Impac Mortgage Holdings

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(cid:192)
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(cid:22)(cid:31)(cid:42)(cid:1)(cid:10)(cid:202)(cid:1)(cid:32)(cid:32)(cid:49)(cid:1)(cid:29)(cid:202)(cid:44)(cid:13)(cid:42)(cid:34)(cid:44)(cid:47)(cid:202)(cid:211)(cid:228)(cid:228)(cid:120)

IMPAC MORTGAGE HOLDINGS, INC.
1401 DOVE STREET
NEWPORT BEACH, CALIFORNIA 92660

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

June 1, 2006
9:00 A.M. (Pacific Daylight Time)

You  are  cordially  invited  to  attend  the  annual  meeting  of  stockholders  of  IMPAC  MORTGAGE
HOLDINGS, INC. ((cid:145)(cid:145)IMH,(cid:146)(cid:146) (cid:145)(cid:145)we,(cid:146)(cid:146) (cid:145)(cid:145)our,(cid:146)(cid:146) (cid:145)(cid:145)us,(cid:146)(cid:146) or the (cid:145)(cid:145)Company(cid:146)(cid:146)), a Maryland corporation, to be held at the
Irvine Marriott, 18000 Von Karman Avenue, Irvine California 92612 on June 1, 2006, at 9:00 a.m. (Pacific
Daylight Time).

The annual meeting of stockholders is being held for the following purposes:

1.

2.

3.

To elect a Board of Directors to serve for the ensuing year;

To ratify the selection of Ernst & Young LLP as our independent auditors for the year ended
December 31, 2006; and

To transact other business as may properly come before the meeting or any adjournments or
postponements thereof.

Only holders of our common stock of record at the close of business on April 7, 2006 will be entitled to
vote at the meeting.

Your proxy is enclosed. You are cordially invited to attend the meeting. However, if you do not expect to
attend or if you plan to attend but desire the proxy holders to vote your shares, please date and sign your
proxy and return it in the enclosed postage paid envelope. Please return the proxy promptly to avoid the
expense of additional proxy solicitation. You may also instruct the voting of your shares over the Internet
or  by  telephone  by  following  the  instructions  on  your  proxy  card.  Voting  by  written  proxy,  over  the
Internet, or by telephone will not affect your right to vote in person in the event you find it convenient to
attend.

Dated: April 26, 2006

For the Board of Directors

Ronald M. Morrison, Secretary

17APR200617522667

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IMPAC MORTGAGE HOLDINGS, INC.

PROXY STATEMENT

FOR ANNUAL STOCKHOLDERS MEETING TO BE HELD
June 1, 2006, AT 9:00 A.M. (PACIFIC DAYLIGHT TIME)

This proxy statement is delivered to you by Impac Mortgage Holdings, Inc., a Maryland corporation, in
connection with the annual meeting of stockholders to be held on June 1, 2006 at 9:00 a.m. (Pacific
Daylight Time) at Irvine Marriott, 18000 Von Karman Avenue, Irvine California 92612 (the (cid:145)(cid:145)Meeting(cid:146)(cid:146)).
Impac Mortgage Holdings, Inc. consists of its subsidiaries, IMH Assets Corp. ((cid:145)(cid:145)IMH Assets(cid:146)(cid:146)), Impac
Warehouse Lending Group, Inc. ((cid:145)(cid:145)IWLG(cid:146)(cid:146)), Impac Commercial Capital Corporation ((cid:145)(cid:145)ICCC(cid:146)(cid:146)), and Impac
Funding Corporation ((cid:145)(cid:145)IFC(cid:146)(cid:146)), together with its wholly-owned subsidiary Impac Secured Assets Corp.
((cid:145)(cid:145)ISAC(cid:146)(cid:146)). We are sending this proxy statement and the enclosed proxy to our stockholders commencing
on or about April 26, 2006.

Solicitations

Our Board of Directors is soliciting the enclosed proxy. We will bear the cost of this solicitation of proxies.
Solicitations will be made by mail. We may, in a limited number of instances, solicit proxies personally or
by telephone. We will reimburse banks, brokerage firms, other custodians, nominees and fiduciaries for
reasonable expenses incurred in sending proxy materials to beneficial owners of our common stock.

Annual Report

Our annual report to stockholders for the year ended December 31, 2005 will be concurrently provided
to each stockholder at the time we send this proxy statement and the enclosed proxy.

Voting

Your vote is important. Your shares can be voted at the annual meeting only if you are present in person
or  represented  by  proxy.  Even  if  you  plan  to  attend  the  meeting,  we  urge  you  to  vote  in  advance.
Maryland  law  does  not  permit  direct  voting  by  telephone  or  other  electronic  means;  however,  a
stockholder may authorize another person as proxy via electronic or telephonic means. Therefore, you
may  direct  your  vote  electronically  by  accessing  the  website  located  at  www.voteproxy.com  and
following the on-screen instructions or by calling the toll-free number listed on your proxy card. Please
have your proxy card in hand when going online or calling. If you instruct the voting of your shares
electronically, you do not need to return your proxy card. If you choose to vote by mail, simply mark
your proxy card, and then date, sign and return it in the postage-paid envelope provided.

Stockholders who hold their shares beneficially in street name through a nominee (such as a bank or
broker)  may  be  able  to  vote  by  telephone  or  the  Internet  as  well  as  by  mail.  You  should  follow  the
instructions you receive from your nominee to vote these shares.

Quorum; Voting Rights

Holders of our common stock of record at the close of business on April 7, 2006 (the (cid:145)(cid:145)Record Date(cid:146)(cid:146)) will
be entitled to vote at the Meeting. There were 76,112,963 shares of common stock, $0.01 par value per
share,  outstanding  at  that  date.  Each  share  of  our  common  stock  is  entitled  to  one  vote  and  the
presence, in person or by proxy, of holders of a majority of the outstanding shares of our common stock,
is necessary to constitute a quorum for the Meeting. If a quorum is not present at the Meeting, we expect
that the Meeting will be adjourned to solicit additional proxies.

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Counting of Votes

If a proxy in the accompanying form is duly executed and returned, the shares represented by the proxy
will be voted as directed. All properly executed proxies delivered pursuant to this solicitation and not
revoked will be voted at the Meeting in accordance with the directions given. Representatives of our
transfer agent will assist us in the tabulation of the votes.

Properly executed proxies that do not contain voting instructions will be voted FOR the election of the
seven nominees for director named herein and the ratification of the selection of Ernst & Young LLP as
our independent auditors for the year ended December 31, 2006.

Votes Required

The affirmative vote of a plurality of all of the votes cast at the Meeting (i.e. the seven director-nominees
who receive the greatest number of votes) at which a quorum is present is necessary for the election of a
director. You may vote in favor of all nominees, withhold your vote as to all nominees or withhold your
vote  as  to  specific  nominees.  Ratification  of  the  appointment  of  our  independent  registered  public
accounting  firm  will  require  the  affirmative  vote  of  the  holders  of  a  majority  of  the  votes  cast  at  the
Meeting.

Effect of Abstentions and Broker Non-Votes

An abstention is the voluntary act of not voting by a stockholder who is present at a meeting and entitled
to vote. A broker (cid:145)(cid:145)non-vote(cid:146)(cid:146) occurs when a broker nominee holding shares for a beneficial owner does
not  vote  on  a  particular  proposal  because  the  nominee  does  not  have  discretionary  power  for  that
particular  item  and  has  not  received  instructions  from  the  beneficial  owner.  Under  New  York  Stock
Exchange rules, brokers that hold shares of our common stock in (cid:145)(cid:145)street(cid:146)(cid:146) name for customers that are
the beneficial owners of those shares may not give a proxy to vote those shares on certain matters
without specific instructions from those customers.

Abstentions  and  broker  (cid:145)(cid:145)non-votes(cid:146)(cid:146)  will  be  treated  as  present  and  entitled  to  vote  for  purposes  of
determining the presence of a quorum.

Brokers  that  do  not  receive  instructions  are  entitled  to  vote  on  the  election  of  directors  and  the
ratification  of  the  appointment  of  our  independent  registered  public  accounting  firm.  If  you  are  a
stockholder who owns shares through a broker and attends the Meeting, you should bring a letter from
your broker identifying you as the beneficial owner of the shares and acknowledging that you will vote
your shares.

Under Maryland law, and our charter and bylaws, abstentions and broker non-votes will have no effect
on the outcome of the vote on the election of directors or the ratification of Ernst & Young LLP as our
registered public accounting firm.

Revocability of Proxy

Any proxy given may be revoked at any time prior to its exercise by notifying the Secretary of Impac
Mortgage Holdings, Inc. in writing of such revocation, by duly executing and delivering another proxy
bearing a later date (including an Internet or telephone vote), or by attending and voting in person at the
Meeting.

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Householding

(cid:145)(cid:145)Householding(cid:146)(cid:146) is a program, approved by the Securities and Exchange Commission (the (cid:145)(cid:145)SEC(cid:146)(cid:146)), which
allows  companies  and  intermediaries  (e.g.,  brokers)  to  satisfy  the  delivery  requirements  for  proxy
statements  and  annual  reports  by  delivering  only  one  package  of  stockholder  proxy  material  to  any
household at which two or more stockholders reside. If you and other residents at your mailing address
own shares of our common stock in street name, your broker or bank may have notified you that your
household will receive only one copy of our proxy materials. Once you have received notice from your
broker that they will be (cid:145)(cid:145)householding(cid:146)(cid:146) materials to your address, (cid:145)(cid:145)householding(cid:146)(cid:146) will continue until you
are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in
(cid:145)(cid:145)householding(cid:146)(cid:146) and would prefer to receive a separate proxy statement, or if you are receiving multiple
copies of the proxy statement and wish to receive only one, please notify your broker if your shares are
held in a brokerage account. If you hold shares of our common stock in your own name as a holder of
record, (cid:145)(cid:145)householding(cid:146)(cid:146) will not apply to your shares.

Postponement or Adjournment of Meeting

If a quorum is not present or represented, our bylaws permit the stockholders entitled to vote at the
Meeting, present in person or represented by proxy, to adjourn the Meeting from time to time to a date
not more than 120 days after the original record date without notice other than the announcement at the
Meeting.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

Our directors are elected annually to serve until the next annual meeting of stockholders and thereafter
until their successors are elected and qualify. Our charter and bylaws currently provide for a variable
number of directors with a range of between one and fifteen members. Our bylaws give the Board of
Directors the authority to establish, increase or decrease the number of directors. The size of our Board
of Directors is currently set at seven. No proxy will be voted for more than seven nominees for director.

Unless otherwise directed by stockholders within the limits set forth in the bylaws, the proxy holders will
vote all shares represented by proxies held by them for the election of the maximum number of the
following nominees, all of whom are now members of and constitute our Board of Directors. We have
been advised that all of the nominees have indicated their availability and willingness to serve if elected.
In the event that any nominee becomes unavailable or unable to serve as a director, prior to the voting,
the proxy holders will refrain from voting for the unavailable nominee or will vote for a substitute nominee
in the exercise of their best judgment.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE (cid:145)(cid:145)FOR(cid:146)(cid:146) ALL NOMINEES.

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Information Concerning Director Nominees

NAME

Joseph R. Tomkinson

William S. Ashmore

James Walsh

Frank P. Filipps

Stephan R. Peers

William E. Rose

Leigh J. Abrams

AGE POSITION

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38

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Chairman of the Board; Chief Executive
Officer and Director of IMH, IFC and IWLG

President, Chief Operating Officer, Director
of IMH; President and Director of IFC and
Director of IWLG; Chief Executive Officer of
ICCC

Director

Director

Director

Director

Director

Joseph R. Tomkinson has been Chairman of the Board since April 1998 and Chief Executive Officer and
a Director of IMH and Chairman of the Board and Chief Executive Officer and Director of IFC, also known
as the mortgage operations, and IWLG also known as the warehouse lending operations, since their
formation.  From  August  1995  to  April  1998,  he  was  Vice  Chairman  of  the  Board  of  IMH.  From
February  1997  to  May  1999,  he  was  Chairman  of  the  Board  and  Chief  Executive  Officer  of  Impac
Commercial  Holdings,  Inc.  ((cid:145)(cid:145)ICH(cid:146)(cid:146)),  a  real  estate  investment  trust  investing  in  commercial  mortgage
assets, and Impac Commercial Capital Corporation, ICH(cid:146)s conduit operations. He served as President
and  Chief  Operating  Officer  of  Imperial  Credit  Industries,  Inc.  ((cid:145)(cid:145)ICII(cid:146)(cid:146))  from  January  1992  to
February 1996, and from 1986 to January 1992, he was President of Imperial Bank Mortgage, one of the
divisions that later was combined to become ICII in 1992. He was a Director of ICII from December 1991
to June of 1999. Mr. Tomkinson brings over 28 years of combined experience in real estate, real estate
financing and mortgage banking.

William S. Ashmore has been President and Chief Operating Officer of IMH and its taxable subsidiary,
IFC,  since  1995.  In  addition,  Mr.  Ashmore  has  been  a  Director  of  IMH  since  July  of  1997.  He  was
President of our warehouse lending operations since its formation until January 2006, and has been a
Director  of  IWLG  since  its  formation.  He  has  also  been  Chief  Executive  Officer  of  ICCC  since  its
formation. From February 1997 to May 1999, he was the President and Chief Operating Officer of Impac
Commercial Holdings, Inc. From August 1993 to February 1996, he was Executive Vice President and
Director of Secondary Marketing at Imperial Credit Industries, Inc., having been its Senior Vice President
of Secondary Marketing since January 1988. From 1985 to 1987, he was Chief Executive Officer and
Vice Chairman of the Board of Century National Mortgage Corporation, a wholesale mortgage banking
company. Mr. Ashmore brings over 28 years of combined experience in real estate, asset/liability risk
management and mortgage banking.

James Walsh has been a Director of IMH since August 1995. In January 2000, he became Managing
Director of Sherwood Trading and Consulting Corporation. From March 1996 to January 2000, he was
an Executive Vice President of Walsh Securities, Inc. where he directed mortgage loan production, sales
and securitization. Mr. Walsh was an executive of Donaldson, Lufkin and Jenrette Securities Corporation
from January 1989 through March 1996 where he oversaw residential mortgage securitization, servicing
brokerage and mortgage banking services.

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Frank  P.  Filipps  has  been  a  Director  of  IMH  since  August  1995.  In  May  2005,  Mr.  Filipps  became
Chairman and Chief Executive Officer of Clayton Holdings, Inc., a mortgage services company. From
June 1999 to April 2005, Mr. Filipps was Chairman and Chief Executive Officer of Radian Group, Inc.
(NYSE:  RDN)  and  its  principal  subsidiary,  Radian  Guaranty,  Inc.  (collectively,  (cid:145)(cid:145)Radian(cid:146)(cid:146)),  which  were
formed  through  a  merger  of  Amerin  and  Commonwealth  Mortgage  Assurance  Company  ((cid:145)(cid:145)CMAC(cid:146)(cid:146)).
Radian  provides  private  mortgage  insurance  coverage  on  residential  mortgage  loans.  From
January 1995 to June 1999, he served as Chairman, President and Chief Executive Officer of CMAC. In
1995,  he  was  elected  President  and  Director  of  CMAC  Investment  Corporation  (NYSE:  CMT)  and  in
January  1996  he  was  elected  Chief  Executive  Officer  of  CMAC  Investment  Corporation.  Mr.  Filipps
originally  joined  CMAC  in  1992  as  Senior  Vice  President  and  Chief  Financial  Officer  and  became
Executive  Vice  President  and  Chief  Operating  Officer  in  1994.  Mr.  Filipps  has  been  a  director  and  a
member  of  the  compensation  committee  of  the  Board  of  Directors  of  Primus  Guaranty,  Ltd.  (NYSE:
PRS), a holding company primarily engaged in selling credit protection against investment grade credit
obligations of corporate and sovereign entities, since September 2004.

Stephan R. Peers has been a Director of IMH since October 1995. Since January 2005, Mr. Peers has
been  an  independent  financial  advisor.  From  September  2001  to  January  2005,  Mr.  Peers  was  a
Managing  Director  of  Sandler  O(cid:146)Neill  &  Partners  practicing  corporate  finance  covering  financial
institutions.  From  March  2000  to  May  2001,  Mr.  Peers  was  a  Managing  Director  at  Bear,  Stearns  &
Co., Inc. From April 1995 to March 2000, he was an Executive Vice President of International Strategic
Finance Corporation, Ltd., where he performed corporate finance services for overseas and domestic
companies.

William E. Rose has been a Director of IMH since August of 2000. Since 1991, Mr. Rose has been
associated with HBK Investments L.P. and is currently a Managing Director. His responsibilities include
U.S. equity derivatives, private investments and trading. Prior to 1991, Mr. Rose worked for William A.M.
Burden  &  Co.,  the  investment  division  of  the  Burden  family  of  New  York,  and  in  the  mergers  &
acquisitions group of Drexel Burnham, Lambert, Inc.

Leigh J. Abrams has been a Director of IMH since April 2001. Since August 1979, Mr. Abrams has been
President, Chief Executive Officer and a Director of Drew Industries Incorporated (NYSE: DW), which
manufactures a wide variety of components for recreational vehicles and manufactured homes. From
May 1994 to the company(cid:146)s sale and liquidation in 2002, Mr. Abrams also served as President, Chief
Executive  Officer  and  Director  for  LBP,  Inc.  Mr.  Abrams,  a  CPA,  has  over  30  years  of  experience  in
corporate finance, mergers and acquisitions, and operations.

Executive Officers

The following table provides certain information regarding those persons who serve as executive officers
of IMH, but who do not serve as directors of IMH:

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Richard J. Johnson

Gretchen D. Verdugo

Ronald M. Morrison

AGE POSITION

Executive Vice President and Chief Financial
Officer of IMH, IFC, IWLG and ICCC

Executive Vice President and Chief
Accounting Officer of IMH, IFC, IWLG and
ICCC

General Counsel, Executive Vice President
and Secretary of IMH, IFC, IWLG and ICCC

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Richard J. Johnson is the Executive Vice President and Chief Financial Officer of IMH, our mortgage
operations,  our  warehouse  lending  operations  and  our  commercial  operations.  He  has  held  these
positions at all three entities since their formation with the exception of the position of Executive Vice
President of IMH, which he attained in January 1998. In February of 1996 he was appointed as a Director
of  our  warehouse  lending  operations.  From  February  1997  to  May  1999,  he  was  the  Executive  Vice
President  and  Chief  Financial  Officer  of  Impac  Commercial  Holdings,  Inc.  and  Impac  Commercial
Capital Corporation. From September 1992 to March 1995, he was Senior Vice President and Chief
Financial Officer of ICII. From November 1989 to September 1992, he was Vice President and Controller
of ICII.

Gretchen D. Verdugo, Executive Vice President and Chief Accounting Officer of IMH, IFC, IWLG and
ICCC, joined the Impac Companies in August 1997. Throughout her tenure with IMH, Ms. Verdugo has
served on the Company(cid:146)s Executive, Asset Liability Management and Human Resource committees.
From November 2000 to February 2005, Ms. Verdugo was Executive Vice President of IWLG. Effective
February  2005,  Ms.  Verdugo  transitioned  from  her  leadership  position  at  IWLG  to  Executive  Vice
President and Chief Accounting Officer of IMH, IFC and IWLG. From 1996 to August 1997, Ms. Verdugo
was a Senior Manager in the Mortgage and Structured Finance Group at KPMG LLP. Ms. Verdugo(cid:146)s
qualifications  include  20  years  of  financial,  management  and  mortgage  industry  experience.
Ms.  Verdugo  is  a  Certified  Public  Accountant  and  received  her  bachelor(cid:146)s  degree  in  Business
Administration with an emphasis in Accountancy from the California State University at Long Beach.

Ronald M. Morrison became General Counsel of IMH in July 1998 and was promoted to Executive Vice
President in August 2001. In July 1998 he was also elected Secretary of IMH and in August 1998 he was
elected Secretary of our mortgage operations and our warehouse lending operations. From August 1998
to  May  1999,  he  was  also  General  Counsel  and  Secretary  of  Impac  Commercial  Holdings,  Inc.  and
Impac Commercial Capital Corporation. From 1978 until joining IMH, Mr. Morrison was a partner at the
law firm of Morrison & Smith.

There are no family relationships between any of the directors or executive officers of IMH.

Significant Employee

The  following  provides  certain  information  regarding  William  D.  Endresen,  President  of  Impac
Commercial Capital Corporation, who is a significant employee of the Company:

William  D.  Endresen,  51,  President  of  Impac  Commercial  Capital  Corporation,  joined  ICCC  in
July  2002.  From  September  1999  until  joining  ICCC,  Mr.  Endresen  was  Senior  Vice  President  and
Managing Director of the Major Loan Division of Fidelity Federal Bank in Los Angeles, which included
responsibility over the commercial real estate origination platform. From 1996 to 1999, Mr. Endresen was
President of the subsidiary of Impac Commercial Holdings, Inc.

Corporate Governance and Board Matters

Vacancies

All directors are elected at each annual meeting of stockholders for a term of one year and hold office
until their successors are elected and qualify. Any vacancy on the Board of Directors for any cause, other
than an increase in the number of directors, may be filled by a majority vote of the remaining directors,
although  such  majority  is  less  than  a  quorum.  Replacements  for  vacancies  occurring  among  the
unaffiliated directors will be elected by a majority vote of the remaining directors, including a majority of
the unaffiliated directors. Any vacancy in the number of directors created by an increase in the number of
directors may be filled by a majority vote of the entire Board of Directors.

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Compensation Of Board Members

We pay an annual director(cid:146)s fee of $20,000 to non-employee directors, an additional $1,000 for each
meeting attended and reimbursement for costs and expenses for attending such meetings. We pay a
quarterly  fee  of  $1,000  to  each  Audit  Committee  member  and  $1,300  to  the  chairman  of  the  Audit
Committee. Members of the Board of Directors are also eligible to receive awards under our 2001 Stock
Plan and may receive quarterly dividend equivalent rights, or (cid:145)(cid:145)DERs.(cid:146)(cid:146) During 2005, each non-employee
director received options to purchase 40,000 shares of stock with an exercise price of $13.76 per share
vesting equally over three years and expiring four years from the date of grant. Furthermore, during 2005,
each  of  Messrs.  Filipps,  Peers  and  Walsh  earned  cash  DERs  payments  of  $72,562  and  each  of
Messrs. Abrams and Rose earned cash DERs payments of $48,375 based on previously granted stock
options. During 2005, James Walsh was also paid $9,000 for his services as a director to a subsidiary of
the Company. Messrs. Tomkinson and Ashmore received no additional compensation for their services
as directors.

Board Member Independence

Pursuant to our Corporate Governance Guidelines, our Board of Directors must, among other criteria,
consist of a majority of directors who qualify as (cid:145)(cid:145)independent(cid:146)(cid:146) under the listing standards of the New
York Stock Exchange ((cid:145)(cid:145)NYSE(cid:146)(cid:146)), and are affirmatively determined by the Board of Directors to have no
material relationship with the Company, its parents or its subsidiaries (either directly or as a partner,
shareholder  or  officer  of  an  organization  that  has  a  relationship  with  the  Company,  its  parents  or  its
subsidiaries). The Governance and Nomination Committee reviews with the Board at least annually the
qualifications of new and existing Board members, considering the level of independence of individual
members, together with such other factors as the Board may deem appropriate, including overall skills
and  experience.  The  Governance  and  Nomination  Committee  also  evaluates  the  composition  of  the
Board as a whole and each of its committees to ensure the Company(cid:146)s on-going compliance with the
independence and other standards set by NYSE rules. Members of the Audit Committee must also be
independent pursuant to the standards of the NYSE and the applicable rules of the SEC.

In  reviewing  the  independence  of  the  members  of  the  Board  of  Directors,  the  Board  applies  the
standards of the NYSE, as summarized below, in addition to reviewing the responses of the directors to
questions regarding employment, compensation history, for-profit and non-profit affiliations and family
and other relationships, among other things:

(cid:127) A director or an immediate family member who is, or who has been within the last three years,

an executive officer of IMH, will not be considered to be independent.

(cid:127) A  director  who  received  or  has  an  immediate  family  member  who  received  more  than
$100,000/year in direct compensation from IMH during any twelve month period within the last
three  years,  other  than  director  and  committee  membership  fees  and/or  pension  or  other
deferred compensation, will not be considered to be independent.

(cid:127) A director who is a current partner or who has an immediate family member who is a current
partner of IMH(cid:146)s external or internal audit firm; a director who is a current employee of the audit
firm; a director who has an immediate family member who is a current employee of the audit firm
and who participates in the firm(cid:146)s audit, assurance or tax compliance practice; or a director or
an immediate family member of the director was, within the last three years (but is no longer), a
partner or employee of the audit firm who personally worked on IMH(cid:146)s audit within that time will
not be considered to be independent.

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(cid:127) A director or an immediate family member of the director is, or has been within the last three
years,  employed  as  an  executive  officer  of  another  company  where  any  of  IMH(cid:146)s  present
executive  officers  at  the  same  time  serve  or  served  on  that  company(cid:146)s  compensation
committee will not be considered to be independent.

(cid:127) A director who is a current employee or who has an immediate family member who is a current
executive officer of another company, that has made payments to or received payment from
IMH for property or services in an amount that, in the last three fiscal years, exceeds the greater
of  $1,000,000  or  2%  of  such  other  company(cid:146)s  consolidated  gross  revenues  will  not  be
considered to be independent.

Until April 2005, Frank P. Filipps was the Chairman and Chief Executive Officer of Radian Group, Inc.,
with  which  IFC  has  an  insurance  commitment  program,  and  its  principal  subsidiary,  Radian
Guaranty, Inc. For the year ended 2005, IFC paid an aggregate of $19.0 million to Radian in connection
with  the  insurance  program.  Radian  continues  to  provide  these  services  to  IFC  subsequent  to
Mr. Filipps(cid:146)s departure from Radian. In May 2005, Mr. Filipps became Chairman and Chief Executive
Officer of Clayton Holdings, Inc., a mortgage services company. A subsidiary of Clayton provides loan
due diligence services to IFC by analyzing a pool of loans that the Company is considering purchasing,
and  verifies  that  the  loans  meet  the  Company(cid:146)s  internal  mortgage  underwriting  standards.  Clayton(cid:146)s
subsidiary  also  confirms  that  the  information  contained  in  the  loan  files  is  accurate  and  complete.
Neither Clayton nor its subsidiary provides compliance or other consulting services for the Company.
The Company engaged Clayton(cid:146)s subsidiaries prior to the commencement of Mr. Filipps(cid:146) employment
with Clayton and does not pay Mr. Filipps directly for any of these services. While the Company paid
Clayton approximately $1.0 million in 2005 for the loan verification services, this amount did not exceed
the 2% of the gross revenues of Clayton in 2005. Mr. Filipps was not paid a bonus and has not received
any  other  compensation  from  Clayton  or  its  subsidiary  as  a  result  of  the  Company(cid:146)s  dealings  with
Clayton or its subsidiaries. Mr. Filipps is not involved with the day-to-day business dealings between the
Company and Clayton, and there does not appear to be any direct benefit to Mr. Filipps arising from this
relationship. Based on the above facts and circumstances and the commercial nature of the services
provided, the Board of Directors has determined that Mr. Filipps continues to qualify as an independent
director under the standards of the NYSE and the applicable rules of the SEC for purposes of the Audit
Committee.

During  2004  and  2005,  IMH  entered  into  a  business  relationship  with,  and  made  payments  of
approximately $1,260,000 to, an entity of which the brother of James Walsh was the managing member
and 100% owner. Mr. Walsh(cid:146)s brother is no longer affiliated with that entity. Furthermore, during 2005,
Mr. Walsh was paid $9,000 as a director to a subsidiary of the Company, which amount falls below the
payment per se thresholds of the NYSE standards. Based on the totality of the circumstances of the
relationships between IMH and Mr. Walsh and the fact that Mr. Walsh(cid:146)s brother is no longer affiliated with
the entity that did business with IMH, Mr. Walsh qualifies as an independent director under the standards
of the NYSE.

Until  January  2005,  Stephan  Peers  served  as  a  Managing  Director  at  the  investment  bank,  Sandler
O(cid:146)Neil Partners LLP, which participated as an underwriter in the Company(cid:146)s offerings during the past
three  years.  As  such,  Sandler  O(cid:146)Neil  received  underwriting  commissions  and  discounts  from  the
Company  for  investment  banking  services  in  connection  with  such  offerings.  The  total  payments  to
Sandler O(cid:146)Neil from the Company in any of the last three years were less than 1% of the gross revenues
of  Sandler  O(cid:146)Neil,  which  was  within  the  limits  of  per  se  indirect  compensation  described  above.
Furthermore, Mr. Peers was not paid a bonus or other direct compensation from Sandler O(cid:146)Neil or the
Company based upon the Company(cid:146)s relationship with Sandler O(cid:146)Neil. Lastly, Mr. Peers is no longer
employed at Sandler O(cid:146)Neill. Since the NYSE listing standards look to current relationships, Mr. Peers
qualifies as an independent director under the NYSE standards.

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Based  on  the  above  and  after  reviewing  the  relationships  with  members  of  our  Board,  our  Board  of
Directors has determined, with the assistance of the Corporate Governance and Nomination Committee
that, with the exception of Mr. Tomkinson, our CEO, and Mr. Ashmore, our President and Chief Operating
Officer, the members of the Board of Directors qualify as independent under the listing standards of the
NYSE. Therefore, our Board of Directors is comprised of a majority of independent directors as required
by the listing standards of the NYSE.

Attendance at Board and Committee Meetings

Twelve regular meetings of the Board of Directors were held during 2005. Each director attended at least
75% of the aggregate of the total number of meetings held by the Board of Directors and a majority of the
total number of meetings held by those committees of the Board of Directors on which such director
served.

We encourage all directors to attend the annual meeting of stockholders. In 2005, all of our directors
attended the annual meeting of stockholders.

Committees and Corporate Governance

The current standing committees of our Board of Directors are the Audit Committee, the Compensation
Committee, and the Corporate Governance and Nomination Committee. Each of these committees has
a written charter approved by our Board of Directors. The members of the committees and a description
of the principal responsibilities of each committee are described below.

Our  Board  of  Directors  has  adopted  Corporate  Governance  Guidelines.  The  Corporate  Governance
Guidelines include items such as criteria for director qualifications, director responsibilities, committees
of  the  board,  director  access  to  officers  and  employees,  director  compensation,  orientation  and
continuing  education,  evaluation  of  the  CEO,  annual  performance  evaluation  and  management
succession. The Board of Directors has chosen not to impose term limits with regard to service on the
board in the belief that continuity of service and the past contributions of the board members who have
developed  an  in-depth  understanding  of  the  Company  and  its  business  over  time  bring  a  seasoned
approach to IMH(cid:146)s governance. Each director is to act on a good faith basis and informed business
judgment in a manner such director reasonably believes to be in the best interest of the Company.

A  copy  of  each  committee  charter  and  our  Corporate  Governance  Guidelines  can  be  found  on  our
website  at  www.impaccompanies.com  by  clicking  (cid:145)(cid:145)Stockholder  Relations(cid:146)(cid:146)  and  then  (cid:145)(cid:145)Corporate
Governance,(cid:146)(cid:146) and is available in print upon request to the Secretary of Impac Mortgage Holdings, Inc.,
1401 Dove Street, Newport Beach, California 92660.

The Audit Committee

The Audit Committee is responsible for overseeing, on behalf of our Board of Directors: (1) the integrity of
the Company(cid:146)s financial statements, (2) the appointment, compensation, qualifications, independence
and  performance  of  our  independent  auditors,  (3)  our  compliance  with  legal  and  regulatory
requirements, and (4) the performance of our internal audit and controls function. The Audit Committee
met  14  times  during  2005  and  consisted  of  Frank  P.  Filipps,  Leigh  J.  Abrams,  James  Walsh  (until
May 2005), and Stephan R. Peers (since June 2005). Each of Messrs. Filipps, Abrams, and Peers is an
independent  director  under  the  NYSE  listing  standards  for  board  and  Audit  Committee  member
independence and as set forth in Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended
(the (cid:145)(cid:145)Exchange Act(cid:146)(cid:146)) and the rules thereunder.

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Audit Committee Financial Expert

Our Board of Directors has determined that at least one person serving on the Audit Committee is an
(cid:145)(cid:145)audit  committee  financial  expert(cid:146)(cid:146)  as  defined  under  Item  401(h)  of  Regulation  S-K.  Frank  P.  Filipps,
Chairman of the Audit Committee, satisfies the (cid:145)(cid:145)audit committee financial expert(cid:146)(cid:146) criteria established by
the SEC and is an independent director under the NYSE listing standards for board and audit committee
member  independence  and  as  set  forth  in  Section  10A(m)(3)  of  the  Exchange  Act  and  the  rules
thereunder.

The Compensation Committee

The Compensation Committee is responsible for (1) recommending to our Board of Directors the cash
and  non-cash  compensation  of  our  executive  officers  as  defined  in  the  rules  promulgated  under
Section  16  of  the  Exchange  Act,  (2)  evaluating  the  performance  of  our  executive  officers,
(3)  recommending  to  our  Board  of  Directors  the  cash  and  non-cash  compensation  policies  for  our
non-employee  directors,  (4)  making  recommendations  to  our  Board  of  Directors  with  respect  to
incentive compensation and equity-based plans that are subject to Board approval, and (5) assisting our
Board of Directors in evaluating potential candidates for executive officer positions with the Company.
The  Compensation  Committee  met  five  times  during  2005.  Until  May  2005,  the  Compensation
Committee  consisted  of  James  Walsh  and  Stephan  R.  Peers.  Since  June  2005,  the  compensation
committee  has  consisted  of  William  E.  Rose  (Chairman)  and  Leigh  J.  Abrams,  each  of  whom  is
considered an independent director under NYSE rules.

The Corporate Governance and Nomination Committee

The Corporate Governance and Nomination Committee assists the Board of Directors in (1) identifying
qualified individuals to become members of the Board of Directors, (2) determining the composition of
the  Board  of  Directors  and  its  committees,  (3)  selecting  the  director  nominees  for  the  next  annual
meeting  of  stockholders,  (4)  monitoring  a  process  to  assess  board,  committee  and  management
effectiveness, (5) aid and monitor management succession planning and (6) developing, implementing
and monitoring policies and processes related to our corporate governance. The Corporate Governance
and Nomination Committee consists of Stephan R. Peers (Chairman) and William E. Rose, each of whom
is  considered  an  independent  director  under  NYSE  rules.  Leigh  J.  Abrams  was  a  member  of  the
committee until May 2005. The committee met three times during 2005.

The Director Nomination Process

The  Corporate  Governance  and  Nomination  Committee  has  the  authority  to  lead  the  search  for
individuals  qualified  to  become  members  of  the  Company(cid:146)s  Board  of  Directors  and  to  select  or
recommend to the Board of Directors director nominees to be presented for stockholder approval. The
committee will select individuals who have high personal and professional integrity, have demonstrated
ability and sound judgment and were or are effective, in conjunction with other director nominees, in
collectively serving the long-term interests of our stockholders. The committee may use its network of
contacts  to  compile  a  list  of  potential  candidates,  but  may  also  engage,  if  it  deems  appropriate,  a
professional search firm. The committee may meet to discuss and consider candidates(cid:146) qualifications
and then choose a candidate by majority vote.

Submission for Proxy Materials. The Corporate Governance and Nomination Committee will consider
nominees  recommended  in  good  faith  by  our  stockholders  as  long  as  these  nominees  for  the
appointment to the Board of Directors meet the requirements set forth in our Corporate Governance
Guidelines as follows: the Board of Directors will consist of a majority of directors who (1) qualify as
(cid:145)(cid:145)independent(cid:146)(cid:146) directors within the meaning of the listing standards of the NYSE, as the same may be

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amended from time to time; (2) meet the applicable requirements to be (cid:145)(cid:145)unaffiliated(cid:146)(cid:146) as defined in the
Company(cid:146)s Bylaws, as may be amended from time to time; and (3) are affirmatively determined by the
Board to have no material relationship with the Company, its parents or its subsidiaries (either directly or
as  a  partner,  shareholder  or  officer  of  an  organization  that  has  a  relationship  with  the  Company,  its
parents  or  its  subsidiaries).  Possible  candidates  who  have  been  suggested  by  stockholders  are
evaluated by the Corporate Governance and Nomination Committee in the same manner as are other
possible candidates. Stockholders are hereby notified that if they wish their director-nominee(s) to be
included in our proxy statement and form of proxy relating to the 2007 annual meeting of stockholders,
they must submit, in writing, the candidate(cid:146)s name, credentials, contact information, along with the other
information  set  forth  below,  and  his  or  her  written  consent  to  be  considered  as  a  candidate,  to  our
Secretary no later than December 27, 2006. If the date of next year(cid:146)s annual meeting is changed by more
than 30 days from the date of this year(cid:146)s meeting, then the deadline is a reasonable time before we begin
to  print  and  mail  proxy  materials.  Director  nominations  must  comply  with  the  proxy  rules  relating  to
stockholder proposals, in particular Rule 14a-8 under the Securities Exchange Act of 1934, in order to be
included in our proxy materials.

Submission for Consideration at Annual Meeting. Stockholders who wish to submit a director-nominee
for consideration at the next annual meeting, but who do not wish to submit the nominee for inclusion in
our  proxy  statement,  must,  in  accordance  with  our  bylaws,  deliver  the  information  no  earlier  than
March 3, 2007, the 90th day prior to the first anniversary of this annual meeting, nor later than April 2,
2007, the 60th day prior to the first anniversary of this annual meeting. In the event that the date of the
annual  meeting  is  advanced  by  more  than  30  days  or  delayed  by  more  than  60  days  from  the  first
anniversary of the preceding year(cid:146)s annual meeting, then notice must be delivered not earlier than the
90th day prior to such annual meeting and no later than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day on which public announcement of the
date of such meeting is first made. If the number of directors to be elected to the Board of Directors is
increased and there is no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by us at least 70 days prior to the first anniversary of the
preceding  year(cid:146)s  annual  meeting,  a  stockholder(cid:146)s  nomination  will  be  deemed  timely,  but  only  with
respect to nominees for any new positions created by such increase, if it is delivered to our Secretary not
later than the close of business on the tenth day following the day on which public announcement is first
made  by  us.  Public  announcement  means  disclosure  in  a  press  release  reported  by  the  Dow  Jones
News Service, Associated Press or comparable news service or in a document that we publicly file with
the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act.

The  proposing  stockholder  must  provide  (1)  as  to  each  person  whom  the  stockholder  proposes  to
nominate for election or reelection as a director (a) all information relating to such person that is required
to be disclosed pursuant to Regulation 14A under the Exchange Act of 1934, as amended and (b) such
person(cid:146)s  written  consent  to  being  named  in  the  proxy  statement  as  a  nominee  and  to  serving  as  a
director if elected, and (2) as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination is made, (a) the name and address of such stockholder, as it appears on
our books, and of such beneficial owner and (b) the number of shares of each class of our stock that are
owned beneficially and of record by such stockholder and such beneficial owner.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics. This code of ethics applies to our directors,
executive officers and employees. This code of ethics is publicly available in the corporate governance
section of the stockholder relations page of our website located at www.impaccompanies.com and in
print  upon  request  to  the  Secretary  at  Impac  Mortgage  Holdings,  Inc.,  1401  Dove  Street,  Newport

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Beach, California, 92660. If we make amendments to the code of ethics or grant any waiver that the SEC
requires us to disclose, we will disclose the nature of such amendment or waiver on our website.

Stockholder Communication with Our Board of Directors

Stockholders who wish to contact any of our directors either individually or as a group may do so by
writing  them  c/o  Ronald  M.  Morrison,  Secretary,  Impac  Mortgage  Holdings,  Inc.,  1401  Dove  Street,
Newport  Beach,  California  92660,  by 
to
rmorrison@impaccompanies.com, specifying whether the communication is directed to the entire board
or to a particular director. Stockholder letters are screened by Company personnel based on criteria
established and maintained by our Corporate Governance and Nomination Committee, and approved
by a majority of our independent directors, which includes filtering out improper or irrelevant topics such
as solicitations.

(949)  475-3942  or  by  email 

telephone  at 

Executive Sessions of Non-Management Directors

Our  Board  of  Directors  will  have  four  regularly  scheduled  in-person  meetings  per  year  for  the
non-management  directors  without  management  present.  Leigh  J.  Abrams  is  the  director  chosen  to
preside at all of these meetings. At these sessions, the non-management directors will review strategic
issues for consideration by our Board of Directors, including future agendas, the flow of information to
directors,  management  progression  and  succession,  and  our  Corporate  Governance  Guidelines.
Stockholders  may  communicate  with  the  non-management  directors  as  a  group  by  email  to
independentdirectors@impaccompanies.com.  If  non-management  directors  include  a  director  that  is
not  an  independent  director,  then  at  least  one  of  the  scheduled  executive  sessions  will  include  only
independent directors.

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EXECUTIVE COMPENSATION

The  following  table  presents  compensation  earned  by  our  executive  officers  for  the  years  ended
December 31, 2005, 2004 and 2003 (the (cid:145)(cid:145)Named Executive Officers(cid:146)(cid:146)).

Summary Compensation Table

Annual Compensation

Long-Term
Compensation
Awards

Name and Principal Position Year Salary ($) Bonus ($)

Other Annual
Compensation
($) (5)

Securities
Underlying

All Other

Restricted

Options Compensation

Stock Award($) (Shares)(#)

($) (7)

Joseph R. Tomkinson
Chairman of the Board and
Chief Executive Officer of IMH,
IFC and IWLG

482,400
2005 600,000 3,364,128 (1)
2004 600,000 5,657,476 (1)
710,400
2003 453,107 4,476,652 (1)(2) 506,400

396,000
William S. Ashmore
President and Chief Operating
586,000
Officer of IMH; President of IFC 2003 407,742 4,417,146 (1)(2) 416,000
and IWLG; Chief Executive
Officer of ICCC

2005 500,000 3,497,866 (1)
2004 500,000 5,882,390 (1)

Richard J. Johnson
Executive Vice President and
Chief Financial Officer of IMH,
IFC, IWLG and ICCC

Ronald M. Morrison
Executive Vice President,
General Counsel and Secretary
of IMH, IFC, IWLG and ICCC

2005 250,000 2,469,112 (1)
2004 250,000 4,152,275 (1)
2003 254,280 3,060,335 (1)

279,000
412,000
293,000

2005 220,000
2004 220,000
2003 230,866

67,631
93,500
-

200,000
269,000
128,000

-
-
-

-
-
-

-
-
-

-
-
-

-
-
150,000

-
100,000
150,000

-
50,000
150,000

8,479
10,096
10,357

8,479
10,096
10,084

8,473
10,091
9,546

50,000
90,000 (3)
50,000

8,394
10,011
9,919

2005 377,548
Gretchen D. Verdugo
Executive Vice President and
2004 175,479
Chief Accounting Officer of IMH, 2003 156,683
IFC, IWLG and ICCC

241,140 (4)
319,969 (4)
372,959 (4)

1,154
5,998
5,768

68,800 (6)

-
-

100,000
5,000
50,000

8,159
9,763
9,462

(1)

(2)
(3)
(4)

(5)

(6)

With respect to Messrs. Tomkinson, Ashmore and Johnson, until April 1, 2003, includes incentive compensation under the
previous employment agreements and, after that, the incentive compensation under the current employment agreements
as described in (cid:145)(cid:145)Employment Agreements.(cid:146)(cid:146)
Until April 1, 2003, includes a bonus based on IFC(cid:146)s total loan production, not to exceed base salary.
All 90,000 stock options were granted with DERs.
Until February 1, 2005, includes a quarterly bonus based on average outstanding warehouse advances to non-affiliated
clients, and after that, the incentive compensation under the current employment agreement as described in (cid:145)(cid:145)Employment
Agreements.(cid:146)(cid:146)
Includes, and in the case of Ms. Verdugo, consists of, a car allowance. With respect to Messrs. Tomkinson, Ashmore, and
Johnson, also includes non-preferential cash payments based on DER awards attached to options granted through 2001,
and  in  the  case  of  Mr.  Morrison,  non-preferential  cash  payments  based  on  DER  awards  attached  to  options  granted
through 2004, of which the following amounts were paid in 2005, 2004 and 2003, respectively: Mr. Tomkinson(cid:151)$468,000,
$696,000  and  $492,000,  Mr.  Ashmore(cid:151)$390,000,  $580,000  and  $410,000,  Mr.  Johnson(cid:151)$273,000,  $406,000  and
$287,000, and Mr. Morrison(cid:151)$195,000, $264,000 and $123,000.
Represents the value of 5,000 shares of restricted stock granted on August 12, 2005 under the 2001 Stock Plan and is
based on a closing price per share of $13.76 on that day. As of December 30, 2005, the value of the restricted stock was
$47,050 based on a closing price per share of $9.41. The shares of restricted stock vest equally on August 12 over three
years  as  follows:  1,667  shares  vest  in  2006,  1,667  shares  vest  in  2007  and  1,666  shares  vest  in  2008.  The  shares  of
restricted stock have all the rights of a stockholder of the Company, including the right to vote the shares and the right to
receive any dividends thereon during the restricted period.

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(7)

For  2005,  consists  of  group  term-life  insurance  payments  and  401(k)  contributions,  respectively,  as  follows:
Mr. Tomkinson(cid:151)$1,300 and $7,178, Mr. Ashmore(cid:151)$1,300 and $7,178, Mr. Johnson(cid:151)$1,295 and $7,178, Mr. Morrison(cid:151)
$1,215 and $7,178 and Ms. Verdugo(cid:151)$981 and $7,178.

The following table sets forth information concerning individual grants of stock options in 2005 to the
Named Executive Officers:

Option Grants in Fiscal Year 2005

Individual Grants

Number of
Securities
Underlying
Options

Percent of
Total Options
Granted to

Name

Granted(#) (1) Employees (2)

Exercise or
Base Price
($/Share) (3)

Expiration
Date (4)

Joseph R. Tomkinson

William S. Ashmore

Richard J. Johnson

-

-

-

-

-

-

-

-

-

-

-

-

Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
for Option Term (5)

5%($)

10%($)

-

-

-

-

-

-

Ronald M. Morrison

50,000

Gretchen D. Verdugo

100,000

3.23%

6.46%

13.76

13.76

8/12/2009 148,268 319,301

8/12/2009 296,537 638,602

(1)
(2)

(3)

(4)
(5)

Options vest equally over a three-year period commencing one year after the date of grant.
The  total  number  of  options  granted  to  our  employees,  excluding  200,000  shares  underlying  options  granted  to
non-employee directors, during 2005 was 1,547,500.
The exercise price per share of options granted represents the fair market value of the underlying shares of common stock
on the date the options were granted.
Stock options expire four years from the date of grant.
In  order  to  comply  with  the  rules  of  the  SEC,  we  are  including  the  gains  or  (cid:145)(cid:145)option  spreads(cid:146)(cid:146)  that  would  exist  for  the
respective  options  we  granted  to  the  named  executive  officers.  We  calculated  these  gains  by  assuming  an  annual
compound stock price appreciation of 5% and 10% from the date of the option grant until the termination date of the
option. These gains do not represent our estimate or projection of the future price of the common stock.

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The following table sets forth information concerning option exercises in 2005 and option values as of
year-end 2005 to the Named Executive Officers:

Aggregated Option Exercises in Fiscal Year 2005
and Fiscal Year End Option Values

Number of

Shares Acquired Value Realized
on Exercise (#) (1)

($) (2)

Number of Securities
Underlying Unexercised
Options at
Fiscal Year-End (#)

Value of Unexercised
In-the-Money Options
at Fiscal Year-End ($) (3)

Exercisable Un-exercisable Exercisable Un-exercisable

Joseph R. Tomkinson

33,334

337,673

421,736

50,000

1,255,200

William S. Ashmore

116,667

1,018,952

316,667

116,667

1,046,000

Richard J. Johnson

Ronald M. Morrison

Gretchen D. Verdugo

33,334

36,666

30,000

417,472

314,201

83,334

732,200

304,585

139,999

100,002

125,700

225,070

24,999

120,002

-

-

-

-

-

-

(1)

(2)

(3)

Shares acquired on exercise include all shares underlying the stock option or portion of the option, exercised
without deducting shares held to satisfy tax obligations, if any, sold to pay the exercise price or otherwise
disposed of.
The value realized of exercised options is the product of (a) the excess of the per share fair market value of the
common stock on the date of exercise over the per-share option exercise price and (b) the number of shares
acquired upon exercise.
The value of unexercised (cid:145)(cid:145)in-the-money(cid:146)(cid:146) options is based on a price per share of $9.41, which was the price
of  a  share  of  common  stock  as  quoted  on  the  New  York  Stock  Exchange  at  the  close  of  business  on
December 30, 2005, minus the exercise price, multiplied by the number of shares underlying the option.

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Employment Agreements

Messrs. Tomkinson, Ashmore and Johnson

On  April  1  2003,  employment  agreements  between  IFC  and  each  Joseph  R.  Tomkinson,  William  S.
Ashmore and Richard J. Johnson (the (cid:145)(cid:145)Employment Agreements(cid:146)(cid:146)) became effective. Each agreement,
unless terminated earlier pursuant to the terms of such agreement, expires on December 31, 2007.

Guaranty. Since IMH will receive direct and indirect benefits from the performance of the officers under
each of the Employment Agreements, IMH executed a guaranty in favor of each the officers. Under the
terms of each guaranty, IMH promises to pay any and all obligations owed to the officers in the event of
default by IFC.

Base  and  Other  Compensation. Pursuant  to  the  terms  of  the  Employment  Agreements,  Joseph  R.
Tomkinson receives an annual base salary of $600,000, William S. Ashmore receives an annual base
salary of $500,000 and Richard J. Johnson receives an annual base salary of $250,000. Each officer(cid:146)s
base salary is not subject to any annual adjustment. The executive officers receive other benefits, such
as a car allowance, health benefits and accrued vacation. The executive officers are prohibited, without
the prior approval of the Board of Directors, from receiving compensation, directly or indirectly, from
companies with whom we have any financial, business or affiliated relationship.

Incentive  Compensation. Each  executive  officer  receives  incentive  compensation,  which  is  paid  to
each executive officer in an amount equal to our excess income, which is the greater of zero or net
income, minus the product of (i) the ten year U.S. treasury rate plus 200 basis points and (ii) the average

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net worth multiplied by the number of days in the quarter and divided by 365, multiplied by 4.0875% in
the case of Joseph Tomkinson, 4.25% in the case of William Ashmore, and 3.0% in the case of Richard
Johnson.  On  September  9,  2004,  Impac  Funding  Corporation  entered  into  an  amendment  to  the
Employment  Agreements.  The  amendment  to  each  Employment  Agreement,  each  effective  as  of
May  25,  2004,  changed  the  definitions  for  net  income  and  average  net  worth  to  take  into  account
preferred stock equity of IMH. As amended, net income is, at any date of determination, determined in
accordance with the then-current tax law after the deduction of dividends, whether declared or paid on
any of IMH(cid:146)s preferred stock equity during the period; however, before the total incentive compensation
is paid to such officers, net income calculation shall be adjusted for the deduction for dividends paid on
IMH(cid:146)s common stock equity and any net operating loss deductions arising from prior periods.

As amended, average net worth is, for any quarter, IMH(cid:146)s accumulated net worth of $514.8 million at
December 31, 2002 plus subsequent to December 31, 2002, the weighted average daily sum of the
gross  proceeds  from  any  sale  of  IMH(cid:146)s  common  stock  equity,  before  deducting  any  underwriting
discounts  and  commissions  and  other  expenses;  plus  the  average  balance  quarter-to-date  of  the
retained earnings for the quarter; less the weighted average daily sum of the gross proceeds used to
repurchase IMH(cid:146)s stock, less the average balance quarter-to-date of the cumulative dividends declared
on both IMH(cid:146)s common and preferred stock equity; plus an amount equal to the prior period losses, as
defined  in  the  Employment  Agreements.  The  ten  year  U.S.  treasury  rate  is  generally  the  arithmetic
average of the weekly per annum ten year average yields published by the Federal Reserve during the
quarter.

The incentive compensation will generally be calculated and reviewed by the compensation committee
within 30 days after each quarter. The incentive compensation will be paid in cash, and the executive
officers may elect to defer any component of their compensation in an approved, Company sponsored,
deferred compensation plan.

Severance Compensation.
If the executive officer(cid:146)s employment is terminated for any reason, other
than without cause or good reason (as such terms are defined in the agreement), the executive officer
will  receive  his  base  compensation,  benefits,  and  pro  rata  incentive  compensation  through  the
termination  date.  In  addition,  if  the  executive  officer  is  terminated  without  cause  or  if  the  executive
resigns with good reason, the executive officer will receive the following:

(i)

an additional 30 months of base salary of which 12 month(cid:146)s worth of base salary will be paid
on the termination date and the other 18 month(cid:146)s worth of base salary will be paid on the
normal salary payment dates over that period;

(ii) benefits  paid  over  the  30  month  period  following  the  termination  date,  provided  certain

conditions are met; and

(iii)

incentive compensation payments determined and paid as follows:

a.

b.

c.

on the termination date, the executive officer will be paid an amount equal to the prior
three quarters(cid:146) worth of incentive compensation;

30  days  after  the  quarter  in  which  the  termination  date  occurs,  the  incentive
compensation  for  that  quarter  that  the  executive  officer  would  have  been  entitled  to
receive had the executive officer not been terminated; and

for the six quarters after the quarter in which the termination date occurs, the executive
officer will be paid his incentive compensation at the time such compensation would
have  been  paid  had  the  executive  officer  not  been  terminated;  provided  that  the

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executive officer(cid:146)s incentive compensation for each quarter will not be less than 50% nor
more  than  100%  of  the  average  quarterly  new  incentive  compensation  for  the  four
quarters immediately preceding the termination date.

Each executive officer has agreed not to compete with us and our subsidiaries and affiliates during the
30 months that severance payments are made to the executive officer, provided that the agreement not
to compete will be waived if the executive officer forgoes the severance compensation.

Gretchen Verdugo

On  August  12,  2005,  Gretchen  Verdugo  and  IFC  executed  an  employment  agreement,  which  was
effective  as  of  February  1,  2005.  The  employment  agreement,  unless  terminated  earlier,  expires  on
January 31, 2008.

Guaranty. Because IMH will receive direct and indirect benefits from the performance of Ms. Verdugo
under  the  employment  agreement,  IMH  executed  a  guaranty,  executed  as  of  August  12,  2005  and
effective as of February 1, 2005, in favor of Ms. Verdugo. Under the terms of the guaranty, IMH promises
to pay any and all obligations owed to Ms. Verdugo in the event of default by IFC.

Base and Other Compensation. Pursuant to the terms of the employment agreement, Ms. Verdugo
receives an annual base salary of $400,000, which is not subject to any annual adjustment. Ms. Verdugo
also receives other benefits, such as a monthly car allowance, health benefits, and accrued vacation.
Additionally, Ms. Verdugo is eligible for tuition reimbursement for up to $67,000 for the costs associated
with  obtaining  her  MBA  degree.  Ms.  Verdugo  is  prohibited,  without  prior  approval  of  the  Board  of
Directors, from receiving compensation, directly or indirectly from any companies with whom IFC or any
of its affiliates has any financial, business or affiliated relationship.

Bonus  Incentive  Compensation. Ms.  Verdugo  is  eligible  to  receive  bonus  incentive  compensation
consisting of a discretionary bonus of up to 50% of her base salary paid during the fiscal year. Such
bonus  incentive  compensation  is  based  upon  management  objectives  established  each  year,  which
currently relate to support, and assistance in the implementation, of management initiatives, successful
overview of compliance with regulatory requirements and continuation of professional education.

Severance  Compensation.
If  Ms.  Verdugo(cid:146)s  employment  is  terminated  for  any  reason,  other  than
without cause or good reason, Ms. Verdugo will receive her base salary, bonus incentive compensation
and accrued vacation benefits prorated through the termination date. Termination with cause includes
conviction of a crime of dishonesty or a felony with certain penalties, substantial failure to perform duties
after  notice,  willful  misconduct  or  gross  negligence  or  material  breach  by  IFC  of  the  employment
agreement. Good reason includes material changes to employee(cid:146)s duties, relocation of the Company(cid:146)s
business by more than 65 miles without employee(cid:146)s consent, the Company(cid:146)s material breach of the
employment agreement or, in the event of a change of control, the acquiring company fails to assume
the  agreement.  If  Ms.  Verdugo  is  terminated  without  cause  or  if  she  resigns  with  good  reason,
Ms. Verdugo will receive, in addition to the above, the following:

(a) an additional 18 months of base salary to be paid proportionally over the 18 month period

following execution of a waiver and release agreement;

(b) health benefits paid over the 18 month period following the termination date, provided certain

conditions are met; and

(c)

the continued vesting for a period of 18 months of stock options, but no new grants of stock
options.

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In the event that Ms. Verdugo voluntary terminates the employment agreement 30 days prior to May 31,
2006, she will receive the severance payments detailed above, except the continued vesting of her stock
options.

Ms. Verdugo has also agreed not to compete with IFC throughout the term of her employment or during
the 18 months that severance payments are made to her, provided that the agreement not to compete
during such 18 month period will be waived if Ms. Verdugo forgoes the severance compensation.

Change of Control. The employment agreement will not be terminated by merger, an acquisition by
another entity, or by transferring of all or substantially all of IFC(cid:146)s assets. In the event of any such change
of control, the surviving entity or transferee, will be bound by the employment agreement.

Deferred Compensation Plan

During 2005, employees who held a position of at least Vice President and performed functions as an
officer and were deemed highly compensated were eligible to participate in our deferred compensation
plan. Participants were permitted to defer up to 50% of their annual salary and their entire bonus or
commissions on a yearly basis and to designate investments based on investment choices provided to
them. On January 31, 2006, the Deferred Compensation Plan was terminated.

Equity Compensation Plan Information

Our current stock plan consists of our 2001 Stock Option, Deferred Stock and Restricted Stock Plan,
which was approved by our stockholders on July 25, 2001. Our 1995 Stock Option, Deferred Stock and
Restricted  Stock  Plan,  which  was  approved  by  our  stockholders  on  November  11,  1995,  expired  in
August  2005.  Our  2001  Stock  Plan  authorizes  our  Board  of  Directors  to  grant  awards  that  include
incentive stock options as defined under Section 422 of the Internal Revenue Code, non-qualified stock
options, deferred stock, restricted stock and dividend equivalent rights.

The following table summarizes our equity compensation plan information as of December 31, 2005 with
respect  to  outstanding  awards  and  shares  remaining  available  for  issuance  under  our  equity
compensation  plans.  Information  is  included  in  the  table  as  to  common  stock  that  may  be  issued
pursuant to the Company(cid:146)s equity compensation plans.

Plan Category

Equity compensation plans approved by

stockholders

Equity compensation plans not approved by

stockholders

Number of Securities
to be issued upon
exercise of
outstanding options
(A)

Weighted-
average exercise
price of
outstanding
options (B)

Number of securities
remaining available for
future issuance
(excluding securities
reflected in column
(A)) (C)

5,266,544

-

5,266,544

14.55

-

14.55

2,191,189 (1)

-

2,191,189

The 2001 Stock Plan contains a provision whereby on January 1st of each year the maximum number of shares of stock
may be increased by an amount equal to the lesser of (a) 3.5% of the total number of shares of stock outstanding on such
anniversary date, and (b) a lesser amount as determined by the Board of Directors; provided, further, that of such amount
the maximum aggregate number of ISOs shall be increased on January 1st of each year to the lesser of (a) 3.5% of the total
number of shares of stock outstanding on such anniversary date, and (b) 3.5% of the total number of shares of stock
outstanding on the effective date of the plan. Pursuant to this provision, the number of shares authorized for issuance
under the 2001 Stock Option Plan increased by 2,000,000 on January 1, 2006.

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Stock Option, Deferred Stock and Restricted Stock Plans

2001 Stock Plan

Our 2001 Stock Option, Deferred Stock and Restricted Stock Plan (the (cid:145)(cid:145)2001 Stock Plan(cid:146)(cid:146)) provides for
the grant of Incentive Stock Options ((cid:145)(cid:145)ISOs(cid:146)(cid:146)) that meet the requirements of Section 422 of the Code,
Non-qualified  Stock  Options  ((cid:145)(cid:145)NQSOs(cid:146)(cid:146)),  deferred  stock  and  restricted  stock  awards  and  dividend
equivalent rights. Subject to adjustment provisions for stock splits, stock dividends and similar events,
the 2001 Stock Option Plan authorizes the grant of options to purchase, and awards of, up to 1,000,000
shares; however, on January 1 of each year such maximum aggregate number of shares of stock may be
increased by an amount equal to the lesser (a) 3.5% of the total number of shares of stock outstanding
on such anniversary date, and (b) a lesser amount as determined by the Board of Directors; provided,
further, that of such amount the maximum aggregate number of ISOs shall be increased on January 1 of
each year by an amount equal to the lesser of (a) 3.5% of the total number of shares of stock outstanding
on  such  anniversary  date,  and  (b)  3.5%  of  the  total  number  of  shares  of  stock  outstanding  on  the
effective date of the Plan. The aggregate maximum number of shares underlying stock options granted
to any eligible employee during any fiscal year may not exceed 1,500,000 shares (subject to adjustment
from time to time in accordance with the terms of the plan). If an option granted under the 2001 Stock
Plan expires or terminates, or an award is forfeited, the shares subject to any unexercised portion of such
option or award will again become available for the issuance of further options or awards under the 2001
Stock Plan. As of March 31, 2006, 2,450,357 shares underlying options were available for grant under
the 2001 Stock Plan.

The  2001  Stock  Plan  is  administered  by  the  Board  of  Directors  or  a  committee  of  the  board  (the
(cid:145)(cid:145)Administrator(cid:146)(cid:146)). ISOs may be granted to the officers and key employees of IMH. NQSOs and awards
may  be  granted  to  the  directors,  officers  and  key  employees  of  IMH  or  any  of  its  subsidiaries.  The
exercise price for any NQSO or ISO granted under the 2001 Stock Plan may not be less than 100% (or
110%  in  the  case  of  ISOs  granted  to  an  employee  who  is  deemed  to  own  in  excess  of  10%  of  the
outstanding  common  stock)  of  the  fair  market  value  of  the  shares  of  common  stock  at  the  time  the
NQSO or ISO is granted. The purpose of the 2001 Stock Plan is to provide a means of performance-
based compensation in order to attract and retain qualified personnel and to provide an incentive to
those whose job performance affects IMH.

Under current law, ISOs may not be granted to any individual who is not also an officer or employee of
IMH, or any of its subsidiaries. To ensure that we qualify as a real estate investment trust, the 2001 Stock
Plan provides that no options may be granted to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 9.5% of our outstanding shares of common
stock.

Each option must terminate no more than 10 years from the date it is granted (or 5 years in the case of
ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of
our outstanding common stock). Options may be granted on terms providing for exercise in whole or in
part at any time or times during their respective terms, or only in specified percentages at stated time
periods or intervals during the term of the option, as determined by the Administrator.

Options granted under the 2001 Stock Plan will become exercisable in accordance with the terms of the
grant  made  by  the  Administrator.  Awards  will  be  subject  to  the  terms  and  restrictions  made  by  the
Administrator. The Administrator has discretionary authority to select participants from among eligible
persons and to determine at the time an option or award is granted and, in the case of options, whether it
is intended to be an ISO or a NQSO, and when and in what increments shares covered by the option may
be purchased.

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The  exercise  price  of  any  option  granted  under  the  2001  Stock  Plan  is  payable  in  full  by  (1)  cash
payment, (2) surrender of shares of our common stock already owned by the option holder having a
market value equal to the aggregate exercise price of all shares to be purchased including, in the case of
the exercise of NQSOs, restricted stock subject to an award under the 2001 Stock Plan, (3) cancellation
of indebtedness owed by us to the option holder, (4) a full recourse promissory note executed by the
option holder, or (5) any combination of the foregoing. In the case of ISOs, however, the right to make
payment in the form of already owned shares of common stock must be authorized at time of grant of
such  ISOs.  The  terms  of  any  promissory  note  may  be  changed  from  time  to  time  by  the  Board  of
Directors to comply with applicable United States Internal Revenue Service or SEC regulations or other
relevant pronouncements.

The Board of Directors may from time to time revise or amend the 2001 Stock Plan, and may suspend or
discontinue it any time. However, no such revision or amendment may impair the rights of any participant
under any outstanding award without his consent or may, without stockholder approval, increase the
number of shares subject to the 2001 Stock Plan or decrease the exercise price of a stock option to less
than 100% of fair market value on the date of grant, with the exception of adjustments resulting from
changes  in  capitalization,  materially  modify  the  class  of  participants  eligible  to  receive  options  or
awards, materially increase the benefits accruing to participants or extend the maximum option term.

