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UNITED STATES
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, 2021 or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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.)
19500 Jamboree Road, Irvine, California 92612
(Address of principal executive offices)
(949) 475-3600
(Company’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
Trading Symbol(s)
IMH
IMH
Name of each exchange on which registered
NYSE American
NYSE American
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ☐ No ☒
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 ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: none
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐
Accelerated Filer ☐
Non-accelerated Filer ☒
Smaller Reporting Company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☒
As of June 30, 2021, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $26.9 million, based on the closing sales price of
common stock on the NYSE American on June 30, 2021. For purposes of the calculation only, all directors and executive officers and beneficial holders of more than 10% of the
stock of the registrant have been deemed affiliates. There were 21,455,170 shares of common stock outstanding as of March 4, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement relating to its 2022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission are
incorporated by reference into Part III of this Annual Report on Form 10-K. The proxy statement will be filed by the registrant with the Securities and Exchange Commission
within 120 days after the end of the registrant’s fiscal year ended December 31, 2021.
Table of Contents
IMPAC MORTGAGE HOLDINGS, INC.
2021 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5. MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
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ITEM 1. BUSINESS
PART I
Impac Mortgage Holdings, Inc., sometimes referred to herein as the “Company,” “we,” “our” or “us,” is a
Maryland corporation incorporated in August 1995 and includes the following subsidiaries: Integrated Real Estate Service
Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), Copperfield Capital Corporation
(CCC) and Impac Funding Corporation (IFC). IMC a subsidiary of IRES, conducts our mortgage lending and real estate
services operations.
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 “may,” “will,” “believe,” “expect,” “likely,”
“should,” “could,” “seem to,” “anticipate,” “plan,” “intend,” “project,” “assume,” or similar terms or variations on those
terms or the negative of those terms. The forward-looking statements are based on current management expectations.
Actual results may differ materially as a result of many factors, including, but not limited to the following: successful
development, marketing, sale and financing of new and existing financial products; expansion of NonQM loan originations
and conventional and government-insured loan programs; local, national and international economic conditions, including
the impact of the Covid-19 pandemic on the economy and demand for our products; ability to successfully diversify our
loan products; ability to successfully sell loans to third-party investors; volatility in the mortgage industry; unexpected
interest rate fluctuations and margin compression; performance of third-party sub-servicers; our ability to manage
personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity and
satisfy financial convents requirements; increased competition in the mortgage lending industry by larger or more efficient
companies; issues and system risks related to our technology; ability to successfully create cost and product efficiencies
through new technology; more than expected increases in default rates or loss severities and mortgage related losses; ability
to obtain additional financing through lending and repurchase facilities, debt or equity funding, strategic relationships or
otherwise; our ability to maintain adequate cash flow and liquidity to manage our operations; the terms of any financing,
whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase
requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including
any settlements, of litigation or regulatory actions pending against us or other legal contingencies; our compliance with
applicable local, state and federal laws and regulations; and other general market and economic conditions.
For a discussion of these and other risks and uncertainties that could cause actual results to differ from those
contained in the forward-looking statements, see Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in this report. This document speaks only as of its date and we
do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made
to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the
date of such statements except as required by law.
Available Information
Our internet website address is www.impaccompanies.com. We make available our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements for our annual stockholders’ 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 the SEC. You can learn
more about us by reviewing our SEC filings on our website by clicking on “Investor Relations” located on our home page
and proceeding to “Financial Information.” We also make available on our website, under “Corporate Governance,”
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,
19500 Jamboree Road, Irvine, California 92612. The SEC also maintains a website at www.sec.gov that contains reports,
proxy statements and other information regarding SEC registrants, including our Company.
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Our Company
We were founded in 1995 and are an established nationwide independent residential mortgage lender which
originates, sells and services residential mortgage loans. We originate non-qualified mortgages (NonQM), conventional
mortgage loans, which are intended to be eligible for sale to U.S. government-sponsored enterprises, (GSEs), including the
Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac)
(conventional loans), and government-insured mortgage loans eligible for government securities issued through the
Government National Mortgage Association (Ginnie Mae or government loans).
Segments
Our business activities are organized and presented in three primary operating segments: Mortgage Lending, the
Long-Term Mortgage Portfolio and Real Estate Services. Our mortgage lending segment provides mortgage lending
products through three lending channels, retail, wholesale and correspondent and opportunistically retains mortgage
servicing rights. Our long-term mortgage portfolio consists of residual interests in securitization trusts. Our real estate
services segment performs master servicing and provides loss mitigation services for primarily our securitized long-term
mortgage portfolio. A description of each operating segment is presented below with further details and discussions of
each segment’s results of operations presented in Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Results of Operations.”
In addition to the segments described above, we also have a corporate segment, which supports all of the operating
segments. The corporate segment includes unallocated corporate and other administrative costs as described below.
Mortgage Lending
We are focused on expanding our mortgage lending platform which provides conventional and government-insured
mortgage loans as well as providing innovative products to meet the needs of borrowers not met by traditional conventional
and government products. Our mortgage lending operation generates origination and processing fees, net of origination
costs, at the time of origination, interest income during the period from origination to sale of loan, as well as gains or
unexpected losses when the loans are sold to third party investors, including Ginnie Mae. We opportunistically retain
mortgage servicing rights from the sale of mortgage loans and earn servicing fees, net of sub-servicer costs, from our
mortgage servicing portfolio. From time to time, we have sold mortgage servicing rights from our servicing portfolio.
NonQMs are generally loans that do not meet the qualified mortgage (QM) guidelines set out by the Consumer
Financial Protection Bureau (CFPB). We continue to believe there is an underserved mortgage market for borrowers with
good credit who may not meet the QM guidelines, for example self-employed borrowers. The third quarter of 2020 saw the
re-emergence of the NonQM market including capital markets distribution exits for the product. In the fourth quarter of
2020, we re-engaged lending in the NonQM market.
The re-emergence of the NonQM market has been defined by products that fit within a much tighter credit box,
which is where our NonQM originations have been historically. We believe the quality, consistency and performance of our
NonQM originations has been demonstrated through the previous issuance of 21 securitizations since 2018, whereby our
originations were represented as the largest originator in over half of the deals and represented no less than the third largest
originator in the other deals. Four of the 21 securitizations were 100% backed by Impac NonQM collateral with the senior
tranches receiving AAA ratings. As interest rates continue to rise, and the demand by consumers for the NonQM product
grows, we expect the investor appetite will continue to increase for the NonQM mortgages. A NonQM borrower is
generally less sensitive to interest rates and generally does not have the same income documentation that a conforming loan
borrower does, nonetheless the borrower is still required to meet the “ability to repay” guidelines.
