust assets, excluding REO (1) 9,248 - 9,248 -
9,248
Total gains (losses) included in earnings 11,267 - 11,267 (7,564)
3,703
Transfers in and/or out of level 3 - - - - - Purchases, issuances and settlements (1,650,518) (3,479) (1,653,997) 1,622,426
(31,571)
Recorded fair value at September 30, 2022 $ - $ - $ - $ - $ -
Represents change in fair value of net trust assets, including trust REO (1) gains in the consolidated statements of operations and comprehensive (loss)
earnings for the nine months ended
Total trust assets above reflect a net gain of
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The table below reflects the net trust assets for the periods indicated as a percentage of total trust assets (residual interests in securitizations):
September 30, December 31,
2022 2021
Net trust assets $ - $ 27,868
Total trust assets - 1,642,730Net trust assets as a percentage of total trust assets - % 1.70 % The following tables present the estimated fair value of our residual interests, by securitization vintage year, and other related assumptions used to derive these values atSeptember 30, 2022 andDecember 31, 2021 : Estimated Fair Value of Residual Estimated Fair Value of Residual Interests by Vintage Year at Interests by Vintage Year at September 30, 2022 December 31, 2021 Origination Year SF MF Total SF MF Total 2002-2003 (1) $ - $ - $ -$ 13,167 $ 722 $ 13,889 2004 - - - 7,661 736 8,397 2005 - - - 851 442 1,293 2006 - - - - 4,289 4,289 Total $ - $ - $
-
- % - % - % 15.4 % 15.3 % 15.4 %
Weighted avg. discount rate - % - % - % 11.8 % 11.6 % 11.7 %
2002-2003 vintage year includes CMO 2007-A, since the majority of the (1) mortgages collateralized in this securitization were originated during this
period.
Prior to the sale of the legacy securitization trusts, we utilized a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions included estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We used the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions to determine collateral cash flows which were used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we used different investor yield (discount rate) assumptions for securitized mortgage collateral and securitized mortgage borrowings and the discount rate used for residual interests based on underlying collateral characteristics, vintage year, assumed risk and market participant assumptions.
Long-Term Mortgage Portfolio Credit Quality
Despite the sale of the legacy securitization portfolio inMarch 2022 , we will remain as the master servicer with respect to all of the securitizations until such time that the deals are collapsed or payoff. We use theMortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days delinquent or greater, foreclosures, delinquent bankruptcies and REO were$278.8 million , or 18.5%, of the long-term mortgage portfolio, atSeptember 30, 2022 as compared to$310.5 million or
17.3% atDecember 31, 2021 . 51 Table of Contents The following table summarizes the gross UPB of loans in our master servicing portfolio, that were 60 or more days delinquent (utilizing the MBA method)
as of
the periods indicated:
September 30, Total December 31, TotalSecuritized mortgage collateral 2022 Collateral
2021 Collateral 60 - 89 days delinquent $ 19,550 1.3 %$ 21,086 1.2 % 90 or more days delinquent 90,639 6.0 147,387 8.2 Foreclosures (1) 92,560 6.1 89,181 5.0 Delinquent bankruptcies (2) 51,008 3.4 52,854 2.9 REO (3) 25,084 1.7 - - Total 60 or more days delinquent and REO$ 278,841 18.5 %$ 310,508 17.3 % Total collateral$ 1,506,355 100.0 %$ 1,798,079 100.0 %
(1) Represents properties in the process of foreclosure.
(2) Represents bankruptcies that are 30 days or more delinquent.
Prior to the sale of the legacy securitization trusts in
consolidated balance sheets.
AtSeptember 30, 2022 , mortgage loans 60 or more days delinquent (whether or not subject to forbearance), including REO, decreased$31.7 million as compared toDecember 31, 2021 . As a result of the sale of the legacy securitization trusts and related deconsolidation of the trusts, including REO, we disclosed the REO within the master servicing portfolio at its UPB atSeptember 30, 2022 .
The following table summarizes the master servicing portfolio and REO at NRV (prior to the sale), that were non-performing as of the dates indicated (excludes 60-89 days delinquent):
Total Total
September 30, Collateral December 31, Collateral
2022 % 2021 %
90 or more days delinquent
(including forbearances),
REO, foreclosures and
delinquent bankruptcies $ 259,291 17.2 % $ 289,422 16.1 %
Real estate owned inside trusts at
NRV - - 3,479 0.2
Total non-performing assets $ 259,291 17.2 % $ 292,901 16.3 %
Non-performing assets consist of non-performing loans (mortgages that are 90 or
more days delinquent, including loans in foreclosure and delinquent bankruptcies
plus REO). It is our policy to place a mortgage loan on nonaccrual status when
it becomes 90 days delinquent and to reverse from revenue any accrued interest,
except for interest income on securitized mortgage collateral when the scheduled
payment is received from the servicer. The servicers are required to advance
principal and interest on loans within the securitization trusts to the extent
the advances are considered recoverable. IFC, a subsidiary of IMH and master
servicer, may be required to advance funds, or in most cases cause the loan
servicers to advance funds, to cover principal and interest payments not
received from borrowers depending on the status of their mortgages.
Prior to the sale of the legacy securitization trusts, REO, which consisted of
residential real estate acquired in satisfaction of loans, was carried at the
lower of cost or net realizable value less estimated selling costs. Adjustments
to the loan carrying value required at the time of foreclosure were included in
the change in the fair value of net trust assets prior to the sale of the
portfolio. Changes in our estimates of net realizable value subsequent to the
time of foreclosure and through the time of ultimate disposition were recorded
as change in fair value of net trust assets including trust REO gains in the
consolidated statements of operations and comprehensive (loss) earnings prior to
the sale of the portfolio.
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For the three months endedSeptember 30, 2022 , no REO entries were recorded as the REO was a component of the sale of the legacy portfolio inMarch 2022 . For the three and nine months endedSeptember 30, 2021 , we recorded a decrease of$269 thousand and an increase of$1.3 million in net realizable value of REO, respectively. Increases and decrease of the net realizable value reflect the change in value of the REO subsequent to foreclosure date, but prior to the date of sale.
The following table presents the balances of REO:
September 30, December 31,
2022 2021
REO $ - $ 10,335
Impairment (1) - (6,856)
Ending balance $ - $ 3,479
REO inside trusts $ - $ 3,479
REO outside trusts - -
Total $ - $ 3,479
(1) Impairment represents the cumulative write-downs of net realizable value
subsequent to foreclosure.
Prior to the sale of the legacy securitization trusts, we calculated the cash flows to assess the fair value of the securitized mortgage collateral, we estimated the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management took many factors into consideration. For instance, a detailed analysis of historical loan performance data was accumulated and reviewed. This data was analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data was also broken down by collection status. Our estimated losses for these loans was developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default was assigned to the loans based on their attributes (e.g., original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default was based on analysis of migration of loans from each aging category. The loss severity was determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis were then applied to the current mortgage portfolio and an estimate was created. We believe that pooling of mortgages with similar characteristics was an appropriate methodology in which to evaluate the future loan losses. Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower's ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor's performance, market perception, historical losses, and industry statistics. The assessment for losses was based on delinquency trends and prior loss experience and management's judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluated these assumptions and various relevant factors affecting credit quality and inherent losses.