Under the 2001 Stock Plan, dividend equivalent rights may accompany awards granted to a participant.
These  rights  entitle  a  participant  to  receive  cash,  common  stock  or  other  awards  equal  in  value  to
dividends paid for a specified number of shares of common stock or other periodic payments. Dividend
equivalent payments typically commence on the first dividend payment date following the grant of the
award and continue until the earlier of the expiration or exercise of the corresponding award.

Restricted  stock  and  deferred  stock  awards  may  be  granted  in  conjunction  with  other  awards  or
separately.  Restricted  stock  and  deferred  stock  may  not  be  transferred  or  sold  until  the  restrictions
lapse, which restrictions may be time or performance-based or conditioned on the exercise of stock
options or other criteria. Recipients of restricted stock awards have all the rights of a stockholder of the
Company, including the right to vote the shares and receive dividends. Recipients of deferred stock
awards do not have rights of a stockholder but receive dividend payments on such shares.

In the event of a change in control, all stock options, restricted stock, and deferred stock may fully vest
and be exercisable, the value of all such awards will be cashed out by payment of cash or other property,
as determined by the Administrator, on the basis of a (cid:145)(cid:145)change of control price(cid:146)(cid:146) or all unexercised stock
options may be terminated. Furthermore, any indebtedness incurred in connection with the 2001 Stock
Plan  may  be  forgiven.  The  Administrator  may,  in  the  alternative,  allow  a  successor  to  substitute
equivalent awards or provide similar consideration. A (cid:145)(cid:145)change of control(cid:146)(cid:146) generally occurs when (i) any
person  becomes  the  beneficial  owner,  directly  or  indirectly,  of  30%  or  more  of  the  combined  voting
power of our securities, (ii) during any consecutive two-year period, individuals who at the beginning of
such period constitute the Board of Directors, and any new director, with certain exceptions, who was
approved by at least two-thirds of the directors still in office who either were directors at the beginning of
the  period  or  whose  election  or  nomination  for  election  was  previously  so  approved,  cease  for  any
reason  to  constitute  at  least  a  majority  of  the  Board  of  Directors,  (iii)  in  some  circumstances,  the
stockholders  approve  a  merger  or  consolidation,  or  (iv)  the  stockholders  approve  the  complete
liquidation,  sale  or  disposition  of  all  or  substantially  all  of  our  assets.  The  (cid:145)(cid:145)change  of  control  price(cid:146)(cid:146)
generally means the higher of (i) the highest price per share paid or offered in any transaction related to a
change of control or (ii) the highest price per share paid in any transaction reported on the exchange on
which  our  common  stock  is  listed  at  any  time  preceding  the  60  day  period  as  determined  by  the
Administrator.

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Unless previously terminated by the Board of Directors, no options or awards may be granted under the
2001 Stock Plan after March 27, 2011.

1995 Stock Plan

The  1995  Stock  Option,  Deferred  Stock  and  Restricted  Stock  Plan  expired  in  August  2005.  As  of
March  31,  2006,  options  to  purchase  743,501  shares  were  outstanding.  In  the  event  of  a  change  in
control, all stock options will fully vest and the value of all such awards will be cashed out by payment of
cash or other property, as determined by the Administrator, on the basis of a (cid:145)(cid:145)change of control price.(cid:146)(cid:146)
Furthermore, any indebtedness incurred in connection with the 1995 Stock Option Plan will be forgiven.
The terms (cid:145)(cid:145)change of control(cid:146)(cid:146) and (cid:145)(cid:145)change of control price(cid:146)(cid:146) have the same meaning as in the 2001
Stock Plan.

401(k) Plan

During 2005, we participated in the Impac Companies 401(k) Savings Plan ((cid:145)(cid:145)401(k) Plan(cid:146)(cid:146)) for all full time
employees with at least six months of service, which is designed to be tax deferred in accordance with
the  provisions  of  Section  401(k)  of  the  Code.  The  401(k)  Plan  provides  that  each  participant  may
contribute from 1% to 25% of his or her salary pursuant to certain restrictions or up to $14,000 annually
for 2005. We will contribute to the participant(cid:146)s plan account at the end of each plan year 50% of the first
4% of salary contributed by a participant. Under the 401(k) Plan, employees may elect to enroll on the
first day of any month, provided that they have been employed for at least six months. Subject to the
rules for maintaining the tax status of the 401(k) Plan, an additional company contribution may be made
at our discretion, as determined by the Board of Directors. We recorded approximately $950,000 for
matching and discretionary contributions during 2005.

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Set  forth  below  is  the  Report  of  our  Compensation  Committee,  a  graph  depicting  our
performance and the Report of the Audit Committee. The information contained in these three
sections of this proxy shall not be deemed to be (cid:145)(cid:145)soliciting material(cid:146)(cid:146) or to be (cid:145)(cid:145)filed(cid:146)(cid:146) with the
Securities and Exchange Commission, nor shall such information be incorporated by reference
into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, except to the extent that we specifically incorporate such information by
reference in such filing.

REPORT OF THE COMPENSATION COMMITTEE

Compensation Policies and Philosophy

The compensation committee administers the policies governing our executive compensation program.
All  issues  pertaining  to  executive  compensation  are  reviewed  and  approved  by  the  compensation
committee  and  approved  by  our  Board  of  Directors.  The  compensation  committee  believes  that
executive  compensation  should  reward  sustained  earnings  and  long-term  value  created  for
stockholders, promote increased performance and reflect our business strategies and long-range plans.

The compensation committee(cid:146)s objectives regarding executive compensation are to maintain efforts to
attract  and  retain  key  high  caliber  executives  and  to  provide  levels  of  compensation  which  provide
incentives  to  create  stockholder  value.  Consistent  with  attaining  these  objectives,  our  executive
compensation philosophy is to establish base salary amounts in view of comparative data and other
factors such as level of responsibility and prior experience and then, with regards Messrs. Tomkinson,
Ashmore  and  Johnson,  to  provide  incentive-based  compensation  that  fluctuates  according  to  our
taxable net income (subject to certain adjustments) and return on equity. With regards to Ms. Verdugo,
the Company(cid:146)s Executive Vice President and Chief Accounting Officer, she is eligible to receive incentive
compensation  consisting  of  a  discretionary  bonus  of  up  to  50%  of  her  base  salary  based  upon
management objectives established each year. Mr. Morrison(cid:146)s incentive compensation has, in the past,
been based on cash dividend equivalent rights that were granted with stock options and a bonus of up to
30% of his base salary.

Compensation in 2005

Each  executive  officer(cid:146)s  compensation  is  primarily  comprised  of  three  principal  components:  base
salary, incentive and bonus compensation and stock options and other awards.

Base Salaries. Under their current employment agreements, which expire at the end of 2007, the base
salaries  for  Messrs.  Tomkinson,  Ashmore  and  Johnson  are  not  subject  to  annual  adjustment.
Mr.  Morrison(cid:146)s  base  salary  remained  the  same  in  2004  and  2005.  Effective  February  1,  2005,
Ms. Verdugo entered into an employment agreement setting her base salary at $400,000, which is not
subject to annual adjustment. Ms. Verdugo entered into the employment agreement in connection with
her  new  position  as  Executive  Vice  President  and  Chief  Accounting  Officer.  In  reviewing  the
compensation terms for Ms. Verdugo under her employment agreement, the committee believes that
they  are  commensurate  with  her  responsibilities  and  those  of  peer  companies  with  similar  size  and
business.

Incentive  and  Bonus  Compensation. For  2005,  each  of  Messrs.  Tomkinson,  Ashmore  and  Johnson
was entitled to the incentive compensation pursuant to their employment agreements. The criteria and
calculation  of  the  incentive  compensation  are  described  above  in  (cid:145)(cid:145)Employment  Agreements.(cid:146)(cid:146)  The

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purpose  of  the  incentive  compensation  is  to  provide  quarterly  incentives  in  a  manner  designed  to
reinforce IMH(cid:146)s performance and financial related goals.

The  compensation  committee  believes  that  the  compensation  package  of  Messers.  Tomkinson,
Ashmore and Johnson should be linked to such factors as taxable net income, return on equity and
business  performance,  based  on  the  terms  of  their  employment  agreements.  In  reviewing  incentive
compensation in 2005, we noted that:

(cid:127) Estimated taxable income per diluted common share decreased 37%

(cid:127) Cash dividends declared decreased 33% to $1.95 per common share

(cid:127) Total assets increased 16% to $27.7 billion as of December 31, 2005

(cid:127) Book value per common share increased 12% to $13.24

Accordingly, Messrs. Tomkinson, Ashmore and Johnson received smaller bonuses in 2005 than they
received in prior years based on the formulas in their employment agreements.

Pursuant  to  her  employment  agreement,  Ms.  Verdugo  is  eligible  to  receive  bonus  incentive
compensation of up to 50% of her base salary if she satisfies certain objectives. Currently, and for 2005,
the  objectives  included  support  and  assistance  in  the  implementation  of  management  initiatives,
successful  overview  of  compliance  with  regulatory  requirements  and  continuation  of  professional
education.  Based  on  this  criteria,  for  2005,  Ms.  Verdugo  received  her  maximum  bonus  incentive
compensation since she satisfied those objectives and the committee believed that her performance
was excellent. Consistent with past incentive compensation, Mr. Morrison, with whom the committee
was laudatory of his efforts, also received an annual bonus equal to 30% of his base salary based on his
performance during 2005 in his role as Executive Vice President and General Counsel.

Stock  Options  and  Other  Awards. Every  year  the  Company  grants  stock  options  to  its  employees,
including its executive officers. Other than any limits set forth in the Company(cid:146)s 2001 Stock Plan, we do
not have any limit on the amount of options or awards that may be granted to any executive officer.
During  2005,  while  Messrs.  Tomkinson,  Ashmore  and  Johnson  did  not  receive  any  grants  of  stock
options or other awards based on the Company(cid:146)s performance, Ms. Verdugo and Mr. Morrison each
received  grants  of  stock  options.  During  2005,  in  connection  with  the  adoption  of  stock  option
expensing rules we also discussed whether the Company should continue granting stock options as its
primary equity compensation or begin granting restricted stock under its 2001 Stock Plan. We believe
that restricted stock awards should have the same vesting provisions and similar terms as stock option
grants so that they align the interests of the executives with that of the stockholders in terms of raising
capital  versus  incentives  to  maximize  tax  earnings.  As  such,  along  with  her  grant  of  stock  options,
Ms. Verdugo was also awarded 5,000 shares of restricted stock that vests equally over three years. The
Committee is still considering whether it should grant restricted stock awards and/or stock options to
executive officers in the future.

As stock dividends are one of the components that we use to measure our performance, we may also
grant stock options with DERs to align the long-range interest of our executive officers with the interests
of our stockholders. The amount of stock options and DERs that is granted to an officer is determined by
taking into consideration the officer(cid:146)s position with IMH, overall individual performance, our performance
and an estimate of the long-term value of the award considering current base salary and any cash bonus
awarded. During 2005, Messrs. Tomkinson, Ashmore, Johnson and Morrison received non-preferential
DER cash payments based on previous option grants. DERs did not accompany the options that were
granted to Ms. Verdugo and Mr. Morrison in 2005.

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In addition to the primary compensation elements of base salary, cash incentive bonuses and equity
awards  discussed  above,  we  review  other  annual  compensation,  including  the  dollar  value  to  the
executive and cost to IMH of all perquisites and other personal benefits, and payments that would be
required  under  various  severance  and  change-in-control  scenarios.  Overall,  we  determined  that  the
elements  of  compensation  were  reasonable  in  the  aggregate  and  that  the  current  employment
agreements align such officers with the Company(cid:146)s performance.

Compensation of Our Chief Executive Officer In 2005

For  2005,  the  compensation  committee  applied  the  principles  and  policies  discussed  above  in
examining  the  compensation  of  Joseph  R.  Tomkinson,  our  Chief  Executive  Officer.  Mr.  Tomkinson(cid:146)s
compensation  is  based  on  the  terms  of  his  current  employment  agreement.  The  compensation
committee  believes  that  Mr.  Tomkinson,  as  Chairman  and  Chief  Executive  Officer,  significantly  and
directly influences our overall performance. The compensation committee has reviewed all components
of Mr. Tomkinson(cid:146)s compensation, including base salary, bonus, stock option grants and other awards, if
any, and benefits. Mr. Tomkinson(cid:146)s incentive compensation during 2005 was directly tied to our financial
performance pursuant to the terms of his employment agreement. In 2005, Mr. Tomkinson received a
base salary of $600,000 pursuant to the terms of his employment agreement. Mr. Tomkinson(cid:146)s base
salary  is  not  subject  to  annual  adjustments.  Based  on  the  financial  performance  of  IMH  in  2005,
Mr. Tomkinson received a bonus of approximately $3.4 million, less than his bonus received for 2004.
Pursuant to the terms of his employment agreement, Mr. Tomkinson(cid:146)s bonus in 2005 was an amount
equal to IMH(cid:146)s excess income, which is the greater of zero or net income, minus the product of (i) the ten
year U.S. treasury rate plus 200 basis points and (ii) the average net worth multiplied by the number of
days  in  the  quarter  and  divided  by  365,  multiplied  by  4.0875%.  Mr.  Tomkinson  was  also  paid  other
annual  compensation  in  the  aggregate  amount  of  $482,400,  which  represents  a  car  allowance  and
non-preferential cash payments based on DER awards. Mr. Tomkinson(cid:146)s other compensation in 2005 in
the amount of $8,479 consisted of group term-life insurance payments and 401(k) plan contributions.
We believe Mr. Tomkinson(cid:146)s total compensation in 2005 was reasonable based upon Mr. Tomkinson(cid:146)s
leadership and overall individual performance, and IMH(cid:146)s performance.

Policy of Deductibility of Compensation

Section 162(m) was added to the Internal Revenue Code as part of the Omnibus Budget Reconciliation
Act of 1993. Section 162(m) limits the deduction for compensation paid to the Chief Executive Officer
and  the  other  Named  Executive  Officers  to  the  extent  that  compensation  of  a  particular  executive
exceeds $1.0 million, unless such compensation was based upon performance goals determined by a
compensation committee consisting solely of two or more outside directors, the material terms of which
are approved by a majority vote of the stockholders prior to the payment of such remuneration. The
incentive compensation under the current employment agreements with each of Messrs. Tomkinson,
Ashmore and Johnson and our 2001 Stock Plan are structured with the intent to meet the compensation
deduction under Section 162(m).

The  compensation  committee  intends  to  review  our  compensation  programs  to  determine  the
deductibility of the future compensation paid or awarded pursuant thereto and will seek guidance with
respect to changes to our existing compensation program that will enable IMH to continue to attract and
retain  key  individuals  while  optimizing  the  deductibility  to  IMH  of  amounts  paid  as  compensation.
However, this policy does not rule out the possibility that compensation may be approved that may not
qualify for the compensation deduction if, in light if all applicable circumstances, it would be in the best
interests of the Company for such compensation to be paid.

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Conclusion

The  compensation  committee  believes  that  IMH(cid:146)s  overall  executive  compensation  program  will  be
successful  in  providing  competitive  compensation  appropriate  to  attract  and  retain  highly  qualified
executives and also to encourage increased performance from the executive group, which will create
added  stockholder  value.  The  committee  will  continue  to  evaluate  and  administer  IMH(cid:146)s  executive
compensation program in a manner that we believe will be in stockholders(cid:146) interests and reasonable in
light of the Company(cid:146)s circumstances and performance, as well as individual performance.

COMPENSATION COMMITTEE:

William E. Rose (Chairman)
Leigh J. Abrams

Compensation Committee Interlocks and Insider Participation

During 2005, our compensation committee consisted of Messrs. Abrams and Rose. Until May 2005,
Messrs. Peers and Walsh were members of the Compensation Committee. During the fiscal year, no
member of the compensation committee was, an officer or employee of IMH, nor was any member of the
compensation committee formerly an officer of IMH. In January 2005, IFC entered into an agreement
with an entity, of which the brother of a director of the Company, James Walsh, was affiliated. Pursuant
to  the  terms  of  the  agreement,  IFC  purchased  selected  equipment  and  furniture  for  approximately
$1,260,000, and assumed the lease for the LLC(cid:146)s facilities in Chicago. James Walsh did not receive any
portion of the purchase price.

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STOCKHOLDER RETURN PERFORMANCE PRESENTATION

Set  forth  below  is  a  performance  graph  comparing  the  cumulative  total  stockholder  return  on  our
common stock, the S&P 500 Stock Index and a peer group index of mortgage real estate investment
trusts ((cid:145)(cid:145)REITs(cid:146)(cid:146)) for the period commencing on December 31, 2000 and ending on December 31, 2005.
The peer group of REITs consist of the following: Arbor Realty Trust Inc., American Home Mortgage
Investment Corp., Annaly Mortgage Management, Inc., Anworth Mortgage Asset Corporation, Capstead
Mortgage Corp., Friedman, Billings, Ramsey Group, Inc., Hanover Capital Mortgage Holdings, Inc., MFA
Mortgage  Investments,  Inc.,  Newcastle  Investment  Corp.,  New  Century  Financial  Corp.,  Novastar
Financial,  Inc.,  Redwood  Trust,  Inc.,  Saxon  Capital,  Inc.,  Sunset  Financial  Resources  Inc.,  and
Thornburg Mortgage Asset Corporation. The graph assumes $100 invested on December 31, 2000 in
our common stock, the S&P 500 Stock Index, the peer group index and reinvestment of dividends. The
stock price performance shown on the graph is not necessarily indicative of future price performance.

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG IMPAC MORTGAGE HOLDINGS, INC.,
S&P 500 INDEX AND PEER GROUP INDEX

1400

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2005

IMPAC MORTGAGE HOLDINGS, INC.
PEER GROUP INDEX
S&P 500 INDEX

ASSUMES $100 INVESTED ON DECEMBER 31, 2000
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2005

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26

 
 
 
REPORT OF THE AUDIT COMMITTEE

The  Audit  Committee  of  our  Board  of  Directors  is  responsible  for  providing  independent,  objective
oversight of our accounting functions and internal control over financial reporting. The Audit Committee
is currently comprised of three directors, each of whom is independent as defined by the New York
Stock  Exchange  listing  standards.  The  Audit  Committee  operates  under  a  written  audit  committee
charter, which was amended and restated and approved by the Board of Directors on June 27, 2005.

Management  is  responsible  for  our  internal  control  over  financial  reporting  and  financial  reporting
process. Ernst & Young LLP, or E&Y, the independent registered public accounting firm, is responsible for
performing  an  independent  audit  of  our  consolidated  financial  statements  in  accordance  with  the
standards  of  the  Public  Company  Accounting  Oversight  Board  (United  States)  and  auditing  of
management(cid:146)s assessment of the effectiveness of our internal control over financial reporting and to
issue separate reports thereon. The Audit Committee(cid:146)s responsibility is to monitor and oversee these
management processes and related independent audits.

In connection with these responsibilities, the Audit Committee met with management and E&Y to review
and discuss the December 31, 2005 financial statements. The Audit Committee also discussed with E&Y
the matters required by Statement on Auditing Standards ((cid:145)(cid:145)SAS(cid:146)(cid:146)) No. 61 (Communication with Audit
Committees) as may be modified or supplemented.

During 2005, Ernst & Young LLP provided tax provision assistance to the Company that related to the
year  ended  December  31,  2004  and  that  had  a  findings-based  fee  arrangement  for  a  tax  services
engagement.  Prior  to  the  appointment  of  Ernst  &  Young,  in  July  2005,  the  findings-based  fee
arrangement  was  changed  to  a  time-based  engagement.  E&Y  advised  the  Company  that  the  tax
services did not impair E&Y(cid:146)s independence. The Audit Committee reviewed the facts surrounding these
services, including discussions about the services with management and E&Y, the amount of fees paid
related to such services and the termination of the findings-based fee arrangement, and after discussing
the  situation  with  SEC  staff,  the  Audit  Committee  concluded  that  it  does  not  believe  that  E&Y(cid:146)s
independence is impaired.

In addition, the Audit Committee also received written disclosures and the letter from E&Y required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees),
which requires the written disclosure of all relationships between us and our independent registered
public  accounting  firm  that,  in  the  independent  registered  public  accounting  firm(cid:146)s  professional
judgment, may reasonably be thought to bear on independence and confirmation that, in its professional
judgment, it is independent of the Company that it is auditing.

The Audit Committee has also reviewed the non-audit fees described below and has concluded that the
amount and nature of those fees is compatible with maintaining E&Y(cid:146)s independence.

Based on the Audit Committee(cid:146)s discussions with management, review of E&Y(cid:146)s letter and discussions
with E&Y, the Audit Committee has recommended to the Board of Directors that the audited financial
statements be included in our annual report on Form 10-K for the fiscal year ended December 31, 2005,
for filing with the SEC.

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Audit Committee:
Frank P. Filipps (Chairman)
Leigh J. Abrams
Stephan R. Peers

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PROPOSAL NO. 2

RATIFICATION OF SELECTION OF AUDITORS

The Audit Committee has appointed Ernst & Young LLP, independent auditors, to audit our consolidated
financial statements for the year ending December 31, 2006. Ernst & Young LLP became our auditors in
July 2005. In recognition of the important role of the independent auditors, the Board of Directors has
determined that the selection of such auditors should be submitted to the stockholders for review and
ratification.

If the stockholders fail to ratify the appointment, the Audit Committee will reconsider whether to retain
Ernst  &  Young  LLP,  and  may  retain  that  firm  or  another  without  re-submitting  the  matter  to  our
stockholders. Even if the appointment is ratified, the Audit Committee may, in its discretion, direct the
appointment of different independent auditors at any time during the year if it determines that such a
change would be in the best interest of the Company and the stockholders.

A representative of Ernst & Young LLP is expected to be present at the meeting, will have the opportunity
to make a statement and is expected to be available to answer appropriate questions.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THIS
PROPOSAL TO RATIFY ERNST & YOUNG LLP AS OUR INDEPENDENT AUDITORS FOR 2006.

Information Regarding Auditors(cid:146) Fees

During  the  year  ended  December  31,  2005,  we  retained  Ernst  &  Young  LLP  as  our  independent
registered  public  accounting  firm.  Until  August  9,  2005,  KPMG  LLP  was  our  independent  registered
public accounting firm. The following table sets forth the aggregate fees billed to us by our principal
accountants, Ernst & Young, LLP, for the year ended December 31, 2005 and KPMG LLP, for the year
ended December 31, 2004.

Audit fees

Audit-related fees

Tax fees

All other fees

Total audit and non-audit fees

For the Year Ended
December 31,

2005

2004

$ 2,468,000

$ 2,468,500

103,000 (1)

374,810 (2)

344,000 (3)

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-

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$ 2,915,000

$ 2,843,310

(1)
(2)
(3)

Includes fees for audit of 401(k) plans and other accounting consultation and projects.
Includes fees for structured finance assistance, audit of 401(k) plan and audit of master servicing policies and procedures.
Includes fees for preparation of tax returns and for tax consulting. In addition, $59,000 was under a findings-based fee
arrangement prior to the appointment of E & Y.

During 2005, Ernst & Young LLP provided tax provision assistance to the Company that related to the
year  ended  December  31,  2004  and  that  had  a  findings-based  fee  arrangement  for  a  tax  services
engagement.  Prior  to  the  appointment  of  Ernst  &  Young,  in  July  2005,  the  findings-based  fee
arrangement  was  changed  to  a  time-based  engagement.  E&Y  advised  the  Company  that  the  tax
services did not impair E&Y(cid:146)s independence.

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Pre-Approval Policies and Procedures For Audit And Non-Audit Services

The Audit Committee pre-approves all auditing services and permitted non-audit services, including the
fees and terms thereof, to be performed by our independent registered public accounting firm, subject to
the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act
which are approved by the Audit Committee prior to the completion of the audit. The Audit Committee
may form and delegate authority to subcommittees consisting of one or more members of the Audit
Committee  when  appropriate,  including  the  authority  to  grant  pre-approvals  of  audit  and  permitted
non-audit  services,  provided  that  decisions  of  such  subcommittee  to  grant  pre-approvals  shall  be
presented to the full Audit Committee at its next scheduled meeting. In pre-approving the services in
2005 under audit related fees, tax fees or all other fees, the Audit Committee did not rely on the de
minimis exception to the SEC pre-approval requirements.

Change of Auditors

On June 6, 2005, KPMG LLP ((cid:145)(cid:145)KPMG(cid:146)(cid:146)) notified the Audit Committee of the Board of Directors of the
Company that it declined to stand for re-appointment as the Company(cid:146)s principal accountants and such
relationship ceased on August 9, 2005 upon completion of the review of the Company(cid:146)s interim financial
statements as of June 30, 2005 and for the three- and six- month periods then ended and the filing by the
Company of its Form 10-Q for the period ended June 30, 2005 with the SEC.

In connection with the audits of the two fiscal years ended December 31, 2004, and the subsequent
interim period through August 9, 2005, there were: (1) no disagreements with KPMG on any matter of
accounting  principles  or  practices,  financial  statement  disclosure,  or  auditing  scope  or  procedures,
which disagreements if not resolved to their satisfaction would have caused them to make reference in
connection  with  their  opinion  to  the  subject  matter  of  the  disagreement,  or  (2)  reportable  events  as
defined in Item 304(a)(1)(v) of Regulation S-K, except that, as previously disclosed by the Company in its
Annual  Report  on  Form  10-K/A  for  the  year  ended  December  31,  2004,  KPMG  advised  that  the
Company did not maintain effective internal control over financial reporting as of December 31, 2004
because of the effect of the following material weaknesses identified in management(cid:146)s assessment:

1)

The Company(cid:146)s internal controls intended to ensure the proper accounting and reporting for
certain complex transactions and financial reporting matters were not designed or operating
effectively as of December 31, 2004. For these purposes, complex transactions and financial
reporting matters include those relating to the transfer of financial assets, derivative financial
instruments, state income tax exposure items, and the income tax effect of intercompany
transfers  of  financial  assets  between  taxable  and  non-taxable  operating  segments.
Specifically, the Company did not employ an adequate number of personnel in its accounting
and finance departments with appropriate skills and expertise to ensure that the accounting
and reporting for certain complex transactions and financial reporting matters included in the
Company(cid:146)s  financial  statements  were  in  accordance  with  U.S.  generally  accepted
accounting  principles.  As  a  result  of  these  ineffective  controls,  the  Company  incorrectly
recorded gains on sales of mortgage servicing rights when the related mortgage loans were
sold  to  its  parent  company,  the  REIT.  These  gains  on  sales  of  mortgage  servicing  rights
should have been recorded as an adjustment to the carrying value of the retained mortgage
loans and recognized as a yield adjustment over the remaining term of the loans. In addition,
the  Company  did  not  identify  certain  loan  purchase  commitments  as  derivative  financial
instruments. Lastly, the Company did not prepare and maintain sufficient documentation of
certain derivative financial instrument transactions to support hedge accounting. As a result,
the  Company  did  not  reflect  fluctuations  in  the  estimated  fair  value  of  these  derivative
financial  instruments  in  earnings  in  the  period  of  change,  as  required  by  U.S.  generally
accepted accounting principles. The Company restated its financial statements in 2004 to

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correct these material errors in accounting for the years ended December 31, 2003, 2002 and
2001, and three months ended March 31, 2004 and 2003, the three and six months ended
June 30, 2004 and 2003, and the three and nine months ended September 30, 2003.

2)

The Company(cid:146)s internal control over financial reporting intended to ensure adequate access
and change control over end-user computing spreadsheets were not designed properly as of
December  31,  2004.  In  addition,  the  information  technology  general  controls  related  to
access and program changes were deficient as of year end, resulting in a potential lack of
reliability and integrity of the financial information which is used in these spreadsheets. As a
result, although no actual misstatement was identified, there is a more than remote likelihood
that  financial  statements  and  related  footnote  disclosures  could  be  materially  misstated.
Specifically, there is the potential that an error could be reflected in the financial reporting and
related disclosure of the allowance for loan losses, asset sales and securitizations and related
yield adjustments on retained interests, and mortgage loan characteristics tables as a result
of this material weakness in internal control over financial reporting.

The audit reports of KPMG on the consolidated financial statements of Impac Mortgage Holdings, Inc.
and subsidiaries as of and for the years ended December 31, 2004 and 2003 did not contain an adverse
opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles. The audit report of KPMG on management(cid:146)s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal control over financial reporting
as of December 31, 2004 did not contain an adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles, except that KPMG(cid:146)s report
indicated  that  the  Company  did  not  maintain  effective  internal  control  over  financial  reporting  as  of
December  31,  2004  because  of  the  effect  of  two  material  weaknesses  on  the  achievement  of  the
objectives  of  the  control  criteria  and  contains  an  explanatory  paragraph  that  describes  the  material
weaknesses consistent with above.

The  subject  matter  of  the  material  weaknesses  described  above  were  discussed  by  the  Company(cid:146)s
management  and  the  Audit  Committee  of  the  Board  of  Directors  of  the  Company  with  KPMG.  The
Company authorized KPMG to respond fully to the inquiries of the Company(cid:146)s successor accountant,
Ernst & Young LLP, concerning the subject matter of the material weaknesses.

Effective July 5, 2005, the Audit Committee of the Board of Directors of Impac Mortgage Holdings, Inc.
appointed Ernst & Young LLP as the Company(cid:146)s independent registered public accounting firm.

Prior  to  the  appointment  of  E&Y,  neither  the  Company  nor  anyone  on  behalf  of  the  Company  had
consulted  with  E&Y  during  the  Company(cid:146)s  two  most  recent  fiscal  years  or  for  the  fiscal  year  2005
through  July  5,  2005  in  any  matter  regarding  (i)  either  the  application  of  accounting  principles  to  a
specified transaction, either completed or proposed, or the type of audit opinion that might be rendered
on the Company(cid:146)s financial statements; or (ii) any matter which was the subject of either a disagreement
or a reportable event, as each are defined in Items 304(a)(1)(iv) and (v) of Regulation S-K, respectively.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, executive officers, and persons who own more
than 10% of a registered class of our equity securities, to file reports of ownership of such securities with
the  SEC.  Directors,  executive  officers  and  greater  than  10%  beneficial  owners  are  required  by  SEC
regulations to furnish us with copies of all Section 16(a) forms they file.

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To our knowledge, based solely on review of the copies of such reports furnished to us during the fiscal
year ended December 31, 2005, all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than ten percent stockholders were satisfied by such persons.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions With Management And Others

In January 2005, IFC entered into an agreement with an entity, of which the brother of a director of the
Company, James Walsh, was affiliated. Pursuant to the terms of the agreement, IFC purchased selected
equipment and furniture for approximately $1,260,000, and assumed the lease for the entity(cid:146)s facilities in
Chicago. James Walsh did not receive any portion of the purchase price.

IFC has an insurance commitment program with Radian Guaranty, Inc. Frank P. Filipps, a director, was
the  Chairman  and  Chief  Executive  Officer  of  Radian  Group,  Inc.  and  its  principal  subsidiary,  Radian
Guaranty, Inc. until April 30, 2005. Radian Guaranty has agreed to insure mortgage loans acquired or
originated by IFC that meet certain credit criteria. IFC pays Radian on a monthly basis. The amount paid
depends on the number of mortgage loans insured by Radian and the credit quality of the mortgages.
For the year ended December 31, 2005, IFC paid an aggregate of approximately $19.0 million to Radian
in connection with the insurance program. This includes only lender paid mortgage insurance.

In May 2005, Frank P. Filipps became Chairman and Chief Executive Officer of Clayton Holdings, Inc., a
mortgage services company and a company with which IFC obtains services. For the year ended 2005,
IFC paid an aggregate of approximately $1.0 million to Clayton in connection with due diligence services
provided.

In the ordinary course of business, mortgage loans have been and may be extended to officers and
directors of IMH and their immediate family members. All such loans are made at the prevailing market
rates and conditions existing at the time.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to us with respect to beneficial ownership of our
common stock as of the April 7, 2006 by (i) each director, (ii) each named executive officer, (iii) each
person known to us to beneficially own more than five percent of our common stock, and (iv) all directors
and executive officers as a group. Unless otherwise indicated in the footnotes to the table, the beneficial
owners named have, to our knowledge, sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws where applicable.

Name of Beneficial Owner (1)

The Amster/Heller/ Zlatin Group (2)
Howard M. Amster (2)
Joseph R. Tomkinson (3)
William S. Ashmore (4)
Richard J. Johnson (5)
Ronald M. Morrison (6)
Gretchen D. Verdugo (7)
James Walsh (8)
Frank P. Filipps (9)
Stephan R. Peers (10)
William E. Rose (11)
Leigh J. Abrams (12)
Directors and executive officers as a group

(10 persons) (13)

Number of Shares
Beneficially Owned

Percentage of Shares
Beneficially Owned

5,652,430
4,677,900
767,738
424,149
433,306
174,095
33,319
94,417
113,749
102,749
108,165
71,500

2,323,187

7.4%
6.1%
*
*
*
*
*
*
*
*
*
*

3.0%

*
(1)

(2)

Less than 1%
Except as otherwise noted, all named beneficial owners, can be contacted at 1401 Dove Street, Newport Beach, California
92660.
The shares reported for Mr. Amster and the Amster/Heller/Zlatin Group consists of the following, which is based on a
Schedule 13D, as amended, and filed with the SEC on November 14, 2005: (a) Howard Amster who beneficially owns
4,677,900  shares,  of  which  he  has  sole  voting  and  investment  power  over  3,972,400  shares  and  shared  voting  and
investment power over 5,597,000 shares; (b) Howard M. Amster 2005 Charitable Remainder Unitrust, of which Mr. Amster
has funded and is trustee and which beneficially owns, and has shared voting and investment power over, 5,900 shares;
Mr. Amster disclaims beneficial ownership of the shares owned by this Unitrust; (c) Amster Limited Partnership, of which
Mr. Amster is a 10% owner and General Partner and which beneficially owns, and has shared voting and investment power
over,  3,600  shares;  (d)  Amster  Trading  Company,  of  which  Mr.  Amster  is  a  100%  owner  and  which  beneficially  owns
246,100  shares,  and  has  shared  voting  and  investment  power  over  1,115,300  shares;  (e)  Amster  Trading  Company
Charitable  Remainder  Unitrusts,  which  beneficially  owns,  and  has  shared  voting  and  investment  power  over,  905,200
shares:  these  Unitrusts  have  been  funded  by  Amster  Trading  Company  and  Mr.  Amster  is  the  trustee,  both  disclaim
beneficial ownership of these shares; (f) Samuel J. Heller, who beneficially owns, and has shared voting and investment
power over, 8,000 shares; (g) Samuel J. Heller Irrevocable Trust, of which Mr. Amster is a co-trustee, and which beneficially
owns, and has shared voting and investment power over, 8,000 shares; Mr. Amster disclaims beneficial ownership of the
shares in this Trust; (h) Let(cid:146)s Get Organized, Inc., which is owned 100% by Mr. Zlatin, and which beneficially owns, and has
shared voting and investment power over, 700 shares; (i) Pleasant Lake Apts Corp., which is owned 100% by Mr. Amster
and which beneficially owns, and has shared voting and investment power over, 25,000 shares; (j) Pleasant Lake Apts Ltd
Partnership, of which Mr. Amster is a 99.75% owner and which beneficially owns, and has shared voting and investment
power over, 25,000 shares; (k) Ramat Securities Ltd., which is owned by Messrs. Amster and Zlatin and which beneficially
owns, and has shared voting and investment power over, 430,800 shares; (l) Tova Financial, Inc. ((cid:145)(cid:145)Tova(cid:146)(cid:146)), which is owned
by Gilda and David Zlatin and which beneficially owns 30,900 shares, and has shared voting and investment power over,
37,480 shares; (m) Tova Financial, Inc. Charitable Remainder Unitrust ((cid:145)(cid:145)Tova Unitrust(cid:146)(cid:146)), which beneficially owns, and has
shared voting and investment power over, 6,580 shares; this Unitrust has been funded by Tova Financial, Inc., and David
and  Gilda  Zlatin  are  co-trustees  of  the  Unitrust;  each  such  party  disclaims  beneficial  ownership  of  the  shares  in  the
Unitrust; (n) ZAK Group LLC, which is owned by Mr. Zlatin and Amster Limited Partnership, and which beneficially owns,
and has shared voting and investment power over, 3,600 shares; (o) David Zlatin, who beneficially owns 481,130 shares,
and has shared voting and investment power over, 480,580 shares, and sole voting and investment power over 7,130

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shares;  (p)  David  Zlatin  and  Gilda  Zlatin  JTWROS,  who  beneficially  own  38,900  shares  and  have  shared  voting  and
investment power over 45,480 shares; and (q) Gilda Zlatin, who beneficially owns 41,020 shares, and has shared voting
and investment power over 45,480 shares and has sole voting and investment power over 2,120 shares. Except for their
holdings as JTWROS and in Tova and Tova Unitrust, David and Gilda Zlatin each disclaim shared voting and dispositive
power over shares that each may own as a beneficial owner. The following are the addresses for such group members:
persons listed in (a) through (e), (h) and (j): 23811 Chagrin Blvd., #200, Beachwood, Ohio 44122; persons listed in (f) and (g):
1550 N. Stapley Dr., #131, Mesa, Arizona 85203; persons listed in (h): 2542 Biscayne Blvd., Beachwood Ohio 44122;
persons listed in (j): 7530 Lucerne Dr. #101, Middleburg Heights, Ohio 44130; persons listed in (l). (m), (o) through (q): 2562
Biscayne Blvd., Beachwood, Ohio 44122; and persons listed in (n): 221 Allynd Blvd, Chardon, Ohio 44024.
Includes (i) options to purchase 421,736 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date and (ii) 285,205 shares held in trust with Mr. Tomkinson as trustee.
Includes (i) options to purchase 316,667 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date, (ii) 11,415 shares held in a profit sharing plan with Mr. Ashmore and his wife as trustees,
(iii) 59,665 shares held in trust with Mr. Ashmore and his wife as trustees, and (iv) 3,325 shares held as custodian for his
children.
Includes (i) options to purchase 314,201 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date, (ii) 110,309 shares held in trust with Mr. Johnson and his wife as trustees, and (iii) 105 shares
held as custodian for his children.
Includes options to purchase 139,999 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date.
Includes options to purchase 24,999 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date.
Includes (i) options to purchase 68,750 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date and (ii) 300 shares held as custodian for his children.
Includes options to purchase 108,749 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date.
Includes options to purchase 90,416 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date.
Includes options to purchase 87,499 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date.
Includes options to purchase 57,500 shares that were exercisable as of April 7, 2006 or have or will become exercisable
within 60 days after such date.
Includes options to purchase an aggregate of 1,630,516 shares that were exercisable as of April 7, 2006 or have or will
become exercisable within 60 days after such date.

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

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Proposals to be Included in Proxy Statement

STOCKHOLDERS(cid:146) PROPOSALS

Stockholders are hereby notified that if they wish a proposal to be included in our proxy statement and
form of proxy relating to the 2007 annual meeting of stockholders, they must deliver a written copy of
their proposal no later than December 27, 2006. If the date of next year(cid:146)s annual meeting is changed by
more than 30 days from the date of this year(cid:146)s meeting, then the deadline is a reasonable time before we
begin  to  print  and  mail  proxy  materials.  Proposals  must  comply  with  the  proxy  rules  relating  to
stockholder proposals, in particular Rule 14a-8 under the Securities Exchange Act of 1934, in order to be
included in our proxy materials.

Proposals to be Submitted for Annual Meeting

Stockholders  who  wish  to  submit  a  proposal  for  consideration  at  our  2006  annual  meeting  of
stockholders, but who do not wish to submit the proposal for inclusion in our proxy statement pursuant
to Rule 14a-8 under the Exchange Act, must, in accordance with our bylaws, deliver a copy of their
proposal no later than the close of business on March 3, 2007, the 60th day prior to the first anniversary of
this annual meeting, nor earlier than April 2, 2007, the 90th day prior to the first anniversary of this annual
meeting. Any stockholder submitting a proposal must provide a brief description of the business desired
to be brought before the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial holder, if any, on whose behalf
the proposal is made. The stockholder and the beneficial owner, if any, on whose behalf the proposal is
made must provide their name and address as it appears on the books of the company and the class and
number  of  shares  of  the  company  which  are  beneficially  owned  and  of  record.  Furthermore,  such
stockholder must promptly provide any other information reasonably requested by the Company.

In the event that the date of the annual meeting is advanced by more than 30 days or delayed by more
than 60 days from the first anniversary of the preceding year(cid:146)s annual meeting, then notice must be
delivered  not  earlier  than  the  90th  day  prior  to  such  annual  meeting  and  not  later  than  the  close  of
business on the later of the 60 th day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made. Public announcement means
disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable
news service or in a document publicly filed by the company with the SEC pursuant to Section 13, 14 or
15(d) of the Exchange Act.

Mailing Instructions

In each case, proposals should be delivered to 1401 Dove Street, Newport Beach, California 92660,
Attention:  Ron  Morrison,  Secretary.  To  avoid  controversy  and  establish  timely  receipt  by  us,  it  is
suggested that stockholders send their proposals by certified mail return receipt requested.

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34

 
 
 
OTHER BUSINESS

The Board of Directors does not know of any other matter to be acted upon at the Meeting. However, if
any  other  matter  shall  properly  come  before  the  Meeting,  the  proxy  holders  named  in  the  proxy
accompanying  this  proxy  statement  will  have  authority  to  vote  all  proxies  in  accordance  with  their
discretion.

By Order of the Board of Directors

Ronald M. Morrison, Secretary

17APR200617522667

Dated: April 26, 2006
Newport Beach, California

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005 or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from 

 to 

.

(cid:1)

(cid:2)

Commission File Number: 1-14100

IMPAC MORTGAGE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)

33-0675505
(I.R.S. Employer
Identification No.)

1401 Dove Street, Newport Beach, California 92660
(Address of principal executive offices)
(949) 475-3600
(Registrant(cid:146)s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, $0.01 par value
Preferred Share Purchase Rights
9.375% Series B Cumulative Redeemable Preferred Stock
9.125% Series C Cumulative Redeemable Preferred Stock

New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes (cid:2) No (cid:1)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes (cid:2)(cid:3)No (cid:1)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:1)(cid:3)No (cid:2)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant(cid:146)s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of the Form 10-K or any amendment to this Form 10-K. (cid:2)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See
definition of (cid:145)(cid:145)accelerated filer and large accelerated filer(cid:146)(cid:146) in Rule 12b-2 of the Exchange Act.

Large accelerated filer (cid:1) Accelerated filer (cid:2) Non-accelerated filer (cid:2)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes (cid:2)(cid:3)No (cid:1)

As of June 30, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately
$1.4 billion, based on the closing sales price of common stock on the New York Stock Exchange on that date. For purposes of
the calculation only, all directors and executive officers of the registrant have been deemed affiliates. There were 76,112,963
shares of common stock outstanding as of March 1, 2006.

Portions  of  information  required  by  Items  10,  11,  12,  13  and  14  of  Part  III,  are  incorporated  by  reference  from  the  Proxy
Statement for the Company(cid:146)s 2006 Annual Meeting of Stockholders, except for the Stock Performance Graph, Report of the
Compensation Committee on Executive Compensation, and Report of the Audit Committee. The Company(cid:146)s Proxy Statement
will be filed with the Commission within 120 days after the year ended December 31, 2005.

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IMPAC MORTGAGE HOLDINGS, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

ITEM 1.

BUSINESS

PART I

Forward-Looking Statements

Available Information

General Overview

Long-Term Investment Operations

Mortgage Operations

Warehouse Lending Operations

Regulation

Competition

Employees

Revisions in Policies and Strategies

ITEM 1.A RISK FACTORS

ITEM 1.B UNRESOLVED STAFF COMMENTS

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT(cid:146)S COMMON EQUITY AND RELATED STOCKHOLDER

MATTERS

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 7. MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Summary of 2005 Financial and Operating Results

Critical Accounting Policies

Taxable Income

Financial Condition and Results of Operations

Liquidity and Capital Resources

Contractual Obligations

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General Overview

Changes in Interest Rates

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

1

1

1

1

3

6

13

13

14

14

14

15

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IMPAC MORTGAGE HOLDINGS, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

PART II

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

PART IV

SIGNATURES

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ITEM 1. BUSINESS

PART I

Unless the context otherwise requires, the terms (cid:145)(cid:145)Company,(cid:146)(cid:146) (cid:145)(cid:145)we,(cid:146)(cid:146) (cid:145)(cid:145)us,(cid:146)(cid:146) and (cid:145)(cid:145)our(cid:146)(cid:146) refer to Impac Mortgage
Holdings, Inc. ((cid:145)(cid:145)IMH(cid:146)(cid:146)), a Maryland corporation incorporated in August 1995, and its wholly-owned subsidiaries,
IMH Assets Corp., or (cid:145)(cid:145)IMH Assets,(cid:146)(cid:146) Impac Warehouse Lending Group, Inc., or (cid:145)(cid:145)IWLG,(cid:146)(cid:146) Impac Multifamily Capital
Corporation, or (cid:145)(cid:145)IMCC,(cid:146)(cid:146) and Impac Funding Corporation, or (cid:145)(cid:145)IFC,(cid:146)(cid:146) together with its wholly-owned subsidiaries
Impac Secured Assets Corp., or (cid:145)(cid:145)ISAC,(cid:146)(cid:146) and Novelle Financial Services, Inc., or (cid:145)(cid:145)Novelle.(cid:146)(cid:146)

Forward-Looking Statements

This report on Form 10-K 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 (cid:145)(cid:145)may,(cid:146)(cid:146) (cid:145)(cid:145)will,(cid:146)(cid:146) (cid:145)(cid:145)believe,(cid:146)(cid:146)
(cid:145)(cid:145)expect,(cid:146)(cid:146) (cid:145)(cid:145)likely,(cid:146)(cid:146) (cid:145)(cid:145)should,(cid:146)(cid:146) (cid:145)(cid:145)anticipate,(cid:146)(cid:146) 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, failure to achieve projected earnings levels;
unexpected increases in credit and bond spreads; the ability to generate sufficient liquidity; the ability to access the
equity markets; increased operating expenses and mortgage origination or purchase expenses that reduce current
liquidity position more than anticipated; continued increase in price competition; risks of delays in raising, or the
inability to raise, additional capital, either through equity offerings, lines of credit or otherwise; the ability to generate
taxable income and to pay dividends; interest rate fluctuations on our assets that differ from those on our liabilities;
unanticipated interest rate fluctuations; changes in expectations of future interest rates; unexpected increase in
prepayment rates on our mortgages; changes in assumption regarding estimated loan losses or an increase in loan
losses; continued ability to access the securitization markets or other funding sources, the availability of financing
and, if available, the terms of any financing; changes in markets which the Company serves, such as mortgage
refinancing  activity  and  housing  price  appreciation;  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 Item 1A (cid:145)(cid:145)Risk Factors(cid:146)(cid:146) and Item 7. (cid:145)(cid:145)Management(cid:146)s Discussion and Analysis
of Financial Condition and Results of Operations(cid:146)(cid:146) in this report. We do not undertake, and specifically disclaim any
obligation, to publicly release 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.

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Available Information

Our  Internet  website  address  is  www.impaccompanies.com.  We  make  available  our  annual  report  on
Form  10-K,  quarterly  reports  on  Form  10-Q,  current  reports  on  Form  8-K  and  proxy  statement  for  our  annual
stockholders(cid:146) meetings, as well as any amendments to those reports, free of charge through our website as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission, or (cid:145)(cid:145)SEC.(cid:146)(cid:146) You can learn more about us by reviewing our SEC filings on our website by clicking on
(cid:145)(cid:145)Stockholder Relations(cid:146)(cid:146) located on our home page and proceeding to (cid:145)(cid:145)Financial Reports.(cid:146)(cid:146) We also make available
on  our  website,  under  (cid:145)(cid:145)Corporate  Governance,(cid:146)(cid:146)  charters  for  the  audit,  compensation,  and  governance  and
nominating  committees  of  our  board  of  directors,  our  Code  of  Business  Conduct  and  Ethics,  our  Corporate
Governance Guidelines and other company information, including amendments to such documents and waivers, if
any to our Code of Business Conduct and Ethics. These documents will also be furnished, free of charge, upon
written request to Impac Mortgage Holdings, Inc., Attention: Stockholder Relations, 1401 Dove Street, Newport
Beach,  California  92660.  The  SEC  also  maintains  a  website  at  www.sec.gov  that  contains  reports,  proxy
statements and other information regarding SEC registrants, including the Company.

General Overview

We are a mortgage real estate investment trust, or (cid:145)(cid:145)REIT,(cid:146)(cid:146) that is a nationwide acquirer, originator, seller and
investor of non-conforming Alt-A mortgages, or (cid:145)(cid:145)Alt-A mortgages,(cid:146)(cid:146) and to a lesser extent, small-balance multi-

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family mortgages, or (cid:145)(cid:145)multi-family mortgages(cid:146)(cid:146), and sub-prime, or (cid:145)(cid:145)B/C mortgages.(cid:146)(cid:146) We also provide repurchase
financing to originators of mortgages.

We operate three core businesses:

(cid:127) the long-term investment operations that are conducted by IMH, IMH Assets and IMCC;

(cid:127) the mortgage operations that are conducted by IFC, ISAC; and

(cid:127) the warehouse lending operations that are conducted by IWLG.

The  long-term  investment  operations  primarily  retain  for  investment  adjustable  rate  and  fixed  rate  Alt-A
mortgages that are acquired and originated by our mortgage operations. Alt-A mortgages are primarily first lien
mortgages made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but
have loan characteristics that make them non-conforming under those guidelines. Some of the principal differences
between mortgages purchased by Fannie Mae and Freddie Mac and Alt-A mortgages are as follows:

(cid:127) credit and income histories of the mortgagor;

(cid:127) documentation required for approval of the mortgagor;

(cid:127) loan balances in excess of maximum Fannie Mae and Freddie Mac lending limits; and.

(cid:127) applicable loan to value ratios.

For instance, Alt-A mortgages may have higher loan-to-value, or (cid:145)(cid:145)LTV,(cid:146)(cid:146) ratios than allowable under Fannie
Mae or Freddie Mac guidelines. Furthermore, Alt-A mortgages may not have certain documentation or verifications
that are required by Fannie Mae and Freddie Mac and, therefore, in making our credit decisions, we are more reliant
upon the borrower(cid:146)s credit score and the adequacy of the underlying collateral. We believe that Alt-A mortgages
provide an attractive net earnings profile by producing higher yields without commensurately higher credit losses
than other types of mortgages.

The  long-term  investment  operations  also  originate  and  invest  in  multi-family  mortgages,  and  recently,
commercial mortgages, that are primarily adjustable rate mortgages with initial fixed interest rate periods of two-,
three-, five-, seven- and ten-years that subsequently adjust to adjustable rate mortgages, or (cid:145)(cid:145)hybrid ARMs,(cid:146)(cid:146) with
balances that generally range from $500,000 to $5.0 million. Multi-family mortgages have interest rate floors, which
is  the  initial  start  rate,  and  prepayment  penalty  periods  of  three-,  five-,  seven-  and  ten-years.  Multi-family
mortgages  provide  greater  asset  diversification  on  our  balance  sheet  as  borrowers  of  multi-family  mortgages
typically have higher credit scores and multi-family mortgages typically have lower loan-to-value ratios, or (cid:145)(cid:145)LTV
ratios,(cid:146)(cid:146) and longer average lives than Alt-A mortgages. On January 1, 2006, we elected to convert IMCC from a
qualified  REIT  subsidiary  to  a  taxable  REIT  subsidiary.  We  have  also  changed  the  name  of  IMCC  to  Impac
Commercial  Capital  Corporation  ((cid:145)(cid:145)ICCC(cid:146)(cid:146)).  Beginning  in  2006,  we  are  expanding  our  multi-family  lending
operations, ICCC, to include commercial loan products. The loan portfolio remains as part of the REIT assets while
the commercial origination operations, ICCC, will be subject to state and federal income taxes beginning in 2006.

The  long-term  investment  operations  generate  earnings  primarily  from  net  interest  income  earned  on
mortgages held for long-term investment, or (cid:145)(cid:145)long-term mortgage portfolio.(cid:146)(cid:146) The long-term mortgage portfolio as
reported on our consolidated balance sheets consist of mortgages held as collateralized mortgage obligations, or
(cid:145)(cid:145)CMO,(cid:146)(cid:146)  and  mortgages  held-for-investment.  Investments  in  Alt-A  mortgages  and  multi-family  and  commercial
mortgages  are  initially  financed  with  short-term  borrowings  under  reverse  repurchase  agreements,  which  are
subsequently  converted  to  long-term  financing  in  the  form  of  CMO  financing.  Cash  flows  from  the  long-term
mortgage portfolio and proceeds from the sale of securities also finance new Alt-A and multi-family and commercial
mortgages.

The Company securitizes mortgages in the form of CMOs and real estate mortgage investment conduits
(REMICs). The typical CMO securitization is designed so that the transferee (securitization trust) is not a qualifying
special purpose entity (QSPE) and thus as the sole residual interest holder, the Company consolidates such variable
interest  entities  (VIEs).  Amounts  consolidated  are  classified  as  CMO  collateral  and  CMO  borrowings  in  the

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30MAR200614310138

 
 
 
consolidated balance sheets. Generally, the typical REMIC securitization qualifies for sale accounting treatment
and the securitization trust is a QSPE and thus not consolidated by the Company. To the extent that our REMIC
securitization trusts do not meet the QSPE criteria, consolidation is assessed pursuant to Financial Accounting
Standards  Board  (FASB)  Interpretation  No.  46  (revised  December  2003),  (cid:145)(cid:145)Consolidation  of  Variable  Interest
Entities(cid:146)(cid:146) (FIN 46R).

In 2005, we completed the ISAC REMIC 2005-2 securitization which was treated as a sale for tax purposes
but  treated  as  a  secured  borrowing  for  generally  accepted  accounting  principles  (GAAP)  purposes  and
consolidated in the financial statements. The associated collateral and borrowings have been included in CMO
collateral  and  borrowings,  respectively,  for  reporting  purposes.  Reference  to  (cid:145)(cid:145)CMO  collateral(cid:146)(cid:146)  or  (cid:145)(cid:145)CMO
borrowings(cid:146)(cid:146)  or  (cid:145)(cid:145)CMO(cid:146)(cid:146)  includes  the  REMIC  2005-2  securitization  collateral  and/or  borrowings,  respectively.  In
January 2006, we combined our Alt-A wholesale and subprime product offerings under one platform. Our subprime
products  previously  marketed  under  Novelle  Financial  Services,  Inc.,  are  now  offered  by  our  Alt-A  wholesale
operations, Impac Lending Group (ILG), a division of IFC.

The mortgage operations acquire, originate, sell and securitize primarily adjustable rate and fixed rate Alt-A
mortgages and, to a lesser extent, B/C mortgages. The mortgage operations generate income by securitizing and
selling mortgages to permanent investors, including the long-term investment operations. This business also earns
revenue from fees associated with mortgage servicing rights, master servicing agreements and interest income
earned  on  mortgages  held  for  sale.  The  mortgage  operations  use  facilities  provided  by  the  warehouse  lending
operations to finance the acquisition and origination of mortgages.

The  warehouse  lending  operations  provide  short-term  repurchase  facilities  to  mortgage  loan  originators,
including  our  mortgage  operations,  by  funding  mortgages  from  their  closing  date  until  sale  to  pre-approved
investors.  This  business  earns  fees  from  each  transaction  as  well  as  net  interest  income  from  the  difference
between its cost of borrowings and the interest earned on repurchase advances.

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For  financial  information  relating  to  the  long-term  investment  operations,  mortgage  operations  and
warehouse  lending  operations,  please  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s  Discussion  and  Analysis  of  Financial
Condition and Results of Operations(cid:146)(cid:146) and our consolidated financial statements beginning on page F-1.

Long-Term Investment Operations

The long-term investment operations retain for investment primarily Alt-A mortgages and, to a lesser extent,
multi-family and commercial mortgages and generate revenue primarily from net interest income on its long-term
mortgage portfolio. Net interest income represents the difference between income received on mortgages and the
corresponding  cost  of  financing.  Net  interest  income  also  includes  (1)  amortization  of  acquisition  costs  on
mortgages  acquired  from  the  mortgage  operations,  (2)  amortization  of  CMO  securitization  expenses  and,  to  a
lesser extent, (3) amortization of CMO bond discounts. Net cash payments or receipts on derivative instruments are
included in realized gain (loss) from derivative instruments, which is a component of non-interest income on our
financial statements. For additional information regarding the classification of interest income, interest expense and
non-interest  income  items  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s  Discussion  and  Analysis  of  Financial  Condition  and
Results of Operations(cid:151)Results of Operations and Financial Condition.(cid:146)(cid:146)

The  mortgage  operations  support  the  investment  objectives  of  the  long-term  investment  operations  by
supplying mortgages at prices that are comparable to those available through mortgage bankers and brokers and
other third parties. We believe that retaining mortgages acquired and originated by our mortgage operations give us
a competitive advantage because of our historical understanding of the underlying credit of these mortgages and
the extensive information on the performance and historical prepayment patterns of these types of mortgages. We
also  believe  that  Alt-A  mortgages  provide  an  attractive  net  earnings  profile  by  producing  higher  yields  without
commensurately higher credit risks than other types of mortgages.

Long-Term Mortgage Portfolio

Alt-A mortgages that we retain for long-term investment are primarily adjustable rate mortgages, or (cid:145)(cid:145)ARMs,(cid:146)(cid:146)
hybrid ARMs and, to a lesser extent, fixed rate mortgages, or (cid:145)(cid:145)FRMs.(cid:146)(cid:146) The interest rate on ARMs are typically tied to
an index, such as the six-month London Interbank Offered Rate, or (cid:145)(cid:145)LIBOR,(cid:146)(cid:146) plus a spread and adjust periodically,

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subject  to  lifetime  interest  rate  caps  and  periodic  interest  rate  and  payment  caps.  The  initial  interest  rates  on
ARMs are typically lower than average comparable FRMs but may be higher than average comparable FRMs over
the life of the mortgage. Hybrid ARMs are mortgages with maturity periods ranging from 15 to 30 years with initial
fixed  interest  rate  periods  generally  ranging  from  two  to  ten  years,  which  subsequently  adjust  to  ARMs.    The
majority  of mortgages retained by the long-term investment operations  have  prepayment penalty features with
prepayment penalty periods ranging from six months to seven years. Prepayment penalties may be assessed to the
borrower if the borrower refinances or, in some cases, sells the home.

During  2005,  the  long-term  investment  operations  retained  $12.2  billion  in  principal  balance  of  primarily
adjustable  rate  Alt-A  mortgages  for  long-term  investment,  which  were  initially  acquired  and  originated  by  the
mortgage operations. In addition, the long-term  investment operations originated $798.5 million of multi-family
mortgages. The retention and origination of Alt-A and multi-family mortgages increased the long-term mortgage
portfolio to $24.7 billion at year-end.

The following table presents selected information on mortgages held as CMO collateral, which comprise a

substantial portion of the long-term mortgage portfolio, for the periods indicated:

At December 31,

Percent of Alt-A mortgages
Percent of ARMs
Percent of FRMs
Percent of hybrid ARMs
Percent of interest-only
Weighted average coupon
Weighted average margin
Weighted average original LTV
Weighted average original credit score
Percent with active prepayment penalty
Prior 3-month constant prepayment

rate

Prior 12-month prepayment rate
Lifetime prepayment rate
Percent of mortgages in California
Percent of purchase transactions
Percent of owner occupied
Percent of first lien

2005

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90
10
76
68
6.07
3.73
75
698
76

38
37
25
56
59
77
99

2004

99
90
10
70
63
5.62
3.61
76
696
76

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29
21
62
60
81
99

2003

99
86
14
48
34
5.56
3.10
79
694
81

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21
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57
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The  following  table  presents  mortgages  retained  by  the  long-term  investment  operations  by  loan

characteristic for the periods indicated (dollars in thousands):

Mortgages by Type:

Fixed rate first trust deeds
Fixed rate second trust deeds
Adjustable rate first trust deeds:

LIBOR ARM(cid:146)s (1)
LIBOR hybrid ARM(cid:146)s (1)
Option ARM(cid:146)s

At December 31,

2005

2004

2003

Principal
Balance

%

Principal
Balance

%

Principal
Balance

%

$

1,087,092
69,866

8 $
1

1,195,200
244,491

7 $
1

706,227
6,744

1,775,892
10,096,987
14,391

14
77
-

91

2,754,757
13,173,928
-

15,928,685

16
76
-

92

1,670,720
3,694,687
-

5,365,407

12
-

27
61
-

88

Total adjustable rate first trust deeds

11,887,270

Total mortgages retained

$ 13,044,228

100 $ 17,368,376

100 $

6,078,378

100

Mortgage by Credit Quality:

Alt-A mortgages
Multi-family mortgages (2)
B/C mortgages (1)

$ 12,232,576
798,463
13,189

94 $ 16,846,781
458,532
63,063

6
-

97 $
3
-

5,760,779
290,527
27,072

95
5
-

Total mortgages retained

$ 13,044,228

100 $ 17,368,376

100 $

6,078,378

100

Mortgage by purpose:

Purchase
Refinance

$

8,045,595
4,998,633

62 $ 10,516,622
6,851,754
38

61 $
39

3,408,584
2,669,794

Total mortgages retained

$ 13,044,228

100 $ 17,368,376

100 $

6,078,378

Mortgages with Prepayment Penalty:

With prepayment penalty
Without prepayment penalty

$

9,512,218
3,532,010

73 $ 12,657,395
4,710,981
27

73 $
27

4,823,027
1,255,351

Total mortgages retained

$ 13,044,228

100 $ 17,368,376

100 $

6,078,378

56
44

100

79
21

100

(1)

Primarily includes mortgages indexed to one-, three- and six-month LIBOR and one-year LIBOR. Also includes minimal
amounts of mortgages indexed to the prime lending rate and constant maturity Treasury index.

(2)

Multi-family mortgages are originated by the long term investment operations.

For  additional  information  regarding  the  long-term  mortgage  portfolio  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s
Discussion  and  Analysis  of  Financial  Condition  and  Results  of  Operations,(cid:146)(cid:146)  (cid:145)(cid:145)Note  C(cid:151)CMO  Collateral,(cid:146)(cid:146)  and
(cid:145)(cid:145)Note D(cid:151)Mortgages Held for Investment(cid:146)(cid:146) in the accompanying notes to the consolidated financial statements.

Financing

We primarily finance our long-term mortgage portfolio as follows:

(cid:127) issuance of CMO borrowings;

(cid:127) short-term borrowings under reverse repurchase agreements, prior to securitization as CMOs; and

(cid:127) proceeds from the sale of securities, including trust preferred issuances during 2005.

As we accumulate mortgages we may issue CMOs secured by such mortgages as a means of financing. The
decision to issue CMOs is based on our current and future investment needs, market conditions and other factors.
Each issue of CMOs is fully payable from the principal and interest payments on the underlying mortgages securing
such debt and any cash or other collateral pledged as a condition of receiving the desired rating on the debt. We

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earn a net interest spread on interest income on mortgages held as CMO collateral less interest and other expenses
associated with the acquisition or origination of the loans and with CMO financing. Net interest spreads may be
directly impacted by levels of early prepayment of underlying mortgages and, to the extent each CMO class has
variable  rates  of  interest,  may  be  affected  by  changes  in  short-term  interest  rates.  Our  CMOs  typically  are
structured as adjustable rate securities that are indexed to one-month LIBOR and fixed rate securities with interest
payable monthly.

When we issue CMOs for financing purposes, we seek an investment grade rating for our CMOs by nationally
recognized rating agencies. To secure such ratings, it is often necessary to incorporate certain structural features
that provide for credit enhancement. This can include the pledge of collateral in excess of the principal amount of
the securities to be issued, generally referred to as over collateralization, a bond guaranty insurance policy for some
or all of the issued securities, or additional forms of mortgage insurance. The need for additional collateral or other
credit enhancements depends upon factors such as the type of collateral provided, the interest rates paid, the
geographic concentration of the mortgaged property securing the collateral and other criteria established by the
rating  agencies.  The  pledge  of  additional  collateral  reduces  our  capacity  to  raise  additional  funds  through
short-term  secured  borrowings  or  additional  CMOs,  and  diminishes  the  potential  expansion  of  our  long-term
mortgage portfolio. As a result, our objective is to pledge additional collateral for CMOs only in the amount required
to obtain an investment grade rating by nationally recognized rating agencies. Our total loss exposure is limited to
total capital invested in the CMOs at any point in time.