As a nationwide mortgage lender, our mortgage lending activities primarily consist of the origination, sale and
servicing of conventional loans eligible for sale to Fannie Mae and Freddie Mac, NonQM and Jumbo mortgages and loans
eligible for government insurance (government loans) by the Federal Housing Administration (FHA), Veterans Affairs
(VA), and United States Department of Agriculture (USDA). We currently originate and fund mortgages through our
wholly-owned subsidiary, IMC, which consist of three channels: Retail (consumer direct), Wholesale and Correspondent.
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● Retail channel - CashCall Mortgage (CCM), operates as a centralized call center that utilizes a marketing
platform to generate customer leads through the internet and call center loan agents. As a centralized retail call
center, loan applications are received and taken by loan agents directly from consumers and through the Internet.
● Wholesale channel - Originates loans sourced through mortgage brokers.
● Correspondent channel - Acquires closed loans from approved correspondent sellers.
Our origination volumes increased 6% in 2021 to $2.9 billion as compared to $2.7 billion in 2020. Of the $2.9
billion in total originations in 2021, approximately $2.3 billion, or 80%, was originated through the retail channel. In
contrast, during 2020, our retail originations contributed 90% to our total origination volume.
Each of our three origination channels, Retail, Wholesale and Correspondent, produces similar mortgage loan
products and applies similar underwriting standards.
(in millions)
Originations by Channel:
Retail
Wholesale
Correspondent
Total originations
For the year ended December 31,
2021
%
2020
%
$
$
2,318.3
585.1
—
2,903.4
80 % $
20
0
100 % $
2,477.5
215.0
54.4
2,746.9
90 %
8
2
100 %
Retail—Our call center based retail channel utilizes a high-volume, rapid response time funding model with a
focus on providing exceptional customer service. The centralized retail call center is a compliment to IMC’s business-to-
business origination channel and provides additional capacity to process increased origination volumes of expanded
products including our NonQM loan programs and government insured Ginnie Mae programs, while having the ability to
generate servicing assets for IMC.
When retail loans are originated, the origination documentation is completed inclusive of customer disclosures and
other aspects of the lending process and funding of the transaction is completed internally. Our call center representatives
contact borrowers through either inbound or outbound marketing campaigns sourced from our digital marketing campaigns,
TV and radio ads, purchase-money and refinance mortgage leads, including leads sourced from customer referrals and
retention of customers in the servicing portfolio that are seeking to refinance or purchase a property. For the year ended
December 31, 2021, we closed $2.3 billion of loans in this origination channel, which equaled 80% of total originations, as
compared to $2.5 billion or 90% of total originations during 2020.
Wholesale—In a wholesale transaction, our account executives work directly with mortgage brokers who originate
and document loans for delivery to our operational center where we underwrite and fund the mortgage loan. Each loan is
underwritten to our underwriting standards and, if approved, the borrower is sent new disclosures under our name and the
loan is funded in the name of IMC.
Prior to accepting loans from mortgage brokers, each mortgage broker is required to meet our guidelines for
minimum experience, credit score and net worth. We also obtain a third-party due diligence report for each prospective
broker that verifies licensing and provides information on any industry sanctions that might exist. In addition, each
mortgage broker is required to sign our broker agreement that contains certain representations and warranties from the
brokers. For the year ended December 31, 2021, we closed loans totaling $585.1 million in this origination channel, which
equaled 20% of total originations, as compared to $215.0 million, or 8%, of total originations during 2020.
Correspondent—Although we have not engaged in correspondent lending since the first quarter of 2020, we
intend to begin lending through our correspondent division during the second quarter of 2022.
Correspondent originations represent mortgage loans acquired from our correspondent sellers, which we have
historically targeted a market of small banks, credit unions and small mortgage banking firms. Prior to accepting loans
from correspondent sellers, each seller is underwritten to determine if it meets our financial and other underwriting
guidelines. Our review of each prospective seller includes obtaining a third party due diligence report that verifies
licensing, insurance coverage, quality of recent Federal Housing Administration (FHA) originations and provides
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information on any industry sanctions that might exist. In addition, each seller is required to sign our correspondent seller
agreement that contains certain representations and warranties from the seller allowing us to require the seller to repurchase
a loan sold to us for various reasons including (i) ineligibility for sale to GSEs, (ii) early payment default, (iii) early pay-off
or (iv) if the loan is uninsurable by a government agency.
In our correspondent channel, the correspondent seller originates and closes the loan. After the loan is originated,
the correspondent seller submits the required documentation for us to review and make a determination if it meets our
underwriting guidelines. The loan is acquired by us only after we approve it for purchase. We focus on customer service for
our clients by facilitating prompt review by our due diligence team, providing bid pricing on both newly originated and
seasoned portfolios, enabling clients to deliver one loan at a time on a flow basis and providing clients with expedited
funding timelines. We purchase NonQM loans, conventional loans eligible for sale to the GSEs and government-insured
loans eligible for Ginnie Mae securities. For the year ended December 31, 2021, we closed no loans in the correspondent
origination channel as a result of the aforementioned closure during the first quarter of 2020 as a result of the COVID-19
pandemic, compared to $54.4 million of originations for the year ended December 31, 2020.
Since 2011, we have provided loans to customers predominantly in the Western U.S. with California, Arizona,
Nevada and Washington comprising 85% of originations in 2021. Currently, we provide nationwide lending with our retail
call center and mortgage brokers.
Loan Types
Our loan products primarily include conventional loans intended to be eligible for sale to Fannie Mae and Freddie
Mac and loans eligible for government insurance by FHA, VA and USDA (the Agencies), NonQM and Jumbo. The FHA,
VA and USDA loans are government-insured loans eligible for Ginnie Mae securities issuance. We have established strict
lending guidelines, including determining the prospective borrowers’ ability to repay the mortgage, which we believe will
keep delinquencies and foreclosures at acceptable levels. We continue to refine our guidelines to expand our reach to the
underserved market of credit worthy borrowers who can fully document and substantiate an ability to repay mortgage
loans, but unable to obtain financing through traditional programs, for example self-employed borrowers. In conjunction
with establishing strict lending guidelines, we have also established investor relationships which provide us with an exit
strategy for these NonQM loans. In the fourth quarter of 2020, we began originating conventional prime jumbo mortgages,
which generally conform to the underwriting guidelines of the GSEs but exceed the maximum loan size allowed for single
unit properties.
