IMPAC MORTGAGE HOLDINGS, INC. Management's discussion and analysis of financial condition and results of operations contain 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. Refer to Item 1. "Business-Forward- Looking Statements" for a complete description of forward-looking statements. Refer to Item 1. "Business" for information on our businesses and operating segments.
Amounts are presented in thousands, except per share data or as otherwise indicated.
Market Conditions
U.S. economic activity slowed during 2022 reflecting the impacts of significantly higher inflation, rising interest rates and energy price volatility as well as repercussions from ongoing geopolitical uncertainty alongside continued economic impacts from the coronavirus (COVID-19) pandemic which resulted in supply chain disruptions. Inflation across many key economies reached generational highs, prompting central banks to undertake monetary policy tightening actions that are likely to create headwinds to economic growth.U.S. Gross Domestic Product (GDP) grew at an estimated annual rate of 2.1% in 2022, while the personal consumption expenditures price index of 5.0% inDecember 2022 remained well above theFederal Reserve Board's (FRB) target inflation rate. The FRB increased short-term interest rates by a total of 425 basis points during 2022 and has indicated that it will increase short-term interest rates further in 2023 in order to fight inflation. While there is debate among economists as to whether these factors, coupled with recent periods of economic contraction in theU.S. , indicate that theU.S. has entered, or in the near term will enter, a recession, it remains difficult to predict the full impact on macroeconomic conditions. These conditions have created significant uncertainty about the future economic environment which will continue to evolve and impact our business in future periods. Concerns over domestic and global policy issues, trade policy in theU.S. and geopolitical events, as well as the implications of those events on the markets in general, further add to the global uncertainty. Interest rate levels, inflation and slowing economic growth, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will continue to impact our results in 2023 and beyond. 32 Table of Contents
Selected Financial Results for 2022 and 2021
For the Three Months Ended For the Year Ended
December 31 , September 30 ,
2022 2022 2021 2022 2021
Revenues:
Gain (loss) on sale of loans, net $ 865 $ (682)
349 290 212 1,081 1,144
(Loss) gain on mortgage servicing
rights, net (157) 196 (68) 194 34
Servicing fees (expense), net 36 32
(39) 63 (432)
Broker fee income 50 - - 50 -
Other (73) 3 (29) 890 279Total revenues (expenses), net 1,070 (161) 14,937 8,595 66,319
Expenses:
Personnel expense 5,060 5,701 13,204 30,705 52,778 General, administrative and other 3,664 3,792
3,978 15,698 16,795
Occupancy 2,041 1,038 1,062 5,297 4,236
Business promotion 261 545 2,249 4,425 7,395
Total expenses 11,026 11,076 20,493 56,125 81,204Operating (loss) earnings: (9,956) (11,237) (5,556) (47,530) (14,885) Other (expense) income: Net interest (expense) income (1,390) (1,334) 403 (3,869) 2,398 Change in fair value of long-term debt (430) (435) 1,459 2,757 2,098 Change in fair value of net trust assets - - 7,284 9,248 6,582 Total other (expense) income, net (1,820) (1,769) 9,146 8,136 11,078 (Loss) earnings before income taxes (11,776) (13,006) 3,590 (39,394) (3,807) Income tax expense (8) 7 8 38 71 Net (loss) earnings$ (11,768) $ (13,013) $ 3,582$ (39,432) $ (3,878) Other comprehensive (loss) earnings: Change in fair value of instrument specific credit risk 6,097 3,347 (1,148) 17,213 (2,722) Total comprehensive (loss) earnings$ (5,671) $ (9,666)
$ 2,434
Diluted weighted average common shares 31,144 21,523 21,359 23,918 21,332
Diluted (loss) earnings per share
$ 0.15$ (1.65) $ (0.22) Status of Operations
For the year endedDecember 31, 2022 , net loss was$39.4 million , or$1.65 per diluted common share, as compared to net loss of$3.9 million , or$0.22 per diluted common share in 2021. For the quarter endedDecember 31, 2022 , net loss was$11.8 million , or$0.38 per diluted common share, as compared to net earnings of$3.6 million , or$0.15 per diluted common share in the fourth quarter of 2021, and net loss of$13.0 million , or$0.62 per diluted common share, in the third quarter of 2022. Net loss for the year endedDecember 31, 2022 increased to$39.4 million as compared to$3.9 million for the year endedDecember 31, 2021 . The year over year increase in net loss was primarily due to a$59.0 million decrease in gain on sale of loans, net, coupled with a$2.9 million decrease in other income, which was partially offset by an$25.1 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 through the fourth quarter 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 pulling 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 2022. For the year endedDecember 31, 2022 , we originated$693.7 million of loans as compared to$2.9 billion of loans originated during the same period in 2021. During the year endedDecember 31, 2022 , margins were 91 bps as compared to 225 bps during the same period in 2021. 33 Table of Contents Other income decreased$2.9 million to$8.1 million for the year endedDecember 31, 2022 primarily due to a$3.6 million reduction in trust gains and net interest (expense) income collectively, which was the result of the sale of the legacy securitization portfolio during the first quarter of 2022, and which was in turn offset by a$659 thousand increase in fair value of our long-term debt. Offsetting the decreases in total revenues and other income was a$25.1 million decrease in operating expenses during 2022 primarily due to a reduction in variable compensation commensurate with reduced originations as well as a reduction in headcount to support reduced volume. As part of our continuous expense management assessment, as previously noted, we have undertaken a number of initiatives during the latter half of 2022 and into the first quarter of 2023 that we believe will significantly reduce our expense run rate. InJanuary 2023 , we exited our legacy commercial office space of 120,000 sq. ft. and relocated to a new 19,000 sq.ft. office space. The reduction of space was made possible by our ability to maintain a majority of our workforce as a hybrid or remote workforce, minimizing in-office space needs. In accordance with the terms of the lease termination agreement, we paid termination consideration of$3.0 million . We estimate that the amount of base rent, common area maintenance (CAM) charges, storage, parking, and any other miscellaneous charges that would have been payable during the final 20 months of the original lease term would have been in excess of$8.8 million . The new lease term runs throughJuly 31, 2025 with an average rent of$1.35 per sq. ft. over the term of the lease, which including CAM charges, totals approximately$800 thousand over the term of the lease, resulting in significant savings. In line with our expense management strategies, we repositioned our retail consumer direct channel, CashCall Mortgage (CCM), to be a mortgage broker rather than a direct lender at the end of 2022 and into 2023. As noted in previous years, our GSE loan originations were sold directly through aggregators. While we remain in good standing with our aggregator partners, the cost to produce retail loans in light of the rising rate environment and severe margin compression felt across the residential mortgage industry proved challenging-resulting in lower origination volumes and higher cost to produce throughout 2022. The broker fulfillment model has many strengths including a reduced expense load associated with personnel, operational and technology support, and reduced marketing needs due to organic lead volume generated by the CCM brand. Broker fulfillment also supports a broader product offering to CCM consumers, allowing the Company to move away from the expense and complexity of managing multiple lending products with support from several departments. We believe adopting a more cost-effective origination strategy is essential to managing the overall monthly expense load of the retail channel while also driving revenue across a broad spectrum of product offerings to consumers. Additionally, given our lack of conventional GSE origination volume and servicing rights over the past several years, with no direct GSE deliveries to Fannie Mae or Freddie Mac since 2016 and 2020, respectively, we intend to voluntarily relinquish our GSE Seller/Servicer designation which has been suspended during these period of non-delivery. We expect to be a third-party originator with both GSE's to support our broker model as needed. Our Wholesale Channel continued to experience significant volume and margin deterioration during the latter half of 2022, and into 2023. The continued volatility experienced with the Non-QM market associated with liquidity, product offerings, expansive credit to meet consumer demand, and rising rates have all proven to be a considerable hindrance to maintaining a profitable channel in the Wholesale space. It is our belief that the market conditions and projections will not improve in the near term, and as a result in the first quarter of 2023, the Company decided to wind down operations within its Wholesale Channel until market conditions improve. With minimal active loans in the pipeline, the Company had no outstanding warehousing or counterparty obligations associated with its wholesale activity. As noted above, the Company will remain focused on serving consumers through its retail channel, exclusively through a broker model fulfillment strategy until market conditions improve to support other opportunities in the direct and/or wholesale lending space. Non-GAAP Financial Measures
For the year endedDecember 31, 2022 , adjusted loss before tax (as defined below) was$52.0 million , or$2.17 per diluted common share, as compared to an adjusted loss before tax of$12.4 million , or$0.58 per diluted common share, in 2021. For the quarter endedDecember 31, 2022 , adjusted loss before tax was$11.0 million , or$0.35 per diluted common share, as compared to an adjusted loss before tax of$5.0 million , or$0.23 per diluted common share, for the fourth quarter of 2021, and adjusted loss before tax of$12.6 million , or$0.59 per diluted common share, for the third quarter of 2022. 34
Table of Contents
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 before tax and diluted adjusted loss per common share before tax. Adjusted loss and diluted adjusted loss 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 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 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 (loss) earnings before income taxes, (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 (loss) earnings before tax and diluted (loss) earnings per common share to non-GAAP adjusted loss before tax and non-GAAP diluted adjusted loss per common share before tax: For the Three Months Ended For the Year EndedDecember 31 ,September 30 ,
2022 2021 2022 2021
(Loss) earnings before income taxes:
Change in fair value of mortgage servicing rights 138 (223) (32) (317) (221) Change in fair value of long-term debt 430 435 (1,459) (2,757) (2,098) Change in fair value of net trust assets, including trust REO (losses) gains - - (7,284) (9,248) (6,582) Legacy corporate-owned life insurance (1) 225 177 166 (257) 330 Adjusted loss before tax$ (10,983) $ (12,617) $ (5,019) $ (51,973) $ (12,378) Diluted weighted average common shares 31,144 21,523 21,359 23,918 21,332 Diluted adjusted loss per common share before tax$ (0.35) $
(0.59)
Diluted (loss) earnings per common $ share (0.38) $ (0.62) $ 0.15$ (1.65) $ (0.22) Adjustments: Cumulative non-declared dividends on preferred stock - 0.02 0.02 - 0.04 Change in fair value of mortgage servicing rights 0.01 (0.01) - (0.01) (0.01) Change in fair value of long-term debt 0.01 0.01 (0.07) (0.11) (0.10) Change in fair value of net trust assets, including trust REO gains (losses) - - (0.34) (0.39) (0.31) Legacy corporate-owned life insurance 0.01 0.01 0.01 (0.01) 0.02 Diluted adjusted loss per common share before tax$ (0.35) $
(0.59)
Amounts included in other revenues, general, administrative and other expense
and net interest income for amounts associated with the cash surrender value (1) 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.
Key Metrics
Total mortgage originations volumes were
? 2022 and
quarter of 2021 and
NonQM mortgage origination volumes were
? 2022 and
quarter of 2021 and$683.6 million in 2021. 35 Table of Contents
Gain on sale of loans, net decreased to
2022, as compared to
? of loans, net decreased to
for 2022 as compared to
for 2021.
During the first quarter of 2022, we sold the legacy securitization portfolio
for
? thousand in transaction costs, resulting in the deconsolidation of securitized
mortgage trust assets of approximately
mortgage trust liabilities of approximately
In
? for approximately
with the remaining proceeds received in 2023 upon transfer of the servicing and
transfer of all trailing documents.
