ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(dollars in thousands, except per share data or as otherwise indicated)
Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), and Impac Funding Corporation (IFC).
Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,” “should,” “could,” “seem to,” “anticipate,” “plan,” “intend,” “project,” “assume,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: failure to achieve the benefits expected from the acquisition of the CashCall Mortgage operations, including an increase in origination volume generally, increase in each of our origination channels and ability to successfully use the marketing platform to expand volumes of our other loan products; successful development, marketing, sale and financing of new mortgage products, including expansion of non-Qualified Mortgage originations and government loan programs; ability to successfully diversify our loan products; ability to increase our market share and geographic footprint in the various residential mortgage businesses; ability to manage and opportunistically sell more MSRs; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; ability to successfully create cost and product efficiencies through new technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing, through lending and repurchase facilities, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions.
For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016, and other reports we file under the Securities Exchange Act of 1934. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
The Mortgage Industry and Discussion of Relevant Fiscal Periods
The mortgage industry is subject to current events that occur in the financial services industry including changes to regulations and compliance requirements that result in uncertainty surrounding the actions of states, municipalities and new government agencies, including the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA). These events can also include changes in economic indicators, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, and customer perception, as well as others. The factors that affect the industry change rapidly and can be unforeseeable making it difficult to predict and manage an operation in the financial services industry.
Current events can diminish the relevance of “quarter over quarter” and “year-to-date over year-to-date” comparisons of financial information. In such instances, the Company attempts to present financial information in its Management’s Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to its financial information.
Selected Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of loans, net
|
|
$
|
37,319
|
|
$
|
65,168
|
|
$
|
53,869
|
|
Real estate services fees, net
|
|
|
1,633
|
|
|
1,622
|
|
|
2,100
|
|
Servicing income, net
|
|
|
7,320
|
|
|
5,054
|
|
|
2,088
|
|
(Loss) gain on mortgage servicing rights, net
|
|
|
(977)
|
|
|
4,808
|
|
|
(10,910)
|
|
Other
|
|
|
47
|
|
|
598
|
|
|
152
|
|
Total revenues
|
|
|
45,342
|
|
|
77,250
|
|
|
47,299
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
24,919
|
|
|
31,534
|
|
|
23,965
|
|
Business promotion
|
|
|
10,231
|
|
|
11,742
|
|
|
9,191
|
|
General, administrative and other
|
|
|
8,023
|
|
|
10,030
|
|
|
7,162
|
|
Accretion of contingent consideration
|
|
|
845
|
|
|
1,753
|
|
|
1,895
|
|
Change in fair value of contingent consideration
|
|
|
539
|
|
|
(4,424)
|
|
|
2,942
|
|
Total expenses
|
|
|
44,557
|
|
|
50,635
|
|
|
45,155
|
|
Operating income:
|
|
|
785
|
|
|
26,615
|
|
|
2,144
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
|
446
|
|
|
754
|
|
|
(101)
|
|
Change in fair value of long-term debt
|
|
|
(2,497)
|
|
|
(7,150)
|
|
|
—
|
|
Change in fair value of net trust assets
|
|
|
6,319
|
|
|
(2,913)
|
|
|
(627)
|
|
Total other (expense) income
|
|
|
4,268
|
|
|
(9,309)
|
|
|
(728)
|
|
Net earnings before income taxes
|
|
|
5,053
|
|
|
17,306
|
|
|
1,416
|
|
Income tax expense
|
|
|
426
|
|
|
365
|
|
|
435
|
|
Net earnings
|
|
$
|
4,627
|
|
$
|
16,941
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares
|
|
|
17,422
|
|
|
17,479
|
|
|
11,668
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
$
|
1.00
|
|
$
|
0.08
|
|
Status of Operations
Summary Highlights
|
·
|
|
We entered into a MSR financing facility of up to $40.0 million initially borrowing
$35.1 million and used a portion of the proceeds to pay off the Term Financing,
which had a higher interest rate, thus reducing interest expense. See Liquidity and Capital Resources for a more detailed description.
|
|
·
|
|
Mortgage servicing portfolio increased to $13.2 billion at March 31, 2017 from $12.4 billion at December 31, 2016 and $5.2 billion at March 31, 2016.
|
|
·
|
|
Servicing income, net increased to $7.3 million for the three months ended March 31, 2017 from $5.1 million for the three months ended December 31, 2016 and $2.1 million for the three months ended March 31, 2016.
|
|
·
|
|
NonQM mortgage origination volumes increased in the first quarter of 2017 to $184.3 million from $86.3 million in the fourth quarter of 2016 and $74.0 million in the first quarter of 2016.
|
For the first quarter of 2017, the Company reported net earnings of $4.6 million, or $0.29 per diluted common share as compared to net earnings of $981 thousand, or $0.08 per diluted common share for the first quarter of 2016. For the first quarter of 2017, o
perating income, excluding the changes in contingent consideration (adjusted operating income)
was $2.2 million, or $0.12 per diluted common share as compared to $7.0 million, or $0.60 per diluted common share for the first quarter of 2016.
Adjusted operating income is not considered an accounting principle generally accepted in the United States of America (GAAP) financial measurement; see the discussion and reconciliation on non-GAAP financial measures below.
Net earnings include fair value adjustments for changes in the contingent consideration, long-term debt and net trust assets. The contingent consideration is related to the CashCall Mortgage (CCM) acquisition transaction, while the other fair value adjustments are related to our legacy portfolio. These fair value adjustments are non-cash items and are not related to current operating results. Although we are required by GAAP to record change in fair value and accretion of the contingent consideration, management believes operating income excluding contingent consideration changes and the related accretion is more useful to discuss our ongoing and future operations.
We calculate adjusted operating income and adjusted operating income per share as performance measures, which are considered non-GAAP financial measures, to further aid our investors in understanding and analyzing our core operating results and comparing them among periods. Adjusted operating income and adjusted operating income per share exclude certain items that we do not consider part of our core operating results. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for net earnings before income taxes, net earnings or diluted earnings per share (EPS) prepared in accordance with GAAP. The table below shows operating income excluding these items:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
2016
|
|
Net earnings:
|
|
$
|
4,627
|
|
$
|
16,941
|
|
$
|
981
|
|
Total other (income) expense
|
|
|
(4,268)
|
|
|
9,309
|
|
|
728
|
|
Income tax expense
|
|
|
426
|
|
|
365
|
|
|
435
|
|
Operating income:
|
|
$
|
785
|
|
$
|
26,615
|
|
$
|
2,144
|
|
Accretion of contingent consideration
|
|
|
845
|
|
|
1,753
|
|
|
1,895
|
|
Change in fair value of contingent consideration
|
|
|
539
|
|
|
(4,424)
|
|
|
2,942
|
|
Adjusted operating income
|
|
$
|
2,169
|
|
$
|
23,944
|
|
$
|
6,981
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares
|
|
|
17,422
|
|
|
17,479
|
|
|
11,668
|
|
Diluted adjusted operating income per share
|
|
$
|
0.12
|
|
$
|
1.37
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
$
|
1.00
|
|
$
|
0.08
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
(1)
|
|
|
(0.27)
|
|
|
0.50
|
|
|
0.07
|
|
Income tax expense
|
|
|
0.02
|
|
|
0.02
|
|
|
0.04
|
|
Accretion of contingent consideration
|
|
|
0.05
|
|
|
0.10
|
|
|
0.16
|
|
Change in fair value of contingent consideration
|
|
|
0.03
|
|
|
(0.25)
|
|
|
0.25
|
|
Diluted adjusted operating income per share
|
|
$
|
0.12
|
|
$
|
1.37
|
|
$
|
0.60
|
|
|
(1)
|
|
Includes the add back of interest expense on the convertible notes, net of tax used to calculate diluted earnings using the if-converted method.
|
Adjusted operating income decreased to $2.2 million or $0.12 per diluted common share for the first quarter of 2017 as compared to $7.0 million or $0.60 per diluted common share in in the first quarter of 2016. The decrease in operating income was primarily due to a decrease in gain on sale of loans of $16.6 million resulting from a 33% decrease in total originations volume. However, as a result of a higher volume of NonQM and government loans, gain on sale margins increased by 7 basis points (bps) to 236 bps in the first quarter of 2017. In the first quarter of 2017, NonQM and government originations represented approximately 39% of total originations, as compared to just 20% of total originations in the first quarter of 2016.
Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
December 31,
|
|
%
|
|
March 31,
|
|
%
|
|
(in millions)
|
|
2017
|
|
2016
|
|
Change
|
|
2016
|
|
Change
|
|
Retail
|
|
$
|
1,066.2
|
|
$
|
2,250.4
|
|
(53)
|
%
|
$
|
1,653.0
|
|
(35)
|
%
|
Correspondent
|
|
|
271.2
|
|
|
539.9
|
|
(50)
|
%
|
|
376.9
|
|
(28)
|
%
|
Wholesale
|
|
|
242.6
|
|
|
320.3
|
|
(24)
|
%
|
|
319.3
|
|
(24)
|
%
|
Total originations
|
|
$
|
1,580.0
|
|
$
|
3,110.6
|
|
(49)
|
%
|
$
|
2,349.2
|
|
(33)
|
%
|
During the first quarter of 2017, total originations decreased 49% to $1.6 billion as compared to $3.1 billion in the fourth quarter of 2016 and decreased 33% as compared to $2.3 billion in the first quarter of 2016. This decrease was caused by the previously anticipated decline in refinance volume as a result of rising interest rates
at the end of 2016 and into the first quarter of 2017.
Our loan products primarily include conventional loans eligible for sale to Fannie Mae and Freddie Mac, loans eligible for government insurance (government loans) by the Federal Housing Administration (FHA), Veterans Affairs (VA), United States Department of Agriculture (USDA) and also NonQM mortgages.
Originations by Loan Type:
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
|
2017
|
|
2016
|
Conventional
|
|
$
|
967.3
|
|
$
|
1,877.2
|
Government (1)
|
|
|
428.4
|
|
|
394.0
|
NonQM
|
|
|
184.3
|
|
|
74.0
|
Other
|
|
|
—
|
|
|
4.0
|
Total originations
|
|
|
1,580.0
|
|
|
2,349.2
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes all government-insured loans including FHA, VA and USDA.
|
During the first quarter of 2017, the origination volume of NonQM loans increased to $184.3 million, as compared to
$86.3 million in the fourth quarter of 2016 and $74.0 million in the first quarter of 2016
. NonQM origination volume increased across all channels in the first quarter of 2017 with 40% from the retail channel and 60% from the wholesale and correspondent channels. In fourth quarter of 2016, retail originations only accounted for 12% of NonQM production while wholesale and correspondent originations accounted for nearly 88% of NonQM production. The NonQM loans originated in 2016 and through the first quarter of 2017 have all been sold on a servicing released basis.
We believe there is an underserved mortgage market for borrowers with good credit who may not meet the qualified mortgage (QM) guidelines set out by the Consumer Financial Protection Bureau (CFPB). During 2014, we rolled out and began originating NonQM loans. We have established strict lending guidelines, including determining the prospective borrowers’ ability to repay the mortgage, which we believe will keep delinquencies and foreclosures at acceptable levels. We continue to refine our guidelines to expand our reach to the underserved market of credit worthy borrowers who can fully document and substantiate an ability to repay mortgage loans, but unable to obtain financing through traditional programs (QM loans), for example self-employed borrowers. In 2016, we relaunched our NonQM loan programs as “The Intelligent NonQM Mortgage”, to better communicate our NonQM loan value proposition to consumers, brokers, sellers and investors. In conjunction with these products, we have established investor relationships that provides us with an exit strategy for these nonconforming loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
Refinance
|
|
|
$
|
1,244.4
|
|
79
|
%
|
$
|
1,977.8
|
|
84
|
%
|
Purchase
|
|
|
|
335.6
|
|
21
|
%
|
|
371.4
|
|
16
|
%
|
Total originations
|
|
|
$
|
1,580.0
|
|
100
|
%
|
$
|
2,349.2
|
|
100
|
%
|
During the first quarter of 2017, refinance volume decreased approximately $733.4 million or 37% as compared to the first quarter of 2016
as a result of rising interest rates
at the end of 2016 and into the first quarter of 2017
. Despite the 33% decrease in origination volumes during the first quarter of 2017, purchase money transactions only decreased 10% to $335.6 million as compared to $371.4 million in the first quarter of 2016.
Mortgage servicing portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
%
|
|
March 31,
|
|
%
|
|
(in millions)
|
|
2017
|
|
2016
|
|
Change
|
|
2016
|
|
Change
|
|
Mortgage servicing portfolio
|
|
$
|
13,241.9
|
|
$
|
12,351.5
|
|
7
|
%
|
$
|
5,161.0
|
|
157
|
%
|
The mortgage servicing portfolio increased to $13.2 billion at March 31, 2017 as compared to $12.4 billion at December 31, 2016 and $5.2 billion at March 31, 2016. The increase was due to a shift in our stragety in 2016 to retain our mortgage servicing as well as initiating a retention program to recapture portfolio runoff during the low interest rate environment. As a result of these efforts,
the unpaid principal balance (UPB) of the Company’s mortgage servicing portfolio increased 157% to $13.2 billion as of March 31, 2017 from March 31, 2016. The servicing portfolio generated net servicing income of $7.3 million in the first quarter of 2017, a 251% increase over the net servicing income of $2.1 million in the first quarter of 2016.
Additionally, delinquencies within the servicing portfolio remain low at 0.27% for 60+ delinquencies as of March 31, 2017.
The following table includes information about our mortgage servicing portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
% 60+ days
|
|
At December 31,
|
|
% 60+ days
|
|
(in millions)
|
|
2017
|
|
delinquent (1)
|
|
2016
|
|
delinquent (1)
|
|
Fannie Mae
|
|
$
|
6,514.2
|
|
0.13
|
%
|
$
|
6,204.2
|
|
0.12
|
%
|
Freddie Mac
|
|
|
4,986.9
|
|
0.08
|
%
|
|
4,611.8
|
|
0.08
|
%
|
Ginnie Mae
|
|
|
1,737.8
|
|
1.18
|
%
|
|
1,359.5
|
|
1.25
|
%
|
Other
|
|
|
3.0
|
|
25.00
|
%
|
|
176.0
|
|
0.00
|
%
|
Total servicing portfolio
|
|
$
|
13,241.9
|
|
0.27
|
%
|
$
|
12,351.5
|
|
0.25
|
%
|
During the three months ended March 31, 2017, our warehouse borrowing capacity increased from $925.0 million to $950.0 million. In addition to funding our mortgage loan originations, we also use a portion of our warehouse borrowing capacity to provide re‑warehouse facilities to our customers, correspondent sellers and other small mortgage banking companies. During the three months ended March 31, 2017, the outstanding balance of finance receivables decreased to $37.6 million at March 31, 2017 as compared to $62.9 million at December 31, 2016. Fundings from the warehouse lending division decreased to $183.6 million during the first quarter of 2017 as compared $255.4 million for the fourth quarter of 2016, but increased as compared to $151.4 million for the first quarter of 2016. As of March 31, 2017, the warehouse lending operations had extended warehouse lines to non-affiliated customers totaling $151.0 million as compared to $175.5 million at December 31, 2016. By leveraging our re‑warehousing division, we hope to increase the capture rate of our approved correspondent sellers business as well as expand our active customer base to include new customers seeking warehouse lines.
For the first quarter of 2017, real estate services fees were $1.6 million as compared to $1.6 million in the fourth quarter of 2016 and $2.1 million in the first quarter of 2016. Since most of our business is generated from our long-term mortgage portfolio, as the long‑term mortgage portfolio continues to decline, we expect real estate services and the related revenues to decline.
In our long-term mortgage portfolio, the residual interests generated cash flows of $5.1 million in the first quarter of 2017, as compared to $2.1 million in the fourth quarter of 2016 and $1.9 million in the first quarter of 2016. The estimated fair value of the residual interests increased $3.3 million in the first quarter of 2017 to $19.0 million at March 31, 2017, as a result of an improvement in performance from certain trusts partially offset by residual cash flows received.
For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of Operations below.
Liquidity and Capital Resources
During the three months ended March 31, 2017, we funded our operations primarily from 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 gains on sale of loans, net, and other mortgage related income, and real estate services fees include portfolio loss mitigation fees primarily generated from our long-term mortgage portfolio. During the three months ended March 31, 2017, we also received proceeds from the MSR financing facility, as further described below. Additionally, we funded mortgage loan originations using warehouse facilities which are repaid once the loan is sold. We may continue to manage our capital through the sale of mortgage servicing rights. We may also seek to raise capital by issuing debt or equity, including offering shares through the “At-the-Market” offering (ATM) program.
On May 5, 2017, the Company entered into an exchange agreement pursuant to which the Company agreed to issue 412,264 shares of its common stock in exchange for trust preferred securities with an aggregate liquidation amount of $8.5 million issued by Impac Capital Trust #4.