The following table indicates the breakdown of our originations by loan type for the periods indicated:
(in millions)
Originations by Loan Type:
Conventional
NonQM
Jumbo
Government
Total originations
For the year ended December 31,
2021
2020
$
$
2,096.9
683.6
73.7
49.2
2,903.4
$
$
2,401.6
264.0
10.7
70.6
2,746.9
Loan Sales—Selling Loans to GSEs, Issuing Ginnie Mae Securities and Selling Loans on a Whole Loan Basis
We primarily sell our conventional, jumbo and NonQM loans on a servicing released whole loan basis to private
investors and issue securities through Ginnie Mae for our government insured product. We securitize government-insured
loans by issuing Ginnie Mae securities through a process whereby a pool of loans is transferred to Ginnie Mae as collateral
for a government-insured mortgage-backed security. Prior to our suspension by Freddie Mac in July 2020, we would
opportunistically sell loans on a servicing-retained basis where the loan is sold to an investor such as Freddie Mac, and we
retain the right to service that loan, called mortgage servicing rights (MSRs). Traditionally, we have not sold a significant
amount of residential mortgage loans on a whole loan basis where the investor also acquires the servicing rights.
Throughout 2020 and 2021, we continued to selectively retain mortgage servicing as well as increase whole loan sales on a
servicing released basis to investors. The largest seven investors accounted for 82% of the Company’s servicing released
loan sales for the year ended December 31, 2021. No other investors accounted for more than 5% of the loan sales for the
year ended December 31, 2021.
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During the fourth quarter of 2017, Fannie Mae sufficiently limited the manner and volume for our deliveries of
eligible loans such that we elected to cease deliveries to them and we expanded our whole loan investor base for these
loans. In 2019, with the creation of the uniform mortgage-backed securities (UMBS) market, which was intended to
improve liquidity and align prepayment speeds across Fannie Mae and Freddie Mac securities, Freddie Mac raised
concerns about the high prepayment speeds of our loans generated through our retail direct channel. We have continued to
expand our investor base and complete servicing released loan sales to non-GSE whole loan investors and expect to
continue to utilize these alternative exit strategies for Fannie Mae and Freddie Mac eligible loans. The use of alternative
exit strategies has resulted in, and could further result in, adverse pricing, delays in our ability to sell timely as a result of
due diligence and investor overlays, and subjects us to changes in risk, collateral, and counterparty eligibility requirements.
In July 2020, we received notification from Freddie Mac that our eligibility to sell whole loans to Freddie Mac was
suspended, without cause. While we believe that the overall volume delivered under purchase commitments to the GSEs
was immaterial prior to the notification, we are committed to operating actively and in good standing with our broad range
of capital markets counterparties. We continue to take steps to manage our prepayment speeds to be more consistent with
our industry peers and to reestablish the full confidence and delivery mechanisms to our investor base. We seek to satisfy
the requirements as outlined by Freddie Mac to achieve reinstatement, while we continue to satisfy our obligations on a
timely basis to our other counterparties, as we have done without exception. Despite being in a suspended status with
Freddie Mac, we remain an approved originator and/or seller/servicer with the GSEs, Agencies and Counterparties for
agency, non-agency, and government insured or guaranteed loan programs.
The following table indicates the breakdown of our loan sales to GSEs, issuance of Ginnie Mae securities and
loans sold to investors on a whole loan servicing-released basis for the periods as indicated:
(in millions)
Ginnie Mae
Freddie Mac
Fannie Mae
Total servicing retained sales
Other (servicing released)
Total loan sales
Mortgage Servicing
For the year ended
December 31,
2021
52.2
$
—
—
52.2
2,707.5
2,759.7
$
$
$
2020
92.2
131.5
—
223.7
3,095.7
3,319.4
Upon our sale of loans to GSEs or the issuance of securities through Ginnie Mae, we generally retain the mortgage
servicing rights with respect to the mortgage loans. We also sell loans on a servicing-released basis to secondary market
investors where we do not retain the servicing rights. When we retain servicing rights, we are entitled to receive a servicing
fee which is collected from interest payments made by the borrower and paid to us on a monthly basis equal to a specified
percentage, typically between 0.25% and 0.44% per annum of the outstanding principal balance of the loans. We may also
be entitled to receive additional servicing compensation, such as late payment fees and earn additional income through the
use of non-interest bearing escrows. As a mortgage servicer, we are required to advance certain amounts to meet the
contractual loan servicing requirements for certain investors. We may advance principal, interest, property taxes and
insurance for borrowers that have become delinquent, plus any other costs to preserve the property. Also, we will advance
funds to maintain, repair and market foreclosed real estate properties. Such advances are typically repaid when the loan
becomes current or repaid from the proceeds generated from the sale of the property subsequent to foreclosure.
We have hired a nationally recognized residential servicer to sub-service the servicing portfolio. Although we use
a sub-servicer to provide primary servicing and certain default servicing functions, our servicing surveillance team, which
is experienced in loss mitigation and real estate recovery, monitors and surveys the performance of the loans and sub-
servicer. We generally earn a servicing fee on each loan, but we also incur the cost of the sub-servicer as well as the internal
servicing surveillance team. Incurring the cost of both a sub-servicer and an internal surveillance team reduces the net
revenues we earn from the mortgage servicing portfolio; however, we believe it reduces our risk by minimizing
delinquencies and repurchase risk.
In 2020, we sold approximately $4.2 billion in unpaid principal balance (UPB) of Freddie Mac and GNMA MSRs
in the second and third quarters, which in conjunction with the historically low interest rate environment that increased
significant voluntary prepayments, decreasing our mortgage servicing portfolio to $30.5 million at December 30, 2020.
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We have continued to selectively retain GNMA mortgage servicing in 2021, increasing our mortgage servicing portfolio to
$71.8 million at December 21, 2021. The value of mortgage servicing rights are affected by increases and decreases in
mortgage interest rates, and we expect continued volatility in the value of mortgage servicing rights going forward.
Risk Management
We are exposed to various business risks which may significantly impact our financial statements. Our risk
management framework and governance structure is intended to provide oversight and ongoing management of the risks
inherent in our business activities and create a culture of risk awareness. Our Compliance and Risk Management teams
oversee governance processes and monitoring of these risks including the establishment of risk strategy and documentation
of risk policies and controls. Compliance and Risk Management work in partnership with the business to provide oversight
of enterprise risk management and controls. This includes establishing enterprise-level risk management policies,
appropriate governance activities and creating risk transparency through risk reporting. For further discussion on
operational and market risks, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Operational and Market Risks.”