Servicing fees (expense), net was income of
? of 2022 and income of
thousand in the fourth quarter of 2021 and an expense of
Operating expenses (personnel, business promotion and general, administrative
? and other) decreased to
million in 2022 as compared to
$81.2 million in 2021. Mortgage Lending For the year ended 2022, total originations were$693.7 million as compared to$2.9 billion in 2021. Retail originations represented the largest channel of originations with 61%, or$422.0 million , of total originations in 2022, which was down from 80% of total originations, or$2.3 billion , in 2021. The decrease in originations as compared to 2021, was due to the continued increase in interest rates which began in the fourth quarter of 2021, resulting in a reduction in purchase loans due to a decrease in home purchase affordability and in refinance volume due to the number of loans that had previously refinanced during the preceding historically low interest rate environment. While we began to shift our origination focus away from more rate and margin sensitive conventional originations during the first quarter of 2021, the increase in interest rates which began in the fourth quarter of 2021 and accelerated throughout 2022, resulted in a significant increase in credit spreads, in which further resulted in a substantial over supply of low coupon originations causing a severe decline in margins and diminished capital market distribution exits for originators reliant upon an aggregation execution model. To mitigate the risks associated with reduced distribution exits and extended settlement timelines, we began to pull back on production, significantly increasing the pricing on our loan products as well as completely shifting to a best-efforts delivery for non-agency production in the first quarter of 2022, which significantly reduced our origination volumes during 2022 as compared to 2021. We continue to manage our headcount, pipeline and capacity to balance the risks inherent in an aggregation execution model. For the year ended December 31, (in millions) 2022 % 2021 % Originations by Channel: Retail$ 422.0 61 %$ 2,318.3 80 % Wholesale 271.7 39 585.1 20 Total originations$ 693.7 100 %$ 2,903.4 100 %
Our loan products include conventional loans for Fannie Mae and Freddie Mac,
NonQM, jumbo and government loans insured by FHA,
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Originations by Loan Type:
For the Year Ended December 31,
(in millions) 2022 2021 % Change
Conventional $ 211.8 $ 2,096.9 (90) %
NonQM 462.5 683.6 (32)
Jumbo 5.5 73.7 (93)
Government (1) 13.9 49.2 (72)
Total originations $ 693.7 $ 2,903.4 (76) %
Weighted average FICO (2) 741 759
Weighted average LTV (3) 64.6% 57.7%
Weighted average coupon 4.90% 3.14%
Avg. loan size (in thousands) $ 382.2 $ 362.4 (1) Includes government-insured loans including FHA,
(2)
(3) LTV-loan to value-measures ratio of loan balance to estimated property value
based upon third party appraisal.
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 backed off NonQM production in the latter half of the first quarter of 2022 with NonQM originations decreasing to$18.4 million in the fourth quarter of 2022 down from$314.3 million during the first quarter of 2022, and down from$382.1 million during the fourth quarter of 2021. For the year endedDecember 31, 2022 , NonQM originations decreased to$462.5 million , or 67% of total originations, as compared to$683.6 million , or 24% of total originations, for the year endedDecember 31, 2021 . The increase in the percentage NonQM originations is the result of the dramatic decline in conventional originations in 2022 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. In 2022, our NonQM originations had a weighted average Fair Isaac Corporation credit score (FICO) of 738 and a weighted average LTV ratio of 67%. In 2021, our NonQM originations had a weighted average FICO of 747 and a weighted average LTV ratio of 65%. In 2022, the retail channel accounted for 43% of NonQM originations while the third party originations (TPO) channels accounted for 57% of NonQM production. In 2021, the retail channel accounted for 28% of NonQM originations while the TPO channels accounted for 72% of NonQM production. We believe the quality, consistency and performance of our NonQM originations has been demonstrated through the previous issuance of 21 securitizations since 2018, whereby our originations were represented as the largest originator in over half of the deals and represented no less than the third largest originator in the other deals. Four of the 21 securitizations were 100% backed by NonQM collateral from the Company with the senior tranches receivingAAA ratings. For the year endedDecember 31, 2022 , refinance volume decreased 81% to$500.4 million as compared to$2.6 billion in 2021. The decrease in originations was due to the aforementioned significant increase in interest rates as compared to 2021. We continue to manage our headcount, pipeline and capacity to balance the risks inherent in an aggregation execution model. For the Year Ended December 31, (in millions) 2022 % 2021 % Refinance$ 500.4 72 %$ 2,611.9 90 % Purchase 193.3 28 291.5 10 Total originations$ 693.7 100 %$ 2,903.4 100 % As ofDecember 31, 2022 , we had approximately 581 approved wholesale relationships with mortgage brokerage companies and are approved to lend in 47 states. While we currently have no approved correspondent relationships with banks, credit unions and mortgage companies, we are approved to lend in 50
states.
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Mortgage Servicing
InDecember 2022 , we sold$68.0 million of our government insured MSRs for approximately$725 thousand , receiving$508 thousand in proceeds upon sale, with the remaining proceeds received in 2023 upon transfer of the servicing and transfer of all trailing documents. As a result of the sale, we were not servicing mortgage loans atDecember 31, 2022 as compared to a mortgage servicing portfolio of$71.8 million atDecember 31, 2021 . The servicing portfolio generated net servicing fees of$63 thousand for the year endedDecember 31, 2022 , as compared to net servicing expense of$432 thousand for the year endedDecember 31, 2021 , as a result of the small UPB of the servicing portfolio during the year.
Real Estate Services
Real estate services fees, net are generated from our former long-term mortgage portfolio. We provide portfolio loss mitigation and real estate services including real estate owned (REO) surveillance and disposition services, default surveillance and loss recovery services, short sale and real estate brokerage services, portfolio monitoring and reporting services. 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. For the year endedDecember 31, 2022 , real estate service fees, net were$1.1 million as compared to$1.1 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , the real estate services segment posted a loss before income taxes of$292 thousand as compared to a loss before income taxes of$265 thousand for the year endedDecember 31, 2021 .
Long-Term Mortgage Portfolio
Our former long-term mortgage portfolio primarily included (a) the residual interests in securitizations, (b) master servicing rights from the securitizations and (c) long-term debt.
As previously noted, inMarch 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$3.1 million in 2021.
For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of Operations below.
Corporate
The corporate segment includes all 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 are allocated to the operating segments. The costs associated with being a public company, unused space from our corporate office as well as the interest expense related to the Convertible Notes and capital leases is not allocated to our operating segments and remains in this segment.
For additional information regarding the corporate segment refer to Results of Operations by Business Segment below.
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.
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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 the following:
? fair value measurements;
? variable interest entities and transfers of financial assets and liabilities;
? repurchase reserve;
? interest income and interest expense; and
? income taxes. Fair Value Measurements
Financial Accounting Standards Board-Accounting Standards Codification FASB
ASC 820-10-35 defines fair value, establishes a framework for measuring fair
value and outlines a fair value hierarchy based on the inputs to valuation
techniques used to measure fair value. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (also referred
to as an exit price). Fair value measurements are categorized into a three-level
hierarchy based on the extent to which the measurement relies on observable
market inputs in measuring fair value. Level 1, which is the highest priority in
the fair value hierarchy, is based on unadjusted quoted prices in active markets
for identical assets or liabilities. Level 2 is based on observable market-based
inputs, other than quoted prices, in active markets for similar assets or
liabilities. Level 3, which is the lowest priority in the fair value hierarchy,
is based on unobservable inputs. Assets and liabilities are classified within
this hierarchy in their entirety based on the lowest level of any input that is
significant to the fair value measurement.
The use of fair value to measure our financial instruments is fundamental to our
financial statements and is a critical accounting estimate because a substantial
portion of our assets and liabilities are recorded at estimated fair value.
Financial instruments classified as Level 3 are generally based on unobservable
inputs, and the process to determine fair value is generally more subjective and
involves a high degree of management judgment and assumptions. These assumptions
may have a significant effect on our estimates of fair value, and the use of
different assumptions, as well as changes in market conditions and interest
rates, could have a material effect on our results of operations or financial
condition.
Mortgage loans held-for-sale-We elected to carry our mortgage loans
held-for-sale originated or acquired from the mortgage lending operation at fair
value. Fair value is based on quoted market prices, where available, prices for
other traded mortgage loans with similar characteristics, and purchase
commitments and bid information received from market participants.
Mortgage servicing rights-We elected to carry all of our mortgage servicing
rights arising from our mortgage lending operation at fair value. The fair value
of mortgage servicing rights is based upon a discounted cash flow model. The
valuation model incorporates assumptions that market participants would use in
estimating the fair value of servicing. These assumptions include estimates of
prepayment speeds, discount rate, cost to service, escrow account earnings,
contractual servicing fee income, prepayment and late fees, among other
considerations.
Derivative financial instruments-We utilize certain derivative instruments in
the ordinary course of our business to manage our exposure to changes in
interest rates. These derivative include Hedging Instruments (typically
to-be-announced mortgage-backed securities (TBA MBS), forward loan commitments
and interest rate swap futures). We also issue interest rate lock commitments
(IRLCs) to borrowers in connection with single family mortgage loan
originations. We recognize all derivative instruments at fair value. The concept
of fair value relating to IRLCs is no different than fair value for any other
financial asset or liability: fair value is the price at which an orderly
transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions. Because IRLCs do not trade in the market, the Company determines the
estimated fair value based on expectations of what an investor would pay to
acquire the Company's IRLCs, which utilizes current market information for
secondary market prices for underlying loan types with similar characteristics
using the TBA MBS market, which is actively quoted and easily validated through
external sources. The data inputs used in this valuation include, but are not
limited to, loan type, underlying loan amount, note rate, loan program, and
expected sale date of the loan, adjusted for current market conditions. These
valuations are adjusted at the loan level to consider the servicing release
premium and loan pricing adjustments specific to each loan. For all IRLCs, the
base value is then adjusted for the anticipated current secondary market prices
for underlying loans and estimated servicing value with similar coupons,
maturities and credit quality, subject to the anticipated loan funding
probability (Pull through Rate). This value is adjusted for other costs that
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would be required by a market participant acquiring the IRLCs. The fair value
of TBA MBS are based on the actively quoted TBA MBS market using observable
inputs related to characteristics of the underlying MBS stratified by product,
coupon and settlement date and are recorded in other liabilities in the
consolidated balance sheets. The fair value of swap futures are based on the
actively traded instruments in a liquid market. The initial and subsequent
changes in value of IRLCs and Hedging Instruments are a component of gain on
sale of loans, net in the consolidated statements of operations and
comprehensive loss.
Long-term debt-Long-term debt (consisting of junior subordinated notes) is
reported at fair value within the long-term mortgage portfolio. These securities
are measured based upon an analysis prepared by management, which utilizes a
discounted cash flow analysis which takes into consideration our credit risk.
Unrealized gains and losses are recognized in earnings in the accompanying
consolidated statements of operations and comprehensive loss as change in fair
value of long-term debt. Our estimate of the fair value of the long-term debt
requires us to exercise significant judgment as to the timing and amount of the
future obligation. Changes in assumptions resulting from changes in our credit
risk profile will affect the estimated fair value of the long-term debt and
those changes are recorded as a component of net earnings. A change in
assumptions associated with the improvement in our credit risk profile could
result in a significant increase in the estimated fair value of the long-term
debt which would result in a significant charge to net earnings.
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 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 were 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.
Repurchase Reserve
When we sell loans through whole loan sales we are required to make normal and
customary representations and warranties about the loans to the purchaser. Our
whole loan sale agreements generally require us to repurchase loans if we breach
a representation or warranty given to the loan purchaser. In addition, we may be
required to repurchase loans as a result of borrower fraud or if a payment
default occurs on a mortgage loan shortly after its sale.