Accrued and unpaid interest on the trust preferred securities was paid in cash in the aggregate amount of approximately $13 thousand.
The interest rate on the trust preferred securities is a variable rate of three-month LIBOR plus 3.75% per annum. At December 31, 2016, the interest rate was 4.75%. The annual interest savings will amount to approximately $400 thousand.
On April 18, 2017, we sold $56.0 million worth of shares of our common stock in a registered direct offering (Offering) at a price of $12.66 per share. In the Offering, we issued an aggregate of 4,423,381 shares of common stock.
The net proceeds from the Offering were approximately $55.4 million after deducting the financial advisory fee and estimated aggregate offering expenses. We intend to use the net proceeds from the Offering for general corporate purposes, including general administrative expenses and working capital and capital expenditures, development costs, strategic investments or possible acquisitions, or repayment of debt.
In February 2017, we entered into a Loan and Security Agreement (Loan Agreement) with a lender (Lender) providing for a revolving loan commitment of up to $40.0 million for a period of two years (the Loan) to finance MSRs. We are able to borrow up to 55% of the fair market value of Fannie Mae pledged servicing rights which at the time of the initial draw was $35.1 million. Upon the two year anniversary of the Loan Agreement, any amounts outstanding will automatically be converted into a term loan due and payable in full on the one year anniversary of the conversion date. Interest payments are payable monthly and accrue interest at the rate per annum equal to one-month LIBOR plus 4.0%. The balance of the obligation may be prepaid at any time. With the initial draw of $35.1 million, a portion of the proceeds were used to pay off the Term Financing (approximately $30.1 million) originally entered into in June 2015. As the fair value of Fannie Mae MSRs on the consolidated balance sheets change, the borrowings under the MSR financing facility may change.
During the three months ended March 31, 2017, we paid approximately $8.0 million in contingent consideration payments related to the CCM acquisition for the fourth quarter of 2016 earn-out period. Additionally, the contingent consideration payment for the first quarter of 2017 is approximately $4.6 million and is due in May 2017. These contingent consideration payments are based on the performance of the CCM division and over time the earn-out percentage declines. The fourth quarter 2016 earn-out percentage was 55% of CCM division earnings, as defined. Beginning in 2017 the earn-out percentage decreased to 45% and terminates at the end of 2017.
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.
We believe that current cash balances, cash flows from our mortgage lending operations, the sale of mortgage servicing rights, real estate services fees generated from our long-term mortgage portfolio, and residual interest cash flows from our long-term mortgage portfolio are adequate for our current operating needs. 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 throughout the 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. Additionally, competition for loss mitigation servicing, loan modification services and other portfolio services has increased. Our competitors include mega mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and recovery collections business. Efforts to market our ability to provide mortgage and real estate services for others is more difficult than many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a rated primary or special servicer of residential mortgage loans as designated by a rating agency. Additionally, performance of the long-term mortgage portfolio is subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio.
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 segment, real estate services segment and realizing cash flows from the long-term mortgage portfolio. Our future financial performance and profitability are dependent in large part upon the ability to expand our mortgage lending platform successfully.
Critical Accounting Policies
We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include those issues included in Management’s Discussion and Analysis of Results of Operations in IMH’s report on Form 10-K for the year ended December 31, 2016. Such policies have not changed during 2017.
Financial Condition and Results of Operations
Financial Condition
As of March 31, 2017 compared to December 31, 2016
The following table shows the condensed consolidated balance sheets for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,531
|
|
$
|
40,096
|
|
$
|
(20,565)
|
|
(51)
|
%
|
Restricted cash
|
|
|
5,956
|
|
|
5,971
|
|
|
(15)
|
|
0
|
|
Mortgage loans held-for-sale
|
|
|
434,322
|
|
|
388,422
|
|
|
45,900
|
|
12
|
|
Finance receivables
|
|
|
37,556
|
|
|
62,937
|
|
|
(25,381)
|
|
(40)
|
|
Mortgage servicing rights
|
|
|
141,586
|
|
|
131,537
|
|
|
10,049
|
|
8
|
|
Securitized mortgage trust assets
|
|
|
3,911,676
|
|
|
4,033,290
|
|
|
(121,614)
|
|
(3)
|
|
Goodwill
|
|
|
104,938
|
|
|
104,938
|
|
|
—
|
|
—
|
|
Intangibles
|
|
|
24,729
|
|
|
25,778
|
|
|
(1,049)
|
|
(4)
|
|
Deferred tax asset
|
|
|
24,420
|
|
|
24,420
|
|
|
—
|
|
—
|
|
Other assets
|
|
|
46,644
|
|
|
46,345
|
|
|
299
|
|
1
|
|
Total assets
|
|
$
|
4,751,358
|
|
$
|
4,863,734
|
|
$
|
(112,376)
|
|
(2)
|
%
|
LIABILITIES & EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse borrowings
|
|
$
|
441,832
|
|
$
|
420,573
|
|
$
|
21,259
|
|
5
|
%
|
MSR financing
|
|
|
35,133
|
|
|
—
|
|
|
35,133
|
|
n/a
|
|
Convertible notes
|
|
|
24,967
|
|
|
24,965
|
|
|
2
|
|
0
|
|
Contingent consideration
|
|
|
24,498
|
|
|
31,072
|
|
|
(6,574)
|
|
(21)
|
|
Long-term debt ($71,120 par)
|
|
|
50,044
|
|
|
47,207
|
|
|
2,837
|
|
6
|
|
Securitized mortgage trust liabilities
|
|
|
3,892,668
|
|
|
4,017,603
|
|
|
(124,935)
|
|
(3)
|
|
Repurchase reserve
|
|
|
3,544
|
|
|
5,408
|
|
|
(1,864)
|
|
(34)
|
|
Term financing
|
|
|
—
|
|
|
29,910
|
|
|
(29,910)
|
|
(100)
|
|
Other liabilities
|
|
|
42,475
|
|
|
55,956
|
|
|
(13,481)
|
|
(24)
|
|
Total liabilities
|
|
|
4,515,161
|
|
|
4,632,694
|
|
|
(117,533)
|
|
(3)
|
|
Total equity
|
|
|
236,197
|
|
|
231,040
|
|
|
5,157
|
|
2
|
|
Total liabilities and stockholders’ equity
|
|
$
|
4,751,358
|
|
$
|
4,863,734
|
|
$
|
(112,376)
|
|
(2)
|
%
|
At March 31, 2017, cash decreased $20.6 million from $40.1 million at December 31, 2016. Cash balances decreased primarily due to the earn-out payment to CashCall Inc. of approximately $8.0 million based upon CCM earnings for the fourth quarter of 2016, and an increase in warehouse haircuts (difference between loan balance funded and amount advanced by warehouse lender) associated with the increase in mortgage loans held-for-sale (LHFS) as well as a reduction in accrued liabilities.
LHFS increased $45.9 million to $434.3 million at March 31, 2017 as compared to $388.4 million at December 31, 2016. The increase was due to $1.6 billion in originations during the first three months of 2017 partially offset by $1.5 billion in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months.
Finance receivables decreased $25.4 million to $37.6 million at March 31, 2017 as compared to $62.9 million at December 31, 2016. The decrease was primarily due to $183.6 million in fundings offset by $206.9 million in settlements in the first quarter of 2017.
MSRs increased $10.0 million to $141.6 million at March 31, 2017 as compared to $131.5 million at December 31, 2016. The increase was due to servicing retained loan sales of $1.4 billion in UPB. Partially offsetting the increase was a bulk sale of NonQM MSRs totaling approximately $156.4 million in UPB and a mark-to-market
reduction in fair value of $1.1 million. At March 31, 2017, we serviced $13.2 billion in UPB for others as compared to $12.4 billion at December 31, 2016.
Warehouse borrowings increased $21.3 million to $441.8 million at March 31, 2017 as compared to $420.6 million at December 31, 2016. The increase was due to an increase in LHFS attributable to the increased loan volume at March 31, 2017. During March 31, 2017, we increased our total borrowing capacity to $950.0 million as compared to $925.0 million at December 31, 2016.
In February, 2017, we entered into a Loan Agreement with a Lender providing for a MSR financing facility of up to $40.0 million for a period of two years. We are able to borrow up to 55% of the fair market value of Fannie Mae pledged servicing rights. We initially drew down $35.1 million, and used a portion of the proceeds to pay off the Term Financing originally entered into in June 2015.