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Results of Operations
For the Three Months Ended September 30, 2022 compared to the Three Months Ended
September 30, 2021
For the Three Months Ended September 30,
$ %
2022 2021 Change Change
(Expenses) Revenues $ (161) $ 19,818 $ (19,979) (101) %
Expenses (11,076) (19,797) 8,721 44
Net interest (expense) income (1,334) 777 (2,111) (272)Change in fair value of long-term debt (435) (1,803) 1,368 76 Change in fair value of net trust assets, including trust REO (losses) gains - 3,112 (3,112) (100) Income tax expense (7) (21) 14 67 Net (loss) earnings$ (13,013) $ 2,086 $ (15,099) (724) % (Loss) earnings per share available to common stockholders-basic$ (0.62) $ 0.08 $ (0.70) (884) % (Loss) earnings per share available to common stockholders-diluted$ (0.62) $ 0.08
For the Nine Months EndedSeptember 30, 2022 compared to the Nine Months EndedSeptember 30, 2021 For the Nine Months Ended September 30, $ % 2022 2021 Change Change Revenues$ 7,524 $ 51,381 $ (43,857) (85) % Expenses (45,098) (60,711) 15,613 26 Net interest (expense) income (2,479) 1,996 (4,475) (224)
Change in fair value of long-term debt 3,187 638 2,549 400 Change in fair value of net trust assets, including trust REO losses 9,248 (702)
9,950 1417
Income tax expense (46) (63) 17 27
Net loss $ (27,664) $ (7,461) $ (20,203) (271) %
Loss per share available to common
stockholders-basic $ (1.34) $ (0.37) $ (0.97) (265) %
Loss per share available to common
stockholders-diluted $ (1.34) $ (0.37) $ (0.97) (265) %
(Expenses) Revenues
For the Three Months Ended September 30, 2022 compared to the Three Months Ended
September 30, 2021
For the Three Months Ended September 30,
$ %
2022 2021 Change Change
(Loss) gain on sale of loans, net $ (682) $ 19,608 $ (20,290) (103) %
Servicing fees (expense), net 32 (124) 156 126
Real estate services fees, net 290 244 46 19
Gain on mortgage servicing rights, net 196 101
95 94
Other revenues (expenses) 3 (11) 14 127
Total revenues $ (161) $ 19,818 $ (19,979) (101) %
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(Loss) gain on sale of loans, net. For the three months ended
September 30, 2022 , gain on sale of loans, net was a loss of $682 thousand
compared to a gain of $19.6 million in the comparable 2021 period. The decrease
in gain on sale of loans, net was most notably due to a $17.6 million decrease
in gain on sale of loans, a $5.7 million decrease in mark-to-market gains on
LHFS, a $605 thousand increase in provision for repurchases, a $469 thousand
decrease in realized and unrealized net gains on derivative financial
instruments and a $246 thousand decrease in premiums from servicing retained
loan sales. Partially offsetting these decreases was a $4.3 million decrease in
direct origination expenses.
The sharp and unexpected decline in gain on sale reflects the intense pressure
on mortgage originations due to the dramatic collapse of the mortgage refinance
market and the weakening mortgage purchase market, which has suffered from a
lack of housing inventory and a significant increase in mortgage interest rates
resulting in customer home purchase affordability issues. As previously
discussed, the increase in interest rates which began in the fourth quarter of
2021, caused a significant increase in credit spreads which accelerated into the
second quarter and third quarters of 2022, resulting in a substantial over
supply of low coupon originations causing a severe decline in margins and
diminishing capital market distribution exits for originators reliant upon an
aggregation execution model. To mitigate the risks associated with reduced
distribution exits and extended settlement timelines, we began to pull back on
production, significantly increasing the pricing on our loan products as well as
completely shifting to best-efforts delivery for non-agency production in the
first quarter of 2022. As a result, origination volumes decreased significantly
during the third quarter of 2022. For the three months ended
September 30, 2022 , we originated and sold $62.0 million and $83.2 million of
mortgage loans, respectively, as compared to $682.6 million and $563.1 million
of loans originated and sold, respectively, during the same period in 2021.
During the three months ended September 30, 2022 , as a result of historically
low volume our margins were (110) bps as compared to 287 bps during the same
period in 2021.
Servicing fees (expenses), net. For the three months ended September 30, 2022 ,
servicing fees (expenses), net were fees of $32 thousand compared to an expense
of $124 thousand in the comparable 2021 period. The reduction in servicing
expenses, net was due to the increase in the average size of our mortgage
servicing portfolio resulting in increased servicing fees as compared to the
third quarter of 2021. The servicing portfolio average balance increased 20% to
$70.1 million for the three months ended September 30, 2022 as compared to an
average balance of $58.5 million for the comparable period in 2021. While we
continue to selectively retain mortgage servicing, we will continue to recognize
an immaterial amount of servicing fees, net or servicing expenses, net related
to the small UPB of remaining servicing portfolio at September 30, 2022 . During
the three months ended September 30, 2022 , we had no servicing retained loan
sales.