Investors may request us to repurchase loans or to indemnify them against losses
on certain loans which the investors believe either do not comply with
applicable representations or warranties or defaulted shortly after its
purchase. Upon completion of our investigation regarding the investor claims, we
may reject the investor claim, repurchase or provide indemnification on certain
loans, as appropriate. We maintain a liability reserve for expected losses on
dispositions of loans expected to be repurchased or on which indemnification is
expected to be provided. We regularly evaluate the adequacy of this repurchase
liability reserve based on trends in repurchase and indemnification requests,
actual loss experience, settlement negotiations, and other relevant factors
including economic conditions.
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We record a provision for losses relating to such representations and warranties as part of each loan sale transaction. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and continually update our estimated repurchase liability. The level of the repurchase liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change over the lives of the underlying loans.
Interest Income and Interest Expense
Prior to the sale of the legacy securitization trusts and related
deconsolidation of the trusts, interest income on securitized mortgage
collateral and interest expense on securitized mortgage borrowings were recorded
using the effective interest method for the period based on the previous
quarter-end's estimated fair value. Interest expense on long-term debt is
recorded using the effective interest method based on estimated future interest
rates and cash flows.
Income Taxes
Provision for income taxes is calculated using the asset and liability method,
which requires the recognition of deferred income taxes. Deferred tax assets and
liabilities are recognized and reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and certain
changes in the valuation allowance. Deferred tax assets are recognized subject
to management's judgment that realization is more likely than not. A valuation
allowance is recognized for a deferred tax asset if, based on the weight of the
available evidence, it is more likely than not that some portion of the deferred
tax asset will not be realized. In making such judgments, significant weight is
given to evidence that can be objectively verified. We provide a valuation
allowance against deferred tax assets if, based on available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. In determining the adequacy of the valuation allowance, we
consider all forms of evidence, including: (1) historic earnings or losses;
(2) the ability to realize deferred tax assets through carry back to prior
periods; (3) anticipated taxable income resulting from the reversal of taxable
temporary differences; (4) tax planning strategies; and (5) anticipated future
earnings exclusive of the reversal of taxable temporary differences.
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Financial Condition and Results of Operations
Financial Condition
For the years ended
The following table shows the condensed consolidated balance sheets for the following periods:
(in thousands, except per share
data) December 31, December 31, $ %
2022 2021 Change Change
ASSETS
Cash $ 25,864 $ 29,555 $ (3,691) (12) %
Restricted cash 4,140 5,657 (1,517) (27)
Mortgage loans held-for-sale 13,052 308,477 (295,425) (96)
Mortgage servicing rights - 749 (749) (100)Securitized mortgage trust assets - 1,642,730
(1,642,730) (100) Other assets 17,275 35,603 (18,328) (51) Total assets$ 60,331 $ 2,022,771 $ (1,962,440) (97) % LIABILITIES & (DEFICIT) EQUITY Warehouse borrowings $ 3,622$ 285,539 $ (281,917) (99) % Convertible notes 15,000 20,000 (5,000) (25) Long-term debt (Par value;$62,000 ) 27,753 46,536 (18,783) (40) Securitized mortgage trust liabilities - 1,614,862 (1,614,862) (100) Repurchase reserve 5,875 4,744 1,131 24 Other liabilities 19,684 41,154 (21,470) (52) Total liabilities 71,934 2,012,835 (1,940,901) (96) % Total (deficit) equity (11,603) 9,936 (21,539) (217) % Total liabilities and
stockholders' (deficit) equity$ 60,331 $ 2,022,771 $ (1,962,440) (97) % Book and tangible book value per share$ (0.32) $ 0.47
AtDecember 31, 2022 , cash decreased to$25.9 million from$29.6 million atDecember 31, 2021 . Cash balances decreased primarily due to payment of operating expenses partially offset by the aforementioned$37.5 million in proceeds from the sale and transfer of the legacy securitization portfolio during the first quarter of 2022. Mortgage loans held-for-sale decreased$295.4 million to$13.1 million atDecember 31, 2022 as compared to$308.5 million atDecember 31, 2021 . During the year endedDecember 31, 2022 , we had originations of$693.7 million offset by$978.6 million in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period were generally sold within one or two subsequent months. Mortgage servicing rights decreased$749 thousand to zero atDecember 31, 2022 as compared to$749 thousand atDecember 31, 2021 . In 2022, the mortgage servicing portfolio decreased due to a mark-to-market decrease in fair value of$70 thousand partially offset by additions of$46 thousand from servicing retained loan sales of$4.5 million in UPB. InDecember 2022 , we sold$68.0 million in UPB of our government insured MSRs for approximately$725 thousand , receiving$508 thousand in proceeds upon sale, with the remaining proceeds received in 2023 upon transfer of the servicing and transfer of all trailing documents. AtDecember 31, 2022 , we had no servicing for others as compared to$71.8 million atDecember 31, 2021 . Other assets decreased$18.3 million to$17.3 million atDecember 31, 2022 as compared to$35.6 million atDecember 31, 2021 . The reduction in other assets was primarily attributable to a$9.0 million decrease in ROU assets as a result of the aforementioned lease modification and termination of our former corporate office inDecember 2022 , as well as amortization of the ROU asset prior to the lease modification and termination.
Warehouse borrowings decreased
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at December 31, 2022 as compared to December 31, 2021 . During 2022, we
decreased our warehouse lending capacity by $574.0 million to $41.0 million and
decreased our warehouse counterparties from four to two as a result of the
decrease in origination volumes. At December 31, 2022 , we did not renew our
$25.0 million warehouse facility further reducing warehouse capacity to $16.0
million with one counterparty.
Convertible notes decreased $5.0 million to $15.0 million at December 31, 2022
as compared to $20.0 million at December 31, 2021 . On April 29, 2022 , the
Company and holders of its Notes agreed to extend the maturity date of the Notes
upon conclusion of the term on May 9, 2022 . The Company decreased the aggregate
principal amount of the Notes to $15.0 million , following the pay-down of $5.0
million in principal of the Notes on May 9, 2022 (Third Amendment). The Notes
are due and payable in three equal installments of $5.0 million on each of May
9, 2023 , May 9, 2024 and the stated maturity date of May 9, 2025 .
The estimated fair value of long-term debt decreased by $18.7 million to $27.8
million from $46.5 million at December 31, 2021 . The decrease in estimated fair
value was the result of a $17.2 million change in the instrument specific credit
risk (included in other comprehensive loss in the consolidated statements of
operations) primarily the result of an increase in the credit risk associated
with the Company's risk profile and a $2.8 million change in the market specific
credit risk (included in Change in fair value of long-term debt in the
consolidated statements of operations) 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 $1.2 million increase due to accretion (included in
interest expense in the consolidated statements of operations).
Repurchase reserves increased $1.2 million to $5.9 million at December 31, 2022
as compared to $4.7 million at December 31, 2021 . The increase was due to $2.4
million in provision for repurchases as a result of an increase in expected
future losses related to repurchased loans partially offset by $1.3 million in
settlements primarily related to repurchased loans and indemnifications.
Other liabilities decreased $21.5 million to $19.7 million at December 31, 2022
as compared to $41.2 million at December 31, 2021 . The reduction in other
liabilities was primarily attributable to a $12.5 million decrease in ROU
liabilities as a result of the aforementioned lease modification and termination
of our former corporate office in December 2022 as well as amortization of the
ROU liability prior to the lease modification and termination.
Book value per share decreased 168% to ($0.32 ) at December 31, 2022 as compared
to $0.47 at December 31, 2021 . Book value per common share increased 79% to
($0.41 ) as of December 31, 2022 (inclusive of the $3.5 million of liquidation
preference on our Series D Preferred stock), as compared to ($1.96 ) as of
December 31, 2021 (which was inclusive of the remaining $51.8 million of
liquidation preference on our preferred stock). Inclusive of the Series D
Preferred stock cumulative undeclared dividends in arrears of $52 thousand in
2022 and Series B Preferred stock cumulative undeclared dividends in arrears of
$19.1 million in 2021, (as discussed further in Note 8 - Redeemable Preferred
Stock of the "Notes to Consolidated Financial Statements"), book value per
common share increased 86% to ($0.41 ) as of December 31, 2022 as compared to
($2.86 ) as of December 31, 2021 .
As previously disclosed, in March 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, payoff or the master servicing
rights are sold.
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The changes in our trust assets and trust liabilities as summarized below.
December 31, December 31, $ %
2022 2021 Change Change
Securitized 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 year 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 December 31, 2022 $ - $ - $ - $ - $ -
Represents change in fair value of net trust assets, including trust REO (1) gains in the consolidated statements of operations and comprehensive loss for
the year ended December 31, 2022 .
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Total trust assets above reflect a net gain of
The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations):
December 31, 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 for the period indicated:
Estimated Fair Value of Residual
Interests by Vintage Year at
December 31, 2021
Origination Year 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 $ 21,679 $ 6,189 $ 27,868
Weighted avg. prepayment rate 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
Ar previously noted, with the sale of the legacy securitization portfolio inMarch 2022 , we remain the master servicer with respect to all of the securitizations until such time that the deals are collapsed, paid off, or the master servicing rights are sold. We used theMortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measured delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days late or greater, foreclosures and delinquent bankruptcies were$310.5 million or 17.3% as ofDecember 31, 2021 . 45 Table of Contents The following table summarized the unpaid principal balances of loans in our mortgage portfolio, included within securitized mortgage collateral, that were 60 or more days delinquent (utilizing the MBA method) as ofDecember 31, 2021 : December 31, Total Securitized mortgage collateral 2021 Collateral 60 - 89 days delinquent$ 21,086 1.2 % 90 or more days delinquent 147,387 8.2 Foreclosures (1) 89,181 5.0 Delinquent bankruptcies (2) 52,854 2.9 REO (3) - -
Total 60 or more days delinquent and REO
$ 1,798,079 100.0 %
(1) Represents properties in the process of foreclosure.
(2) Represents bankruptcies that are 30 days or more delinquent.
At
Delinquency and forbearance are taken into account as part of our credit loss assumptions when determining the estimated fair value of our residual interests.
The following table summarizeed the UPB of securitized mortgage collateral, mortgage loans held-for-sale and real estate owned, that were non-performing as of the dates indicated (excludes 60-89 days delinquent):
Total
December 31 , Collateral
2021 %90 or more days delinquent (including forbearances), REO, foreclosures and delinquent bankruptcies
$ 289,422 16.1 % Real estate owned inside trusts at NRV 3,479
0.2
Total non-performing assets $ 292,901 16.3 %
Non-performing assets consisted 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 was 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. AtDecember 31, 2021 , non-performing assets to total collateral was 16.3%. Non-performing assets decreased by approximately$60.3 million atDecember 31, 2022 as comparedDecember 31, 2021 . 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 prior to the sale of the portfolio. For the year endedDecember 31, 2022 , no REO entries were recorded as the REO was a component of the sale of the legacy portfolio inMarch 2022 . For the year endedDecember 31, 2021 , we recorded a$111 thousand increase in net realizable value of the REO. Increases and write-downs of the net realizable value reflect increases or declines in value of the REO subsequent to foreclosure date, but prior to the date of sale. 46 Table of Contents
The following table presents the balances of the REO:
December 31, 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.