Underwriting
We primarily originate residential first mortgage loans for sale that conform to the respective underwriting
guidelines established by Fannie Mae, Freddie Mac, FHA, VA and USDA. Our mortgage loans are underwritten
individually on a loan-by-loan basis. Each mortgage loan originated from our retail and wholesale channel are underwritten
by one of our underwriters or by a third party contract underwriter using our underwriting guidelines. When we originate
loans from our correspondent channel, each mortgage loan is reviewed internally or by a third party underwriting company
to determine if the borrower meets our underwriting guidelines.
Our criteria for underwriting generally include, but are not limited to, full documentation of borrower’s income,
assets, other relevant financial information, the specific agency’s eligible loan-to-value (LTV), borrower’s debt-to-income
ratio and full appraisals when required. Variances from any of these standards are permitted only to the extent allowable
under the specific program requirements. Our underwriting procedures for all retail and wholesale loans require the use of a
GSE automated underwriting system (AUS). Our underwriting procedures for all correspondent originated loans includes a
file review verifying that the borrower’s credit and the collateral meet our applicable program guidelines and an appropriate
AUS report has been completed. We also confirm the loan is compliant with regulatory guidelines. In addition, we perform
quality control procedures on selected pools prior to our acquisition of the loan.
Quality Control
Prior to funding, retail and wholesale loans are reviewed internally by our quality control department to verify the
loan conforms to our program guidelines and meets state and federal compliance guidelines. Prior to the acquisition of a
correspondent loan, we perform quality control procedures on selected pools. Management reviews the reports prior to the
acquisition of any correspondent loan. We also perform post origination quality controls procedures on at least 10% of all
mortgage loans funded or acquired from third party originators. Additionally, we closely monitor the servicing performance
of loans retained in our mortgage servicing portfolio to identify any opportunities to improve our underwriting process or
procedures and identify any issues with mortgage brokers or correspondent sellers. Findings are summarized monthly and
the appropriate changes are implemented.
Hedging
We are exposed to interest rate risks relating to our mortgage lending operations. We use derivative instruments to
manage some of our interest rate risk; however, we do not attempt to hedge interest rate risk completely. For further
discussion on interest rate risk and hedging, see Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Operation and Market Risks.”
Data Security
Sensitive borrower information, such as name, address and social security number is included in nearly all
mortgage loan files. We seek to keep this information secure for every borrower. To do so, our policy requires all sensitive
borrower data to be transmitted to us through our secure website portal which allows all of our customers, correspondent
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sellers, mortgage brokers and individual borrowers to send data to us securely in an encrypted manner. For a discussion of
cybersecurity and data privacy risk see Item 1A. “Risk Factors - Cybersecurity risks, data privacy breaches, cyber incidents
and technology failures may adversely affect our business by causing a disruption to our operations, a compromise or
corruption of our confidential information, and/or damage to our business relationships, all of which could negatively
impact our financial results.”
Long-Term Mortgage Portfolio
The long-term mortgage portfolio primarily consists of residual interests in the securitization trusts reflected as
trust assets and liabilities in our consolidated balance sheets that hold non-conforming mortgage loans originated between
2002 and 2007. Since we are no longer adding new mortgage loans to the long-term mortgage portfolio, the long-term
mortgage portfolio continues to decrease and is a smaller component of our overall operating results.
Our long-term mortgage portfolio consists of our residual interests in securitizations represented on our
consolidated balance sheets as the difference between total trust assets and total trust liabilities. Our long-term mortgage
portfolio includes adjustable rate and, to a lesser extent, fixed rate Alt-A single-family residential mortgages and
commercial (primarily multifamily residential loans) mortgages that were acquired and originated primarily by our
discontinued, prior non-conforming mortgage lending operations and retained in our long-term portfolio before 2008. Alt-
A mortgages are primarily first lien mortgages made to borrowers whose credit was generally within established Fannie
Mae and Freddie Mac guidelines at origination date but have loan characteristics that make them non-conforming under
those guidelines.
In previous years, we securitized mortgage loans by transferring originated residential single-family mortgage
loans and multifamily commercial loans (the “transferred assets”) into non-recourse bankruptcy remote trusts which in turn
issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and
liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the
event of a shortfall. These securitizations were structured to include interest rate derivatives, which have since expired. We
retained the residual interest in each trust, and in most cases are the master servicer. A trustee and servicer, unrelated to us,
was named for each securitization. Cash flows from the loans (the loan payments and liquidation of foreclosed real estate
properties) collected by the loan servicer are remitted to us, the master servicer. The master servicer remits payments to the
trustee who remits payments to the bondholders (investors). The servicer collects loan payments and performs loss
mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which
results in real estate owned (REO).
Commercial mortgages in our long-term mortgage portfolio are primarily adjustable rate mortgages with initial
fixed interest rate periods of two, three, five, seven and ten years that subsequently convert to adjustable rate mortgages
(hybrid ARMs), and are primarily secured with multi-family residential real estate. Commercial mortgages have provided
greater asset diversification on our consolidated balance sheets as borrowers of commercial mortgages typically have
higher credit scores and commercial mortgages typically have lower LTVs.
Before 2007, we securitized mortgage loans in the form of collateralized mortgage obligations, or CMOs, which
were consolidated and accounted for as secured borrowings for financial statement purposes. Securitized mortgages in the
form of real estate mortgage investment conduits, or REMICs, were either consolidated or unconsolidated depending on the
design of the securitization structure. We consolidated the variable interest entity, or VIE, as the primary beneficiary of the
sole residual interest in each securitization trust where we also performed the master servicing. Amounts consolidated were
included in trust assets and liabilities as securitized mortgage collateral, real estate owned, derivative assets, securitized
mortgage borrowings and derivative liabilities in the accompanying consolidated balance sheets. At December 31, 2021,
our residual interests in securitizations (represented by the difference between total trust assets and total trust liabilities)
increased to $27.9 million, compared to $16.7 million at December 31, 2020.
Since 2007, we have not added any mortgage loans to our long-term mortgage portfolio.
For additional information regarding the long-term mortgage portfolio refer to Item 7. “Management’s Discussion
and Analysis of Financial Condition,” and Note 6. “Securitized Mortgage Trusts” in the notes to the consolidated financial
statements.
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Master Servicing
Until 2007, we were retaining master servicing rights on substantially all of our non-conforming single-family
residential and commercial mortgage acquisitions and originations that were sold through securitizations. Since 2008, we
have not retained any additional master servicing rights, but have continued to be the master servicer of previously retained
master servicing rights.