For  additional  information  regarding  CMOs  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s  Discussion  and  Analysis  of
Financial Condition and Results of Operations(cid:151)Liquidity and Capital Resources(cid:146)(cid:146) and (cid:145)(cid:145)Note H(cid:151)CMO Borrowings(cid:146)(cid:146)
in the accompanying notes to the consolidated financial statements.

Prior to the issuance of CMOs, we use reverse repurchase agreements as short-term financing. A reverse
repurchase agreement acts as a financing vehicle under which we effectively pledge our mortgages as collateral to
secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount equal to a
percentage of the market value of the pledged collateral. At maturity of the reverse repurchase agreement, we are
required to pay  interest and repay the loan and in return, we  receive our collateral. Our borrowing agreements
require us to pledge cash, additional mortgages or additional investment securities backed by mortgages in the
event the market value of existing collateral declines. We may be required to sell assets to reduce our borrowings to
the extent that cash reserves are insufficient to cover such deficiencies in collateral.

For  additional  information  regarding  reverse  repurchase  agreements  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s
Discussion and Analysis of Financial Condition and Results of Operations(cid:151)Liquidity and Capital Resources(cid:146)(cid:146) and
(cid:145)(cid:145)Note G(cid:151)Reverse Repurchase Agreements(cid:146)(cid:146) in the accompanying notes to the consolidated financial statements.

Interest Rate Risk Management

Our  primary  objective  is  to  manage  exposure  to  the  variability  in  future  cash  flows  attributable  to  the
variability of one-month LIBOR, which is the underlying index of our adjustable rate CMO borrowings. We also
monitor on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. Our interest
rate risk management program is formulated with the intent to mitigate the potential adverse effects of changing
interest rates on cash flows on adjustable rate CMO borrowings.

To mitigate our exposure to the effect of changing interest rates on cash flows on our adjustable rate CMO
borrowings, we acquire derivatives in the form of interest rate swaps, or (cid:145)(cid:145)swaps,(cid:146)(cid:146) interest rate cap agreements, or
(cid:145)(cid:145)caps(cid:146)(cid:146)  and  interest  rate  floor  agreements,  or  (cid:145)(cid:145)floors,(cid:146)(cid:146)  collectively,  (cid:145)(cid:145)derivatives.(cid:146)(cid:146)  For  additional  information
regarding  interest  rate  risk  management  activities  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s  Discussion  and  Analysis  of
Financial Condition and Results of Operations,(cid:146)(cid:146) Item 7A. (cid:145)(cid:145)Quantitative and Qualitative Disclosures About Market
Risk(cid:146)(cid:146) and (cid:145)(cid:145)Note O(cid:151)Derivative Instruments(cid:146)(cid:146) in the accompanying notes to the consolidated financial statements.

Mortgage Operations

The mortgage operations acquire, originate, sell and securitize primarily adjustable rate and fixed rate Alt-A
mortgages and, to a lesser extent B/C mortgages, from correspondents, mortgage bankers and brokers and retail
customers.

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Correspondent Acquisition Channel. The mortgage operations acquire adjustable rate and fixed rate Alt-A
mortgages from its network of third party correspondents on a flow basis (loan-by-loan) or on a bulk basis (pool of
multiple  loans)  from  approved  correspondent  mortgage  companies.  Correspondents  originate  and  close
mortgages  under  the  mortgage  operations(cid:146)  mortgage  programs.  Correspondents  include  savings  and  loan
associations, commercial banks and mortgage bankers. The mortgage operations act as intermediaries between
the originators of mortgages that may not meet the guidelines for purchase by Fannie Mae and Freddie Mac and
permanent  investors  in  mortgage-backed  securities  secured  by  or  representing  an  ownership  interest  in  such
mortgages. The mortgage operations also acquire Alt-A mortgages on a bulk basis from approved correspondent
sellers that are underwritten to guidelines substantially similar to Alt-A loan programs, but not specific to those of
the mortgage operations.

Wholesale and Retail Origination Channel. The mortgage operations market, underwrite, process and fund
mortgages for wholesale and, to a lesser extent, retail customers. The wholesale origination channel works directly
with mortgage bankers and brokers to originate, underwrite and fund their mortgages. Many wholesale customers
cannot  conduct  business  with  the  mortgage  operations  as  correspondents  because  they  do  not  have  the
necessary  net  worth  or  financing  to  close  mortgages  in  their  name.  Through  its  retail  channel,  the  mortgage
operations markets mortgages directly to the public.

B/C  Origination  Channel. The  mortgage  operations  also  originate  B/C  mortgages  through  a  network  of
wholesale mortgage brokers and sells its mortgages to third party investors for cash gains. In January 2006, the B/
C Wholesale and Retail Origination channels were combined under Impac Lending Group, a division of IFC.

Marketing Strategy

We believe that we can compete effectively with other Alt-A mortgage conduits through our efficient loan
purchasing process, flexible purchase commitment options, competitive pricing and by designing Alt-A mortgages
that suit the needs of our correspondents, mortgage bankers, brokers and their borrowers. Our principal strategy is
to  expand  our  market  position  as  a  low-cost  nationwide  acquirer  and  originator  of  Alt-A  mortgages,  while
continuing to emphasize an efficient centralized operating structure. To help accomplish this, we have developed a
second-generation web-based automated underwriting and pricing system called Impac Direct Access System for
Lending,  or  (cid:145)(cid:145)iDASLg2.(cid:146)(cid:146)  iDASLg2  substantially  increases  efficiencies  for  our  customers  and  our  mortgage
operations by significantly decreasing the processing time for a mortgage while improving employee productivity
and maintaining superior customer service.

iDASLg2  is  an  interactive  Internet-based  system  that  allows  our  customers  to  automatically  underwrite
mortgages,  enabling  our  customers  to  pre-qualify  borrowers  for  various  mortgage  programs  and  receive
automated approval decisions. iDASLg2 is intended to increase efficiencies not only for our customers but also for
the  mortgage  operations  by  significantly  decreasing  the  processing  time  for  a  mortgage.  We  believe  iDASLg2
improves employee production and maintains superior customer service, which together leads to higher closing
ratios, improved profit margins and increased profitability at all levels of our business operations. Most importantly,
iDASLg2 allows us to move closer to our correspondents and mortgage bankers and brokers with minimal future
capital investment while maintaining centralization, a key factor in the success of our operating strategy. All of our
correspondents submit mortgages via iDASLg2 and all wholesale mortgages delivered by mortgage bankers and
brokers are directly underwritten through iDASLg2. However, mortgages purchased on a bulk basis from approved
correspondent  sellers  that  may  not  be  underwritten  specifically  to  our  Alt-A  mortgage  guidelines  are  not
underwritten through iDASLg2.

We  also  focus  on  expansion  opportunities  to  attract  correspondent  originators,  mortgage  bankers,  and
brokers  to  our  nationwide  network  in  order  to  increase  mortgage  acquisitions  and  originations  in  a  controlled
manner.  This  allows  us  to  shift  the  high  fixed  costs  of  interfacing  with  the  homeowner  to  our  correspondents,
mortgage bankers and brokers. This marketing strategy is designed to accomplish the following three objectives:

(cid:127) attract  a  geographically  diverse  group  of  both  large  and  small  correspondent  originators,  mortgage

bankers and brokers;

(cid:127) establish relationships with correspondents, mortgage bankers, and brokers that facilitate their ability to

offer a variety of loan products designed by the mortgage operations; and

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(cid:127) purchase mortgages, securitize and sell them in the secondary market, or to the long-term investment

operations.

In order to accomplish our production objectives, we design and offer mortgage products that we believe are
attractive to potential Alt-A borrowers and to end-investors in Alt-A mortgages and mortgage-backed securities.
We have historically emphasized and continue to emphasize flexibility in our mortgage product mix as part of our
strategy  to  attract  and  establish  long-term  relationships  with  our  correspondents  and  mortgage  bankers  and
brokers. We also maintain relationships with numerous investors so that we may develop mortgage products that
may be of interest to them as market conditions change. In response to the needs of our correspondents, and as
part of our strategy to facilitate the sale of our mortgages through the mortgage operations, our marketing strategy
offers efficient response time in the purchase process, direct and frequent contact with our correspondents and
mortgage bankers and brokers through a trained sales force and flexible commitment programs. Finally, due to the
price  sensitivity  of  most  homebuyers,  we  are  competitive  in  pricing  our  products  in  order  to  attract  sufficient
numbers of mortgages.

Underwriting

We have developed comprehensive purchase guidelines for the acquisition and origination of mortgages.
Each mortgage underwritten assesses the borrower(cid:146)s credit score and ability to repay the mortgage obligation and
the adequacy of the mortgaged property as collateral for the mortgage. Subject to certain exceptions and the type
of  mortgage  product,  each  purchased  mortgage  generally  conforms  to  the  loan  parameters  and  eligibility
requirements  specified  in  our  seller/servicer  guide  with  respect  to,  among  other  things,  loan  amount,  type  of
property, compliance, LTV ratio, mortgage insurance, credit history, debt service-to-income ratio, appraisal and
loan documentation.

All mortgages acquired or originated under our loan programs are underwritten either by our employees or by
contracted  mortgage  services  companies  or  delegated  sellers.  Under  all  of  our  underwriting  methods,  loan
documentation requirements for verifying the borrower(cid:146)s income and assets vary according to LTV ratios and other
factors.  Generally,  as  the  standards  for  required  documentation  are  lowered,  the  borrowers(cid:146)  down  payment
requirements are increased and the required LTV ratios are decreased. The borrower is also required to have a
stronger credit history, larger cash reserves and an appraisal of the property that may be validated by an enhanced
desk or field review, depending on the loan program. Lending decisions are based on a risk analysis assessment
after the review of the entire mortgage file. Each mortgage is individually underwritten with emphasis placed on the
overall quality of the mortgage.

Seller Eligibility Requirements

Mortgages  acquired  by  the  mortgage  operations  are  originated  by  various  sellers,  including  mortgage
bankers, savings and loan associations and commercial banks. Sellers are required to meet certain regulatory,
financial, insurance and performance requirements established by us before they are eligible to participate in our
mortgage purchase programs. Sellers must also submit to periodic reviews to ensure continued compliance with
these requirements. Our current criteria for seller participation generally includes a minimum tangible net worth
requirement of $250,000, approval as a Fannie Mae or Freddie Mac seller/servicer in good standing, a Housing and
Urban Development, or (cid:145)(cid:145)HUD,(cid:146)(cid:146) approved mortgagee in good standing or a financial institution that is insured by the
Federal  Deposit  Insurance  Corporation,  or  (cid:145)(cid:145)FDIC,(cid:146)(cid:146)  or  comparable  federal  or  state  agency,  or  that  the  seller  is
examined by a federal or state authority.

In addition, sellers are required to have comprehensive mortgage origination quality control procedures. In
connection with its qualification, each seller enters into an agreement that generally provides for recourse by us
against  the  seller  in  the  event  of  a  breach  of  representations  or  warranties  made  by  the  seller  with  respect  to
mortgages sold to us, which includes but is not limited to any fraud or misrepresentation during the mortgage loan
origination process or upon early payment default on mortgages.

Mortgage Acquisitions and Originations

Mortgages  acquired  and  originated  by  the  mortgage  operations  are  adjustable  rate  and  fixed  rate  Alt-A
mortgages. A portion of Alt-A mortgages that are acquired and originated by the mortgage operations exceed the

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maximum principal balance for a conforming loan purchased by Fannie Mae or Freddie Mac, which was $417,000
as of November 29, 2005, and are referred to as (cid:145)(cid:145)jumbo loans.(cid:146)(cid:146) We generally do not acquire or originate Alt-A
mortgages with principal balances above $2.0 million. Alt-A mortgages generally consist of mortgages that are
acquired and originated in accordance with underwriting or product guidelines that differ from those applied by
Fannie Mae and Freddie Mac. Alt-A mortgages may involve greater risk as a result of different underwriting and
product guidelines. Additionally, a portion of mortgages acquired and originated through the mortgage operations
are B/C mortgages, which may entail greater credit risks than Alt-A mortgages. B/C mortgages represented 4%
and 3% of total acquisitions and originations during 2005 and 2004, respectively.

We  generally  do  not  originate  B/C  mortgages  with  principal  balances  above  $650,000.  In  general,  B/C
mortgages  are  residential  mortgages  made  to  borrowers  with  lower  credit  ratings  than  borrowers  of  Alt-A
mortgages.  B/C  mortgages  are  normally  subject  to  higher  rates  of  loss  and  delinquency  than  Alt-A  mortgages
acquired and originated by the mortgage operations. As a result, B/C mortgages normally bear a higher rate of
interest and are typically subject to higher fees than Alt-A mortgages. In general, greater emphasis is placed upon
the value of the mortgaged property and, consequently, the quality of appraisals, and less upon the credit history of
the borrower in underwriting B/C mortgages than in underwriting Alt-A mortgages. In addition, B/C mortgages are
generally subject to lower LTV ratios than Alt-A mortgages.

Residential mortgages acquired or originated by the mortgage operations are generally secured by first liens
and, to a lesser extent, second liens on single-family residential properties with either adjustable rate or fixed rates
of interest. FRMs have a constant interest rate over the life of the loan, which is generally 15 or 30 years. The interest
rates  on  ARMs  are  typically  tied  to  an  index,  such  as  six-month  LIBOR,  plus  a  spread  and  adjust  periodically,
subject  to  lifetime  interest  rate  caps  and  periodic  interest  rate  and  payment  caps.  The  initial  interest  rates  on
ARMs  are  typically  lower  than  the  average  comparable  FRM  but  may  be  higher  than  average  comparable
FRMs  over  the  life  of  the  loan.  We  acquire  and  originate  mortgages  with  the  following  most  common  loan
characteristics,  although  we  may  purchase  mortgages  with  other  interest  rate,  prepayment  and  maturity
characteristics:

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(cid:127) FRMs  that  have  original  terms  to  maturity  ranging  from  15  to  30  years  with  six-month  to  five-year

prepayment penalty periods;

(cid:127) ARMs that adjust based on one-, three- and six-month LIBOR and one-year LIBOR with terms to maturity

ranging from 15 to 30 years with six-month to five-year prepayment penalty periods;

(cid:127) two-, three-, five- and seven-year hybrid ARMs with terms to maturity ranging from 15 to 30 years that
subsequently adjust to one-, three- and six-month LIBOR and one-year LIBOR with six-month to five-year
prepayment penalty periods; and

(cid:127) adjustable rate and fixed rate interest-only mortgages with 5 to 10 year interest-only periods and terms to

maturity of 30 years with six-month to five-year prepayment penalty periods.

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The following table presents the mortgage operations(cid:146) acquisitions and originations by loan characteristic for

the periods indicated (in thousands):

For the year ended December 31,

2005

2004

2003

Principal
Balance

%

Principal
Balance

%

Principal
Balance

%

Mortgages by Type:

Fixed rate first trust deeds
Fixed rate second trust deeds
Adjustable rate first trust deeds:

LIBOR ARM(cid:146)s (1)
LIBOR hybrid ARM(cid:146)s (1)
Option ARM(cid:146)s

Total adjustable rate first trust deeds
Adjustable rate second trust deeds

Total adjustable rate first & second trust

deeds

$

2,914,055
1,189,145

13 $
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1,968,502
755,913

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3,812,952
181,173

2,776,787
14,437,507
838,343

18,052,637
154,766

18,207,403

12
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81
1

82

3,382,978
16,105,711
-

19,488,689
-

19,488,689

15
73
-

88
-

88

1,611,392
3,919,604
-

5,530,996
-

5,530,996

Total mortgage acquisitions and originations

$ 22,310,603

100 $ 22,213,104

100 $

9,525,121

Mortgages by Channel:

Correspondent acquisitions:

Flow acquisitions
Bulk acquisitions

Total correspondent acquisitions

Wholesale and retail originations
B/C originations (2)

$

8,386,911
10,659,756

37 $ 10,996,260
8,537,504
48

19,046,667

2,431,382
832,554

85

11
4

19,533,764

1,994,569
684,771

50 $
38

88

9
3

5,399,428
2,159,116

7,558,544

1,468,697
497,880

40
2

17
41
-

58
-

58

100

57
23

80

15
5

Total mortgage acquisitions and originations

$ 22,310,603

100 $ 22,213,104

100 $

9,525,121

100

Mortgage by Credit Quality:

Alt-A mortgages
B/C mortgages

$ 21,460,424
850,179

96 $ 21,453,383
759,721

4

97 $
3

8,988,018
537,103

Total mortgage acquisitions and originations

$ 22,310,603

100 $ 22,213,104

100 $

9,525,121

Mortgage by Purpose:

Purchase
Refinance

$ 13,469,872
8,840,731

60 $ 13,373,840
8,839,264
40

60 $
40

4,683,202
4,841,919

Total mortgage acquisitions and originations

$ 22,310,603

100 $ 22,213,104

100 $

9,525,121

Mortgages with Prepayment Penalty:

With prepayment penalty
Without prepayment penalty

$ 16,071,802
6,238,801

72 $ 15,965,959
6,247,145
28

72 $
28

7,165,949
2,359,172

Total mortgage acquisitions and originations

$ 22,310,603

100 $ 22,213,104

100 $

9,525,121

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6

100

49
51

100

75
25

100

(1)

(2)

Primarily includes mortgages indexed to one-, three- and six-month LIBOR and one-year LIBOR. Also includes minimal
amounts of mortgages indexed to the prime lending rate and constant maturity Treasury index.
These mortgages were subsequently sold to third party investors on a whole loan basis.

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Our  mortgage  acquisition  and  origination  activities  focus  on  those  regions  of  the  country  where  higher
volumes  of  Alt-A  mortgages  are  originated  including  California,  Florida,  New  York,  Colorado,  New  Jersey,
Maryland, Virginia, Illinois, Arizona and Nevada. During the years ended December 31, 2005 and 2004, 54% and
61%, respectively, of mortgage acquisitions and originations were secured by properties located in California, and
11% and 8%, respectively, were secured by properties located in Florida.

Of the $22.3 billion in principal balance of mortgages acquired and originated in 2005, $10.2 billion, or 46%,
were acquired from our top ten correspondents. Decision One Mortgage accounted for $2.2 billion, or 10% of
mortgages  acquired  and  originated  by  the  mortgage  operations  in  2005.  No  other  correspondents,  banker  or
broker accounted for more than 10% of the total mortgages acquired and originated by the mortgage operations in
2005.

Securitization and Sales

After acquiring mortgages from correspondents on a flow or bulk basis and originating mortgages through
wholesale and retail channels, the mortgage operations securitize or sell mortgages to permanent investors. The
mortgage  operations  sell  much  of  its  ARM  acquisitions  to  the  long-term  investment  operations  at  prices
comparable to prices available from third party investors at the date of sale. When a sufficient volume of FRMs with
similar characteristics has been accumulated, generally $100 million to $350 million, the mortgage operations may
(1) sell bulk packages, referred to as whole loan sales, to third party investors, (2) securitize mortgages through the
issuance  of  mortgage-backed  securities  in  the  form  of  REMICs,  or  (3)  sell  them  to  the  long-term  investment
operations.

During 2005, the mortgage operations sold $12.2 billion in principal balance of mortgages to the long-term
investment  operations,  sold  $8.1  billion  in  principal  balance  of  mortgages  as  whole  loan  sales  and  sold
$633.9  million  in  principal  balance  of  mortgages  as  a  REMIC.  Generally,  the  mortgage  operations  sell  all  of  its
mortgage acquisitions and originations to third party investors as servicing released, which means that it does not
retain primary mortgage servicing rights. However, the mortgage operations does retain rights as master servicer
for its securitizations, see (cid:145)(cid:145)Master Servicing(cid:146)(cid:146) below.

The  period  of  time  between  when  we  commit  to  purchase  mortgages  and  the  time  we  sell  or  securitize
mortgages generally ranges from 15 to 45 days, depending on certain factors, including the length of the purchase
commitment period, volume by product type and the securitization process. REMIC securities generally consist of
one or more classes of (cid:145)(cid:145)regular interests(cid:146)(cid:146) and a single class of (cid:145)(cid:145)residual interest.(cid:146)(cid:146) The regular interests are tailored
to the needs of investors and may be issued in multiple classes with varying maturities, average lives and interest
rates. REMICs created by us are structured so that one or more of the classes of securities are rated investment
grade by at least one nationally recognized rating agency. The ratings for our REMICs are based upon the perceived
credit risk by  the applicable rating agency of the  underlying mortgages, the structure of the securities and  the
associated  level  of  credit  enhancement.  Credit  enhancement  is  designed  to  provide  protection  to  the  security
holders in the event of borrower defaults and other losses including those associated with fraud or reductions in the
principal balances or interest rates on mortgages as required by law or a bankruptcy court.

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Master Servicing

We retain master servicing rights on substantially all of our Alt-A and multi-family mortgage acquisitions and
originations. Our function as master servicer includes collecting loan payments from loan servicers and remitting
loan payments, less master servicing fees receivable and other fees, to a trustee or other purchaser for each series
of mortgage-backed securities or loans master serviced. In addition, as master servicer, we monitor compliance
with our servicing guidelines and are required to perform, or to contract with a third party to perform, all obligations
not adequately performed by any loan servicer. We may also be required to advance funds or we may cause our
loan servicers to advance funds to cover interest payments not received from borrowers depending on the status of
their mortgages. We also earn income or incur expense on principal and interest payments we receive from our
borrowers  until  those  payments  are  remitted  to  the  investors  in  those  mortgages.  Master  servicing  fees  are
generally 0.03% per annum on the declining principal balances of the loans serviced. At year-end 2005, we master
serviced approximately 115,000 mortgages with a principal balance of approximately $28.4 billion.

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The following table presents the amount of delinquent mortgages, both those sold to third parties and those

we own, in our master servicing portfolio for the periods indicated (dollars in thousands):

As of December 31,

2005

2004

2003

Principal
Balance of Servicing Balance of Servicing Balance of Servicing
Portfolio
Mortgage

Portfolio Mortgage

Portfolio Mortgage

Principal

Principal

% of
Master

% of
Master

% of
Master

Loans delinquent for:
60-89 days
90 days and over

Total 60 days and

over

Foreclosures pending
Bankruptcies pending

$

379,848
265,085

1.34% $
0.93%

205,486
87,277

0.72% $
0.31%

105,455
87,297

644,933
308,965
50,314

2.27%
1.09%
0.17%

292,763
258,189
23,807

574,759

1.03%
0.91%
0.08%

2.02% $

192,752
158,261
19,912

370,925

0.76%
0.63%

1.39%
1.14%
0.14%

2.67%

Total

$ 1,004,212

3.53% $

Servicing

We sell or subcontract all of our servicing obligations to independent third parties pursuant to sub-servicing
agreements.  We  believe  that  the  sale  of  servicing  rights  or  the  selection  of  third-party  sub-servicers  is  more
effective  than  establishing  a  servicing  department  within  our  mortgage  operations.  However,  part  of  our
responsibility is to continually monitor the performance of servicers or sub-servicers through performance reviews
and regular site visits. Depending on our reviews, we may in the future rely on our internal default management
group  to  take  an  ever  more  active  role  to  assist  servicers  or  sub-servicers  in  the  servicing  of  our  mortgages.
Servicing includes collecting and remitting loan payments, making required advances, accounting for principal and
interest,  holding  escrow  or  impound  funds  for  payment  of  taxes  and  insurance,  if  applicable,  making  required
inspections  of  the  mortgaged  property,  contacting  delinquent  borrowers,  and  supervising  foreclosures  and
property dispositions in the event of un-remedied defaults in accordance with our guidelines. Servicing fees are
charged on the declining principal balances of loans serviced and generally range from 0.25% per annum for FRMs,
0.375% per annum for ARMs, 0.50% per annum for B/C mortgages and 0.75% per annum for properties secured
by second liens. To the extent the mortgage operations finance the acquisition of mortgages with facilities provided
by the warehouse lending operations, the mortgage operations pledges mortgages and the related servicing rights
to the warehouse lending operations as collateral. As a result, the warehouse lending operations have an absolute
right  to  control  the  servicing  of  such  mortgages,  including  the  right  to  collect  payments  on  the  underlying
mortgages,  and  to  foreclose  upon  the  underlying  real  property  in  the  case  of  default.  Typically,  the  warehouse
lending operations delegate its right to service the mortgages securing the facility to the mortgage operations.

The  following  table  presents  information  regarding  our  mortgage  servicing  portfolio  which  includes  our
mortgages held-for-sale and mortgages held for long-term investment for the periods shown (dollars in millions,
except average loan size):

Beginning servicing portfolio
Add: Loan acquisitions and originations
Less: Servicing transferred and principal repayment

(1)

Ending servicing portfolio

Number of loans serviced
Average loan size
Weighted average coupon rate

For the year ended December 31,

2005

1,690.8
22,310.6

(21,793.0)

2,208.4

10,892
203,000
6.39%

$

$

$

2004

1,402.1
22,213.1

(21,924.4)

1,690.8

9,256
183,000
6.62%

$

$

$

2003

2,653.4
9,525.1

(10,776.4)

1,402.1

6,695
209,000
6.28%

$

$

$

(1)

Includes the sale of mortgages on a servicing released basis, the sale of servicing rights on mortgages owned and
scheduled and unscheduled principal repayments.

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Interest Rate Risk Management

The mortgage operations manage interest rate risk and price volatility on its pipeline of rate-locked mortgage
loans, or (cid:145)(cid:145)mortgage pipeline,(cid:146)(cid:146) during the time it commits to acquire or originate mortgages at a pre-determined rate
and the time it sells the mortgage loans. To mitigate interest rate and price volatility risks, the mortgage operations
may  enter  into  derivatives.  The  nature  and  quantity  of  derivatives  are  determined  based  on  various  factors,
including  expected  pull-through,  price  sensitivity,  market  conditions,  and  the  expected  volume  of  mortgage
acquisitions and originations. For additional information regarding interest rate risk management activities refer to
Item 7A. (cid:145)(cid:145)Quantitative and Qualitative Disclosures About Market Risk(cid:146)(cid:146) and (cid:145)(cid:145)Note O(cid:151)Derivative Instruments(cid:146)(cid:146) in the
accompanying notes to the consolidated financial statements.

Warehouse Lending Operations

The  warehouse  lending  operations  provide  warehouse  lines  of  credit  to  affiliated  companies  and  reverse
repurchase financing to approved non-affiliated mortgage bankers, or (cid:145)(cid:145)non-affiliated clients,(cid:146)(cid:146) some of which are
correspondents  of  the  mortgage  operations,  to  finance  mortgages  during  the  time  from  the  closing  of  the
mortgages to sale or other settlement with pre-approved investors. The warehouse lending operations rely mainly
on  the  sale  or  liquidation  of  the  mortgages  as  a  source  of  repayment.  Any  claim  of  the  warehouse  lending
operations as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay. Borrowings
under these facilities are presented on our balance sheet as finance receivables. Terms of non-affiliated clients(cid:146)
repurchase  facilities,  including  the  commitment  amount,  are  determined  based  upon  the  financial  strength,
historical performance and other qualifications of the borrower. As of December 31, 2005, the warehouse lending
operations  had  approved  facilities  to  non-affiliated  clients  of  $691.5  million,  of  which  $350.2  million  was
outstanding, as compared to $738.7 million and $471.8 million, respectively, as of December 31, 2004.

Regulation

We establish underwriting guidelines that include provisions for inspections and appraisals, require credit
reports on prospective borrowers and determine maximum loan amounts. Our mortgage acquisition and origination
activities are subject to, among other laws, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair
Credit  Reporting  Act,  Fair  and  Accurate  Credit  Transaction  Act,  Fair  Housing  Act,  Gramm-Leach,  Bliley  Act,
Telephone Consumer Protection Act, Can Spam Act, Real Estate Settlement Procedures Act and Home Mortgage
Disclosure  Act  and  the  regulations  promulgated  there-under.  These  laws  and  regulations,  among  other  things,
prohibit  discrimination  and  require  the  disclosure  of  certain  basic  information  to  mortgagors  concerning  credit
terms and settlement costs, prohibit the payment of kickbacks for the referral of business incident to a real estate
settlement  service,  limit  payment  for  settlement  services  to  the  reasonable  value  of  the  services  rendered  and
goods furnished, restrict the marketing practices we may use to find customers, require us to safeguard non-public
information  about  our  customers  and  require  the  maintenance  and  disclosure  of  information  regarding  the
disposition of mortgage applications based on race, gender, geographical distribution, price and income level. Our
mortgage acquisition and origination activities are also subject to state and local laws and regulations, including
state licensing laws, anti-predatory lending laws, and may also be subject to applicable state usury statutes. IFC is
an approved Fannie Mae seller/servicer, an approved servicer of Freddie Mac, and an approved Housing and Urban
Development (cid:145)(cid:145)HUD(cid:146)(cid:146) lender. In addition, IFC is required annually to submit to Fannie Mae, Freddie Mac, and HUD
audited financial statements, or the equivalent, according to the financial reporting requirements of each regulatory
entity for its sellers/ servicers. IFC(cid:146)s affairs are also subject to examination by Fannie Mae and Freddie Mac at any
time to assure compliance with applicable regulations, policies and procedures.

On  December  15,  2004,  the  Securities  and  Exchange  Commission  (SEC)  approved  the  final  regulations
covering the registration, disclosure, communications, and reporting requirements for for asset-backed securities
((cid:145)(cid:145)Regulation  AB(cid:146)(cid:146)),  which  became  effective  January  1,  2006.  The  new  rules  contain  several  new  disclosure
requirements,  including  requirements  to  provide  historical  financial  data  with  respect  to  either  previously
securitized pools of the same asset class or prior originations and information with respect to the background,
experience and roles of the various transaction parties, including those involved in the origination, sale or servicing
of the loans in the securitized pool. Moreover, annual assessments of compliance with enhanced servicing criteria
by  servicers  and  attestation  reports  from  an  independent  accounting  firm  must  be  obtained  with  respect  to
securitized pools of our mortgage loans.

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30MAR2006121

 
 
 
Competition

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In acquiring and originating Alt-A mortgages and issuing securities backed by such loans, we compete with
other established mortgage conduit programs, investment banking firms, savings and loan associations, banks,
thrift  and  loan  associations,  finance  companies,  mortgage  bankers  and  brokers,  insurance  companies,  other
lenders and other entities purchasing mortgage assets. As the Federal Reserve continues to raise interest rates at a
measured  pace  and  the  number  of  mortgage  refinance  opportunities  diminish,  the  mortgage  industry  may
experience a consolidation that may reduce the number of current correspondents and independent mortgage
bankers and brokers available to the mortgage operations, reducing our potential customer base and resulting in
the mortgage operations acquiring and originating a larger percentage of mortgages from a smaller number of
customers. In addition, until a consolidation occurs in the mortgage industry, price competition among competitors
can affect the profitability on the sale of mortgage loans or the return on investments as mortgage lenders are willing
to  cut  their  profitability  margins  to  maintain  current  production  levels.  Changes  of  this  nature  could  negatively
impact our businesses.

Mortgage-backed securities issued by the mortgage operations and the long-term investment operations
face competition from other investment opportunities available to prospective investors. We face competition in our
mortgage operations and warehouse lending operations from other financial institutions, including but not limited to
banks and investment banks. Our main competitors include Countrywide Home Loans, IndyMac Bancorp, Inc.,
Greenpoint Financial Corporation, Residential Funding Corporation, Aurora Loan Services, Inc., Credit Suisse First
Boston Corporation and Bear Stearns and Company, Inc.

Competition  can  take  place  on  various  levels,  including  convenience  in  obtaining  a  mortgage,  service,
marketing, origination channels and pricing. We depend primarily on correspondents and independent mortgage
bankers and brokers for the acquisition and origination of mortgages. These independent mortgage bankers and
brokers  deal  with  multiple  lenders  for  each  prospective  borrower.  We  compete  with  these  lenders  for  the
independent bankers and brokers(cid:146) business on the basis of price, service, loan fees, costs and other factors. Our
competitors also seek to establish relationships with such bankers and brokers, who are not obligated by contract
or otherwise to do business with us. Many of the institutions with which we compete in our mortgage operations
and warehouse lending operations have significantly greater financial resources than we have. However, we can
compete  effectively  with  other  Alt-A  mortgage  conduits  through  our  efficient  loan  purchasing  process,  flexible
purchase commitment options and competitive pricing and by designing Alt-A mortgage programs that suit the
needs  of  our  correspondents  and  their  borrowers,  which  is  intended  to  provide  sufficient  credit  quality  to  our
investors.

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Risk factors, as outlined below, provide additional information related to risks associated with competition in

the mortgage banking industry.

Employees

As of December 31, 2005, we had a total of 989 full-time, part-time, temporary and contract employees.
Management believes that relations with its employees are good. We are not a party to any collective bargaining
agreements.

Revisions in Policies and Strategies

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Our  board  of  directors  has  approved  our  investment  and  operating  policies  and  strategies.  Our  core
operations involve the acquisition and origination of mortgages and their subsequent securitization and sale. We
also act as a warehouse lender providing financing facilities to mortgage originators. These operations and their
associated policies and strategies, are further described herein. Our board of directors has delegated asset/liability
management to the Asset/Liability Committee, or (cid:145)(cid:145)ALCO,(cid:146)(cid:146) which reports to the board of directors at least quarterly.
See  a  further  discussion  of  ALCO  in  Item  7.  (cid:145)(cid:145)Management(cid:146)s  Discussion  of  Financial  Condition  and  Results  of
Operations(cid:146)(cid:146)  and  Item  7A.  (cid:145)(cid:145)Quantitative  and  Qualitative  Disclosures  About  Market  Risk.(cid:146)(cid:146)  Any  of  our  policies,
strategies  and  activities  may  be  modified  or  waived  by  our  board  of  directors  without  stockholder  consent.
Developments  in  the  market,  which  affect  the  policies  and  strategies  mentioned  herein  or  which  change  our
assessment of the market, may cause our board of directors to revise our policies and financing strategies.

30MAR200614310138

14

 
 
 
We have elected to qualify as a REIT for tax purposes. We have adopted certain compliance guidelines to
ensure we maintain our REIT status which include limitations on the acquisition, holding and sale of certain assets.

The long-term investment operations primarily invest in Alt-A and multi-family mortgages. The long-term
investment operation does not limit the proportion of its assets that may be invested in each type of mortgage.

We  closely  monitor  our  acquisition  and  investment  in  mortgage  assets  and  the  sources  of  our  income,
including income or expense from interest rate risk management strategies, to ensure at all times that we maintain
our qualifications as a REIT. We have developed certain accounting systems and testing procedures to facilitate our
ongoing compliance with the REIT provisions of the Internal Revenue Code. No changes in our investment policies,
including  credit  criteria  for  mortgage  asset  investments,  may  be  made  without  the  approval  of  our  board  of
directors.

We may at times and on terms that our board of directors deems appropriate:

(cid:127) Issue  senior  securities  (cid:150)  In  2004,  we  issued  2,000,000  shares  of  our  9.375%  Series  B  Cumulative
Redeemable Preferred Stock, par value $0.01 per share, liquidation preference $25.00 per share. In 2004
and 2005, we issued an aggregate of 4,300,000 shares and 71,200 shares respectively, of our 9.125%
Series  C  Cumulative  Redeemable  Preferred  Stock,  par  value  $0.01  per  share,  liquidation  preference
$25.00 per share;

(cid:127) Borrow money (cid:150) We finance our operations in large part through the issuance of CMOs and short-term

borrowings under reverse repurchase agreements;

(cid:127) Make loans to other persons (cid:150) The warehouse lending operations provide financing to affiliated companies
and to approved non-affiliated clients, some of which are correspondents of the mortgage operations, to
finance mortgages during the time from the closing of the mortgages to their sale or other settlement with
pre-approved investors;

(cid:127) Engage in the purchase and sale of investments (cid:150) In connection with the issuance of mortgage-backed
securities by our mortgage operations in the form of REMICs, our long-term investment operations may
retain senior or subordinated securities on a short- or long-term basis;

(cid:127) Repurchase or otherwise reacquire our shares or other securities in the future (cid:150) During 2003, we did not
repurchase  any  shares  of  common  stock.  In  February  of  2004,  the  share  repurchase  program  was
cancelled  by  our  board  of  directors.  During  2005,  we  adopted  a  repurchase  plan  to  repurchase  up  to
5.0 million shares of our common stock in the open market. As of the date of the filing of this report, we
have not repurchased any shares of common stock; and

(cid:127) Issue common stock and other securities (cid:150) During 2005 and 2004, we issued an aggregate of 363,700
shares and 18.4 million shares of common stock, respectively. During 2005, we formed four wholly-owned
trust subsidiaries for the purposes of issuing an aggregate of $96.3 million of trust preferred securities.

We may also offer securities in exchange of property, invest in securities of other issuers for the purpose of
exercising control and underwrite the securities of other issuers, although we have not done so in the past three
years and have no present intention to do so. Historically, we have and intend to continue to distribute annual
reports to our stockholders, including financial statements audited by independent auditors, describing our current
business and strategy.

ITEM 1.A. RISK FACTORS

Some of the following risk factors relate to a discussion of our assets. For additional information on our asset
categories  refer  to  Item  7.  (cid:145)(cid:145)Management(cid:146)s  Discussion  and  Analysis  of  Financial  Condition  and  Results  of
(cid:145)(cid:145)Note  D(cid:151)Mortgages
Operations,(cid:146)(cid:146) 
Held-for-Investment,(cid:146)(cid:146)  and  (cid:145)(cid:145)Note  E(cid:151)Allowance  for  Loan  Losses(cid:146)(cid:146)  and  in  the  accompanying  notes  to  the
consolidated financial statements. 

(cid:145)(cid:145)Note  B(cid:151)Mortgages  Held-for-Sale,(cid:146)(cid:146) 

(cid:145)(cid:145)Note  C(cid:151)CMO  Collateral,(cid:146)(cid:146) 

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30MAR2006121

 
 
 
Risks Related To Our Businesses

If we are unable to generate sufficient liquidity we may be unable to conduct our operations as planned.

If we cannot generate sufficient liquidity, we may be unable to continue to grow our operations, grow our
asset base, maintain our current interest rate risk management policies and pay dividends. We have traditionally
derived our liquidity from the following primary sources:

(cid:127) financing facilities provided to us by others to acquire or originate mortgage assets;

(cid:127) whole loan sales and securitizations of acquired or originated mortgages;

(cid:127) our issuance of equity and debt securities;

(cid:127) excess cash flow from our long-term mortgage portfolio; and

(cid:127) earnings from operations.

We cannot assure you that any of these alternatives will be available to us, or if available, that we will be able
to negotiate favorable terms. Our ability to meet our long-term liquidity requirements is subject to the renewal of our
credit and repurchase facilities and/or obtaining other sources of financing, including additional debt or equity from
time to time. Any decision by our lenders and/or investors to make additional funds available to us in the future will
depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements, our
financial performance, industry and market trends in our various businesses, the lenders(cid:146) and/or investors(cid:146) own
resources and policies concerning loans and investments, and the relative attractiveness of alternative investment
or lending opportunities. If we cannot raise cash by selling debt or equity securities, we may be forced to sell our
assets at unfavorable prices or discontinue various business activities. Our inability to access the capital markets
could have a negative impact on our growth of taxable income and also our ability to pay dividends.

Any  significant  margin  calls  under  our  financing  facilities  would  adversely  affect  our  liquidity  and  may
adversely affect our financial results.

During  periods  of  disruption  in  the  financial  markets,  the  mortgage  industry  may  experience  substantial
turmoil as a result of a lack of liquidity in the secondary markets. At such times, investors may be unwilling to
purchase interests in securitizations due, in part, to:

(cid:127) the lack of financing to acquire these securitization interests;

(cid:127) the widening of returns expected by institutional investors on securitization interests over the prevailing

Treasury rate; and

(cid:127) market uncertainty.

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As a result, during these periods, many mortgage originators, including us, may be unable to access the
securitization  market  on  favorable  terms.  This  may  result  in  some  companies  declaring  bankruptcy.  Some
companies, like us, may be required to sell loans on a whole loan basis and liquidate holdings of mortgage-backed
securities to repay short-term borrowings. However, the large amount of mortgages available for sale on a whole
loan basis may create an oversupply and affect the pricing offered for these mortgages, which in turn may reduce
the value of the collateral underlying the financing facilities. Therefore, many providers of financing facilities may
initiate margin calls. Margin calls may result when our lenders evaluate the market value of the collateral securing
our financing facilities and require us to provide them with additional equity or collateral to secure our borrowings.

Our financing facilities are short-term borrowings and in the event of a market disruption, many traditional
providers  of  financing  facilities  may  be  unwilling  to  provide  facilities  on  favorable  terms,  or  at  all.  Our  current
financing facilities continue to be short-term borrowings and we expect this to continue. If we cannot renew or
replace maturing borrowings, we may have to sell, on a whole loan basis, the loans securing these facilities, which,
depending upon market conditions may result in substantial losses.

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Increased  levels  of  early  prepayments  of  mortgages  may  accelerate  our  amortization  expenses  and
decrease our net interest income.

Mortgage prepayments generally increase on our ARMs when fixed mortgage interest rates fall below the
then-current  interest  rates  on  outstanding  ARMs  or  fully  indexed  ARMs.  Prepayments  on  mortgages  are  also
affected by the terms and credit grades of the mortgages, their interest rate reset date, conditions in the financial
markets, housing appreciation and general economic conditions. If we acquire mortgages at a premium and they
are subsequently prepaid, we must expense the unamortized premium at the time of the prepayment. We could
possibly  lose  the  opportunity  to  earn  interest  at  a  higher  rate  over  the  expected  life  of  the  mortgage.  Also,  if
prepayments on mortgages increase when interest rates are declining, our net interest income may decrease if we
cannot reinvest the prepayments in mortgage assets with comparable net interest margins. If prepayment rates
differ from our projections, we may experience a change in net earnings due to a change in the ratio of derivatives to
the related mortgages. This may result in a reduction of cash flows from our mortgage loans net of financing costs
as we have a higher percentage of derivative costs related to these loans than originally projected.

We generally acquire mortgages on a servicing released basis, meaning we acquire both the mortgages and
the rights to service them. This strategy requires us to pay a higher purchase price or premium for the mortgages. If
the mortgages that we acquire at a premium prepay faster than originally projected GAAP requires us to write down
the remaining capitalized premium amounts at a faster speed than was originally projected, which would decrease
our current net interest income.

Interest rate fluctuations may adversely affect our operating results.

Our operations, as a mortgage loan acquirer and originator, an investor in mortgage loans or a warehouse
lender, may be adversely affected by rising and falling interest rates. Interest rates have been historically low over
the  past  few  years;  however  increases  in  interest  rates  may  discourage  potential  borrowers  from  refinancing
mortgages, borrowing to purchase homes or seeking second mortgages. For example, during 2005, the Federal
Reserve Bank increased short term rates a total of 200 basis points. This has decreased the amount of mortgages
available to be acquired or originated by our mortgage operations and has decreased the demand for repurchase
financing provided by our warehouse lending operations, which adversely affects our operating results if we are not
able to commensurately increase our market share. If short-term interest rates exceed long-term interest rates,
there is a higher risk of increased loan prepayments, as borrowers may seek to refinance their fixed and adjustable
rate mortgages at lower long-term fixed interest rates. Increased loan prepayments could lead to a reduction in the
number of loans in our long-term mortgage portfolio and reduce our net interest income. Rising interest rates may
also increase delinquencies, foreclosures and losses on our adjustable rate mortgages.

We  are  subject  to  the  risk  of  rising  mortgage  interest  rates  between  the  time  we  commit  to  purchase
mortgages  at  a  fixed  price  through  the  issuance  of  individual,  bulk  or  other  rate-locks  and  the  time  we  sell  or
securitize those mortgages. An increase in interest rates will generally result in a decrease in the market value of
mortgages that we have committed to purchase at a fixed price, but have not been sold or securitized. As a result,
we may record a smaller gain, or even a loss, upon the sale or securitization of those mortgages.

If  we  are  unable  to  complete  securitizations  or  if  we  experience  delayed  mortgage  loan  sales  or
securitization  closings,  we  could  face  a  liquidity  shortage  which  would  adversely  affect  our  operating
results.

We rely significantly upon securitizations to generate cash proceeds to repay borrowings and replenish our
borrowing  capacity.  If  there  is  a  delay  in  a  securitization  closing  or  any  reduction  in  our  ability  to  complete
securitizations we may be required to utilize other sources of financing, which, if available at all, may not be on
similar terms. In addition, delays in closing mortgage sales or securitizations of our mortgages increase our risk by
exposing us to credit and interest rate risks for this extended period of time. Furthermore, gains on sales from
certain of our securitizations represent a significant portion of the taxable income dividend to the REIT from our
taxable REIT subsidiary, IFC. Several factors could affect our ability to complete securitizations of our mortgages,
including:

(cid:127) conditions in the securities and secondary markets;

(cid:127) credit quality of the mortgages acquired or originated through our mortgage operations;

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(cid:127) volume of our mortgage loan acquisitions and originations;

(cid:127) our ability to obtain credit enhancements; and

(cid:127) lack of investors purchasing higher risk components of the securities.

If we are unable to sell a sufficient number of mortgages at a premium or profitably securitize a significant
number of our mortgages in a particular financial reporting period, then we could experience lower net earnings or a
loss for that period, which could have a material adverse affect on our operations. We cannot assure you that we will
be able to continue to profitably securitize or sell our loans on a whole loan basis, or at all.

The market for first loss risk securities, which are securities that take the first loss when mortgages are not
paid  by  the  borrowers,  is  generally  limited.  In  connection  with  our  REMIC  securitizations,  we  may  not  sell  all
securities subjecting us to a first loss risk. If we do not sell these securities, we may hold them for an extended
period, subjecting us to a first loss risk.

A prolonged economic downturn or recession would likely result in a reduction of our mortgage origination
activity which could adversely affect our financial results.

The United States economy has undergone in the past and may in the future, undergo, a period of economic
slowdown,  which  some  observers  view  as  a  recession.  An  economic  downturn  or  a  recession  may  have  a
significant  adverse  impact  on  our  operations  and  our  financial  condition.  For  example,  a  reduction  in  new
mortgages may adversely affect our ability to maintain or expand our long-term mortgage portfolio, our principal
means of generating earnings. In addition, a decline in new mortgage activity may likely result in reduced activity for
our  warehouse  lending  operations  and  our  long-term  investment  operations.  In  the  case  of  our  mortgage
operations,  a  decline  in  mortgage  activity  may  result  in  fewer  loans  that  meet  its  criteria  for  purchase  and
securitization or sale, thus resulting in a reduction in interest income and fees and gain on sale of loans. We may also
experience  larger  than  previously  reported  losses  on  our  long-term  mortgage  portfolio  due  to  a  higher  level  of
defaults or foreclosures or higher loss rates on our mortgages.

We may experience reduced net earnings or losses if our liabilities reprice at different rates than our assets.

Our principal source of revenue is net interest income or net interest spread from our long-term mortgage
portfolio, which is the difference between the interest we earn on our interest earning assets and the interest we pay
on our interest bearing liabilities. The rates we pay on our borrowings are independent of the rates we earn on our
assets and may be subject to more frequent periodic rate adjustments. Therefore, we could experience a decrease
in net earnings or a loss because the interest rates on our borrowings could increase faster than the interest rates on
our assets, if the increased borrowing costs are not offset by reduced cash payments on derivatives recorded in
other non-interest income. If our net interest spread becomes negative, we will be paying more interest on our
borrowings than we will be earning on our assets and we will be exposed to a risk of loss.

Additionally, the rates paid on our borrowings and the rates received on our assets may be based upon
different indices. Our long-term mortgage portfolio includes mortgages that are one-, three- and six-month LIBOR
and one-year LIBOR hybrid ARMs. These are mortgages with fixed interest rates for an initial period of time, after
which they begin bearing interest based upon short-term interest rate indices and adjust periodically. We generally
fund mortgages with adjustable interest rate borrowings having interest rates that are indexed to short-term interest
rates, typically one-month LIBOR, and adjust periodically at various intervals. During 2005, borrowing costs on
adjustable rate CMO borrowings, which are tied to one month LIBOR and reprice monthly without limitation, rose at
a faster pace than coupons on LIBOR ARMs securing CMO borrowings, which generally reprice every six months
with limitation. To the extent that there is an increase in the interest rate index used to determine our adjustable
interest rate borrowings and it increases faster than the indices used to determine the rates on our assets (i.e., the
increase is not offset by a corresponding increase in the rates at which interest accrues on our assets) or is not
offset by various cash payments on interest rate derivatives that we have in place at any given time, our net earnings
will decrease or we will have net losses.

ARMs typically have interest rate caps, which limit interest rates charged to the borrower during any given
period. Our borrowings are not subject to similar restrictions. As a result, in a period of rapidly increasing interest
rates, the interest rates we pay on our borrowings could increase without limitation, while the interest rates we earn

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on our ARMs would be capped. If this occurs, our net interest spread could be significantly reduced or we could
suffer a net interest loss if not offset by a decrease in the cash payments on interest rate derivatives that we have in
place at any given time.

Our operating results will be affected by the results of our interest rate risk management activities.

To mitigate interest rate risks associated with our mortgage and long-term investment operations, we enter
into transactions designed to limit our exposure to interest rate risks. To mitigate the interest rate risks associated
with adjustable rate borrowings, we attempt to match the interest rate sensitivities of our ARMs with the associated
financing liabilities. Management determines the nature and quantity of derivative transactions based on various
factors, including market conditions and the expected volume of mortgage acquisitions. While we believe that we
properly  manage  our  interest  rate  risk  on  an  economic  and  tax  basis,  we  have  elected  not  to  achieve  hedge
accounting,  as  established  by  the  Financial  Accounting  Standards  Board,  or  FASB,(cid:146)(cid:146)  under  the  provisions  of
Statement  of  Financial  Accounting  Standards  No.  133,  or  (cid:145)(cid:145)SFAS  133,(cid:146)(cid:146)  for  our  interest  rate  risk  management
activities in our financial statements. The effect of not applying hedge accounting means that our interest rate risk
management activities may result in significant volatility in our quarterly net earnings as interest rates go up or
down. It is possible that there will be periods during which we will incur losses on derivative transactions that may
result in net losses, as was the case in 2001 after the restatement of our consolidated financial statements, and for
the three months ended June 30, 2005. In addition, if the counter parties to our derivative transactions are unable to
perform according to the terms of the contracts, we may incur losses. Our derivative transactions may not offset the
risk of adverse changes in our net interest margins.

We may be subject to losses on mortgages for which we do not obtain credit enhancements.

We do not obtain credit enhancements such as mortgage pool or special hazard insurance for all of our
mortgages and investments. Generally, we require mortgage insurance on any mortgage with an LTV ratio greater
than 80%. During the time we hold mortgages for investment, we are subject to risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard insurance. If a borrower defaults
on a mortgage that we hold, we bear the risk of loss of principal to the extent there is any deficiency between the
value of the related mortgaged property and the amount owing on the mortgage loan and any insurance proceeds
available to us through the mortgage insurer. In addition, since defaulted mortgages, which under our financing
arrangements are mortgages that are generally 60 to 90 days delinquent in payments, may be considered ineligible
collateral under our borrowing arrangements, we could bear the risk of being required to own these loans without
the use of borrowed funds until they are ultimately liquidated or possibly sold at a loss. 

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Our mortgage products may expose us to greater credit risks.

We are an acquirer and originator of Alt-A mortgages, and to a lesser extent, multi-family and B/C mortgages.
These  are  mortgages  that  generally  may  not  qualify  for  purchase  by  government-sponsored  agencies  such  as
Fannie  Mae  and  Freddie  Mac  or  (cid:145)(cid:145)conforming  loans(cid:146)(cid:146).  Our  operations  may  be  negatively  affected  due  to  our
investments  in  these  mortgages.  Credit  risks  associated  with  these  mortgages  may  be  greater  than  those
associated with conforming mortgages. The interest rates we charge on these mortgages are often higher than
those charged for conforming loans in order to compensate for the higher risk and lower liquidity. Lower levels of
liquidity may cause us to hold loans or other mortgage-related assets supported by these loans that we otherwise
would not hold. By doing this, we assume the potential risk of increased delinquency rates and/or credit losses as
well as interest rate risk. Additionally, the combination of different underwriting criteria and higher rates of interest
leads to greater risk, including higher prepayment rates and higher delinquency rates and/or credit losses. We also
have loan programs that allow a borrower to pay only the interest attributable to his loan for a set period of time. If
there is a decline in real estate values borrowers may default on these types of loans since they have not reduced
their  principal  balances,  which,  therefore,  could  exceed  the  value  of  their  property.  In  addition,  a  reduction  in
property values would also cause an increase in the LTV ratio for that loan which could have the effect of reducing
the value of that loan.

There has been an increase in production of our loan product which is characterized as (cid:145)(cid:145)interest only(cid:146)(cid:146) and
option ARM loans. There have been recent announcements by federal regulators concerning interest-only loan
programs, option ARM loan programs and other ARM loans with deeply discounted initial rates and/or negative
amortization features. There is increasing public policy debate focused on the rapid increase in the use of loans with

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interest-only  features  that  require  no  amortization  of  principal  for  a  protracted  period  or  loans  with  potential
negative amortization features, such as option payment ARMs.  Already one rating agency (Standard & Poors) has
required greater credit enhancements for securitization pools that are backed by option ARMs.  These could lead to
the loan product becoming less available as financing options and hence this could have a material affect on the
value of such products.

Our multi-family and commercial mortgages may expose us to increased lending risks.

Generally, we consider multi-family and commercial mortgages to involve a higher degree of risk compared
to first mortgages on one- to four-family, owner occupied residential properties. These mortgages have higher risks
than  mortgages  secured  by  residential  real  estate  because  repayment  of  the  mortgages  often  depends  on  the
successful  operations  and  the  income  stream  of  the  borrowers.  Furthermore,  multi-family  and  commercial
mortgages typically involve larger mortgage balances to single borrowers or groups of related borrowers compared
to one- to four-family residential mortgages.

Our use of second mortgages exposes us to greater credit risks.

Our security interest in the property securing second mortgages is subordinated to the interest of the first
mortgage holder and the second mortgages have a higher combined LTV ratio than does the first mortgage. If the
value of the property is equal to or less than the amount needed to repay the borrower(cid:146)s obligation to the first
mortgage holder upon foreclosure, our second mortgage loan will not be repaid.

Lending to non-conforming borrowers may expose us to a higher risk of delinquencies, foreclosures and
losses.

Our  market  includes  borrowers  who  may  be  unable  to  obtain  mortgage  financing  from  conventional
mortgage sources. Mortgages made to such borrowers generally entail a higher risk of delinquency and higher
losses than mortgages made to borrowers who utilize conventional mortgage sources. Delinquency, foreclosures
and  losses  generally  increase  during  economic  slowdowns  or  recessions.  The  actual  risk  of  delinquencies,
foreclosures and losses on mortgages made to our borrowers could be higher under adverse economic conditions
than those currently experienced in the mortgage lending industry in general.

Further, any material decline in real estate values increases the LTV ratios of mortgages previously made by
us, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default.
Any  sustained  period  of  increased  delinquencies,  foreclosures  or  losses  after  the  mortgages  are  sold  could
adversely affect the pricing of our future loan sales and our ability to sell or securitize our mortgages in the future. In
the past, certain of these factors have caused revenues and net earnings of many participants in the mortgage
industry, including us, to fluctuate from quarter to quarter.

Our borrowings and use of substantial leverage may cause losses.

Our use of CMOs may expose our operations to credit losses.

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To  grow  our  long-term  mortgage  portfolio,  we  borrow  a  substantial  portion  of  the  market  value  of
substantially all of our investments in mortgages in the form of CMOs. There are no limitations on the amount of
CMO  borrowings  we  may  incur,  other  than  the  aggregate  value  of  the  underlying  mortgages.  We  currently  use
CMOs  as  financing  vehicles  to  increase  our  leverage  since  mortgages  held  for  CMO  collateral  are  retained  for
investment.

Retaining mortgages as collateral for CMOs exposes our operations to greater credit losses than does the
use of other securitization techniques that are treated as sales because as the equity holder in the security, we are
allocated losses from the liquidation of defaulted loans first, prior to any other security holder. Although our liability
under a collateralized mortgage obligation is limited to the collateral used to create the collateralized mortgage
obligation, we generally are required to make a cash equity investment to fund collateral in excess of the amount of
the securities issued in order to obtain the appropriate credit ratings for the securities being sold, and therefore
obtain the lowest interest rate available, on the CMOs. If we experience greater credit losses than expected on the
pool of loans subject to the CMO, the value of our equity investment will decrease and we may have to increase the
allowance for loan losses on our financial statements.

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If we default under our financing facilities, we may be forced to liquidate collateral.

If we default under our financing facilities, our lenders could force us to liquidate the collateral. If the value of
the collateral is less than the amount borrowed, we could be required to pay the difference in cash. Furthermore, if
we default under one facility, it would generally cause a default under our other facilities. If we were to declare
bankruptcy, some of our reverse repurchase agreements may obtain special treatment and our creditors would then
be allowed to liquidate the collateral without any delay. On the other hand, if a lender with whom we have a reverse
repurchase agreement declares bankruptcy, we might experience difficulty repurchasing our collateral, or enforcing
our  claim  for  damages,  and  it  is  possible  that  our  claim  could  be  repudiated  and  we  could  be  treated  as  an
unsecured creditor. If this occurs, our claims would be subject to significant delay and we may receive substantially
less than our actual damages or nothing at all.

If we are forced to liquidate, we may have few unpledged assets for distribution to unsecured creditors.

We have pledged a substantial portion of our assets to secure the repayment of CMO borrowings issued in
securitizations and our financing facilities. We will also pledge substantially all of our current and future mortgages
to secure borrowings pending their securitization or sale. The cash flows we receive from our investments that have
not yet been distributed or pledged or used to acquire mortgages or other investments may be the only unpledged
assets available to our unsecured creditors if we were liquidated.

The geographic concentration of our mortgages increases our exposure to risks in those areas.

We do not set limitations on the percentage of our long-term mortgage portfolio composed of properties
located in any one area (whether by state, zip code or other geographic measure). Concentration in any one area
increases  our  exposure  to  the  economic  and  natural  hazard  risks  associated  with  that  area.  A  majority  of  our
mortgage  acquisitions  and  originations,  long-term  mortgage  portfolio  and  finance  receivables  are  secured  by
properties in California and, to a lesser extent, Florida. Certain parts of California have experienced an economic
downturn in past years and California and Florida have suffered the effects of certain natural hazards.

Furthermore, if borrowers are not insured for natural disasters, which are typically not covered by standard
hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the
property  is  damaged.  This  would  cause  increased  foreclosures  and  decrease  our  ability  to  recover  losses  on
properties affected by such disasters. This would have a material adverse effect on our results of operations or
financial condition. As a result of the hurricanes during 2005, we have provided a specific reserve of $12.8 million to
record an estimated loss exposure for 886 properties securing a total unpaid principal balance of $183.7 million in
the  affected  areas.  Declines  in  those  residential  real  estate  markets  may  reduce  the  values  of  the  properties
collateralizing the mortgages, increase foreclosures and losses and have material adverse effect on our results of
operations or financial condition.

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Representations and warranties made by us in our loan sales and securitizations may subject us to liability.

In connection with our loan sales to third parties and our securitizations, we transfer mortgages acquired and
originated  by  us  to  the  third  parties  or  into  a  trust  in  exchange  for  cash  and,  in  the  case  of  a  CMO,  residual
certificates issued by the trust. The trustee or purchaser will have recourse to us with respect to the breach of the
standard representations and warranties made by us at the time such mortgages are transferred. While we may
have recourse to our customers for any such breaches, there can be no assurance of our customers(cid:146) abilities to
honor their respective obligations. Also, we engage in bulk whole loan sales pursuant to agreements that generally
provide for recourse by the purchaser against us in the event of a breach of one of our representations or warranties,
any fraud or misrepresentation during the mortgage origination process, or upon early default on such mortgage.
We  generally  limit  the  potential  remedies  of  such  purchasers  to  the  potential  remedies  we  receive  from  the
customers from whom we acquired or originated the mortgages. However, in some cases, the remedies available to
a purchaser of mortgages from us may be broader than those available to us against the sellers of the mortgages
and should a purchaser enforce its remedies against us, we are not always able to enforce whatever remedies we
have against our customers. Furthermore, if we discover, prior to the sale or transfer of a loan, that there is any fraud
or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may
not be able to sell the mortgage or we may have to sell the mortgage at a discount.

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In the ordinary course of our business, we are subject to claims made against us by borrowers and trustees in
our securitizations arising from, among other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and
agents  (including  our  appraisers),  incomplete  documentation  and  our  failure  to  comply  with  various  laws  and
regulations applicable to our business. Any claims asserted against us may result in legal expenses or liabilities that
could have a material adverse effect on our results of operations or financial condition.

A reduction in the demand for our loan products may adversely affect our operations.

The availability of sufficient mortgages meeting our criteria is dependent in part upon the size and level of
activity in the residential real estate lending market and, in particular, the demand for residential mortgages, which is
affected by:

(cid:127) interest rates;

(cid:127) national economic conditions;

(cid:127) residential property values; and

(cid:127) regulatory and tax developments.

If our mortgage acquisitions and originations decline, we may have:

(cid:127) decreased economies of scale;

(cid:127) higher origination costs per loan;

(cid:127) reduced fee income;

(cid:127) smaller gains on the sale of mortgages; and

(cid:127) an insufficient volume of mortgages to generate securitizations which thereby causes us to accumulate

mortgages over a longer period.

Competition for mortgages is intense and may adversely affect our operations.

We  compete  in  acquiring  and  originating  Alt-A,  B/C  and  multi-family  mortgages  and  issuing  mortgage-
backed securities with other mortgage conduit programs, investment banking firms, savings and loan associations,
banks,  thrift  and  loan  associations,  finance  companies,  mortgage  bankers  and  brokers,  insurance  companies,
other lenders, and other entities purchasing mortgage assets.

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We also face intense competition from Internet-based lending companies where entry barriers are relatively
low. Some of our competitors are much larger than we are, have better name recognition than we do, and have far
greater financial and other resources. Government-sponsored entities, in particular Fannie Mae and Freddie Mac,
are also expanding their participation in the Alt-A mortgage industry. These government-sponsored entities have a
size and cost-of-funds advantage over us that allows them to price mortgages at lower rates than we are able to
offer. This phenomenon may seriously destabilize the Alt-A mortgage industry. In addition, if as a result of what may
be  less-conservative,  risk-adjusted  pricing,  these  government-sponsored  entities  experience  significantly
higher-than-expected  losses,  it  would  likely  adversely  affect  overall  investor  perception  of  the  Alt-A  and  B/C
mortgage industry because the losses would be made public due to the reporting obligations of these entities.

The  intense  competition  in  the  Alt-A,  B/C  and  multi-family  mortgage  industry  has  also  led  to  rapid
technological  developments,  evolving  industry  standards  and  frequent  releases  of  new  products  and
enhancements. As mortgage products are offered more widely through alternative distribution channels, such as
the Internet, we may be required to make significant changes to our current retail and wholesale structure and
information systems to compete effectively. Our inability to continue enhancing our current Internet capabilities, or
to adapt to other technological changes in the industry, could have a material adverse effect  on our business,
financial condition, liquidity and results of operations.

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The  need  to  maintain  mortgage  loan  volume  in  this  competitive  environment  creates  a  risk  of  price
competition in the Alt-A, B/C and multi-family mortgage industry. Competition in the industry can take many forms,
including interest rates and costs of a loan, less stringent underwriting standards, convenience in obtaining a loan,
customer service, amount and term of a loan and marketing and distribution channels. Our failure to maintain our
customer service levels may affect our ability to effectively compete in the mortgage industry. Price competition
would lower the interest rates that we are able to charge borrowers, which would lower our interest income and/or
our  gain  on  sale  of  mortgage  loans.  Price-cutting  or  discounting  reduces  profits  and  will  depress  earnings  if
sustained for any length of time. If our competition uses less stringent underwriting standards we will be pressured
to do so as well, resulting in greater loan risk without being able to price for that greater risk. Our competitors may
lower their underwriting standards to increase their market share. If we do not relax underwriting standards in the
face of competition, we may lose market share. Increased competition may also reduce the volume of our loan
originations and acquisitions. Any increase in these pricing and credit pressures could have a material adverse
effect on our business, financial condition, liquidity and results of operations.

We are a defendant in purported class actions and may not prevail in these matters.