Results of Operations
For the year ended
For the Year Ended December 31,
$ %
2022 2021 Change Change
Revenues $ 8,595 $ 66,319 $ (57,724) (87) %
Expenses (56,125) (81,204) 25,079 31
Net interest (expense) income (3,869) 2,398 (6,267) (261)Change in fair value of long-term debt 2,757 2,098 659 31 Change in fair value of net trust assets, including trust REO losses 9,248 6,582
2,666 41 Income tax expense (38) (71) 33 46 Net loss$ (39,432) $ (3,878) $ (35,554) (917) % Loss per share available to common stockholders-basic$ (1.65) $ (0.22) $ (1.43) (656) % Loss per share available to common stockholders-diluted$ (1.65) $ (0.22) $ (1.43) (656) % 47 Table of Contents Revenues For the Year Ended December 31, $ % 2022 2021 Change Change
Gain on sale of loans, net$ 6,317 $ 65,294 $ (58,977) (90) % Servicing fees (expense), net 63 (432) 495
115
Real estate services fees, net 1,081 1,144 (63)
(6)
Gain on mortgage servicing rights, net 194 34 160
471
Broker fee income 50 - 50 n/a
Other revenues 890 279 611 219
Total revenues $ 8,595 $ 66,319 $ (57,724) (87) %
Gain on sale of loans, net. For the year ended December 31, 2022 , gain on sale
of loans, net totaled $6.3 million compared to $65.3 million in the comparable
2021 period. The decrease in gain on sale of loans, net was most notably due to
a $62.5 million decrease in gain on sale of loans, a $12.2 million increase in
mark-to-market losses on loans held-for-sale (LHFS), a $2.3 million increase in
provision for repurchases and a $490 thousand decrease in premiums from
servicing retained loan sales. Partially offsetting these decreases in gain on
sale of loans, net was a $13.2 million decrease in direct origination expenses
and a $5.4 million increase in realized and unrealized net gains on derivative
financial instruments.
The sharp 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
throughout 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 2022. For the
year ended December 31, 2022 , we originated and sold $693.7 million and $978.6
million of mortgage loans, respectively, as compared to $2.9 billion and $2.8
billion of loans originated and sold, respectively, during the same period in
2021. During the year ended December 31, 2022 , as a result of historically low
volume our margins were 91 bps as compared to 225 bps during the same period in
2021.
Servicing (expenses) fees, net. For the year ended December 31, 2022 , servicing
fees, net were $63 thousand compared to servicing expenses, net of ($432)
thousand in the comparable 2021 period. The increase in servicing fees, 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.
For the years ended December 31, 2022 and 2021, we had $4.5 million and $52.2
million , respectively, in servicing retained loan sales. The servicing
portfolio average balance increased 29% to $66.2 million for the year ended
December 31, 2022 as compared to an average balance of $51.2 million for the
comparable period in 2021. While we continued to selectively retain mortgage
servicing throughout 2022, in December 2022 , we sold $68.0 million in UPB of our
government insured MSRs for approximately $725 thousand , receiving $508 thousand
in proceeds upon sale, with the remaining proceeds received in 2023 upon
transfer of the servicing and transfer of all trailing documents. As a result
of the servicing sale, we currently have no servicing portfolio at December
31,
2022.
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Gain on mortgage servicing rights, net.
For the Year Ended December 31,
$ %
2022 2021 Change ChangeGain on sale of mortgage servicing rights$ 264 $ 160 $ 104 65 % Changes in fair value: Due to changes in valuation market rates, inputs or assumptions 53 61 (8) (13) Other changes in fair value: Scheduled principal prepayments (43) (48)
5 10
Voluntary prepayments (80) (139) 59 42
Total changes in fair value $ (70) $ (126) $ 56 44
Gain on mortgage servicing rights, net
160 471 %
The year over year increase in gain on mortgage servicing rights, net was primarily due to the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales partially offset by a reduction due to the aforementioned servicing sale during the fourth quarter of 2022. For the year endedDecember 31, 2022 , gain on sale MSRs, net was$194 thousand compared to a gain of$34 thousand in the comparable 2021 period. For the year endedDecember 31, 2022 , we recorded a$264 thousand gain on sale of MSR, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales which was partially offset by an$18 thousand loss on sale of MSRs during the fourth quarter of 2022. During the year endedDecember 31, 2021 , we recorded a$160 thousand gain on MSRs, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales. Additionally, for the year endedDecember 31, 2022 , we recorded a$70 thousand loss from change in fair value of MSRs due to voluntary and scheduled prepayments partially offset by an increase in fair value changes associated with changes in market interest rates, inputs and assumptions. For the year endedDecember 31, 2021 , we recorded a$126 thousand loss from change in fair value of MSRs due to voluntary and scheduled prepayments partially offset by an increase in fair value changes associated with changes in market interest rates, inputs and assumptions. Real estate services fees, net. For the year endedDecember 31, 2022 , real estate services fees, net were flat at$1.1 million compared to$1.1 million in the comparable 2021 period. While real estate service fees were flat year over year, we expect them 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, 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, it is our expectation that the real estate services fees generated from the long term mortgage portfolio will decline in future periods as the securitization trusts are called or collapsed by the purchaser. Broker fee income. As previously noted in Item 1.- "Business" of Part I of this Annual Report on Form 10-K, inDecember 2022 , we repositioned our retail consumer direct channel CCM, to be a broker rather than a direct lender. As a result, during the fourth quarter of 2022 we had broker fee income of$50 thousand on$2.1 million of brokered loans. Other revenues. For the year endedDecember 31, 2022 , other revenues were$890 thousand as compared to$279 thousand in the comparable 2021 period. The$611 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. 49 Table of Contents Expenses For the Year Ended December 31, $ % 2022 2021 Change Change Personnel expense$ 30,705 $ 52,778 $ (22,073) (42) %
General, administrative and other 15,698 16,795 (1,097)
(7) Occupancy 5,297 4,236 1,061 25 Business promotion 4,425 7,395 (2,970) (40) Total expenses$ 56,125 $ 81,204 $ (25,079) (31) % Total expenses decreased to$56.1 million for the year endedDecember 31, 2022 compared to$81.2 million for the comparable period 2021. Personnel expense decreased$22.1 million to$30.7 million for the year endedDecember 31, 2022 as compared to$52.8 million in the same period in 2021. The decrease in personnel expense was primarily related to a reduction in variable compensation as well as a reduction in headcount to support reduced volume as compared to the same period in 2021. Average headcount decreased 37% to 210 for the year endedDecember 31, 2022 as compared to 335 for the same period in 2021. General, administrative and other expenses decreased to$15.7 million for the year endedDecember 31, 2022 compared to$16.8 million for the same period in 2021. The decrease in general, administrative and other expenses was the result of an$1.7 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$348 thousand increase in legal fees associated with the aforementioned Exchange Offers and a$215 thousand increase in CAM expense primarily related to a true up of prior and current year maintenance for the corporate headquarters. Occupancy expense increased to$5.3 million for the year endedDecember 31, 2022 compared to$4.2 million for the same period in 2021. The increase in occupancy expense was primarily due to the modification and early termination of the Company's previous corporate office. OnDecember 15, 2022 , IFC, a wholly-owned subsidiary of IMH, andJacaranda Holdings, LLC (the Landlord), entered into a Lease Termination Agreement (the Termination Agreement) relating to the lease (the Lease) for the Company's primary executive, administrative and operations offices located at19500 Jamboree Road ,Irvine, California (the Premises). The Lease, as amended, was originally entered into inMarch 2005 , and the Premises consisted of approximately 120,000 sq. ft. Pursuant to the Termination Agreement, IFC and Landlord agreed to terminate the Lease onJanuary 31, 2023 , in lieu of the Lease's original expiration date ofSeptember 30, 2024 . In accordance with the terms of the Termination Agreement, onDecember 16, 2022 , IFC paid to Landlord the termination consideration of$3.0 million among other required action items. As a result of the Termination Agreement, the Company accounted for the termination as a lease modification, recording an additional$970 thousand of occupancy expense inDecember 2022 related to the modification, with an additional$1.2 million in occupancy expense occurring inJanuary 2023 , when the Premises was vacated. Additionally, during the first quarter of 2022, the Company recorded a$123 thousand right of use (ROU )asset impairment charge related to the sublease of approximately 1,900 sq. ft. of a floor within the Company's previous corporate office, reducing the carrying value of the lease asset to its estimated fair value.
Business promotion decreased
Business promotion previously remained low as a result of the prior more favorable interest rate environment requiring significantly less business promotion to source leads. Beginning in second quarter of 2021, we began to increase our marketing expenditures in an effort to more directly target NonQM production in the retail channel, expand production expansion outside ofCalifornia and maintain our lead volume as competition increased. Due to the dislocation within the NonQM market based on the significant increase in interest rates, starting in the second quarter of 2022 and continuing through the end of 2022, we reduced our marketing spend as we pulled back on our origination volumes to mitigate the aforementioned risks associated with the current market environment. Although we continue to source leads through digital campaigns, which we believe allows for a more cost effective approach, the recent competitiveness among other lenders for NonQM production within theCalifornia market has driven up advertising costs. 50 Table of Contents Other Income For the Year Ended December 31, Increase % 2022 2021 (Decrease) Change Interest income$ 15,268 $ 65,666 $ (50,398) (77) % Interest expense (19,137) (63,268) 44,131 70 Net interest (expense) income (3,869) 2,398 (6,267) (261)
Change in fair value of long-term debt 2,757 2,098 659 31 Change in fair value of net trust assets, including trust REO gains 9,248 6,582
2,666 41 Total other income, net$ 8,136 $ 11,078 $ (2,942) (27) % Net Interest 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. The following tables summarize average balance, interest and weighted average yield on interest-earning assets and interest-bearing liabilities, for the periods indicated. For the Year Ended December 31, 2022 2021 Average Average Balance Interest Yield Balance Interest Yield ASSETS Securitized mortgage collateral$ 263,763 $ 10,772 4.08 %$ 1,872,153 $ 59,022 3.15 % Mortgage loans held-for-sale 81,809 3,910 4.78 199,796 6,634 3.32 Other (1) 47,297 586 1.24 44,376 10 0.02 Total interest-earning 392,869 15,268 2,116,325 65,666 assets $ $ 3.89 % $ $ 3.10 % LIABILITIES Securitized mortgage borrowings$ 259,768 $ 9,575 3.69 %$ 1,856,869 $ 50,897 2.74 % Warehouse borrowings 74,435 3,119 4.19 191,794 6,543 3.41 Long-term debt 38,198 4,692 12.28 45,534 3,965 8.71 Convertible notes 16,753 1,176 7.02 20,000 1,404 7.02 Other (2) 13,254 575 4.34 12,779 459 3.59 Total interest-bearing 402,408 19,137 2,126,976 63,268 liabilities $ $ 4.76 % $ $ 2.97 % Net interest (expense) spread (3)$ (3,869) (0.87) %$ 2,398 0.13 % Net interest margin (4) (0.98) % 0.11 %
(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 (expense) spread decreased$6.3 million for the year endedDecember 31, 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 59 bps for the years endedDecember 31, 2022 as compared to a negative spread of 9 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.