The function of a 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 mortgages master serviced. In addition, as master servicer, we monitor compliance with the servicing
guidelines and perform or contract with third parties to perform all functions not adequately performed by any loan
servicer. The master servicer is also required to advance funds, or cause the loan servicers to advance funds, to cover
principal and interest payments not received from borrowers depending on the status of their mortgages, but only to the
extent that it is determined that such advances are recoverable either from the borrower or from the liquidation of the
property.
Master servicing fees are generally 0.03% per annum on the unpaid principal balance of the mortgages serviced.
As a master servicer, we also earn income or incur expense on principal and interest payments received from borrowers
until those payments are remitted to the investors of those mortgages. Fees from the master servicing portfolio have
declined significantly due to a decrease in principal balances since the end of 2008, which in turn affects the amount we
earn on balances held in custodial accounts. At December 31, 2021, we were the master servicer for approximately 9,000
mortgages with an UPB of approximately $2.0 billion, of which $389.6 million of those loans were 60 or more days
delinquent. At December 31, 2021, we were also the master servicer for unconsolidated securitizations (included in the
total master servicing portfolio above) totaling approximately $164.6 million in unpaid principal balance, of which
$79.1 million of those loans were 60 or more days delinquent. Fees earned from master servicing are separate from those
earned from mortgage servicing which are generated from servicing rights generated from loans sold servicing retained
from new originations since 2011.
Real Estate Services
In 2008, we established our Real Estate Services segment to provide solutions to the distressed mortgage and real
estate markets. We provide loss mitigation and real estate services primarily on our own long-term mortgage portfolio,
including default surveillance, loan modification services, short sale services (where a lender agrees to take less than the
balance owed from the borrower), REO surveillance and disposition services and monitoring, reconciling and reporting
services for residential and multifamily mortgage portfolios. The activities and related revenues have declined in recent
years, and we expect these revenues to gradually decline over time as our long-term mortgage portfolio declines. These
operations are conducted by IMC. In the second quarter of 2020, CCC was created to, among other activities, assist with
managing mortgage loans held-for-sale, and provide origination and servicing solutions focusing on loss mitigation
strategies, including loan modifications and restructurings to assist borrowers.
Corporate
This segment includes all corporate services groups including information technology, human resources, legal,
facilities, accounting, treasury and corporate administration. This corporate services group supports all operating segments.
A portion of these costs are allocated to the operating segments based on certain allocation methods. These corporate
services groups are centralized to be efficient and avoid any duplicate cost burdens. Specific costs associated with being a
publicly traded company are not allocated and remain in this segment.
The corporate segment also includes debt expense related to the Convertible Notes which were extended in 2020
and due in 2022 as well as capital leases. Debt service expense is not allocated and remains in this segment. We have taken
advantage of very low financing rates and entered into capital lease arrangements to finance the purchase of equipment,
mostly computer equipment, used in all three segments. The interest expense associated with the capital leases is not
allocated and remains in this segment.
Human Capital Management
The Company’s key human capital management objectives are to attract, retain and develop talent to deliver on
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the Company’s strategy. To support these objectives, the Company’s human resources programs are designed to: keep
people safe and healthy; enhance the Company’s culture through efforts aimed at making the workplace more inclusive and
free from discrimination or harassment on the basis of color, race, sex, national origin, ethnicity, religion, age, disability,
sexual orientation, gender identification or expression or any other status protected by applicable law; acquire and retain
diverse talent; reward and support employees through competitive pay and benefit programs; develop talent to prepare
them for critical roles and leadership positions; and facilitate internal talent mobility to create a high-performing workforce.
The COVID-19 pandemic has had a significant impact on how we managed our human capital. Nearly all of our
workforce began working remotely since March 2020, and we instituted safety protocols and procedures for the essential
employees who returned to work on site.
As of December 31, 2021, we had a total of 326 employees, nearly all of whom are full-time. Management
believes that relations with our employees are good. We are not a party to any collective bargaining agreements.
Regulation
The U.S. mortgage industry is heavily regulated. Our mortgage lending operations, as well as our real estate
services, are subject to federal, state and local laws that regulate and restrict the manner in which we operate in the
residential mortgage industry, including, but not limited to, laws and regulations which: regulate our business practices;
limit the interest rates, finance charges and other fees we may charge or pay; impose underwriting requirements; regulate
our marketing techniques and practices; mandate disclosures and notices to consumers; regulate our servicing practices;
and impose licensing requirements and financial obligations on us.. Plus, mortgage bankers and brokers in our wholesale
production channel and correspondents from which we purchase loans are also subject to regulation, which may have an
effect on our business and the mortgage loans we are able to fund or acquire. Compliance with regulations in the mortgage
industry requires us to incur costs and expenses in our operations. To the extent we, or others with which we conduct
business, do not comply with applicable laws and regulations, we may be subject to fines, reimbursements and other
penalties which could include restrictions on our operations. Changes in these regulatory and legal requirements, including
changes in their enforcement, could materially and adversely affect our business and our financial condition, liquidity and
results of operations. The laws and regulations that we are subject to include (but are not limited to) the following:
● the Bank Secrecy Act and the USA PATRIOT Act, as well as related regulations issued by the U.S.
Department of the Treasury and federal banking regulators (collectively, AML laws) which require financial
to implement an AML compliance program that is reasonably designed to prevent money laundering and the
financing of terrorism;
● the Federal Truth-in-Lending Act (known as TILA) and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the loans, regulates the methods in which
compensation can be paid to brokers and loan originators; and prohibits lenders from making residential
mortgage loans unless a good faith determination is made of a borrower’s creditworthiness based on verified
and documented information;
● the Equal Credit Opportunity Act and Regulation B promulgated thereunder, 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;
● 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;
● the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrower’s
credit experience;
● the Fair and Accurate Credit Transaction Act, which regulates credit reporting and use of credit information
in making unsolicited offers of credit;
● state and federal privacy regulations which include the Gramm-Leach-Bliley Act, which imposes
requirements on all lenders with respect to their collection and use of nonpublic financial information and
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requires them to maintain the security of that information and the California Consumer Privacy Act (and
comparable data privacy regulations in other states) which enhances privacy rights and consumer protections
for California residents and property owners;
● the Real Estate Settlement Procedures Act (known as RESPA) and Regulation X promulgated thereunder,
outlaws kickbacks that increase the cost of settlement services;
● the Home Mortgage Disclosure Act (known as HMDA) and Regulation C promulgated thereunder, which
requires the reporting of public loan data;
● the Telephone Consumer Protection Act and the CAN-SPAM Act, which regulate commercial solicitations
via telephone, fax, and the Internet;
● the Depository Institutions Deregulation and Monetary Control Act of 1980, which preempts certain state
usury laws;
● the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws which
regulate alternative mortgage transactions;
● the Fair Debt Collection Practices Act, which prohibits unfair debt collection practices;
● the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, which establishes national minimum
standards for mortgage licensees;
● regulations promulgated by the CFPB to help assure that consumers are provided with timely and
understandable information about residential mortgage loans that protect them against Unfair, Deceptive or
Abusive Acts or Practices;
● interagency final rules required pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank) establishing minimum national underwriting guidelines for residential mortgages that lenders
will be allowed to securitize without retaining any of the loans’ default risk; and
● the Secure and Fair Enforcement for Mortgage Licensing Act, commonly known as the SAFE Act, which is
designed to enhance consumer protection and reduce fraud by requiring states to establish minimum
standards for the licensing and registration of state licensed mortgage loan originators.