Gain on mortgage servicing rights, net
For the Three Months Ended September 30,
$ %
2022 2021 Change ChangeGain on sale of mortgage servicing rights$ 181 $ 143 $ 38 27 % Changes in fair value: Due to changes in valuation market rates, inputs or assumptions 42 7 35 500 Other changes in fair value: Scheduled principal prepayments (9) (11)
2 18
Voluntary prepayments (18) (38) 20 53
Total changes in fair value $ 15 $ (42) $ 57 136
Gain on mortgage servicing rights, net
For the three months endedSeptember 30, 2022 , gain on MSRs, net was a net gain of$196 thousand compared to$101 thousand in the comparable 2021 period. For the three months endedSeptember 30, 2022 , we recorded a$15 thousand gain from change in fair value of MSRs primarily due to changes in fair value associated with changes in market interest rates, inputs and assumptions partially offset by scheduled and voluntary prepayments. For the three months endedSeptember 30, 2021 , we recorded a$42 thousand loss from a change in fair value of MSRs primarily due to changes in 55
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scheduled and voluntary prepayments. Additionally, during the three months endedSeptember 30, 2022 , we recorded$181 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales. Real estate services fees, net. For the three months endedSeptember 30, 2022 , real estate services fees, net were$290 thousand as compared to$244 thousand in the comparable 2021 period. The real estate service fees increased slightly for the three months endedSeptember 30, 2022 as compared to the same period in 2021, however we expect the fees will decline over time as a result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio. Additionally, as previously noted, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within the long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the purchaser. Other revenues. For the three months endedSeptember 30, 2022 , other revenues were$3 thousand as compared to an expense of$11 thousand in the comparable 2021 period. The$14 thousand increase in other revenues was primarily the result of a decrease in the mark-to-market adjustment of the cash surrender value associated with the corporate-owned life insurance trusts during the third quarter of 2022 as compared to the adjustment during the third quarter of 2021. For the Nine Months EndedSeptember 30, 2022 compared to the Nine Months EndedSeptember 30, 2021 For the Nine Months Ended September 30, $ % 2022 2021 Change Change Gain on sale of loans, net$ 5,452 $ 50,432 $ (44,980) (89) %
Servicing fees (expense), net 27 (393) 420 107 Real estate services fees, net 732 932 (200) (21) Gain on mortgage servicing rights, net 351 102
249 244 Other revenues 962 308 654 212 Total revenues$ 7,524 $ 51,381 $ (43,857) (85) % Gain on sale of loans, net. For the nine months endedSeptember 30, 2022 , gain on sale of loans, net was$5.5 million compared to$50.4 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a$40.1 million decrease in gain on sale of loans, a$12.6 million increase in mark-to-market losses on LHFS, a$3.3 million increase in provision for repurchases and a$413 thousand decrease in premiums from servicing retained loan sales. Partially offsetting these decreases in gain on sale of loans, net was a$8.3 million decrease in direct origination expenses and a$3.2 million increase in realized and unrealized net gains on derivative financial instruments. As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which accelerated into the second and third quarters of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the first nine months of 2022. For the nine months endedSeptember 30, 2022 , we originated and sold$672.2 million and$950.9 million of mortgage loans, respectively, as compared to$2.1 billion and$2.0 billion of loans originated and sold, respectively, during the same period in 2021. During the nine months endedSeptember 30, 2022 , margins were 81 bps as compared to 235 bps during the same period in 2021. Servicing fees (expense), net. For the nine months endedSeptember 30, 2022 , servicing fees, net were$27 thousand compared to a net expense of$393 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the same period in 2021. As a result, the servicing portfolio average balance increased 53% to$72.5 million for the nine months endedSeptember 30, 2022 as compared to an average balance of$47.4 million for the comparable 56
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period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize an immaterial amount of servicing fees, net or servicing expenses, net related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio. During the nine months endedSeptember 30, 2022 , we had$4.5 million in servicing retained loan sales.
Gain on mortgage servicing rights, net
For the Nine Months Ended September 30 ,
$ %
2022 2021
Change Change
Gain on sale of mortgage servicing rights
97 %
Changes in fair value:
Due to changes in valuation market rates,
inputs or assumptions 173 47 126 268
Other changes in fair value:
Scheduled principal prepayments (35) (37)
2 5
Voluntary prepayments (68) (51) (17) (33)
Total changes in fair value $ 70 $ (41) $ 111 271
Gain on mortgage servicing rights, net
244 %
For the nine months ended September 30, 2022 , gain on MSRs, net was a net gain
of $351 thousand compared to a net gain of $102 thousand in the comparable 2021
period. For the nine months ended September 30, 2022 , we recorded a $173
thousand gain from a change in fair value of MSRs primarily due to changes in
fair value associated with changes in market rates, inputs and assumptions
partially offset by $103 thousand loss from scheduled and voluntary prepayments.
For the nine months ended September 30, 2021 , we recorded an $88 thousand loss
from voluntary and scheduled prepayments partially offset by a $47 thousand gain
from a change in fair value of MSRs primarily due to changes in fair value
associated with changes in market interest rates, inputs and assumptions.
Additionally, during the nine months ended September 30, 2022 , we recorded $281
thousand gain on sale of mortgage servicing rights, net as a result of the
collection of holdbacks in excess of previously reserved for amounts on prior
period mortgage servicing sales.
Real estate services fees, net. For the nine months ended September 30, 2022 ,
real estate services fees, net were $732 thousand as compared to $932 thousand
in the comparable 2021 period. The real estate service fees decreased for the
nine months ended September 30, 2022 as compared to the same period in 2021, and
will continue to decline over time as a result of a decrease in transactions
related to the decline in the number of loans and the UPB of the long-term
mortgage portfolio. Additionally, as previously noted, in March 2022 , we sold
our residual interest certificates, and assigned certain optional termination
and loan purchase rights which entailed the entire legacy securitization
portfolio within our long-term mortgage portfolio. As a result, it is our
expectation that the real estate services fees generated from the long-term
mortgage portfolio will continue to decline in future periods as the
securitization trusts are called or collapsed by the purchaser.
Other revenues. For the nine months ended September 30, 2022 , other revenues
were $962 thousand as compared to $308 thousand in the comparable 2021 period.
The $654 thousand increase was primarily the result of an increase in the cash
surrender value of the corporate-owned life insurance trusts during the first
quarter of 2022, as a result of the application of prior year investment gains
which get applied at the annual renewal date in the first quarter of each fiscal
year.
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Expenses
For the three months ended September 30, 2022 as compared to the three months
ended September 30, 2021
For the Three Months Ended September 30,
$ %
2022 2021 Change Change
Personnel expense $ 5,701 $ 12,685 $ (6,984) (55) %
General, administrative and other 4,830 4,927 (97) (2)
Business promotion 545 2,185 (1,640) (75)
Total expenses $ 11,076 $ 19,797 $ (8,721) (44) %
Total expenses decreased by$8.7 million , or 44%, to$11.1 million for the three months endedSeptember 30, 2022 , compared to$19.8 million for the comparable period in 2021. Personnel expense decreased$7.0 million to$5.7 million for the three months endedSeptember 30, 2022 as compared to the same period in 2021. The decrease in personnel expense was primarily related to a reduction in variable compensation commensurate with reduced originations during the third quarter of 2022 as well as reductions in headcount to support reduced volume as compared to 2021. As a result, average headcount decreased 47% for the three months endedSeptember 30, 2022 as compared to the same period in 2021. General, administrative and other expenses decreased$97 thousand to$4.8 million for the three months endedSeptember 30, 2022 , as compared to$4.9 million for the comparable period in 2021. The$97 thousand decrease in general, administrative and other expenses was the result of a$706 thousand decrease in professional fees, data processing, and general administrative and other expense all related to a reduction in fundings during the period.
Partially offsetting the decrease in general administrative and other expense
was a
Business promotion expense decreased$1.6 million to$545 thousand for the three months endedSeptember 30, 2022 as compared to$2.2 million for the same period in the prior year. Business promotion previously remained relatively low as a result of the favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside ofCalifornia and maintain our lead volume as competition increased. As a result of the dislocation within the NonQM market as a result of the significant increase in interest rates, in the third quarter of 2022, we further reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment.