51
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As a result, net interest margin decreased to (0.98)% for the year ended
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$6.9 million reduction in net interest income for the year endedDecember 31, 2022 as compared to the same period in 2021. During the year endedDecember 31, 2022 , the yield on interest-earning assets increased to 3.89% from 3.10% in the comparable 2021 period. The yield on interest-bearing liabilities increased to 4.76% for the year endedDecember 31, 2022 from 2.97% 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 expected cash flow analysis. 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 2022, the estimated fair value of long-term debt decreased by$18.7 million to$27.8 million from$46.5 million atDecember 31, 2021 . The decrease in estimated fair value was the result of a$17.2 million change in the instrument specific credit risk (included in other comprehensive loss in the consolidated statements of operations) primarily the result of an increase in the credit risk associated with the Company's risk profile and a$2.8 million change in the market specific credit risk (included in Change in fair value of long-term debt in the consolidated statements of operations) 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$1.2 million increase due to accretion (included in interest expense in the consolidated statements of operations). During 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$2.7 million change in the instrument specific credit risk and a$1.5 million increase due to accretion, partially offset by a$2.1 million 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 2020.
Change in fair value of net trust assets, including trust REO gains
For the Year Ended
December 31,
2022 2021
Change in fair value of net trust assets, excluding
REO $ 9,248 $6,471
Gains from REO -
111
Change in fair value of net trust assets, including trust REO gains$ 9,248 $
6,582
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of$9.2 million for the year endedDecember 31, 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$6.6 million for the year endedDecember 31, 2021 . The change in fair value of net trust assets, excluding trust REO was due to$6.5 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 had decreased. Additionally, the NRV of REO increased$111 thousand during the period attributed to lower expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period. 52 Table of Contents Income Taxes We recorded income tax expense of$38 thousand and$71 thousand for the years endedDecember 31, 2022 and 2021, respectively. The income tax expense for the years endedDecember 31, 2022 and 2021, is primarily the result of state income taxes from states where we do not have net operating loss (NOL) carryforwards or state minimum taxes. As ofDecember 31, 2022 , we had federal NOL carryforwards of$850.1 million . As ofDecember 31, 2022 , the estimated Federal NOL carryforward expiration schedule is as follows (in millions):
Tax Year Established Amount Expiration Date
12/31/2007 $ 166.9 12/31/2027
12/31/2008 3.6 12/31/2028
12/31/2009 101.6 12/31/2029
12/31/2010 89.7 12/31/2030
12/31/2011 44.1 12/31/2031
12/31/2012 - 12/31/2032
12/31/2013 28.5 12/31/2033
12/31/2014 - 12/31/2034
12/31/2015 30.5 12/31/2035
12/31/2016 55.0 12/31/2036
12/31/2017 37.7 12/31/2037
12/31/2018 - n/a
12/31/2019 3.3 n/a
12/31/2020 47.8 n/a
12/31/2021 13.0 n/a
12/31/2022 (1) 228.4 n/a
Total Federal NOLs
NOL amounts are estimates until the final tax returns are filed in October
(1) 2023. Additionally, any NOLs that are generated subsequent to the enactment
of the Tax Act on
As of
Our deferred tax assets are primarily the result of net operating losses and basis differences on mortgage securities. We have recorded a full valuation allowance against our deferred tax assets atDecember 31, 2022 as it is more likely than not that the deferred tax assets will not be realized. The valuation allowance is based on the management's assessment that it is more likely than not that certain deferred tax assets, primarily net operating loss carryforwards, may not be realized in the foreseeable future due to objective negative evidence that we may not generate sufficient taxable income to realize the deferred tax assets. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) the ability to realize deferred tax assets through carry back to prior periods; (3) anticipated taxable income resulting from the reversal of taxable temporary differences; (4) tax planning strategies; and (5) anticipated future earnings exclusive of the reversal of taxable temporary differences.
We are subject to federal income taxes as a regular (Subchapter C) corporation
and file a consolidated
53
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Results of Operations by Business Segment
We have three primary operating segments: Mortgage Lending, Real Estate Services
and Long-Term Mortgage Portfolio. Unallocated corporate and other administrative
costs, including the cost associated with being a public company as well as the
interest expense related to the Convertible Notes and capital leases, are
presented in Corporate. Segment operating results are as follows:
Mortgage Lending
Condensed Statements of Operations Data
For the Year Ended December 31,
$ %
2022 2021 Change Change
Gain on sale of loans, net $ 6,317 $ 65,294 $ (58,977) (90) %Servicing fees (expense), net 63 (432) 495 115 Gain on mortgage servicing rights, net 194 34
160 471 Broker fee income 50 - 50 n/a Total revenues 6,624 64,896 (58,272) (90) Other income 1,377 122 1,255 1029 Personnel expense (23,851) (46,656) 22,805 49
General, administrative and other (4,909) (7,087)
2,178 31 Business promotion (4,423) (7,386) 2,963 40 Occupancy (842) (1,476)
634 43
(Loss) earnings before income taxes
For the year endedDecember 31, 2022 , gain on sale of loans, net totaled$6.3 million compared to$65.3 million in the comparable 2021 period. The decrease in gain on sale of loans, net was most notably due to a$62.5 million decrease in gain on sale of loans, a$12.2 million increase in mark-to-market losses on LHFS, a$2.3 million increase in provision for repurchases and a$490 thousand decrease in premiums from servicing retained loan sales. Partially offsetting these decreases in gain on sale of loans, net was a$13.2 million decrease in direct origination expenses and a$5.4 million increase in realized and unrealized net gains on derivative financial instruments. The sharp 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 throughout 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 2022. For the year endedDecember 31, 2022 , we originated and sold$693.7 million and$978.6 million of mortgage loans, respectively, as compared to$2.9 billion and$2.8 billion of loans originated and sold, respectively, during the same period in 2021. During the year endedDecember 31, 2022 , as a result of historically low volume our margins were 91 bps as compared to 225 bps during the same period in 2021. For the year endedDecember 31, 2022 , servicing fees, net were$63 thousand compared to servicing expenses, net of($432) thousand in the comparable 2021 period. The increase in servicing fees, 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. For the years endedDecember 31, 2022 and 2021, we had$4.5 million and$52.2 million , respectively, in servicing retained loan sales. As a result, the servicing portfolio average balance increased 29% to$66.2 million for the year endedDecember 31, 2022 as compared to an average balance of$51.2 million for the comparable period in 2021. While we had continued to selectively retain mortgage servicing throughout 2022, inDecember 2022 , we sold$68.0 million in UPB of 54
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our government insured MSRs for approximately$725 thousand , receiving$508 thousand in proceeds upon sale, with the remaining proceeds received in 2023 upon transfer of the servicing and transfer of all trailing documents. As a result of the servicing sale, we currently have no servicing portfolio atDecember 31, 2022 . The year over year increase in gain on MSRs, net was primarily due to the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales partially offset by a reduction due to the aforementioned servicing sale during the fourth quarter of 2022. For the year endedDecember 31, 2022 , gain on sale MSRs, net was$194 thousand compared to a gain of$34 thousand in the comparable 2021 period. For the year endedDecember 31, 2022 , we recorded a$264 thousand gain on MSRs, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales which was partially offset by an$18 thousand loss on sale of MSRs during the fourth quarter of 2022. During the year endedDecember 31, 2021 , we recorded a$160 thousand gain on MSRs, net as a result of the collection of holdbacks in excess of previously reserved for amounts on prior period mortgage servicing sales. Additionally, for the year endedDecember 31, 2022 , we recorded a$70 thousand loss from change in fair value of MSRs due to voluntary and scheduled prepayments partially offset by an increase in fair value changes associated with changes in market interest rates, inputs and assumptions. For the year endedDecember 31, 2021 , we recorded a$126 thousand loss from change in fair value of MSRs due to voluntary and scheduled prepayments partially offset by an increase in fair value changes associated with changes in market interest rates, inputs and assumptions. As previously noted in Item 1.- "Business" of Part I of this Annual Report on Form 10-K, inDecember 2022 , we repositioned our retail consumer direct channel CCM, to a broker rather than a direct lender. As a result, during the fourth quarter of 2022 we had broker fee income of$50 thousand on$2.1 million of brokered loans. For the year endedDecember 31, 2022 , other income increased to$1.4 million as compared to$122 thousand in the comparable 2021 period. The$1.3 million increase in other income was primarily due to a$700 thousand increase in net interest spread between loans held-for-sale and their related warehouse borrowings during the year endedDecember 31, 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 year endedDecember 31, 2022 , interest income on cash deposits increased$576 thousand as compared to the same period in the prior year, due to the increases in interest rates throughout 2022.
Personnel expense decreased
The
decrease in personnel expense was primarily related to a reduction in variable compensation commensurate with reduced originations for the year endedDecember 31, 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 45% to 141 for the year endedDecember 31, 2022 as compared to 257 for the same period in 2021. Although personnel expense decreased in the mortgage lending segment during 2022, it increased to 344 bps of fundings as compared to 161 bps for the comparable 2021 period.
Business promotion decreased
Business promotion previously remained low as a result of the prior 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 end 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 to$4.9 million for the year endedDecember 31, 2022 compared to$7.1 million for the same period in 2021. During the year endedDecember 31, 2022 , general, administrative and other expenses decreased$2.2 million primarily due to a$1.2 million decrease in data processing, and other expense all related to a reduction in loan fundings during the period as well as an$938 thousand decrease in legal and professional 55 Table of Contents
fees associated with a decrease in litigation and related expenses.
Occupancy expense decreased to$842 thousand for the year endedDecember 31, 2022 compared to$1.5 million for the same period in 2021. The decrease in occupancy expense was primarily due to a reduction in allocated rent to the mortgage lending division, partially offset by$123 thousand in ROU asset impairment. During the first quarter of 2022, the Company recorded a$123 thousand ROU asset impairment charge related to the sublease of approximately 1,900 square feet of a floor within the Company's corporate office, reducing the carrying value of the lease asset to its estimated fair value.