Class action lawsuits and regulatory actions alleging improper marketing practices, abusive loan terms and
fees,  disclosure  violations,  improper  yield  spread  premiums  and  other  matters  are  risks  faced  by  all  mortgage
originators, particularly those in the Alt-A and B/C market. We are a defendant in purported class actions pending in
different states. The class actions allege generally that the loan originator improperly charged fees in violation of
various state lending or consumer protection laws in connection with mortgages that we acquired. Although the
suits  are  not  identical,  they  generally  seek  unspecified  compensatory  damages,  punitive  damages,  pre-  and
post-judgment interest, costs and expenses and rescission of the mortgages, as well as a return of any improperly
collected fees.

Since  January  10,  2006,  several  purported  class  action  complaints  have  been  filed  against  us  and  our
executive officers and directors. The complaints, which are brought on behalf of persons who acquired common
stock during the period of May 13, 2005 through August 9, 2005, generally allege violations of the federal securities
laws due to allegedly false and misleading statements or omissions, related to the Company(cid:146)s financial condition
and  future  prospects.  Since  February  1,  2006  derivative  shareholder  actions  have  also  been  filed  against  our
officers and directors alleging breach of fiduciary duty, abuse of control, unjust enrichment and other related claims.

These actions are in the early stages of litigation and, accordingly, it is difficult to predict the outcome or
resolution of these matters or the timing for their resolution. We expect to incur defense costs and other expenses in
connection with the class action lawsuits, and we cannot assure you that the ultimate outcome of these or other
actions will not have a material adverse effect on our financial condition or results of operations. In addition to the
expense and burden incurred in defending this litigation and any damages that we may suffer, our management(cid:146)s
efforts and attention may be diverted from the ordinary business operations in order to address these claims. If the
final resolution of this litigation is unfavorable to us, our financial condition, results of operations and cash flows
might be materially adversely affected if our existing insurance coverage is unavailable or inadequate to resolve the
matters.

We  believe  we  have  meritorious  defenses  to  the  actions  and  intend  to  defend  against  them  vigorously;

however, an adverse judgment in any of these matters could have a material adverse effect on us.

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We may incur losses in the future.

During  the  years  ended  December  31,  2001  and  2000,  we  experienced  net  losses  of  $2.2  million  and
$54.5 million. The 2001 loss was related to a loss on derivatives and the 2000 loss was the result of write-downs of
non-performing  investment  securities  secured  by  mortgages  and  additional  increases  in  the  provision  for  loan
losses to provide for the deterioration of the performance of collateral supporting specific investment securities for
2000.  During  the  year  ended  December  31,  1998,  we  experienced  a  net  loss  of  $5.9  million  primarily  as  the
mortgage industry experienced substantial turmoil as a result of a lack of liquidity in the secondary markets, which
caused us to sell mortgages at losses to meet margin calls on our financing facilities. We cannot be certain that
revenues will remain at current levels or improve or that we will generate net earnings in the future, which could
prevent us from effectuating our business strategy.

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A substantial interruption in our use of iDASLg2 may adversely affect our level of mortgage acquisitions and
originations.

We  utilize  the  Internet  in  our  business  principally  for  the  implementation  of  our  automated  mortgage
origination  program,  iDASLg2.  iDASLg2  allows  our  customers  to  pre-qualify  borrowers  for  various  mortgage
programs  based  on  criteria  requested  from  the  borrower  and  renders  an  automated  underwriting  decision  by
issuing an approval of the mortgage loan or a referral for further review or additional information. Substantially all of
our  correspondents  submit  mortgages  through  iDASLg2  and  all  wholesale  mortgages  delivered  by  mortgage
bankers  and  brokers  are  directly  underwritten  through  the  use  of  iDASLg2.  iDASLg2  may  be  interrupted  if  the
Internet  experiences  periods  of  poor  performance,  if  our  computer  systems  or  the  systems  of  our  third-party
service  providers  contain  defects,  or  if  customers  are  reluctant  to  use  or  have  inadequate  connectivity  to  the
Internet.  Increased  government  regulation  of  the  Internet  could  also  adversely  affect  our  use  of  the  Internet  in
unanticipated  ways  and  discourage  our  customers  from  using  our  services.  If  our  ability  to  use  the  Internet  in
providing our services is impaired, our ability to originate or acquire mortgages on an automated basis could be
delayed or reduced. Furthermore, we rely on a third party hosting company in connection with the use of iDASLg2. If
the third party hosting company fails for any reason, and adequate back-up is not implemented in a timely manner,
it may delay and reduce those mortgage acquisitions and originations done through iDASLg2. Any substantial delay
and  reduction  in  our  mortgage  acquisitions  and  originations  will  reduce  our  taxable  income  for  the  applicable
period.

We are exposed to potential fraud and credit losses in providing repurchase financing.

As a warehouse lender, we lend money to mortgage bankers on a secured basis and we are subject to the
risks associated with lending to mortgage bankers, including the risks of fraud, borrower default and bankruptcy,
any  of  which  could  result  in  credit  losses  for  us.  Fraud  risk  may  include,  but  is  not  limited  to,  the  financing  of
nonexistent loans or fictitious mortgage loan transactions or the delivery to us of fraudulent collateral that could
result in the loss of all sums we have advanced to the borrower. For example, during 2004, the warehouse lending
operations had a specific allowance for loan losses of $10.7 million for impaired repurchase advances. Also, our
claims as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay.

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Our delinquency ratios and our performance may be adversely affected by the performance of parties who
service or sub-service our mortgages.

We sell or contract with third-parties for the servicing of all mortgages, including those in our securitizations.
Our  operations  are  subject  to  risks  associated  with  inadequate  or  untimely  servicing.  Poor  performance  by  a
servicer may result in greater than expected delinquencies and losses on our mortgages. A substantial increase in
our delinquency or foreclosure rate could adversely affect our ability to access the capital and secondary markets
for our financing needs. Also, with respect to mortgages subject to a securitization, greater delinquencies would
adversely impact the value of our equity interest, if any, we hold in connection with that securitization.

In  a  securitization,  relevant  agreements  permit  us  to  be  terminated  as  servicer  or  master  servicer  under
specific conditions described in these agreements. If, as a result of a servicer or sub-servicer(cid:146)s failure to perform
adequately, we were terminated as master servicer of a securitization, the value of any master servicing rights held
by us would be adversely affected.

We face risks related to our recent accounting restatements.

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On  July  22,  2004,  we  publicly  announced  that  we  had  discovered  accounting  inaccuracies  in  previously
reported  financial  statements.  As  a  result,  following  consultation  with  our  auditors,  we  decided  to  restate  our
financial  statements  for  the  three  months  ended  March  31,  2004  and  2003,  the  three  and  six  months  ended
June  30,  2003,  the  three  and  nine  months  ended  September  30,  2003  and  for  each  of  the  years  ended
December 31, 2003, 2002 and 2001. The restatements related to a correction to our revenue recognition policy with
respect  to  the  cash  sales  of  mortgage  servicing  rights  to  unrelated  third  parties  when  the  mortgage  loans  are
retained,  our  accounting  for  derivatives  and  interest  rate  risk  management  activities,  the  accounting  for  loan
purchase commitments as derivatives and selected elimination entries to consolidate IFC with that of IMH. We also
corrected a clerical error in the calculation of earnings per share for the six months ended June 30, 2004.

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The restatement of our financial statements could lead to litigation claims and/or regulatory proceedings
against us. The defense of any such claims or proceedings may cause the diversion of management(cid:146)s attention and
resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor.
Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and
other expenses. We also may have difficulty raising equity capital or obtaining other financing, such as lines of
credit  or  otherwise.  We  may  not  be  able  to  effectuate  our  current  operating  strategy,  including  the  ability  to
originate, acquire or securitize mortgage loans for retention or sale at projected levels. The occurence of any of the
foregoing could harm our business and reputation and cause the price of our securities to decline.

We are exposed to environmental liabilities, with respect to properties that we take title to upon foreclosure,
that could increase our costs of doing business and harm our results of operations.

In the course of our activities, we may foreclose and take title to residential properties and become subject to
environmental  or  mold  liabilities  with  respect  to  those  properties.  The  laws  and  regulations  related  to  mold  or
environmental contamination often impose liability without regard to responsibility for the contamination. We may
be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and
clean-up  costs  incurred  by  these  parties  in  connection  with  mold  or  environmental  contamination,  or  may  be
required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs
associated with investigation or remediation activities could be substantial. Moreover, as the owner or former owner
of a contaminated site, we may be subject to common law claims by third parties based upon damages and costs
resulting from mold or environmental contamination emanating from the property. If we ever become subject to
significant mold or environmental liabilities, our business, financial condition, liquidity and results of operations
could be significantly harmed.

We are subject to risks of operational failure that are beyond our control.

Substantially all of our operations are located in Newport Beach, California. Our systems and operations are
vulnerable  to  damage  and  interruption  from  fire,  flood,  telecommunications  failure,  break-ins,  earthquake  and
similar  events.  Our  operations  may  also  be  interrupted  by  power  disruptions,  including  rolling  black-outs
implemented in California due to power shortages. We do not have alternative power sources in all of our locations.
Furthermore, our security mechanisms may be inadequate to prevent security breaches to our computer systems,
including  from  computer  viruses,  electronic  break-ins  and  similar  disruptions.  Such  security  breaches  or
operational failures could expose us to liability, impair our operations, result in losses, and harm our reputation.

If we fail to maintain effective systems of internal control over financial reporting and disclosure controls
and procedures, we may not be able to accurately report our financial results or prevent fraud, which could
cause current and potential shareholders to lose confidence in our financial reporting, adversely affect the
trading price of our securities or harm our operating results.

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Effective internal control over financial reporting and disclosure controls and procedures are necessary for us
to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. Any
failure  to  develop  or  maintain  effective  internal  control  over  financial  reporting  and  disclosure  controls  and
procedures could harm our reputation or operating results, or cause us to fail to meet our reporting obligations.
Furthermore, if we do not have effective internal control over financial reporting, our external auditors will not be
able to issue an unqualified opinion on the effectiveness of our internal control over financial reporting. In the past,
we  have  reported,  and  may  discover  in  the  future,  material  weaknesses  in  our  internal  control  over  financial
reporting.

Ineffective  internal  control  over  financial  reporting  and  disclosure  controls  and  procedures  could  cause
investors to lose confidence in our reported financial information, which could have a negative effect on the trading
price of our securities or affect our ability to access the capital markets and could result in regulatory proceedings
against us by, among others, the SEC. In addition, a material weakness in internal control over financial reporting,
which may lead to deficiencies in the preparation of financial statements, could lead to litigation claims against us.
The defense of any such claims may cause the diversion of management(cid:146)s attention and resources, and we may be
required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation, even if

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resolved in our favor, could cause us to incur significant legal and other expenses. Such events could harm our
business, affect our ability to raise capital and adversely affect the trading price of our securities.

Regulatory Risks

Violation of various federal, state and local laws may result in losses on our loans.

Applicable state and local laws generally regulate interest rates and other charges, require certain disclosure,
and require licensing of the mortgage broker, lender and purchaser. In addition, other state and local laws, public
policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and
debt collection practices may apply to the origination, servicing and collection of our loans. Mortgage loans are also
subject to federal laws, including:

(cid:127) the  Federal  Truth-in-Lending  Act  and  Regulation  Z  promulgated  there  under,  which  require  certain

disclosures to the borrowers regarding the terms of the loans;

(cid:127) the Equal Credit Opportunity Act and Regulation B promulgated there under, which prohibit discrimination
on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or
the exercise of any right under the Consumer Credit Protection Act, in the extension of credit;

(cid:127) the Fair Housing Act, which prohibits discrimination in housing on the basis of race, color, national origin,

religion, sex, familial status, or handicap, in housing-related transactions;

(cid:127) the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrower(cid:146)s

credit experience;

(cid:127) the Fair and Accurate Credit Transaction Act, which regulates credit reporting and use of credit information

in making unsolicited offers of credit;

(cid:127) the Gramm-Leach-Bliley Act, which imposes requirements on all lenders with respect to their collection
and use of nonpublic financial information and requires them to maintain the security of that information;

(cid:127) the Real Estate Settlement Procedures Act, which requires that consumers receive disclosures at various

times and outlaws kickbacks that increase the cost of settlement services;

(cid:127) the Home Mortgage Disclosure Act, which requires the reporting of public loan data;

(cid:127) the Telephone Consumer Protection Act and the Can Spam Act, which regulate commercial solicitations

via telephone, fax, and the Internet;

(cid:127) the Depository Institutions Deregulation and Monetary Control Act of 1980, which preempts certain state

usury laws; and

(cid:127) the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws which

regulate alternative mortgage transactions.

Violations of certain provisions of these federal and state laws may limit our ability to collect all or part of the
principal of or interest on the loans and in addition could subject us to damages and could result in the mortgagors
rescinding the loans whether held by us or subsequent holders of the loans. In addition, such violations may cause
us to be in default under our credit and repurchase facilities and could result in the loss of licenses held by us.

Similarly,  it  is  possible  borrowers  may  assert  that  the  loan  forms  we  use  or  acquire,  including  forms  for
(cid:145)(cid:145)interest-only(cid:146)(cid:146) and (cid:145)(cid:145)option ARM(cid:146) loans for which there is little standardization or uniformity, fail to properly describe
the transactions they intended, or that our forms fail to comply with applicable consumer protection statutes or
other federal and state laws. This could result in liability for violations of certain provisions of federal and state
consumer protection laws and our inability to sell the loans and our obligation to repurchase the loans or indemnify
the purchasers.

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New regulatory laws affecting the mortgage industry may increase our costs and decrease our mortgage
origination and acquisition.

The regulatory environments in which we operate have an impact on the activities in which we may engage,
how the activities may be carried out, and the profitability of those activities. Therefore, changes to laws, regulations
or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, recently
enacted and proposed local, state and federal legislation targeted at predatory lending could have the unintended
consequence  of  raising  the  cost  or  otherwise  reducing  the  availability  of  mortgage  credit  for  those  potential
borrowers with less than prime-quality credit histories, thereby resulting in a reduction of otherwise legitimate Alt-A
or B/C lending opportunities. Similarly, recently enacted and proposed local, state and federal privacy laws and
laws prohibiting or limiting marketing by telephone, facsimile, email and the Internet may limit our ability to market
and our ability to access potential loan applicants. For example, the Can Spam Act of 2003 establishes the first
national standards for the sending of commercial email allowing, among other things, unsolicited commercial email
provided it contains certain information and an opt-out mechanism. We cannot provide any assurance that the
proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future.
Adoption of these laws and regulations could have a material adverse impact on our business by substantially
increasing the costs of compliance with a variety of inconsistent federal, state and local rules, or by restricting our
ability to charge rates and fees adequate to compensate us for the risk associated with certain loans.

Some states and local governments have enacted, or may enact, laws or regulations that prohibit inclusion of
some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and
require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. Our failure
to comply with these laws could subject us to monetary penalties and could result in the borrowers rescinding the
mortgage loans, whether held by us or subsequent holders. Lawsuits have been brought in various states making
claims against assignees of these loans for violations of state law. Compliance with some of these restrictions
requires lenders to make subjective judgments, such as whether a loan will provide a (cid:145)(cid:145)net tangible benefit(cid:146)(cid:146) to the
borrower. These restrictions expose a lender to risks of litigation and regulatory sanction no matter how carefully a
loan is underwritten and impact the way in which a loan is underwritten. The remedies for violations of these laws
are not based solely on actual harm to the consumer and can result in damages that exceed the loan balance.
Liability for violations of HOEPA, as well as violations of many of the state and local equivalents, could extend not
only to us, but to our secured warehouse lenders, institutional loan purchasers, securitization trusts that hold our
loans and other assignees, regardless of whether such assignee knew of or participated in the violation. 

Furthermore,  various  federal  and  state  laws  impose  significant  privacy  or  customer  information  security
obligations which may subject us to additional costs and legal risks and we cannot assure you that we will not be
subject to lawsuits or compliance actions under such requirements. Similarly various state and federal laws have
been  enacted  to  restrict  unsolicited  advertising  using  telephones,  facsimile  machines  and  electronic  means  of
transmission. These laws and regulations could have a material adverse impact on our business by substantially
increasing the costs of compliance or by subjecting us to lawsuits or compliance actions.

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In addition to changes to legal requirements contained in statutes, regulations, case law, and other sources
of law, changes in the investigation or enforcement policies of federal and state regulatory agencies could impact
the activities in which we may engage, how the activities may be carried out, and the profitability of those activities.
For  example,  various  state  and  federal  agencies  have  initiated  regulatory  enforcement  proceedings  against
mortgage companies for engaging in business practices that were not specifically or clearly proscribed by law, but
which  in  the  judgment  of  the  regulatory  agencies  were  unfair  or  deceptive  to  consumers.  Federal  and  state
regulatory  agencies  might  also  determine  in  the  future  that  certain  of  our  business  practices  not  presently
proscribed by any law and not the subject of previous enforcement actions are unfair or deceptive to consumers. If
this happens, it could impact the activities in which we may engage, how we carry out those activities, and our
profitability.  We  might  also  be  required  to  pay  fines,  make  reimbursements,  and  make  other  payments  to  third
parties for past business practices. Additionally, if an administrative enforcement proceeding were to result in us
having to discontinue or alter certain business practices, then we might be placed at a competitive disadvantage
vis- ‘a-vis  competitors  who  are  not  required  to  make  comparable  changes  to  their  business  practices.  This
competitive disadvantage could be most acute if the business practices that we are required to discontinue or
change are not clearly proscribed by any federal or state law of general applicability. 

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New Criteria May Effect the Value or Marketability of Certain of Our Loan Products

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The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the
Federal  Deposit  Insurance  Corporation,  the  Office  of  Thrift  Supervision,  and  the  National  Credit  Union
Administration (none of whom regulate IMH) jointly issued draft guidance to promote sound credit risk management
practices.  The  guidance  cautions  lenders  to  consider  all  relevant  risk  factors  when  establishing  underwriting
guidelines, including a borrower(cid:146)s income and debt levels, credit score as well as the loan size, collateral value, lien
position and property type and location. It stresses that prudently underwritten home equity loans should include
an  evaluation  of  a  borrower(cid:146)s  capacity  to  adequately  service  the  debt,  and  that  reliance  on  a  credit  score  is
insufficient because it relies on historical financial performance not present capacity to pay. While not specifically
applicable to IMH, the guidance is instructive of the regulatory climate covering low and no documentation loans,
which IMH does acquire and originate, and hence it may affect our ability to sell these loans to third parties, should
we elect to sell them. If we were required to make these changes to our business practices, it might affect the
business  activities  in  which  we  may  engage  and  the  profitability  of  those  activities.  Furthermore,  some  of  the
institutions from which we purchase or to which we sell nontraditional mortgage products might be among the
institutions directly subject to the Guidance. Our business could be adversely impacted if these institutions are
required to make changes to their business practices and policies relative to nontraditional mortgage products. For
example, if entities from which we purchase our loans are required to change their origination guidelines thereby
affecting the volume, diversity and quality of loans available for purchase by us, or if purchasers of our mortgage
loans  are  required  to  make  changes  to  the  purchasing  policies  then  our  ability  to  sell  mortgage  loans,  our
profitability and our credit risk exposure could be adversely impacted.

There has been an increase in production of loan products which we characterize as (cid:145)(cid:145)interest-only(cid:146)(cid:146) and
(cid:145)(cid:145)option-ARM(cid:146)(cid:146) loans. There is increasing public policy debate over loans with interest-only features that require no
amortization of principal for a protracted period and loans with potential negative amortization features, such as
option payment ARMs.  There is a risk that this debate will lead to the enactment of laws which limit our ability to
continue producing these loan products at our present levels, or which augment the risks of legal liability that we
face in connection with such loan products. Further, one rating agency has required greater credit enhancements
for securitization pools that are backed by option ARMS, actions such as this by rating agencies can impact the
profitability of originating or dealing in these loan products.

We  may  be  subject  to  fines  or  other  penalties  based  upon  the  conduct  of  our  independent  brokers  or
correspondents.

The mortgage brokers and correspondents from which we obtain mortgages have parallel and separate legal
obligations to which they are subject. While these laws may not explicitly hold the originating lenders or an acquirer
of the loan responsible for the legal violations of mortgage bankers and brokers, increasingly federal and state
agencies  have  sought  to  impose  such  liability.  Previously,  for  example,  the  United  States  Federal  Trade
Commission, or (cid:145)(cid:145)FTC,(cid:146)(cid:146) entered into a settlement agreement with a mortgage lender where the FTC characterized a
broker that had placed all of its loan production with a single lender as the (cid:145)(cid:145)agent(cid:146)(cid:146) of the lender; the FTC imposed a
fine on the lender in part because, as (cid:145)(cid:145)principal,(cid:146)(cid:146) the lender was legally responsible for the mortgage broker(cid:146)s unfair
and deceptive  acts and practices. The United States Justice Department, various state attorney generals,  and
other state officials have sought to hold sub-prime mortgage lenders responsible for the pricing practices of their
mortgage bankers and brokers, alleging that the mortgage lender was directly responsible for the total fees and
charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage
banker could charge nor kept the money for its own account. Accordingly, we may be subject to fines or other
penalties based upon the conduct of our independent mortgage bankers, brokers or correspondents.

Our operations may be adversely affected if we are subject to the Investment Company Act.

We intend to conduct our business at all times so as not to become regulated as an investment company
under the Investment Company Act. The Investment Company Act exempts entities that are primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.

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In order to qualify for this exemption we must maintain at least 55% of our assets directly in mortgages,
qualifying pass-through certificates and certain other qualifying interests in real estate. Our ownership of certain
mortgage assets may be limited by the provisions of the Investment Company Act, should we ever be subject to the
Act. If the SEC adopts a contrary interpretation with respect to these securities or otherwise believes we do not
satisfy the above exception, we could be required to restructure our activities or sell certain of our assets. To insure
that  we  continue  to  qualify  for  the  exemption  we  may  be  required  at  times  to  adopt  less  efficient  methods  of
financing certain of our mortgage assets and we may be precluded from acquiring certain types of higher-yielding
mortgage assets. The net effect of these factors will be to lower our net interest income. If we fail to qualify for
exemption from registration as an investment company, our ability to use leverage would be substantially reduced,
and we would not be able to conduct our business as described. Our business will be materially and adversely
affected if we fail to qualify for this exemption.

Regulation AB may create additional liabilities, costs and restrictions for our business.

On  December  15,  2004,  the  Securities  and  Exchange  Commission  (SEC)  approved  the  final  regulations
covering the registration, disclosure, communications, and reporting requirements for for asset-backed securities
((cid:145)(cid:145)Regulation  AB(cid:146)(cid:146)),  which  became  effective  January  1,  2006.  The  new  rules  contain  several  new  disclosure
requirements,  including  requirements  to  provide  historical  financial  data  with  respect  to  either  prior  securitized
pools of the same asset class or prior originations and information with respect to the background, experience and
roles of the various transaction parties, including those involved in the origination, sale or servicing of the loans in
the securitized pool. Moreover, annual assessments of compliance with enhanced servicing criteria by servicers
and attestation reports from an independent accounting firm must be obtained with respect to securitized pools of
our mortgage loans.

Securitizations. Our  failure  to  provide  the  information  required  by  Regulation  AB  could  subject  us  to
Securities  Act  liability  either  directly  or  indirectly  through  the  indemnification  provisions  of  the  transaction
documents  related  to  a  securitization  of  our  mortgage  loans.  Furthermore,  any  failure  to  comply  with  the  new
reporting requirements for asset-backed securities under the Securities Exchange Act of 1934, as amended, may
result in the loss of eligibility to register our asset-backed securities on Form S-3 which would increase the costs of
and limit our access to the public asset-backed securities market.

Mortgage Loan Sales. As a result of the implementation of Regulation AB, our loan sale agreements with third
parties  may  require  us  to  provide  certain  information  with  respect  to  ourselves  and  historical  information  with
respect to the performance of our mortgage loans to such purchasers. Our failure to provide this information with
respect to any of our mortgage loan products may result in a breach of a contractual obligation for which we provide
an indemnification. In addition, if we are not able to provide such information, the number of potential purchasers of
our mortgage loans may be limited or the transaction sizes of sales of our mortgage loans may be limited, each of
which may have an adverse effect on the price we receive for our mortgage loans.

In the case of both securitizations and loan sales, compliance with Regulation AB will increase our cost of
doing business as we are required to develop systems and procedures to ensure that we do not violate any aspect
of these new requirements.

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Risks Related To Our Status As A REIT

We may not pay dividends to stockholders.

REIT  provisions  of  the  Internal  Revenue  Code  generally  require  that  we  annually  distribute  to  our
stockholders at least 90% of all of our taxable income, exclusive of the application of any tax loss carry forwards
that may be used to offset current period taxable income. These provisions restrict our ability to retain earnings and
thereby generate capital from our operating activities. We may decide at a future date to terminate our REIT status,
which would cause us to be taxed at the corporate levels and cease paying regular dividends. In addition, for any
year that we do not generate taxable income, we are not required to declare and pay dividends to maintain our REIT
status. For instance, due to losses incurred in 2000, we did not declare any dividends from November 2000 until
September 2001.

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To  date,  a  portion  of  our  taxable  income  and  cash  flow  has  been  attributable  to  our  receipt  of  dividend
distributions from the mortgage operations. The mortgage operations is not a REIT and is not, therefore, subject to
the  above-described  REIT  distribution  requirements.  Because  the  mortgage  operations  is  seeking  to  retain
earnings to fund the future growth of our mortgage operations business, IFC(cid:146)s board of directors, only comprised of
executive  officers  of  the  Company,  which  is  not  the  same  as  IMH(cid:146)s  board  of  directors,  may  decide  that  the
mortgage operations should cease making dividend distributions in the future. This would materially reduce the
amount  of  our  taxable  income  and  in  turn,  would  reduce  the  amount  we  would  be  required  to  distribute  as
dividends.

If we fail to maintain our REIT status, we may be subject to taxation as a regular corporation.

We believe that we have operated and intend to continue to operate in a manner that enables us to meet the
requirements for qualification as a REIT for federal income tax purposes. We have not requested, and do not plan to
request, a ruling from the Internal Revenue Service that we qualify as a REIT.

Moreover, no assurance can be given that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Our continued qualification as a REIT will depend on our satisfaction of certain
asset, income, organizational and stockholder ownership requirements on a continuing basis.

If  we  fail  to  qualify  as  a  REIT,  we  would  not  be  allowed  a  deduction  for  distributions  to  stockholders  in
computing our taxable income and would be subject to federal income tax at regular corporate rates. We also may
be subject to the federal alternative minimum tax. Unless we are entitled to relief under specific statutory provisions,
we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
Therefore,  if  we  lose  our  REIT  status,  the  funds  available  for  distribution  to  stockholders  would  be  reduced
substantially for each of the years involved. Failure to qualify as a REIT could adversely affect the value of our
securities.

On  October  22,  2004,  President  Bush  signed  the  American  Jobs  Creation  Act  of  2004  (the  (cid:145)(cid:145)2004  Act(cid:146)(cid:146)),
which, among other things, amends the rules applicable to REIT qualification. In particular, the 2004 Act provides
that a REIT that fails the quarterly asset tests for one or more quarters will not lose its REIT status as a result of such
failure if either (i) such failure is regarded as a de minimis failure under standards set out in the 2004 Act, or (ii) the
failure is greater than a de minimis failure but is attributable to reasonable cause and not willful neglect. In the case
of a greater than de minimis failure, however, the REIT must pay a tax and must remedy the failure within 6 months
of the close of the quarter in which such failure occurred. In addition, the 2004 Act provides relief for failures of other
tests imposed as a condition of REIT qualification, as long as such failures are attributable to reasonable cause and
not willful neglect. A REIT would be required to pay a penalty of $50,000, however, in the case of each such failure.
The above-described changes apply for taxable years of REITs beginning after the date of enactment.

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Potential  characterization  of  distributions  or  gain  on  sale  as  unrelated  business  taxable  income  to
tax-exempt investors.

If (1) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (2) we are a
(cid:145)(cid:145)pension-held REIT,(cid:146)(cid:146) (3) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or
(4) the residual REMIC interests we buy generate (cid:145)(cid:145)excess inclusion income,(cid:146)(cid:146) then a portion of the distributions to
and, in the case of a stockholder described in (3), gains realized on the sale of common stock by such tax-exempt
stockholder  may  be  subject  to  Federal  income  tax  as  unrelated  business  taxable  income  under  the  Internal
Revenue Code.

Classification as a taxable mortgage pool could subject us or certain of our stockholders to increased
taxation.

If we have borrowings with two or more maturities and, (1) those borrowings are secured by mortgages or
mortgage-backed securities and, (2) the payments made on the borrowings are related to the payments received on
the underlying assets, then the borrowings and the pool of mortgages or mortgage-backed securities to which such
borrowings relate may be classified as a taxable mortgage pool under the Internal Revenue Code. If any part of our
Company were to be treated as a taxable mortgage pool, then our REIT status would not be impaired, but a portion

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of  the  taxable  income  we  recognize  may,  under  regulations  to  be  issued  by  the  Treasury  Department,  be
characterized as (cid:145)(cid:145)excess inclusion(cid:146)(cid:146) income and allocated among our stockholders to the extent of and generally in
proportion to the distributions we make to each stockholder. Any excess inclusion income would:

(cid:127) not be allowed to be offset by a stockholder(cid:146)s net operating losses;

(cid:127) be subject to a tax as unrelated business income if a stockholder were a tax-exempt stockholder;

(cid:127) be subject to the application of federal income tax withholding at the maximum rate (without reduction for
any otherwise applicable income tax treaty) with respect to amounts allocable to foreign stockholders; and

(cid:127) be taxable (at the highest corporate tax rate) to us, rather than to our stockholders, to the extent the excess
inclusion income relates to stock held by disqualified organizations (generally, tax-exempt companies not
subject to tax on unrelated business income, including governmental organizations).

Based on our analysis and advice of our tax counsel, we believe our existing financing arrangements do not

create a taxable mortgage pool.

We may be subject to possible adverse consequences as a result of limits on ownership of our shares.

Our charter limits ownership of our capital stock by any single stockholder, including a corporation, to 9.5%
of our outstanding shares unless waived by the board of directors. By subjecting entities, such as corporations, to
the ownership limitation, our charter is more restrictive than the requirements of the federal tax laws applicable to
REITs,  and  thereby  serves  the  dual  purpose  of  helping  us  maintain  our  REIT  status  and  protecting  us  from  an
unwanted  takeover.  Our  board  of  directors  may  increase  the  9.5%  ownership  limit.  In  addition,  to  the  extent
consistent with the REIT provisions of the Internal Revenue Code, our board of directors may, pursuant to our
articles of incorporation, waive the 9.5% ownership limit for a stockholder or purchaser of our stock. In order to
waive the 9.5% ownership limit our board of directors must require the stockholder requesting the waiver to provide
certain representations to the Company to ensure compliance with the REIT provisions of the Internal Revenue
Code. Our charter also prohibits anyone from buying shares if the purchase would result in us losing our REIT
status. This could happen if a share transaction results in fewer than 100 persons owning all of our shares or in five
or fewer persons, applying certain broad attribution rules of the Internal Revenue Code, owning more than 50% (by
value) of our shares. If you or anyone else acquires shares in excess of the ownership limit or in violation of the
ownership requirements of the Internal Revenue Code for REITs, we:

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(cid:127) will consider the transfer to be null and void;

(cid:127) will not reflect the transaction on our books;

(cid:127) may institute legal action to enjoin the transaction;

(cid:127) will not pay dividends or other distributions with respect to those shares;

(cid:127) will not recognize any voting rights for those shares;

(cid:127) may redeem the shares; and

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(cid:127) will consider the shares held in trust for the benefit of a charitable beneficiary as designated by us.

The trustee shall sell the shares held in trust and the owner of the excess shares will be entitled to the lesser of:

(a)

the price paid by the owner;

(b)

if  the  owner  did  not  purchase  the  excess  shares,  the  closing  price  for  the  shares  on  the  national
securities exchange on which IMH is listed on the day of the event causing the shares to be held in trust;
or

(c)

the price received by the trustee from the sale of the shares.

Notwithstanding the above, our charter contains a provision which provides that nothing in the charter will

preclude the settlement of transactions entered into through the facilities of the NYSE.

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Limitations on acquisition and change in control ownership limit.

Our charter and bylaws, and Maryland corporate law contain a number of provisions that could delay, defer,
or prevent a transaction or a change of control of us that might involve a premium price for holders of our capital
stock or otherwise be in their best interests by increasing the associated costs and timeframe necessary to make an
acquisition, making the process for acquiring a sufficient number of shares of our capital stock to effectuate or
accomplish such a change of control longer and more costly. In addition, investors may refrain from attempting to
cause a change in control because of the difficulty associated with such a venture because of the limitations.

Our share prices have been and may continue to be volatile.

Risks Related To Ownership of Our Securities

Historically, the market price of our securities has been volatile. The market price of our securities is likely to

continue to be highly volatile and could be significantly affected by factors including:

(cid:127) the amount of dividends paid;

(cid:127) availability of liquidity in the securitization market;

(cid:127) loan sale pricing;

(cid:127) termination of financing agreements;

(cid:127) margin calls by warehouse lenders or changes in warehouse lending rates;

(cid:127) unanticipated fluctuations in our operating results;

(cid:127) prepayments on mortgages;

(cid:127) valuations of securitization related assets;

(cid:127) the effect of the restatement of our financial condition and results of operations;

(cid:127) mark to market adjustments related to the fair value of derivatives;

(cid:127) cost of funds; and

(cid:127) general market conditions.

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During 2005, our common stock reached an intra-day high sales price of $23.49 on February 2, and closed at
the low sales price of $9.00 on October 11. In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the securities of mortgage REIT companies such as ours. These
broad market fluctuations have adversely affected and may continue to adversely affect the market price of our
common stock. If our results of operations fail to meet the expectations of securities analysts or investors in a future
quarter,  the  market  price  of  our  securities  could  also  be  materially  adversely  affected  and  we  may  experience
difficulty in raising capital.

Sales of additional common or preferred stock may adversely affect its market price.

To sustain our growth strategy we intend to raise capital through the sale of equity. The sale or the proposed
sale of substantial amounts of our common stock or preferred stock in the public market could materially adversely
affect  the  market  price  of  our  common  stock  or  other  outstanding  securities.  We  do  not  know  the  actual  or
perceived effect of these offerings, the timing of these offerings, the potential dilution of the book value or earnings
per share of our securities then outstanding and the effect on the market price of our securities then outstanding.
For  example,  during  2005,  the  Company  issued  shares  of  common  and  preferred  stock  which  resulted  in  net
proceeds of approximately $4.2 million and $1.6 million, respectively.

We also have shares reserved for future issuance under our stock plans. The sale of a large amount of shares
or the perception that such sales may occur, could adversely affect the market price for our common stock or other
outstanding securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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30MAR200614310138

 
 
 
ITEM 2. PROPERTIES

Our primary executive and administrative offices are located at 1401 Dove Street, Newport Beach, California
where we have a premises lease expiring in May of 2008 to use approximately 74,000 square feet of office space.
We also executed premises leases located at 1500 Quail Street, Newport Beach, California expiring in September
of 2008 to use approximately 15,000 square feet of office space and 1301 Dove St., Newport Beach, California
expiring in August of 2008 to use approximately 16,000 square feet of office space to accommodate expansion. In
addition, the mortgage operations have mortgage production offices located in various states with premises lease
terms ranging from month to month or one to two years.

On March 4, 2005, we entered into a new lease for our business and corporate facilities. The lease is for a
term of ten years and commences on the date construction of the premises is complete or the date we commence
business operations on the premises. We have two options to extend the term for five-year periods for each option.
The premises are to be located at 19500 Jamboree Road, Newport Beach, California and are anticipated to be
ready  for  business  June  of  2006.  The  premises  will  consist  of  a  seven-story  building  containing  approximately
200,000  square  feet  with  an  initial  annual  rental  rate  of  $31.80  per  square  foot,  which  amount  increases  every
30 months. We have options for additional space in the complex if needed. We anticipate moving our entire Orange
County operations to this facility in June 2006.

ITEM 3. LEGAL PROCEEDINGS

Mortgage-related Litigation

On June 27, 2000, a complaint captioned Michael P. and Shellie Gilmor v. Preferred Credit Corporation and
Impac Funding Corporation, et al. was filed in the Circuit Court for Clay County, Missouri, as a purported class
action lawsuit alleging that the defendants violated Missouri(cid:146)s Second Loans Act and Merchandising Practices Act.
In July 2001, the Missouri complaint was amended to include IMH and other Impac-related entities. A plaintiffs
class was certified on January 2, 2003. On June 22, 2004, the court issued an order to stay all proceedings pending
the outcome of an appeal in a similar case in the Eighth Circuit.

On February 3, 2004, a complaint captioned James and Jill Baker v. Century Financial Group, Inc, et al was
filed in the Circuit Court of Clay County, Missouri, as a purported class action lawsuit alleging that the defendants
violated Missouri(cid:146)s Second Loan Act and Merchandising Practices Act.

On  October  2,  2001,  a  complaint  captioned  Deborah  Searcy,  Shirley  Walker,  et  al.  v.  Impac  Funding
Corporation, Impac Mortgage Holdings, Inc. et. al. was filed in the Wayne County Circuit Court, State of Michigan,
as a purported class action lawsuit alleging that the defendants violated Michigan(cid:146)s Secondary Mortgage Loan Act,
Credit Reform Act and Consumer Protection Act. A motion to dismiss an amended complaint has been filed, but not
yet ruled upon.

On July 31, 2003, a purported class action complaint captioned Frazier, et al v. Impac Funding Corp., et al,
was filed in federal court in Tennessee. The causes of action in the action allege violations of Tennessee(cid:146)s usury
statute and Consumer Protection Act. A motion to dismiss the complaint was filed and not yet ruled upon. The court
agreed to administratively close the case on April 5, 2004 pending an appeal in a similar case. On April 29, 2004, the
court issued its order administratively closing the case.

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On November 25, 2003, a complaint captioned Michael and Amber Stallings v. Empire Funding Home Loan
Owner Trust 1997-3; U.S. Bank, National Association; and Wilmington Trust Company was filed in the United States
District Court for the Western District of Tennessee, as a purported class action lawsuit alleging that the defendants
violated Tennessee predatory lending laws governing second mortgage loans. The complaint further alleges that
certain assignees of mortgage loans, including two Impac-related trusts, should be included as defendants in the
lawsuit. Like the Frazier matter this case was administratively closed on April 29, 2004 pending an appeal in a
similar case.

All of the above purported class action lawsuits are similar in nature in that they allege that the mortgage loan
originators  violated  the  respective  state(cid:146)s  statutes  by  charging  excessive  fees  and  costs  when  making  second
mortgage loans on residential real estate. The complaints allege that IFC was a purchaser, and is a holder, along
with other affiliated entities, of second mortgage loans originated by other lenders. The plaintiffs in the lawsuits are
seeking  damages  that  include  disgorgement  of  interest  paid,  restitution,  rescission,  actual  damages,  statutory

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30MAR2006121

 
 
 
damages,  exemplary  damages,  pre-judgment  interest  and  punitive  damages.  No  specific  dollar  amount  of
damages is specified in the complaints.

We  believe  that  we  have  meritorious  defenses  to  the  above  claims  and  intend  to  defend  these  claims
vigorously. Nevertheless, litigation is uncertain and we may not prevail in the lawsuits and can express no opinion as
to its ultimate outcome. An adverse judgment in any of these matters could have a material adverse affect on us;
however,  no  judgment  in  any  matter  is  probable  to  occur  nor  is  any  amount  of  any  loss  from  such  judgment
reasonably estimable at this time.

Securities Litigation

From January 10, 2006 through February 28, 2006, six purported class action complaints have been filed
against IMH and its senior officers and all but one of its directors by the following plaintiffs, individually and on
behalf of all others similarly situated, in the U.S. District Court, Central District of California: Earl Schriver, Jr. (filed
January 10, 2006), Jeff Dayton (filed January 13, 2006), Joseph Mathieu (filed January 18, 2006), Fred Safir and
Wilma Libar (filed January 26, 2006), Ronald Kelner (filed February 1, 2006), and Miroslav Bardos (filed February 9,
2006). The complaints, which are brought on behalf of persons who acquired IMH(cid:146)s common stock during the
period  of  May  13,  2005  through  August  9,  2005,  allege  claims  against  all  defendants  for  violations  under
Section 10(b) of the Securities Exchange Act of 1934 (the (cid:145)(cid:145)Exchange Act(cid:146)(cid:146)) and Rule 10b-5 thereunder, and claims
against  the  individual  defendants  for  violations  of  Section  20(a)  of  the  Exchange  Act.  Plaintiffs  claim  that  the
defendants  caused  IMH(cid:146)s  common  stock  to  trade  at  artificially  inflated  prices  through  false  and  misleading
statements related to the Company(cid:146)s financial condition and future prospects and that the individual defendants
improperly sold holdings. The complaints seek compensatory damages for all damages sustained as a result of the
defendants(cid:146) actions, including interest, reasonable costs and expenses, and other relief as the court may deem just
and proper.

From January 27, 2006 through February 28, 2006, seven shareholder derivative actions have been filed
against the Company and all of its senior officers and directors by the following parties, derivatively on behalf of
nominal defendant IMH, four of which are filed in the U.S. District Court, Central District of California and three of
which are filed in Orange County Superior Court: Green Meadows Partners, LLP (filed January 27, 2006), Louis
Misarti  and  Anne  Misarti  (filed  February  1,  2006),  Miguel  Portillo  (filed  February  6,  2006),  Brian  Dawley  (filed
February 14, 2006), Michael Eleftheriou (filed February 21, 2006), Henry J. Krsjak (filed February 21, 2006) and
Ronald A. Gustafson (filed February 24, 2006). The actions allege claims for a shareholder derivative complaint for
breach  of  fiduciary  duties  for  insider  selling  and  misappropriation  of  information,  abuse  of  control,  gross
mismanagement,  waste  of  corporate  assets,  unjust  enrichment  and  violation  of  California  Corporations  Code
related to false and misleading statements regarding the Company(cid:146)s business and future prospects, and in the case
of one complaint, related to materially deficient internal controls and illegal stock sales. The shareholder derivative
actions generally seek, in favor of the Company, damages sustained as a result of the individual defendants(cid:146) breach
of fiduciary duties and the other causes of action, and, in the case of two derivative actions, in an amount equal to
three times the difference between prices at which stock was sold and the market value at which shares would have
been sold had the alleged non-public information been publicly disseminated; a constructive trust for the stock
proceeds; equitable and injunctive relief; disgorgement of all profits, benefits and other compensation obtained by
defendants; costs and disbursements of the action including attorneys(cid:146), accountants(cid:146) and experts(cid:146) fees and further
relief as the court deems just and proper. Furthermore, one derivative action is seeking relief directing all necessary
actions to reform and improve corporate governance and internal procedures to comply with applicable law; and
another derivative action includes punitive damages.

We  believe  that  we  have  meritorious  defenses  to  the  above  claims  and  intend  to  defend  these  claims
vigorously. Nevertheless, litigation is uncertain and we may not prevail in the lawsuits and can express no opinion as
to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on us.

Other Litigation

We are a party to other litigation and claims which are normal in the course of our operations. While the
results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such
matters will not have a material adverse effect on our financial condition or results of operations.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the security holders to be voted on during the fourth quarter of 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT(cid:146)S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the NYSE under the symbol (cid:145)(cid:145)IMH.(cid:146)(cid:146)

The following table summarizes the high, low and closing sales prices for our common stock for the periods

indicated:

High

2005

Low

Close

High

2004

Low

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

$

23.49 $
22.32
19.11
12.49

16.00 $
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11.15
9.00

19.18 $
18.65
12.26
9.41

27.20 $
26.73
27.91
27.19

18.25 $
17.15
21.07
20.50

Close

27.20
22.52
26.30
22.67

On March 1, 2006, the last reported sale price of our common stock on the NYSE was $8.42 per share. As of
March 1, 2006, there were 595 holders of record, including holders who are nominees for an undetermined number
of beneficial owners, of our common stock.

Common Stock Dividend Distributions. To maintain our qualification as a REIT, we intend to make annual
distributions to stockholders at an amount that maintains our REIT status in accordance with the Internal Revenue
Code, which may not necessarily equal net earnings as calculated in accordance with GAAP. Our dividend policy is
subject to revision at the discretion of the board of directors. All distributions in excess of those required to maintain
our REIT status will be made at the discretion of the board of directors and will depend on our taxable income,
financial  condition  and  other  factors  as  the  board  of  directors  deems  relevant.  The  board  of  directors  has  not
established a minimum distribution level. Distributions to stockholders will generally be taxable as ordinary income
or qualified income, which is subject to a 15% tax rate, although a portion of such distributions may be designated
by us as capital gain or may constitute a tax-free return of capital. We annually furnish to each of our stockholders a
statement setting forth distributions paid during the preceding year and their characterization as ordinary income,
qualified income, capital gain or return of capital.

The following table presents our common stock dividend record dates and per share dividend amounts for

the quarters indicated:

Quarter Ended

March 31, 2004
June 30, 2004
September 30, 2004
December 31, 2004
March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005

Stockholder
Record
Date

Per Share
Dividend
Amount

$

April 5, 2004
July 6, 2004
October 8, 2004
December 15, 2004
April 8, 2005
July 8, 2005
October 7, 2005
January 17, 2006

0.65
0.75
0.75
0.75
0.75
0.75
0.45
0.20

Repurchases of Common Stock. On October 13, 2005, the board of directors approved the repurchase of
up to 5.0 million shares of our common stock. No shares were repurchased during the period from October 13, 2005
through December 31, 2005.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The  following  selected  consolidated  statements  of  operations  data  for  each  of  the  years  in  the  five-year
period ended December 31, 2005 and the consolidated balance sheet data as of the year end for each of the years
in the five-year period ended December 31, 2005 were derived from the audited consolidated financial statements.
Such selected financial data should be read in conjunction with the consolidated financial statements and the notes
to the consolidated financial statements starting on page F-1 and with Item 7. (cid:145)(cid:145)Management(cid:146)s Discussion and
Analysis of Financial Condition and Results of Operations.(cid:146)(cid:146)

IMPAC MORTGAGE HOLDINGS, INC.
(amounts in thousands, except per share data)

For the year ended December 31,

2005

2004

2003

2002

2001

Statement of Operations Data:
Net interest income:
Interest income
Interest expense

Net interest income
Provision for loan losses

Net interest income after provision for loan

losses

Non-interest income:

Gain on sale of loans
Other income
Realized gain (loss) from derivative instruments
Change in fair value of derivative instruments
Equity in net earnings of IFC

Total non-interest income (expense)

Non-interest expense:
Personnel expense
Other expense
General and administrative and other expense
Amortization of deferred charge
Impairment on investment securities available-

for-sale

(Gain) loss on sale of real estate owned

$ 1,251,960 $
1,047,209

755,616 $
412,533

385,716 $
209,009

230,267 $
127,801

141,563
108,183

204,751
30,563

343,083
30,927

176,707
24,853

102,466
19,848

33,380
16,813

174,188

312,156

151,854

82,618

16,567

-
2,864
(28,361)
(22,141)
11,299

(36,339)

-
5,295
(5,214)
(28,177)
19,499

(8,597)

39,509
13,888
22,595
144,932
-

220,924

77,508
26,327
25,384
27,174

-
(1,888)

24,729
10,948
(91,881)
96,575
-

40,371

60,420
17,392
17,097
16,212

1,120
(3,901)

37,523
9,995
(47,847)
31,826
11,537

43,034

25,250
11,072
7,660
5,658

298
(2,632)

47,306

1,856
1,898
985
-

1,039
154

5,932

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Total non-interest expense

154,505

108,340

Earnings before extraordinary item and cumulative

effect of change in accounting principle
Extraordinary item
Income tax benefit
Cumulative effect of change in accounting

240,607
-
(29,651)

244,187
-
(13,450)

147,582
-
(1,397)

40,347
-
-

principle

Net earnings (loss)

-

-

-

-

$

270,258 $

257,637 $

148,979 $

40,347 $

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Net earnings per share before extraordinary item
and cumulative effect of change in accounting
principle:
Basic

Diluted

Net earnings per share:

Basic

Diluted

Dividends declared per share

$

$

$

$

$

3.38 $

3.35 $

3.38 $

3.35 $

1.95 $

3.79 $

3.72 $

3.79 $

3.72 $

2.90 $

2.94 $

2.88 $

2.94 $

2.88 $

2.05 $

1.01 $

0.99 $

1.01 $

0.99 $

1.76 $

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1,192
1,669
1,686
-

2,217
(1,931)

4,833

3,137
(1,006)
-

(4,313)

(2,182)

0.07

0.11

(0.16)

(0.16)

0.69

 
 
 
As of December 31,

2005

2004

2003 (1)

2002

2001

Balance Sheet Data:
CMO collateral and mortgages held-for-investment $24,654,360 $21,895,592 $ 9,296,893 $ 5,215,731 $ 2,242,036
300,571
Finance receivables
-
Mortgages held-for-sale
210,134
Investments in and advances to IFC (1)
2,842,677
Total assets
2,139,818
CMO borrowings
469,491
Reverse repurchase agreements
2,646,847
Total liabilities
195,830
Total stockholders(cid:146) equity

630,030
397,618
-
27,720,379 23,815,767 10,577,957
8,489,853
23,990,430 21,206,373
1,568,807
1,527,558
26,553,432 22,771,692 10,105,170
472,787
1,044,075

664,021
-
531,032
6,540,339
5,019,934
1,168,029
6,256,814
283,525

350,217
2,052,694
-

471,820
587,745
-

1,166,947

2,430,075

As of and for the year ended December 31,

2005

2004

2003

2002

2001

Operating Data:
Mortgage acquisitions and originations for the

year

Master servicing portfolio at year-end
Servicing portfolio at year-end

$22,310,603 $22,213,104 $ 9,525,121 $ 5,945,498 $ 3,203,559
5,568,740
28,448,507 28,404,008 13,919,694
1,754,366
1,402,100
1,690,800

8,694,474
2,653,414

2,208,433

(1)

On July 1, 2003, IMH purchased 100% of the outstanding shares of common stock of IFC. The purchase of IFC(cid:146)s
common stock combined with IMH(cid:146)s ownership of 100% of IFC(cid:146)s preferred stock resulted in the consolidation of
IFC from July 1, 2003 through December 31, 2003. Prior to July 1, 2003, IFC was a non-consolidated subsidiary of
IMH and 99% of the net earnings of IFC were reflected in IMH(cid:146)s financial statements as (cid:145)(cid:145)Equity in net earnings
(loss) of IFC.(cid:146)(cid:146)

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ITEM 7. MANAGEMENT(cid:146)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Management(cid:146)s  discussion  and  analysis  of  financial  condition  and  results  of  operations  contain  certain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities  Exchange  Act  of  1934.  Refer  to  Item  1.(cid:146)(cid:146)Business(cid:151)Forward-Looking  Statements(cid:146)(cid:146)  for  a  complete
description of forward-looking statements. All of our businesses actively work together to deliver comprehensive
mortgage and lending services to our correspondents, mortgage bankers and brokers, retail customers and capital
market investors through a wide array of mortgage loan programs using web-based technology and centralized
operations so that we can provide high levels of customer service at low per loan operating costs. We elect to be
taxed as a REIT for federal income tax purposes, which generally allows us to pass through income to stockholders
without payment of federal income tax at the corporate level. Our goal is to generate consistent and reliable income
for distribution to our stockholders primarily from the earnings of our core operating businesses, which include the
long-term  investment  operations,  mortgage  operations  and  warehouse  lending  operations.  Refer  to  Item  1.
(cid:145)(cid:145)Business(cid:146)(cid:146) for additional information on our businesses and operating segments.

Summary of 2005 Financial and Operating Results

(cid:127) Net earnings per diluted common share were $3.35 for 2005 as compared to net earnings per diluted

common share of $3.72 for 2004.

(cid:127) Estimated taxable income per diluted common share was $1.87 for 2005 as compared to actual taxable
income per diluted common share of $2.97 for 2004. See the (cid:145)(cid:145)Estimated Taxable Income available to IMH
Common Stockholders(cid:146)(cid:146) table for the calculation of taxable income.

(cid:127) Cash dividends paid for 2005 were $1.95 per common share as compared to $2.90 per common share for

2004.

(cid:127) Total assets as of December 31, 2005 were $27.7 billion compared to $23.8 billion as of prior year-end.

(cid:127) Book value per common share was $13.24 as of December 31, 2005 as compared to $11.80 as of prior

year-end primarily as a result of the increase in fair value of derivative instruments.

(cid:127) The mortgage operations acquired and originated approximately $22.3 billion of primarily non-conforming

Alt-A mortgages during 2005, as compared to $22.2 billion for 2004.

(cid:127) The long-term investment operations retained approximately $12.2 billion of primarily Alt-A mortgages and
originated $798.5 million of small-balance multi-family mortgages during 2005 compared to $16.9 billion
and $458.5 million, respectively, for 2004.

(cid:127) For 2005, the long-term investment operations securitized approximately $14.0 billion of mortgages as
CMO  transactions  to  finance  the  acquisition  and  origination  and  retention  of  Alt-A  and  multi-family
mortgages for long-term investment.

(cid:127) During 2005, the Company issued 363,700 shares of common stock which resulted in net proceeds of
$4.2 million; 71,200 shares of Series C preferred stock which resulted in net proceeds of $1.6 million, and
issued trust preferred securities, which resulted in net proceeds of $93.2 million.

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Critical Accounting Policies

We define critical accounting policies as those that are important to the portrayal of our financial condition
and  results  of  operations  and  require  estimates  and  assumptions  based  on  our  judgment  of  changing  market
conditions and the performance of our assets and liabilities at any given time. 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

30MAR200614310138

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that require the most complex and difficult judgments and that are particularly susceptible to significant change to
our financial condition and results of operations include the following:

(cid:127) allowance for loan losses;

(cid:127) derivative financial instruments;

(cid:127) securitization of financial assets as financing versus sale; and

(cid:127) amortization of loan premiums and securitization costs.

Allowance for Loan Losses

We  provide  an  allowance  for  loan  losses  for  mortgages  held  as  CMO  collateral,  finance  receivables  and
mortgages held-for-investment ((cid:145)(cid:145)loans provided for(cid:146)(cid:146)). In evaluating the adequacy of the allowance for loan losses,
management takes several items 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 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 allowance for loan losses. Management also recognizes that
there are qualitative factors that must be taken into consideration when evaluating and measuring inherent loss in
our loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower(cid:146)s
ability to pay, changes in value of collateral, projected loss curves, political factors and industry statistics. Specific
valuation allowances may be established for loans that are deemed impaired, if default by the borrower is deemed
probable, and if the fair value of the loan or the collateral is estimated to be less than the gross carrying value of the
loan.  Actual  losses  on  loans  are  recorded  as  a  reduction  to  the  allowance  through  charge-offs.  Subsequent
recoveries of amounts previously charged off are credited to the allowance.

Derivative Financial Instruments

Loan Commitments

We enter into commitments to make loans whereby the interest rate on the loan is set prior to funding. We
enter commitments on an individual loan basis, referred to as an Interest Rate Lock Commitment (IRLC), and on a
bulk purchase basis, referred to as bulk purchase commitments (collectively referred to as (cid:145)(cid:145)loan commitments(cid:146)(cid:146)).
These loan commitments are considered to be derivatives and are recorded at fair value in the consolidated balance
sheets. The change in fair value of derivative instruments are recorded in the consolidated statements of operations
and  comprehensive  earnings.  Subsequent  to  the  April  1,  2004  issuance  of  Staff  Accounting  Bulletin  No.  105
(cid:145)(cid:145)Application of Accounting Principles to Loan Commitments(cid:146)(cid:146) (SAB 105), when measuring the fair value of interest
rate lock commitments, the amount of the expected servicing rights is not included in the valuation. The fair value is
calculated  and  adjusted  using  an  anticipated  fallout  factor  for  loan  commitments  that  are  not  expected  to  be
funded.

Unlike most other derivative instruments, there is no active market for the loan commitments that can be
used to determine their fair value. Consequently, we have developed a method for estimating the fair value of our
loan commitments. The fair value of the loan commitments is determined by calculating the change in market value
from  the  point  of  commitment  date  to  the  measurement  date  based  upon  changes  in  interest  rates  during  the
period, adjusted for an anticipated fallout factor for loan commitments that are not expected to fund. Under this fair
value methodology, the loan commitment has zero value on day one and all future value is the result of changes in
interest rates, exclusive of any inherent servicing value.

Forward Sale Commitments

The policy of recognizing the fair value of the loan commitments has the effect of recognizing a gain or loss on
the  related  mortgage  loans  based  on  changes  in  the  interest  rate  environment  before  the  mortgage  loans  are
funded and sold. As such, loan commitments expose us to interest rate risk. We mitigate such risk by entering into

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forward  sale  commitments,  such  as  mandatory  commitments  on  U.S.  Treasury  bonds  and  mortgage-backed
securities,  call  options  and  put  options.  These  forward  sale  commitments  are  treated  as  derivatives  under  the
provisions of SFAS No. 133, (cid:145)(cid:145)Accounting for Derivative Instruments and Hedging Activities(cid:146)(cid:146) (SFAS 133), with the
change in fair value of derivative instruments reported as such in the consolidated statement of operations.

The fair value of our forward sale commitments are generally based on market prices provided by dealers,

which make markets in these financial instruments.

Interest Rate Swaps, Caps, and Floors

Our primary objective is to limit the exposure to the variability in future cash flows attributable to the variability
of  one-month  LIBOR,  which  is  the  underlying  index  of  adjustable  rate  CMO  and  short-term  borrowings  under
reverse repurchase agreements. We also monitor on an ongoing basis the prepayment risks that arise in fluctuating
interest rate environments. Our interest rate risk management policies are formulated with the intent to offset the
potential adverse effects of changing interest rates on CMO and reverse repurchase borrowings.

To mitigate exposure to the effect of changing interest rates on cash flows on CMO and reverse repurchase
borrowings, we purchase derivative instruments primarily in the form of interest rate swap agreements (swaps) and,
to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). The swaps, caps
and floors are treated as derivatives under the provisions of SFAS 133, with changes in fair value of derivative
instruments reported as such in the consolidated statements of operations. Cash paid or received on swaps, caps
and floors is recorded as a current period expense or income as realized gain (loss) on derivative instruments in the
consolidated statements of operations.

The fair value of our interest rate swaps, caps, floors and other derivative transactions are generally based on

market prices provided by dealers, which make markets in these financial instruments.

Securitization of Financial Assets as Financing versus Sale

The mortgage operations recognize gains or losses on the sale of mortgages when the sales transaction
settles or upon the securitization of the mortgages when the risks of ownership have passed to the purchasing
party. Gains and losses may be increased or decreased by the amount of any servicing related premiums received
and costs associated with the acquisition or origination of mortgages. A transfer of financial assets in which control
is surrendered is accounted for as a sale to the extent that consideration other than a beneficial interest in the
transferred assets is received in the exchange. The long-term investment operations structure CMO securitizations
as  financing  arrangements  and  recognize  no  gain  or  loss  on  the  transfer  of  mortgage  assets.  The  CMO
securitization trusts do not meet criteria within SFAS No. 140, (cid:145)(cid:145)Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities(cid:146)(cid:146) (SFAS 140), to be qualifying special purpose entities, and further, are
considered variable interest entities under FASB Interpretation No. 46R (FIN 46R) and, therefore, are consolidated
by the long-term investment operations as the entities(cid:146) primary beneficiary. The mortgage operations generally
structure REMIC securitizations as sales and gains and losses are recognized. REMICs which do not meet the sale
criteria within SFAS 140 are accounted for as secured borrowing transactions and consolidated under FIN46R to
the  extent  the  Company  holds  a  residual  interest  and  thus  considered  the  primary  beneficiary.  Liabilities  and
derivatives  incurred  or  obtained  at  the  transfer  of  financial  assets  are  required  to  be  measured  at  fair  value,  if
practicable.  Also,  servicing  assets  and  other  retained  interests  in  the  transferred  assets  must  be  measured  by
allocating the previous carrying value between the asset sold and the interest retained, if any, based on their relative
fair values at the date of transfer. To determine the value of the securities and retained interest, management uses
certain  analytics  and  data  to  estimate  future  rates  of  prepayments,  prepayment  penalties  to  be  received,
delinquencies, defaults and default loss severity and their impact on estimated cash flows.

Amortization of Loan Premiums and Securitization Costs

In accordance with Statement of Financial Accounting Standard No. 91, (cid:145)(cid:145)Accounting for Nonrefundable Fees
and  Costs  Associated  with  Originating  or  Acquiring  Loans  and  Initial  Direct  Costs  of  Leases(cid:146)(cid:146)  ((cid:145)(cid:145)SFAS  91(cid:146)(cid:146)),  we
amortize the mortgage premiums, securitization costs, bond discounts, deferred gains/losses to interest income
over the estimated lives of the mortgages as an adjustment to yield of the mortgages. Amortization calculations

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include certain loan information including the interest rate, loan maturity, principal balance and certain assumptions
including expected prepayment rates. We estimate prepayments on a collateral-specific basis and consider actual
prepayment activity for the collateral pool. We also consider the current interest rate environment and the forward
market curve projections.

Compliance with Regulation AB

Our  securitization  program  represents  an  additional  source  of  liquidity.  We  currently  maintain  a  shelf
registration with the SEC relating to the issuance of securities secured by mortgage loans. In December 2004, the
SEC  adopted  Regulation  AB  relating  to  offerings  of  and  the  on-going  reporting  with  respect  to  asset-backed
securities ((cid:145)(cid:145)Regulation AB(cid:146)(cid:146)) which became effective January 1, 2006. We are required to comply with Regulation
AB  to  ensure  our  ability  to  utilize  securitization  as  a  source  of  liquidity.  Refer  to  the  (cid:145)(cid:145)BUSINESS(cid:151)Mortgage
Operations(cid:151)Regulation(cid:146)(cid:146) section of this Annual Report for further discussion about our securitization program. We
expect compliance with Regulation AB will increase the scope, complexity and cost of our reporting and disclosure
practices with respect to our securitization program.

Taxable Income

Estimated  taxable  income  available  to  common  stockholders  was  $142.9  million,  or  $1.87  per  diluted
common  share,  for  2005  as  compared  to  $202.9  million,  or  $2.97  per  diluted  common  share,  for  2004  and
$127.5  million,  or  $2.46  per  diluted  common  share,  for  2003.  To  maintain  our  REIT  status,  we  are  required  to
distribute a minimum of 90% of our annual taxable income to our stockholders. Because we pay dividends based
on taxable income, dividends may be more or less than net earnings. As such, we believe that the disclosure of
estimated  taxable  income  available  to  common  stockholders,  which  is  a  non-generally  accepted  accounting
principle, or (cid:145)(cid:145)GAAP,(cid:146)(cid:146) financial measurement, is useful information for our investors.

We paid total cash dividends of $1.95 per common share during 2005, $2.90 per common share during 2004
and  $2.53  per  common  share  during  2003,  which,  when  combined  with  available  tax  loss  carry-forwards  met
taxable income distribution requirements for each year. Distributions to stockholders will generally be taxable as
ordinary or qualified dividends, although such distributions may be designated as capital gains or a tax-free return
of capital. Under the Jobs and Growth Tax Relief Act of 2003, a portion of the total common stock dividends paid to
our stockholders during 2005 was the result of dividends paid from IFC to IMH which will be taxed as qualifying
dividends. IMH annually furnishes to each of its stockholders a statement setting forth tax characteristics. The 2005
dividend distribution characteristics are as follows: 77.1%, 20.3% and 2.6% ordinary income, qualifying dividends,
capital gains or return of capital, respectively.

Upon the filing of our 2004 tax return, we had a federal net operating tax loss carry-forward of $18.1 million,
which expires in the year 2020 and which may or may not be used to offset taxable income in 2005 or in subsequent
years. We expect to file our 2005 federal and state tax returns in September 2006 at which time changes to federal
net operating loss carry-forwards, if any, will be determined.

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Year Ended 2005 vs. Year Ended 2004

Estimated Taxable Income available to IMH Common Stockholders

Estimated taxable income available to IMH common stockholders excludes net earnings from IFC and its
subsidiaries  and  the  elimination  of  intercompany  loan  sale  transactions.  The  following  schedule  reconciles  net
earnings to estimated taxable income available to common stockholders of the REIT.