Although we continue to source leads through digital campaigns, which allows
for a more cost effective approach, the recent competitiveness among other
lenders for NonQM production within the
For the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 For the Nine Months Ended September 30, $ % 2022 2021 Change Change Personnel expense$ 25,646 $ 39,574 $ (13,928) (35) % General, administrative and other 15,287 15,991 (704) (4) Business promotion 4,165 5,146 (981) (19) Total expenses$ 45,098 $ 60,711 $ (15,613) (26) %
Total expenses decreased by$15.6 million , or 26%, to$45.1 million for the nine months endedSeptember 30, 2022 , compared to$60.7 million for the comparable period in 2021. Personnel expense decreased$13.9 million to$25.6 million for the nine months endedSeptember 30, 2022 as compared to the same period in
2021.
The
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decrease in personnel expense was primarily related to a reduction in variable
compensation commensurate with reduced originations for the nine months ended
September 30, 2022 as well as a reduction in headcount to support reduced volume
as compared to the same period in 2021. As a result, average headcount
decreased 29% for the nine months ended September 30, 2022 as compared to the
same period in 2021.
General, administrative and other expenses decreased $704 thousand to $15.3
million for the nine months ended September 30, 2022 , as compared to $16.0
million for the same period in 2021. The $704 thousand decrease in general,
administrative and other expenses was the result of a $1.2 million decrease in
data processing, professional fees and general administrative and other expense
all related to a reduction in fundings during the period. Partially offsetting
the decline in general, administrative and other expenses was a $227 thousand
increase in legal fees associated with the aforementioned Exchange Offer, a $184
thousand increase in CAM expense related to a true up of prior and current year
maintenance for the corporate headquarters, and a $123 thousand increase within
occupancy expense as we recognized right of use (ROU) asset impairment related
to the sublease of approximately 1,900 square feet of a floor within our
corporate office.
Business promotion expense decreased $981 thousand to $4.2 million for the nine
months ended September 30, 2022 as compared to $5.1 million for the same period
in the prior year. Business promotion previously remained low as a result of
prior quarters' more favorable interest rate environment requiring significantly
less business promotion to source leads. Beginning in second quarter of 2021,
we began to increase our marketing expenditures in an effort to more directly
target NonQM production in the retail channel, expand production expansion
outside of California and maintain our lead volume as competition increased. As
a result of the dislocation within the NonQM market as a result of the
significant increase in interest rates, starting in the second quarter and
continuing through the third quarter of 2022, we reduced our marketing spend as
we pulled back on our origination volumes to mitigate the aforementioned risks
associated with the current environment. Although we continue to source leads
through digital campaigns, which allows for a more cost effective approach, the
recent competitiveness among other lenders for NonQM production within the
California market has driven up advertising costs.
Net Interest (Expense) Income
We earn net interest income primarily from mortgage assets, which include securitized mortgage collateral (prior to the sale inMarch 2022 ) and loans held-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 secured by mortgage assets, which include securitized mortgage borrowings (prior to the sale inMarch 2022 ) and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes and corporate-owned life insurance trusts. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities. 59
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The following table summarizes average balance, interest and weighted average
yield on interest-earning assets and interest-bearing liabilities, for the
periods indicated.
For the Three Months Ended September 30,
2022 2021
Average Average
Balance Interest Yield Balance Interest Yield
ASSETS
Securitized mortgage
collateral $ - $ - - % $ 1,791,398 $ 15,704 3.51 %
Mortgage loans
held-for-sale 25,834 427 6.61 174,331 1,491 3.42
Other (1) 51,761 228 1.76 42,862 2 0.02
Total interest-earning 77,595 655 3.38 2,008,591 17,197 3.42
assets $ $ % $ $ %
LIABILITIES
Securitized mortgage
borrowings $ - $ - - $ 1,777,359 $ 13,504 3.04 %
Warehouse borrowings 21,154 341 6.45 168,153 1,447 3.44
Long-term debt 34,577 1,242 14.37 45,679 1,003 8.78
Convertible notes 15,000 262 6.99 20,000 350 7.00
Other (2) 13,302 144 4.33 12,836 116 3.61
Total interest-bearing 84,033 1,989 9.47 2,024,027 16,420 3.25
liabilities $ $ % $ $ %
Net interest (expense)
spread (3) $ (1,334) (6.09) % $ 777 0.17 %
Net interest margin (4) (6.88) % 0.15 %
(1) Included in other assets is cash and cash equivalents.
(2) Included in other liabilities is the corporate owned life insurance trust
liability.
Net interest spread is calculated by subtracting the weighted average yield (3) on interest-bearing liabilities from the weighted average yield on
interest-earning assets.
(4) Net interest margin is calculated by dividing net interest spread by total
average interest-earning assets.
Net interest spread income decreased$2.1 million for the three months endedSeptember 30, 2022 primarily attributable to a decrease in the net interest spread income on the securitized mortgage collateral and securitized mortgage borrowings as a result of aforementioned sale during the first quarter of 2022, an increase in interest expense on the long-term debt and an increase in interest expense on the corporate-owned life insurance trusts (within other liabilities). Offsetting the decrease in net interest (expense) spread income was an increase in interest income on cash deposits, an increase in the net interest spread income between loans held-for-sale and their related warehouse borrowings (a positive spread of 16 bps for the three months endedSeptember 30, 2022 as compared to a negative spread of 2 bps for the same period in the prior year) as well as a reduction in interest expense on the convertible notes. As a result, the net interest margin decreased to (6.88)% for the three months endedSeptember 30, 2022 from 0.15% for the three months endedSeptember 30, 2021 . Due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022, we deconsolidated the securitized mortgage trust assets and liabilities as of the sale date as we were no longer the primary beneficiary of the residual interests in the securitization trusts. As a result, we no longer recognize interest income or expense related to the legacy securitization portfolio. The sale and transfer of the legacy securitization portfolio resulted in a$2.2 million reduction in net interest income during the third quarter of 2022 as compared to the third quarter of 2021. During the three months endedSeptember 30, 2022 , the yield on interest-earning assets decreased to 3.38% from 3.42% in the comparable 2021 period. The yield on interest-bearing liabilities increased to 9.47% for the three months endedSeptember 30, 2022 from 3.25% for the comparable 2021 period. In connection with the fair value accounting for securitized mortgage collateral and borrowings (in prior periods) and long-term debt, interest income and interest expense are recognized using effective yields based on estimated fair values for these instruments. 60 Table of Contents For the Nine Months Ended September 30, 2022 2021 Average Average Balance Interest Yield Balance Interest Yield ASSETS Securitized mortgage collateral$ 351,684 $ 10,772 4.08 %$ 1,930,379 $ 45,404 3.14 % Mortgage loans held-for-sale 103,508 3,619 4.66 170,521 4,017 3.14 Other (1) 51,438 312 0.81 48,909 8 0.02 Total interest-earning 506,630 14,703 2,149,809 49,429 assets $ $ 3.87 % $ $ 3.07 % LIABILITIES Securitized mortgage borrowings$ 346,358 $ 9,575 3.69 %$ 1,917,371 $ 38,898 2.70 % Warehouse borrowings 96,734 2,965 4.09 164,496 4,176 3.38 Long-term debt 40,810 3,350 10.95 45,283 2,968 8.74 Convertible notes 17,344 913 7.02 20,000 1,050 7.00 Other (2) 13,185 379 3.83 12,721 341 3.57 Total interest-bearing 514,431 17,182 2,159,871 47,433 liabilities $ $ 4.45 % $ $ 2.93 % Net interest (expense) spread (3)$ (2,479) (0.58) %$ 1,996 0.14 % Net interest margin (4) (0.65) % 0.12 %
(1) Included in other assets is cash and cash equivalents.