The changes in total assets and liabilities, at fair market value, are primarily attributable to decreases in our trust assets and trust liabilities as summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Securitized mortgage collateral
|
|
$
|
3,903,336
|
|
$
|
4,021,891
|
|
$
|
(118,555)
|
|
(3)
|
%
|
Other trust assets
|
|
|
8,340
|
|
|
11,399
|
|
|
(3,059)
|
|
(27)
|
|
Total trust assets
|
|
|
3,911,676
|
|
|
4,033,290
|
|
|
(121,614)
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized mortgage borrowings
|
|
$
|
3,892,668
|
|
$
|
4,017,603
|
|
$
|
(124,935)
|
|
(3)
|
%
|
Other trust liabilities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
n/a
|
|
Total trust liabilities
|
|
|
3,892,668
|
|
|
4,017,603
|
|
|
(124,935)
|
|
(3)
|
|
Residual interests in securitizations
|
|
$
|
19,008
|
|
$
|
15,687
|
|
$
|
3,321
|
|
21
|
%
|
Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, trust assets and liabilities have been netted to present our interest in these trusts more simply, which are considered the residual interests in securitizations. For unconsolidated securitizations the residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, the residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities, was $19.0 million at March 31, 2017 as compared to $15.7 million at December 31, 2016.
We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on information derived from market participants. During the three months ended March 31, 2017, actual losses were relatively flat and were inline with forecasted losses for the majority of trusts with residual value. Principal payments and liquidations of securitized mortgage collateral and securitized mortgage borrowings also contributed to the reduction in trust assets and liabilities. The increase in residual fair value at March 31, 2017 was the result of a decrease in loss assumptions as well as recoveries on certain multifamily trusts with residual value.
|
·
|
|
The estimated fair value of securitized mortgage collateral decreased $118.6 million during the three months ended March 31, 2017, primarily due to reductions in principal from borrower payments and transfers of loans to Real Estate Owned (REO) for single-family and multi-family collateral. Additionally, other trust assets decreased $3.1 million during the three months ended March 31, 2017, primarily due to REO liquidations of
|
$6.9 million. Partially offsetting the decrease was an increase of $2.3 million in REO from foreclosures and a $1.5 million increase in the net realizable value (NRV) of REO.
|
|
·
|
|
The estimated fair value of securitized mortgage borrowings decreased $124.9 million during the three months ended March 31, 2017, primarily due to reductions in principal balances from principal payments during the period for single-family and multi-family collateral as well as a decrease in loss assumptions.
|
Prior to 2008, we securitized mortgage loans by transferring originated and acquired residential single-family mortgage loans and multi-family commercial loans (the “transferred assets”) into non-recourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing function. A trustee and sub-servicer, unrelated to us, were utilized for each securitization. Cash flows from the loans (the loan payments as well as liquidation of foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders (investors). The sub-servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO. Our real estate services segment also performs mitigation activities for loans within the portfolio.
To estimate fair value of the assets and liabilities within the securitization trusts each reporting period, management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes referred to as “curves,” for defaults, loss severity, interest rates (LIBOR) and prepayments are inputted into the valuation model for each securitization trust. We hire third-party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations. Before inputting this information into the model, management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using other information gathered from the mortgage and real estate market (
i.e.
, third party home price indices, published industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default and foreclosure information for each trust from the respective trustees.
We use 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 are over collateralized, we may receive the excess interest as the holder of the residual interest. The information above provides us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings, derivative assets/liabilities, and the residual interests.
To determine the discount rates to apply to these cash flows, we gather 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 determine an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We use 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 (after taking into consideration any derivatives in the securitization).
The following table presents changes in the trust assets and trust liabilities for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRUST LIABILITIES
|
|
|
|
|
|
|
Level 3 Recurring Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value Measurement
|
|
|
|
|
|
|
|
Level 3 Recurring Fair
|
|
|
|
|
|
|
|
|
|
NRV (1)
|
|
|
|
|
Value Measurement
|
|
|
|
|
|
|
Securitized
|
|
Real
|
|
|
|
|
Securitized
|
|
Net
|
|
|
|
mortgage
|
|
estate
|
|
Total trust
|
|
mortgage
|
|
trust
|
|
|
|
collateral
|
|
owned
|
|
assets
|
|
borrowings
|
|
assets
|
|
Recorded book value at December 31, 2016
|
|
$
|
4,021,891
|
|
$
|
11,399
|
|
$
|
4,033,290
|
|
$
|
(4,017,603)
|
|
$
|
15,687
|
|
Total gains/(losses) included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
15,484
|
|
|
—
|
|
|
15,484
|
|
|
—
|
|
|
15,484
|
|
Interest expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40,695)
|
|
|
(40,695)
|
|
Change in FV of net trust assets, excluding REO (2)
|
|
|
51,052
|
|
|
—
|
|
|
51,052
|
|
|
(46,266)
|
|
|
4,786
|
|
Gains from REO – not at FV but at NRV (2)
|
|
|
—
|
|
|
1,533
|
|
|
1,533
|
|
|
—
|
|
|
1,533
|
|
Total gains (losses) included in earnings
|
|
|
66,536
|
|
|
1,533
|
|
|
68,069
|
|
|
(86,961)
|
|
|
(18,892)
|
|
Transfers in and/or out of level 3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchases, issuances and settlements
|
|
|
(185,091)
|
|
|
(4,592)
|
|
|
(189,683)
|
|
|
211,896
|
|
|
22,213
|
|
Recorded book value at March 31, 2017
|
|
$
|
3,903,336
|
|
$
|
8,340
|
|
$
|
3,911,676
|
|
$
|
(3,892,668)
|
|
$
|
19,008
|
|
|
(1)
|
|
Accounted for at net realizable value.
|
|
(2)
|
|
Represents change in fair value of net trust assets, including trust REO (losses) gains in the consolidated statements of operations for the three months ended March 31, 2017.
|
Inclusive of losses from REO, total trust assets above reflect a net gain of $52.6 million for the three months ended March 31, 2017 as a result of an increase in fair value from securitized mortgage collateral of $51.1 million and gains from REO of $1.5 million. Net losses on trust liabilities were $46.3 million from the increase in fair value of securitized mortgage borrowings. As a result, non-interest income—net trust assets totaled an increase of $6.3 million for the three months ended March 31, 2017.
The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Net trust assets
|
|
$
|
19,008
|
|
$
|
15,687
|
|
Total trust assets
|
|
|
3,911,676
|
|
|
4,033,290
|
|
Net trust assets as a percentage of total trust assets
|
|
|
0.49
|
%
|
|
0.39
|
%
|
For the three months ended March 31, 2017, the estimated fair value of the net trust assets increased as a percentage of total trust assets. The increase was primarily due to an increase in projected future cash flows due to a decrease in loss assumptions in the 2006 multi-family vintage.
Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities.
The following tables present the estimated fair value of our residual interests, including investment securities available for sale, by securitization vintage year and other related assumptions used to derive these values at March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value of Residual
|
|
Estimated Fair Value of Residual
|
|
|
|
Interests by Vintage Year at
|
|
Interests by Vintage Year at
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Origination Year
|
|
SF
|
|
MF
|
|
Total
|
|
SF
|
|
MF
|
|
Total
|
|
2002-2003 (1)
|
|
$
|
8,962
|
|
$
|
889
|
|
$
|
9,851
|
|
$
|
8,402
|
|
$
|
921
|
|
$
|
9,323
|
|
2004
|
|
|
1,004
|
|
|
653
|
|
|
1,657
|
|
|
1,267
|
|
|
653
|
|
|
1,920
|
|
2005
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2006
|
|
|
—
|
|
|
7,489
|
|
|
7,489
|
|
|
—
|
|
|
4,444
|
|
|
4,444
|
|
Total
|
|
$
|
9,977
|
|
$
|
9,031
|
|
$
|
19,008
|
|
$
|
9,669
|
|
$
|
6,018
|
|
$
|
15,687
|
|
Weighted avg. prepayment rate
|
|
|
6.2
|
%
|
|
10.3
|
%
|
|
6.6
|
%
|
|
6.3
|
%
|
|
10.1
|
%
|
|
6.6
|
%
|
Weighted avg. discount rate
|
|
|
16.0
|
%
|
|
18.6
|
%
|
|
17.3
|
%
|
|
16.3
|
%
|
|
17.9
|
%
|
|
16.9
|
%
|
|
(1)
|
|
2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period.
|
We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we use 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. The increase in the estimated fair value of the 2006 multi-family residual interests was due to a reduction in future loss assumptions and recoveries within certain trusts.