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, paid off or the master servicing rights are sold. For the Year Ended December 31, $ % 2022 2021 Change Change Other revenue$ 24 $ 110 $ (86) (78) % Personnel expense (89) (108) 19 18
General, administrative and other (173) (670)
497 74 Total expenses (262) (778) 516 66 Net interest (expense) income (3,494) 4,160 (7,654) (184)
Change in fair value of long-term debt 2,757 2,098 659 31 Change in fair value of net trust assets, including trust REO gains 9,248 6,582 2,666 41 Total other income 8,511 12,840 (4,329) (34) Earnings before income taxes$ 8,273 $ 12,172 $ (3,899) (32) % For the year endedDecember 31, 2022 , general, administrative and other expense decreased$497 thousand to$173 thousand as compared to$670 thousand for the same period in 2021. The decrease in general, administrative and other expense for the year endedDecember 31, 2022 was due to the aforementioned sale and transfer of the legacy securitization portfolio during the first quarter of 2022. For the year endedDecember 31, 2022 , net interest (expense) income was an expense of$3.5 million as compared to income of$4.2 million for the comparable 2021 period. Net interest income decreased$7.7 million for the year endedDecember 31, 2022 primarily attributable to a$6.9 million decrease as a result of the sale of the legacy portfolio inMarch 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 2022, the estimated fair value of long-term debt decreased by$18.7 million to$27.8 million from$46.5 million atDecember 31, 2021 . The decrease in estimated fair value was the result of a$17.2 million change in the instrument specific credit risk (included in other comprehensive loss in the consolidated statements of operations) primarily the result of an increase in the credit risk associated with the Company's risk profile and a$2.8 million change in the market specific credit risk (included in Change in fair value of long-term debt in the consolidated statements of operations) 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$1.2 million increase due to accretion (included in interest expense in the consolidated statements of operations). 56 Table of Contents The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of$9.2 million for the year endedDecember 31, 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 Real Estate Services For the Year Ended December 31, $ % 2022 2021 Change Change
Real estate services fees, net
(6) % Personnel expense (1,148) (1,170) 22
2
General, administrative and other (225) (239) 14
6 Loss before income taxes$ (292) $ (265) $ (27) (10) % For the year endedDecember 31, 2022 , real estate services fees, net were$1.1 million compared to$1.1 million in the comparable 2021 period. The$63 thousand decrease in real estate services fees, net was primarily the result of a$177 thousand decrease in loss mitigation fees partially offset by a$114 thousand increase 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 For the Year Ended December 31, $ % 2022 2021 Change Change Interest expense$ (1,743) $ (1,860) $ 117 6 % Other expenses (19,608) (16,267) (3,341) (21)
Loss before income taxes
For the year endedDecember 31, 2022 , interest expense decreased to$1.7 million as compared to$1.9 million in the comparable 2021 period. The$117 thousand decrease in interest expense was primarily a$228 thousand decrease in interest expense attributable to the$5.0 million pay down of the convertible notes inMay 2022 , partially offset by a$115 thousand increase in interest expense associated with the premium financing associated with the corporate-owned life insurance trusts liability. For the year endedDecember 31, 2022 , other expenses increased to$19.6 million as compared to$16.3 million for the comparable 2021 period. During the year endedDecember 31, 2022 , the primary increase in other expense was due to$1.6 million in legal and professional fees primarily associated with the aforementioned Exchange Offer and a$1.7 million increase in occupancy expense. The increase in occupancy expense was primarily attributable to the aforementioned modification and termination of our corporate office lease resulting in an additional$970 thousand in expense in the fourth quarter of 2022, ROU asset impairment of$123 thousand related to the sublease of approximately 1,900 square feet of a floor within our corporate office, a$214 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.
Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of our debt and margin calls relating to our Hedging Instruments and warehouse lines), fund new originations and purchases, meet servicing and master servicing requirements, and make investments as we identify them. As ofDecember 31, 2022 , unrestricted cash and cash equivalents were$25.9 million and uncommitted borrowing capacity under our warehouse lines was$41.0 million of which$3.6 million was outstanding as ofDecember 31, 2022 . AtDecember 31, 2022 , we did not renew our$25.0 million warehouse facility further reducing our total warehouse capacity 57 Table of Contents
to
As previously noted, we have undertaken a number of initiatives during the latter half of 2022 and into the first quarter of 2023 that we believe will significantly reduce our expense run rate. InJanuary 2023 , we exited our legacy commercial office space of 120,000 sq. ft. and relocated to a new 19,000 sq.ft. office space and paid a termination fee of$3.0 million . We estimate that the amount of base rent, common area maintenance (CAM) charges, storage, parking, and any other miscellaneous charges that would have been payable during the final 20 months of the original lease term would have been in excess of$8.8 million . The new lease term runs throughJuly 31, 2025 with an average rent of$1.35 per sq. ft. over the term of the lease, which including CAM charges would total approximately$800 thousand over the term of the lease, resulting in significant savings. In line with our expense management strategies, we repositioned our retail consumer direct channel, CashCall Mortgage (CCM) to be a mortgage broker rather than a direct lender at the end of 2022 and into 2023. As noted in previous years, our GSE loan originations were sold directly through aggregators. While we remain in good standing with our aggregator partners, the cost to produce retail loans in light of the rising rate environment and severe margin compression felt across the residential mortgage industry proved challenging-resulting in lower origination volumes and higher cost to produce throughout 2022. The broker fulfillment model has many strengths including a reduced expense load associated with personnel, operational and technology support, and reduced marketing needs due to organic lead volume generated by the CCM brand. Broker fulfillment also supports a broader product offering to CCM consumers, allowing the Company to move away from the expense and complexity of managing multiple lending products with support from several departments. We believe adopting a more cost-effective origination strategy is essential to managing the overall monthly expense load of the retail channel while also driving revenue across a broad spectrum of product offerings to consumers. Our wholesale channel continued to experience significant volume and margin deterioration during the latter half of 2022, and into 2023. The continued volatility experienced with the Non-QM market associated with liquidity, product offerings, expansive credit to meet consumer demand, and rising rates have all proven to be a considerable hindrance to maintaining a profitable channel in the wholesale space. It is our belief that the market conditions and projections will not improve in the near term, and as a result in the first quarter of 2023, the Company decided to wind down operations within its wholesale channel until market conditions improve. With minimal active loans in the pipeline, the Company had no outstanding warehousing or counterparty obligations associated with its wholesale activity. In the first quarter of 2023, as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES), we filed for$7.3 million of employee retention credit, which is a cash refund we qualified for based on the first, second and third quarters of 2021. We expect to receive the refund in the third or fourth quarter of 2023. Although the Company currently forecasts adequate liquidity to operate its business for the next 12 months, repayment of$5.0 million in principal of Convertible Notes dueMay 9, 2023 , with no additional added capital or liquidity, will result in a more limited amount of liquidity to operate the business. The Company may seek to raise secured or unsecured debt, raise equity or working capital, retire or restructure the Convertible Notes (which pay down$5.0 million eachMay 9th for the next three years), pursue actions to reorganize the capital structure or redeploy the liquidity to other corporate finance and strategic opportunities. We cannot provide assurance that any of such efforts will be successful or will improve our liquidity.
Sources of Liquidity
During the year endedDecember 31, 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.
While 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 our capital raise efforts will be successful.
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
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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 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 continued to accelerate throughout 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 pulled 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. Cash flows from our mortgage lending operations. We receive loan fees from loan originations. Fee income consists of application and underwriting fees and fees on cancelled loans. These loan fees are offset by the related direct loan origination costs including broker fees related to our wholesale and correspondent channels. In addition, we generally recognize net interest income on loans held-for-sale from the date of origination through the date of disposition. We sell or securitize substantially all of the loans we originate in the secondary mortgage market, with servicing rights released or retained. Loans are sold on a whole loan basis by entering into sales transactions with third-party investors in which we receive a premium for the loan and related servicing rights, if applicable. The mortgage lending operations sold$978.6 billion and$2.8 billion of mortgages through whole loan sales and securitizations during 2022 and 2021, respectively. Additionally, the mortgage lending operations enter into IRLCs and utilize Hedging Instruments and forward delivery commitments to hedge interest rate risk. We may be subject to pair-off gains and losses associated with these instruments. Since we rely significantly upon loan sales to generate cash proceeds to repay warehouse borrowings and to create credit availability, any disruption in our ability to complete loan sales may require us to utilize other sources of financing, which, if available at all, may be on less favorable terms. In addition, delays in the disposition of our mortgage loans increase our risk by exposing us to credit and interest rate risk for this extended period of time.
In
As previously noted above, in December we began to broker loans and in the first quarter 2023, we repositioned our retail consumer direct channel CCM, to be a broker rather than a direct lender. As a result, during the fourth quarter of 2022, we had broker fee income of$50 thousand on$2.1 million of brokered loans. We expect broker fee income to substantially increase in 2023 as the pivot in strategy allows us to originate loans for consumers within a wider suite of loan products and programs-offering more flexibility around credit and pricing. We receive servicing income net of subservicing cost and other related servicing expenses from our mortgage servicing portfolio. For the year endedDecember 31, 2022 , servicing fees increased to$63 thousand compared to servicing expenses, net of($432) thousand in the comparable 2021 period, as a result of the servicing portfolio increasing to an average balance of$66.2 million for the year endedDecember 31, 2022 as compared to an average balance of$51.2 million for the comparable period in 2021. While we had continued to selectively retain mortgage servicing throughout 2022, as previously noted, inDecember 2022 we completed the sale of$68.1 million in UPB of our government insured MSRs for approximately$725 thousand , receiving$508 thousand in proceeds upon sale, with the remaining proceeds received in 2023 upon transfer of the servicing and transfer of all trailing documents. As a result of the servicing sale, we have no servicing portfolio as ofDecember 31, 2022 . Cash flows from our long-term mortgage portfolio (residual interests in securitizations). 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. Prior to the sale of the legacy securitization portfolio, we received residual cash flows on mortgages held as securitized mortgage collateral after 59
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distributions were made to investors on securitized mortgage borrowings to the extent required credit enhancements are maintained and performance covenants were complied with for credit ratings on the securitized mortgage borrowings. 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 as compared to$3.1 million for the year endedDecember 31, 2021 . These cash flows represented the difference between principal and interest payments on the underlying mortgages and are affected by the following:
? servicing and master servicing fees paid;
? premiums paid to mortgage insurers;
? cash payments/receipts on derivatives;
? interest paid on securitized mortgage borrowings;
? principal payments and prepayments paid on securitized mortgage borrowings;
? overcollateralization requirements;
? actual losses, net of any gains incurred upon disposition of other real estate
owned or acquired in settlement of defaulted mortgages;
? unpaid interest shortfall; and
? basis risk shortfall.
Additionally, we act as the master servicer for mortgages included in our long-term mortgage portfolio, which consists of CMO and REMIC securitizations. The master servicing fees we earn are generally 0.03% per annum (3 basis points) on the declining principal balances of these mortgages plus interest income on cash held in custodial accounts until remitted to investors, less any interest shortfall. With the sale of the legacy securitization portfolio, we remain the master servicer with respect to all of the securitizations with the expectation that the portfolio will decrease in size as deals are called or collapsed by the purchaser of the portfolio or payoff. Fees from our real estate service business activities. We earn fees from various real estate business activities, including loss mitigation, real estate disposition, monitoring and surveillance services and real estate brokerage. We provide services to investors, servicers and individual borrowers primarily by focusing on loss mitigation and performance of our long-term mortgage portfolio. Real estate services fees, net have declined and will continue to decline over time as a result of the decline in the number of loans and the UPB of the long-term mortgage portfolio. As a result of the aforementioned sale of the legacy securitization portfolio, 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.