(2) Included in other liabilities is the corporate owned life insurance trust
liability.
Net interest spread is calculated by subtracting the weighted average yield (3) on interest-bearing liabilities from the weighted average yield on
interest-earning assets.
(4) Net interest margin is calculated by dividing net interest spread by total
average interest-earning assets.
Net interest spread income decreased$4.5 million for the nine months endedSeptember 30, 2022 primarily attributable to a decrease in the net interest spread income on the securitized mortgage collateral and securitized mortgage borrowings, an increase in interest expense on the long-term debt and an increase in interest expense on the corporate-owned life insurance trusts (within other liabilities). Offsetting the decrease in net interest (expense) spread income was an increase in the net interest spread income between loans held-for-sale and their related warehouse borrowings (a positive spread of 57 bps for the nine months endedSeptember 30, 2022 as compared to a negative spread of 24 bps for the same period in the prior year), an increase in interest income on cash deposits as well as a reduction in interest expense on the convertible notes. As a result, the net interest margin decreased to (0.65)% for the nine months endedSeptember 30, 2022 from 0.12% for the nine months endedSeptember 30, 2021 . Due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022, we deconsolidated the securitized mortgage trust assets and liabilities as of the sale date as we were no longer the primary beneficiary of the residual interests in the securitization trusts. As a result, we no longer recognize interest income or expense related to the legacy securitization portfolio. The sale and transfer of the legacy securitization portfolio resulted in a$5.3 million reduction in net interest income for the nine months endedSeptember 30, 2022 as compared to the same period in 2021. During the nine months endedSeptember 30, 2022 , the yield on interest-earning assets increased to 3.87% from 3.07% in the comparable 2021 period. The yield on interest-bearing liabilities increased to 4.45% for the nine months endedSeptember 30, 2022 from 2.93% for the comparable 2021 period.
In connection with the fair value accounting for securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense are recognized using effective yields based on estimated fair values for these instruments.
Change in the fair value of long-term debt.
Long-term debt (consisting of junior subordinated notes) is measured based upon an internal analysis, which considers our own credit risk and discounted cash flow analyses. Improvements in our financial results and financial condition in the future could result in additional increases in the estimated fair value of the long-term debt, while deterioration in financial results and financial condition could result in a decrease in the estimated fair value of the long-term debt. During the three months endedSeptember 30, 2022 , the fair value of long-term debt decreased by$2.6 million to$33.3 million from$35.9 million atJune 30, 2022 . The decrease in estimated fair value was the result of a$3.3 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the 61
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Company's risk profile partially offset by a$435 thousand change in the market specific credit risk as a result of an increase in the risk free rate component of the discount rate and forward LIBOR curve as compared to the second quarter of 2022, partially offset by a$287 thousand increase due to accretion. During the nine months endedSeptember 30, 2022 , the fair value of long-term debt decreased by$13.3 million to$33.3 million from$46.5 million atDecember 31, 2021 . The decrease in estimated fair value was the result of an$11.1 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company's risk profile, a$3.2 million change in the market specific credit risk as a result of an increase in the risk free rate component of the discount rate and forward LIBOR curve during 2022, partially offset by a$1.0 million increase due to accretion. During the three months endedSeptember 30, 2021 , the fair value of long-term debt increased by$1.6 million to$46.5 million from$44.9 million June 30, 2021 . The increase in estimated fair value was the result of a$1.8 million change in the market specific credit risk as a result of a decrease in the risk free rate component of the discount rate as compared to the second quarter of 2021 and a$386 thousand increase due to accretion, partially offset by a$631 thousand change in the instrument specific credit risk. During the nine months endedSeptember 30, 2021 , the fair value of long-term debt increased by$2.1 million to$46.5 million from$44.4 million atDecember 31, 2020 . The increase in estimated fair value was the result of a$1.6 million change in the instrument specific credit risk and a$1.1 million increase due to accretion, partially offset by a$638 thousand change in the market specific credit risk as a result of an increase in the risk free rate component of the discount rate as compared to the fourth quarter of 2020.
Change in fair value of net trust assets, including trust REO gains (losses)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Change in fair value of net trust
assets, excluding REO $ - $ 3,381 $ 9,248 $ (1,991)
Gains (losses) from REO - (269) - 1,289
Change in fair value of net trust
assets, including trust REO gains
(losses) $ - $
3,112
The decrease in change in fair value of net trust assets, including trust REO (residual interests in securitizations) for the three months endedSeptember 30, 2022 was due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022. The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of$9.2 million for the nine months endedSeptember 30, 2022 . As previously noted, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entails the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, inMarch 2022 , we recorded a$9.2 million increase in fair value, net of$277 thousand in transaction costs related to the transfer of the legacy securitization portfolio. The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of$3.1 million for the three months endedSeptember 30, 2021 . The change in fair value of net trust assets, excluding REO was due to$3.4 million in gains from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of a decrease in residual discount rates as estimated bond prices have continued to improve and corresponding yields have decreased, partially offset by an increase in loss assumptions on certain trusts. Additionally, the NRV of REO decreased$269 thousand during the period attributed to higher expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period. The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of$0.7 million for the nine months endedSeptember 30, 2021 . The change in fair value of net trust assets, excluding REO was due to$2.0 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of cash received during the period and an increase in forward LIBOR, as compared toDecember 2020 , offset by gains from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of a decrease in residual discount rates as estimated bond prices have continued to improve and corresponding yields have decreased. The NRV of REO increased$1.3 million during the period which partially offset the change in fair value 62
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of the net trust assets, excluding REO. The increase in NRV of REO was attributed to lower expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.
Income Taxes
For the three and nine months endedSeptember 30, 2022 , we recorded income tax expense of approximately$7 thousand and$46 thousand , respectively, which was the result of state income taxes from states where the Company does not have net operating loss (NOL) carryforwards or state minimum taxes. For the three and nine months endedSeptember 30, 2021 , the Company recorded income tax expense of approximately$21 thousand and$63 thousand , respectively, which was the result of applying 1) the calculated annual effective tax rate (ETR) against the year to date net loss, and 2) the discrete method in jurisdictions where the Company meets an exception to using ETR. The net deferred tax assets (DTA) were fully reserved for atSeptember 30, 2022 , consistent withDecember 31, 2021 . As ofDecember 31, 2021 , we had estimated NOL carryforwards of approximately$623.5 million . Federal NOL carryforwards begin to expire in 2027. Included in the estimated NOL carryforward is$65.9 million of NOLs with an indefinite carryover period. As ofDecember 31, 2021 , we had estimated California NOL carryforwards of approximately$435.2 million , which begin to expire in 2028.