The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage at March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future
|
|
Investor Yield
|
|
|
|
Losses (1)
|
|
Requirement (2)
|
|
|
|
SF
|
|
MF
|
|
SF
|
|
MF
|
|
2002-2003
|
|
6
|
%
|
*
|
(3)
|
6
|
%
|
7
|
%
|
2004
|
|
8
|
|
*
|
(3)
|
6
|
|
5
|
|
2005
|
|
9
|
|
3
|
%
|
6
|
|
4
|
|
2006
|
|
14
|
|
3
|
|
6
|
|
6
|
|
2007
|
|
12
|
|
1
|
|
6
|
|
4
|
|
|
(1)
|
|
Estimated future losses derived by dividing future projected losses by UPB at March 31, 2017.
|
|
(2)
|
|
Investor yield requirements represent our estimate of the yield third-party market participants would require to price our trust assets and liabilities given our prepayment, credit loss and forward interest rate assumptions.
|
|
(3)
|
|
Represents less than 1%.
|
Despite the increase in housing prices through March 31, 2017, housing prices in many parts of the country are still at levels which have significantly reduced or eliminated equity for loans originated after 2003. Future loss estimates are significantly higher for mortgage loans included in securitization vintages after 2005 which reflect severe home price deterioration and defaults experienced with mortgages originated during these periods.
Long-Term Mortgage Portfolio Credit Quality
We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which
a payment was received. Delinquencies for loans 60 days delinquent or greater, foreclosures and delinquent bankruptcies were $981.8 million or 20.2% of the long-term mortgage portfolio as of March 31, 2017. Despite the increase in percentage of loans 60 or more days delinquent at March 31, 2017 as compared to December 31, 2016, the UPB of loans 60 days or more delinquent at March 31, 2017 decreased by $33.6 million.
The following table summarizes the gross UPB of loans in our mortgage portfolio, included in securitized mortgage collateral, that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Total
|
|
December 31,
|
|
Total
|
|
Securitized mortgage collateral
|
|
2017
|
|
Collateral
|
|
2016
|
|
Collateral
|
|
60 - 89 days delinquent
|
|
$
|
113,402
|
|
2.3
|
%
|
$
|
140,567
|
|
2.8
|
%
|
90 or more days delinquent
|
|
|
424,537
|
|
8.7
|
|
|
417,947
|
|
8.2
|
|
Foreclosures (1)
|
|
|
218,323
|
|
4.5
|
|
|
224,633
|
|
4.4
|
|
Delinquent bankruptcies (2)
|
|
|
225,538
|
|
4.6
|
|
|
232,249
|
|
4.6
|
|
Total 60 or more days delinquent
|
|
$
|
981,799
|
|
20.2
|
|
$
|
1,015,396
|
|
20.0
|
|
Total collateral
|
|
$
|
4,863,603
|
|
100.0
|
|
$
|
5,078,500
|
|
100.0
|
|
|
(1)
|
|
Represents properties in the process of foreclosure.
|
|
(2)
|
|
Represents bankruptcies that are 30 days or more delinquent.
|
The following table summarizes the gross securitized mortgage collateral and REO at NRV, that were non-performing as of the dates indicated (excludes 60-89 days delinquent):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Total
|
|
|
|
March 31,
|
|
Collateral
|
|
December 31,
|
|
Collateral
|
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
90 or more days delinquent, foreclosures and delinquent bankruptcies
|
|
$
|
868,397
|
|
17.9
|
%
|
$
|
874,829
|
|
17.2
|
%
|
Real estate owned
|
|
|
8,340
|
|
0.2
|
|
|
11,399
|
|
0.2
|
|
Total non-performing assets
|
|
$
|
876,737
|
|
18.0
|
|
$
|
886,228
|
|
17.5
|
|
Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including loans in foreclosure and delinquent bankruptcies) plus REO. It is our policy to place a mortgage on nonaccrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages. As of March 31, 2017, non-performing assets (UPB of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total collateral was 18.0%. At December 31, 2016, non-performing assets to total collateral was 17.5%. Non-performing assets decreased by approximately $9.5 million at March 31, 2017 as compared to December 31, 2016. At March 31, 2017, the estimated fair value of non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) was $252.1 million or 5.3% of total assets. At December 31, 2016, the estimated fair value of non-performing assets was $263.6 million or 5.4% of total assets.
REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in the consolidated statements of operations.
For the three months ended March 31, 2017, we recorded an increase in net realizable value of the REO in the amount of $1.5 million, compared to a decrease of $1.1 million for the comparable 2016 period. 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.
The following table presents the balances of REO:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
REO
|
|
$
|
21,209
|
|
$
|
25,802
|
|
Impairment (1)
|
|
|
(12,869)
|
|
|
(14,403)
|
|
Ending balance
|
|
$
|
8,340
|
|
$
|
11,399
|
|
REO inside trusts
|
|
$
|
8,340
|
|
$
|
11,399
|
|
REO outside trusts
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
8,340
|
|
$
|
11,399
|
|
|
(1)
|
|
Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.
|
In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the loans based on their attributes (e.g. original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the future loan losses.
Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The assessment for losses is based on delinquency trends and prior loss experience and management’s judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent losses.
Results of Operations
For the Three Months Ended March 31, 2017 compared to the Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Revenues
|
|
|
$
|
45,342
|
|
$
|
47,299
|
|
$
|
(1,957)
|
|
(4)
|
%
|
Expenses (1)
|
|
|
|
(44,557)
|
|
|
(45,155)
|
|
|
598
|
|
1
|
|
Net interest income (expense)
|
|
|
|
446
|
|
|
(101)
|
|
|
547
|
|
542
|
|
Change in fair value of long-term debt
|
|
|
|
(2,497)
|
|
|
—
|
|
|
(2,497)
|
|
n/a
|
|
Change in fair value of net trust assets, including trust REO gains (losses)
|
|
|
|
6,319
|
|
|
(627)
|
|
|
6,946
|
|
1108
|
|
Income tax expense
|
|
|
|
(426)
|
|
|
(435)
|
|
|
9
|
|
(2)
|
|
Net earnings
|
|
|
$
|
4,627
|
|
$
|
981
|
|
$
|
3,646
|
|
372
|
|
Earnings per share available to common stockholders—basic
|
|
|
$
|
0.29
|
|
$
|
0.09
|
|
$
|
0.20
|
|
235
|
%
|
Earnings per share available to common stockholders—diluted
|
|
|
$
|
0.29
|
|
$
|
0.08
|
|
$
|
0.21
|
|
247
|
%
|
|
(1)
|
|
Includes changes in contingent consideration liability resulting in expense of $0.5 million and $2.9 million for the the three months ended March 31, 2017 and 2016, respectively.
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Gain on sale of loans, net
|
|
$
|
37,319
|
|
$
|
53,869
|
|
$
|
(16,550)
|
|
(31)
|
%
|
Real estate services fees, net
|
|
|
1,633
|
|
|
2,100
|
|
|
(467)
|
|
(22)
|
|
Servicing income, net
|
|
|
7,320
|
|
|
2,088
|
|
|
5,232
|
|
251
|
|
Loss on mortgage servicing rights, net
|
|
|
(977)
|
|
|
(10,910)
|
|
|
9,933
|
|
91
|
|
Other revenues
|
|
|
47
|
|
|
152
|
|
|
(105)
|
|
(69)
|
|
Total revenues
|
|
$
|
45,342
|
|
$
|
47,299
|
|
$
|
(1,957)
|
|
(4)
|
|
Gain on sale of loans, net.
For the three months ended March 31, 2017, gain on sale of loans, net were $37.3 million compared to $53.9 million in the comparable 2016 period. The $16.6 million decrease is primarily due to a $21.0 million decrease in premiums from the sale of mortgage loans, a $6.8 million decrease in premiums from servicing retained loan sales and a $6.0 million decrease in mark-to-market gains on LHFS, partially offset by a $11.6 million decrease in direct loan origination expenses, $3.5 million increase in realized and unrealized net gains on derivative financial instruments and a $2.0 million increase in recovery for repurchases.
The overall decrease in gain on sale of loans, net was primarily due to decreased volumes partially offset by an increase in gain on sale margins. For the three months ended March 31, 2017, we originated and sold $1.6 billion and $1.5 billion of loans, respectively, as compared to $2.3 billion and $2.1 billion of loans originated and sold, respectively, during the same period in 2016. Margins increased to approximately 236 bps for the three months ended March 31, 2017 as compared to 229 bps for the same period in 2016 due to a higher concentration of NonQM and government insured loans which have higher margins than conventional loans.
Real estate services fees, net.