Since its formation, the CFPB has taken a very active role in the mortgage industry. The CFPB has rulemaking
authority with respect to many of the federal consumer protection laws applicable to mortgage lenders and servicers, and its
rulemaking and regulatory agenda relating to loan servicing and origination continues to evolve. The CFPB also has broad
supervisory and enforcement powers with regard to non-depository financial institutions that engage in the origination and
servicing of mortgage loans. The CFPB has conducted routine examinations of our business and will conduct future
examinations
As part of its enforcement authority, the CFPB can order, among other things, rescission or reformation of
contracts, the refund of moneys or the return of real property, restitution, disgorgement or compensation for unjust
enrichment, the payment of damages or other monetary relief, public notifications regarding violations, remediation of
practices, external compliance monitoring and civil money penalties. The CFPB has been active in investigations and
enforcement actions and has issued large civil money penalties since its inception to parties the CFPB determines violated
the laws and regulations it enforces.
In addition, various federal, state and local laws have been enacted that are designed to discourage predatory
lending and servicing practices. Some states have enacted, or may enact, similar laws or regulations, which in some cases
impose restrictions and requirements greater than those in federal law. Also, under the anti-predatory lending laws of some
states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under
applicable law, must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly
subjective and open to interpretation. As a result, a court may determine that a residential loan, for example, does not meet
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the test even if the related originator reasonably believed that the test was satisfied. Failure of residential loan originators or
servicers to comply with these laws, to the extent any of their residential loans are or become part of our mortgaged-related
assets, could subject us to monetary penalties and could result in the borrowers rescinding the affected residential loans.
Our mortgage lending operations is an approved Housing and Urban Development (HUD) lender, a Ginnie Mae
approved issuer and servicer and an approved but inactive seller/servicer of Fannie Mae. As previously disclosed, on July
7, 2020 we were suspended by Freddie Mac and are working to satisfy the requirements outlined to achieve reinstatement.
As such, we are required to submit annually to Fannie Mae, Freddie Mac (when an active seller/servicer), and HUD, as
applicable, audited financial statements, or the equivalent, according to the financial reporting requirements of each
regulatory entity for its sellers/servicers. Our lending activities are also subject to examination by Fannie Mae, Ginnie Mae,
Freddie Mac, HUD, CFPB and state regulatory agencies including the California Department of Financial Protection and
Innovation (f/k/a California Department of Business Oversight) at any time to assure compliance with applicable
regulations, policies and procedures. Also refer to “Regulatory Risks” under Item 1A. Risk Factors for a further discussion
of regulations that may affect us.
Competition
We operate in a highly competitive industry that could become even more competitive as a result of legislative,
regulatory, economic, and technological changes, as well as continued consolidation or expansion. Our competitors include
banks, thrifts, credit unions, real estate brokerage firms, mortgage brokers, fintech companies and mortgage banking
companies. Competition is based on a number of factors including, among others, customer service, quality and range of
products and services offered, price, reputation, interest rates, lending limits and customer convenience. To compete
effectively, we must have a very high level of operational, technological, and managerial expertise, as well as access to
capital at a competitive cost. Many of our competitors are larger than we are and have access to greater financial resources
than we do, which can place us at a competitive disadvantage. In addition, many of our largest competitors are banks or
affiliated with banking institutions, the advantages of which include, but are not limited to, the ability to hold new
mortgage loan originations in an investment portfolio and having access to financing with more favorable terms than we
do, including lower funding costs with bank deposits as a source of liquidity.
Our real estate services segment competes with firms that provide similar services, including loan modification
companies, real estate asset management and disposition companies and real estate brokerage firms. Our competitors
include large mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and
recovery collections business. Efforts to market our ability to provide real estate services for others is more difficult than
many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a
rated primary or special servicer of residential mortgage loans as designated by a rating agency.
Risk factors, as outlined below, provide additional information related to risks associated with competition in the
mortgage industry.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Our long-term success is primarily dependent on our ability to increase the profitability of our mortgage originations.
We believe that a key driver for our Company will be increasing the profitability of our mortgage lending
operations. Our success is dependent on many factors such as the documentation and data capture technology we employ,
increasing our loan origination operational capacities, increasing our mortgage origination efficiencies, attracting qualified
employees, ability to maintain our approvals and sell or securitize loans eligible for sale to Fannie Mae, Freddie Mac,
Ginnie Mae and other investors, ability to increase our mortgage servicing portfolio, the ability to obtain adequate
warehouse borrowing capacity, the ability to adequately maintain loan quality and manage the risk of losses from loan
repurchases, the changing regulatory environment for mortgage lending and the ability to fund our originations.
If we are unable to generate sufficient net earnings from our mortgage lending operations, we may be unable to
satisfy our future operating costs and liabilities, including repayment of our debt obligations, which may materially and
adversely affect our financial condition and results of operations.
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If we are unable to satisfy our debt obligations or to meet or maintain the requisite financial covenant requirements
with our lenders, our financial condition and results of operations may be materially and adversely effected.
We have significant debt obligations including:
● $20.0 million Convertible Promissory Notes due May 2022;
● Junior Subordinated Notes with an outstanding principal balance of $62.0 million at December 31, 2021 and due
March 2034; and
● Warehouse facilities with third-party lenders which are secured by and used to fund residential mortgage loans
until such loans are sold.
Our ability to make scheduled payments on our debt obligations depends on our future performance, which is
subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow
from operations in the future sufficient to service our debt. If we are unable to generate cash flow from operations, we may
be required to pursue one or more alternatives, including, but not limited to, monetizing certain assets (including but not
limited to our residual interests), restructuring debt and/or pursuing actions to reorganize the capital structure or obtaining
additional equity capital on terms that may be unfavorable to us or, highly dilutive to our shareholders and other
stakeholders. We may not be able to engage in any of these activities or engage in these activities on desirable terms,
which could have a material adverse effect on our financial condition and results of operations. Additionally, if we are
unable to sell loans timely to repay our warehouse lenders, our liquidity may be adversely affected.