Net earnings
Adjustments to net earnings: (2)

Loan loss provision
Cash received from previously charged-off assets
Tax loss on sale of investment securities
Tax deduction for actual loan losses
Change in fair value of derivatives (3)
Dividends on preferred stock
Net earnings of IFC (4)
Equity in net earnings of IFC
Dividend from IFC (5)
Elimination of inter-company loan sales transactions (6)
Net miscellaneous adjustments

Estimated taxable income available to common

stockholders (7)

Estimated taxable income per diluted common share (7)

$

$

For the year ended December 31,

2005 (1)

2004

2003

$

270,258 $

257,637 $

148,979

30,563
-
-
(16,004)
(155,695)
(14,530)
(14,968)
-
32,850
10,429
-

30,927
-
-
(16,252)
(103,724)
(3,750)
(42,944)
-
37,000
44,048
-

24,853
(5,533)
(4,725)
(12,859)
(38,762)
-
(16,889)
(11,537)
31,385
12,339
215

142,903 $

202,942 $

127,466

1.87 $

2.97 $

2.46

51,779

Diluted weighted average common shares outstanding

76,277

68,244

(1)

(2)

(3)

(4)
(5)

(6)

(7)

Estimated taxable income includes estimates of book to tax adjustments and can differ from actual taxable income as
calculated  when  we  file  our  annual  corporate  tax  return.  Since  estimated  taxable  income  is  a  non-GAAP  financial
measurement,  the  reconciliation  of  estimated  taxable  income  available  to  common  stockholders  to  net  earnings  is
intended to meet the requirement of Regulation G as promulgated by the SEC for the presentation of non-GAAP financial
measurements.
Certain adjustments are made to net earnings in order to calculate taxable income due to differences in the way revenues
and expenses are recognized under the two methods. As an example, to calculate estimated taxable income, actual loan
losses are deducted; however, the calculation of net earnings using GAAP requires a deduction for estimated losses
inherent in our mortgage portfolios in the form of a provision for loan losses. To maintain our REIT status, we are required
to distribute a minimum of 90% of our annual taxable income to our stockholders.
The mark-to-market change for the valuation of derivatives at IMH is income or expense for GAAP financial reporting but
is not included as an addition or deduction for taxable income calculations.
Represents net earnings of IFC, a taxable REIT subsidiary, which may not necessarily equal taxable income.
Any dividends paid by IFC to IMH are prorated to IMH stockholders based on total dividends paid by IMH and are taxed
at the qualifying dividend tax rate. The IFC dividend distribution to IMH represents federal taxable income to IMH as
distributions  from  IFC  were  from  current  and  accumulated  earnings  and  profits  (E&P).  Based  on  estimates  as  of
December 31, 2005, the accumulated E&P is approximately $1.0 million. Any dividends paid to IMH by IFC in excess of
IFC(cid:146)s accumulated E&P would be recognized as return of capital by IMH to the extent of IMH(cid:146)s capital investment in IFC.
Any distributions by IFC in excess of IMH(cid:146)s capital investment in IFC would be taxed as capital gains.
Includes the effects to taxable income associated with the elimination of gains from inter company loan sales between
IFC and IMH, net of tax and the related amortization of the deferred charge.
Excludes the deduction for dividends paid and the availability of a deduction attributable to net operating loss carry-
forwards. As of December 31, 2004, the company has Federal net operating loss carry-forwards of $18.1 million that
expire in the year 2020.

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Estimated taxable income available to common shareholders decreased to $142.9 million for the year ended
2005  as  compared  to  $202.9  million  for  the  year  ended  2004.  The  decline  in  estimated  taxable  income  of
$60.0 million for 2005 as compared to 2004 was mainly attributable to:

(cid:127) a decline of $33.0 million in adjusted net interest margin at IMH, which includes the realized gain (loss) from

derivative instruments and excludes amortization of intercompany gains;

(cid:127) an increase in preferred dividends of $10.7 million;

(cid:127) an increase in operating expenses of $5.5 million; and

(cid:127) a decrease in the dividend from IFC of $4.1 million.

The decline in adjusted net interest margin at IMH of $33.0 million was the result of an increase in borrowing
costs of $641.4 million, offset by an increase in interest income of $493.9 million and an increase in the realized gain
(loss) from derivative instruments of $114.5 million.

Financial Condition and Results of Operations

Financial Condition

As of December 31,

2005

2004

Increase
(Decrease)

%
Change

CMO collateral
Mortgages held-for-investment
Finance receivables
Allowance for loan losses
Mortgages held-for-sale
Derivatives
Other assets

Total assets

$ 24,494,290
160,070
350,217
(78,514)
2,052,694
250,368
491,254

$ 21,308,906
586,686
471,820
(63,955)
587,745
95,388
829,177

$ 27,720,379

$ 23,815,767

CMO borrowings
Reverse repurchase agreements
Other liabilities

$ 23,990,430
2,430,075
132,927

$ 21,206,373
1,527,558
37,761

Total liabilities
Total stockholder(cid:146)s equity

26,553,432
1,166,947

22,771,692
1,044,075

$

$

$

3,185,384
(426,616)
(121,603)
(14,559)
1,464,949
154,980
(337,923)

3,904,612

2,784,057
902,517
95,166

3,781,740
122,872

15 %
(73)
(26)
23
249
162
(41)

16 %

13 %
59
252

17
12

Total liabilities and

stockholder(cid:146)s equity

$ 27,720,379

$ 23,815,767

$

3,904,612

16 %

Total assets grew 16% to $27.7 billion as of December 31, 2005 as compared to $23.8 billion as of prior
year-end, as the long-term investment operations retained $12.2 billion of primarily Alt-A mortgages and originated
$798.5 million of multi-family mortgages, substantially offset by approximately $10.3 billion in prepayments. The
retention  of  Alt-A  and  multi-family  mortgages  increased  the  long-term  mortgage  portfolio  to  $24.7  billion  as  of
December 31, 2005 as compared to $21.9 billion as of prior year-end. The acquisition and origination of mortgages
were primarily financed through the issuance of $14.0 billion of CMO transactions and net proceeds of $4.2 million
in new common equity and net proceeds of $1.7 million in new preferred equity.

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CMO collateral
Mortgages held-for-investment
Finance receivables
Allowance for loan losses
Mortgages held-for-sale
Derivatives
Other assets

Total assets

CMO borrowings
Reverse repurchase agreements
Other liabilities

Total liabilities
Total stockholder(cid:146)s equity

Increase
(Decrease)

%
Change

As of December 31,

$

2004

$ 21,308,906
586,686
471,820
(63,955)
587,745
95,388
829,177

2003

8,644,079
652,814
630,030
(38,596)
397,618
-
292,012

$ 12,664,827
(66,128)
(158,210)
(25,359)
190,127
95,388
537,165

$ 23,815,767

$ 10,577,957

$ 13,237,810

$ 21,206,373
1,527,558
37,761

$

8,489,853
1,568,807
46,510

$ 12,716,520
(41,249)
(8,749)

22,771,692
1,044,075

10,105,170
472,787

12,666,522
571,288

147 %
(10)
(25)
(66)
48
100
184

125 %

150 %
(3)
(19)

125
121

Total liabilities and stockholder(cid:146)s equity

$ 23,815,767

$ 10,577,957

$ 13,237,810

125 %

Total assets grew 125% to $23.8 billion as of December 31, 2004 as compared to $10.6 billion in 2003, as the
long-term investment operations retained $16.9 billion of primarily Alt-A mortgages and originated $458.5 million of
multi-family  mortgages.  The  retention  of  Alt-A  and  multi-family  mortgages  increased  the  long-term  mortgage
portfolio to $21.9 billion as of December 31, 2004 as compared to $9.3 billion as of the prior year-end.

The following table presents selected financial data for the periods indicated (dollars in thousands, except

per share data):

Book value per share
Return on average assets
Return on average equity
Assets to equity ratio
Debt to equity ratio
Allowance for loan losses as a percentage of loans

provided

Prior 12-month constant prepayment rate (CPR)
Total non-performing assets
Total non-performing assets to total assets
Mortgages owned 60+ days delinquent
60+ day delinquency of mortgages owned

As of and for the year ended
December 31,

2005

2004

2003

13.24 $
1.04%
24.66%
23.75:1
22.72:1

0.31%
37%
479,660 $
1.73%
733,348 $
3.12%

11.80 $
1.51%
35.62%
22.81:1
21.77:1

0.29%
29%
259,695 $
1.09%
381,290 $
1.74%

8.39
1.80%
41.59%
22.35:1
21.28:1

0.39%
28%
140,369
1.33%
175,313
1.79%

$

$

$

We believe that in order for us to generate positive cash flows and net earnings from our long-term mortgage

portfolio, we must successfully manage the following primary operational and market risks:

(cid:127) credit risk;

(cid:127) prepayment risk;

(cid:127) liquidity risk; and

(cid:127) interest rate risk.

Credit Risk. We manage credit risk by retaining high credit quality Alt-A mortgages and, to a lesser extent,
multi-family mortgages, also by adequately providing for loan losses and actively managing delinquencies and
defaults.  We  believe  that  by  improving  the  overall  credit  quality  of  our  long-term  mortgage  portfolio  we  can

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consistently generate stable future cash flow and net earnings. During 2005 we retained primarily Alt-A mortgages
with an original weighted average credit score of 694 and an original weighted average LTV ratio of 76%. Alt-A
mortgages are primarily first lien mortgages made to borrowers whose credit is generally within typical Fannie Mae
and  Freddie  Mac  guidelines,  but  that  have  loan  characteristics  that  make  them  non-conforming  under  those
guidelines. We primarily acquire non-conforming (cid:145)(cid:145)A(cid:146)(cid:146) or (cid:145)(cid:145)A-(cid:146)(cid:146) credit quality mortgages, collectively, Alt-A mortgages.
As of December 31, 2005, the original weighted average credit score of mortgages held as CMO collateral was 698
and the original weighted average LTV ratio was 75%. For additional information regarding the long-term mortgage
portfolio refer to Item 1. (cid:145)(cid:145)Long-Term Mortgage Portfolio,(cid:146)(cid:146) (cid:145)(cid:145)Note C(cid:151)CMO Collateral(cid:146)(cid:146) and (cid:145)(cid:145)Note D(cid:151)Mortgages
Held-for-Investment(cid:146)(cid:146) in the accompanying notes to the consolidated financial statements.

In  addition  to  retaining  mortgages  acquired  and  originated  by  our  mortgage  operations,  the  long-term
investment operations originated $798.5 million of multi-family mortgages through IMCC, which was formed to
primarily originate small balance and multi-family mortgages of high credit quality. IMCC primarily originates hybrid
ARMs with balances generally ranging from $500,000 to $5.0 million. Multi-family mortgages provide greater asset
diversification  on  our  balance  sheet  as  multi-family  mortgages  typically  have  longer  lives  than  residential
mortgages.  All  multi-family  mortgages  originated  during  2005  had  interest  rate  floors  with  prepayment  penalty
periods ranging from three to ten years.

We  believe  that  we  have  adequately  provided  for  loan  losses  as  allowance  for  loan  losses  increased  to
$78.5  million  as  of  December  31,  2005  as  compared  to  $64.0  million  as  of  prior  year-end.  During  2005,  the
long-term investment operations retained $12.2 billion of mortgages and originated $798.5 million of small-balance
multi-family mortgages for long-term investment. Actual loan charge-offs net of recoveries on mortgages held for
long-term investment increased to $16.0 million for 2005 as compared to $5.6 million for 2004 due to the increase
and seasoning of our loan portfolio. Included in the allowance at December 31, 2005 was a specific reserve of
$12.8 million for expected losses from hurricane affected areas. Additionally in 2004, we provided specific loan loss
allowances of $10.7 million for impaired repurchase advances by our warehouse lending operations.

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We monitor our servicers and sub-servicers to make sure that they perform loss mitigation, foreclosure and
collection functions according to our servicing guidelines. This includes an effective and aggressive collection effort
in order to minimize mortgages from becoming non-performing assets. However, when resolving issues related to
non-performing assets, including potential disposition, servicers and sub-servicers are required to take timely and
aggressive action. Servicers and sub-servicers are required to take collection action under various circumstances
in accordance with our servicing guidelines, which results in maximum financial benefit. This is accomplished by
either working with the borrower to bring the mortgage current or by foreclosing and liquidating the property. We
perform  ongoing  review  of  mortgages  that  display  weaknesses  and  believe  that  we  maintain  adequate  loss
allowance on our mortgages. When a borrower fails to make required payments on a mortgage and does not cure
the delinquency within 60 days, we generally record a notice of default and commence foreclosure proceedings. If
the mortgage is not reinstated within the time permitted by law for reinstatement, the property may then be sold at a
foreclosure  sale.  In  foreclosure  sales,  we  generally  acquire  title  to  the  property.  As  of  December  31,  2005,
mortgages that we owned included 3.12% of mortgages that were 60 days or more delinquent as compared to
1.74% as of year-end 2004 and 1.79% as of year-end 2003.

The  following  table  summarizes  mortgages  that  we  own,  including  CMO  collateral,  mortgages  held  for
long-term investment and mortgages held-for-sale, that were 60 or more days delinquent for the periods indicated
(in thousands):

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90 or more days delinquent
Foreclosures
Delinquent bankruptcies

Total 60 or more days delinquent

As of December 31,

2005

2004

2003

300,039 $
221,581
161,414
50,314

139,872 $
68,877
157,867
14,674

51,173
52,080
66,767
5,293

733,348 $

381,290 $

175,313

$

$

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Non-performing  assets  consist  of  mortgages  that  are  90  days  or  more  delinquent,  including  loans  in
foreclosure  and  delinquent  bankruptcies.  It  is  our  policy  to  place  a  mortgage  that  is  categorized  as  held  for
investment  on  our  financial  statements  on  non-accrual  status  when  it  becomes  90  days  delinquent  and  any
previously accrued interest will be reversed from revenue. When real estate is acquired in settlement of loans, or
other real estate owned, the mortgage is written-down to a percentage of the property(cid:146)s appraised value or broker(cid:146)s
price opinion less anticipated selling costs. As of year-end 2005, non-performing assets as a percentage of total
assets was 1.73% compared to 1.09% as of year-end 2004 and 1.33% as of year-end 2003.

The  following  table  summarizes  mortgages  that  we  own,  including  CMO  collateral,  mortgages  held  for
long-term  investment  and  mortgages  held-for-sale,  that  were  non-performing  for  the  periods  indicated  (in
thousands):

As of December 31,

2005

2004

2003

90 or more days delinquent, foreclosures

and delinquent bankruptcies

Other real estate owned

Total non-performing assets

$

$

433,309 $
46,351

241,418 $
18,277

479,660 $

259,695 $

124,140
16,229

140,369

Prepayment Risk. Mortgage industry evidence suggests that the increase in home appreciation rates and
lower payment option mortgage products over the last three years was a significant factor affecting Alt-A borrowers
refinancing decisions during 2004 and 2005. Mortgage prepayment rates accelerated during the latter part of 2004
and continued through the fourth quarter of 2005. It appears that borrowers are more willing to pay the penalties in
order to cash out or obtain lower monthly payments by refinancing into other mortgage products. The Company
uses prepayment penalties as a method of reducing prepayment risk.

During 2005, 71% of Alt-A mortgages acquired by the long-term investment operations from the mortgage
operations had prepayment penalty features ranging from six-months to five years, and as of December 31, 2005,
76% of mortgages held as CMO collateral had prepayment penalties. As of December 31, 2005, the twelve-month
CPR of mortgages held as CMO collateral was 37% as compared to a 29% twelve-month CPR as of December 31,
2004 and a 28% twelve-month CPR as of December 31, 2003. CPR increased during 2005 as compared to 2004
even  as  short-term  interest  rates  increased  200  basis  points,  and  resulted  in  an  increase  in  amortization  of
premiums during 2005. Prepayment penalties are charged to borrowers for mortgages that are repaid early and
recorded as interest income on our consolidated financial statements. Interest income from prepayment penalties
helps offset additional amortization of loan premiums and securitization costs. During 2005 prepayment penalties
received from borrowers was recorded as interest income and increased the yield on average mortgage assets by
16 basis points as compared to 6 basis points for 2004.

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Liquidity Risk. We employ a leveraging strategy to increase assets by financing our long-term mortgage
portfolio primarily with CMO borrowings, reverse repurchase agreements and capital, then using cash proceeds to
acquire additional mortgage assets. We retain ARMs and FRMs that are acquired and originated from the mortgage
operations  and  finance  the  acquisition  of  those  mortgages,  during  this  accumulation  period,  with  reverse
repurchase agreements. After accumulating a pool of mortgages, generally between $200 million and $2.5 billion,
we securitize the mortgages in the form of CMOs. Our strategy is to sell or securitize our mortgages every 15 to
45  days  in  order  to  reduce  the  accumulation  period  that  mortgages  are  outstanding  on  short-term  reverse
repurchase facilities, which reduces our exposure to margin calls on these facilities. CMO borrowings are classes of
bonds that are sold to investors of mortgage-backed securities and as such are not subject to margin calls. In
addition, CMOs generally require a smaller initial cash investment as a percentage of mortgages financed than does
interim reverse repurchase financing. For additional information regarding financing refer to Item 1. (cid:145)(cid:145)(cid:151)Financing.(cid:146)(cid:146)

Because of the historically favorable loss rates of our Alt-A mortgages, we have received favorable credit
ratings on our CMO borrowings from credit rating agencies, which has increased the percentage of bonds issued
and reduced our required initial capital investment. The ratio of total assets to total equity, or (cid:145)(cid:145)leverage ratio,(cid:146)(cid:146) was
23.75 to 1 as of December 31, 2005 as compared to 22.81 to 1 as of prior year-end. This use of leverage at these
historical levels allows us to grow our balance sheet by efficiently using available capital. We continually monitor our

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leverage ratio and liquidity levels to insure that we are adequately protected against adverse changes in market
conditions. For additional information regarding liquidity refer to (cid:145)(cid:145)(cid:151)Liquidity and Capital Resources.(cid:146)(cid:146)

Interest Rate Risk. Refer to Item 7A. (cid:145)(cid:145)Quantitative and Qualitative Disclosures About Market Risk.(cid:146)(cid:146)

Results of Operations

Condensed Statements of Operations Data
(in thousands, except per share data)

For the Year Ended December 31,

2005

2004

(Decrease) Change

Increase

%

Interest income
Interest expense

Net interest income
Provision for loan losses

Net interest income after provision

for loan losses
Total non-interest income
Total non-interest expense
Income tax benefit

Net earnings

Net earnings per share - diluted

Dividends declared per common share

$

$

$

$

1,251,960 $
1,047,209

755,616 $
412,533

204,751
30,563

174,188
220,924
154,505
(29,651)

343,083
30,927

312,156
40,371
108,340
(13,450)

496,344
634,676

(138,332)
(364)

(137,968)
180,553
46,165
(16,201)

66 %

154

(40)
(1)

(44)
447
43
(120)

270,258 $

257,637 $

12,621

5 %

3.35 $

1.95 $

3.72 $

2.90 $

(0.37)

(0.95)

(10)%

(33)%

Condensed Statements of Operations Data
(in thousands, except per share data)

Interest income
Interest expense

Net interest income
Provision for loan losses

Net interest income after provision

for loan losses
Total non-interest income
Total non-interest expense
Income tax benefit

Net earnings

Net earnings per share - diluted

Dividends declared per common share

Net Interest Income

For the Year Ended December 31,

2004

2003

(Decrease) Change

Increase

%

$

755,616 $
412,533

385,716 $
209,009

343,083
30,927

312,156
40,371
108,340
(13,450)

176,707
24,853

151,854
43,034
47,306
(1,397)

369,900
203,524

166,376
6,074

160,302
(2,663)
61,034
(12,053)

$

$

$

257,637 $

148,979 $

108,658

3.72 $

2.90 $

2.88 $

2.05 $

0.84

0.85

96 %
97

94
24

106
(6)
129
(863)

73 %

29 %

41 %

Net  interest  income  is  primarily  derived  from  interest  income  on  mortgage  assets  which  include  CMO
collateral, mortgages held-for-investment, mortgages held-for-sale, finance receivables and investment securities
available-for-sale, or collectively, (cid:145)(cid:145)mortgage assets,(cid:146)(cid:146) less interest expense from interest paid on borrowings on

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mortgage  assets,  which  include  CMO  borrowings,  reverse  repurchase  agreements  and  borrowings  secured  by
investment securities available-for-sale. Net interest income also includes (1) amortization of acquisition costs on
mortgages acquired from the mortgage operations, (2) accretion of loan discounts, which primarily represents the
amount allocated to mortgage servicing rights when they are sold to third parties and mortgages are transferred to
the  long-term  investment  operations  from  the  mortgage  operations  and  retained  for  long-term  investment,
(3) amortization of CMO securitization expenses and, to a lesser extent, (4) amortization of CMO bond discounts.

The following table summarizes average balance, interest and weighted average yield on mortgage assets

and borrowings on mortgage assets for the periods indicated (dollars in thousands):

For the year ended December 31,

2005

2004

2003

Average
Balance

Interest

Yield

Average
Balance

Interest

Yield

Average
Balance

Interest

Yield

MORTGAGE ASSETS

Subordinated securities

collateralized by
mortgages

Mortgages held as CMO

collateral (1)

Mortgages held-for-

investment and held-for-
sale

Finance receivables

Total mortgage assets\

interest income

BORROWINGS

CMO borrowings
Reverse repurchase

agreements

Borrowings secured by

investment securities (2)

Total borrowings on

mortgage assets\interest
expense

Net Interest Spread (3)
Net Interest Margin (4)

Net Interest Income on
Mortgage Assets
Less: Accretion of loan

discounts (5)

Adjusted by net cash

(payments) receipts on
derivatives (6)

Adjusted Net Interest

Margin (7)

Effect of amortization of
loan premiums and
securitization costs (8)

$

39,054 $

1,656 4.24% $

27,937 $

3,764 13.47% $

31,479 $

3,839 12.20%

23,132,083

1,061,712 4.59% 14,283,347

618,771 4.33%

6,620,727

317,434 4.79%

2,587,614
352,833

163,087 6.30%
20,332 5.76%

1,837,347
510,899

105,742 5.76%
25,018 4.90%

633,474
557,553

34,580 5.46%
28,969 5.20%

$ 26,111,584 $ 1,246,787 4.77% $ 16,659,530 $

753,295 4.52% $ 7,843,233 $

384,822 4.91%

$ 22,721,309 $

919,732 4.05% $ 14,072,852 $

354,547 2.52% $ 6,445,968 $

174,199 2.70%

2,730,805

121,755 4.46%

2,175,728

57,837 2.66%

1,379,749

32,382 2.35%

-

- 0.00%

-

- 0.00%

2,709

2,316 85.49%

$ 25,452,114 $ 1,041,487 4.09% $ 16,248,580 $

412,384 2.54% $ 7,828,426 $

208,897 2.67%

0.68%
0.79%

1.98%
2.05%

2.24%
2.24%

$

$

$

$

205,300

(77,051)

22,595

0.09

150,844 0.58%

$

$

$

$

340,911

(54,867)

(0.33)

(91,882)

(0.55)

194,162 1.17%

$

295,476 -1.13%

$

166,649 -1.00%

$

$

$

$

$

175,925

(21,101)

(0.27)

(47,846)

(0.61)

106,978 1.36%

69,573 -0.89%

(1)
(2)

(3)

(4)

(5)

Interest includes amortization of acquisition cost on mortgages acquired from the mortgage operations and accretion of loan discounts.
Payments  and  excess  cash  flows  received  from  investment  securities  collateralizing  these  borrowings  were  used  to  pay  down  the
outstanding borrowings. The payments were received from a collateral base that was in excess of the borrowings. Therefore, while the
payment amounts remained relatively stable, the average balance of the borrowings continued to decline. These borrowings were paid
off during the third quarter of 2003 and the yield for 2003 reflects discount and securitization costs that were recorded as interest
expense upon repayment of the borrowings.
Net interest spread on mortgage assets is calculated by subtracting the weighted average yield on total borrowings on mortgage assets
from the weighted average yield on total mortgage assets.
Net interest margin on mortgage assets is calculated by subtracting interest expense on total borrowings on mortgage assets from
interest income on total mortgage assets and then dividing by total mortgage assets.
Yield represents income from the accretion of loan discounts, as defined in (1), divided by total average mortgage assets.

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(6)
(7)

(8)

Yield represents net cash (payments) receipts on derivatives divided by total average mortgage assets.
Adjusted net interest margin on mortgage assets is calculated by subtracting interest expense on total borrowings on mortgage assets,
accretion of loan discounts and net cash (payments) receipts on derivatives from interest income on total mortgage assets and dividing
by total average mortgage assets. Net cash (payments) receipts on derivatives are a component of realized gain (loss) on derivatives on
the consolidated statements of operations. Adjusted net interest margins on mortgage assets is a non-GAAP financial measurement,
however, the reconciliation provided in this table is intended to meet the requirements of Regulation G as promulgated by the SEC for the
presentation of non-GAAP financial measurements. We believe that the presentation of adjusted net interest margin on mortgage assets
is useful information for our investors as it more closely reflects the true economics of net interest margins on mortgage assets.
The amortization of loan premiums and CMO securitization costs are components of interest income and interest expense, respectively.
Yield represents the cost of amortization of net loan premiums and CMO securitization costs divided by total average mortgage assets.

For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004

Decreases in net interest income were primarily due to a decline in net interest margins on mortgage assets

primarily caused by the following:

(cid:127) increase in one-month LIBOR rate underlying borrowings only partially offset by realized gain (loss) from

derivative instruments;

(cid:127) differences in interest rate adjustment periods;

(cid:127) faster amortization of mortgage premium and CMO securitization cost;

(cid:127) use of higher leverage lower net interest margin CMOs completed during since the second half of 2004;

and

(cid:127) an increasingly challenging competitive environment.

Net interest income for 2005 decreased 40% to $204.7 million as compared to $343.1 million for 2004. The
year-over-year  decrease  in  net  interest  income  of  $138.3  million  was  primarily  due  to  net  interest  margins  on
mortgage assets declining by 126 basis points to 0.79% for 2005 as compared to 2.05% for 2004. Net interest
margin on mortgage assets declined as one-month LIBOR, which is the interest rate index used to price borrowing
costs on CMO and reverse repurchase borrowings, rose approximately 200 basis points since 2004 while mortgage
assets over the same period did not re-price upward as quickly. This resulted in an increase in interest expense of
154% to $1.0 billion in 2005 compared to $412.5 million in 2004. Adjusted net interest margins on mortgage assets,
as defined in the yield table above, declined by 59 basis points to 0.58% during 2005 as compared to 1.17% during
2004. The decrease in adjusted net interest margins on mortgage assets was primarily due to (1) an increase in
short-term  interest  rates,  (2)  an  increase  in  the  amortization  of  loan  premiums,  securitization  costs  and  bond
discounts as a result of higher than expected mortgage prepayments and, to a lesser extent, (3) higher leverage and
lower net interest margins on certain CMOs completed during the second half of 2004.

During 2005, the Federal Reserve raised short-term interest rates, which effected movements in one-month
LIBOR, a total of 200 basis points. This caused borrowing costs on adjustable rate CMO borrowings, which are tied
to  one-month  LIBOR  and  re-price  monthly  without  limitation,  to  rise  at  a  faster  pace  than  coupons  on  LIBOR
ARMs securing CMO borrowings, which generally re-price every six months with limitation. LIBOR ARMs held in
our long-term investment portfolio are subject to the following interest rate risks:

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(cid:127) interest  rate  adjustment  limitations  on  mortgages  held  for  long-term  investment  due  to  periodic  and
lifetime  interest  rate  cap  features  as  compared  to  borrowings  which  are  not  subject  to  adjustment
limitations;

(cid:127) mismatched  interest  rate  re-pricing  periods  between  mortgages  held  for  long-term  investment,  which
generally  re-price  every  six  months,  and  borrowings,  which  re-price  every  month  in  regards  to  CMO
borrowings and daily in regards to reverse repurchase agreements; and

(cid:127) uneven and unequal movements in the interest rate indices used to re-price mortgages held for long-term
investment, which are generally indexed to one-, three- and six-month LIBOR and one-year LIBOR, and
borrowings, which are generally indexed to one-month LIBOR.

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30MAR2006121

 
 
 
Along with an increase in short-term interest rates, our expectation, based on past experience, was that we
would  see  a  corresponding  decline  in  mortgage  prepayment  speeds.  However,  mortgage  prepayment  speeds
continued  at  heightened  levels  during  2005.  There  is  recent  mortgage  industry  evidence  that  documents  a
substantial  increase  in  home  appreciation  rates  over  the  last  three  years  which  has  been  a  significant  factor
affecting prepayment patterns of Alt-A borrowers. Borrowers appear more willing to use home equity to pay loan
prepayment penalties in order to obtain lower monthly payments by refinancing into other mortgage products, such
as interest-only and high loan-to-value mortgage products.

Actual prepayment speeds in excess of projected future prepayment rates resulted in a cumulative upward
adjustment in both the amortization rate and amortization amount of loan premiums, securitization costs and bond
discounts during 2005. As such, amortization of loan premiums and securitization expenses increased by 13 basis
points  to  1.13%  of  average  mortgage  assets  during  2005  as  compared  to  1.00%  of  average  mortgage  assets
during  2004.  A  substantial  portion  of  our  long-term  mortgage  investment  portfolio  consists  of  mortgages  with
prepayment penalty features that are primarily designed to help minimize the rate of early mortgage prepayments.
However, if mortgages do prepay, a prepayment penalty is charged which helps offset additional amortization of
loan premiums and securitization costs. During 2005, prepayment penalties received from borrowers was recorded
as interest income and increased 10 basis points to 16 basis points of mortgage assets as compared to 6 basis
points of mortgage assets in 2004.

Because of the uncertainty surrounding our ability to raise capital in 2004 during the process of restating our
consolidated financial statements, we utilized CMO structures during the second half of 2004 which allowed us to
preserve existing capital through the use of higher leverage and lower net interest margins. Higher leverage CMOs
were structured to require a lower level of initial capital investment than for CMOs completed prior to July 2004.
Capital invested in higher leverage CMOs has been, and will continue to be, deposited into those specific CMO
trusts  from  monthly  excess  cash  flows  on  mortgages  securing  the  CMOs  until  the  required  level  of  capital
investment is attained. The use of higher leverage CMOs contributed to compressed net interest margins on total
mortgage assets.

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Additionally, the net interest margin continues to be impacted by the difficult competitive environment facing
mortgage  portfolio  lenders.  As  a  result,  net  interest  margins  continue  to  tighten  on  newly  originated  loans.
Furthermore, a rise in short-term rates and decline in long term rates has resulted in a flattening of the yield curve,
adding pressure to mortgage lending profitability.

During 2005, adjusted net interest margins on mortgage assets, which is a non-GAAP financial measurement
as indicated in the yield table above, decreased by 59 basis points as compared to a decline of 126 basis points on
net interest margin on mortgage assets. Adjusted net interest margin on mortgage assets did not decline as much
as net interest margin on mortgage assets primarily due to a 64 basis point increase in realized gain (loss) from
derivative instruments relative to total average mortgage assets. Lower derivative costs relative to total average
mortgage assets partially offset the decline in adjusted net interest margins on mortgage assets which was caused
by the factors described above.

Adjusted net interest margins were also affected by the following during 2005:

(cid:127) our  interest  rate  risk  management  policies  do  not  allow  100%  coverage  of  the  principal  amount

outstanding on CMO borrowings at any given time; and

(cid:127) actual  mortgage  prepayments  and  the  corresponding  repayment  of  CMO  borrowings  exceeded  the

pre-determined amortization schedule of the notional amount of derivative instruments.

Our  interest  rate  risk  management  policies  are  formulated  with  the  intent  to  offset  the  potential  adverse
effects  of  changing  interest  rates  primarily  associated  with  cash  flows  on  adjustable  rate  CMO  borrowings.
However, as a result of the combination of the factors listed above, the interest rate spread differential between
ARMs and adjustable rate CMO borrowings compressed, which compressed net interest margins on mortgage
assets.  By  design,  our  current  interest  rate  risk  management  program  provides  20%  to  25%  coverage  of  the
outstanding  principal  balance  of  our  six  month  LIBOR  ARMs  and  85%  to  98%  coverage  of  the  outstanding
principal balance of intermediate, or hybrid, ARMs at the point in time that we securitize the mortgages.

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For the Year Ended December 31, 2004 compared to the Year Ended December 31, 2003

Net interest income increased 94% to $343.1 million for 2004 as compared to $176.7 million for 2003. The
year-over-year increase in net interest income of $166.4 million was primarily due to a 114% increase in average
mortgage  assets  to  $16.7  billion  for  2004  as  compared  to  $7.8  billion  for  2003  and  the  long-term  investment
operations acquired $16.9 billion of mortgages from the mortgage operations in addition to $458.5 million of multi-
family mortgages originated by the long-term investment operations. Adjusted net interest margins on mortgage
assets, as defined in the yield table above, declined by 19 basis points to 1.17% during 2004 as compared to
1.36% during 2003. The decrease in adjusted net interest margins on mortgage assets was primarily due to (1) an
increase in short-term interest rates, (2) an increase in the amortization of loan premiums, securitization costs and
bond  discounts  as  a  result  of  higher  than  expected  mortgage  prepayments  and,  to  a  lesser  extent,  (3)  higher
leverage and lower net interest margins on certain CMOs completed during the second half of 2004.

During 2004 the Federal Reserve raised short-term interest rates, which effected movements in one-month
LIBOR, a total of 125 basis points. This caused borrowing costs on adjustable rate CMO borrowings, which are tied
to  one-month  LIBOR  and  re-price  monthly  without  limitation,  to  rise  at  a  faster  pace  than  coupons  on  LIBOR
ARMs securing CMO borrowings, which generally re-price every six months with limitation. LIBOR ARMs held in
our long-term investment portfolio are subject to the following interest rate risks:

(cid:127) interest  rate  adjustment  limitations  on  mortgages  held  for  long-term  investment  due  to  periodic  and
lifetime  interest  rate  cap  features  as  compared  to  borrowings  which  are  not  subject  to  adjustment
limitations;

(cid:127) mismatched  interest  rate  re-pricing  periods  between  mortgages  held  for  long-term  investment,  which
generally  re-price  every  six  months  and  borrowings,  which  re-price  every  month  in  regards  to  CMO
borrowings and daily in regards to reverse repurchase agreements; and

(cid:127) uneven and unequal movements in the interest rate indices used to re-price mortgages held for long-term
investment, which are generally indexed to one-, three- and six-month LIBOR and one-year LIBOR, and
borrowings, which are generally indexed to one-month LIBOR.

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Along with an increase in short-term interest rates, our expectation, based on past experience, was that we
would  see  a  corresponding  decline  in  mortgage  prepayment  rates.  However,  mortgage  prepayment  rates
accelerated during the latter part of 2004. There is recent mortgage industry evidence that documents a substantial
increase in home appreciation rates over the last three years has been a significant factor affecting prepayment
patterns of Alt-A borrowers. Borrowers appeared more willing to use home equity to pay loan prepayment penalties
in order to obtain lower monthly payments by refinancing into other mortgage products, such as interest-only and
high loan-to-value mortgage products.

Actual prepayment rates in excess of projected future prepayment rates resulted in a cumulative upward
adjustment in both the amortization rate and amortization amount of loan premiums, securitization costs and bond
discounts during the fourth quarter of 2004. As such, amortization of loan premiums and securitization expenses
increased by 11 basis points to 1.00% of average mortgage assets during 2004 as compared to 0.89% of average
mortgage assets during 2003. A substantial portion of our long-term mortgage investment portfolio consists of
mortgages with prepayment penalty features that are primarily designed to help minimize the rate of early mortgage
prepayments. However, if mortgages do prepay, a prepayment penalty is charged which helps offset additional
amortization  of  loan  premiums  and  securitization  costs.  During  2004,  prepayment  penalties  received  from
borrowers was recorded as interest income and increased the yield on average mortgage assets by 6 basis points.
Therefore,  prepayment  penalty  income  offset  the  effect  of  increased  amortization  of  loan  premiums  and
securitization expenses due to higher than expected prepayments by approximately 45%.

Adjusted net interest margins were also affected by the following during 2004:

(cid:127) our  interest  rate  risk  management  policies  do  not  allow  100%  coverage  of  the  principal  amount

outstanding on CMO borrowings at any given time; and

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(cid:127) actual  mortgage  prepayments  and  the  corresponding  repayment  of  CMO  borrowings  exceeded  the

pre-determined amortization schedule of the notional amount of derivative instruments.

Our  interest  rate  risk  management  policies  are  formulated  with  the  intent  to  offset  the  potential  adverse
effects  of  changing  interest  rates  primarily  associated  with  cash  flows  on  adjustable  rate  CMO  borrowings.
However, as a result of the combination of the factors listed above, the interest rate spread differential between
ARMs and adjustable rate CMO borrowings compressed, which compressed net interest margins on mortgage
assets.  By  design,  our  current  interest  rate  risk  management  program  provides  20%  to  25%  coverage  of  the
outstanding principal balance of our LIBOR ARMs and 75% to 85% coverage of the outstanding principal balance
of intermediate, or hybrid, ARMs at the point in time that we securitize the mortgages.

Additionally,  we  primarily  acquire  a  certain  notional  amount  of  interest  rate  swap  agreements,  which
correspond  to  the  balance  of  CMO  borrowings  at  the  time  we  securitize  mortgages.  The  interest  rate  swap
agreements  are  generally  acquired  with  a  pre-determined  amortization  schedule  of  the  notional  amount  of  the
interest rate swap agreements and is based upon the past prepayment experience of our mortgages. However,
actual prepayment of mortgages and the corresponding repayment of CMO borrowings exceeded the amortization
schedule of the notional amount of the interest rate swap agreements, which resulted in greater net cash payments
on derivatives than we originally anticipated. Even so, as interest rates rose during 2004, realized loss on derivative
instruments declined by 6 basis points to 55 basis points of average mortgage assets during 2004 as compared to
61 basis points during 2003 as realized loss on derivative instruments relative to average mortgage assets declined.
Realized loss on derivative instruments during 2004 were $91.9 million on average mortgage assets of $16.7 billion
as compared to $47.8 million on average mortgage assets of $7.8 billion during 2003. Realized loss on derivative
instruments  along  with  the  change  in  fair  value  of  derivatives  comprises  substantially  all  of  the  gain  (loss)  on
derivative instruments on our statement of operations.

Non-Interest Income

For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004

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2004

(Decrease) Change

Increase

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Realized gain (loss) from derivative instruments
Change in fair value of derivative instruments
Gain on sale of loans
Other income

$

22,595 $

144,932
39,509
13,888

(91,881) $
96,575
24,729
10,948

114,476
48,357
14,780
2,940

Total non-interest income

$

220,924 $

40,371 $

180,553

125 %
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447 %

Realized Gain (Loss) from Derivative Instruments. Realized gain (loss) from derivative instruments increased
to $22.6 million during 2005 as compared to $(91.9) million during 2004, or 9 basis points of total average mortgage
assets during 2005 as compared to (55) basis points of total average mortgage assets during 2004. The increase in
realized gain (loss) from derivatives is due to the 200 basis point increase in one-month LIBOR from the end of 2004,
which  has  caused  the  floating  rate  payment  received  on  swaps  to  increase  above  the  fixed  payment  made.
Realized  gain  (loss)  from  derivative  instruments  are  recorded  as  current  period  expense  or  revenue  on  our
consolidated financial statements and are included in the calculation of taxable income.

Change in Fair Value of Derivative Instruments. Change in fair value of derivative instruments increased to
$144.9 million during 2005 as compared to $96.6 million during 2004. The increase in market valuation adjustment
was the result of an increase in future expectations of short-term interest rates which took place during 2005 as a
result of stronger than expected employment growth and rising inflationary expectations. We primarily enter into

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derivative contracts to offset changes in cash flows associated with CMO liabilities. In our consolidated financial
statements, we record a market valuation adjustment for these derivatives, as well as other derivatives used by the
mortgage operations to hedge our loan pipeline and mortgage loans held for sale, as current period expense or
revenue. Changes in fair value of derivatives at IMH is not included as an addition or deduction for purposes of
calculating estimated taxable income.

Gain  on  Sale  of  Loans. Gain  on  sale  of  loans  increased  to  $39.5  million  during  2005  as  compared  to
$24.7 million during 2004. The increase of $14.8 million is primarily due to a 64% increase in whole loan sales and a
REMIC securitization as the mortgage operations sold $8.7 billion of loans to third party investors and a REMIC
during 2005 as compared to $5.3 billion for the same period in 2004. Additionally, we use derivatives to protect the
market  value  of  mortgages  from  the  point  in  time  when  we  establish  an  interest  rate  lock  commitment  on  a
particular  mortgage  prior  to  its  close  until  the  eventual  sale  or  securitization.  Any  changes  in  interest  rates  on
mortgages that we have committed to acquire at a particular rate until we sell or securitize the mortgage generally
results in an increase or decrease in the market value of the related derivative. For the year ended December 31,
2005, we recorded a $25.6 million gain from the settlement of these derivatives as compared to a loss of $(24.3)
million for the year ended December 31, 2004. GAAP requires us to record our loans held-for-sale at the lower of
cost or market (LOCOM) value. Market conditions at the end of 2005, such as widening of credit and bond spreads
and  an  oversupply  of  mortgage  inventory,  resulted  in  the  loans  decreasing  in  value  below  cost  resulting  in  us
recording a $4.5 million LOCOM adjustment. For 2005 and 2004, the gain on sale of loans was also reduced by
provisions for repurchases of $5.8 million and $405 thousand, respectively.

Non-Interest Income

For the Year Ended December 31, 2004 compared to the Year Ended December 31, 2003

Changes in Non-Interest Income
(dollars in thousands)

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Realized gain (loss) from derivative instruments
Change in fair value of derivative instruments
Gain on sale of loans
Other income
Equity in net earnings of Impac Funding

Corporation

For the Year Ended December 31,

2004

2003

(Decrease) Change

Increase

%

$

(91,881) $
96,575
24,729
10,948

(47,847) $
31,826
37,523
9,995

(44,034)
64,749
(12,794)
953

(92)%
203
(34)
10

-

11,537

(11,537)

(100)

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Total non-interest income

$

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43,034 $

(2,663)

(6)%

Realized Gain (Loss) from Derivative Instruments. Realized gain (loss) from derivative instruments increased
to $(91.9) million during 2004 as compared to $(47.8) during 2003 primarily due to the increase in one month LIBOR.
Total net cash payments on derivatives increased 92%, however, as interest rates rose during 2004, derivative
costs declined by 6 basis points to (55) basis points of average mortgage assets during 2004 as compared to
(61)  basis  points  during  2003.  Realized  gain  (loss)  from  derivative  instruments  are  recorded  as  current  period
expense or revenue in our consolidated statement of operations and comprehensive earnings and are included in
the calculation of taxable income.

Change in Fair Value of Derivative Instruments. The change in fair value of derivative instruments increased
to $96.6 million during 2004 as compared to $31.8 million during 2003. The increase was a result of changes in
future  expectations  of  short-term  rates  which  positively  affected  the  value  of  our  derivatives.  We  enter  into
derivative  contracts  to  manage  the  various  interest  rate  risks  associated  with  cash  flows  on  CMO  and  reverse
repurchase borrowings. The change in fair value of derivative instruments is recorded in our consolidated statement
of operations and comprehensive earnings but is excluded from the calculation of taxable income.

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Gain  on  Sale  of  Loans. Gain  on  sale  of  loans  decreased  to  $24.7  million  during  2004  as  compared  to
$37.5 million during 2003. The decrease in gain on sale is mainly attributed to a decrease in profitability on whole
loan sales and REMIC securitizations.

Non-Interest Expense

Changes in Non-Interest Expense
(dollars in thousands)

Personnel expense
General and administrative and other expense
Professional services
Equipment expense
Occupancy expense
Data processing expense

Total operating expense (1)

Amortization of deferred charge
Amortization and impairment of mortgage servicing rights
Impairment on investment securities available-for-sale
(Gain) loss on sale of other real estate owned

Total non-operating expense (2)

Total non-interest expense

For the Year Ended December 31,

2005

2004

(Decrease) Change

Increase

%

$

77,508 $
25,384
9,496
5,420
5,018
4,387

127,213

27,174
2,006
-
(1,888)

27,292

60,420 $
17,097
4,374
3,689
3,658
3,608

92,846

16,212
2,063
1,120
(3,901)

15,494

17,088
8,287
5,122
1,731
1,360
779

34,367

10,962
(57)
(1,120)
2,013

11,798

28 %
48
117
47
37
22

37

68
(3)
(100)
52

76

$

154,505 $

108,340 $

46,165

43 %

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Changes in Non-Interest Expense
(dollars in thousands)

Personnel expense
General and administrative and other expense
Professional services
Equipment expense
Occupancy expense
Data processing expense

Total operating expense (1)

Amortization of deferred charge
Amortization and impairment of mortgage servicing rights
Impairment on investment securities available-for-sale
(Gain) loss on sale of other real estate owned

Total non-operating expense (2)

Total non-interest expense

For the Year Ended December 31,

2004

2003

(Decrease) Change

Increase

%

$

60,420 $
17,097
4,374
3,689
3,658
3,608

92,846

16,212
2,063
1,120
(3,901)

15,494

25,250 $
7,660
4,785
1,608
1,560
1,829

42,692

5,658
1,290
298
(2,632)

4,614

35,170
9,437
(411)
2,081
2,098
1,779

50,154

10,554
773
822
(1,269)

10,880

139 %
123
(9)
129
134
97

117

187
60
276
(48)

236

$

108,340 $

47,306 $

61,034

129 %

(1)

(2)

Operating expenses are primarily related to the mortgage operations personnel, which fluctuates in conjunction with
increases or decreases in mortgage acquisition and origination volumes.
Non-operating expenses generally relate to existing assets and liabilities and are generally not a function of increases or
decreases in mortgage acquisition or origination volumes.

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For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004

Total  non-interest  expense  was  $154.5  million  for  2005  as  compared  to  $108.3  million  for  2004.  The

year-over-year increase in non-interest expense of $46.2 million was primarily the result of the following:

(cid:127) $34.4 million increase in operating expenses and

(cid:127) $11.0 million increase in amortization of deferred charge

Operating expenses. Operating expenses from the mortgage operations are a component of the mortgage
operations(cid:146) net earnings and are reflected on the consolidated financial statements as equity in net earnings of
Impac Funding Corporation. Operating expenses include personnel expense, general and administrative and other
expense, professional services, equipment expense, occupancy expense and data processing expense.

Operating costs rose by $34.4 million, or 37%, as the Company continued to upgrade and expand the staffs
of  primarily  our  Information  Technology  and  Internal  Audit  departments.  Although  the  mortgage  operations
acquisitions and originations remained substantially unchanged at $22.3 billion for 2005 as compared to $22.2 in
2004, we continued to hire personnel to support the current levels of production. Operating costs also increased
during 2005 due to the expansion of our wholesale mortgage operations into the Midwest and East Coast including
the hiring of mortgage professionals and the assumption of certain premises and operating leases. In addition, an
increase in staffing caused an increase of $8.3 million, or 48%, in general and administrative and other expense
while occupancy expense increased to $5.0 million, or 37%, during 2005 as compared to $3.7 million during 2004.
In order to accommodate expansion, we entered into premises leases for office space directly surrounding our main
corporate facility in Newport Beach, California. The expansion of our operations within a geographically centralized
area allows us to maintain our centralized operating approach.

Amortization  of  deferred  charge. A  deferred  charge  was  recorded  to  eliminate  the  income  tax  effect
resulting from gains on inter company mortgage sales, which primarily represent the amount allocated to MSRs
when  they  are  sold  to  third  parties.  The  deferred  charge  is  amortized  to  expense  over  the  expected  life  of  the
mortgages. Amortization of deferred charge was $27.2 million during 2005 as compared to $16.2 million during
2004. The year-over-year increase in the amortization of the deferred charge was the result of a higher average
balance of deferred charge in 2005 as compared 2004 as a result of $16.9 billion in retentions of mortgages by the
long term investment operations from the mortgage operations in 2004. Also, the increase in amortization was
associated with the higher loan prepayments in 2005 as compared to 2004.

Income Taxes

Income tax benefit increased to $29.7 million during 2005 as compared to $13.5 million during 2004 primarily
due to an increase in operating losses at IFC when profits on inter company loan sales are eliminated from IFC(cid:146)s net
earnings. IFC is a taxable REIT subsidiary (TRS) and is therefore subject to corporate income taxes. For GAAP
purposes, the Company records a deferred charge to eliminate the expense recognition of income taxes paid on
inter company profits that result from the sale of mortgages from IFC to the long-term operations. The amortization
of the deferred charge is recorded in other expense rather than income tax expense.

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Operating  expenses. Operating  costs  for  2003  include  only  six  months  of  operating  expenses  from  the
mortgage operations that were consolidated on the consolidated financial statements as the mortgage operations
were  acquired  by  the  Company  on  July  1,  2003.  Therefore,  if  a  full  year  of  operating  costs  from  the  mortgage
operations  were  recorded  on  the  financial  statements  on  a  consolidated  basis  for  2003,  the  year-over-year
percentage change in operating costs would be lower. Operating expenses from the mortgage operations during
the first six months of 2003 are a component of the mortgage operations(cid:146) net earnings and are reflected on the
consolidated financial statements as equity in net earnings of Impac Funding Corporation. Operating expenses
include  personnel  expense,  general  and  administrative  and  other  expense,  professional  services,  equipment
expense, occupancy expense and data processing expense.

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Operating  expense  increased  117%  to  $92.8  million  during  2004  as  compared  to  $42.7  million  for  2003
primarily due to (1) a 134% increase in originations and acquisitions from the mortgage operations during 2004 and
(2) operating expenses for 2003 include the consolidation of operating expenses from the mortgage operations for
only the last six months of 2003 as the mortgage operations were consolidated on July 1, 2003.

Operating costs rose by $50.1 million, or 117%, primarily as acquisitions and originations from the mortgage
operations increased 134% to $22.2 billion for 2004 as compared to $9.5 billion for 2003. The increase in mortgage
acquisitions and originations resulted in the addition of personnel during 2004 which increased personnel expense
by $35.1 million, or 139%, to $60.4 million during 2004 as compared to $25.3 million during 2003. In addition, an
increase in staffing caused an increase of $9.4 million, or 123%, in general and administrative and other expense
while occupancy expense increased to $3.7 million, or 131%, during 2004 as compared to $1.6 million during 2003.
In order to accommodate expansion, we entered into premises leases for office space directly surrounding our main
corporate facility in Newport Beach, California. The expansion of our operations within a geographically centralized
area  allows  us  to  maintain  our  centralized  operating  approach  as  we  are  able  to  leverage  technology  and
operational expertise from our main headquarters to the new facilities.

On a cost per loan basis, operating costs were lower during 2004 as compared to 2003 primarily as we
acquired a larger percentage of mortgages on a bulk basis during 2004 as compared to the prior year. During 2004
the  mortgage  operations  acquired  $8.5  billion,  or  38%  of  total  mortgage  acquisitions  and  originations,  of
mortgages through bulk purchase transactions as compared to $2.2 billion, or 23% of total mortgage acquisitions
and originations, during 2003. Mortgages acquired on a bulk basis generally require less staffing and personnel-
related costs than mortgages acquired on a flow basis. However, premiums paid for acquiring mortgages on a bulk
basis  are  generally  higher  than  premiums  paid  for  the  acquisition  of  a  mortgage  on  a  flow  basis  as  the  higher
premium paid for bulk packages factors in operating costs incurred by the mortgage originator.

Amortization  of  deferred  charge. A  deferred  charge  was  recorded  to  eliminate  the  income  tax  effect
resulting from gains on inter company mortgage sales, which primarily represents the amount allocated to MSRs
when MSRs are sold to third parties and mortgages are transferred from the mortgage operations to the long-term
investment operations and retained for long-term investment. The deferred charge is amortized to expense over the
expected life of the mortgages. Amortization of deferred charge was $16.2 million during 2004 as compared to
$5.7 million during 2003. The year-over-year increase in the amortization of the deferred charge was the result of the
acquisition of $16.9 billion of mortgages by the long-term investment operations from the mortgage operations and
the  subsequent  sale  of  MSRs  to  third  parties  during  2004  as  compared  to  the  acquisition  of  $5.8  billion  of
mortgages  by  the  long-term  investment  operations  from  the  mortgage  operations  and  the  subsequent  sale  of
MSRs to third parties during 2003.

Income Taxes

Income tax benefit increased to $13.5 million during 2004 as compared to $1.4 million during 2003 primarily
due to an increase in operating losses at IFC when profits on inter company loan sales where eliminated from IFC(cid:146)s
net earnings. IFC is a taxable REIT subsidiary (TRS) and is therefore subject to corporate income taxes. However, in
California we file a combined tax return with IMH and IFC where certain inter company transactions are eliminated
which can result in a net tax operating loss for IFC. We also, for GAAP purposes, recorded a deferred charge to
eliminate the expense recognition of income taxes paid on inter company profits that resulted from the sale of
mortgages  from  IFC  to  the  long-term  operations.  The  amortization  of  the  deferred  charge  is  recorded  in  other
expense rather than income tax expense.

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Results of Operations by Business Segment

We operate three core businesses:

(cid:127) the long-term investment operations;

(cid:127) the mortgage operations; and

(cid:127) the warehouse lending operations.

30MAR200614310138

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Long-Term Investment Operations

For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004

Condensed Statements of Operations Data
(dollars in thousands)

Net interest income
Provision for loan losses

$

74,604 $
30,563

231,944 $ (157,340)
5,712

24,851

(68)%
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For the Year Ended December 31,

2005

2004

(Decrease) Change

Increase

%

Net interest income after provison for loan

losses

44,041

207,093

(163,052)

Realized gain (loss) from derivative instruments
Change in fair value of derivative instruments
Other non-interest income

Total non-interest income

Non-interest expense and income taxes

22,595
155,695
1,528

179,818

14,083

(91,881)
96,575
11,617

114,476
59,120
(10,089)

16,311

163,507

1002

8,102

5,981

Net earnings

$

209,776 $

215,302 $

(5,526)

(79)

125
61
(87)

74

(3)%

Net  interest  income. Net  interest  income  decreased  68%  to  $74.6  million  for  2005  as  compared  to
$231.9 million for 2004 primarily due to a 153% increase in borrowing cost on mortgage assets as one-month
LIBOR  increased  approximately  200  basis  points  in  2005.  The  long-term  investment  operations  acquired
$12.2 billion of mortgages from the mortgage operations and originated $798.5 million of multi-family mortgages.
The acquisition and origination of mortgages by the long-term investment operations was primarily financed by the
securitization of $14.0 billion of CMOs. The adjusted net interest margin on mortgages held as CMO collateral
declined 52 basis points to 0.39% during 2005 as compared to 0.91% during 2004. The decline in adjusted net
interest margin was primarily due to (1) an increase in short-term interest rates, (2) an increase in the amortization of
loan premiums, securitization costs and bond discounts as a result of higher than expected mortgage prepayments
and, to a lesser extent, (3) higher leverage and lower net interest margins on certain CMOs completed during the
second half of 2005, as previously discussed. Adjusted net interest margin on mortgages held as CMO collateral is
calculated by subtracting interest expense on CMO borrowings, accretion of loan discounts and cost of derivatives
from  interest  income  on  mortgages  held  as  CMO  collateral  and  dividing  by  average  mortgages  held  as  CMO
collateral in the yield table above.

Non-interest  income. Non-interest  income  for  our  long-term  investment  operations  is  primarily  derived
from realized gain (loss) from derivative instruments, change in fair value of derivative instruments, gain (loss) on
loans  held-for-sale, gain (loss) on  sale of securities,  loan servicing income  and  other  fee income. During 2005,
non-interest income rose by $163.5 million to $179.8 million as compared to $16.3 million during 2004 primarily due
to increases of $114.5 million in realized gain (loss) from derivative instruments and $59.1 million in change in fair
value  of  derivative  instruments.  The  increase  in  realized  gain  (loss)  from  derivative  instruments  is  primarily
associated with the increase in one-month LIBOR and the change in fair value of derivative instruments is primarily
attributable to an increase in future expectations of higher one-month LIBOR rates positively affecting the value of
derivatives.

On January 1, 2006, we elected to change IMCC from a qualified REIT subsidiary to a taxable REIT subsidiary
which is consistent with the remaining mortgage operations. We have also changed the name of IMCC to Impac
Commercial  Capital  Corporation  ((cid:145)(cid:145)ICCC(cid:146)(cid:146)).  The  loan  portfolio  remains  as  part  of  the  REIT  assets  while  the
commercial origination operations, ICCC, will be subject to state and federal income taxes beginning in 2006.

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Condensed Statements of Operations Data
(dollars in thousands)

For the Year Ended December 31,

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2003

(Decrease) Change

Increase

%

Net interest income
Provision for loan losses

$

231,944 $
24,851

130,529 $
22,368

Net interest income after provison for loan losses

207,093

108,161

Realized loss from derivative instruments
Change in fair value of derivative instruments
Other non-interest income

Total non-interest income

Non-interest expense and income taxes

(91,881)
96,575
11,617

16,311

8,102

(47,847)
31,826
17,615

1,594

4,332

101,415
2,483

98,932

(44,034)
64,749
(5,998)

14,717

3,770

78 %
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(92)
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87

Net earnings

$

215,302 $

105,423 $

109,879

104 %

Net  interest  income. Net  interest  income  increased  78%  to  $231.9  million  for  2004  as  compared  to
$130.5 million for 2003, primarily due to an increase in total average mortgage assets as the long-term investment
operations acquired $16.9 billion of mortgages from the mortgage operations and originated $458.5 million of multi-
family  mortgages.  The  acquisition  and  origination  of  mortgages  by  the  long-term  investment  operations  was
primarily financed by the securitization of $17.7 billion of CMOs. The adjusted net interest margin on mortgages
held as CMO collateral declined 30 basis points to 0.82% during 2004 as compared to 1.12% during 2003. The
decline  in  adjusted  net  interest  margin  was  primarily  due  to  (1)  an  increase  in  short-term  interest  rates,  (2)  an
increase in the amortization of loan premiums, securitization costs and bond discounts as a result of higher than
expected mortgage prepayments and, to a lesser extent and (3) higher leverage and lower net interest margins on
certain CMOs completed during the second half of 2004, as previously discussed. Adjusted net interest margin on
mortgages held as CMO collateral is calculated by subtracting interest expense on CMO borrowings, accretion of
loan discounts and cost of derivatives from interest income on mortgages held as CMO collateral and dividing by
average mortgages held as CMO collateral in the yield table above.

Non-interest income. Non-interest income rose by $14.7 million to $16.3 million during 2004 as compared
to $1.6 million for 2003, which was primarily due to a $64.8 million increase in the change in fair value of derivative
instruments from an increase in future expectations of higher one-month LIBOR rates. Realized loss on derivative
instruments decreased to $91.9 million during 2004 as compared to a loss of $47.8 million during 2003.

Mortgage Operations

For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004

Condensed Statements of Operations Data
(dollars in thousands)

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2004

(Decrease) Change

Increase

%

Net interest income
Non-interest income
Non-interest expense and income taxes

Net earnings

$

$

3,824 $

14,744 $

120,020
108,876

130,563
102,363

(10,920)
(10,543)
6,513

14,968 $

42,944 $

(27,976)

(74)%
(8)
6

(65)%

The mortgage operation generates income by securitizing and selling mortgages to permanent investors,
including the long-term investment operations and to a lesser extent, earns revenue from fees associated with
mortgage servicing rights, master servicing agreements and interest income earned on mortgages held for sale.

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Net earnings for the mortgage operations were $14.9 million during 2005 as compared to $42.9 million during
2004. The decrease in net earnings was primarily due to decreases of $10.9 million in net interest income and
$10.5 million in non-interest income, offset by an increase in non-interest expense and income taxes of $6.5 million.

Net  interest  income  dropped  74%  during  2005  to  $3.8  million  as  compared  to  $14.7  million  for  2004.
Although interest income on mortgage assets increased 106% to $127.0 million as compared to $61.7 million for
2004,  borrowing  costs,  which  are  tied  to  one-month  LIBOR,  increased  approximately  200  basis  points  which
caused borrowing costs to increase faster than the adjustments on our assets and resulted in an overall decrease in
net interest income.

Non-interest income decreased 8% during 2005 primarily due to a $15.3 million decrease in gain (loss) on
sale of loans. Lower volumes of mortgages sold to the long-term investment operations and third party investors
resulted in a decrease in gain (loss) on sale of loans. The mortgage operations sold $20.9 billion to the long-term
investment operations and third party investors in 2005, 6% less than the $22.2 billion sold in 2004. Gain (loss) on
sale of loans includes the difference between the price at which we acquire or originate mortgages and the price we
receive upon the sale or securitization of mortgages plus or minus direct mortgage origination revenue and costs,
i.e. loan and underwriting fees, commissions, appraisal review fees and document processing expenses. Gain on
sale of loans acquired or originated by the mortgage operations also includes a premium for the sale of mortgage
servicing rights upon the sale or securitization of mortgages including REMICs and CMOs. In order to minimize
risks associated with the accumulation of our mortgages, we seek to securitize or sell mortgages monthly thereby
reducing  our  exposure  to  interest  rate  risk  and  price  volatility  during  the  accumulation  period  of  mortgages.
Additionally, as required by GAAP, the company recorded loans held-for-sale at the lower of cost or market resulting
in a $4.5 million write down as current market conditions, such as the widening of credit and bond spreads and a
lack of demand for mortgage product forced the loans to drop in value at year end.

Additionally, net earnings decreased as non-interest expense and income taxes increased $6.5 million as
operating  expenses  increased  39%  to  $103.6  in  2005.  Mortgage  acquisitions  and  originations  remained
substantially unchanged from period to period however personnel expenses increased 19% to $56.2 million in 2005
as compared to $47.1 for 2004, as a result of increasing staff levels as needed by higher production levels starting in
2004  as  well  as  an  increase  in  infrastructure  costs  in  information  technology  and  internal  audit  required  for
compliance to Sarbanes-Oxley regulations. Also included in non-interest expense are legal and professional fees
which increased 197% to $10.4 million as compared to $3.5 million for 2004, business promotion expenses which
increased 159% to $7.5 million as compared to $2.9 million for 2004 and general and administrative expenses
which increased to $11.4 million as compared to $8.7 million for 2004. Operating expenses are partially offset when
netted  against  income  taxes  as  the  mortgage  operations  recorded  a  tax  benefit  of  $3.3  million  for  2005  as
compared to a tax expense of $20.9 in 2004 million primarily due to an increase in operating losses at IFC.

For the Year Ended December 31, 2004 compared to the Year Ended December 31, 2003

Condensed Statements of Operations Data
(dollars in thousands)

For the Year Ended December 31,

2004

2003

(Decrease) Change

Increase

%

Net interest income
Non-interest income
Non-interest expense and income taxes

Net earnings

$

$

14,744 $

8,262 $

130,563
102,363

55,723
47,096

6,482
74,840
55,267

78 %

134
117

42,944 $

16,889 $

26,055

154 %

The mortgage operations generate income by securitizing and selling mortgages to permanent investors,
including the long-term investment operations and, to a lesser extent, it earns revenue from fees associated with
mortgage servicing rights, master servicing agreements and interest income earned on mortgages held for sale.
Net earnings from the mortgage operations for 2004 include twelve months of results of operations, however, prior
to IMH(cid:146)s purchase of all of the outstanding shares of common stock of IFC, thereby causing the consolidation of

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IFC(cid:146)s financial statements into IMH(cid:146)s financial statements, its results of operations were reflected on a consolidated
basis for the period January 1, 2003 to June 30, 2003.

Net  earnings  from  the  mortgage  operations  increased  by  $26.0  million  to  $42.9  million  during  2004  as
compared to net earnings of $16.9 million during the consolidation period. For a full year comparison, net earnings
for the mortgage operations were $42.9 million during 2004 as compared to $35.4 million on a non-consolidated
basis during 2003. The increase in net earnings was primarily due to an increase of $73.8 million in non-interest
income, which was partially offset by a $54.2 million increase in non-interest expense.

Non-interest income increased 129% during 2004 primarily due to a higher volume of mortgages sold to the
long-term investment operations and third party investors due a higher volume of mortgages that were acquired
and originated during 2004 as compared to 2003. As a result of an increase in gain on sale of loans, non-interest
income increased to $131.0 million during 2004 as compared to $57.2 million during 2003. Gain on sale of loans
includes the difference between the price at which we acquire or originate mortgages and the price we receive upon
the sale or securitization of mortgages plus or minus direct mortgage origination revenue and costs, i.e. loan and
underwriting fees, commissions, appraisal review fees and document processing expenses. Gain on sale of loans
acquired or originated by the mortgage operations also includes a premium for the sale of mortgage servicing rights
upon the sale or securitization of mortgages, including REMICs and CMOs. Substantially all mortgages sold or
securitized during 2004 and 2003 were done so on a servicing released basis, which resulted in substantially all
cash gains. In order to minimize risks associated with the accumulation of our mortgages, we seek to securitize or
sell  mortgages  monthly  thereby  reducing  our  exposure  to  interest  rate  risk  and  price  volatility  during  the
accumulation period of mortgages.