Uses of Liquidity
Acquisition and origination of mortgage loans. For the year endedDecember 31, 2022 and 2021, the mortgage lending operations originated or acquired$693.7 million and$2.9 billion , respectively, of mortgage loans. When we originate mortgage loans and draw on the warehouse lines, we must pledge eligible loan collateral and make a capital investment, which is outstanding until we sell the loans. Initial capital invested in mortgage loans includes premiums paid when mortgages are acquired and originated and our capital investment, or "haircut," required upon financing, which is generally determined by the type of collateral provided and the warehouse facility terms. The haircuts are normally recovered from sales proceeds. With the shift to a broker delivery model in 2023, our reliance and use of liquidity related to warehouse line hair cuts are expected to be minimal. Investment in mortgage servicing rights. As part of our business plan, we have selectively invested in mortgage servicing rights through the sale of mortgage loans on a servicing retained basis and to a lesser extent the purchase of MSR pools. Beginning in 2021, we retained less servicing by doing more whole loan sales, servicing released. For the years 60
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endedDecember 31, 2022 and 2021, we capitalized$46 thousand and$536 thousand in mortgage servicing rights, respectively, from selling$4.5 million and$52.2 million , respectively, in loans with servicing retained. As previously noted, inDecember 2022 , we sold our remaining government insured MSRs and do not currently hold any mortgage servicing. Cash flows from financing facilities and other lending relationships. We primarily fund our mortgage originations on a short-term basis through warehouse facilities with third-party lenders which are primarily with national and regional banks. Our warehouse facilities are short-term borrowings which mature in less than one year. During the year endedDecember 31, 2022 , we have reduced our warehouse lending capacity to$41.0 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 , which we did not renew. InOctober 2022 , we entered into a$1.0 million committed facility which expires inOctober 2023 . InNovember 2022 , we reduced 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. AtDecember 31, 2022 , the warehouse facilities borrowing capacity amounted to$41.0 million , of which$3.6 million was outstanding. AtDecember 31, 2022 , we did not renew our$25.0 million warehouse facility further reducing warehouse capacity to$16.0 million with one counterparty. The warehouse facilities are secured by and used to fund single-family residential mortgage loans until such loans are sold. Under the terms of these warehouse lines, the Company is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum tangible net worth, (ii) minimum liquidity, (iii) a maximum leverage ratio and (iv) pre-tax net income requirements. As ofDecember 31, 2022 , we were not in compliance with certain warehouse lending related covenants, and received the necessary waivers. In order to mitigate the liquidity risk associated with warehouse borrowings, we attempt to sell or securitize our mortgage loans expeditiously. Our ability to meet liquidity requirements and the financing needs of our customers is subject to the renewal of our warehouse facilities or obtaining other sources of financing, if required, including additional debt or equity from time to time. Any decision our lenders or investors make to provide available financing to us in the future will depend upon a number of factors, including:
? our compliance with the terms of existing warehouse lines and credit
arrangements, including any financial covenants;
? the ability to obtain waivers upon any noncompliance;
? our financial performance;
? industry and market trends in our various businesses;
? the general availability of, and rates applicable to, financing and
investments;
? our lenders or investors resources and policies concerning loans and
investments; and
? the relative attractiveness of alternative investment or lending opportunities. Repurchase Reserve. When we sell loans through whole loan sales we are required
to make normal and customary representations and warranties about the loans to the purchaser. Our whole loan sale agreements generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. From time to time, investors have requested us to repurchase loans or to indemnify them against losses on certain loans which the investors believe either do not comply with applicable representations or warranties or defaulted shortly after its purchase. We record an estimated reserve for these losses at the time the loan is sold, and adjust the reserve to reflect the estimated
loss.
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Financing Activities
Long-term Debt (consisting of Junior Subordinated Notes). The Junior
Subordinated Notes are redeemable at par at any time with a stated maturity of
March 2034 and require quarterly distributions at 3-month LIBOR plus 3.75% per
annum. At December 31, 2022 , the interest rate was 8.52%. We are current on all
interest payments. At December 31, 2022 , long-term debt had an outstanding
principal balance of $62.0 million with an estimated fair value of $27.8 million
and is reflected on our consolidated balance sheets as long-term debt.
Convertible Notes. In May 2015 , we issued $25.0 million Convertible Promissory
Notes (Notes) to purchasers, some of which are related parties. The Notes were
originally due to mature on or before May 9, 2020 and accrue interest at a rate
of 7.5% per annum, paid quarterly.
Noteholders may convert all or a portion of the outstanding principal amount of
the Notes into shares of the Company's common stock (Conversion Shares) at a
rate of $21.50 per share, subject to adjustment for stock splits and dividends
(Conversion Price). The Company has the right to convert the entire outstanding
principal of the Notes into Conversion Shares at the Conversion Price if the
market price per share of the common stock, as measured by the average
volume-weighted closing stock price per share of the common stock on the NYSE
AMERICAN (or any other U.S. national securities exchange then serving as the
principal such exchange on which the shares of common stock are listed), reaches
the level of $30.10 for any twenty (20) trading days in any period of thirty
(30) consecutive trading days after the Closing Date (as defined in the
Convertible Notes). Upon conversion of the Notes by the Company, the entire
amount of accrued and unpaid interest (and all other amounts owing) under the
Notes are immediately due and payable. To the extent the Company pays any cash
dividends on its shares of common stock prior to conversion of the Notes, upon
conversion of the Notes, the noteholders will also receive such dividends on an
as-converted basis of the Notes less the amount of interest paid by the Company
prior to such dividend.
On April 15, 2020 , the Company amended and restated the outstanding Notes in the
principal amount of $25.0 million originally issued in May 2015 pursuant to the
terms of the Note Agreement between the Company and the noteholders of the
Notes. The Notes were amended to extend the maturity date by six months (until
November 9, 2020 ) and to reduce the interest rate on such Notes to 7.0% per
annum. In connection with the issuance of the Amended Notes, the Company issued
to the noteholders of the Notes, warrants to purchase up to an aggregate of
212,649 shares of the Company's common stock at a cash exercise price of $2.97
per share. The relative fair value of the warrants were $244 thousand and
recorded as debt discounts, which are accreted over the term of the warrants
(October 2020 ), using an effective interest rate of 8.9%. The warrants are
exercisable commencing on October 16, 2020 and expire on April 15, 2025 .
On October 28, 2020 , the Company entered into agreements with certain holders of
the Notes due November 9, 2020 in the aggregate principal amount of $25.0
million to further extend the maturity date of the Notes from November 9, 2020 ,
by an additional 18-months to May 9, 2022 and to decrease the aggregate
principal amount of the Notes to $20.0 million , following the pay-down of $5.0
million in principal of the Notes on November 9, 2020 . The interest rate on the
Notes remains at 7.0% per annum.
On April 29, 2022 , we entered into an agreement to repay $5.0 million of the
outstanding Notes on May 9, 2022 , the date of maturity of such Notes, and extend
the maturity date of the Notes upon conclusion of the term on May 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 on May 9, 2022
(Third Amendment). The Notes were due and payable in three equal installments
of $5.0 million on each of May 9, 2023 , May 9, 2024 and the Stated Maturity Date
of May 9, 2025 , provided we completed the contemplated Exchange Offer and
provided notice of redemption of our remaining outstanding Series B Preferred
Stock and Series C Preferred Stock by October 31, 2022 , as described below.On
October 20, 2022 , we received approval for the Exchange offer and subsequently provided notice of redemption of our remaining 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. Operating activities. Net cash provided by (used in) operating activities was$249.6 million for 2022 as compared to$(104.5) million for 2021, primarily due to the timing of originations and sales of loans held-for-sale between 2022 and 2021. During 2022 and 2021, the primary sources of cash in operating activities were cash received from fees generated by our mortgage and real estate service business activities, cash received from mortgage lending and excess cash flows from our residual interests in securitizations offset by operating expenses. 62 Table of Contents Investing activities. Net cash provided by investing activities was$110.4 million for 2022 as compared to$600.0 million for 2021. For 2022 and 2021, the primary source of cash from investing activities was provided by principal repayments on our securitized mortgage collateral as well as the sale of mortgage servicing rights and proceeds from the liquidation of REO and sale of the legacy securitization portfolio. Financing activities. Net cash used in financing activities was$365.2 million for 2022 as compared to$520.0 million for 2021. For 2022, significant uses of cash in financing activities were primarily for net repayments against warehouse agreements, principal repayments on securitized mortgage borrowings and the partial repayment of the Convertible notes. For 2021, significant uses of cash in financing activities were primarily for principal repayments on securitized mortgage borrowings, partially offset by net borrowings against warehouse agreements. Inflation. The consolidated financial statements and corresponding notes to the consolidated financial statements have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. For the years endedDecember 31, 2022 and 2021, inflation had no significant impact on our revenues or net income. Almost all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates have a greater effect on our performance than do the effects of general levels of inflation. Inflation affects our operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. 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, 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. Given our lack of conventional GSE origination volume and servicing rights over the past several years, with no direct GSE deliveries to Fannie Mae or Freddie Mac since 2016 and 2020, respectively, we intend to voluntarily relinquish our GSE Seller/Servicer designation which has been suspended during these period of non-delivery. We expect to be a third-party originator with both GSE's to support our broker model as needed. As disclosed within Note 13.-Commitments and Contingencies, 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 had 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. Every quarter the cumulative undeclared dividends in arrears increased by$0.5859 per Series B Preferred share, or approximately$390 thousand . The accrued and unpaid dividends on the Series B Preferred were payable only upon declaration by the Board of Directors, and the liquidation preference, inclusive of Series B Preferred cumulative undeclared dividends in arrears, was only payable upon voluntary or involuntary liquidation, dissolution or winding up of the Company's affairs. In addition, the Company was 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 carried limited voting rights and were redeemable at the option of the Company, retained 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 63
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Stock if any such dividends were 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 received the applicable consideration payable therein and were 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 stock were entitled to receive (the Series B Consideration), for each share of Series B Preferred stock 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 (Series D Preferred stock). Holders of Series C Preferred stock were entitled to receive (the Series C Consideration), for each share of Series C Preferred stock 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 Series D Preferred 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 Series D Preferred stock and 1,425,695 warrants to purchase an equal number of shares of common stock. Concurrently with the Exchange Offers, the Company received 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 would be redeemed (the Redemption) onNovember 15, 2022 upon 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 issued approximately 3,298,439 shares of newly issued common stock, 6,599,035 shares of Series D Preferred 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 only received the applicable consideration payable therein and were not entitled to any other payment with respect to the liquidation preference of, or any accrued and unpaid dividends on, any shares of Series B Preferred stock or Series C 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 Series B Preferred stock is completed prior toDecember 5, 2022 , to deposit 13,311,840 shares of Series D Preferred 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. The Exchange Offer was approved and closed with respect to tendered shares onOctober 26, 2022 , and the Company deposited the required stock with a third party pursuant to the Segregation Order. OnAugust 29, 2022 , theCircuit Court issued an order approving the form and substance of the notice by which the Company and the class notice administrator are required to give notice to the Series B Preferred stock class of the final hearing date ofDecember 5, 2022 , and the opportunity to file objections to the proposed final injunctive relief and to the applications for awards of attorney's fees, expenses and incentives. On dates betweenSeptember 7 through September 19 , the Company and the notice administrator provided the notice required by theAugust 29, 2022 order. OnDecember 5, 2022 , theCircuit Court held a final hearing on all outstanding matters identified in the notice. OnDecember 16, 2022 , theCircuit Court issued its Final Judgment Order which was entered onDecember 19, 2022 . The Final Judgment Order granted Plaintiff Camac's Motion for Attorney's Fees, Litigation Costs, and Incentive Payment, 64