We may not be able to realize the maximum benefit due to the nature and tax entities that hold the NOL.
Results of Operations by Business Segment
We have three primary operating segments: Mortgage Lending, Long-Term Mortgage
Portfolio and Real Estate Services. Unallocated corporate and other
administrative costs, including the cost associated with being a public company,
are presented in Corporate. Segment operating results are as follows:
Mortgage Lending
For the Three Months Ended September 30,
$ %
2022 2021 Change Change
(Loss) gain on sale of loans, net $ (682) $ 19,608 $ (20,290) (103) %
Servicing fees (expense), net 32 (124) 156 126
Gain on mortgage servicing rights, net 196 101
95 94
Total revenues (454) 19,585 (20,039) (102)
Other income 315 46 269 585
Personnel expense (4,427) (11,096) 6,669 60
Business promotion (545) (2,183) 1,638 75General, administrative and other (1,242) (1,803)
561 31
(Loss) earnings before income taxes
For the three months endedSeptember 30, 2022 , (loss) gain on sale of loans, net was a loss of$682 thousand compared to a gain of$19.6 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a$17.6 million decrease in gain on sale of loans, a$5.7 million decrease in mark-to-market gains on LHFS, a$605 thousand increase in provision for repurchases, a$469 thousand decrease in realized and unrealized net gains on derivative financial instruments and a$246 thousand decrease in premiums from servicing retained loan sales. Partially offsetting these decreases was a$4.3 million decrease in direct origination expenses. The sharp and unexpected decline in gain on sale reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and a significant increase in mortgage interest rates resulting in customer home purchase affordability issues. As previously discussed, the increase in interest rates which began in the fourth quarter
of
2021,
63
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caused a significant increase in credit spreads which accelerated into the second quarter and third quarter of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the third quarter of 2022. For the three months endedSeptember 30, 2022 , we originated and sold$62.0 million and$83.2 million of mortgage loans, respectively, as compared to$682.6 million and$563.1 million of loans originated and sold, respectively, during the same period in 2021. During the three months endedSeptember 30, 2022 , as a result of historically low volume our margins were (110) bps as compared to 287 bps during the same period in 2021. For the three months endedSeptember 30, 2022 , servicing fees (expenses), net were fees of$32 thousand compared to an expense of$124 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the third quarter of 2021. The servicing portfolio average balance increased 20% to$70.1 million for the three months endedSeptember 30, 2022 as compared to an average balance of$58.5 million for the comparable period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize an immaterial amount of servicing fees, net or servicing expenses, net related to the small UPB of remaining servicing portfolio atSeptember 30, 2022 . During the three months endedSeptember 30, 2022 , we had no servicing retained loan sales. For the three months endedSeptember 30, 2022 , gain on MSRs, net was a net gain of$196 thousand compared to$101 thousand in the comparable 2021 period. For the three months endedSeptember 30, 2022 , we recorded a$15 thousand gain from change in fair value of MSRs primarily due to changes in fair value associated with changes in market interest rates, inputs and assumptions partially offset by scheduled and voluntary prepayments. For the three months endedSeptember 30, 2021 , we recorded a$42 thousand loss from a change in fair value of MSRs primarily due to changes in scheduled and voluntary prepayments. Additionally, during the three months endedSeptember 30, 2022 , we recorded$181 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales. For the three months endedSeptember 30, 2022 , other income increased to$315 thousand as compared to$46 thousand in the comparable 2021 period. The$269 thousand increase in other income was primarily due to a$224 thousand increase in interest income on cash deposits due to the increase in interest rates as well as a$42 thousand increase in interest spread between loans held-for-sale and their related warehouse borrowings during the three months endedSeptember 30, 2022 as compared to the comparable period in 2021. As a result of the increase in interest rates which began in the fourth quarter of 2021, as well as our efforts to increase the weighted average coupon on our production, we have positive net interest carry on our originations as the note rates on the underlying mortgage loans financed in most instances was greater than the financing rates on our warehouse lines of credit financing the originations, as compared to negative spread for the same period in the prior year. Personnel expense decreased$6.7 million to$4.4 million for the three months endedSeptember 30, 2022 as compared to the same period in 2021. The decrease in personnel expense is primarily related to a reduction in variable compensation commensurate with reduced originations during the third quarter of 2022 as well as a reduction in headcount to support reduced volume as compared to 2021. As a result, average headcount decreased 58% in the mortgage lending segment for the three months endedSeptember 30, 2022 as compared to the same period in 2021. 64 Table of Contents
Business promotion expense decreased$1.6 million to$545 thousand for the three months endedSeptember 30, 2022 as compared to$2.2 million for the same period in the prior year. Business promotion previously remained relatively low as a result of the favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside ofCalifornia and maintain our lead volume as competition increased. As a result of the dislocation within the NonQM market as a result of the significant increase in interest rates, in the third quarter of 2022, we further reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment.
Although we continue to source leads through digital campaigns, which allows
for a more cost effective approach, the recent competitiveness among other
lenders for NonQM production within the
General, administrative and other expenses decreased$561 thousand to$1.2 million for the three months endedSeptember 30, 2022 , as compared to$1.8 million for the same period in 2021. During the three months endedSeptember 30, 2022 , general, administrative and other expenses decreased$652 thousand due to a decrease in occupancy, professional fees, data processing, and other expense all related to a reduction in fundings during the period.