For the three months ended March 31, 2017, real estate services fees, net were $1.6 million compared to $2.1 million in the comparable 2016 period. The $467 thousand decrease was primarily the
result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to 2016.
Servicing income, net.
For the three months ended March 31, 2017, servicing income, net was $7.3 million compared to $2.1 million in the comparable 2016 period. The increase in servicing income, net was the result of the servicing portfolio increasing 188% to an average balance of $13.0 billion for the three months ended March 31, 2017 as compared to an average balance of $4.5 billion for the three months ended March 31, 2016. The increase in the average balance of the servicing portfolio is a result of our efforts during the past year to retain servicing as well as $1.4 billion in servicing retained loan sales during the three months ended March 31, 2017. Partially offsetting the increase was a bulk sale of NonQM MSRs totaling approximately $156.4 million in UPB.
Loss on mortgage servicing rights, net.
For the three months ended March 31, 2017, loss on MSRs was $977 thousand compared to $10.9 million in the comparable 2016 period. For the three months ended March 31, 2017, we recorded a $1.1 million loss from a change in fair value of MSRs primarily the result of mark-to-market changes related to amortization slightly offset by an increase in servicing value due to lower interest rates. During the first quarter, we had a $414 thousand loss on sale of mortgage servicing rights related to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods. Partially offsetting the loss was a $559 thousand increase in realized and unrealized gains from hedging instruments related to MSRs.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Personnel expense
|
|
$
|
24,919
|
|
$
|
23,965
|
|
$
|
954
|
|
4
|
%
|
Business promotion
|
|
|
10,231
|
|
|
9,191
|
|
|
1,040
|
|
11
|
|
General, administrative and other
|
|
|
8,023
|
|
|
7,162
|
|
|
861
|
|
12
|
|
Accretion of contingent consideration
|
|
|
845
|
|
|
1,895
|
|
|
(1,050)
|
|
(55)
|
|
Change in fair value of contingent consideration
|
|
|
539
|
|
|
2,942
|
|
|
(2,403)
|
|
(82)
|
|
Total expenses
|
|
$
|
44,557
|
|
$
|
45,155
|
|
$
|
(598)
|
|
(1)
|
|
Total expenses were $44.6 million for the three months ended March 31, 2017, compared to $45.2 million for the comparable period of 2016. Personnel expense increased $954 thousand to $24.9 million for the three months ended March 31, 2017. The increase is primarily due to a 9% increase in average headcount and a $540 thousand increase in healthcare costs as well as other personnel related costs during the first quarter of 2017 as compared to 2016. With the decline in volumes in the first quarter of 2017, we made staff reductions during the first quarter, of which the full impact of the reductions were not reflected in the first quarter personnel expense.
Business promotion was $10.2 million for the three months ended March 31, 2017, compared to $9.2 million for the comparable period of 2016. Our centralized call center purchases leads and promotes its business through radio and television advertisements. During the first quarter of 2017, business promotion increased due to efforts to increase NonQM and purchase money production with the reduction in refinance activity as a result of the increase in interest rates
.
General, administrative and other expenses increased to $8.0 million for the three months ended March 31, 2017, compared to $7.2 million for the same period in 2016. The increase was primarily related to a $468 thousand increase in legal and professional fees, $369 thousand increase in additional occupancy expense and a $242 thousand increase in data processing. Partially offsetting the increase was a $147 thousand decrease in premises and equipment expense as well as a $71 thousand decrease in other general and administrative expenses.
As part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in December 2017, which increases the
contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period. In the first quarter of 2017, accretion increased the contingent consideration liability by $845 thousand as compared to $1.9 million during the first quarter of 2016. The reduction in accretion is due to the reduction in the estimated earn-out percentage as compared to 2016. The accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period in December 2017.
We recorded a $539 thousand change in fair value associated with an increase in the contingent consideration liability for the first quarter of 2017 related to updated assumptions including current market conditions and increased projected NonQM mortgage loan originations for CCM. The change in fair value of contingent consideration was related to the estimated increase in future pre-tax earnings of CCM over the remaining earn-out period of three quarters. The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM.
Even though this projected increase in NonQM mortgage volume for CCM is favorable, it resulted in a corresponding charge to earnings of $539 thousand in the first quarter of 2017.
Net Interest Income (Expense)
We earn net interest income primarily from mortgage assets, which include securitized mortgage collateral, loans held-for-sale and finance receivables, 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 and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes, short-term borrowings, MSR Financing and Term Financing. 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. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. These cash receipts and payments are included as a component of the change in fair value of net trust assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Balance
|
|
Interest
|
|
Yield
|
|
Balance
|
|
Interest
|
|
Yield
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized mortgage collateral
|
|
$
|
3,962,613
|
|
$
|
57,921
|
|
5.85
|
%
|
$
|
4,469,739
|
|
$
|
66,313
|
|
5.93
|
%
|
Mortgage loans held-for-sale
|
|
|
283,314
|
|
|
3,199
|
|
4.52
|
|
|
265,794
|
|
|
2,704
|
|
4.07
|
|
Finance receivables
|
|
|
28,511
|
|
|
428
|
|
6.00
|
|
|
25,251
|
|
|
301
|
|
4.77
|
|
Other
|
|
|
36,939
|
|
|
36
|
|
0.39
|
|
|
24,822
|
|
|
9
|
|
0.15
|
|
Total interest-earning assets
|
|
$
|
4,311,377
|
|
$
|
61,584
|
|
5.71
|
|
$
|
4,785,606
|
|
$
|
69,327
|
|
5.79
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized mortgage borrowings
|
|
$
|
3,955,136
|
|
$
|
55,811
|
|
5.64
|
%
|
$
|
4,473,506
|
|
$
|
63,982
|
|
5.72
|
%
|
Warehouse borrowings (1)
|
|
|
305,035
|
|
|
2,981
|
|
3.91
|
|
|
289,989
|
|
|
2,625
|
|
3.62
|
|
MSR financing facility
|
|
|
19,518
|
|
|
242
|
|
4.96
|
|
|
—
|
|
|
—
|
|
—
|
|
Long-term debt
|
|
|
47,475
|
|
|
1,219
|
|
10.27
|
|
|
31,981
|
|
|
957
|
|
11.97
|
|
Convertible notes
|
|
|
24,963
|
|
|
471
|
|
7.55
|
|
|
30,589
|
|
|
1,109
|
|
14.50
|
|
Term financing
|
|
|
13,619
|
|
|
407
|
|
11.95
|
|
|
29,763
|
|
|
748
|
|
10.05
|
|
Other
|
|
|
2,794
|
|
|
7
|
|
1.00
|
|
|
2,243
|
|
|
7
|
|
1.25
|
|
Total interest-bearing liabilities
|
|
$
|
4,368,540
|
|
$
|
61,138
|
|
5.60
|
|
$
|
4,858,071
|
|
$
|
69,428
|
|
5.72
|
|
Net Interest Spread (2)
|
|
|
|
|
$
|
446
|
|
0.11
|
%
|
|
|
|
$
|
(101)
|
|
0.07
|
%
|
Net Interest Margin (3)
|
|
|
|
|
|
|
|
0.04
|
%
|
|
|
|
|
|
|
-0.01
|
%
|
|
(1)
|
|
Warehouse borrowings include the borrowings from mortgage loans held-for-sale and finance receivables.
|
|
(2)
|
|
Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.
|
|
(3)
|
|
Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.
|
Net interest spread increased $547 thousand for the three months ended March 31, 2017 primarily attributable to an increase in the net interest spread between loans held-for-sale and finance receivables and their related warehouse borrowings, a decrease in interest expense from the conversion of the 2013 Convertible Notes in February 2016 and a decrease in interest expense related to the payoff of the Term Financing. Offsetting the increase in net spread was a decrease in the net interest spread on the securitized mortgage collateral and securitized mortgage borrowings, an increase in the interest expense on the long-term debt as well as an increase in interest expense as a result of the MSR financing facility. As a result, the net interest margin increased to 0.04% for the three months ended March 31, 2017 from (0.01)% for the three months ended March 31, 2016.
During the three months ended March 31, 2017, the yield on interest-earning assets decreased to 5.71% from 5.79% in the comparable 2016 period. The yield on interest-bearing liabilities decreased to 5.60% for the three months ended March 31, 2017 from 5.72% for the comparable 2016 period. In connection with the fair value accounting for securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield as compared to the previous period.
Change in the fair value of long-term debt.
Long-term debt (consisting of trust preferred securities and junior subordinated notes) is measured based upon an internal analysis, which considers our own credit risk and discounted cash flow analyses. Improvements in 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.