In addition, our credit and warehouse facilities contain covenants, including requirements to maintain a certain
minimum net worth, liquidity, litigation judgment thresholds, debt ratios, profitability levels and other customary debt
covenants. A breach of the covenants can result in an event of default under our facilities and as such allows the lender to
pursue certain remedies, including foreclosure on our assets. Furthermore, a breach under one facility may constitute a
cross default under other agreements which would allow counterparties to pursue additional remedies against us. At
December 31, 2021, we were not in compliance with certain financial covenants under our warehouse facilities and
received the necessary waivers. In the event we are in noncompliance with our debt obligations, we cannot provide any
assurance that we will be able to obtain waivers in the event of future noncompliance of our debt obligations.
Further spread of COVID-19 or any mutations thereof could negatively impact the availability of key personnel
necessary to conduct our business.
The continued effects of the pandemic could adversely impact our financial condition and results of operations due
to interrupted service and availability of personnel, including our executive officers and other employees that are part of
our management team and an inability to recruit, attract and retain skilled personnel. To the extent our management or
personnel are impacted in significant numbers by the outbreak of pandemic or epidemic disease and are not available or
allowed to conduct work, our business and operating results may be negatively impacted. Additionally, the pandemic could
negatively impact our ability to ensure operational continuity in the event our business continuity plan is not effective or
ineffectively implemented or deployed during a disruption.
The continued impact of the pandemic could negatively impact the availability of key third party service providers
necessary to conduct our business and the ability of counterparties to meet contractual obligations to us.
Our financial results and results of operations could be negatively impacted by the inability of third-party vendors
to provide services we rely on to conduct our business and operate effectively, including vendors that provide IT services,
mortgage origination support services, corporate support services, government services or other operational support
services. Further, an inability of our counterparties to make or satisfy the conditions or representations and warranties in
agreements they have entered into with us could also have a material adverse effect on our financial condition, results of
operations and cash flows.
Our use of financial leverage exposes us to increased risks, including breaches and additional potential breaches of the
financial covenants under our borrowing facilities, which could result in our being required to immediately repay all
outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing
needs, as well as triggering cross-defaults under other debt agreements.
Significant and widespread decreases in the fair values of our assets have caused and could continue to cause us
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to breach financial covenants under our borrowing facilities related to profitability, net worth and leverage. Such covenants,
if breached, can result in our being required to immediately repay all outstanding amounts borrowed under these facilities
and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt
agreements. During the second and fourth quarters of 2021, we breached such financial covenants in certain borrowing
agreements with our financing counterparties and were able to obtain waivers. We regularly engage in discussions with our
financing counterparties in regards to such financial covenants; however, we cannot be certain whether we will be able to
remain in compliance with these financial covenants, or whether our financing counterparties will negotiate terms or
amendments in respect of these financial covenants, the timing of any such negotiations or amendments or the terms
thereof. Even if we continue to obtain temporary or permanent amendments or waivers from financing counterparties to
amend and or waive financial covenants, there is no certainty that we will be able to remain in compliance with such
amended covenants and or receive waivers in the event we breach a covenant. If any of our counterparties elected not to
renew our borrowing facility, we may not be able to find a replacement counterparty, which could have a material adverse
effect on our financial condition, results of operations and cash flows.
The use of alternative exit strategies subjects us to risk associated with the potential limitation or elimination of delivery
options to counterparties which has had and could continue to have a material adverse effect on our financial condition,
results of operations and cash flows.
It is important for us to sell or securitize the loans we originate. Prepayment speeds on loans generated through
our retail direct channel have been a concern for some investors dating back to 2016, which has resulted and could further
result in adverse pricing or delays in our ability to sell or securitize loans and related MSRs on a timely and profitable
basis. The use of alternative exit strategies has resulted in and could further result in adverse pricing, delays in our ability
to sell timely as a result of due diligence, investor overlays, and increased staffing. In addition, reliance on these investors
subjects us to changes in risk, collateral, and counterparty eligibility requirements which may affect our ability to deliver
and securitize loans. If we are unable to meet all required eligibility criteria, which may be amended and/or implemented
without notice, it could impact the volume, products, pricing, and servicing options for originated loans which could have a
material adverse impact on overall operations, profitability and cash flows. Additionally, there can be no assurance that
investors will continue to purchase our collateral at favorable terms, or at all.
The success and growth of our business will depend upon our ability to adapt to and implement technological changes.
We operate in an industry experiencing rapid technological change and frequent product introductions. We rely on
our technology to make our platform available to clients, evaluate loan applicants and service loans. In addition, we may
increasingly rely on technological innovation as we introduce new products, expand our current products into new markets
and continue to streamline various loan-related and lending processes. The process of integrating new technologies and
products is complex, and if we are unable to successfully innovate and continue to deliver a superior client experience, the
demand for our products and services may decrease and our growth and operations may be harmed.
The origination process is increasingly dependent on technology, and our business relies on our continued ability
to process loan applications over the internet, accept electronic signatures, and provide instant process status updates and
other client- and loan applicant-expected conveniences. Maintaining and improving this technology will require significant
capital expenditures.
The implementation of new technologies, including migrating to new technology solutions such as loan
origination systems (LOS) or point of sale systems (POS) requires significant financial and personnel resources. To the
extent we are dependent on any particular technology or technological solution, we may be harmed if such technology or
technological solution becomes non-compliant with existing industry standards, fails to meet or exceed the capabilities of
our competitors' equivalent technologies or technological solutions, becomes increasingly expensive to service, retain and
update or malfunctions or functions in a way we did not anticipate that results in loan defects potentially requiring
repurchase. Additionally, new technologies and technological solutions are continually being released. As such, it is
difficult to predict the problems we may encounter in improving our technologies' functionality.
To operate our LOS, POS and websites and provide our loan products and services, we use software packages
from a variety of third parties, which are customized and integrated with code that we have developed ourselves. We rely
on third-party software products and services related to automated underwriting functions and loan document production.
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If we are unable to integrate this software in a fully functional manner, we may experience increased costs and difficulties
that could delay or prevent the successful development, introduction or marketing of new products and services.
There is no assurance that we will be able to successfully adopt new technology as critical systems and
applications become obsolete and better ones become available. Additionally, if we fail to implement and maintain
technologies to respond to technological developments and changing client and loan applicant needs in a cost-effective
manner, or fail to acquire or integrate our third-party technologies effectively, we may experience disruptions in our
operations, lose market share or incur substantial costs.