Partially offsetting the decrease in general, administrative and other expenses
was a
For the Nine Months Ended September 30,
$ %
2022 2021 Change Change
Gain on sale of loans, net $ 5,452 $ 50,432 $ (44,980) (89) %
Servicing fees (expense), net 27 (393) 420 107Gain on mortgage servicing rights, net 351 102
249 244 Total revenues 5,830 50,141 (44,311) (88) Other income (expense) 968 (129) 1,097 850 Personnel expense (21,190) (34,758) 13,568 39 Business promotion (4,172) (5,140) 968 19
General, administrative and other (4,741) (6,700)
1,959 29
(Loss) earnings before income taxes
For the nine months endedSeptember 30, 2022 , gain on sale of loans, net was a gain of$5.5 million compared to a gain of$50.4 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a$40.1 million decrease in gain on sale of loans, a$12.6 million increase in mark-to-market losses on LHFS, a$3.3 million increase in provision for repurchases and a$413 thousand decrease in premiums from servicing retained loan sales. Partially offsetting these decreases in gain on sale of loans, net was a$8.3 million decrease in direct origination expenses and a$3.2 million increase in realized and unrealized net gains on derivative financial instruments. As previously discussed, the increase in interest rates which began in the fourth quarter of 2021, caused a significant increase in credit spreads which accelerated into the second and third quarters of 2022, resulting in a substantial over supply of low coupon originations causing a severe decline in margins and diminishing capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022. As a result, origination volumes decreased significantly during the first nine months of 2022. For the nine months endedSeptember 30, 2022 , we originated and sold$672.2 million and$950.9 million of mortgage loans, respectively, as compared to$2.1 billion and$2.0 billion of loans originated and sold, respectively, during the same period in 2021. During the nine months endedSeptember 30, 2022 , margins were 81 bps as compared to 235 bps during the same period in 2021. 65
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For the nine months endedSeptember 30, 2022 , servicing fees (expense), net were$27 thousand compared to an expense of$393 thousand in the comparable 2021 period. The reduction in servicing expenses, net was due to the increase in the average size of our mortgage servicing portfolio resulting in increased servicing fees as compared to the same period in 2021. As a result, the servicing portfolio average balance increased 53% to$72.5 million for the nine months endedSeptember 30, 2022 as compared to an average balance of$47.4 million for the comparable period in 2021. While we continue to selectively retain mortgage servicing, we will continue to recognize an immaterial amount of servicing fees, net or servicing expenses, net related to interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio. During the nine months endedSeptember 30, 2022 , we had$4.5 million in servicing retained loan sales. For the nine months endedSeptember 30, 2022 , gain on MSRs, net was a net gain of$351 thousand compared to a net gain of$102 thousand in the comparable 2021 period. For the nine months endedSeptember 30, 2022 , we recorded a$173 thousand gain from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market rates, inputs and assumptions partially offset by$103 thousand loss from scheduled and voluntary prepayments. For the nine months endedSeptember 30, 2021 , we recorded an$88 thousand loss from voluntary and scheduled prepayments partially offset by a$47 thousand gain from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market interest rates, inputs and assumptions. Additionally, during the nine months endedSeptember 30, 2022 , we recorded$281 thousand gain on sale of mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales. For the nine months endedSeptember 30, 2022 , other income (expense) increased to income of$968 thousand as compared to expense of$129 thousand in the comparable 2021 period. The$1.1 million increase in other income was primarily due to a$813 thousand increase net interest spread between loans held-for-sale and their related warehouse borrowings during the nine months endedSeptember 30, 2022 as compared to the comparable period in 2021. As a result of the increase in interest rates which began in the fourth quarter of 2021, as well as our efforts to increase the weighted average coupon on our production, we have positive net interest carry on our originations as the note rates on the underlying mortgage loans financed in most instances is greater than the financing rates on our warehouse lines of credit financing the originations, as compared to negative spread for the same period in the prior year. Additionally, for the 2022, interest income on cash deposits increased$303 thousand as compared to the same period in the prior year, due to the recent increases in interest rates. Personnel expense decreased$13.6 million to$21.2 million for the nine months endedSeptember 30, 2022 as compared to the same period in 2021. The decrease in personnel expense is primarily related to a reduction in variable compensation commensurate with reduced originations during the first nine months of 2022 as well as a reduction in headcount to support reduced origination volume as compared to 2021. As a result, average headcount decreased 36% in the mortgage lending segment for the nine months endedSeptember 30, 2022 as compared to the same period in 2021. Although personnel expense decreased in the mortgage lending segment during the first nine months of 2022, it increased to 315 bps of fundings as compared to 162 bps for the comparable 2021 period. Business promotion expense decreased$968 thousand to$4.2 million for the nine months endedSeptember 30, 2022 as compared to$5.1 million for the same period in the prior year. Business promotion previously remained low as a result of prior quarters' more favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside ofCalifornia and maintain our lead volume as competition increased. As a result of the dislocation within the NonQM market as a result of the significant increase in interest rates, starting in the second quarter of 2022 and continuing through the third quarter of 2022, we reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current environment. Although we continue to source leads through digital campaigns, which allows for a more cost effective approach, the recent competitiveness among other lenders for NonQM production within theCalifornia market has driven up advertising costs. General, administrative and other expenses decreased$2.0 million to$4.7 million for the nine months endedSeptember 30, 2022 , as compared to$6.7 million for the same period in 2021. During the nine months endedSeptember 30, 2022 , general, administrative and other expenses decreased by$2.0 million primarily due to a$1.2 million decrease in occupancy, data processing, and other expense all related to a reduction in loan fundings during the period, as well as an$887 thousand decrease in legal fees associated with a decrease in litigation and related expenses. Partially 66
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offsetting the reduction in general, administrative and other expenses was a
Long-Term Mortgage Portfolio
As previously noted above, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights relating to 37 securitizations that closed between 2000 and 2007, which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result of the sale, in accordance with FASB ASC 810-10-25, we deconsolidated the securitized mortgage trust assets totaling approximately$1.6 billion and trust liabilities of$1.6 billion as of the sale date as the Company was no longer the primary beneficiary of the consolidated securitization trusts. We will remain as the master servicer with respect to all of the securitizations until such time that the securitization trusts are collapsed or payoff. For the Three Months Ended September 30, $ % 2022 2021 Change Change Other revenue$ 29 $ 24 $ 5 21 % Personnel expense (17) (27) 10 37
General, administrative and other (52) (215)
163 76
Total expenses (69) (242) 173 71
Net interest (expense) income (1,242) 1,197 (2,439) (204)Change in fair value of long-term debt (435) (1,803) 1,368 76 Change in fair value of net trust assets, including trust REO gains - 3,112 (3,112) (100) Total other (expense) income (1,677) 2,506 (4,183) (167) (Loss) earnings before income taxes$ (1,717) $ 2,288
For the three months endedSeptember 30, 2022 , general, administrative and other expense decreased$163 thousand to$52 thousand as compared to$215 thousand for the same period in 2021. The decrease in general, administrative and other expense for the three months endedSeptember 30, 2022 was due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022. For the three months endedSeptember 30, 2022 , net interest (expense) income was an expense of$1.2 million as compared to income of$1.2 million for the same period in 2021. Net interest income decreased$2.4 million for the three months endedSeptember 30, 2022 primarily attributable to a$2.1 million decrease as a result of the sale of the legacy portfolio inMarch 2022 . Additionally, interest expense on the long-term debt increased$239 thousand as a result of an increase in 3-month LIBOR as compared to the third quarter of 2021. During the three months endedSeptember 30, 2022 , the fair value of long-term debt decreased by$2.6 million to$33.3 million from$35.9 million atSeptember 30, 2022 . The decrease in estimated fair value was the result of a$3.3 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company's risk profile partially offset by a$435 thousand change in the market specific credit risk as a result of an increase in the risk free rate component of the discount rate and forward LIBOR curve as compared to the second quarter of 2022, partially offset by a$287 thousand increase due to accretion. The decrease in change in fair value of net trust assets, including trust REO (residual interests in securitizations) for the three months endedSeptember 30, 2022 was due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022. 67 Table of Contents For the Nine Months Ended September 30, $ % 2022 2021 Change Change Other revenue $ 72$ 92 $ (20) (22) % Personnel expense (67) (82) 15 18
General, administrative and other (144) (416)
272 65
Total expenses (211) (498) 287 58
Net interest (expense) income (2,152) 3,538 (5,690) (161)Change in fair value of long-term debt 3,187 638 2,549 400 Change in fair value of net trust assets, including trust REO gains (losses) 9,248 (702)
9,950 1417
Total other income 10,283 3,474 6,809 196
Earnings before income taxes $ 10,144 $ 3,068 $ 7,076 231 %
For the nine months ended September 30, 2022 , general, administrative and other
expense decreased $272 thousand to $144 thousand as compared to $416 thousand
for the same period in 2021. The decrease in general, administrative and other
expense for the nine months ended September 30, 2022 was due to the
aforementioned sale and transfer of the legacy securitization portfolio during
the first quarter of 2022.