Change in the fair value of long-term debt resulted in an expense of $2.5 million for the three months ended March 31, 2017, compared to no gain or loss for the comparable 2016 period as a result of an increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a decrease in the discount rate attributable to an improvement in our credit risk profile, financial condition as well as an increase in LIBOR during the fourth quarter of 2016 and first quarter of 2017.
Change in fair value of net trust assets, including trust REO losses
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Change in fair value of net trust assets, excluding REO
|
|
$
|
4,786
|
|
$
|
513
|
Gains (losses) from REO
|
|
|
1,533
|
|
|
(1,140)
|
Change in fair value of net trust assets, including trust REO (losses) gains
|
|
$
|
6,319
|
|
$
|
(627)
|
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $6.3 million for the three months ended March 31, 2017. The change in fair value of net trust assets, including REO was due to $4.8 million in gains from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral primarily associated updated loss assumptions and recoveries on certain a later vintage multifamily trust with improved performance. Additionally, the NRV of REO increased $1.5 million during the period as a result of lower expected loss severities on properties held in the long-term mortgage portfolio.
The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $627 thousand for the quarter ended March 31, 2016. The change in fair value of net trust assets, excluding REO was due to $513 thousand in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for sale primarily associated with a decrease in LIBOR as well as updated assumptions on certain later vintage trusts with improved performance. Additionally, the NRV of REO decreased $1.1
million during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio during the period.
Income Taxes
We recorded income tax expense of $426 thousand and $435 thousand for the the three months ended March 31, 2017 and 2016, respectively, primarily the result of amortization of the deferred charge, federal alternative minimum tax (AMT), and state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, including AMT. The deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH prior to 2008. The deferred charge is amortized and/or impaired, which does not result in any tax liability to be paid. The deferred charge is included in other assets in the accompanying consolidated balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statements of operations.
As of December 31, 2016, had estimated federal and state net operating loss (NOL) carryforwards of approximately $511.0 million and $491.7 million, respectively. Federal and state net operating loss carryforwards begin to expire in 2027 and 2017, respectively.
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, are presented in Corporate. Segment operating results are as follows:
Mortgage Lending
We recorded a $2.9 million change in fair value associated with an increase in the contingent consideration liability for the first quarter of 2016 related to updated assumptions including current market conditions and increased mortgage loan originations for CCM. The change in fair value of contingent consideration was related to the estimated increase in future pre-tax earnings of CCM over the remaining earn-out period of seven quarters. The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM. Beginning in the second quarter of 2015, as part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in 2017, which increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period. In the first quarter of 2016, accretion increased the contingent consideration liability by $1.9 million. We did not record accretion in the first quarter of 2015 as the acquisition transaction did not close until March 31, 2015, however the accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Gain on sale of loans, net
|
|
$
|
37,319
|
|
$
|
53,869
|
|
$
|
(16,550)
|
|
(31)
|
%
|
Servicing income, net
|
|
|
7,320
|
|
|
2,088
|
|
|
5,232
|
|
251
|
|
Loss on mortgage servicing rights, net
|
|
|
(977)
|
|
|
(10,910)
|
|
|
9,933
|
|
91
|
|
Other
|
|
|
14
|
|
|
49
|
|
|
(35)
|
|
(71)
|
|
Total revenues
|
|
|
43,676
|
|
|
45,096
|
|
|
(1,420)
|
|
(3)
|
|
Other income
|
|
|
407
|
|
|
388
|
|
|
19
|
|
5
|
|
Personnel expense
|
|
|
(22,958)
|
|
|
(23,807)
|
|
|
849
|
|
4
|
|
Business promotion
|
|
|
(10,211)
|
|
|
(9,163)
|
|
|
(1,048)
|
|
(11)
|
|
General, administrative and other
|
|
|
(4,916)
|
|
|
(4,558)
|
|
|
(358)
|
|
(8)
|
|
Accretion of contingent consideration
|
|
|
(845)
|
|
|
(1,895)
|
|
|
1,050
|
|
55
|
|
Change in fair value of contingent consideration
|
|
|
(539)
|
|
|
(2,942)
|
|
|
2,403
|
|
82
|
|
Earnings before income taxes
|
|
$
|
4,614
|
|
$
|
3,119
|
|
$
|
1,495
|
|
48
|
|
For the three months ended March 31, 2017, gain on sale of loans, net were $37.3 million compared to $53.9 million in the comparable 2016 period. The $16.6 million decrease is primarily due to a $21.0 million decrease in premiums from the sale of mortgage loans, an $6.8 million decrease in premiums from servicing retained loan sales and a $6.0 million decrease in mark-to-market gains on LHFS, partially offset by a $11.6 million decrease in direct loan origination expenses, $3.5 million increase in realized and unrealized net gains on derivative financial instruments and a $2.0 million increase in recovery for repurchases.
The overall decrease in gain on sale of loans, net was primarily due to decreased volumes partially offset by an increase in gain on sale margins. For the three months ended March 31, 2017, we originated and sold $1.6 billion and $1.5 billion of loans, respectively, as compared to $2.3 billion and $2.1 billion of loans originated and sold, respectively,
during the same period in 2016. Margins increased to approximately 236 bps for the three months ended March 31, 2017 as compared to 229 bps for the same period in 2016 due to a higher concentration of NonQM and government insured loans which have higher margins than conventional loans.
For the three months ended March 31, 2017, servicing income, net was $7.3 million compared to $2.1 million in the comparable 2016 period. The increase in servicing income, net was the result of the servicing portfolio increasing 188% to an average balance of $13.0 billion for the three months ended March 31, 2017 as compared to an average balance of $4.5 billion for the three months ended March 31, 2016. The increase in the average balance of the servicing portfolio is a result of our efforts during the past year to retain servicing as well as $1.4 billion in servicing retained loan sales during the three months ended March 31, 2017 Partially offsetting the increase was a bulk sale of NonQM MSRs totaling approximately $156.4 million in UPB.
For the three months ended March 31, 2017, loss on MSRs was $977 thousand compared to $10.9 million in the comparable 2016 period. For the three months ended March 31, 2017, we recorded a $1.1 million loss from a change in fair value of MSRs primarily the result of mark-to-market changes related to amortization slightly offset by an increase in servicing value due to lower interest rates. During the first quarter, we had a $414 thousand loss on sale of mortgage servicing rights related to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods. Partially offsetting the loss was a $559 thousand increase in realized and unrealized gains from hedging instruments related to MSRs.
For the three months ended March 31, 2017, other income was $407 thousand compared to $388 thousand in the comparable 2016 period. Other income increased $19 thousand for the three months ended March 31, 2017 as a result of a $261 thousand increase in net interest spread between loans held-for-sale, finance receivables and their related warehouse borrowing expense. Offsetting the increase in net interest spread was a $242 thousand increase in interest expense related to the MSR financing facility entered into in February 2017.
Personnel expense was $23.0 million for the three months ended March 31, 2017, compared to $23.8 million for the comparable period of 2016. Despite an 8% increase in average headcount in the mortgage lending segment as compared to the first quarter of 2016, personnel expense decreased due to a reduction in commissions as a result of the decrease in mortgage loan originations during the first quarter of 2017. With the decline in volumes in the first quarter of 2017, we made staff reductions during the first quarter, of which the full impact of the reductions were not reflected in the first quarter personnel expense.
Business promotion was $10.2 million for the three months ended March 31, 2017, compared to $9.2 million for the comparable period of 2016. Our centralized call center purchases leads and promotes its business through radio and television advertisements. During the first quarter of 2017, business promotion increased due to efforts to increase NonQM and purchase money production with the reduction in refinance activity as a result of the increase in interest rates
.
General, administrative and other expenses increased to $4.9 million for the three months ended March 31, 2017, compared to $4.6 million for the same period in 2016. The increase was primarily related to a $281 thousand increase in additional occupancy expense, a $111 thousand increase in data processing and a $49 thousand increase in legal and professional fees. Partially offsetting the increase was an $84 thousand decrease in other general and administrative expenses. Occupancy is allocated by headcount which had increased in mortgage lending until the staff reductions made during the first quarter of 2017.
As part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in December 2017, which increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period. In the first quarter of 2017, accretion increased the contingent consideration liability by $845 thousand as compared to $1.9 million during the first quarter of 2016. The reduction in accretion is due to the reduction in the estimated earn-out percentage as compared to 2016. The accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period in December 2017.