Partially  offsetting  the  increase  in  non-interest  income  was  an  increase  in  non-interest  expense,  which
increased 112% to $102.8 million during 2004 as compared to $48.6 million for 2003, as mortgage acquisitions and
originations rose by 134% to $22.2 billion for 2004 as compared to $9.5 billion for 2003. The increase in mortgage
acquisitions and originations resulted in the addition of personnel by the mortgage operations and a corresponding
increase in operating costs. In order to accommodate expansion, we entered into premises leases for office space
directly  surrounding  our  main  corporate  facility  in  Newport  Beach,  California.  The  expansion  of  our  operations
within a geographically centralized area allows us to maintain our centralized operating approach as we are able to
leverage technology and operational expertise from our main headquarters to the new facilities.

Warehouse Lending Operations

For the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004

Condensed Statements of Operations Data
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Provision for loan losses
Non-interest income
Non-interest expense and income taxes

Net earnings

For the Year Ended December 31,

2005

2004

(Decrease) Change

Increase

%

$

55,725 $

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7,760
7,542

45,822 $
6,076
10,592
6,899

9,903
(6,076)
(2,832)
643

22 %

(100)
(27)
9

$

55,943 $

43,439 $

12,504

29 %

The warehouse lending operations primarily generate net earnings from net interest income earned from the
difference between its cost of borrowings and the interest earned on warehouse advances and, to a lesser extent,
fees  from  warehouse  lending  transactions.  The  warehouse  lending  operations  provide  warehouse  financing  to
affiliated companies, including the mortgage operations and long-term investment operations and to approved,
non-affiliated clients some of which are correspondents of the mortgage operations.

Net  earnings  from  the  warehouse  lending  operations  were  $55.9  million  for  2005  as  compared  to
$43.4 million for 2004. The increase in net earnings of $12.5 million was primarily due to a $10.0 million increase in

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net interest income to $55.7 million during 2005 as compared to $45.8 million during 2004. Net interest income rose
for 2005 as one-month LIBOR rates increased approximately 200 basis points resulting in higher interest earnings
on warehouse advances to affiliated companies. Additionally, net interest income rose 22% on year-over-year basis
as total average finance receivables rose 22% to $2.8 billion during 2005 as compared to $2.3 billion during 2004.

Net earnings were negatively impacted during 2004 as the warehouse lending operations added $6.1 million
to  loan  loss  provisions  during  2004  as  fraudulent  warehouse  advances  were  discovered  in  2004  which  were
determined to be impaired. By year-end 2004, the warehouse lending operations had a specific allowance for loan
losses of $10.7 million for impaired warehouse advances. For calculation of estimated taxable income, deductions
for permanently impaired mortgages were taken as a deduction to estimated taxable income for 2004.

For the Year Ended December 31, 2004 compared to the Year Ended December 31, 2003

Condensed Statements of Operations Data
(dollars in thousands)

Net interest income
Provision for loan losses
Non-interest income
Non-interest expense and income taxes

Net earnings

For the Year Ended December 31,

2004

2003

(Decrease) Change

Increase

%

$

45,822 $
6,076
10,592
6,899

28,950 $
2,485
6,016
5,012

16,872
3,591
4,576
1,887

58 %

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43,439 $

27,469 $

15,970

58 %

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The warehouse lending operations primarily generate net earnings from net interest income earned from the
difference between its cost of borrowings and the interest earned on warehouse advances and, to a lesser extent,
fees  from  warehouse  lending  transactions.  The  warehouse  lending  operations  provide  warehouse  financing  to
affiliated companies, including the mortgage operations and long-term investment operations and to approved
non-affiliated clients some of which are correspondents of the mortgage operations.

Net  earnings  from  the  warehouse  lending  operations  were  $43.4  million  for  2004  as  compared  to
$27.5 million for 2003. The increase in net earnings of $15.9 million was primarily due to a $16.8 million increase in
net interest income to $45.8 million during 2004 as compared to $29.0 million during 2003. Net interest income rose
58% on year-over-year basis as total average finance receivables rose 64% to $2.3 billion during 2004 as compared
to $1.4 billion during 2003.

Net earnings were negatively impacted during 2004 as the warehouse lending operations added $6.1 million
to  loan  loss  provisions  during  2004  as  fraudulent  warehouse  advances  were  discovered  in  2004  which  were
determined to be impaired. By year-end 2004, the warehouse lending operations had a specific allowance for loan
losses of $10.7 million for impaired warehouse advances. For calculation of estimated taxable income, deductions
for permanently impaired mortgages were taken as a deduction to estimated taxable income for 2004.

Refer to Note I. (cid:145)(cid:145)Segment Reporting(cid:146)(cid:146) in the notes to consolidated financial statements for financial results of

the operating segments and see Item 1. Business for additional detail regarding the operating structure.

Liquidity and Capital Resources

We recognize the need to have funds available for our operating businesses and our customers(cid:146) demands for
obtaining short-term warehouse financing until the settlement or sale of mortgages with us or with other investors. It
is  our  policy  to  have  adequate  liquidity  at  all  times  to  cover  normal  cyclical  swings  in  funding  availability  and
mortgage  demand  and  to  allow  us  to  meet  abnormal  and  unexpected  funding  requirements.  We  plan  to  meet
liquidity through normal operations with the goal of avoiding unplanned sales of assets or emergency borrowing of
funds. Toward this goal, our asset/liability committee, or (cid:145)(cid:145)ALCO,(cid:146)(cid:146) is responsible for monitoring our liquidity position
and funding needs.

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ALCO participants include senior executives of the mortgage operations and warehouse lending operations.
ALCO meets on a weekly basis to review current and projected sources and uses of funds. ALCO monitors the
composition of the balance sheet for changes in the liquidity of our assets. Our primary liquidity consists of cash
and cash equivalents; short-term securities available for sale and maturing mortgages, or (cid:145)(cid:145)liquid assets.(cid:146)(cid:146)

We believe that current cash balances, short-term investments, currently available financing facilities, capital
raising capabilities and excess cash flows generated from our long-term mortgage portfolio will adequately provide
for projected funding needs and limited asset growth. Refer to Item 1.A (cid:145)(cid:145)Business(cid:151)Risk Factors(cid:146)(cid:146) for additional
information regarding risks that could adversely affect our liquidity.

Our operating businesses primarily use available funds as follows:

(cid:127) acquisition and origination of mortgages by the mortgage and long-term investment operations;

(cid:127) long-term investment in mortgages by the long-term investment operations;

(cid:127) provide short-term warehouse advances by the warehouse lending operations;

(cid:127) pay interest on debt;

(cid:127) distribute common and preferred stock dividends; and

(cid:127) pay operating and non-operating expenses.

Acquisition and origination of mortgages by the mortgage and long-term investment operations. During
2005,  the  mortgage  operations  acquired  $22.3  billion  of  primarily  Alt-A  mortgages,  of  which  $12.2  billion  were
acquired by the long-term investment operations from IFC for long-term investment. Capital invested in mortgages
is outstanding until we sell or securitize mortgages, which is one of the reasons we attempt to sell or securitize
mortgages  between  15  to  45  days  of  acquisition  or  origination.  Initial  capital  invested  in  mortgages  includes
premiums paid when mortgages are acquired and originated and our capital investment, or (cid:145)(cid:145)haircut,(cid:146)(cid:146) required upon
financing, which is generally determined by the type of collateral provided. The mortgage operations acquired and
originated mortgages at a weighted average price of 101.7 during, which were financed with warehouse borrowings
from the warehouse lending operations at a haircut generally between 2% to 10% of the outstanding principal
balance of the mortgages. In addition, IMCC originated $798.5 million of multi-family mortgages at a weighted
average  price  of  100.1  which  were  initially  financed  with  short-term  reverse  repurchase  financing  from  the
warehouse lending operations at a haircut of generally 3% of the outstanding principal balance of the mortgages.

Long-term  investment  in  mortgages  by  the  long-term  investment  operations. The  long-term  investment
operations  acquire  primarily  Alt-A  mortgages  from  the  mortgage  operations  and  finance  them  with  reverse
repurchase borrowings from the warehouse lending operations at substantially the same terms as the mortgage
operations.  When  the  long-term  investment  operations  finance  mortgages  with  long-term  CMO  borrowings,
short-term reverse repurchase financing is repaid. Then, depending on credit ratings from national credit rating
agencies on our CMOs, we are generally required to provide an over-collateralization, or (cid:145)(cid:145)OC(cid:146)(cid:146), of 0.35% to 1% of
the principal balance of mortgages securing CMO financing as compared to a haircut of 2% to 10% of the principal
balance  of  mortgages  securing  short-term  reverse  repurchase  financing.  Our  total  capital  investment  in  CMOs
generally ranges from approximately 2% to 5% of the principal balance of mortgages securing CMO borrowings
which  includes  premiums  paid  upon  acquisition  of  mortgages  from  the  mortgage  operations,  costs  paid  for
completion of CMOs, costs to acquire derivatives and OC required to achieve desired credit ratings. Multi-family
mortgages are financed on a long-term basis with CMO borrowings at substantially the same rates and terms as
Alt-A  mortgages.  Multi-family  loans  generally  have  a  3%  haircut  on  reverse  repurchase  lines  and  initial  over
collateralization target of 2.75% to 3.37%

Provide short-term warehouse advances by the warehouse lending operations. We utilize committed and
uncommitted  reverse  repurchase  facilities  with  various  lenders  to  provide  short-term  warehouse  financing  to
affiliates and non-affiliated clients of the warehouse lending operations. The warehouse lending operations provide
short-term financing to the mortgage operations and non-affiliated clients from the closing of mortgages to their
sale or other settlement with investors. The warehouse lending operations generally finance between 90% and
98% of the fair market value of the principal balance of mortgages, which equates to a haircut requirement of

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between  10%  and  2%,  respectively,  at  one-month  LIBOR,  plus  a  spread.  The  mortgage  operations  have
uncommitted warehouse line agreements to obtain financing from the warehouse lending operations at one-month
LIBOR plus a spread during the period that the mortgage operation accumulate mortgages until the mortgages are
securitized or sold. As of December 31, 2005, the mortgage operations had $2.0 billion of warehouse advances
outstanding with the warehouse lending operations. In addition, as of December 31, 2005, the warehouse lending
operations  had  $691.5  million  of  approved  warehouse  lines  available  to  non-affiliated  clients,  of  which
$350.2 million was outstanding.

Our ability to meet liquidity requirements and the financing needs of our customers is subject to the renewal
of our credit and repurchase facilities or obtaining other sources of financing, if required, including additional debt
or equity from time to time. Any decision our lenders or investors make to provide available financing to us in the
future will depend upon a number of factors, including:

(cid:127) our compliance with the terms of our existing credit arrangements;

(cid:127) our financial performance;

(cid:127) industry and market trends in our various businesses;

(cid:127) the general availability of, and rates applicable to, financing and investments;

(cid:127) our lenders or investors resources and policies concerning loans and investments; and

(cid:127) the relative attractiveness of alternative investment or lending opportunities.

Pay  common  and  preferred  stock  dividends  and  trust  preferred  payments. We  paid  common  stock
dividends of $147.4 million and preferred stock dividends of $14.5 million during 2005, which we generated from
our operating activities. We are required to distribute a minimum of 90% of our taxable income to our stockholders
in order to maintain our REIT status, exclusive of the application of any tax loss carry forwards that may be used to
offset current period taxable income. Because we pay dividends based on taxable income, dividends may be more
or less than net earnings. We paid total regular cash dividends of $1.95 per common share in 2005 which met
taxable income distribution requirements for the year. We also paid interest of $5.4 million attributable to the junior
subordinated  debt  issued  by  the  Company  in  connection  with  our  trust  preferred  offerings.  See  (cid:145)(cid:145)Issuance  of
Preferred Stock(cid:146)(cid:146) for a discussion of the terms of our outstanding series of preferred stock and (cid:145)(cid:145)Note U(cid:151)Trust
Preferred Securities(cid:146)(cid:146) in the accompanying notes to the consolidated financial statements.

A  portion  of  dividends  paid  to  IMH(cid:146)s  stockholders  came  from  dividend  distributions  from  the  mortgage
operations,  our  taxable  REIT  subsidiary,  to  IMH.  During  2005,  the  mortgage  operations  provided  a  dividend
distribution  of  $32.9  million  to  IMH  of  which  approximately  $22.8  million  was  attributable  to  prior  period
undistributed taxable income. Because the mortgage operations may seek to retain earnings to fund the acquisition
and origination of mortgages or to expand the mortgage operations, the board of directors of our taxable REIT
subsidiary may decide that the mortgage operations should cease making dividend distributions in the future. This
could reduce the amount of taxable income that would be distributed to IMH stockholders in the form of dividend
payment amounts.

Our operating businesses are primarily funded as follows:

(cid:127) CMO borrowings and reverse repurchase agreements;

(cid:127) excess cash flows from our long-term mortgage portfolio;

(cid:127) sale and securitization of mortgages;

(cid:127) cash proceeds from the issuance of common and preferred stock;

(cid:127) cash proceeds from the issuance of trust preferred securities; and

(cid:127) cash proceeds from the exercise of stock options.

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Reverse repurchase agreements and CMO borrowings. We use reverse repurchase agreements to fund
substantially all financing to affiliates and non-affiliated clients and for the acquisition and origination of Alt-A and
multi-family mortgages. As we accumulate mortgages, we finance the acquisition of mortgages primarily through
borrowings on reverse repurchase facilities with third party lenders. We primarily use uncommitted and committed
facilities with major investment banks to finance substantially all warehouse financing, as needed. During 2005 the
warehouse facilities amounted to $4.3 billion, of which $2.4 billion was outstanding at December 31, 2005. The
warehouse  facilities  provide  us  with  a  higher  aggregate  credit  limit  to  fund  the  acquisition  and  origination  of
mortgages at terms comparable to those we have received in the past. These warehouse facilities may have certain
covenant tests which we continue to satisfy. From time to time, we may also receive additional uncommitted interim
financing  from  our  lenders  in  excess  of  our  permanent  borrowing  limits  to  finance  mortgages  during  the
accumulation phase and prior to securitizations or whole loan sales.

From time to time, we may also utilize term reverse repurchase financing provided to us by underwriters who
underwrite some of our securitizations. The term reverse repurchase financing funds mortgages that are specifically
allocated  to  securitization  transactions,  which  allows  us  to  reduce  overall  borrowings  outstanding  on  reverse
repurchase  agreements  with  other  lenders  during  the  period  immediately  prior  to  the  settlement  of  the
securitization. Terms and interest rates on the term reverse repurchase facilities are generally lower than on other
reverse repurchase agreements. Term reverse repurchase financing are generally repaid within 30 days from the
date funds are advanced.

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

In order to mitigate the liquidity risk associated with reverse repurchase agreements, we attempt to sell or
securitize our mortgages between 15 to 45 days from acquisition or origination. Although securitizing mortgages
more frequently adds operating and securitization costs, we believe the added cost is offset as liquidity is provided
more frequently with less interest rate and price volatility, as the accumulation and holding period of mortgages is
shortened. When we have accumulated a sufficient amount of mortgages, we seek to issue CMOs and convert
short-term  advances  under  reverse  repurchase  agreements  to  long-term  CMO  borrowings.  The  use  of  CMO
borrowings provides the following benefits:

(cid:127) allows  us  to  use  long  term  financing  for  the  duration  of  the  CMO  asset  secured  by  the  underlying

mortgages; and

(cid:127) eliminates margin calls on the borrowings that are converted from reverse repurchase agreements to CMO
borrowings as well as associated derivatives used to manage interest rate risks on CMO borrowings.

During  2005,  we  completed  $14.0  billion  of  CMOs  to  provide  long-term  financing  for  the  retention  of
$12.2 billion of primarily Alt-A mortgages and the origination of $798.5 million of multi-family mortgages. Because
of the credit profile, historical loss performance and prepayment characteristics of our Alt-A mortgages, we have
been able to borrow a higher percentage against the principal balance of mortgages held as CMO collateral, which
means that we have to provide less initial capital upon completion of CMOs. Capital investment in the CMOs is
established at the time CMOs are issued at levels sufficient to achieve desired credit ratings on the securities from
credit rating agencies.

Excess cash flows from our long-term mortgage portfolio. We receive excess cash flows on mortgages held
as CMO collateral after distributions are made to investors on CMO borrowings to the extent cash or other collateral
required to maintain desired credit ratings on the CMOs is fulfilled and can be used to provide funding for some of
the long-term investment operations(cid:146) activities. Excess cash flows represent the difference between principal and
interest payments on the underlying mortgages, adjusted by the following:

(cid:127) servicing and master servicing fees paid;

(cid:127) premiums paid to mortgage insurers;

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(cid:127) cash payments / receipts on derivatives;

(cid:127) interest paid on CMO borrowings;

(cid:127) pro-rata early principal prepayments paid on CMO borrowings;

(cid:127) OC requirements;

(cid:127) actual  losses,  net  of  any  gains  incurred  upon  disposition  of  other  real  estate  owned  or  acquired  in

settlement of defaulted mortgages;

(cid:127) unpaid interest shortfall;

(cid:127) basis risk shortfall;

(cid:127) bond writedowns reinstated; and

(cid:127) residual cashflow.

Sale and securitization of mortgages. We sell and securitize loans in the following ways:

(cid:127) When  the  mortgage  operations  accumulate  a  sufficient  amount  of  mortgages  that  are  intended  to  be

deposited into a CMO, it sells the mortgages to the long-term investment operations;

(cid:127) When selling mortgages on a whole loan basis, the mortgage operations will accumulate mortgages and

enter into sales transactions with third party investors on a monthly basis; and

(cid:127) When  the  mortgage  operations  enter  into  a  Real  Estate  Mortgage  Investment  Company  (REMIC)

securitization it accumulates mortgages and sells these loans periodically.

The mortgage operations sold $12.2 billion of mortgages to the long-term investment operations during 2005
and sold $8.7 billion of mortgages to third party investors and through REMICs. The mortgage operations sold
mortgage  servicing  rights  on  all  mortgages  sold  during  2005.  The  sale  of  mortgage  servicing  rights  generated
substantially all cash, which was used to acquire and originate additional mortgage assets.

Since we rely significantly upon sales and securitizations to generate cash proceeds to repay borrowings and
to create credit availability, any disruption in our ability to complete sales and securitizations may require us to
utilize other sources of financing, which, if available at all, may be on less favorable terms. In addition, delays in
closing sales and securitizations of our mortgages increase our risk by exposing us to credit and interest rate risk for
this extended period of time.

Issuance of Common and Preferred Stock We filed with the SEC a shelf registration statement that allows
us to sell up to $1.0 billion of securities, including common stock, preferred stock, debt securities and warrants. By
issuing  new  shares  periodically  throughout  the  year,  we  believe  that  we  were  able  to  utilize  new  capital  more
efficiently and profitably.

On September 30, 2005, the Company entered into a common stock sales agreement with Brinson Patrick
Securities Corporation (Brinson Patrick) for the sale of up to 7.5 million shares of its common stock from time to time
through Brinson Patrick as sales agent. As of December 31, 2005, we sold 363,700 shares of common stock and
received net proceeds of $4.2 million. Brinson Patrick received a commission of 3% of the gross sales price per
share of the shares of common stock sold pursuant to the sales agreement, which amounted to an aggregate
commission of $131,000.

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On September 30, 2005, the Company also entered into a Preferred Stock sales agreement with Brinson
Patrick,  for  the  sale  of  up  to  800,000  shares  of  its  9.125%  Series  C  Cumulative  Redeemable  Preferred  Stock
(Series C Preferred Stock) from time to time through Brinson Patrick as sales agent. As of December 31, 2005, we
sold 71,200 shares of Series C Preferred Stock and received net proceeds of approximately $1.7 million. Brinson
Patrick  received  a  commission  of  3%  of  the  gross  sales  price  per  share  of  the  shares  of  preferred  stock  sold
pursuant to the sales agreement, which amounted to an aggregate commission of $51,000.

In May of 2004, we completed the sale of 2.0 million shares of 9.375% Series B Cumulative Redeemable
Preferred Stock, par value $0.01 per share, liquidation preference $25.00 per share, or (cid:145)(cid:145)series B preferred stock.(cid:146)(cid:146)
Dividends  on  the  series  B  preferred  stock  are  payable  quarterly  in  arrears  on  or  before  March  31,  June  30,
September 30 and December 31 of each year. The shares of series B preferred stock have no stated maturity, are

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not subject to any sinking fund or mandatory redemption and are not convertible into any other securities. Holders
of  shares  of  series  B  preferred  stock  generally  have  no  voting  rights,  but  will  have  limited  voting  rights  if  the
Company fails to pay dividends for six or more quarters and in certain other events. The Company may not redeem
the series B preferred stock until May 29, 2009 except in limited circumstance to preserve the Company(cid:146)s status as
a real estate investment trust. On or after May 29, 2009, the Company may, at its option, redeem the series B
preferred stock in whole or in part, at any time and from time to time, for cash at $25.00 per share, plus accrued and
unpaid dividends (whether or not declared), if any, to and including the redemption date.

In November and December, 2004, we completed the sale of an aggregate of 4.3 million shares of 9.125%
Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share, liquidation preference $25.00 per
share, or (cid:145)(cid:145)series C preferred stock.(cid:146)(cid:146) Dividends on the series C preferred stock are payable quarterly in arrears on or
before March 31, June 30, September 30 and December 31 of each year. The shares of series C preferred stock
have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into
any other securities. Holders of shares of series C preferred stock generally have no voting rights, but will have
limited voting rights if the Company fails to pay dividends for six or more quarters and in certain other events. The
Company may not redeem the series C preferred stock until November 23, 2009 except in limited circumstances to
preserve the Company(cid:146)s status as a real estate investment trust. On or after November 23, 2009, the Company may,
at its option, redeem the series C preferred stock in whole or in part, at any time and from time to time, for cash at
$25.00  per  share,  plus  accrued  and  unpaid  dividends  (whether  or  not  declared),  if  any,  to  and  including  the
redemption date. See Note U to the consolidated financial statements for a further description of the trust preferred
securities.

Cash  proceeds  from  the  issuance  of  trust  preferred  securities During  2005,  the  Company  formed  four
wholly-owned trust subsidiaries (Trusts) for the purpose of issuing an aggregate of $99.2 million of trust preferred
securities (the Trust Preferred Securities). The proceeds from the sale thereof were invested in junior subordinated
debt issued by the Company. All proceeds from the sale of the Trust Preferred Securities and the common securities
issued by the Trusts are invested in junior subordinated notes (Notes), which are the sole assets of the Trusts. The
Trusts pay dividends on the Trust Preferred Securities at the same rate as paid by the Company on the Notes held
by  the  Trusts.  The  Company  received  net  proceeds  of  $93.2  million  from  the  issuance  of  the  trust  preferred
securities.

Cash proceeds from the issuance of stock options During 2005, the Company received $6.4 million from

the issuance of common stock associated with the exercise of stock options.

Operating Activities (cid:150) Net cash (used in) provided by operating activities was $(812.8) million for 2005 as
compared to $(179.4) million for 2004 and $166.2 million for 2003. For 2005, the purchase of mortgages, net of loan
sales, of $1.4 billion and the decrease in restricted cash used for CMO pre-fundings of $252.7 million were primarily
used in operating activities. Funds used in operating activities during 2005 were partially offset by net earnings of
$270.3 million. Funds used in operating activities during 2004 were partially offset by net earnings of $257.6 million.
In  2003,  operating  activities  provided  loan  sales  net  of  loan  purchases  of  $88.3  million  and  net  earnings  of
$149.0 million.

Investing  Activities  (cid:150)  Net  cash  used  in  investing  activities  was  $2.9  billion  for  2005  as  compared  to
$12.6 billion for 2004 and $4.0 billion for 2003. For 2005, 2004 and 2003, net cash of $3.1 billion, $12.8 billion and
$4.1 billion, respectively, was used in investing activities to acquire mortgages, net of principal repayments, for
long-term investment.

Financing Activities (cid:150) Net cash provided by financing activities was $3.6 billion for 2005 as compared to
$13.0 billion for 2004 and $3.9 billion for 2003. For 2005, 2004 and 2003, net cash flows of $2.7 billion, $12.7 billion
and $3.4 billion, respectively, were provided by financing activities as a result of CMO financing, net of principal
repayments.

Inflation

The  consolidated  financial  statements  and  corresponding  notes  to  the  consolidated  financial  statements
have been prepared in accordance with GAAP, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased costs of our operations during each of 2005,

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2004 and 2003. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.
Inflation affects our operations primarily through its effect on interest rates, since interest rates normally increase
during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest
rates, demand for mortgages and a borrower(cid:146)s ability to qualify for mortgage financing in a purchase transaction
may be adversely affected. During periods of decreasing interest rates, borrowers may prepay their mortgages,
which in turn may adversely affect our yield and subsequently the value of our portfolio of mortgage assets.

Contractual Obligations

As of December 31, 2005, we had the following contractual obligations (in thousands):

Payments Due by Period

Total

Less than
one year

One to
Three Years

Three to
Five Years

More than
Five Years

CMO Borrowings (1)
Reverse repurchase agreements
Rate-locked mortgage pipeline
Trust preferred securities
Premises operating lease

agreements

$ 24,037,633 $ 9,733,417 $ 9,173,319 $ 3,330,895 $ 1,800,002
-
-
96,250

2,430,075
1,291,826
96,250

2,430,075
1,291,826
-

-
-
-

-
-
-

77,812

7,641

17,468

13,566

39,137

Total Contractual Obligations

$ 27,933,596 $ 13,462,959 $ 9,190,787 $ 3,344,461 $ 1,935,389

(1)

Payments on CMO borrowings are based on anticipated receipts of principal on underlying mortgage loan collateral
using expected prepayment rates. If actual mortgage prepayment rates differ from our estimates, the payment amounts
will vary from the reported amounts.

For additional information regarding our commitments refer to (cid:145)(cid:145)Note H(cid:151)CMO Borrowings(cid:146)(cid:146) and (cid:145)(cid:145)Note N(cid:151)

Commitments and Contingencies(cid:146)(cid:146) in the accompanying notes to the consolidated financial statements.

RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

The following table displays our ratio of earnings to fixed charges and ratio of earnings to combined fixed

charges and preferred stock dividends (1)(2):

Ratio of earnings to fixed

charges

Ratio of earnings to

combined fixed charges
and preferred stock
dividends

For the year ended December 31,

2005

2004

2003

2002

2001

1.23x

1.59x

1.70x

1.33x

- (4)

1.21x

1.58x

1.70x (3)

1.33x (3)

- (4)

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(2)

(3)
(4)

Earnings used in computing the ratio of earnings to fixed charges consist of net earnings before income taxes plus fixed
charges. Fixed charges include interest expense on debt and the portion of rental expense deemed to represent the
interest factor.
Financial  information  for  the  years  ended  December  31,  2003  to  2001  reflects  accounting  restatements  and
reclassifications  for  prior  periods.  In  addition,  prior  to  the  consolidation  of  IFC  on  July  1,  2003,  the  method  used  to
calculate the ratio of earnings to fixed charges and preferred stock dividends reflects the consolidated net earnings of
IMH less net earnings of IFC plus dividend distributions from IFC to IMH.
No preferred stock dividends were paid during this period as we did not have any preferred stock outstanding.
Earnings were insufficient to cover fixed charges. The amount of the deficiency for the year ended December 31, 2001
was $7.5 million.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General Overview

Although we manage credit, prepayment and liquidity risk in the normal course of business, we consider
interest rate risk to be a significant market risk, which could potentially have the largest material impact on our
financial condition and results of operations. Since a significant portion of our revenues and earnings are derived
from net interest income, we strive to manage our interest-earning assets and interest-bearing liabilities to generate
what  we  believe  to  be  an  appropriate  contribution  from  net  interest  income.  When  interest  rates  fluctuate,
profitability can be adversely affected by changes in the fair market value of our assets and liabilities and by the
interest  spread  earned  on  interest-earning  assets  and  interest-bearing  liabilities.  We  derive  income  from  the
differential  spread  between  interest  earned  on  interest-earning  assets  and  interest  paid  on  interest-bearing
liabilities. Any change in interest rates affects income received and income paid from assets and liabilities in varying
and typically in unequal amounts. Changing interest rates may compress or widen our interest rate margins and
affect overall earnings.

Interest rate risk management is the responsibility of ALCO, which reports results of interest rate risk analysis
to the board of directors on a quarterly basis. ALCO establishes policies that monitor and coordinate sources, uses
and pricing of funds. ALCO also attempts to reduce the volatility in net interest income by managing the relationship
of interest rate sensitive assets to interest rate sensitive liabilities. In addition, various modeling techniques are used
to value interest sensitive mortgage-backed securities, including interest-only securities. The value of investment
securities available-for-sale is determined using a discounted cash flow model using prepayment rate, discount
rate  and  credit  loss  assumptions.  Our  investment  securities  portfolio  is  available-for-sale,  which  requires  us  to
perform market valuations of the securities in order to properly record the portfolio. We continually monitor the
interest rates of our investment securities portfolio as compared to prevalent interest rates in the market. We do not
currently maintain a securities trading portfolio and are not exposed to market risk as it relates to trading activities.

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Changes in Interest Rates

ALCO follows interest rate risk management policies intended to limit our exposure to changes in interest
rates primarily associated with cash flows on our adjustable rate borrowings. Our primary objective is to limit our
exposure  to  the  variability  in  future  cash  flows  attributable  to  the  variability  of  one-month  LIBOR,  which  is  the
underlying index of our adjustable rate borrowings. We also monitor on an ongoing basis the prepayment risks that
arise in fluctuating interest rate environments. Our interest rate risk management policies are formulated with the
intent to substantially offset the potential adverse effects of changing interest rates on cash flows on adjustable rate
borrowings.

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

We measure the sensitivity of our net interest income to changes in interest rates affecting interest sensitive
assets and liabilities using various simulations. These simulations take into consideration changes that may occur
in investment and financing strategies, the forward yield curve, interest rate risk management strategies, mortgage
prepayment  speeds  and  the  volume  of  mortgage  acquisitions  and  originations.  As  part  of  various  interest  rate
simulations,  we  calculate  the  effect  of  potential  changes  in  interest  rates  on  our  interest-earning  assets  and
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interest-bearing liabilities and their affect on overall earnings. The simulations assume instantaneous and parallel
shifts in interest rates. First, we estimate net interest income along with net cash flows on derivatives for the next
twelve months using balance sheet data and the notional amount of derivatives as of December 31, 2005 and
12-month projections of the following primary drivers affecting net interest income:

(cid:127) future interest rates using forward yield curves, which are considered market estimates of future interest

rates;

(cid:127) mortgage acquisition and originations;

(cid:127) mortgage prepayment rate assumptions; and

(cid:127) forward swap rates.

We refer to the 12-month projection of net interest income along with the 12-month projection of net cash
flows on derivatives as the (cid:145)(cid:145)base case.(cid:146)(cid:146) For financial reporting purposes, net cash flows on derivative instruments
are included in realized gain (loss) on derivative instruments on the consolidated financial statements. However, for
purposes of interest rate risk analysis we include net cash flows on derivatives in our base case simulations as we
acquire derivatives to offset the effect that changes in interest rates have on variable borrowing costs, such as CMO
and reverse repurchase borrowings. We believe that including net cash flows on derivatives in our interest rate risk
analysis presents a more useful simulation of the effect of changing interest rates on net cash flows generated by
our long-term mortgage portfolio.

Once the base case has been established, we (cid:145)(cid:145)shock(cid:146)(cid:146) the base case with instantaneous and parallel shifts in
interest rates in 100 basis point increments upward and downward. Calculations are made for each of the defined
instantaneous and parallel shifts in interest rates over or under the forward yield curve used to determine the base
case and include any associated changes in projected mortgage prepayment rates caused by changes in interest
rates. The results of each 100 basis point change in interest rates are then compared against the base case to
determine the estimated dollar and percentage change to base case. The simulations consider the affect of interest
rate changes on interest sensitive assets and liabilities as well as derivatives. The simulations also consider the
impact that instantaneous and parallel shift in interest rates have on prepayment rates and the resulting affect of
accelerating or decelerating amortization of premium and securitization costs.

In the following table, the down 100 basis point scenario as of December 31, 2005 represents our projection
of the net change from base case net interest income, which is derived from assumptions as previously discussed,
if market interest rates were to immediately decline by 100 basis points. This means that we reduce interest rates at
all data points along our projected forward yield curve by 100 basis points and recalculate our projection of net
interest income over the next 12 months. In addition, based on changes in interest rates, or changes in our forward
yield  curve,  our  model  adjusts  mortgage  prepayment  rates  and  recalculates  amortization  of  acquisition  and
securitization costs and net cash receipts or payments on derivates as part of the calculation of net interest income.
Thus, if a 100 basis point decline occurred the projected volatility to net interest income is positively impacted
through our use of derivatives.

Over the past year, the interest rate risk profile shifted from modestly asset sensitive to modestly liability
sensitive. This occurred as part of a deliberate and long-term optimization strategy as mortgages having marginally
longer  duration  than  that  of  CMO  borrowings  were  added  to  our  balance  sheet  during  2005.  Other  factors
contributing to the shift in the interest rate risk profile include the increase in the overall level of interest rates, the
flattening of the yield curve and slower expected prepayment behavior. However, since our estimates are based
upon numerous assumptions, actual sensitivity to interest rate changes could vary if actual experience differs from
the assumptions used.

The following table estimates the financial impact to base case, including net cash flow from derivatives, from
various  instantaneous  and  parallel  shifts  in  interest  rates  based  on  both  our  on-balance  sheet  structure  and

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off-balance sheet structure, which refers to the notional amount of derivatives that are not recorded on our balance
sheet as of December 31, 2005 and 2004 (dollar amounts in millions):

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Instantaneous and Parallel Change in Interest Rates (2)
Up 300 basis points, or 3% (3)
Up 200 basis points, or 2%
Up 100 basis points, or 1%
Down 100 basis points or 1%
Down 200 basis points or 2%
Down 300 basis points or 3%

Instantaneous and Parallel Change in Interest Rates (2)
Up 300 basis points, or 3% (3)
Up 200 basis points, or 2%
Up 100 basis points, or 1%
Down 100 basis points or 1%

Changes in base case as of December 31, 2005 (1)

Excluding net cash
flow on derivatives

Net cash
flow on
derivatives

Including net cash
flow on derivatives

$

(%)

$

$

(%)

(394.0)
(263.2)
(129.9)
125.8
251.8
379.3

1,340
895
442
(428)
(856)
1,290

367.0
244.6
122.3
(122.3)
(244.6)
(366.6)

(27.0)
(18.5)
(7.6)
3.4
7.1
12.6

(21)
(14)
(6)
3
6
10

Changes in base case as of December 31, 2004 (1)

Excluding net cash
flow on derivatives

Net cash
flow on
derivatives

Including net cash
flow on derivatives

$

(%)

$

$

(%)

(380.1)
(258.3)
(123.2)
114.9

(132)
(90)
(43)
40

328.3
218.9
109.4
(109.4)

(51.8)
(39.4)
(13.8)
5.5

(18)
(14)
(5)
2

(1)

(2)
(3)

The dollar and percentage changes represent base case for the next twelve months versus the change in base case using
various instantaneous and parallel interest rate change simulations, excluding the effect of amortization of loan discounts
to base case.
Instantaneous and parallel interest rate changes over and under the projected forward yield curve.
This simulation was added to our analysis as it is relevant in light of the interest rate environment as of December 31, 2004
and 2005 and the projected forward yield curves for 2004 and 2005.

The use of derivatives to manage risk associated with changes in interest rates is an integral part of our
strategy. The amount of cash payments or cash receipts on derivatives is determined by (1) the notional amount of
the derivative and (2) current interest rate levels in relation to the various strikes or coupons of derivatives during a
particular time period. As of December 30, 2005 and December 31, 2004, we had notional balances of interest rate
swaps,  caps,  and  floors  of  $20.2  billion  and  $15.1  billion,  respectively,  with  fair  values  of  $248.2  million  and
$92.5 million, respectively. By using derivatives, we attempt to minimize the effect of both upward and downward
interest rate changes on our long-term mortgage portfolio. Our goal is to minimize significant changes to base case
net interest income, including net cash flows from derivatives, as interest rates change. We primarily acquire swaps
to essentially convert our adjustable rate CMO borrowings into fixed rate borrowings. For instance, we receive
one-month LIBOR on swaps, which offsets interest expense on adjustable rate CMO borrowings, and we pay a
fixed interest rate.

The following table presents the extent to which changes in interest rates and changes in the volume of
interest rate sensitive assets and interest rate sensitive liabilities have affected interest income and interest expense
during the periods indicated. Information is provided on mortgage assets and borrowings on mortgage assets, only,
with respect to the following:

(cid:127) changes attributable to changes in volume (changes in volume multiplied by prior rate);

(cid:127) changes attributable to changes in rate (changes in rate multiplied by prior volume);

(cid:127) changes in interest due to both rate and volume; and

(cid:127) net change.

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Increase (decrease) in:

Subordinated securities collateralized by mortgages
Mortgages held as CMO collateral
Mortgages held-for-investment and held-for-sale
Finance receivables

Change in interest income on mortgage assets

CMO borrowings
Reverse repurchase agreements

Year Ended December 31, 2005 over 2004

Volume

Rate

Rate/Volume Net Change

(in thousands)

$

1,497
383,337
43,179
(7,740)

420,273

217,886
14,756

$

(2,579)
36,804
10,059
4,422

48,706

215,106
39,169

$

(1,026)
22,800
4,107
(1,368)

24,513

132,193
9,993

$

(2,108)
442,941
57,345
(4,686)

493,492

565,185
63,918

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Change in interest expense on borrowings on mortgage

assets

232,642

254,275

142,186

629,103

Change in net interest income on mortgage assets

$187,631

$(205,569)

$(117,673)

$(135,611)

Increase (decrease) in:

Subordinated securities collateralized by mortgages
Mortgages held as CMO collateral
Mortgages held-for-investment and held-for-sale
Finance receivables

Change in interest income on mortgage assets

CMO borrowings
Reverse repurchase agreements
Borrowings secured by investment securities

Change in interest expense on borrowings on mortgage

assets

Change in net interest income on mortgage assets

Year Ended December 31, 2004 over 2003

Volume

Rate

Rate/Volume Net Change

(in thousands)

$

(432)
367,388
65,717
(2,424)

430,249

206,112
18,681
(2,316)

222,477

$207,772

$

402
(30,616)
1,877
(1,666)

(30,003)

(11,801)
4,296
-

$

(45)
(35,435)
3,568
139

(31,773)

(13,963)
2,478
-

$

(75)
301,337
71,162
(3,951)

368,473

180,348
25,455
(2,316)

(7,505)

(11,485)

203,487

$(22,498)

$(20,288)

$164,986

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  information  required  by  this  Item  8  is  incorporated  by  reference  to  Impac  Mortgage  Holdings,  Inc.(cid:146)s
Consolidated Financial Statements and Independent Auditors(cid:146) Report beginning at page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures of the Company that are designed to
ensure that information required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 (the (cid:145)(cid:145)Exchange Act(cid:146)(cid:146)) is recorded, processed, summarized and reported, within
the  time  periods  specified  in  the  SEC(cid:146)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(cid:146)s
management,  including  its  principal  executive  and  principal  financial  officers,  or  persons  performing  similar
functions, as appropriate to allow timely decisions regarding required disclosure.

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As of December 31, 2005, our CEO and CFO, with the participation of other management of the Company,
evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
or 15(d)-15(e) promulgated under the Exchange Act, and based upon that evaluation, our CEO and CFO concluded
that these disclosure controls and procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC(cid:146)s rules and forms.

Management(cid:146)s Report on Internal Control over Financial Reporting

Introduction

Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Section 13a-15(f) of the Securities Exchange Act of 1934, as amended). Internal
control over financial reporting is a process designed by, or under the supervision of, the Company(cid:146)s CEO and CFO
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company(cid:146)s
financial  statements  for  external  reporting  purposes  in  conformity  with  U.S.  generally  accepted  accounting
principles  and  include  those  policies  and  procedures  that  (i) pertain  to  the  maintenance  of  records  that  in
reasonable  detail  accurately  and  fairly  reflect  the  transactions  and  disposition  of  the  assets  of  the  company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company(cid:146)s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems  determined  effective  could  provide  only  reasonable,  not  absolute,  assurance  with  respect  to  financial
statement preparation and presentation.

Management(cid:146)s Assessment

As of December 31, 2005, management conducted an assessment of the effectiveness of the Company(cid:146)s
internal  control  over  financial  reporting  based  on  the  framework  established  in  Internal  Control(cid:151)Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
the  criteria  established  by  COSO,  management  concluded  that  the  Company(cid:146)s  internal  control  over  financial
reporting was effective as of December 31, 2005.

Auditor Reports

Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has
been  audited  by  Ernst &  Young  LLP,  the  independent  registered  public  accounting  firm  that  also  audited  our
consolidated financial statements. Ernst & Young LLP(cid:146)s report on management(cid:146)s assessment of our internal control
over financial reporting appears on page 73 hereof and is incorporated by reference herein.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2005, the Company completed its remediation efforts with respect to
the  two  material  weaknesses  in  Internal  Control  Over  Financial  Reporting  that  were  previously  reported  as  of
December 31, 2004. These remediation efforts are discussed below under (cid:145)(cid:145)Remediation Efforts Related to the
Material Weaknesses in Internal Control Over Financial Reporting(cid:146)(cid:146) section below.

Remediation Efforts Related to the Material Weakness in Internal Control over Financial Reporting

Material Weakness #1

As of December 31, 2004, the Company(cid:146)s internal control over financial reporting intended to ensure the
proper  accounting  and  reporting  for  certain  complex  transactions  and  financial  reporting  matters  were  not
designed or operating effectively. Based on the assessment of our internal control over financial reporting as of

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December 31,  2005  as  discussed  above  under  (cid:145)(cid:145)Management(cid:146)s  Report  on  Internal  Control  over  Financial
Reporting(cid:146)(cid:146), this material weakness has been remediated as of December 31, 2005 by implementing the following:

Prior to fourth quarter 2005:

(cid:127) we appointed an Executive Vice President, Chief Accounting Officer;

(cid:127) we hired a Tax Manager to lead the Company(cid:146)s federal and state income tax functions;

(cid:127) we  hired  an  additional  Assistant  Controller  to  improve  the  monthly  close  process  and  hired  additional

technical accounting staff;

(cid:127) we established controls to review the Company(cid:146)s systems and processes related to financial reporting and

accounting and enhanced our documentation of critical accounting policies;

(cid:127) we enhanced our documentation of critical accounting policies;

(cid:127) we conducted internal audits of high risk process areas; and

(cid:127) we began the implementation of the processes completed in the quarter ended December 31, 2005 as

noted below.

During  the  quarter  ended  December 31,  2005,  the  Company  completed  its  remediation  process  by
implementing  the  following,  which  have  materially  affected,  or  are  reasonably  likely  to  materially  affect  the
Company(cid:146)s internal control over financial reporting:

(cid:127) we further expanded our technical resources by hiring a VP of Technical Accounting and a third Assistant
Controller. In all, we added six Certified Public Accountants with experience from large accounting firms
(i.e. the (cid:145)(cid:145)Big Four(cid:146)(cid:146)) in connection with our remediation efforts;

(cid:127) we  reorganized,  expanded  and  reengineered  the  Company(cid:146)s  accounting  and  finance  departments;
including  Technical  Accounting,  Financial  Reporting,  Tax  Accounting  and  Financial  Planning  and
Budgeting groups;

(cid:127) we  completed  the  establishment  of  our  Internal  Audit  Department  that  performs  risk  assessment  and
monitoring of our systems of internal controls and of our formal policies and procedures throughout our
organization; and

(cid:127) we  established  an  Enterprise  Risk  Management  group  including  the  hiring  a  SVP  of  Enterprise  Risk

Management to lead corporate risk assessment and manage credit and market risk.

Material Weakness #2

As  of  December 31,  2004,  the  Company(cid:146)s  internal  control  over  financial  reporting  intended  to  ensure
adequate  access  and  change  control  over  end-user  computing  spreadsheets  was  not  designed  properly.  In
addition,  the  information  technology  general  controls  related  to  access  and  program  changes  were  deficient,
resulting  in  a  potential  lack  of  reliability  and  integrity  of  the  financial  information  which  was  used  in  these
spreadsheets. Based on the assessment of our internal control over financial reporting as of December 31, 2005 as
discussed  above  under  (cid:145)(cid:145)Management(cid:146)s  Report  on  Internal  Control  over  Financial  Reporting(cid:146)(cid:146),  this  material
weakness has been remediated by implementing the following:

Prior to fourth quarter 2005:

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(cid:127) we evaluated and developed an implementation plan for an automated end-user computing tool to ensure

proper access and data integrity.

During  the  quarter  ended  December 31,  2005,  the  Company  completed  its  remediation  process  by
implementing  the  following,  which  have  materially  affected,  or  are  reasonably  likely  to  materially  affect  the
Company(cid:146)s internal control over financial reporting:

(cid:127) we analyzed all of the end-user computing spreadsheets identified by the business processes that have a

material impact on the financial statements;

(cid:127) we  conducted  a  baseline  review  of  the  critical  end-user  computing  spreadsheets  to  validate  the

methodology underlying the spreadsheet(cid:146)s calculations, individual formulas and source data;

(cid:127) we established a central repository for all critical end-user spreadsheets and set up independent validation

of each subsequent iteration of the spreadsheets to test the accuracy of any modifications;

(cid:127) we conducted a systematic review of user entitlements for all critical applications systems, significantly
strengthened the change control process and established procedures for periodic entitlement reviews; and

(cid:127) we  improved  documentation  of  our  policies  and  procedures  for  change  control  and  established  an

Information Technology self-assessment review of this area.

We believe we have remediated the material weaknesses identified as of December 31, 2004, which supports
our conclusion that the Company(cid:146)s internal control over financial reporting was effective as of December 31, 2005.
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Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

The Board of Directors and Shareholders
Impac Mortgage Holdings, Inc.

We  have  audited  management(cid:146)s  assessment,  included  in  the  accompanying  Management(cid:146)s  Report  on  Internal
Control over Financial Reporting, that Impac Mortgage Holdings, Inc. (the Company) maintained effective internal
control  over  financial  reporting  as  of  December  31,  2005,  based  on  criteria  established  in  Internal  Control  (cid:150)
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO  criteria).  Impac  Mortgage  Holdings,  Inc.(cid:146)s  management  is  responsible  for  maintaining  effective  internal
control  over  financial  reporting  and  for  its  assessment  of  the  effectiveness  of  internal  control  over  financial
reporting.  Our  responsibility  is  to  express  an  opinion  on  management(cid:146)s  assessment  and  an  opinion  on  the
effectiveness of the Company(cid:146)s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining  an  understanding  of  internal  control  over  financial  reporting,  evaluating  management(cid:146)s  assessment,
testing  and  evaluating  the  design  and  operating  effectiveness  of  internal  control,  and  performing  such  other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A  company(cid:146)s  internal  control  over  financial  reporting  is  a  process  designed  to  provide  reasonable  assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company(cid:146)s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance  regarding  prevention  or  timely  detection  of  unauthorized  acquisition,  use,  or  disposition  of  the
company(cid:146)s assets that could have a material effect on the financial statements.

Because  of  its  inherent  limitations,  internal  control  over  financial  reporting  may  not  prevent  or  detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, management(cid:146)s assessment that Impac Mortgage Holdings, Inc. maintained effective internal control
over financial reporting as of December 31, 2005, is  fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Impac Mortgage Holdings, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on the COSO criteria.

We  also  have  audited,  in  accordance  with  the  standards  of  the  Public  Company  Accounting  Oversight  Board
(United States), the 2005 consolidated financial statements of Impac Mortgage Holdings, Inc. and our report dated
March 7, 2006, expressed an unqualified opinion thereon.

Los Angeles, California
March 7, 2006

/s/ Ernst & Young LLP

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ITEM 9B. OTHER INFORMATION

On  January  31,  2006,  the  Impac  Companies  Deferred  Compensation  Plan  was  amended  and  restated
effective as of January 1, 2005 to, generally, address Section 409A of the Internal Revenue Code, include dividend
equivalent rights, refine the definition of commissions, how to make change elections under the plan, and revise
change  of  control  to  35%  beneficial  ownership.  On  January  31,  2006,  the  Impac  Companies  Deferred
Compensation Plan was terminated due to market conditions and lack of participation. Employees who hold a
position of at least Vice President and perform functions as an officer and are deemed highly compensated were
eligible to participate in the Deferred Compensation Plan. Participants were permitted to defer up to 50% of their
annual salary and their entire bonus or commissions on a yearly basis and to designate investments based on
investment  choices  provided  to  them.  The  Company  does  not  consider  the  termination  of  the  Deferred
Compensation Plan to be material to the Company so as to require disclosure of such information in response to
Item  1.02  of  Form  8-K.  However,  to  the  extent  that  the  information  reported  is  considered  material,  then  the
Company hereby includes such information.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  by  this  Item  10  is  hereby  incorporated  by  reference  to  Impac  Mortgage
Holdings, Inc.(cid:146)s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
Impac Mortgage Holdings, Inc.(cid:146)s 2005 fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by  this  Item  11  is  hereby  incorporated  by  reference  to  Impac  Mortgage
Holdings, Inc.(cid:146)s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
Impac Mortgage Holdings, Inc.(cid:146)s 2005 fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required  by  this  Item  12  is  hereby  incorporated  by  reference  to  Impac  Mortgage
Holdings, Inc.(cid:146)s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
Impac Mortgage Holdings, Inc.(cid:146)s 2005 fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by  this  Item  13  is  hereby  incorporated  by  reference  to  Impac  Mortgage
Holdings, Inc.(cid:146)s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
Impac Mortgage Holdings, Inc.(cid:146)s 2005 fiscal year.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  required  by  this  Item  14  is  hereby  incorporated  by  reference  to  Impac  Mortgage
Holdings, Inc.(cid:146)s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
Impac Mortgage Holdings, Inc.(cid:146)s 2005 fiscal year.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(3) Exhibits

PART IV

The exhibits listed on the accompanying Exhibit Index are incorporated by reference into this Item 15 of this

Annual Report on Form 10-K.

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of
Newport Beach, State of California, on the 15th day of March 2006.

SIGNATURES

IMPAC MORTGAGE HOLDINGS, INC.

by /s/ JOSEPH R. TOMKINSON

Joseph R. Tomkinson
Chairman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following

persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ JOSEPH R. TOMKINSON

Joseph R. Tomkinson

/s/ RICHARD J. JOHNSON

Richard J. Johnson

Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)

March 15, 2006

Executive Vice President and Chief Financial
Officer (Principal Financial Officer)

March 15, 2006

/s/ WILLIAM S. ASHMORE

President and Director

March 15, 2006

William S. Ashmore

/s/ GRETCHEN D. VERDUGO

Gretchen D. Verdugo

Executive Vice President and Chief Accounting
Officer (Principal Accounting Officer)

March 15, 2006

/s/ JAMES WALSH

James Walsh

Director

March 15, 2006

/s/ FRANK P. FILIPPS

Director

March 15, 2006

Frank P. Filipps

/s/ STEPHAN R. PEERS

Director

March 15, 2006

Stephan R. Peers

/s/ WILLIAM E. ROSE

Director

March 15, 2006

William E. Rose

/s/ LEIGH J. ABRAMS

Director

March 15, 2006

Leigh J. Abrams

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Exhibit
Number Description

Exhibit Index

3.1

3.1(a)

3.1(b)

3.1(c)

3.1(d)

3.1(e)

3.1(f)

3.1(g)

3.1(h)

3.1(i)

3.1(j)

3.1(k)

3.1(l)

Charter of the Registrant (incorporated by reference to the corresponding exhibit number to the
Registrant(cid:146)s Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on November 8, 1995).

Certificate of Correction of the Registrant (incorporated by reference to exhibit 3.1(a) of the
Registrant(cid:146)s 10-K for the year ended December 31, 1998).

Articles of Amendment of the Registrant (incorporated by reference to exhibit 3.1(b) of the
Registrant(cid:146)s 10-K for the year ended December 31, 1998).

Articles of Amendment for change of name to Charter of the Registrant (incorporated by reference
to exhibit number 3.1(a) of the Registrant(cid:146)s Current Report on Form 8-K/A Amenment No. 1, filed
February 12, 1998).

Articles Supplementary and Certificate of Correction for Series A Junior Participating Preferred
Stock of the Registrant (incorporated by reference to exhibit 3.1(d) of the Registrant(cid:146)s 10-K for the
year ended December 31, 1998).

Articles Supplementary for Series B 10.5% Cumulative Convertible Preferred Stock of the
Registrant (incorporated by reference to exhibit 3.1b of the Registrant(cid:146)s Current Report on
Form 8-K, filed December 23, 1998).

Articles Supplementary for Series C 10.5% Cumulative Convertible Preferred Stock of the
Registrant (incorporated by reference to the corresponding exhibit number of the Registrant(cid:146)s
Annual Report on Form 10-K for the period ending December 31, 1999.

Certificate of Correction for Series C Preferred Stock of the Registrant (incorporated by reference
to the corresponding exhibit number of the Registrant(cid:146)s Annual Report on Form 10-K for the
period ending December 31, 1999).

Articles Supplementary, filed with the State Department of Assessments and Taxation of Maryland
on February 24, 2000, reclassifying Series B Preferred Stock of the Registrant.

Articles Supplementary, filed with the State Department of Assessments and Taxation of Maryland
on July 12, 2002, reclassifying Series C Preferred Stock of the Registrant (incorporated by
reference to exhibit 9 of the Registrant(cid:146)s Form 8-A/A, Amendment No. 2, filed July 30, 2002).

Articles of Amendment, filed with the State Department of Assessments and Taxation of Maryland
on July 16, 2002, increasing authorized shares of Common Stock of the Registrant (incorporated
by reference to exhibit 10 of the Registrant(cid:146)s Form 8-A/A, Amendment No. 2, filed July 30, 2002).

Articles of Amendment, filed with the State Department of Assessments and Taxation of Maryland
on June 22, 2004, amending and restating Article VII of the Registrant(cid:146)s Charter (incorporated by
reference to exhibit 7 of the Registrant(cid:146)s Form 8-A/A, Amendment No. 1, filed June 30, 2004).

Articles Supplementary designating the Company(cid:146)s 9.375% Series B Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, filed with the
State Department of Assessments and Taxation of Maryland on May 26, 2004 (incorporated by
reference to exhibit 3.8 of the Registrant(cid:146)s Form 8-A/A, Amendment No. 1, filed June 30, 2004).

3.1(m)

Articles Supplementary designating the Company(cid:146)s 9.125% Series C Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, filed with the
State Department of Assessments and Taxation of Maryland on November 18, 2004 (incorporated
by reference to exhibit 3.10 of the Registrant(cid:146)s Form 8-A filed November 19, 2004).

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Exhibit
Number Description

Bylaws of the Registrant, as amended and restated (incorporated by reference to the
corresponding exhibit number of the Registrant(cid:146)s Quarterly Report on Form 10-Q for the period
ending March 31, 1998).

Amendment to Bylaws of the Registrant (incorporated by reference to exhibit 3.2(a) of the
Registrant(cid:146)s Registration Statement of Form S-3 (File No. 333-111517) filed with the Securities and
Exchange Commission on December 23, 2003).

Second Amendment to Bylaws of the Registrant (incorporated by reference to Exhibit 3.2(b) of the
Registrant(cid:146)s Form 8-K, filed with the Securities and Exchange Commission on April 1, 2005).

Form of Stock Certificate of the Company (incorporated by reference to the corresponding exhibit
number to the Registrant(cid:146)s Registration Statement on Form S-11, as amended (File No. 33-96670),
filed with the Securities and Exchange Commission on September 7, 1995).

Rights Agreement between the Registrant and BankBoston, N.A. (incorporated by reference to
exhibit 4.2 of the Registrant(cid:146)s Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on October 14, 1998).

Amendment No. 1 to Rights Agreement between the Registrant and BankBoston, N.A.
(incorporated by reference to exhibit 4.2(a) of the Registrant(cid:146)s Registration Statement on Form
8-A/A as filed with the Securities and Exchange Commission on December 23, 1998).

Specimen Certificate representing the 9.375% Series B Cumulative Redeemable Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Registrant(cid:146)s Form 8-A, filed with the Securities and
Exchange Commission on May 27, 2004).

Specimen Certificate representing the 9.125% Series C Cumulative Redeemable Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Registrant(cid:146)s Form 8-A, filed with the Securities and
Exchange Commission on November 19, 2004).

Amended and Restated Junior Subordinated Indenture between Impac Mortgage Holdings, Inc.
and JPMorgan Chase Bank, N.A. dated September 16, 2005 (incorporated by reference to Exhibit
4.1 of the Registrant(cid:146)s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on September 20, 2005).

Junior Subordinated Indenture between Impac Mortgage Holdings, Inc. and Wilmington Trust
Company dated April 22, 2005 (incorporated by reference to Exhibit 4.1 of the Registrant(cid:146)s Current
Report on Form 8-K, filed with the Securities and Exchange Commission on April 27, 2005).

Junior Subordinated Indenture between Impac Mortgage Holdings, Inc. and JPMorgan Chase
Bank, National Association, dated May 20, 2005 (incorporated by reference to Exhibit 4.1 of the
Registrant(cid:146)s Current Report on Form 8-K, filed with the Securities and Exchange Commission on
May 25, 2005).

Indenture between Impac Mortgage Holdings, Inc. and Wilmington Trust Company, as trustee,
dated October 18, 2005.

1995 Stock Option, Deferred Stock and Restricted Stock Plan, as amended and restated
(incorporated by reference to exhibit 10.1 of the Registrant(cid:146)s Quarterly Report on Form 10-Q for
the period ending March 31, 1998).

Form of 2002 Indemnification Agreement between the Registrant and its Directors and Officers
(incorporated by reference to exhibit 10.1(a) of the Registrant(cid:146)s Quarterly Report on Form 10-Q for
the period ended September 30, 2004).

Schedule of each officer and director that is a party to an Indemnification Agreement (incorporated
by reference to exhibit 10.1(b) of the Registrant(cid:146)s Quarterly Report on Form 10-Q for the period
ended September 30, 2004).

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3.2

3.2(a)

3.2(b)

4.1

4.2

4.2(a)

4.3

4.4

4.5

4.6

4.7

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10.1*

10.2(a)

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Exhibit
Number Description

10.3

10.4

10.5

10.5(a)

10.6

10.7

10.8*

10.8(a)*

10.8(b)*

10.8(c)*

10.8(d)*

10.9*

10.10*

Form of Loan Purchase and Administrative Services Agreement between the Registrant and Impac
Funding Corporation (incorporated by reference to exhibit 10.9 to the Registrant(cid:146)s Registration
Statement on Form S-11, as amended (File No. 33-96670), filed with the Securities and Exchange
Commission on September 7,1995).

Servicing Agreement effective November 11, 1995 between the Registrant and Impac Funding
Corporation (incorporated by reference to exhibit 10.14 to the Registrant(cid:146)s Registration Statement
on Form S-11, as amended (File No. 333-04011), filed with the Securities and Exchange
Commission on May 17, 1996).

Lease dated June 1, 1998 regarding 1401 Dove Street, Newport Beach California (incorporated by
reference to exhibit 10.17 of the Registrant(cid:146)s 10-K for the year ended December 31, 1998).

Second Amendment to Lease dated October 1, 1999 between The Realty Associates Fund V, L.P.,
the Registrant and Impac Funding Corporation regarding 1401 Dove Street, Newport Beach
California (incorporated by reference to exhibit number 10.4(d) of the Registrant(cid:146)s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000).

Office Lease, First Amendment to Office Lease, and Assignment, Assumption and Consent to
Assignment of Lease with Property California OB One Corporation and Assignment to Impac
Funding Corporation regarding 15050 Avenue of Science Suite 210 San Diego California.
(incorporated by reference to exhibit number 10.10 of the Registrant(cid:146)s Annual Report on Form
10-K for the year ended December 31, 2001).

Lease dated March 4, 2005 regarding 19500 Jamboree Road, Newport Beach California
(incorporated by reference to exhibit 10.8 of the Registrant(cid:146)s Annual Report on Form 10-K for the
year ended December 31, 2004).

Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred Stock and Restricted Stock Plan
(incorporated by reference to Appendix A of Registrant(cid:146)s Definitive Proxy Statement filed with the
SEC on April 30, 2001).

Amendment to Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred Stock and
Restricted Stock Plan (incorporated by reference to exhibit 4.1(a) of the Registrant(cid:146)s Form S-8 filed
with the SEC on March 1, 2002).

Amendment No. 2 to Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred Stock and
Restricted Stock Plan (incorporated by reference to exhibit 10.10(b) of the Registrant(cid:146)s Annual
Report on Form 10-K for the year ended December 31, 2003).

Form of Stock Option Agreement for 2001 Stock Option, Deferred Stock and Restricted Stock
Plan (incorporated by reference to exhibit 10.2 of the Registrant(cid:146)s Quarterly Report on Form 10-Q
for the period ended September 30, 2004).

Form of Restricted Stock Agreement (incorporated by reference to exhibit 10.1 of the Registrant(cid:146)s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 2,
2005).

The Impac Companies 2006 Amended and Restated Deferred Compensation Plan.

Employment Agreement, made as of April 1, 2003, between Impac Funding Corporation and
Joseph R. Tomkinson (incorporated by reference to exhibit 10.1 of the Registrant(cid:146)s Current Report
on Form 8-K, filed July 15, 2003).

10.10(a)*

Amendment to Employment Agreement, dated September 9, 2004, between Impac Funding
Corporation and Joseph R. Tomkinson (incorporated by reference to exhibit 10.1 of the
Registrant(cid:146)s Current Report on Form 8-K, filed September 15, 2004).

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30MAR2006121

 
 
 
Exhibit
Number Description

10.11*

10.11(a)*

10.12*

10.12(a)*

10.13*

10.14*

10.15*

10.16

10.17

10.18

10.19

10.20

10.21

Employment Agreement, made as of April 1, 2003, between Impac Funding Corporation and
William S. Ashmore (incorporated by reference to exhibit 10.2 of the Registrant(cid:146)s Current Report
on Form 8-K, filed July 15, 2003).

Amendment to Employment Agreement, dated September 9, 2004, between Impac Funding
Corporation and William S. Ashmore (incorporated by reference to exhibit 10.2 of the Registrant(cid:146)s
Current Report on Form 8-K, filed September 15, 2004).

Employment Agreement, made as of April 1, 2003, between Impac Funding Corporation and
Richard J. Johnson (incorporated by reference to exhibit 10.3 of the Registrant(cid:146)s Current Report
on Form 8-K, filed July 15, 2003).

Amendment to Employment Agreement, dated September 9, 2004, between Impac Funding
Corporation and Richard J. Johnson (incorporated by reference to exhibit 10.3 of the Registrant(cid:146)s
Current Report on Form 8-K, filed September 15, 2004).

Guaranty, dated April 1, 2003, granted by Impac Mortgage Holdings, Inc. in favor of Joseph R.
Tomkinson (incorporated by reference to exhibit 10.4 of the Registrant(cid:146)s Current Report on Form
8-K, filed July 15, 2003).

Guaranty, dated April 1, 2003, granted by Impac Mortgage Holdings, Inc. in favor of William S.
Ashmore (incorporated by reference to exhibit 10.5 of the Registrant(cid:146)s Current Report on Form
8-K, filed July 15, 2003).

Guaranty, dated April 1, 2003, granted by Impac Mortgage Holdings, Inc. in favor of Richard J.
Johnson (incorporated by reference to exhibit 10.6 of the Registrant(cid:146)s Current Report on Form
8-K, filed July 15, 2003).

Underwriting Agreement, dated May 7, 2004, by and among Impac Mortgage Holdings, Inc., UBS
Securities LLC, RBC Capital Markets Corporation and Roth Capital Partners LLC (incorporated by
reference to exhibit 1.1 of the Registrant(cid:146)s Current Report on Form 8-K filed May 10, 2004).

Equity Distribution Agreement, dated May 12, 2004, between Impac Mortgage Holdings, Inc. and
UBS Securities LLC (incorporated by reference to exhibit 1.1 of the Registrant(cid:146)s Current Report on
Form 8-K filed May 13, 2004).

Underwriting Agreement, dated May 25, 2004, by and between Impac Mortgage Holdings, Inc.,
and Bear, Stearns & Co. Inc., Stifel, Nicolaus & Company, Incorporated, JMP Securities LLC, RBC
Dain Rauscher Inc., Advest, Inc., and Flagstone Securities, LLC (incorporated by reference to
exhibit 1.1 of the Registrant(cid:146)s Current Report on Form 8-K filed May 27, 2004).