For the nine months ended September 30, 2022 , net interest (expense) income was
an expense of $2.2 million as compared to income of $3.5 million for the same
period in 2021. Net interest income decreased $5.7 million for the nine months
ended September 30, 2022 primarily attributable to a $5.3 million decrease as a
result of the sale of the legacy portfolio in March 2022 as well as a reduction
in net interest spread on the long-term mortgage portfolio prior to the sale.
Additionally, interest expense on the long-term debt increased
During the nine months endedSeptember 30, 2022 , the fair value of long-term debt decreased by$13.3 million to$33.3 million from$46.5 million atDecember 31, 2021 . The decrease in estimated fair value was the result of an$11.1 million change in the instrument specific credit risk primarily the result of an increase in the discount rate associated with the Company's risk profile, a$3.2 million change in the market specific credit risk as a result of an increase in the risk free rate component of the discount rate and forward LIBOR curve during 2022, partially offset by a$1.0 million increase due to accretion. The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of$9.2 million for the nine months endedSeptember 30, 2022 . As previously noted, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within our long-term mortgage portfolio. As a result, inMarch 2022 , we recorded a$9.2 million increase in fair value, net of$277 thousand in transaction costs related to the transfer of the legacy securitization portfolio. Real Estate Services For the Three Months Ended September 30, $ % 2022 2021 Change Change
Real estate services fees, net$ 290 $ 244 $ 46 19 % Personnel expense (283) (298) 15 5 General, administrative and other (56) (61)
5 8 Loss before income taxes$ (49) $ (115) $ 66 57 % 68 Table of Contents For the three months endedSeptember 30, 2022 , real estate services fees, net were$290 thousand compared to$244 thousand in the comparable 2021 period. The increase is the result of an$58 thousand increase in in real estate services fees partially offset by a$12 thousand decrease in loss mitigation fees. Additionally, as previously noted, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within the long-term mortgage portfolio. Although there may be periods with slight increases in real estate service fees, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the
purchaser.
For the Nine Months Ended September 30,
$ %
2022 2021 Change Change
Real estate services fees, net
(892) (894) 2 0
General, administrative and other (164) (189) 25 13 Loss before income taxes$ (324) $ (151) $ (173) (115) % For the nine months endedSeptember 30, 2022 , real estate services fees, net were$732 thousand compared to$932 thousand in the comparable 2021 period. The$200 thousand decrease in real estate services fees, net was primarily the result of a$151 thousand decrease in loss mitigation fees and a$49 thousand decrease in real estate service fees. Additionally, as previously noted, inMarch 2022 , we sold our residual interest certificates, and assigned certain optional termination and loan purchase rights which entailed the entire legacy securitization portfolio within the long-term mortgage portfolio. As a result, it is our expectation that the real estate services fees generated from the long-term mortgage portfolio will continue to decline in future periods as the securitization trusts are called or collapsed by the purchaser.
Corporate
The corporate segment includes all compensation applicable to the corporate
services groups, public company costs as well as debt expense related to the
Convertible Notes and capital leases. This corporate services group supports all
operating segments. A portion of the corporate services costs is allocated to
the operating segments. The costs associated with being a public company as well
as the interest expense related to the Convertible Notes and capital leases are
not allocated to our other segments and remain in this segment.
For the Three Months Ended September 30,
$ %
2022 2021 Change Change
Interest expense $ (404) $ (466) $ 62 13 %
Other expenses (4,483) (4,149) (334) (8)
Loss before income taxes $ (4,887) $ (4,615) $ (272) (6) %
For the three months ended September 30, 2022 , interest expense decreased to
$404 thousand as compared to $466 thousand in the comparable 2021 period. The
decrease was primarily due to a $88 thousand decrease in interest expense
attributable to the $5.0 million pay down of the convertible notes in May 2022 ,
partially offset by a $28 thousand increase in interest expense associated with
the premium financing associated with the corporate-owned life insurance trusts
liability.
For the three months ended September 30, 2022 , other expenses increased to $4.5
million as compared to $4.1 million for the comparable 2021 period. During the
three months ended September 30, 2022 , the primary increase in other expense was
a $615 thousand increase in legal and professional fees associated with the
aforementioned Exchange Offer and a $186 thousand increase in occupancy expense
primarily attributable to the reduction in personnel in the mortgage lending
segment, which reduced allocated rent to the mortgage lending division and
increased the rent in corporate.
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Partially offsetting the increase in legal and occupancy expense was a$463 thousand decrease in personnel expense, professional fees, data processing, and general administrative and other expense all related to a reduction in fundings during the period. For the Nine Months Ended September 30, $ % 2022 2021 Change Change Interest expense$ (1,288) $ (1,389) $ 101 7 % Other expenses (12,855) (12,340) (515) (4) Loss before income taxes$ (14,143) $ (13,729) $ (414) (3) %
For the nine months endedSeptember 30, 2022 , interest expense decreased to$1.3 thousand as compared to$1.4 million in the comparable 2021 period. The decrease was primarily due to a$137 thousand decrease in interest expense attributable to the$5.0 million pay down of the convertible notes inMay 2022 , partially offset by an$36 thousand increase in interest expense associated with the premium financing associated with the corporate-owned life insurance trusts liability. For the nine months endedSeptember 30, 2022 , other expenses increased to$12.9 million as compared to$12.3 million for the comparable 2021 period. During the nine months endedSeptember 30, 2022 , the primary increase in other expense was a$1.3 million increase in legal and professional fees primarily associated with the aforementioned Exchange Offer, a$553 thousand increase in occupancy expense primarily attributable to ROU asset impairment of$123 thousand related to the sublease of approximately 1,900 square feet of a floor within our corporate office, a$173 thousand increase in CAM expense related to a true up of prior and current year maintenance for the building as well as a reduction in allocated rent to the mortgage lending division. Partially offsetting the increase in other expenses was a$683 thousand increase in the cash surrender value of the corporate-owned life insurance trusts for the nine months endedSeptember 30, 2022 , as a result of the application of prior year investment gains which get applied at the annual renewal date in the first quarter of each fiscal year, as well as a$806 decrease in personnel expense, professional fees, data processing, and general administrative and other expense all related to a reduction in fundings during the period.
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