We recorded a $539 thousand change in fair value associated with an increase in the contingent consideration liability for the first quarter of 2017 related to updated assumptions including current market conditions and increased projected NonQM mortgage loan originations for CCM. The change in fair value of contingent consideration was related to the estimated increase in future pre-tax earnings of CCM over the remaining earn-out period of three quarters. The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM.
Even though this projected increase in NonQM mortgage volume for CCM is favorable, it resulted in a corresponding charge to earnings of $539 thousand in the first quarter of 2017.
Real Estate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Real estate services fees, net
|
|
$
|
1,633
|
|
$
|
2,100
|
|
$
|
(467)
|
|
(22)
|
%
|
Personnel expense
|
|
|
(791)
|
|
|
(1,341)
|
|
|
550
|
|
41
|
|
General, administrative and other
|
|
|
(204)
|
|
|
(225)
|
|
|
21
|
|
9
|
|
Earnings before income taxes
|
|
$
|
638
|
|
$
|
534
|
|
$
|
104
|
|
19
|
%
|
For the three months ended March 31, 2017, real estate services fees, net were $1.6 million compared to $2.1 million in the comparable 2016 period. The $467 thousand decrease in real estate services fees, net was the result of a $551 thousand decrease in real estate and recovery fees and a $10 thousand decrease in loss mitigation fees partially offset by a $94 thousand increase in real estate services.The $467 thousand decrease was primarily the result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to 2016.
Long-Term Mortgage Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Other revenue
|
|
$
|
61
|
|
$
|
67
|
|
$
|
(6)
|
|
(9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(86)
|
|
|
(109)
|
|
|
23
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
891
|
|
|
1,375
|
|
|
(484)
|
|
(35)
|
|
Change in fair value of long-term debt
|
|
|
(2,497)
|
|
|
—
|
|
|
(2,497)
|
|
n/a
|
|
Change in fair value of net trust assets, including trust REO gains (losses)
|
|
|
6,319
|
|
|
(627)
|
|
|
6,946
|
|
1108
|
|
Total other income
|
|
|
4,713
|
|
|
748
|
|
|
3,965
|
|
530
|
|
Earnings before income taxes
|
|
$
|
4,688
|
|
$
|
706
|
|
$
|
3,982
|
|
564
|
%
|
For the three months ended March 31, 2017, net interest income totaled $891 thousand as compared to $1.4 million for the comparable 2016 period. Net interest income decreased $484 thousand for the three months ended March 31, 2017 primarily attributable to a $261 thousand increase in interest expense on the long-term debt due to an increase in 3 month LIBOR as compared to the prior year and a $221 thousand decrease in net interest spread on the
long-term mortgage portfolio due to increased prices on mortgage-backed bonds which resulted in a decrease in yield as compared to the previous period.
Change in the fair value of long-term debt resulted in an expense of $2.5 million for the three months ended March 31, 2017, compared to no gain or loss for the comparable 2016 period as a result of an increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a decrease in the discount rate attributable to an improvement in our credit risk profile, financial condition as well as an increase in LIBOR during the fourth quarter of 2016 and first quarter of 2017.
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $6.3 million for the three months ended March 31, 2017. The change in fair value of net trust assets, including REO was due to $4.8 million in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated updated loss assumptions on certain a later vintage multifamily trust with improved performance. Additionally, the NRV of REO increased $1.5 million during the period as a result of lower expected loss severities on properties held in the long-term mortgage portfolio.
Corporate
The corporate segment includes all compensation applicable to the corporate services groups, public company costs as well as debt expense related to the Convertible Notes, Term Financing and capital leases. This corporate services group supports all operating segments. A portion of the corporate services costs is allocated to the operating segments. The costs associated with being a public company as well as the interest expense related to the Convertible Notes and capital leases are not allocated to our other segments and remain in this segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
|
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
Change
|
|
Interest expense
|
|
$
|
(852)
|
|
$
|
(1,864)
|
|
|
1,012
|
|
54
|
%
|
Other expenses
|
|
|
(4,035)
|
|
|
(1,079)
|
|
|
(2,956)
|
|
(274)
|
|
Net loss before income taxes
|
|
$
|
(4,887)
|
|
$
|
(2,943)
|
|
$
|
(1,944)
|
|
(66)
|
%
|
For the three months ended March 31, 2017, interest expense decreased to $852 thousand as compared to $1.9 million for the comparable 2016 period. The $1.0 million decrease in interest expense was primarily due a $638 thousand reduction in interest expense related to the conversion of the original $20.0 million in Convertible Notes to common stock in January 2016 as well as a $341 thousand decrease in interest expense related to the payoff the Term Financing in February 2017.
For the three months ended March 31, 2017, other expenses increased to $4.0 million as compared to $1.1 million for the comparable 2016 period. The increase was primarily due to an increase in corporate expenses of $2.0 million in the first quarter of 2017 as compared to the first quarter of 2016 and a reduction in allocated corporate expenses in other segments. The increase in corporate expenses is due to a $773 thousand increase in personnel costs primarily associated with our increased investment in technology, a $395 thousand increase in healthcare costs as well as a $401 thousand increase in legal and professional fees and a $120 thousand increase in data processing. Partially offsetting the increase was a $111 thousand decrease in equipment expense.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of operational and market risks. Refer to the complete discussion of operational and market risks included in Part II, Item 7 of our report on Form 10-K for the year ended December 31, 2016. There has been no material change to the types of market and operational risks faced by us.
Interest Rate Risk
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-term Treasury 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, MSR financing and mortgage warehouse borrowings. We anticipate that such interest rates will remain our primary benchmark for market risk for the foreseeable future.
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. Furthermore, with declining rates, we would expect the market value of our MSRs to decline due to higher actual and projected loan prepayments related to our loan servicing portfolio. Conversely, in a rising interest rate environment, we would expect a negative impact on the results of operations of our mortgage production activities but a positive impact on the market values of our MSRs. The interaction between the results of operations of our mortgage activities is a core component of our overall interest rate risk strategy.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds, discount rates, costs of servicing and default rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. We use a forward yield curve, which we believe better presents fair value of MSRs because the forward yield curve is the market’s expectation of future interest rates based on its expectation of inflation and other economic conditions.
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 20 days.
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 balance sheet on average for only 7 to 25 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.
Sensitivity Analysis
We have exposure to economic losses due to interest rate risk arising from changes in the level or volatility of market interest rates. We assess this risk based on changes in interest rates using a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
We used March 31, 2017 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitivity and assume instantaneous, parallel shifts in interest rate yield curves. Management uses sensitivity analysis, such as those summarized below, based on a hypothetical 25 basis point increase or decrease in interest rates, to monitor the risks associated with changes in interest rates. We believe the use of a 50 basis point shift up and down (100 basis point range) is appropriate given the relatively short time period that the mortgage loans pipeline is held on our balance sheet and exposed to interest rate risk (during the processing, underwriting and closing stages of the mortgage loans which can last up to approximately 60 days). We also actively manage our risk management strategy for our mortgage loans pipeline (through the use of economic hedges such as forward loan sale commitments and mandatory delivery commitments) and generally adjust our hedging position daily. In analyzing the interest rate risks associated with our MSRs, management also uses multiple sensitivity analyses (hypothetical 25 and 50 basis point increases and decreases) to review the interest rate risk associated with our MSRs.
At a given point in time, the overall sensitivity of our mortgage loans pipeline is impacted by several factors beyond just the size of the pipeline. The composition of the pipeline, based on the percentage of IRLC’s compared to mortgage loans held for sale, the age and status of the IRLC’s, the interest rate movement since the IRLC’s were entered into, the channels from which the IRLC’s originate, and other factors all impact the sensitivity.
These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
The following table summarizes the estimated changes in the fair value of our mortgage pipeline, MSRs and related derivatives that are sensitive to interest rates as of March 31, 2017 given hypothetical instantaneous parallel shifts in the yield curve:
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Changes in Fair Value
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Down
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Down
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Up
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Up
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50 bps
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25 bps
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25 bps
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50 bps
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Total mortgage pipeline (1)
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(216)
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34
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(523)
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(1,311)
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Mortgage servicing rights (2)
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(9,027)
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(4,018)
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2,936
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4,893
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(1)
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Represents unallocated mortgage loans held for sale, IRLCs and hedging instruments that are considered “at risk” for purposes of illustrating interest rate sensitivity. IRLCs and hedging instruments are considered to be unallocated when we have not committed the underlying mortgage loans for sale.
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(2)
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Includes hedging instruments used to hedge fair value changes associated with changes in interest rates relating to mortgage servicing rights.
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ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as March 31, 2017, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.