Underwriting Agreement, dated May 25, 2004, by and between Impac Mortgage Holdings, Inc.,
and Bear, Stearns & Co. Inc., Stifel, Nicolaus & Company, Incorporated, JMP Securities LLC, RBC
Dain Rauscher Inc., Advest, Inc., and Flagstone Securities, LLC (incorporated by reference to
exhibit 1.1 of the Registrant(cid:146)s Current Report on Form 8-K filed May 27, 2004).

Underwriting Agreement, dated November 18, 2004, by and between Impac Mortgage Holdings,
Inc., and Bear, Stearns & Co. Inc., Stifel, Nicolaus & Company, Incorporated, and RBC Dain
Rauscher Inc. (incorporated by reference to exhibit 1.1 of the Registrant(cid:146)s Current Report on Form
8-K filed November 19, 2004).

Underwriting Agreement, dated November 18, 2004, by and between Impac Mortgage Holdings,
Inc., and UBS Securities LLC, Bear, Stearns & Co. Inc., Deutsche Bank Securities Inc., and JMP
Securities LLC (incorporated by reference to exhibit 1.1 of the Registrant(cid:146)s Current Report on
Form 8-K filed November 19, 2004).

10.22*

Employment Agreement between Impac Funding Corporation and Gretchen Verdugo executed
August 12, 2005 and effective as of February 1, 2005 (incorporated by reference to exhibit 10.1 of
the Registrant(cid:146)s Quarterly Report on Form 10-Q/A for the period ended June 30, 2005).

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30MAR200614310138

80

 
 
 
10.23*

10.24

10.25

10.26

10.27

10.28

10.29

12.1

21.1

23.1

23.2

31.1

31.2

32.1

*

**

Exhibit
Number Description

10.22(a)*

Addendum dated January 4, 2005 to Employment Agreement between Impac Funding Corporation
and Gretchen Verdugo (incorporated by reference to exhibit 10.1 of the Registrant(cid:146)s Current
Report on Form 8-K filed January 10, 2006).

Guaranty, effective February 1, 2005, granted by Impac Mortgage Holdings, Inc. in favor of
Gretchen D. Verdugo (incorporated by reference to exhibit 10.1 of the Registrant(cid:146)s Quarterly
Report on Form 10-Q/A for the period ended June 30, 2005).

Second Amended and Restated Trust Agreement among Impac Mortgage Holdings, Inc.,
JPMorgan Chase Bank, N.A., Chase Manhattan Bank USA, N.A., and the Administrative Trustees
named therein, dated September 16, 2005 (incorporated by reference to Exhibit 10.1 of the
Registrant(cid:146)s Current Report Form 8-K, filed with the Securities and Exchange Commission
September 20, 2005).

Amended and Restated Trust Agreement among Impac Mortgage Holdings, Inc., Wilmington Trust
Company, and the Administrative Trustees named therein, dated April 22, 2005 (incorporated by
reference to Exhibit 10.1 of the Registrant(cid:146)s Current Report on Form 8-K, filed with the Securities
and Exchange Commission April 27, 2005).

Amended and Restated Trust Agreement among Impac Mortgage Holdings, Inc., JPMorgan Chase
Bank, National Association, as Property Trustee, Chase Bank USA, National Association, as
Delaware Trustee, and the Administrative Trustees named therein, dated May 20, 2005
(incorporated by reference to Exhibit 10.1 of the Registrant(cid:146)s Current Report on Form 8-K, filed
with the Securities and Exchange Commission May 25, 2005).

Common Stock Sales Agreement, dated September 30, 2005, by and between Impac Mortgage
Holdings, Inc., and Brinson Patrick Securities Corporation (incorporated by reference to
Exhibit 1.1(a) of the Registrant(cid:146)s Current Report on Form 8-K, filed with the Securities and
Exchange Commission October 3, 2005).

Preferred Stock Sales Agreement, dated September 30, 2005, by and between Impac Mortgage
Holdings, Inc. and Brinson Patrick Securities Corporation (incorporated by reference to Exhibit
1.1(b) of the Registrant(cid:146)s Current Report on Form 8-K, filed with the Securities and Exchange
Commission October 3, 2005).

Amended and Restated Declaration of Trust among Impac Mortgage Holdings, Inc., Wilmington
Trust Company, as Delaware and Institutional Trustee, and the Administrative Trustees named
therein, dated October 18, 2005.

Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.

Subsidiaries of the Registrant (incorporated by reference to exhibit 21.1 of the Registrant(cid:146)s
Quarterly Report on Form 10-Q for the period ended June 30, 2003).

Consent of Ernst & Young LLP.

Consent of KPMG LLP.

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Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

Denotes a management or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of
Regulation S-K
This exhibit shall not be deemed (cid:145)(cid:145)filed(cid:146)(cid:146) for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any filings.

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30MAR2006121

 
 
 
CONSOLIDATED FINANCIAL STATEMENTS

INDEX

Report of Independent Registered Public Accounting Firms .............................................................

Consolidated Balance Sheets as of December 31, 2005 and 2004 ....................................................

F-2

F-4

Consolidated Statements of Operations and Comprehensive Earnings for the years ended December

31, 2005, 2004 and 2003 .........................................................................................................

F-5

Consolidated Statements of Changes in Stockholders(cid:146) Equity for the years ended December 31, 2005,

2004 and 2003 .......................................................................................................................

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 ........

F-7

F-8

Notes to Consolidated Financial Statements ..................................................................................

F-10

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30MAR2006121

F-1

 
 
 
Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Impac Mortgage Holdings, Inc.

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We have audited the accompanying consolidated balance sheet of Impac Mortgage Holdings, Inc. and subsidiaries
(the  Company)  as  of  December  31,  2005,  and  the  related  consolidated  statements  of  operations  and
comprehensive earnings, changes in stockholders(cid:146) equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company(cid:146)s management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting  principles  used  and  significant  estimates  made  by  management,  as  well  as  evaluating  the  overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Impac Mortgage Holdings, Inc. and subsidiaries at December 31, 2005, and the consolidated
results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.

We  also  have  audited,  in  accordance  with  the  standards  of  the  Public  Company  Accounting  Oversight  Board
(United States), the effectiveness of Impac Mortgage Holdings, Inc. internal control over financial reporting as of
December  31,  2005,  based  on  criteria  established  in  Internal  Control(cid:151)Integrated  Framework  issued  by  the
Committee  of  Sponsoring  Organizations  of  the  Treadway  Commission  and  our  report  dated  March  7,  2006
expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California
March 7, 2006

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30MAR200614310138

F-2

 
 
 
Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Impac Mortgage Holdings, Inc.:

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Impac  Mortgage  Holdings,  Inc.  and
subsidiaries as of December 31, 2004 and the related consolidated statements of operations and comprehensive
earnings,  changes  in  stockholders(cid:146)  equity,  and  cash  flows  for  each  of  the  years  in  the  two-year  period  ended
December 31, 2004. These consolidated financial statements are the responsibility of the Company(cid:146)s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis,  evidence  supporting  the  amounts  and  disclosures  in  the  financial  statements.  An  audit  also  includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Impac Mortgage Holdings, Inc. and subsidiaries as of December 31, 2004, and the results
of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Los Angeles, California
May 13, 2005

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30MAR2006121

F-3

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands)

At December 31,

2005

2004

$

146,621
698
24,494,290
350,217
160,070
(78,514)
2,052,694
123,565
250,368
220,370

$

324,351
253,360
21,308,906
471,820
586,686
(63,955)
587,745
97,617
95,388
153,849

$ 27,720,379

$ 23,815,767

$ 23,990,430
2,430,075
96,750
36,177

$ 21,206,373
1,527,558
-
37,761

26,553,432

22,771,692

-

20

44

-

20

43

761
1,167,059
1,305

752
1,152,861
979

(675,373)
673,131

(2,242)

(513,453)
402,873

(110,580)

1,166,947

1,044,075

$ 27,720,379

$ 23,815,767

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Cash and cash equivalents
Restricted cash
CMO collateral
Finance receivables
Mortgages held-for-investment
Allowance for loan losses
Mortgages held-for-sale
Accrued interest receivable
Derivatives
Other assets

Total assets

CMO borrowings
Reverse repurchase agreements
Trust preferred securities
Other liabilities

Total liabilities

Commitments and contingencies

ASSETS

LIABILITIES

STOCKHOLDERS(cid:146) EQUITY

Series-A junior participating preferred stock, $0.01 par value; 2,500,000 shares

authorized; none issued and outstanding as of December 31, 2005 and 2004,
respectively

Series-B 9.375% cumulative redeemable preferred stock, $0.01 par value;

liquidation value $50,000; 2,000,000 shares authorized, 2,000,000 shares issued
and outstanding as of December 31, 2005 and 2004, respectively

Series-C 9.125% cumulative redeemable preferred stock, $0.01 par value;

liquidation value $109,280; 5,500,000 shares authorized; 4,371,200 shares and
4,300,000 issued and outstanding as of December 31, 2005 and 2004,
respectively

Common stock, $0.01 par value; 200,000,000 shares authorized; 76,112,963 and
75,153,926 shares issued and outstanding as of December 31, 2005 and 2004,
respectively

Additional paid-in capital
Accumulated other comprehensive income
Net accumulated deficit:

Cumulative dividends declared
Retained earnings

Net accumulated deficit

Total stockholders(cid:146) equity

Total liabilities and stockholders(cid:146) equity

See accompanying notes to consolidated financial statements.

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30MAR200614310138

F-4

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS
(in thousands, except per share data)

INTEREST INCOME:
Mortgage assets
Other

Total interest income

INTEREST EXPENSE:
CMO borrowings
Reverse repurchase agreements
Other borrowings

Total interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

NON-INTEREST INCOME:

Realized gain (loss) from derivative instruments
Change in fair value of derivative instruments
Gain on sale of loans
Other income
Equity in net earnings of Impac Funding Corporation

Total non-interest income

NON-INTEREST EXPENSE:

Personnel expense
General and administrative and other expense
Amortization of deferred charge
Professional services
Equipment expense
Occupancy expense
Data processing expense
Amortization and impairment of mortgage servicing rights
Impairment on investment securities available-for-sale
Gain on sale of other real estate owned

Total non-interest expense

Net earnings before income taxes

Income tax benefit

Net earnings

Cash dividends on cumulative redeemable preferred stock

For the year ended December 31,

2005

2004

2003

$ 1,246,787
5,173

$

1,251,960

$

753,295
2,321

755,616

384,822
894

385,716

919,731
121,756
5,722

1,047,209

204,751
30,563

174,188

22,595
144,932
39,509
13,888
-

220,924

77,508
25,384
27,174
9,496
5,420
5,018
4,387
2,006
-
(1,888)

154,505

240,607
(29,651)

270,258
(14,530)

354,547
57,837
149

412,533

343,083
30,927

312,156

(91,881)
96,575
24,729
10,948
-

40,371

60,420
17,097
16,212
4,374
3,689
3,658
3,608
2,063
1,120
(3,901)

108,340

244,187
(13,450)

257,637
(3,750)

174,199
32,382
2,428

209,009

176,707
24,853

151,854

(47,847)
31,826
37,523
9,995
11,537

43,034

25,250
7,660
5,658
4,785
1,608
1,560
1,829
1,290
298
(2,632)

47,306

147,582
(1,397)

148,979
-

Net earnings available to common stockholders

$

255,728

$

253,887

$

148,979

See accompanying notes to consolidated financial statements.

F-5

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS - (continued)
(in thousands, except per share data)

Net earnings
Net unrealized gains (losses) on securities:

Unrealized holding gains arising during year
Reclassification of gains (losses) included in net earnings

Net unrealized gains (losses)

Comprehensive earnings

Net earnings per share:
Basic

Diluted

Dividends declared per common share

For the year ended December 31,

2005

2004

2003

$

270,258

$

257,637

$

148,979

186
140

326

71
(3,448)

(3,377)

2,272
(6,387)

(4,115)

$

270,584

$

254,260

$

144,864

$

$

$

3.38

3.35

1.95

$

$

$

3.79

3.72

2.90

$

$

$

2.94

2.88

2.05

See accompanying notes to consolidated financial statements.

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30MAR200614310138

F-6

 
 
 
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(cid:146)
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30MAR2006121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings
Adjustments to reconcile net earnings to net cash (used in) provided by

operating activities:

Equity in net earnings of Impac Funding Corporation
Provision for loan losses
Amortization of deferred charge, net
Amortization of premiums, securitization costs and debt issuance costs
Gain on sale of other real estate owned
Gain on sale of loans
Change in fair value of derivative instruments
Purchase of mortgages held-for-sale
Sale and principal reductions on mortgages held-for-sale
Net change in deferred taxes
Gain on sale of investment securities available-for-sale
Depreciation and amortization
Amortization and impairment of mortgage servicing rights
Net change in accrued interest receivable
Net change in investment in and advances to IFC
Impairment of investment securities available-for-sale
Net change in restricted cash
Net change in other assets and liabilities

For the year ended December 31,

2005

2004

2003

$

270,258

$

257,637

$

148,979

-
30,563
27,174
292,982
(1,888)
(39,509)
(144,932)
(22,310,603)
20,875,235
(6,832)
(49)
4,610
2,006
(25,948)
-
-
252,662
(38,571)

-
30,927
(18,181)
166,649
(3,901)
(25,134)
(96,575)
(22,213,104)
22,037,869
(3,061)
(5,474)
3,471
2,063
(58,270)
-
1,120
(253,038)
(2,370)

(11,537)
24,853
(8,076)
69,573
(2,632)
(39,022)
(31,826)
(5,960,645)
6,048,976
18,903
(9,078)
1,524
1,290
(12,128)
(21,319)
298
(241)
(51,702)

Net cash (used in) provided by operating activities

(812,842)

(179,372)

166,190

CASH FLOWS FROM INVESTING ACTIVITIES:

Net change in CMO collateral
Net change in finance receivables
Purchase of premises and equipment
Cash received from acquisition of Impac Funding Corporation
Net change in mortgages held-for-investment
Sale of investment securities available-for-sale
Purchase of investment securities available-for-sale
Net change in mortgage servicing rights
Purchase of investments for deferred compensation plan
Dividends from Impac Funding Corporation
Net principal reductions on investment securities available-for-sale
Proceeds from the sale of other real estate owned

(3,513,890)
121,603
(7,998)
-
420,069
5,861
(36,781)
(735)
(3,492)
-
16,663
52,367

(12,827,524)
158,210
(6,312)
-
56,261
4,510
(3,920)
(887)
(2,563)
-
6,837
38,688

(3,529,784)
33,991
(1,816)
23,510
(595,860)
12,632
(15,252)
(5,620)
(2,206)
11,385
12,717
33,877

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Net cash used in investing activities

(2,946,333)

(12,576,700)

(4,022,426)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in reverse repurchase agreements
Proceeds from CMO borrowings
Repayment of CMO borrowings
Issuance of trust preferred securities
Common stock dividends paid
Preferred stock dividends paid
Proceeds from sale of common stock
Proceeds from sale of common stock via equity distribution agreement
Proceeds from sale of cumulative redeemable preferred stock
Proceeds from exercise of stock options

Net cash provided by financing activities

Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

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902,517
13,330,941
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99,244
(147,390)
(14,530)
4,234
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1,625
6,380

(41,249)
17,644,706
(4,963,984)
-
(202,672)
(3,750)
232,592
133,672
152,249
3,706

400,778
5,925,794
(2,480,966)
-
(127,831)
-
69,046
76,750
-
4,554

3,581,445

12,955,270

3,868,125

(177,730)
324,351

199,198
125,153

11,889
113,264

$

146,621

$

324,351

$

125,153

30MAR200614310138

F-8

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(in thousands)

SUPPLEMENTARY INFORMATION:

Interest paid
Taxes paid

NON-CASH TRANSACTIONS:

Accumulated other comprehensive gain (loss)
Transfer of mortgages to other real estate owned
Transfer of CMO Collateral to other real estate owned
Transfer of finance receivables to other real estate owned

For the year ended December 31,

2005

2004

2003

$

$

$

$

980,434
18,198

326
5,501
73,052
-

$

$

368,123
26,720

(3,377)
4,215
32,630
-

193,494
17,885

(4,115)
5,776
30,394
91

The following table presents the acquisition of the assets and liabilities of Impac Funding Corporation as of

July 1, 2003 (in thousands):

Cash and cash equivalents
Mortgages held-for-sale
Accrued interest receivable
Other assets

Total assets

Warehouse borrowings
Other liabilities
Deferred revenue

Total liabilities
Total stockholders(cid:146) equity

ASSETS ACQUIRED

LIABILITIES ASSUMED

Total liabilities and stockholders(cid:146) equity

Net Assets Acquired:

Investment in Impac Funding Corporation
Cash paid for common stock
Shares issued for common stock

See accompanying notes to consolidated financial statements.

$

$

$

$

$

$

24,135
451,465
565
91,962

568,127

447,951
66,971
52,371

567,293
834

568,127

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125

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30MAR2006121

F-9

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note A(cid:151)Summary of Business and Significant Accounting Policies

1.

Business

Unless the context otherwise requires, the terms (cid:145)(cid:145)Company,(cid:146)(cid:146) (cid:145)(cid:145)we,(cid:146)(cid:146) (cid:145)(cid:145)us,(cid:146)(cid:146) and (cid:145)(cid:145)our(cid:146)(cid:146) refer to Impac Mortgage
Holdings, Inc. (IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, IMH Assets Corp.
(IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), Impac Multifamily Capital Corporation (IMCC) and
Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC)
and Novelle Financial Services, Inc. (Novelle).

We are a mortgage real estate investment trust (REIT) that is a nationwide acquirer, originator, seller and
securitizer of non-conforming Alt-A mortgages (Alt-A mortgages). Alt-A mortgages are primarily first lien mortgages
made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but have loan
characteristics that make them non-conforming under those guidelines. Some of the principal differences between
mortgages purchased by Fannie Mae and Freddie Mac and Alt-A mortgages are as follows:

(cid:127) credit and income histories of the mortgagor;

(cid:127) documentation required for approval of the mortgagor; and

(cid:127) loan balances in excess of maximum Fannie Mae and Freddie Mac lending limits.

Alt-A mortgages may not have certain documentation or verifications that are required by Fannie Mae and
Freddie Mac and, therefore, in making our credit decisions, we are more reliant upon the borrower(cid:146)s credit score
and the adequacy of the underlying collateral. We believe that Alt-A mortgages provide an attractive net earnings
profile by producing higher yields without commensurately higher credit losses than other types of mortgages.

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We operate three core businesses:

(cid:127) long-term investment operations that are conducted by IMH, IMH Assets and IMCC;

(cid:127) mortgage operations that are conducted by IFC, ISAC; and

(cid:127) warehouse lending operations that are conducted by IWLG.

The  long-term  investment  operations  generate  earnings  primarily  from  net  interest  income  earned  on
mortgages  held  for  long-term  investment  (long-term  mortgage  portfolio).  The  long-term  mortgage  portfolio  as
reported  on our consolidated balance sheets consist of mortgages held as collateralized mortgage obligations
(CMO) and mortgages held-for-investment. Investments in Alt-A mortgages and multi-family mortgages are initially
financed with short-term borrowings under reverse repurchase agreements, which are subsequently converted to
long-term financing in the form of CMO financing. Cash flow from the long-term mortgage portfolio and proceeds
from the sale of capital stock also finance the acquisition of new Alt-A and multi-family mortgages.

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The  mortgage  operations  acquire,  originate,  sell  and  securitize  primarily  Alt-A  adjustable  rate  mortgages
(ARMs)  and  fixed  rate  mortgages  (FRMs)  and,  to  a  lesser  extent,  sub-prime  mortgages  (B/C  mortgages)  from
correspondents, mortgage brokers and retail customers. Correspondents originate and close mortgages under
their mortgage programs and then sell the closed loans to the mortgage operations on a flow (loan-by-loan) basis or
through bulk sale commitments. Correspondents include savings and loan associations, commercial banks and
mortgage bankers. The mortgage operations generate income by securitizing and selling mortgages to permanent
investors, including the long-term investment operations. This business also earns revenue from fees associated
with  mortgage  servicing  rights,  master  servicing  agreements  and  interest  income  earned  on  mortgages
held-for-sale. The mortgage operations use facilities provided by the warehouse lending operations to finance the
acquisition and origination of mortgages.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The Company securitizes mortgages in the form of CMOs and real estate mortgage investment conduits
(REMICs). The typical CMO securitization is designed so that the transferee (securitization trust) is not a qualifying
special purpose entity (QSPE) and thus as the sole residual interest holder, the Company consolidates such variable
interest  entity  (VIE).  Amounts  consolidated  are  classified  as  CMO  collateral  and  CMO  borrowings  in  the
consolidated balance sheets. Generally, the typical REMIC securitization qualifies for sales accounting treatment
and  the  securitization  trust  is  a  QSPE  and  thus  not  consolidated  by  the  Company.  In  the  event  that  a  REMIC
securitization trust does not meet sale accounting and QSPE criteria, the securitization is treated as a secured
borrowing and consolidation is assessed pursuant to FIN 46R.

In January 2006, we combined our Alt-A wholesale and subprime product offerings under one platform. Our
subprime  products  previously  marketed  under  Novelle  Financial  Services,  Inc.,  are  now  offered  by  our  Alt-A
wholesale operations, Impac Lending Group (ILG), a division of IFC.

The warehouse lending operations provide repurchase financing to mortgage loan originators, including the
mortgage  operations,  by  funding  mortgages  from  their  closing  date  until  sale  to  pre-approved  investors.  This
business earns fees from each transaction as well as net interest income from the difference between its cost of
borrowings and the interest earned on repurchase advances.

2.

Financial Statement Presentation

Principles of Consolidation

The  financial  condition  and  results  of  operations  have  been  presented  in  the  consolidated  financial
statements  for  the  three-year  period  ended  December  31,  2005  and  include  the  financial  results  of  IMH,  IMH
Assets, IWLG, IMCC and IFC (together with its wholly-owned subsidiaries Novelle and ISAC).

On July 1, 2003, IMH purchased 100% of the outstanding shares of common stock of IFC. The purchase of
IFC(cid:146)s common stock combined with IMH(cid:146)s ownership of 100% of IFC(cid:146)s preferred stock resulted in the consolidation
of IFC from July 1, 2003 through December 31, 2003. Prior to July 1, 2003, IFC was a non-consolidated subsidiary
of IMH and 99% of the net earnings of IFC were reflected in IMH(cid:146)s financial statements as (cid:145)(cid:145)Equity in net earnings
(loss) of IFC.(cid:146)(cid:146)

The accompanying consolidated financial statements include accounts of IMH and other entities in which the
Company has a controlling financial interest. The usual condition for a controlling financial interest is ownership of a
majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as
special purpose entities (SPEs), through arrangements that do not involve voting interests.

There are two different accounting frameworks applicable to SPEs, depending on the nature of the entity and
the Company(cid:146)s relation to that entity; the QSPE framework under Statement of Financial Accounting Standards
No. 140, (cid:145)(cid:145)Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities(cid:146)(cid:146) (SFAS 140)
and  the  VIE  framework  under  the  Financial  Accounting  Standards  Board  (FASB)  Interpretation  No.  46  (revised
December 2003), (cid:145)(cid:145)Consolidation of Variable Interest Entities(cid:146)(cid:146) (FIN 46R).

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The QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE meeting certain
criteria. These criteria are designed to ensure that the activities of the SPE are essentially predetermined in their
entirety at the inception of the vehicle and that the transferor cannot exercise control over the entity, its assets or
activities. Entities meeting these criteria are not consolidated by the Company. For further details, refer to Note 8(cid:151)
Mortgages Held-for-Sale.

When the SPE does not meet the QSPE criteria, consolidation is assessed pursuant to FIN 46R. A VIE is
defined as an entity that (1) lacks enough equity investment at risk to permit the entity to finance its activities without
additional  subordinated  financial  support  from  other  parties,  (2)  has  equity  owners  who  are  unable  to  make

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

decisions and/or (3) has equity owners that do not absorb or receive the entity(cid:146)s losses and returns. QSPEs are
excluded from the scope of FIN 46R.

FIN 46R requires a variable interest holder (counterparty to a VIE) to consolidate the VIE if that party will
absorb a majority of the expected losses of the VIE, receive a majority of the residual returns of the VIE, or both. This
party is considered the primary beneficiary of the entity. The determination of whether the Company meets the
criteria  to  be  considered  the  primary  beneficiary  of  a  VIE  requires  an  evaluation  of  all  transactions  (such  as
investments, liquidity commitments, derivatives and fee arrangements) with the entity.

Prior to the Company(cid:146)s adoption of FIN 46R, the decision of whether or not to consolidate an SPE depended
on the applicable accounting principles for non-QSPEs, including a determination regarding the nature and amount
of the investments made by third parties in the SPE. Consideration was given to, among other factors, whether a
third party had a substantial equity investment in the SPE; which party had voting rights, if any; who made decisions
about the assets in the SPE; and who was at risk of loss. The SPE was consolidated if the Company retained or
acquired control over the risks and rewards of the assets in the SPE.

Investments in other companies in which the Company has significant influence over operating and financing
decisions and holds more than a 20% voting interest, are accounted for in accordance with the equity method of
accounting. Prior to July 1, 2003, IMH was entitled to 99% of the earnings or losses of IFC through its ownership of
all of the non-voting preferred sock of IFC. Therefore, the Company has accounted for its 99% interest in IFC under
the equity method for periods prior to July 1, 2003.

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Inter-Company Eliminations

All significant inter-company balances and transactions have been eliminated in consolidation or under the
equity method of accounting regarding transactions involving the mortgage operations prior to its consolidation.

Use of Estimates in the Preparation of Financial Statements

The accompanying consolidated financial statements of IMH and our subsidiaries (as defined above) have
been  prepared  in  accordance  with  accounting  principles  generally  accepted  in  the  United  States  of  America
(GAAP). In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered
necessary  for  a  fair  presentation  have  been  included.  Management  has  made  a  number  of  estimates  and
assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at
the  date  of  the  financial  statements  and  the  reported  amounts  of  revenues  and  expenses  during  the  reporting
period to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from
those estimates.

Reclassifications

Certain amounts in the 2004 and 2003 consolidated financial statements have been reclassified to conform

with the current year presentation.

3.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash and
money  market  mutual  funds.  Investments  with  maturities  of  three  months  or  less  at  date  of  acquisition  are
considered to be cash equivalents.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

4.

Restricted Cash

Restricted cash primarily consists of cash deposits in a CMO securitization trust that will be used to finance
the remaining mortgage loan collateral that will be deposited into the trust within 15 to 30 days of the issuance of
the  CMO.  In  addition,  restricted  cash  includes  money  market  accounts  held  in  the  Company(cid:146)s  deferred
compensation plan and escrow accounts related to the Company(cid:146)s master servicing activities.

5.

CMO Collateral and Mortgages Held-for-Investment

The long-term investment operations invest in primarily Alt-A ARMs, FRMs secured by first liens on single-
family residential real estate properties acquired and originated by the mortgage operations, multi-family residential
real estate properties originated by IMCC and, to a lesser extent, fixed rate second trust deeds secured by single-
family residential real estate properties to be held for long-term investment. After accumulating a pool of mortgages
of generally between $200.0 million and $2.5 billion, mortgages held-for-investment on our financial statements are
securitized as CMOs and the mortgages are deposited in a trust and at that time we record the mortgages as CMO
collateral. CMO collateral is recorded in IMH Assets, a special purpose financing subsidiary which is used to issue
CMO financing. The typical CMO securitization is designed such that the securitization trust is not a QSPE and thus
as the sole residual interest holder the Company consolidates the securitization trust. Generally, this is achieved by
including  terms  in  the  securitization  agreements  that  give  the  Company  the  ability  to  unilaterally  cause  the
securitization trust to return specific mortgages, other than through a clean-up call.

In 2005, we completed the ISAC REMIC 2005-2 securitization which was treated as a sale for tax purposes
but treated as a secured borrowing for GAAP purposes and consolidated in the financial statements due to the
retention  of  a  residual  interest.  The  associated  collateral  and  borrowings  have  been  included  in  the  CMOs  for
reporting purposes. Reference to (cid:145)(cid:145)CMO collateral(cid:146)(cid:146) or (cid:145)(cid:145)CMO borrowings(cid:146)(cid:146) or (cid:145)(cid:145)CMO(cid:146)(cid:146) includes the REMIC 2005-2
securitization collateral and or borrowings.

CMO collateral and mortgages held-for-investment are recorded at cost, net of premiums and discounts.
Premiums and discounts are amortized to interest income over the estimated lives of the mortgages using the
interest  method  as  an  adjustment  to  the  yield  of  the  mortgages.  Management  utilizes  an  estimate  of  the
prepayment rate of the mortgages to forecast the remaining average life of the mortgages.

Mortgages held-for-investment are continually evaluated for collectibility and, if appropriate, the mortgage is
placed on non-accrual status when the mortgage is 90 days past due, and previously accrued interest is reversed
from income. CMO collateral is not placed on non-accrued status as the sub-servicer remits the interest payments
to the Company regardless of the delinquency status of the underlying mortgage loan.

In accordance with Statement of Financial Accounting Standard No. 91, (cid:145)(cid:145)Accounting for Nonrefundable Fees
and  Costs  Associated  with  Originating  or  Acquiring  Loans  and  Initial  Direct  Costs  of  Leases(cid:146)(cid:146)  ((cid:145)(cid:145)SFAS 91(cid:146)(cid:146)),  we
amortize the mortgage premiums, securitization costs, bond discounts, deferred gains/losses to interest income
over the estimated lives of the mortgages as an adjustment to yield of the mortgages. Amortization calculations
include certain loan information including the interest rate, loan maturity, principal balance and certain assumptions
including expected prepayment rates. We estimate prepayments on a collateral-specific basis and consider actual
prepayment activity for the collateral pool. We also consider the current interest rate environment and the forward
market curve projections.

6.

Finance Receivables

Finance  receivables  represent  transactions  with  customers  involving  residential  real  estate  lending.  As  a
warehouse lender, the warehouse lending operations are a secured creditor of the mortgage bankers and brokers to
which it extends credit and is subject to the risks inherent in that status, including the risk of borrower fraud, default
and bankruptcy. Any claim of the warehouse lending operations as a secured lender in a bankruptcy proceeding

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

may be subject to adjustment and delay. Finance receivables represent warehouse lines of credit with affiliates and
repurchase  facilities  with  mortgage  bankers  that  are  primarily  collateralized  by  mortgages  on  single-family
residential  real  estate.  Terms  of  non-affiliated  repurchase  facilities,  including  the  maximum  facility  amount  and
interest rate, are determined based upon the financial strength, historical performance and other qualifications of
the borrower. The facilities have maturities that range from on-demand to one year. Finance receivables are stated
at the principal balance outstanding. Interest income is recorded on the accrual basis.

At the end of the first quarter of 2004, we discovered that one client of the warehouse lending operations and
certain of its officers had perpetrated a fraud pursuant to which they defrauded the warehouse lending operations
into making advances pursuant to a repurchase facility. As of the date the fraud was discovered, an aggregate of
$12.6  million  of  fraudulent  advances  were  outstanding.  We  immediately  terminated  the  facility  and  have  been
cooperating with federal investigators in their ongoing investigation of the defrauding parties.

We retained an independent consultant to investigate the matter. The investigator reported that no principals
of the warehouse lending operations had knowingly participated in the fraud. As a result of the fraud, during 2004
we established a specific allowance for loan losses in the amount of $8.0 million to provide for anticipated losses on
the fraudulent advances as we have deemed this amount to be non-collectible. Based on available information, we
believe we will be able to recover the remaining $4.6 million of related advances over time. To the extent that we
believe that the actual losses will exceed the $8.0 million allowance, we will make an additional allowance for loan
losses when, or if, we determine it is appropriate to do so as events and circumstances dictate. During 2005, no
amounts were recovered or written off and the ending allowance balance as of December, 31, 2005 remained at
$8.0 million. We believe that this specific allowance is adequate to provide for anticipated loan losses based on
currently available information.

During the year ended December 31, 2004, we terminated a warehouse lending client that sold mortgages to
third  party  investors  that  were  pledged  as  collateral  to  our  warehouse  lending  operations,  whereby,  the  sales
proceeds from these loans were wired by the third party investor directly to our customer without the customer
repaying their borrowings to us. The warehouse lending operations contacted the investors who purchased these
loans  to  notify  them  of  our  interest  in  these  loans.  As  a  result  of  the  termination  of  this  client,  we  seized  the
remaining available loans that were secured as collateral in settlement of a portion of these borrowings. In certain
cases, investors have released their interest in loans securing our advances previously purchased by them and we
are pursuing legal action on any remaining loans securing our advances in order to perfect our ownership interest in
these  loans.  As  a  result,  during  2004  management  provided  for  a  specific  write-down  of  $2.7  million  on  these
advances.  During  2005,  no  amounts  were  recovered  or  written  off  and  the  ending  allowance  balance  as  of
December, 31, 2005 remained at $2.7 million. We believe that this specific allowance is adequate to provide for
anticipated loan losses based on currently available information.

During the year ended December 31, 2005, we had no specific write-downs on warehouse lending advances.
Management believes that the aggregate specific allowance of $10.7 million, which is included in the allowance for
loan losses, is adequate to provide for future losses based on currently available information.

7.

Allowance for Loan Losses

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An allowance is maintained for losses on mortgages held-for-investment, mortgages held as CMO collateral
and  finance  receivables  collectively  (cid:145)(cid:145)loans  provided  for(cid:146)(cid:146)  at  an  amount  that  management  believes  provides  for
losses inherent in those loan portfolios. We have implemented a methodology designed to analyze the performance
of  various  loan  portfolios,  based  upon  the  relatively  homogeneous  nature  within  these  loan  portfolios.  The
allowance for losses is also analyzed using the following factors:

(cid:127) management(cid:146)s judgment of the net loss potential of mortgages in the long-term mortgage portfolio based

on prior loan loss experience;

30MAR200614310138

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

(cid:127) changes in the nature and volume of the long-term mortgage portfolio;

(cid:127) value of the collateral;

(cid:127) expected losses as derived from rating agencies analyses;

(cid:127) delinquency trends; and

(cid:127) current economic conditions that may affect the borrowers(cid:146) ability to pay.

In evaluating the adequacy of the allowance for loan losses, 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 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 allowance for loan losses. Management also recognizes that
there are qualitative factors that must be taken into consideration when evaluating and measuring inherent loss in
our loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower(cid:146)s
ability to pay, changes in value of collateral, political factors and industry statistics.

Additions to the allowance are provided through a charge to earnings. Specific valuation allowances may be
established for loans that are deemed impaired, if default by the borrower is deemed probable and if the fair value of
the loan or the collateral is estimated to be less than the gross carrying value of the loan. Actual losses on loans are
recorded  as  a  reduction  to  the  allowance  through  charge-offs.  Subsequent  recoveries  of  amounts  previously
charged off are credited to the allowance.

Mortgages held-for-investment are placed on non-accrual status when the mortgage is 90 days past due. For
loans on non-accrual status, cash receipts are applied and interest income is recognized on a cash basis. For all
other impaired loans, cash receipts are applied to principal and interest in accordance with the contractual terms of
the loan and interest income is recognized on the accrual basis. Generally, a loan may be returned to accrual status
when all delinquent principal and interest are brought current in accordance with the terms of the loan agreement.
Loans are charged off when foreclosure of the property is complete and the property is transferred to Real estate
owned at its estimated net realizable value.

8.

Mortgages Held-for-Sale

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Mortgages  held-for-sale  consists  primarily  of  Alt-A  mortgages,  which  are  secured  by  one-to-four  family
properties,  located  throughout  the  United  States.  The  mortgage  operations  acquire  and  originate  mortgages
generally with the intent to sell them in the secondary market (primarily in REMIC securitizations and on a whole
loan basis) or to the long-term investment operations. Mortgages held-for-sale are carried at the lower of aggregate
cost net of purchase discounts or premiums and deferred fees, or market value. We determine the fair value of
mortgages held-for-sale using current secondary market prices for loans with similar coupons, maturities and credit
quality.

SFAS  140  requires  that  a  transfer  of  financial  assets  in  which  we  surrender  control  over  the  assets  be
accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is
received in exchange. SFAS 140 requires a (cid:145)(cid:145)true sale(cid:146)(cid:146) analysis of the treatment of the transfer under law as if the
Company was a debtor under the bankruptcy code. A (cid:145)(cid:145)true sale(cid:146)(cid:146) legal analysis includes several legally relevant
factors, such as the nature and level of recourse to the transferor and the nature of retained servicing rights. Once
the  legal  isolation  test  has  been  met  under  SFAS  140,  other  factors  concerning  the  nature  and  extent  of  the
transferor(cid:146)s control over the transferred assets are taken into account in order to determine whether de-recognition
of assets is warranted, including whether the SPE has complied with rules concerning QSPEs.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

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A legal opinion regarding legal isolation for each securitization has been obtained by the Company. The (cid:145)(cid:145)true
sale(cid:146)(cid:146) opinion provides reasonable assurance the purchased assets would not be characterized as the property of
the transferring Company(cid:146)s receivership or conservatorship estate in the event of insolvency and also states the
transferor would not be required to substantively consolidate the assets and liabilities of the SPE with those of the
transferor upon such event.

The REMIC securitization process involves the sale of the  loans to  one of our wholly-owned bankruptcy
remote special-purpose entities which then sells the loans to a separate, transaction-specific securitization trust in
exchange for cash and certain trust interests that we retain. The securitization trust issues and sells undivided
interests to third party investors that entitle the investors to specified cash flows generated from the securitized
loans. These undivided interests are usually represented by certificates with varying interest rates, and are secured
by the payments on the loans acquired by the trust, and commonly include senior and subordinated classes. The
senior class securities are usually rated (cid:145)(cid:145)AAA(cid:146)(cid:146) by at least two of the major independent rating agencies and have
priority over the subordinated classes in the receipt of payments. We have no obligation to provide funding support
to either the third party investors or the securitization trusts. The third party investors or the securitization trusts
generally have no recourse to our assets or us and have no ability to require us to repurchase their securities other
than standard representations and warranties. We do make certain representations and warranties concerning the
loans, such as lien status or mortgage insurance coverage, and if we are found to have breached a representation or
warranty  we  may  be  required  to  repurchase  the  loan  from  the  securitization  trust.  We  do  not  guarantee  any
certificates issued by the securitization trusts. Generally, the securitization trusts represent QSPEs and meet the
requirements  for  sale  treatment  under  SFAS  140,  and  are  therefore  not  consolidated  for  financial  reporting
purposes.. In the event that a REMIC securitization trust does not meet sale accounting and QSPE criteria, the
securitization is treated as a secured borrowing and consolidation is assessed pursuant to FIN 46R.

In addition to the cash the securitization trust pays to the Company for the loans, we may retain certain
interests in the securitization trust as part of the trust(cid:146)s payment to us for the loans. These retained interests may
include subordinated classes of securities, interest-only securities, residual securities and master servicing rights.
These  retained  interests  are  accounted  for  as  investment  securities  available-for-sale  in  other  assets  in  the
consolidated balance sheets. Transaction costs associated with the securitizations are recognized as a component
of the gain or loss at the time of sale.

When  the  Company  securitizes  mortgage  loans,  the  carrying  value  of  the  mortgages  sold  is  allocated
between the loans sold and the retained interests based on their relative fair values. Our recognition of gain or loss
on the sale of loans from REMIC securitizations is accounted for in accordance with SFAS 140 and represents the
difference between the cash proceeds and the allocated cost of the loans sold and interests retained. At the closing
of  each  securitization,  mortgages  held-for-sale  are  removed  from  the  consolidated  balance  sheets  and  cash
received and any portion of the mortgages retained from the securitizations (retained interests) are added to the
consolidated balance sheet.

Retained interests are amortized over the expected repayment life of the underlying loans. The Company
evaluates  quarterly  the  carrying  value  of  its  retained  interest  in  light  of  the  actual  repayment  experience  of  the
underlying loans and makes adjustments to reduce the carrying value, if appropriate. Amortization of the retained
interest is included in interest income in the consolidated statement of operations and comprehensive earnings.

9.

Derivative Instruments

Statement of Financial Accounting Standards No. 133, (cid:145)(cid:145)Accounting for Derivative Instruments and Hedging
Activities,(cid:146)(cid:146)  (SFAS 133),  subsequently  amended  by  SFAS  149,  (cid:145)(cid:145)Amendment  of  Statement  133  on  Derivative
Instruments and Hedging Activities,(cid:146)(cid:146) establishes accounting and reporting standards for derivative instruments,
including a number of derivative instruments embedded in other contracts, and for hedging activities. It requires
that  an  entity  recognizes  all  derivatives  as  either  assets  or  liabilities  in  the  balance  sheet  and  measure  those
instruments at fair value. If specific conditions are met, a derivative may be specifically designated as (1) a hedge of

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30MAR200614310138

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (2) a
hedge of the exposure to variable cash flows of a forecasted transaction; or (3) a hedge of the foreign currency
exposure  of  a  net  investment  in  a  foreign  operation,  an  unrecognized  firm  commitment,  an  available-for-sale
security or a foreign-currency-denominated forecasted transaction. For derivatives that are not designated as a
hedging  instrument,  any  change  in  fair  value  is  recorded  as  an  expense  or  income  in  the  current  period.  The
maximum length of time we mitigate interest rate risk using derivative instruments is currently 5 years.

Loan Commitments

We enter into commitments to make loans whereby the interest rate on the loan is set prior to funding. We
enter commitments on an individual loan basis, referred to as an Interest Rate Lock Commitment (IRLC), and on a
bulk purchase basis, referred to as bulk purchase commitments (collectively referred to as (cid:145)(cid:145)loan commitments(cid:146)(cid:146)).
These loan commitments are considered to be derivatives and are recorded at fair value in the consolidated balance
sheets. The change in fair value of derivative instruments are recorded in the consolidated statements of operations
and  comprehensive  earnings.  Subsequent  to  the  April  1,  2004  issuance  of  Staff  Accounting  Bulletin  No.  105
(cid:145)(cid:145)Application of Accounting Principles to Loan Commitments,(cid:146)(cid:146) (SAB 105), when measuring the fair value of interest
rate lock commitments, the amount of the expected servicing rights is not included in the valuation. The fair value is
calculated  and  adjusted  using  an  anticipated  fallout  factor  for  loan  commitments  that  are  not  expected  to  be
funded.

Unlike most other derivative instruments, there is no active market for the loan commitments that can be
used to determine their fair value. Consequently, we have developed a method for estimating the fair value of our
loan commitments. The fair value of the loan commitments are determined by calculating the change in market
value from the point of commitment date to the measurement date based upon changes in interest rates during the
period, adjusted for an anticipated fallout factor for loan commitments that are not expected to fund. Under this fair
value methodology, the loan commitment has zero value on day one and all future value is the result of changes in
interest rates, exclusive of any inherent servicing value.

Forward Sale Commitments

The policy of recognizing the fair value of the loan commitments has the effect of recognizing a gain or loss on
the  related  mortgage  loans  based  on  changes  in  the  interest  rate  environment  before  the  mortgage  loans  are
funded and sold. As such, loan commitments expose us to interest rate risk. We mitigate such risk by entering into
forward  sale  commitments,  such  as  mandatory  commitments  on  U.S.  Treasury  bonds  and  mortgage-backed
securities,  call  options  and  put  options.  These  forward  sale  commitments  are  treated  as  derivatives  under  the
provisions of SFAS 133, with the change in fair value of derivative instruments reported as such in the consolidated
statement of operations.

The fair value of our forward sale commitments are generally based on market prices provided by dealers,

which make markets in these financial instruments.

Interest Rate Swaps, Caps, and Floors

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Our primary objective is to limit the exposure to the variability in future cash flows attributable to the variability
of  one-month  LIBOR,  which  is  the  underlying  index  of  adjustable  rate  CMO  and  short-term  borrowings  under
reverse repurchase agreements. We also monitor on an ongoing basis the prepayment risks that arise in fluctuating
interest rate environments. Our interest rate risk management policies are formulated with the intent to offset the
potential adverse effects of changing interest rates on CMO and reverse repurchase borrowings.

To mitigate exposure to the effect of changing interest rates on cash flows on CMO and reverse repurchase
borrowings, we purchase derivative instruments primarily in the form of interest rate swap agreements (swaps) and,
to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). The swaps, caps
and floors are treated as derivatives under the provisions of SFAS 133, with changes in fair value of derivative

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

instruments reported as such in the consolidated statements of operations. Cash paid or received on swaps, caps
and floors is recorded as a current period expense or income as realized gain (loss) on derivative instruments in the
consolidated statements of operations.

The fair value of our interest rate swaps, caps, floors and other derivative transactions are generally based on

market prices provided by dealers, which make markets in these financial instruments.

Credit Risk

The Company(cid:146)s exposure to credit risk on derivative instruments is limited to the cost of replacing contracts
should the counterparty fail. The Company seeks to minimize credit risk through the use of credit approval and
review processes, the selection of only the most creditworthy counterparties, continuing review and monitoring of
all counterparties, exposure reduction techniques and thorough legal scrutiny of agreements.

10. CMO Borrowings

The decision to issue CMOs is based on our current and future investment needs, market conditions and
other factors. CMOs, which are primarily secured by Alt-A mortgages on single-family and multi-family residential
real properties, are issued as a means of financing our long-term mortgage portfolio. CMOs are carried at their
outstanding  principal  balances,  including  securitization  costs  and  accrued  interest  on  such  obligations.  For
accounting purposes, mortgages financed through the issuance of CMOs are treated as assets and the CMOs are
treated as debt when the CMO qualifies as a secured borrowing arrangement.

In 2005, we completed the ISAC REMIC 2005-2 securitization which was treated as a sale for tax purposes
but  treated  as  a  secured  borrowing  for  GAAP  purposes  and  consolidated  in  the  financial  statements.  The
associated collateral and borrowings have been included in the CMOs for reporting purposes. Reference to (cid:145)(cid:145)CMO
collateral(cid:146)(cid:146)  or  (cid:145)(cid:145)CMO  borrowings(cid:146)(cid:146)  or  (cid:145)(cid:145)CMO(cid:146)(cid:146)  includes  the  REMIC  2005-2  securitization  collateral  and  related
borrowings.

Each  issuance  of  a  CMO  is  fully  payable  from  the  principal  and  interest  payments  on  the  underlying
mortgages collateralizing such debt. CMOs typically are structured as one-month London Interbank Offered Rate
(LIBOR) (cid:145)(cid:145)floaters(cid:146)(cid:146) and fixed rate securities with interest payable to certificate holders monthly. The maturity of each
class of CMO is directly affected by the rate of principal prepayments on the related CMO collateral. Each CMO
series is also subject to redemption according to specific terms of the respective indentures. As a result, the actual
maturity  of  any  class  of  a  CMO  series  is  likely  to  occur  earlier  than  the  stated  maturities  of  the  underlying
mortgages.

When we issue CMOs for financing purposes, we generally seek an investment grade rating for our CMOs by
nationally recognized rating agencies. To secure such ratings, it is often necessary to incorporate certain structural
features that provide for credit enhancement. This can include the pledge of collateral in excess of the principal
amount of the securities to be issued, a bond guaranty insurance policy for some or all of the issued securities, or
additional forms of mortgage insurance. The need for additional collateral or other credit enhancements depends
upon factors such as the type of collateral provided, the interest rates paid, the geographic concentration of the
mortgaged property securing the collateral and other criteria established by the rating agencies. The pledge of
additional  collateral  reduces  our  capacity  to  raise  additional  funds  through  short-term  secured  borrowings  or
additional  CMOs  and  diminishes  the  potential  expansion  of  our  long-term  mortgage  portfolio.  Our  total  loss
exposure is limited to the net economic investment in the CMOs at any point in time.

11. Gain on Sale of Mortgage Servicing Rights

The sub-servicing of mortgage servicing rights created in our CMO and REMIC securitizations are generally
sold to third parties concurrent with the securitization of the mortgages. We believe that the sale of sub-servicing is
consistent  with  the  accounting  for  the  sale  of  servicing,  therefore,  the  sales  of  mortgage  servicing  rights  are

F-18

30MAR200614310138

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

recognized  in  accordance  with  AICPA  Statement  of  Position  01-6,  (cid:145)(cid:145)Accounting  by  Certain  Entities  (Including
Entities with Trade Receivables) that Lend to or Finance the Activities with Others(cid:146)(cid:146) (SOP 01-6) and Emerging Issues
Task  Force  No.  95-5,  (cid:145)(cid:145)Determination  of  What  Risks  and  Rewards,  If  any,  Can  be  Retained  and  Whether  Any
Unresolved Contingencies May Exist in a Sale of Mortgage Loan Servicing Rights(cid:146)(cid:146) when the following conditions
have been met: (1) title has passed, (2) substantially all risks and rewards of ownership have irrevocably passed to
the buyer and (3) any protection provisions retained by the seller are minor and can be reasonably estimated. The
Company  believes  that  based  on  the  terms  and  conditions  of  the  related  sales  agreements  all  of  the  above
conditions have been met.

The gains or losses on sale of mortgage servicing rights to third parties, where the underlying mortgage is in a
CMO securitization, are accounted for in accordance with the provisions in SOP 01-6. Under SOP 01-6, for sales of
mortgage servicing rights with the loans being retained, the carrying value of the loan is allocated between the loan
basis and the mortgage servicing rights basis consistent with the relative fair value method prescribed in SFAS 140.
As a result, only a nominal gain is realized from the sale of mortgage servicing rights and a discount is recorded on
the mortgages retained as CMO collateral and mortgages held-for-investment. The discount is amortized to interest
income over the estimated life of the mortgages using the interest method as an adjustment to the yield of the
mortgages. Management utilizes an estimate of the prepayment rate of the mortgages to forecast the remaining
average life of the mortgages.

The  gains  or  losses  on  sale  of  mortgage  servicing  rights  to  third  parties  in  REMIC  securitizations  are
accounted for in accordance with SFAS 140 and SOP 01-6 and recorded in gain loss on the consolidated statement
of operations. Since the sale of the mortgage servicing rights to third parties generally occurs concurrently with the
REMIC securitization, the carrying value of the securitized mortgage loans is allocated between the mortgages
sold, mortgage servicing rights to be sold, and retained interests (master servicing rights) based on their relative fair
values. A gain or loss on sale of mortgage servicing rights is based upon the difference between its sales price and
associated relative fair value and is recorded as gain on sale of loans in the consolidated statement of operations
and comprehensive earnings.

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12. Master Servicing Rights

Generally, master servicing rights are retained when the sub-servicing of mortgage servicing rights are sold
and  the  corresponding  mortgages  are  retained  in  CMO  securitization.  In  addition,  master  servicing  rights  are
generally retained when the sub-servicing of mortgage servicing rights are sold and the corresponding mortgages
are sold in REMIC securitizations. The retained master servicing rights are recorded as a separate retained asset in
accordance with SFAS 140 in the REMIC securitizations, while in the CMO securitizations such rights remain as part
of the retained mortgage loans.

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Master servicing rights retained in REMIC securitizations are recorded in other assets in the consolidated
balance  sheets.  The  Company  records  master  servicing  rights  arising  from  the  transfer  of  mortgages  to  the
securitization trusts utilizing the relative fair value allocation method based upon an estimate of what a third party
would pay for the master servicing rights. The master servicing rights are amortized in proportion to and over the
estimated  period  of  net  servicing  income.  The  Company  subsequently  evaluates  and  measures  the  master
servicing  rights  for  impairment  using  a  discounted  cash  flows  valuation  model  to  estimate  the  fair  value.  The
valuation  model  incorporates  assumptions  relating  to  market  discount  rates,  float  values,  prepayment  speeds,
master servicing fees and default rates. An impairment loss is recognized for master servicing rights that have an
unamortized balance in excess of the estimated fair value. Master servicing rights retained in CMO securitizations
remain as part of the mortgage loan balance and are accounted for as part of such loan.

The  servicing  fee  income  associated  with  the  master  servicing  rights  is  reported  in  other  income  in  the
consolidated statements of operations. Also reported in other income is any sub-servicing expense incurred during
the period prior to the securitization. The amortization and impairment of mortgage servicing rights are classified
separately in the consolidated statements of operations.

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Master servicing fees are generally 0.03% per annum on the declining principal balances of the mortgages
serviced. The value of master servicing fees is subject to prepayment and interest rate risks on the transferred
financial assets. The carrying value of master servicing rights was $2.5 million and $3.5 million as of December 31,
2005 and 2004, respectively.

As of December 31, 2005, we master serviced mortgages for others of approximately $4.9 billion that were
primarily mortgages collateralizing REMIC securitizations. Related fiduciary funds are held in trust for investors in
non-interest bearing accounts. We may also be required to advance funds or we may cause our loan servicers to
advance funds to cover interest payments not received from borrowers depending on the status of their mortgages.

13.

Investment Securities

Investment securities are classified as available-for-sale and are included in other assets on our consolidated
balance sheets. Available-for-sale securities are reported at fair value with unrealized gains and losses as other
comprehensive  earnings.  Gains  and  losses  realized  on  the  sale  of  available-for-sale  investment  securities  and
declines in value judged to be other-than-temporary are based on the specific identification method and reported in
current earnings. Premiums or discounts obtained on investment securities are accreted or amortized to interest
income  over  the  estimated  life  of  the  investment  securities  using  the  effective  interest  method.  Investment
securities may be subject to credit, interest rate and/or prepayment risk.

14.

Income Taxes

We operate so as to qualify as a REIT under the requirements of the Internal Revenue Code (the Code).
Requirements for qualification as a REIT include various restrictions on ownership of IMH(cid:146)s stock, requirements
concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A
REIT must distribute at least 90% of its taxable income to its stockholders of which 85% must be distributed within
the taxable year in order to avoid the imposition of an excise tax. The remaining balance may extend until timely
filing of our tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a
REIT in computing taxable income. If in any tax year IMH should not qualify as a REIT, we would be taxed as a
corporation and distributions to stockholders would not be deductible in computing taxable income. If IMH were to
fail to qualify as a REIT in any tax year, we would not be permitted to qualify for that year and the succeeding four
years.

IFC is a taxable REIT subsidiary (TRS) and is therefore subject to corporate income taxes. Deferred tax assets
and  liabilities  are  recognized  for  the  future  tax  consequences  attributable  to  differences  between  the  financial
statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.

In  accordance  with  Accounting  Research  Bulletin  No.  51,  (cid:145)(cid:145)Consolidated  Financial  Statements,(cid:146)(cid:146)  the
Company records a deferred charge to eliminate the expense recognition of income taxes paid on inter-company
profits that result from the sale of mortgages from IFC to IMH. The deferred charge is included in other assets in the
consolidated  balance  sheets.  The  deferred  charge  is  amortized  as  non-interest  expense  in  the  consolidated
statements of operations over the estimated life of the mortgages retained in the long-term mortgage portfolio.

15. Net Earnings per Share

Basic  net  earnings  per  share  are  computed  on  the  basis  of  the  weighted  average  number  of  shares
outstanding  for  the  year  divided  into  net  earnings  available  to  common  stockholders  for  the  year.  Diluted  net
earnings per share are computed on the basis of the weighted average number of shares and dilutive common
equivalent shares outstanding for the year divided by net earnings available to common stockholders for the year.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

16.

Stock Options

Stock  options  and  awards  may  be  granted  to  the  members  of  the  board  of  directors,  officers  and  key
employees. The exercise price for any qualified incentive stock options (ISOs), non-qualified stock options (NQSOs)
granted under our stock option plans may not be less than 100% (or 110% in the case of ISOs granted to an
employee who is deemed to own in excess of 10% of the outstanding common stock) of the fair market value of the
shares of common stock at the time the NQSO or ISO is granted.

In December 2002 the FASB issued SFAS No. 148, (cid:145)(cid:145)Accounting for Stock-Based Compensation(cid:151)Transition
and  Disclosure(cid:146)(cid:146)  (SFAS  148),  an  amendment  of  FASB  Statement  No.  123,  (cid:145)(cid:145)Accounting  for  Stock-Based
Compensation,(cid:146)(cid:146)  (SFAS  123).  SFAS  148  amends  FASB  123  to  provide  alternative  methods  of  transition  for  a
voluntary change to the fair value method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and
interim  financial  statements.  On  January  1,  2003,  IMH  adopted  the  disclosure  requirements  of  SFAS  148.  This
statement establishes financial accounting standards for stock-based employee compensation plans. SFAS 123
permits management to choose either a fair value based method or the Accounting Principals Board Opinion No. 25
(cid:145)(cid:145)Accounting For Stock Issued to Employees(cid:146)(cid:146) (APB 25) intrinsic value based method of accounting for its stock-
based compensation arrangements. SFAS 123 requires pro forma disclosures of net earnings (loss) computed as if
the fair value based method had been applied in financial statements of companies that continue to follow current
practice  in  accounting  for  such  arrangements  under  APB  25.  SFAS  123  applies  to  all  stock-based  employee
compensation plans in which an employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS 123 also applies to plans in which the employer incurs liabilities
to employees in amounts based on the price of the employer(cid:146)s stock, i.e., stock option plans, stock purchase plans,
restricted stock plans and stock appreciation rights. The statement also specifies the accounting for transactions in
which a company issues stock options or other equity instruments for services provided by non-employees or to
acquire goods or services from outside suppliers or vendors.

The Company applies APB 25 in accounting for stock-based awards to employees. No compensation cost
has been recognized for stock-based awards to employees as the stock option exercise price is equal to the fair
market value of the underlying common stock as of the stock option grant date. Summarized below are the pro
forma effects on net earnings and earnings per share data, as if the Company had elected to use the fair value
approach prescribed by SFAS 123 to account for its employee stock-based compensation plans:

For the year ended December 31,

2005

2004

2003

Net earnings available to common stockholders

$

255,728

$

253,887

$

148,979

Less: Total stock-based employee

compensation expense using the fair value
method

Pro forma net earnings

Net earnings per share as reported:

Basic

Diluted

Pro forma net earnings per share:

Basic

Diluted

$

$

$

$

$

(2,420)

(1,705)

(1,158)

253,308

$

252,182

$

147,821

3.38

3.35

3.35

3.34

$

$

$

$

3.79

3.72

3.77

3.71

$

$

$

$

2.94

2.88

2.91

2.85

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The fair value of options granted, which is amortized to expense over the option vesting period in determining
pro forma net earnings, is estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:

For the year ended December 31,
2003
2004
2005

Risk-free interest rate
Expected lives (in years)
Expected volatility
Expected dividend yield
Fair value per share

3.90%-4.26% 2.16%-4.50% 1.56%-4.18%
3 - 4
42.26%
10.00%

3
34.75%
10.00%

3
28.83%
10.00%

$

1.79

$

3.71

$

1.09

During the periods in which the mortgage operations were accounted for under the equity method, grants of
stock options by IMH to IFC employees were not accounted for under APB 25 but were accounted for at fair value
consistent with the provisions specified under SFAS 123. See New Accounting Pronouncements in Note A.19.

17. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), (cid:145)(cid:145)Share-Based Payment(cid:146)(cid:146) ((cid:145)(cid:145)SFAS 123(R)(cid:146)(cid:146)),
which  amends  SFAS  123,  (cid:145)(cid:145)Accounting  for  Stock-Based  Compensation(cid:146)(cid:146),  supercedes  APB  Opinion  No.  25,
(cid:145)(cid:145)Accounting for Stock Issued to Employees(cid:146)(cid:146), and amends SFAS 95, (cid:145)(cid:145)Statement of Cash Flows.(cid:146)(cid:146) SFAS 123(R)
requires companies to measure all employee stock-based compensation awards using a fair value method and
record such expense in its consolidated financial statements. In addition, the adoption of SFAS 123(R) requires
additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based
payment arrangements. SFAS 123(R) is effective beginning as of the first annual reporting period beginning after
June  15,  2005.  The  Company  will  be  applying  the  modified  prospective  method  of  transition.  As  permitted  by
SFAS  123,  the  Company  currently  accounts  for  share-based  payments  to  employees  using  the  intrinsic  value
method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the
adoption  of  SFAS  123(R)(cid:146)s  fair  value  method  will  not  have  a  significant  impact  on  the  Company(cid:146)s  result  of
operations, or its overall financial position. The future impact of adoption of SFAS 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments granted in the future. However, if the Company had
adopted  SFAS  123(R)  in  prior  periods,  the  impact  of  that  standard  would  have  approximated  the  impact  of
SFAS  123  as  described  in  the  disclosure  of  pro  forma  net  income  and  earnings  per  share  in  Note  A.15  to  the
Company(cid:146)s consolidated financial statements. SFAS 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating cash flows and increase net financing
cash flows in periods after adoption.
Note B(cid:151)Mortgages Held-for-Sale

Mortgages held-for-sale for the periods indicated consists of the following:

Mortgages held-for-sale
Change in fair value of mortgages held-for-sale
Net premiums on mortgages held-for-sale

Total mortgages held-for-sale

At December 31,

2005

2004

$ 2,027,194
(4,465)
29,965

$

576,777
-
10,968

$ 2,052,694

$

587,745

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30MAR200614310138

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The provision for loan repurchases and gains and losses on repurchases are recorded against the gain on
mortgages held-for-sale. Included in other liabilities as of December 31, 2005 and 2004, was a liability for mortgage
repurchases of $10.4 million and $2.2 million, respectively. The liability for mortgage repurchases is maintained for
the  purpose  of  purchasing  previously  sold  mortgages  for  various  reasons,  including  early  payment  defaults  or
breach of representations or warranties, which may be subsequently sold at a loss. In determining the adequacy of
the liability for mortgage repurchases, management considers such factors as specific requests for repurchase,
known  problem  loans,  underlying  collateral  values,  recent  sales  activity  of  similar  loans  and  other  appropriate
information. In the opinion of management, the potential exposure related to these representations and warranties
will not have a material adverse effect on our financial condition and results of operations.

During  2005,  2004  and  2003,  the  provision  for  loan  repurchases  was  $5.8  million,  $405  thousand  and
$1.5  million  respectively.  The  loss  (gain)  on  sale  of  repurchased  mortgages  for  2005,  2004,  and  2003  was
$1.8 million, ($549) thousand and ($902) thousand, respectively.

Note C(cid:151)CMO Collateral

CMO collateral for the periods indicated consists of the following:

Mortgages secured by single-family residential real estate
Mortgages secured by multi-family residential real estate
Net unamortized premiums on mortgages

Total CMO collateral

At December 31,

2005

2004

$ 23,021,760
1,195,541
276,989

$ 20,428,144
604,934
275,828

$ 24,494,290

$ 21,308,906

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Mortgages held-for-investment for the periods indicated consists of the following:

Mortgages secured by single-family residential real estate
Mortgages secured by multi-family residential real estate
Net unamortized premiums on mortgages

Total mortgages held-for-investment

At December 31,

2005

2004

$

$

$

5,183
153,583
1,304

497,756
77,809
11,121

160,070

$

586,686

As of December 31, 2005 and 2004, there were $2.3 million and $14.9 million, respectively, of mortgages

held-for-investment, which were not accruing interest due to the delinquent nature of the mortgages.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note E(cid:151)Allowance for Loan Losses

The allowance for loan loss is comprised of the following:

CMO collateral and mortgages held-for-investment
Specific reserve for finance receivables
Specific reserve for estimated hurricane losses

Total allowance for loan losses

Activity for allowance for loan losses was as follows:

At December 31,

2005

2004

$

$

$

55,007
10,683
12,824

78,514

$

53,272
10,683
-

63,955

Beginning balance
Provision for loan losses (1)
Charge-offs, net of recoveries

Total allowance for loan losses

For the year ended December 31,

2005

2004

2003

$

$

$

63,955
30,563
(16,004)

$

38,596
30,927
(5,568)

26,602
24,853
(12,859)

78,514

$

63,955

$

38,596

(1)

For the year ended December 31, 2005, the Company reviewed the properties in areas affected by hurricanes
Katrina, Rita and Wilma and recorded a specific reserve of $12.8 million for the estimated loss exposure for
886 properties securing a total unpaid principal balance of $183.7 million in the affected areas. The amount of
the provision may be adjusted in the future as more information becomes available. The provision for loan
losses for the year ended December 31, 2004 includes a specific impairment on warehouse advances of
$10.7 million.