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granted in part and denied in part Plaintiff Timm's Petition for Incentive Award and Payment of Costs and Expenses. InFebruary 2023 , pursuant to the Final Judgement Order, (i) the 2009 Dividend Amount was distributed to certain former Series B Preferred stockholders, with a portion going to pay attorney's fees, litigation costs and incentive payments and (ii) the Common Stock and Series D Preferred Stock that was held in escrow was distributed to certain former Series B Preferred stockholders, with a portion of the Series D Preferred Stock going to pay attorney's fees to Class Counsel. The Series D Preferred stock (w) ranks senior to the Common 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 Series D Preferred 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 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 Series D Preferred stock and for any stock ranking on parity with the Series D Preferred stock with respect to redemption and which have become redeemable as of the applicable redemption date would cause the Company to violate the Cash Consideration Restrictions, as defined below, or (B) any date the Company fixes not more than sixty (60) days after any determination by the Board of Directors (which the Board of Directors, 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 the Company of the redemption price for the Series D Preferred stock and any stock ranking on parity with the Series D Preferred stock with respect to redemption rights that have become redeemable as of such redemption date would not cause the Company 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 completion of the redemption, the aggregate cumulative undeclared dividends in arrears of approximately$20.3 million , or approximately$30.47 per outstanding share of Series B Preferred, were exchanged and are no longer considered in the earnings per share calculation. However, as a result of the Company not being able to satisfy the new dividend payment on the 8.25% dividend on the Series D Preferred stock as a result of the aforementioned Cash Consideration Restrictions, the Company has approximately$52 thousand in cumulative dividends in arrears on the new Series D Preferred Stock from the date of issuance. Every quarter the cumulative undeclared dividends in arrears will accumulate by approximately$0.0021 per Series D Preferred share, or approximately$72 thousand , increasing the new Series D Preferred 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 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. We may seek to raise secured or unsecured debt, raise equity or working capital, retire or restructure the Convertible Notes which pays down$5.0 million eachMay 9 for the next three years, pursue actions to reorganize the capital structure or redeploy the liquidity to other corporate finance however we cannot provide any assurance that our 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 many factors, particularly our ability to successfully operate our mortgage lending and real estate services segment as well as seek additional capital. Our future financial performance and profitability are dependent in large part upon the ability to operate our mortgage lending platform successfully. 65 Table of Contents Operational and Market Risks We are exposed to a variety of operation and market risks which include interest rate risk, credit risk, operational risk, real estate risk, prepayment risk, and liquidity risk. Interest Rate Risk
Interest Rate Risk-Mortgage Lending. We are exposed to interest rate risks relating to our ongoing mortgage lending operations. We use derivative instruments to manage some of our interest rate risk. However, we do not attempt to hedge interest rate risk completely. Our interest rate risk arises from the financial instruments and positions we hold. This includes mortgage loans held-for-sale, MSRs and derivative financial instruments. These risks are regularly monitored by executive management that identify and manage the sensitivity of earnings or capital to changing interest rates to achieve our overall financial objectives. Our principal market exposure is to interest rate risk, specifically changes in long-termTreasury rates and mortgage interest rates due to their impact on mortgage-related assets and commitments. We are also exposed to changes in short-term interest rates, such as LIBOR, on certain variable rate borrowings including our term financing and mortgage warehouse borrowings. The withdrawal and replacement of LIBOR with an alternative benchmark rate may introduce a number of risks for our business and the financial services industry. While cessation timelines have been agreed by the industry and regulatory authorities, we continue to assess how the discontinuation of existing benchmark rates could materially affect our business, financial condition and results of operations. Refer to "Risk Factors" for additional discussion regarding risks associated with the replacement of LIBOR. Our business is subject to variability in results of operations in both the mortgage origination and mortgage servicing activities due to fluctuations in interest rates. In a declining interest rate environment, we would expect our mortgage production activities' results of operations to be positively impacted by higher loan origination volumes and gain on sale margins. Interest rate lock commitments (IRLCs) represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held-for-sale, which are held in inventory awaiting sale into the secondary market, and our interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As such, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment through the earlier of (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range between 15 and 60 days; and our holding period of the mortgage loan from funding to sale is typically within 15 - 45 days for agency loans and 45 - 75 days for NonQM loans. We manage the interest rate risk associated with our outstanding IRLCs and mortgage loans held-for-sale by entering into derivative loan instruments such as forward loan sales commitments or To-Be-Announced mortgage-backed securities (TBA Forward Commitments). We expect these derivatives will experience changes in fair value opposite to changes in fair value of the derivative IRLCs and mortgage loans held-for-sale, thereby reducing earnings volatility. We take into account various factors and strategies in determining the portion of the mortgage pipeline (derivative loan commitments) and mortgage loans held-for-sale we want to economically hedge. Our expectation of how many of our IRLCs will ultimately close is a key factor in determining the notional amount of derivatives used in hedging the position. Mortgage loans held-for-sale are financed by our warehouse lines of credit which generally carry variable rates. Mortgage loans held-for-sale are carried on our consolidated balance sheets on average for only 15 to 45 days after closing and prior to being sold. As a result, we believe that any negative impact related to our variable rate warehouse borrowings resulting from a shift in market interest rates would not be material to our consolidated financial statements. Interest Rate Risk-Securitized Trusts and Long-term Debt. Prior to the sale of the legacy securitized portfolio, our earnings from the long-term mortgage portfolio depended largely on our interest rate spread, represented by the relationship between the yield on our interest-earning assets (primarily securitized mortgage collateral) and the cost of our interest-bearing liabilities (primarily securitized mortgage borrowings and long-term debt).
Our
interest rate spread was
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impacted by several factors, including general economic factors, forward interest rates and the credit quality of mortgage loans in the long-term mortgage portfolio.
The residual interests in our long-term mortgage portfolio were sensitive to changes in interest rates on securitized mortgage collateral and the related securitized mortgage borrowings as any reduction in interest rate spread resulted in a reduction in residual cash flows received. Changes in interest rates affected the cash flows and fair values of our trust assets and liabilities, as well as our earnings and stockholders' (deficit) equity. We are also subject to interest rate risk on our long-term debt (consisting of junior subordinated notes). These interest bearing liabilities include adjustable rate periods based on three-month LIBOR plus a margin (junior subordinated notes). We do not currently hedge our exposure to the effect of changing interest rates related to these interest-bearing liabilities. Significant fluctuations in interest rates could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Credit Risk
We are subject to credit risk in connection with our loan sale transactions. We provide representations and warranties to purchasers and insurers of the loans sold that typically are in place for the life of the loan. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us unless we have recourse to our correspondent seller. We maintain a reserve for losses on loans repurchased or indemnified as a result of breaches of representations and warranties on our sold loans. Our estimate is based on our most recent data regarding loan repurchases and indemnity payments, actual losses on repurchased loans, and recovery history, among other factors. Our assumptions are affected by factors both internal and external in nature. Internal factors include, among other things, level of loan sales, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to recover any losses from third parties. External factors that may affect our estimate includes, among other things, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overallU.S. and world economy. Many of the factors are beyond our control and may lead to judgments that are susceptible to change. Counterparty Credit Risk. We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. In general, we manage such risk by selecting only counterparties that we believe to be financially strong and disperse risk among multiple counterparties when possible. We monitor our counterparties and currently do not anticipate losses due to counterparty non-performance. As ofDecember 31, 2022 , we believe there were no significant concentrations of credit risk related to our exposure with any individual counterparty. Credit Risk-Securitized Trusts. Prior to the sale of the legacy securitized portfolio, we managed credit risk by actively managing delinquencies and defaults through our servicers. Starting with the second half of 2007, we had not retained any additional mortgages in our long-term mortgage portfolio. Our securitized mortgage collateral primarily consisted of non-conforming mortgages which when originated were generally within typical Fannie Mae and Freddie Mac guidelines but had loan characteristics, which may have included higher loan balances, higher loan-to-value ratios or lower documentation requirements (including stated-income loans), that made them non-conforming under those guidelines. Using historical losses, current portfolio statistics and market conditions and available market data, we had estimated future loan losses on the long- term mortgage portfolio, which were included in the fair value adjustment to our securitized mortgage collateral. The credit performance for the loans had been clearly far worse than our initial expectations when the loans were originated. We had seen some restoration of real estate values, however the ultimate level of realized losses were largely be influenced by local real estate conditions in areas where underlying properties are located, including the recovery of the housing market and overall strength of the economy. We monitor our servicers to attempt to ensure that they perform loss mitigation, foreclosure and collection functions according to their servicing practices and each securitization trust's pooling and servicing agreement. We have met with the management of our servicers to assess our borrowers' current ability to pay their mortgages and to make arrangements with selected delinquent borrowers which will result in the best interest of the trust and borrower, in an effort 67 Table of Contents
to minimize the number of mortgages which become seriously delinquent. When resolving delinquent mortgages, servicers are required to take timely action. The servicer is required to determine payment collection under various circumstances, which will result in the maximum financial benefit. This is accomplished by either working with the borrower to bring the mortgage current by modifying the loan with terms that will maximize the recovery or by foreclosing and liquidating the property. At a foreclosure sale, the trusts consolidated on our consolidated balance sheets generally acquire title to
the property. Operational Risk
Operational risk is inherent in our business practices and related support functions. Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, human factors or external events. Operational risk may occur in any of our business activities and can manifest itself in various ways including, but not limited to, errors resulting from business process failures, material disruption in business activities, system breaches and misuse of sensitive information and failures of outsourced business processes. These events could result in non-compliance with laws or regulations, regulatory fines and penalties, litigation or other financial losses, including potential losses resulting from lost client relationships. Our business is subject to extensive regulation by federal, state and local government authorities, which require us to operate in accordance with various laws, regulations, and judicial and administrative decisions. While we are not a bank, our business subjects us to both direct and indirect banking supervision (including examinations by our clients' regulators), and each client may require a unique compliance model. In recent years, there have been a number of developments in laws and regulations that have required, and will likely continue to require, widespread changes to our business. The frequent introduction of new rules, changes to the interpretation or application of existing rules, increased focus of regulators, and near-zero defect performance expectations have increased our operational risk related to compliance with laws and regulations. Our operational risk includes managing risks relating to information systems and information security. As a service provider, we actively utilize technology and information systems to operate our business and support business development. We also must safeguard the confidential personal information of our customers, as well as the confidential personal information of the employees and customers of our clients. We consider industry best practices to manage our technology risk, and we continually develop and enhance the controls, processes and systems to protect our information systems and data from unauthorized access.
To monitor and control this risk, we have established policies, procedures and a controls framework that are designed to provide sound and consistent risk management processes and transparent operational risk reporting.
Real Estate Risk
Residential property values are subject to volatility and may be negatively affected by numerous factors, including, but not limited to, national, regional and local economic conditions such as unemployment and interest rate environment; local real estate conditions including housing inventory and foreclosures; and demographic factors. Decreases in property values reduce the value of the collateral securing and the potential proceeds available to a borrower to repay our loans, which could cause us to suffer losses.
Prepayment Risk
Prepayment speed is a measurement of how quickly UPB is reduced. Items reducing UPB include normal monthly loan principal payments, loan refinancing's, voluntary property sales and involuntary property sales such as foreclosures or short sales. Prepayment speed impacts future servicing fees, fair value of mortgage servicing rights and float income. When prepayment speed increases, our servicing fees decrease faster than projected due to the shortened life of a portfolio. Faster prepayment speeds will cause our mortgage servicing rights fair value to decrease.
We historically used prepayment penalties as a method of partially mitigating prepayment risk for those borrowers that have the ability to refinance. The historically low interest rate environment, availability of credit and home price appreciation had increased borrower's ability to refinance and significantly increased prepayment speeds within the long-term mortgage portfolio.
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Liquidity Risk
We are exposed to liquidity risks relating to our ongoing mortgage lending operations. We primarily fund our mortgage lending originations through warehouse facilities with third-party lenders. Refer to "Liquidity and Capital Resources" for additional information regarding liquidity.
Off Balance Sheet Arrangements
When we sell or broker loans through whole-loan sales, we are required to make normal and customary representations and warranties to the loan originators or purchasers, including guarantees against early payment defaults typically 90 days, and fraudulent misrepresentations by the borrowers. Our agreements generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. Because the loans are no longer on our consolidated balance sheets, the representations and warranties are considered a guarantee. During 2022 and 2021, we sold$978.6 million and$2.8 billion , respectively, of loans subject to representations and warranties. AtDecember 31, 2022 , we had$5.9 million in repurchase reserve as compared to a reserve of$4.7 million as ofDecember 31, 2021 .
See disclosures in the notes to the consolidated financial statements under "Commitments and Contingencies" for other arrangements that qualify as off balance sheets arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
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