Note F(cid:151)Other Assets

Other assets consist of the following for the periods presented:

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Deferred charge (Note K)
Prepaid and other assets
Investment securities available-for-sale
Cash margin balances
Investments for deferred compensation plan
Real estate owned
Premises and equipment, net
Deferred income taxes (Note K)
Investment in Impac Capital Trust (Note U)

$

At December 31,

2005

2004

$

47,406
34,422
40,227
16,567
8,041
46,351
12,312
12,160
2,884

48,211
35,423
25,427
7,902
4,189
18,277
9,092
5,328
-

Total other assets

$

220,370

$

153,849

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30MAR200614310138

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The  amortized  cost  and  estimated  fair  value  of  investment  securities  available-for-sale  for  the  periods

indicated are presented as follows:

As of December 31, 2005:

Subordinated securities secured by

mortgages

Restricted investments (1)

As of December 31, 2004:

Subordinated securities secured by

mortgages

Restricted investments (1)

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Estimated
Fair Value

$

$

$

$

39,775
7,187

46,962

24,851
3,786

28,637

$

$

$

$

963
854

1,817

905
403

1,308

$

$

$

$

(511) $
-

40,227
8,041

(511) $

48,268

(329) $
-

25,427
4,189

(329) $

29,616

(1)

Investments related to the Company(cid:146)s deferred compensation program are classified as available-for-sale.

As of December 31, 2005, no investment securities available-for-sale were placed on deposit (pledged) with
third parties compared to $15.3 million as of December 31, 2004. The securities are pledged as collateral for margin
calls on derivative instruments if necessary, depending on the change in the fair value of the derivative instruments.
Gross realized gains from the sale of investment securities available-for-sale were $49 thousand and $5.1 million for
the years ended December 31, 2005 and 2004, respectively. During the year ended December 31, 2005 and 2004,
we received none and $389 thousand, respectively, of recoveries on investment securities available-for-sale that
were written-off in prior periods.

Real estate owned, which consists of residential real estate acquired in satisfaction of loans, is carried at the
lower of cost or estimated fair value less estimated selling costs. Adjustments to the loan carrying value required at
the time of foreclosure are charged off against the allowance for loan losses. Losses or gains from the ultimate
disposition of real estate owned are recorded as (gain) loss on sale of other real estate owned in the consolidated
statement of operations.

Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on
premises and equipment is recorded using the straight-line method over the estimated useful lives of individual
assets,  typically,  three  to  twenty  years.  Premises  and  equipment  consisted  of  the  following  for  the  periods
indicated:

Premises and equipment
Less: Accumulated depreciation

Total premises and equipment

At December 31,

2005

2004

$

$

32,242
(19,930)

12,312

$

$

24,250
(15,158)

9,092

F-25

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

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Note G(cid:151)Reverse Repurchase Agreements

We enter into reverse repurchase agreements with major brokerage firms to finance our warehouse lending
operations and to fund the purchase of mortgages. Reverse repurchase agreements consist of uncommitted lines,
which may be withdrawn at any time by the lender, and committed lines. A reverse repurchase agreement, although
structured  as  a  sale  and  repurchase  obligation,  acts  as  a  financing  vehicle  under  which  we  effectively  pledge
mortgages as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in
an  amount  equal  to  a  percentage  of  the  market  value  of  the  pledged  collateral.  At  the  maturity  of  the  reverse
repurchase agreement, we are required to repay the loan and correspondingly receive our collateral. Under reverse
repurchase agreements, we retain the beneficial ownership, including the right to distributions on the collateral and
the right to vote on matters as to which certificate holders vote. Upon payment default, the lending party may
liquidate the collateral. Our borrowing agreements require us to pledge cash, additional mortgages or additional
assets in the event the market value of existing collateral declines. We may be required to sell assets to reduce our
borrowings  to  the  extent  that  cash  reserves  are  insufficient  to  cover  such  deficiencies  in  collateral.  As  of
December 31, 2005, the warehouse lending operations had a total of $4.3 billion of reverse repurchase facilities.
Committed facilities comprised of $125 million of the total available facilities, with uncommitted facilities totaling
$4.175  billion.  As  of  December  31,  2005  and  2004,  reverse  repurchase  agreements  include  accrued  interest
payable of $12.1 million and $5.2 million, respectively.

The following tables present certain information on reverse repurchase agreements for the periods indicated:

Maximum
Borrowing
Capacity

Range of
Allowable
Advance
Rate Range Rates (%) Outstanding

Balance

Maturity Date

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Short-term borrowings

(indexed to one month
LIBOR):
Repurchase agreement 1
Repurchase agreement 2
Repurchase agreement 3
Repurchase agreement 4
Repurchase agreement 5
Repurchase agreement 6

Total short-term
borrowings

90 - 97
0.75-1.50%
0.88-1.50%
93 - 98
0.93-1.13% 95.5 - 99
70 - 98
0.70-1.00%
90 - 98
0.93%
80
0.40%

$

500,000
700,000
400,000
1,200,000
1,500,000
29,174

$ 4,329,174

No Expiration
December 8, 2006
March 15, 2006
No Expiration
March 29, 2006
No Expiration

$

154,163
436,909
223,079
1,145,075
441,675
29,174

$ 2,430,075

Maximum
Borrowing
Capacity

Range of
Allowable
Advance
Rate Range Rates (%) Outstanding

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December 31, 2004
Short-term borrowings

(indexed to one month
LIBOR):
Repurchase agreement 1
Repurchase agreement 2
Repurchase agreement 3
Repurchase agreement 4
Repurchase agreement 5

Total short-term
borrowings

30MAR200614310138

$

250,000
700,000
700,000
1,200,000
500,000

90 - 97
0.75-1.50%
0.88-1.50%
93 - 98
0.93-1.13% 95.5 - 99
70 - 98
0.70-1.00%
90 - 98
0.93%

$

62,480
485,041
212,996
539,233
227,808

$ 3,350,000

$ 1,527,558

F-26

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The following table presents certain information on reverse repurchase agreements for the periods indicated:

Maximum month-end outstanding balance during period
Average balance outstanding for period
Underlying collateral (mortgage loans)
Weighted average rate for period

Note H(cid:151)CMO Borrowings

For the year ended
December 31,

2005

2004

$ 3,963,788
2,730,805
2,603,917
4.46%

$ 2,253,540
2,175,728
1,629,486
2.66%

The following table presents CMOs issued and outstanding for the periods indicated and certain interest rate

information on CMOs by year of issuance for the periods indicated (dollars in millions):

CMOs Outstanding as of

Range of (%):

Original
Issuance
Amount

$ 3,876.1
5,966.1
17,710.7
13,387.7

12/31/2005

12/31/2004

Fixed
Interest
Rates

Interest Rate
Interest Rate
Margins over Margins after
Adjustment
One-Month
Date (2)
LIBOR (1)

$

219.8
1,723.0
10,191.9
11,902.9

$ 1,237.3
3,615.8
16,407.5
-

5.25 - 12.00
4.34 - 12.75
3.58 - 5.56
-

0.27 - 2.75
0.27 - 3.00
0.25 - 2.50
0.24 - 2.90

0.54 - 3.68
0.54 - 4.50
0.50 - 3.75
0.48 - 4.35

24,037.6

21,260.6

18.1

12.9

(65.3)

(67.1)

$ 23,990.4

$ 21,206.4

Year of Issuance

2002
2003
2004
2005

Subtotal CMO
borrowings
Accrued interest

expense
Unamortized

securitization
costs

Total CMO

Borrowings

(1)
(2)

One-month LIBOR was 4.39% as of December 31, 2005.
Interest rate margins are generally adjusted when the unpaid principal balance is reduced to less than 10-20% of the
original issuance amount.

Expected principal maturity of the CMO borrowings, which is based on expected prepayment rates, is as

follows (dollars in millions):

Payments Due by Period

Total

Less Than
One Year

One to
Three
Years

Three to
Five Years

More Than
Five Years

CMO borrowings

$ 24,037.6

$

9,733.4

$

9,173.3

$

3,330.9

$

1,800.0

F-27

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

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Note I(cid:151)Segment Reporting

Management internally reviews and analyzes its operating segments as follows:

(cid:127) long-term investment operations that are conducted by IMH, IMH Assets and IMCC invest primarily in
Alt-A ARMs and, to a lesser extent, Alt-A FRMs acquired from the mortgage operations and multi-family
mortgages;

(cid:127) warehouse lending operations that are conducted by IWLG provide warehouse and repurchase financing
to affiliated companies and to approved mortgage bankers and brokers, some of which are clients of the
mortgage operations, to finance mortgages; and

(cid:127) mortgage operations that are conducted by IFC and its wholly-owned subsidiaries ISAC and Novelle, the
operations of which were combined with IFC, acquire and originate primarily ARMs and FRMs and, to a
lesser extent, B/C mortgages from its network of third party correspondents, mortgage brokers and retail
customers.

The  accounting  policies  of  the  operating  segments  are  the  same  as  those  described  in  the  summary  of
significant accounting policies except for the elimination of inter-company profits and the related tax effect that
result  from  the  sale  of  mortgages  from  the  mortgage  operations  to  the  long-term  investment  operations.  Rent
expense related to the facilities are allocated among the operating segments based on square footage. Personnel,
legal and marketing costs are allocated among the operating segments based upon their estimated usage.

The following table presents reporting segments as of and for the year ended December 31, 2005:

Balance Sheet Items as of
December 31, 2005:

Cash and cash equivalents
CMO collateral and mortgages

held-for-investment
Allowance for loan losses
Mortgages held-for-sale
Finance receivables
Other assets
Total assets
Total liabilities
Total stockholders(cid:146) equity

Statement of Operations Items
for the year ended
December 31, 2005:

Net interest income
Provision for loan losses
Realized gain (loss) from

derivatives

Change in fair value of derivatives
Other non-interest income
Non-interest expense and income

taxes

Net earnings

Long-Term Warehouse Mortgage
Operations
Investment
Lending
(IFC)
Operations Operations

Inter-

Company (1) Consolidated

$

105,292

$

32,353

$

63,596

$

(54,620) $

146,621

24,784,954
(67,831)
-
-
202,571
25,024,986
24,026,788
998,198

-
(10,683)
-
2,488,364
109,787
2,619,821
2,401,443
218,378

-
-
2,052,694
-
80,531
2,196,821
2,096,280
100,541

(130,594)
-
-
(2,138,147)
202,112
(2,121,249)
(1,971,079)
(150,170)

24,654,360
(78,514)
2,052,694
350,217
595,001
27,720,379
26,553,432
1,166,947

$

74,604
30,563

$

55,725
-

$

3,824
-

$

70,598
-

$

22,595
155,695
1,528

-
-
7,760

-
(10,763)
130,783

-
-
(86,674)

14,083
209,776

$

$

7,542
55,943

$

108,876
14,968

$

(5,647)
(10,429) $

204,751
30,563

22,595
144,932
53,397

124,854
270,258

(1)

Statement of operations items are net of adjustments on inter-company sales transactions.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The following table presents reporting segments as of and for the year ended December 31, 2004:

Balance Sheet Items as of
December 31, 2004:

Cash and cash equivalents
CMO collateral and mortgages

held-for-investment
Allowance for loan losses
Mortgages held-for-sale
Finance receivables
Other assets
Total assets
Total liabilities
Total stockholders(cid:146) equity

Long-Term Warehouse Mortgage
Operations
Investment
Lending
(IFC)
Operations Operations

Inter-

Company (1) Consolidated

$

272,908

$

43,821

$

34,355

$

(26,733) $

324,351

22,018,119
(53,272)
-
-
363,031
22,600,786
21,695,469
905,317

-
(10,683)
1,154
1,605,642
50,456
1,690,390
1,528,221
162,169

-
-
586,591
-
51,377
672,323
636,527
35,796

(122,527)
-
-
(1,133,822)
135,350
(1,147,732)
(1,088,525)
(59,207)

21,895,592
(63,955)
587,745
471,820
600,214
23,815,767
22,771,692
1,044,075

Statement of Operations Items
for the year ended
December 31, 2004:

Long-Term Warehouse Mortgage
Operations
Investment
Lending
(IFC)
Operations Operations

Inter-

Company(1) Consolidated

Net interest income
Provision for loan losses
Realized gain (loss) from

derivatives

Change in fair value of derivatives
Other non-interest income
Non-interest expense and income

taxes

Net earnings

$

231,944
24,851

$

45,822
6,076

$

14,744
-

$

50,573
-

$

343,083
30,927

(91,881)
96,575
11,617

-
-
10,592

-
-
130,563

-
-
(117,095)

(91,881)
96,575
35,677

8,102

6,899

102,363

(22,474)

94,890

$

215,302

$

43,439

$

42,944

$

(44,048) $

257,637

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Statement of operations items are net of adjustments on inter-company sales transactions.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The following table presents reporting segments for the year ended December 31, 2003:

Balance Sheet Items as of
December 31, 2003:

Cash and cash equivalents
CMO collateral and mortgages

held-for-investment
Allowance for loan losses
Mortgages held-for-sale
Finance receivables
Other assets
Total assets
Total liabilities
Total stockholders(cid:146) equity

Statement of Operations Items
for the year ended
December 31, 2003:

Net interest income
Provision for loan losses
Equity in net earnings of IFC
Realized gain (loss) from

derivatives

Change in fair value of derivatives
Other non-interest income
Non-interest expense and income

taxes

Net earnings

Long-Term Warehouse Mortgage
Operations
Investment
Lending
(IFC)
Operations Operations

Inter-

Company (1) Consolidated

$

91,274

$

32,268

$

27,454

$

(25,843) $

125,153

9,094,503
(34,739)
-
-
54,857
9,205,895
8,865,020
340,875

-
(3,857)
2,624
1,630,979
26,285
1,688,299
1,569,569
118,730

269,679
-
394,994
-
48,250
740,377
712,037
28,340

(67,289)
-
-
(1,000,949)
37,467
(1,056,614)
(1,041,456)
(15,158)

9,296,893
(38,596)
397,618
630,030
166,859
10,577,957
10,105,170
472,787

$

$

130,529
22,368
-

$

28,950
2,485
-

$

8,262
-
-

$

8,966
-
11,537

(47,847)
31,826
17,615

4,332

-
-
6,016

5,012

-
-
55,723

-
-
(31,836)

$

105,423

$

27,469

$

16,889

$

(802) $

148,979

47,096

(10,531)

45,909

176,707
24,853
11,537

(47,847)
31,826
47,518

(1)

Statement of operations items are net of adjustments on inter-company sales transactions.

Note J(cid:151)Fair Value of Financial Instruments

The estimated fair value amounts have been determined by management using available market information
and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that
could  be  realized  in  a  current  market  exchange.  The  use  of  different  market  assumptions  and/or  estimation
methodologies may have a material effect on the estimated fair value amounts.

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F-30

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

The  following  table  presents  the  fair  value  of  financial  instruments  included  in  the  consolidated  balance

sheets for the periods presented:

December 31, 2005

December 31, 2004

Estimated
Fair
Value of
Financial
Instruments

Carrying
Amount

Estimated
Fair
Value of
Financial
Instruments

Carrying
Amount

Assets

Cash and cash equivalents
Cash margin balances
Restricted cash
Investment securities available-for-sale
Investments for deferred compensation plan
CMO collateral
Mortgages held-for-investment
Finance receivables
Mortgages held-for-sale
Derivative assets

$

146,621 $
16,567
698
40,227
8,041
24,494,290
160,070
350,217
2,052,694
250,368

146,621 $
16,567
698
40,227
8,041
24,409,599
156,694
350,217
2,052,694
250,368

324,351 $
7,902
253,360
25,427
4,189
21,308,906
586,686
471,820
587,745
95,388

324,351
7,902
253,360
25,427
4,189
21,595,622
612,394
471,820
601,203
95,388

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Liabilities

CMO borrowings, excluding accrued interest
Reverse repurchase agreements
Derivative liabilities

$ 23,972,349 $ 24,051,587 $ 21,193,494 $ 21,163,573
1,527,558
4,417

2,430,075
2,495

2,430,075
2,495

1,527,558
4,417

The fair value estimates as of December 31, 2005 and 2004 are based on pertinent information available to
management as of that date. Although management is not aware of any factors that would significantly affect the
estimated  fair  value  amounts,  such  amounts  have  not  been  comprehensively  revalued  for  purposes  of  these
consolidated  financial  statements  since  those  dates  and,  therefore,  current  estimates  of  fair  value  may  differ
significantly from the amounts presented.

The following describes the methods and assumptions used by management in estimating fair values:

Cash and Cash Equivalents, Cash Margin Balances, and Restricted Cash

Fair value approximates carrying amounts as these instruments are demand deposits and money market

mutual funds and do not present unanticipated interest rate or credit concerns.

Investment Securities Available-for-Sale and Investments for Deferred Compensation Plan

Fair value is estimated using a discounted cash flow model, which incorporates certain assumptions such as

prepayment, yield and losses.

CMO Collateral

Fair value is estimated based on quoted market prices from independent dealers and brokers for similar

types of mortgages.

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Finance Receivables

Fair value approximates carrying amounts due to the short-term nature of the assets and do not present

unanticipated interest rate or credit concerns.

Mortgages Held-for-Investment

Fair value is estimated based on estimates of proceeds that could be received from the sale of the underlying

collateral of each mortgage.

Mortgages Held-for-Sale

Fair value is estimated based on estimates of proceeds that could be received from the sale of the underlying

collateral of each mortgage.

CMO Borrowings

Fair value of CMO borrowings is estimated based on the use of a bond model, which incorporates certain

assumptions such as prepayment, yield and losses.

Reverse Repurchase Agreements

Fair value approximates carrying amounts due to the short-term nature of the liabilities and do not present

unanticipated interest rate or credit concerns.

Derivative Assets and Liabilities

Fair value is estimated based on quoted market prices from independent dealers and brokers.

Note K(cid:151)Income Taxes

The following table presents income tax benefit for the periods indicated:

For the year ended
December 31,

2005

2004

2003

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Current income taxes:

Federal
State

Total current income taxes

Deferred income taxes:

Federal
State

Total deferred income taxes

Total income taxes at TRS

Elimination of income taxes on inter-company profits

$

$

3,233
1,167

4,400

$

18,869
5,135

24,004

(602)
(7,081)

(7,683)

(3,283)
(26,368)

396
(3,457)

(3,061)

20,943
(34,393)

Total income tax benefit

$

(29,651) $

(13,450) $

7,947
913

8,860

(3,748)
(851)

(4,599)

4,261
(5,658)

(1,397)

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Effective income taxes differ from the amount determined by applying the statutory federal rate of 35% for

the period indicated as follows:

Income taxed at federal tax rate
State tax, net of federal income tax
Exclusion of REIT income and IFC income prior to

consolidation

Amortization of deferred charge(1)
REMIC transaction ISAC 2005-2
Other

Total income tax benefit

For the year ended
December 31,

2005

2004

2003

$

84,213
(5,594)

$

85,465
(1,329)

$

51,654
567

(93,002)
(9,511)
(1,909)
(3,848)

(90,559)
(5,674)
-
(1,353)

$

(29,651) $

(13,450) $

(50,046)
(1,980)
-
(1,592)

(1,397)

(1)

Included in equity in net earnings of IFC in the consolidated statement of operations during the year ended
December 31, 2003 was $4.3 million of amortization of deferred charge.

The tax affected cumulative temporary differences that give rise to deferred tax assets and liabilities for the

periods indicated are as follows:

Deferred tax assets:
Depreciation and amortization
Salary accruals
Other accruals
Non-accrual loans
Provision for repurchases
REMIC interest
FAS 133 valuation
Change in fair value of loans held for sale
State net operating loss

Total gross deferred tax assets

Deferred tax liabilities:
Mortgage servicing rights
Depreciation and amortization
Non-accrual loans
Other

Total gross deferred tax liabilities

Net deferred tax asset

At December 31,

2005

2004

$

$

340
3,868
1,743
685
4,601
-
1,492
1,967
7,209

-
4,604
1,736
-
947
31
3,601
-
4,707

21,905

15,626

(7,097)
-
-
(2,648)

(9,745)

(6,867)
(879)
(96)
(2,456)

(10,298)

$

12,160

$

5,328

Management believes that the deferred tax asset will more likely than not be realized due to the reversal of the
deferred tax liability and expected future taxable income. In determining the possible future realization of deferred
tax assets, future taxable income from the following sources are taken into account: (a) the reversal of taxable
temporary differences and (b) future operations exclusive of reversing temporary differences.

As of December 31, 2005, the Company has an estimated federal and California net operating loss tax carry-
forward of $18.1 million and $66.5 million, respectively. The federal and California net operating loss carry-forward
begins to expire in the year 2020 and 2013, respectively.

F-33

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note L(cid:151)Employee Benefit Plans

401(k) Plan

After meeting certain employment requirements, employees can participate in our 401(k) plan. Under the
401(k) plan, employees may contribute up to 25% of their salaries, pursuant to certain restrictions. We match 50%
of the first 4% of employee contributions. Additional contributions may be made at the discretion of the board of
directors. During the years ended December 31, 2005, 2004 and 2003, we recorded $950 thousand, $775 thousand
and $445 thousand, respectively, for matching and discretionary contributions.

Deferred Compensation Plan

The Company maintains a nonqualified deferred compensation plan (the (cid:145)(cid:145)Deferred Compensation Plan(cid:146)(cid:146)) for
certain executives of the Company. Under the Deferred Compensation Plan, eligible participants may defer receipt
of up to 50% of their base compensation and up to 100% of their bonuses on a pretax basis until specified future
dates,  upon  retirement  or  death.  The  deferred  amounts  are  placed  in  a  trust  and  invested  by  the  Company.
Participants recommend investment vehicles for the funds, subject to approval by the trustees. The balance due
each participant increases or decreases as a result of the related investment gains and losses. The trust and the
investments therein are assets of the Company and the participants of the Deferred Compensation Plan are general
creditors of the Company with respect to benefits due and are recorded in the accompanying consolidated balance
sheets. Included in accrued liabilities in the accompanying consolidated balance sheets at December 31, 2005 and
2004  was  $8.1  million  and  $5.2  million,  respectively,  relating  to  amounts  owed  by  the  Company  to  the  plan
participants.

Effective January 2006, the Company terminated the Deferred Compensation Plan. The plan was terminated
due to market conditions and lack of participation. The amounts held in trust by the Company under this plan were
distributed to participants in 2006.

Note M(cid:151)Related Party Transactions

IFC has entered into an insurance commitment program with Radian Guaranty, Inc. A director of IMH was the
Chairman and Chief Executive Officer of Radian Group, Inc. and its principal subsidiary, Radian Guaranty, Inc. until
April  30,  2005.  Radian  Guaranty  has  agreed  to  insure  mortgage  loans  acquired  or  originated  by  IFC  that  meet
certain credit criteria. IFC pays Radian on a monthly basis. The amount paid depends on the number of mortgage
loans insured by Radian and the credit quality of the mortgages. For the year ended December 31, 2005 and 2004,
IFC paid an aggregate of approximately $19.0 and $12.0 million, respectively, to Radian in connection with the
insurance program. This includes only lender paid mortgage insurance.

In May 2005, a director of IMH became Chairman and Chief Executive Officer of Clayton Holdings, Inc., a
mortgage underwriting company and a company with which IFC obtains services. For the year ended 2005, IFC
paid an aggregate of $1.0 million Clayton in connection with due diligence services provided.

During the ordinary course of business, loans have been extended to officers and directors of the Company.

All such loans are made at the prevailing market rates and conditions existing at the time.

Note N(cid:151)Commitments and Contingencies

We are a party to financial instruments with off-balance sheet risk in the normal course of business. Such
instruments include short-term commitments to extend credit to borrowers under warehouse lines of credit, which
involve elements of credit risk, lease commitments, and exposure to credit loss in the event of nonperformance by
the counter-parties to the various agreements associated with loan purchases. Unless noted otherwise, we do not

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F-34

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

require  collateral  or  other  security  to  support  such  commitments.  We  use  the  same  credit  policies  in  making
commitments and conditional obligations as we do for on-balance sheet instruments.

Short-Term Loan Commitments

The warehouse lending operations provide secured short-term revolving financing to small and medium-size
mortgage originators to finance mortgages from the closing of the mortgages until sold to permanent investors. As
of  December  31,  2005,  the  warehouse  lending  operations  had  approved  warehouse  lines  to  non-affiliated
customers  of  $691.5  million,  of  which  $350.2  million  was  outstanding,  as  compared  to  $738.7  million  and
$471.8 million, respectively, as of December 31, 2004.

Lease Commitments

The  Company  leases  office  space  under  various  operating  lease  agreements.  Minimum  premises  rental

commitments under non-cancelable leases are as follows:

Year 2006
Year 2007
Year 2008
Year 2009
Year 2010 and thereafter

Total lease commitments

$ 7,641,124
9,586,280
7,881,369
6,781,679
45,921,229

$ 77,811,681

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Total rental expense for the years ended December 31, 2005, 2004 and 2003 was $4.4 million, $3.2 million
and $1.4 million, respectively and is included in occupancy expense in the consolidated statement of operations.

Mortgage Repurchase Commitments

In the ordinary course of business, the mortgage operation is exposed to liability under representations and
warranties made to purchasers and insurers of mortgages and the purchasers of servicing rights. Under certain
circumstances,  the  mortgage  operations  are  required  to  repurchase  mortgages  if  there  had  been  a  breach  of
representations or warranties.

Master Commitments

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The  mortgage  operations  establish  mortgage  purchase  commitments  (master  commitments)  with  sellers
that, subject to certain conditions, entitle the seller to sell and obligate the mortgage operations to purchase a
specified dollar amount of mortgages over a period generally ranging from six months to one year. The terms of
each master commitment specify whether a seller may sell mortgages to the mortgage operations on a mandatory,
best efforts or optional basis. Master commitments generally do not obligate the mortgage operations to purchase
mortgages at a specific price, but rather provide the seller with a future outlet for the sale of its originated mortgages
based  on  quoted  prices  at  the  time  of  purchase.  As  of  December  31,  2005,  the  mortgage  operations  had
outstanding short-term master commitments with 193 sellers to purchase mortgages in the aggregate principal
amount of $9.8 billion over periods ranging from one month to one year, of which $2.9 billion had been purchased or
committed  to  be  purchased  pursuant  to  loan  commitments.  There  is  no  exposure  to  credit  loss  in  this  type  of
commitment  until  the  loans  are  funded  and  interest  rate  risk  associated  with  the  short-term  commitments  is
mitigated by the use of forward contracts to sell loans to investors.

Sellers  who  have  entered  into  master  commitments  may  sell  mortgages  to  the  mortgage  operations  by
executing  individual  or  bulk  loan  commitments.  Each  loan  commitment,  in  conjunction  with  the  related  master
commitment,  specifies  the  terms  of  the  related  sale,  including  the  quantity  and  price  of  the  mortgages  or  the

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

formula  by  which  the  price  will  be  determined,  the  loan  commitment  type  and  the  delivery  requirements.
Historically, the up-front fee paid by a seller to obtain a master commitment on a mandatory delivery basis is often
refunded pro rata as the seller delivers loans pursuant to rate-locks. We retain any remaining fee after the master
commitment expires.

Following the issuance of a loan commitment, the mortgage operations are subject to the risk of interest rate
fluctuations and enter into derivatives to diminish such risk. Interest rate risk management transactions may include
mandatory or optional forward sale commitments of mortgages or mortgage-backed securities, interest rate caps,
floors and swaps, mandatory forward sale commitments, mandatory or optional sales of futures and other financial
futures transactions. Management, based on various factors including market conditions and the expected volume
of mortgage purchases, determines the nature and quantity of derivative transactions.

Loan Commitments

The mortgage operations also acquire mortgages from sellers that are not purchased pursuant to master
commitments.  These  purchases  may  be  made  on  an  individual  loan  basis  or  on  a  bulk  loan  purchase  basis.
Pursuant to these purchases, we enter loan commitments an individual loan basis and on a bulk purchase basis. A
loan commitment for a bulk purchase may obligate the seller to sell and the mortgage operations to purchase a
specific  group  of  mortgages,  generally  ranging  from  $500  thousand  to  $125.0  million  in  aggregate  committed
principal amount, at set prices on specific dates.

Bulk purchases enable the mortgage operations to acquire substantial quantities of mortgages on a more
immediate basis. The specific pricing, delivery and program requirements of these purchases are determined by
negotiation between the parties but are generally in accordance with the provisions of our seller/servicer guide. Due
to the active presence of investment banks and other substantial investors in this area, bulk pricing is extremely
competitive. Mortgages are also purchased from individual sellers, typically smaller originators of mortgages, who
do  not  wish  to  sell  pursuant  to  either  a  master  commitment  or  on  a  bulk  purchase  basis.  The  terms  of  these
individual purchases are based primarily on our seller/servicer guide and standard pricing provisions.

Mandatory, Best-Efforts and Optional Rate-Lock

Mandatory rate-locks require the seller to deliver a specified quantity of mortgages over a specified period of
time regardless of whether the mortgages are actually originated by the seller or whether circumstances beyond the
seller(cid:146)s control prevent delivery. The mortgage operations are required to purchase all mortgages covered by the
rate-lock at prices established at the time of rate-lock. If the seller is unable to deliver the specified mortgages, it
may instead deliver comparable mortgages approved by the mortgage operations within the specified delivery
time. Failure to deliver the specified mortgages or acceptable substitute mortgages under a mandatory rate-lock
obligates the seller to pay a penalty. In contrast, mortgages sold on a best efforts basis must be delivered to the
mortgage operations only if they are actually originated by the seller. The best-efforts rate-lock provides sellers with
an effective way to sell mortgages during the origination process without any penalty for failure to deliver. Optional
rate-locks give the seller the option to deliver mortgages to us at a fixed price on a future date and require the
payment  of  up-front  fees.  The  mortgage  operations  retain  any  up-front  fees  paid  in  connection  with  optional
rate-locks if the mortgages are not delivered.

Forward Sale Commitments

As of December 31, 2005, the mortgage operations had $156 million in outstanding commitments to sell
mortgages through mortgage-backed securities. These commitments allow the mortgage operations to enter into
mandatory commitments when the mortgage operations notify the investor of its intent to exercise a portion of the
forward delivery contracts. The mortgage operations were not obligated under mandatory commitments to deliver
loans to such investors as of December 31, 2005. The credit risk of forward contracts relates to the counter-parties

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

ability to perform under the contract. We evaluate counter-parties based on their ability to perform prior to entering
into any agreements.

As  of  December  31,  2005,  the  mortgage  operations  had  written  option  contracts  and  swaps  with  an
outstanding notional balance of $130 million and $1.7 billion, respectively. The mortgage operations may sell, call or
buy put options on U.S. Treasury bonds and mortgage-backed securities. The risk in writing a call option is that the
mortgage operations give up the opportunity for profit if the market price of the mortgages increases and the option
is  exercised.  The  mortgage  operations  also  have  the  additional  risk  of  not  being  able  to  enter  into  a  closing
transaction if a liquid secondary market does not exist. The risk of buying a put option is limited to the premium paid
for the put option.

Legal Proceedings

Mortgage-related Litigation

On June 27, 2000, a complaint captioned Michael P. and Shellie Gilmor v. Preferred Credit Corporation and
Impac Funding Corporation, et al. was filed in the Circuit Court for Clay County, Missouri, as a purported class
action lawsuit alleging that the defendants violated Missouri(cid:146)s Second Loans Act and Merchandising Practices Act.
In July 2001, the Missouri complaint was amended to include IMH and other Impac-related entities. A plaintiffs
class was certified on January 2, 2003. On June 22, 2004, the court issued an order to stay all proceedings pending
the outcome of an appeal in a similar case in the Eighth Circuit.

On February 3, 2004, a complaint captioned James and Jill Baker v. Century Financial Group, Inc, et al was
filed in the Circuit Court of Clay County, Missouri, as a purported class action lawsuit alleging that the defendants
violated Missouri(cid:146)s Second Loan Act and Merchandising Practices Act.

On  October  2,  2001,  a  complaint  captioned  Deborah  Searcy,  Shirley  Walker,  et  al.  v.  Impac  Funding
Corporation, Impac Mortgage Holdings, Inc. et. al. was filed in the Wayne County Circuit Court, State of Michigan,
as a purported class action lawsuit alleging that the defendants violated Michigan(cid:146)s Secondary Mortgage Loan Act,
Credit Reform Act and Consumer Protection Act. A motion to dismiss an amended complaint has been filed, but not
yet ruled upon.

On July 31, 2003, a purported class action complaint captioned Frazier, et al v. Impac Funding Corp., et al,
was filed in federal court in Tennessee. The causes of action in the action allege violations of Tennessee(cid:146)s usury
statute and Consumer Protection Act. A motion to dismiss the complaint was filed and not yet ruled upon. The court
agreed to administratively close the case on April 5, 2004 pending an appeal in a similar case. On April 29, 2004, the
court issued its order administratively closing the case.

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On November 25, 2003, a complaint captioned Michael and Amber Stallings v. Empire Funding Home Loan
Owner Trust 1997-3; U.S. Bank, National Association; and Wilmington Trust Company was filed in the United States
District Court for the Western District of Tennessee, as a purported class action lawsuit alleging that the defendants
violated Tennessee predatory lending laws governing second mortgage loans. The complaint further alleges that
certain assignees of mortgage loans, including two Impac-related trusts, should be included as defendants in the
lawsuit. Like the Frazier matter this case was administratively closed on April 29, 2004 pending an appeal in a
similar case.

All of the above purported class action lawsuits are similar in nature in that they allege that the mortgage loan
originators  violated  the  respective  state(cid:146)s  statutes  by  charging  excessive  fees  and  costs  when  making  second
mortgage loans on residential real estate. The complaints allege that IFC was a purchaser, and is a holder, along
with other affiliated entities, of second mortgage loans originated by other lenders. The plaintiffs in the lawsuits are
seeking  damages  that  include  disgorgement  of  interest  paid,  restitution,  rescission,  actual  damages,  statutory

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

damages,  exemplary  damages,  pre-judgment  interest  and  punitive  damages.  No  specific  dollar  amount  of
damages is specified in the complaints.

We  believe  that  we  have  meritorious  defenses  to  the  above  claims  and  intend  to  defend  these  claims
vigorously. Nevertheless, litigation is uncertain and we may not prevail in the lawsuits and can express no opinion as
to its ultimate outcome. An adverse judgment in any of these matters could have a material adverse affect on us,
however,  no  judgment  in  any  matter  is  probable  to  occur  nor  is  any  amount  of  any  loss  from  such  judgment
reasonably estimable at this time.

Securities Litigation

From January 10, 2006, through February 28, 2006, six purported class action complaints have been filed
against IMH and its senior officers and all but one of its directors by the following plaintiffs, individually and on
behalf of all others similarly situated, in the U.S. District Court, Central District of California: Earl Schriver, Jr. (filed
January 10, 2006), Jeff Dayton (filed January 13, 2006), Joseph Mathieu (filed January 18, 2006), Fred Safir and
Wilma Libar (filed January 26, 2006), Ronald Kelner (filed February 1, 2006), and Miroslav Bardos (filed February 9,
2006). The complaints, which are brought on behalf of persons who acquired IMH(cid:146)s common stock during the
period  of  May  13,  2005  through  August  9,  2005,  allege  claims  against  all  defendants  for  violations  under
Section 10(b) of the Securities Exchange Act of 1934 (the (cid:145)(cid:145)Exchange Act(cid:146)(cid:146)) and Rule 10b-5 thereunder, and claims
against  the  individual  defendants  for  violations  of  Section  20(a)  of  the  Exchange  Act.  Plaintiffs  claim  that  the
defendants  caused  IMH(cid:146)s  common  stock  to  trade  at  artificially  inflated  prices  through  false  and  misleading
statements related to the company(cid:146)s financial condition and future prospects and that the individual defendants
improperly sold holdings. The complaints seek compensatory damages for all damages sustained as a result of the
defendants(cid:146) actions, including interest, reasonable costs and expenses, and other relief as the court may deem just
and proper.

From January 27, 2006, through February 28, 2006, seven shareholder derivative actions have been filed
against the company and all of its senior officers and directors by the following parties, derivatively on behalf of
nominal defendant IMH, four of which are filed in the U.S. District Court, Central District of California and three of
which are filed in Orange County Superior Court: Green Meadows Partners, LLP (filed January 27, 2006), Louis
Misarti  and  Anne  Misarti  (filed  February  1,  2006),  Miguel  Portillo  (filed  February  6,  2006),  Brian  Dawley  (filed
February 14, 2006), Michael Eleftheriou (filed February 21, 2006), Henry J. Krsjak (filed February 21, 2006) and
Ronald A. Gustafson (filed February 24, 2006). The actions allege claims for a shareholder derivative complaint for
breach  of  fiduciary  duties  for  insider  selling  and  misappropriation  of  information,  abuse  of  control,  gross
mismanagement,  waste  of  corporate  assets,  unjust  enrichment  and  violation  of  California  Corporations  Code
related to false and misleading statements regarding the company(cid:146)s business and future prospects, and in the case
of one complaint, related to materially deficient internal controls and illegal stock sales. The shareholder derivative
actions generally seek, in favor of the company, damages sustained as a result of the individual defendants(cid:146) breach
of fiduciary duties and the other causes of action, and, in the case of two derivative actions, in an amount equal to
three times the difference between prices at which stock was sold and the market value at which shares would have
been sold had the alleged non-public information been publicly disseminated; a constructive trust for the stock
proceeds; equitable and injunctive relief; disgorgement of all profits, benefits and other compensation obtained by
defendants; costs and disbursements of the action including attorneys(cid:146), accountants(cid:146) and experts(cid:146) fees and further
relief as the court deems just and proper. Furthermore, one derivative action is seeking relief directing all necessary
actions to reform and improve corporate governance and internal procedures to comply with applicable law; and
another derivative action includes punitive damages.

We  believe  that  we  have  meritorious  defenses  to  the  above  claims  and  intend  to  defend  these  claims
vigorously. Nevertheless, litigation is uncertain and we may not prevail in the lawsuits and can express no opinion as
to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on us.

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Other Litigation

We are a party to other litigation and claims which are normal in the course of our operations. While the
results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such
matters will not have a material adverse effect on our financial position.

Note O(cid:151)Derivative Instruments

Our primary objective is to limit exposure to the variability in future cash flows attributable to the variability of
one-month LIBOR, which is the underlying index of adjustable rate CMO borrowings and in the variability of the
value of mortgage loans held-for-sale as we enter into interest rate lock commitments and purchase commitments.
We also monitor on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. Our
interest rate risk management program is formulated with the intent to mitigate the potential adverse effects of
changing interest rates on cash flows on CMO borrowings and the value of mortgages held-for-sale. To mitigate
exposure to the effect of changing interest rates, we purchase derivative instruments primarily in the form of swaps
and, to a lesser extent, caps and floors.

Derivative assets amounted to $250.4 million as of December 31, 2005 and $95.4 million as of December 31,
2004. Cash margin balances placed with third parties of $16.6 million and $7.9 million as of December 31, 2005 and
2004, respectively are included in other assets on the consolidated balance sheets. Included in other liabilities on
the consolidated balance sheets as of December 31, 2005 and 2004 are $2.5 million and $4.4 million of derivative
liabilities, respectively.

Note P(cid:151)Stock Option Plans

Grants under stock option plans are made and administered by the board of directors. We currently have a
1995 Stock Option, Deferred Stock and Restricted Stock Plan (1995 Plan) and a 2001 Stock Option, Deferred Stock
and Restricted Stock Plan (2001 Plan), collectively, (cid:145)(cid:145)the stock plans.(cid:146)(cid:146) Each stock plan provides for the grant of
ISOs, NQSOs, deferred stock and restricted stock and, in the case of the 2001 Plan, dividend equivalent rights and,
in the case of the 1995 Plan, stock appreciation rights and limited stock appreciation rights awards (awards). The
total number of shares initially reserved and available for issuance under the 2001 Plan was 1.0 million shares.
However,  on  the  beginning  of  each  calendar  year  the  maximum  number  of  shares  available  for  issuance  may
increase by 3.5% of the total number of shares of stock outstanding or a lesser amount determined by the board of
directors.  Pursuant  to  this  provision,  in  2005,  2004  and  2003,  under  the  2001  Plan  an  additional  2.6  million,
2.0 million and 1.5 million shares, respectively, were available for grant. At December 31, 2005, no shares were
reserved  and  available  for  issuance  under  the  1995  Plan  and  2,91,189  shares  were  reserved  and  available  for
issuance under the 2001 Plan. Options or awards may not be granted under the 2001 Plan after March 27, 2011.
The  1995  Plan  expired  on  August  31,  2005,  but  outstanding  options  granted  under  the  1995  Plan  may  still  be
exercised, to the extent exercisable.

Options granted under the stock plans would become exercisable in accordance with the terms of the grant
made by the board of directors. Awards will be subject to the terms and restrictions of the award made by the board
of directors. The board of directors has discretionary authority to select participants from among eligible persons
and to determine at the time an option or award is granted and, in the case of options, whether it is intended to be an

F-39

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

ISO  or  a  NQSO,  and  when  and  in  what  increments  shares  covered  by  the  option  may  be  purchased.  Option
transactions for the periods indicated are summarized as follows:

For the year ended December 31,

2005

2004

2003

Weighted-
Average
Exercise Number of
Price $

Shares

Weighted-
Average
Exercise Number of
Price $

Shares

Weighted-
Average
Exercise
Price $

14.53
13.76
10.69
17.01

14.55

3,395,445
1,536,000
(345,893)
(151,668)

4,433,884

10.59
22.91
10.71
19.90

14.53

2,446,427
1,548,000
(520,978)
(78,004)

3,395,445

7.88
14.27
8.74
10.68

10.59

Number of
Shares

4,433,884
1,747,500
(590,337)
(324,503)

5,266,544

Options outstanding at beginning of year
Options granted
Options exercised
Options forfeited / cancelled

Options outstanding at end of year

The following table presents information about fixed stock options outstanding at December 31, 2005:

Stock Options Outstanding

Options Exercisable

Weighted-
Average
Remaining
Contractual
Outstanding Life in Years

Number

Weighted-
Average
Exercise
Price ($)

Weighted-
Average
Exercise
Price ($)

Number
Exercisable

22,500
652,500
121,250
20,000
418,622
1,574,000
1,136,339
40,000
726,333
555,000

5,266,544

5.08
5.24
5.67
0.33
0.58
3.61
1.58
8.47
2.58
2.59

2.96

3.85
4.18
7.37
10.54
10.95
13.76
14.27
21.77
22.83
23.10

14.55

22,500
652,500
121,250
20,000
418,622
-
671,324
40,000
247,660
184,994

2,378,850

3.85
4.18
7.37
10.54
10.95
-
14.27
21.77
22.83
23.10

12.14

Exercise
Price
Range ($)

3.85
4.18
4.44 - 9.42
10.54
10.95
13.76
14.27
21.77
22.83
23.10

3.85 - 23.10

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note Q(cid:151)Reconciliation of Earnings Per Share

The  following  table  presents  the  computation  of  basic  and  diluted  net  earnings  per  share,  including  the
dilutive effect of stock options and cumulative redeemable preferred stock outstanding for the periods indicated:

Numerator for basic earnings per share:
Net earnings

Less: Cash dividends on cumulative redeemable preferred stock

Net earnings available to common stockholders

Denominator for basic earnings per share:
Basic weighted average number of common shares

outstanding during the period

Denominator for diluted earnings per share:
Diluted weighted average number of common shares

outstanding during the period

Net effect of dilutive stock options

Diluted weighted average common shares

Net earnings per share:

Basic

Diluted

For the year ended December 31,

2005

2004

2003

$

$

270,258
(14,530)

255,728

$

$

257,637
(3,750)

253,887

$

$

148,979
-

148,979

75,594

66,967

50,732

75,594
683

76,277

66,967
1,277

68,244

50,732
1,047

51,779

$

$

3.38

3.35

$

$

3.79

3.72

$

$

2.94

2.88

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The  anti-dilutive  effects  of  stock  options  outstanding  as  of  December  31,  2005,  2004  and  2003  were

1.4 million, 612 thousand and none, respectively.

Note R(cid:151)Quarterly Financial Data (unaudited)

Selected quarterly financial data for 2005 follows:

For the Three Months Ended,

December 31, September 30,

June 30,

March 31,

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Net interest income
Provision for loan losses
Non-interest income (expense)
Non-interest expense
Income taxes

Net earnings (loss)

Net earnings (loss) per share - diluted (1)

Dividends declared per share

$

$

$

$

340,746 $
326,150

324,050 $
281,154

309,785 $
243,632

14,596
5,344
39,491
39,179
(15,727)

42,896
13,434
129,012
39,454
(7,337)

66,153
5,711
(79,384)
40,182
(4,124)

25,291 $

126,357 $

(55,000) $

0.28 $

0.20 $

1.61 $

0.45 $

(0.78) $

0.75 $

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277,380
196,274

81,106
6,074
131,806
35,691
(2,463)

173,610

2.26

0.75

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30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

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Selected quarterly financial data for 2004 follows:

Interest income
Interest expense

Net interest income
Provision (benefit) for loan losses
Non-interest income (expense)
Non-interest expense
Income taxes

Net earnings (loss)

Net earnings (loss) per share - diluted (1)

Dividends declared per share

For the Three Months Ended,

December 31, September 30,

June 30,

March 31,

$

$

$

$

250,372 $
160,683

210,388 $
114,967

160,719 $
75,269

89,689
6,149
65,258
31,060
3,371

95,421
(229)
(88,780)
25,623
(9,436)

85,450
15,282
96,628
26,454
(2,872)

114,367 $

(9,317) $

143,214 $

1.52 $

0.75 $

(0.15) $

0.75 $

2.17 $

0.75 $

134,137
61,614

72,523
9,725
(32,735)
25,203
(4,513)

9,373

0.15

0.65

(1)

Diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the
quarterly earnings per share may not equal the total for the year.

Note S(cid:151)Schedule of Mortgage Loans on Real Estate

The following table presents the activity included in CMO collateral and mortgages held for investment on the

consolidated balance sheets for the years presented.

Beginning Balance

Additions:

Loans retained and originated
Additions of premiums
Loans transferred for mortgages held-for-sale

Total additions

Deductions:

Principal paydowns
Loans transferred to mortgages held-for-sale
Loans sold to third parties
Amortization of premiums
Transfers to other real estate owned

Total deductions

Ending Balance

For the year ended December 31,

2005

2004

2003

$21,895,592

$ 9,296,893

$ 5,215,731

13,044,229
277,075
-

17,368,376
333,669
-

6,078,378
51,859
269,679

13,321,304

17,702,045

6,399,916

(10,243,488)
-
-
(240,786)
(78,262)

(4,666,671)
(269,679)
-
(130,851)
(36,145)

(2,148,153)
-
(89,949)
(44,482)
(36,170)

(10,562,536)

(5,103,346)

(2,318,754)

$24,654,360

$21,895,592

$ 9,296,893

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Characteristics of our CMO collateral and loans held-for-investment at December 31, 2005, which consisted

primarily of Alt-A mortgages (dollar amounts in thousands):

Original Loan Amounts

$50,000 or less
$50,001 to $100,000
$100,001 to $150,000
$150,001 to $200,000
$200,001 to $250,000
$250,001 to $300,000
$300,001 to $350,000
$350,001 to $400,000
$400,001 to $450,000
$450,001 to $500,000
$500,001 to $550,000
$550,001 to $600,000
$600,001 to $650,000
$650,001 or more

Unamortized net premiums on

mortgages

REO transfers pending

Total CMO collateral and mortgages

held-for-investment

Number of
Mortgage Loans

Aggregate
Principal
Balance

Maturity
Date

Percent
of Total

6/07 - 11/35
10/10 - 1/36
10/03 - 1/36
11/10 - 1/36
2/12 - 1/36
11/17 - 1/36
3/12 - 1/36
6/17 - 1/36
4/14 - 1/36
11/17 - 1/36
4/19 - 1/36
11/17 - 2/36
6/17 - 1/36
11/17 - 1/36

0.25%
2.85%
8.48%
10.70%
10.78%
11.24%
10.36%
9.01%
6.50%
6.21%
4.15%
3.85%
3.80%
11.84%

100%

1,972
8,737
16,673
15,047
11,791
10,037
7,842
5,888
3,753
3,200
1,936
1,638
1,479
2,891

92,884

$

61,855
694,496
2,067,670
2,609,895
2,629,296
2,742,578
2,526,428
2,197,513
1,585,339
1,516,119
1,011,963
938,254
927,564
2,888,049

24,397,019

313,564
(56,223)

$ 24,654,360

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Characteristics of our CMO collateral and loans held-for-investment at December 31, 2005, which consisted

primarily of Alt-A mortgages (dollar amounts in thousands):

Interest Rate Ranges

4% or less
4.01% to 4.5%
4.51% to 5.0%
5.01% to 5.5%
5.51% to 6.0%
6.01% to 6.5%
6.51% to 7.0%
7.01% to 7.5%
7.51% to 8.0%
8.01% to 8.5%
8.51% to 9.0%
9.01% to 9.5%
9.51% or more

Unamortized net premiums on mortgages
REO transfers pending

Number of
Mortgage Loans

Aggregate
Principal
Balance

Percent of
Total

2,016
3,896
9,471
14,121
19,345
15,858
12,405
6,054
3,533
1,397
1,184
616
2,988

92,884

$

600,688
1,184,690
2,858,959
4,333,827
5,606,284
4,192,822
2,978,041
1,297,022
692,687
232,342
153,789
68,264
197,604

24,397,019

313,564
(56,223)

2.46%
4.86%
11.72%
17.76%
22.98%
17.19%
12.21%
5.32%
2.84%
0.95%
0.63%
0.28%
0.81%

100%

Total CMO collateral and mortgages held-for-investment

$ 24,654,360

The  geographic  distribution  of  the  Company(cid:146)s  CMO  collateral  and  loans  held-for-investment  at

December 31, 2005 was as follows:

Geographic Location

Number of
Mortgage Loans

39,704
12,272
3,828
2,850
2,757
2,136
1,519
1,793
2,216
2,235
21,574

92,884

CA
FL
AZ
VA
NV
MD
NY
NJ
CO
IL
Other

Unamortized net premiums on mortgages
REO transfers pending

Total CMO collateral and mortgages

held-for-investment

F-44

Percent of
Total

55.96%
9.71%
3.13%
3.10%
2.67%
2.11%
2.00%
1.86%
1.82%
1.80%
15.84%

100%

Aggregate
Principal
Balance

$ 13,652,388
2,369,838
762,597
757,197
652,280
513,879
487,222
453,200
444,814
438,586
3,865,018

24,397,019

313,564
(56,223)

$ 24,654,360

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30MAR200614310138

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

Note T(cid:151)Redeemable Preferred Stock

On May 28, 2004, the Company sold 2.0 million shares of Series B Cumulative Redeemable Preferred Stock,
raising $48.3 million in net proceeds. The shares have a liquidation value of $25.00 per share and will pay an annual
coupon of 9.375%. The shares are redeemable at the Company(cid:146)s option, in whole or in part, on or after May 28,
2009 except in limited circumstances to preserve the Company(cid:146)s REIT status.

On November 18, 2004, the Company sold 4.0 million shares of Series C Cumulative Redeemable Preferred
Stock, raising $96.6 million in net proceeds. The shares have a liquidation value of $25.00 per share and will pay an
annual coupon of 9.125%. The shares are redeemable at the Company(cid:146)s option, in whole or in part, on or after
November 23, 2009 except in limited circumstances to preserve the Company(cid:146)s REIT status. The Company granted
its  underwriters  an  option,  exercisable  for  30  days,  to  purchase  up  to  an  additional  300,000  shares  to  cover
over-allotments,  if  any.  On  December  7,  2004  the  underwriters  exercised  their  options  for  300,000  shares  in
over-allotments resulting in net proceeds of $7.3 million.

Note U(cid:151)Trust Preferred Securities

During 2005, the Company formed four wholly-owned trust subsidiaries (Trusts) for the purpose of issuing an
aggregate of $99.2 million of trust preferred securities (the Trust Preferred Securities). The proceeds from the sale
thereof were invested in junior subordinated debt issued by the Company. All proceeds from the sale of the Trust
Preferred  Securities  and  the  common  securities  issued  by  the  Trusts  are  invested  in  junior  subordinated  notes
(Notes), which are the sole assets of the Trusts. The Trusts pay dividends on the Trust Preferred Securities at the
same rate as paid by the Company on the Notes held by the Trusts.

The following table shows the Trust Preferred Securities issued for the year ended December 31, 2005:

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Impac Capital Trust # 1 (1)
Impac Capital Trust # 2 (2)
Impac Capital Trust # 3 (3)
Impac Capital Trust # 4 (4)

Sub-total

Unamortized debt issuance costs

Trust
Preferred
Securities

Common
Securities

Junior
Subordinated
Debt

Stated
Maturity
Date

$

25,000 $
25,000
26,250
20,000

780 $
774
820
620

$

96,250 $

2,994

$

04/30/35
04/30/35
06/30/35
07/30/35

25,780
25,774
27,070
20,620

99,244

(2,494)

96,750

Optional
Redemption
Date

4/30/2010 (5)
4/30/2010 (6)
6/30/2010 (5)
7/30/2010 (5)

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(1)

(2)

(3)

(4)

Requires quarterly distributions initially at a fixed rate of 8.01% per annum through April 30, 2010 and thereafter at a
variable rate of three-month LIBOR plus 3.75% per annum. Distributions are cumulative but after April 2006 may be
deferred for a period of up to four consecutive quarterly interest payment periods if the Company exercises its right to
defer the payment of interest on the Notes (Extension Period).
Requires quarterly distributions initially at a fixed rate of 8.065% per annum through April 30, 2010 and thereafter at a
variable rate of three-month LIBOR plus 3.75% per annum. Distributions are cumulative but after April 2006 may be
deferred for a period of up to four consecutive quarterly interest payment periods if the Company exercises its right to
defer the payment of interest on the Notes (Extension Period).
Requires quarterly distributions initially at a fixed rate of 8.01% per annum through June 30, 2010 and thereafter at a
variable rate of three-month LIBOR plus 3.75% per annum. Distributions are cumulative but after May 2006 may be
deferred for a period of up to four consecutive quarterly interest payment periods if the Company exercises its right to
defer the payment of interest on the Notes (Extension Period).
Requires quarterly distributions initially at a fixed rate of 8.55% per annum through July 30, 2010 and thereafter at a
variable rate of three-month LIBOR plus 3.75% per annum. Distributions are cumulative but may be deferred for a period
of up to twenty consecutive quarterly interest payment periods if the Company exercises its right to defer the payment of
interest on the Notes (Extension Period).

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F-45

30MAR2006121

 
 
 
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)

(5)
(6)

Redeemable at par at any time after the date indicated.
Redeemable at par at any time after the date indicated and before that date, under certain events, at a premium of 7.5%
of the outstanding amount.

During any Extension Period, the Company may not declare or pay dividends on its capital stock. If an event
of default occurs (such as a payment default that is outstanding for 30 days, a default in performance, a breach of
any covenant or representation, bankruptcy or insolvency of the Company or liquidation or dissolution of the Trust)
either the trustee of the Notes or the holders of at least 25% of the aggregate principal amount of the outstanding
Notes  may  declare  the  principal  amount  of,  and  all  accrued  interest  on,  all  the  Notes  to  be  due  and  payable
immediately, or if the holders of the Notes fail to make such declaration, the holders of at least 25% in aggregate
liquidation amount of the Preferred Securities outstanding shall have a right to make such declaration.

FIN  46R  requires  the  deconsolidation  of  trust  preferred  entities  since  the  Company  does  not  have  a
significant variable interest in the trust. Therefore, the Company records its investment in the trust preferred entities
in other assets and accounts for such under the equity method of accounting and reflects a liability for the issuance
of the junior subordinated notes to the trust preferred entities. The interest expense on such notes is recorded in
interest expense (cid:150) other borrowings in the consolidated statement of operations and comprehensive earnings.

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30MAR200614310138

F-46

 
 
 
Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-121562)
and Form S-8 (Nos. 333-12025, 333-68128, 333-83650, 333-106647, 333-117070, 333-117137 and 333-128113)
and related Prospectuses of Impac Mortgage Holding, Inc. of our reports dated March 7, 2006 with respect to the
consolidated  financial  statements  of  Impac  Mortgage  Holding,  Inc.,  management(cid:146)s  assessment  of  the
effectiveness  of  internal  control  over  financial  reporting,  and  the  effectiveness  of  internal  control  over  financial
reporting of Impac Mortgage Holding, Inc., in this Annual Report (Form 10-K) for the year ended December 31,
2005.

Los Angeles, California
March 10, 2006

/s/ ERNST & YOUNG LLP

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30MAR2006121

 
 
 
Consent of Independent Registered Public Accounting Firm

Exhibit 23.2

The Board of Directors
Impac Mortgage Holdings, Inc.:

We  consent  to  the  incorporation  by  reference  in  the  registration  statement  No.  333-121562  on  Form  S-3  and
registration  statements  (Nos.  333-12025,  333-68128,  333-83650,  333-117137,  333-117070,  333-106647  and
333-128113) on Form S-8 of Impac Mortgage Holdings, Inc. of our report dated May 13, 2005, with respect to the
consolidated  balance  sheet  of  Impac  Mortgage  Holdings,  Inc.  as  of  December  31,  2004,  and  the  related
consolidated statements of operations and comprehensive earnings, changes in stockholders(cid:146) equity, and cash
flows  for  each  of  the  years  in  the  two-year  period  ended  December  31,  2004,  which  report  appears  in  the
December 31, 2005, annual report on Form 10-K of Impac Mortgage Holdings, Inc..

/s/ KPMG LLP

Los Angeles, California

March 14, 2006

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30MAR200614310138

 
 
 
CERTIFICATION

Exhibit 31.1

I, Joseph R. Tomkinson, certify that:

1.

2.

3.

4.

I have reviewed this report on Form 10-K of Impac Mortgage Holdings, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report,
fairly  present  in  all  material  respects  the  financial  condition,  results  of  operations  and  cash  flows  of  the
registrant as of, and for, the periods presented in this report;

The  registrant(cid:146)s  other  certifying  officer  and  I  are  responsible  for  establishing  and  maintaining  disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to  be  designed  under  our  supervision,  to  ensure  that  material  information  relating  to  the  registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;

c.

evaluated the effectiveness of the registrant(cid:146)s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation;

d. disclosed  in  this  report  any  change  in  the  registrant(cid:146)s  internal  control  over  financial  reporting  that
occurred during the registrant(cid:146)s most recent fiscal quarter (the registrant(cid:146)s fourth fiscal quarter in the
case  of  an  annual  report)  that  has  materially  affected,  or  is  reasonably  likely  to  materially  affect,  the
registrant(cid:146)s internal control over financial reporting; and

5.

The registrant(cid:146)s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant(cid:146)s auditors and the audit committee of registrant(cid:146)s board of
directors (or persons performing the equivalent functions):

a.

b.

all significant deficiencies and material weaknesses in the design or operation of internal control over
financial  reporting  which  are  reasonably  likely  to  adversely  affect  the  registrant(cid:146)s  ability  to  record,
process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant(cid:146)s internal control over financial reporting.

/s/ Joseph R. Tomkinson
Joseph R. Tomkinson
Chief Executive Officer
March 15, 2006

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30MAR2006121

 
 
 
CERTIFICATION

Exhibit 31.2

I, Richard J. Johnson, certify that:

1.

2.

3.

4.

I have reviewed this report on Form 10-K of Impac Mortgage Holdings, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report,
fairly  present  in  all  material  respects  the  financial  condition,  results  of  operations  and  cash  flows  of  the
registrant as of, and for, the periods presented in this report;

The  registrant(cid:146)s  other  certifying  officer  and  I  are  responsible  for  establishing  and  maintaining  disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to  be  designed  under  our  supervision,  to  ensure  that  material  information  relating  to  the  registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;

c.

evaluated the effectiveness of the registrant(cid:146)s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation;

d. disclosed  in  this  report  any  change  in  the  registrant(cid:146)s  internal  control  over  financial  reporting  that
occurred during the registrant(cid:146)s most recent fiscal quarter (the registrant(cid:146)s fourth fiscal quarter in the
case  of  an  annual  report)  that  has  materially  affected,  or  is  reasonably  likely  to  materially  affect,  the
registrant(cid:146)s internal control over financial reporting; and

5.

The registrant(cid:146)s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant(cid:146)s auditors and the audit committee of registrant(cid:146)s board of
directors (or persons performing the equivalent functions):

a.

b.

all significant deficiencies and material weaknesses in the design or operation of internal control over
financial  reporting  which  are  reasonably  likely  to  adversely  affect  the  registrant(cid:146)s  ability  to  record,
process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant(cid:146)s internal control over financial reporting.

/s/ Richard J. Johnson
Richard J. Johnson
Chief Financial Officer
March 15, 2006

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30MAR200614310138

 
 
 
Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Impac Mortgage Holdings, Inc. (the (cid:145)(cid:145)Company(cid:146)(cid:146)) on Form 10-K for the
period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the
(cid:145)(cid:145)Report(cid:146)(cid:146)), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to
18  U.S.C.  Section  1350,  as  adopted  pursuant  to  Section  906  of  the  Sarbanes-Oxley  Act  of  2002,  that  to  his
knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act

of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition

and results of operations of the Company.

/s/ Joseph R. Tomkinson
Joseph R. Tomkinson
Chief Executive Officer
March 15, 2006

/s/ Richard J. Johnson
Richard J. Johnson
Chief Financial Officer
March 15, 2006

A  signed  original  of  this  written  statement  required  by  Section  906  will  be  provided  to  Impac  Mortgage
Holdings, Inc. and will be retained by Impac Mortgage Holdings, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.

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30MAR2006121

 
 
 
(cid:10)(cid:34)(cid:44)(cid:42)(cid:34)(cid:44)(cid:1)(cid:47)(cid:13)(cid:202)(cid:34)(cid:19)(cid:19)(cid:22)(cid:10)(cid:13)(cid:44)(cid:45)(cid:202)(cid:69)(cid:202)(cid:12)(cid:22)(cid:44)(cid:13)(cid:10)(cid:47)(cid:34)(cid:44)(cid:45)

(cid:10)(cid:34)(cid:44)(cid:42)(cid:34)(cid:44)(cid:1)(cid:47)(cid:13)(cid:202)(cid:22)(cid:32)(cid:19)(cid:34)(cid:44)(cid:31)(cid:1)(cid:47)(cid:22)(cid:34)(cid:32)

(cid:27)(cid:156)(cid:195)(cid:105)(cid:171)(cid:133)(cid:202)(cid:44)(cid:176)(cid:202)(cid:47)(cid:156)(cid:147)(cid:142)(cid:136)(cid:152)(cid:195)(cid:156)(cid:152)
(cid:10)(cid:133)(cid:62)(cid:136)(cid:192)(cid:147)(cid:62)(cid:152)(cid:202)(cid:156)(cid:118)(cid:202)(cid:204)(cid:133)(cid:105)(cid:202)(cid:9)(cid:156)(cid:62)(cid:192)(cid:96)(cid:93)(cid:202)
(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:202)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:202)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)

(cid:55)(cid:136)(cid:143)(cid:143)(cid:136)(cid:62)(cid:147)(cid:202)(cid:45)(cid:176)(cid:202)(cid:1)(cid:195)(cid:133)(cid:147)(cid:156)(cid:192)(cid:105)
(cid:12)(cid:136)(cid:192)(cid:105)(cid:86)(cid:204)(cid:156)(cid:192)(cid:93)(cid:202)(cid:42)(cid:192)(cid:105)(cid:195)(cid:136)(cid:96)(cid:105)(cid:152)(cid:204)(cid:93)(cid:202)
(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:202)(cid:34)(cid:171)(cid:105)(cid:192)(cid:62)(cid:204)(cid:136)(cid:152)(cid:125)(cid:202)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)

(cid:44)(cid:136)(cid:86)(cid:133)(cid:62)(cid:192)(cid:96)(cid:202)(cid:27)(cid:176)(cid:202)(cid:27)(cid:156)(cid:133)(cid:152)(cid:195)(cid:156)(cid:152)
(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:202)(cid:54)(cid:136)(cid:86)(cid:105)(cid:202)(cid:42)(cid:192)(cid:105)(cid:195)(cid:136)(cid:96)(cid:105)(cid:152)(cid:204)(cid:93)(cid:202)
(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:202)(cid:19)(cid:136)(cid:152)(cid:62)(cid:152)(cid:86)(cid:136)(cid:62)(cid:143)(cid:202)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)

(cid:44)(cid:156)(cid:152)(cid:62)(cid:143)(cid:96)(cid:202)(cid:31)(cid:176)(cid:202)(cid:31)(cid:156)(cid:192)(cid:192)(cid:136)(cid:195)(cid:156)(cid:152)
(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:202)(cid:54)(cid:136)(cid:86)(cid:105)(cid:202)(cid:42)(cid:192)(cid:105)(cid:195)(cid:136)(cid:96)(cid:105)(cid:152)(cid:204)(cid:93)(cid:202)
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(cid:202)

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