Our performance may be adversely affected by the performance of parties who service or sub-service our mortgage
loans.
We contract with third parties for the servicing of our mortgage loans in our long-term mortgage portfolio, for
which we are the master servicer, and the servicing portfolio in our mortgage lending operations. Although we use third-
party servicers, we retain primary responsibility to ensure the serviced loans meet contractual and regulatory requirements.
Our operations, performance and liabilities are subject to risks associated with inadequate or untimely servicing. If a
servicer defaults or fails to perform to certain standards then this can be deemed to be a default or failure by us to perform
those duties or functions. If we, or our sub-servicers, commit a material breach of our obligations as a servicer or master
servicer, we may be subject to damages or termination if the breach is not cured within a specified period of time following
notice, causing us to lose servicing rights income. In addition, we may be required to indemnify the investor or
securitization trustee against losses from any failure by us, as master servicer or on behalf of the sub-servicer, to perform
the servicing obligations properly. If, as a result of a servicer or sub-servicer’s failure to perform adequately, we were
terminated as servicer by an investor, trustee or master servicer, the value of any servicing or master servicing rights held
by us could be adversely affected. Also, this could affect the cash flow generated by our servicing rights portfolio.
Poor performance by a sub-servicer may result in greater than expected delinquencies and foreclosures and losses
on our mortgage loans or, in the case of our long-term mortgage portfolio, in our resulting exposure to investors, bond
holders, bond insurers or others to whom we are responsible for the performance of our loan sub-servicers. As master
servicer in our securitizations we are responsible for the duties, responsibilities and actions of the subservicers. Their
actions, or lack thereof, may impose liability upon us from third party claims. 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. With
respect to our long-term mortgage portfolio, greater delinquencies would adversely affect our cash flows and the value of
our residual interests, if any, we hold in connection with that securitization.
The value of mortgage servicing rights are dependent upon various factors, including, but not limited to, the
adequate performance of the servicing function by our sub-servicer, the responsibilities imposed on us by the investors of
our loans for which we hold the servicing rights, interest rates, the cost of our sub-servicers, loan prepayments and
delinquencies. As these factors and others vary, the value of our mortgage servicing rights may fluctuate which may affect
our ability to meet financial covenants, maintain credit facilities, expand our operations and generate income from our
operations.
Our NonQM product offerings may expose us to a higher risk of delinquencies, regulatory risks, foreclosures,
counterparty risk and losses adversely affecting our earnings and financial condition.
We originate and acquire various types of residential mortgage products, which include NonQM and non-
conforming loan products. Unlike Qualified Mortgages, NonQM loans do not benefit from a presumption that the
borrower has the ability to repay the loan. In the event that these NonQM mortgages begin to experience a significant rate
of default, we could be subject to statutory claims for violations of the ability to repay standard. Any such claims could
materially and adversely affect our ability to underwrite these loans, our business, and results of operations or financial
condition.
While we undertake initiatives to mitigate any exposure and use our commercially reasonable efforts to ensure that
we have made a reasonable determination that the borrowers will have the ability to repay a loan, this type of product has
increased risk and exposure to litigation and claims of borrowers. If, however, we were to make a loan which does not
satisfy the regulatory standards for ascertaining the borrower’s ability to repay the loan, the consequences could include
giving the borrower a defense to repayment of the loan, which may prevent us from collecting interest and principal on that
loan.
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NonQM loans are mortgages that generally did not qualify for purchase by government-sponsored entities such as
Fannie Mae and Freddie Mac. Credit risks associated with all these mortgages may be greater than those associated with
conforming mortgages. Mortgages made to these borrowers may 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 these borrowers may be higher to the extent the economy enters a recession. The combination of different
underwriting criteria and higher rates of interest can adversely affect our business and financial condition from higher
prepayment rates and higher delinquency rates and/or credit losses. Additionally, during periods of market dislocation,
similar to what occurred during the first and second quarters of 2020, liquidity for NonQM and non-conforming loan
products suffer more acute pressure which creates a substantial widening of credit spreads on these assets, causing a severe
decline in the values assigned by investors and counterparties for NonQM and non-conforming assets. These periods of
market dislocation have adversely affected the values assigned to our NonQM and non-conforming assets. Further periods
of economic dislocation caused by the pandemic or other factors may adversely affect the liquidity for our products and
may have a material adverse effect on our business, financial condition and results of operations.
Cybersecurity risks, data privacy breaches, cyber incidents and technology failures may adversely affect our business by
causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to
our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of
our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining
unauthorized access to our information systems for purposes of theft of certain personally identifiable information of
consumers, misappropriating assets, stealing confidential information, corrupting data or causing operational disruption.
The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen
assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our business
relationships.
As our reliance on rapidly changing technology has increased, so have the risks posed to its information systems,
both proprietary and those provided to us by third-party service providers. System disruptions and failures caused by fire,
power loss, telecommunications outages, unauthorized intrusion, unintended employee actions, computer viruses and
disabling devices, natural disasters and other similar events may interrupt or delay our ability to provide services to our
customers or result in the unintended disclosure of consumer information.
Despite our efforts to ensure the integrity of our systems, our investment in significant physical and technological
security measures, employee training, contractual precautions and business continuity plans, and our implementation of
policies and procedures designed to help mitigate cybersecurity risks and cyber intrusions, there can be no assurance that
any such cyber intrusions or data privacy breaches will not occur or, if they do occur, that they will be adequately
addressed. We also may not be able to anticipate or implement effective preventive measures against all security breaches,
especially because the methods of attack change frequently or may not be recognized until after such attack has been
launched, and because security attacks can originate from a wide variety of sources, including third parties such as persons
involved with organized crime or associated with external service providers. We are also held accountable for the actions
and inactions of our third-party vendors regarding cybersecurity, data privacy breaches and other consumer-related matters.
Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or
to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny,
governmental enforcement actions, significant litigation exposure and harm to our reputation, any of which could have a
material adverse effect on our business, financial condition, liquidity and results of operations.
Inability to successfully complete securitizations, or delayed mortgage loan sales or securitization closings, could result
in a liquidity shortage which would adversely affect our operating results.
We are exploring utilizing securitizations as an additional exit strategy to generate cash proceeds to repay
borrowings and replenish our borrowing capacity. If there is a delay in mortgage loan sales or securitization closing or any
reduction in our ability to complete mortgage loan sales or securitizations, we may be required to utilize other sources of
financing, which, may not be available on favorable terms or at all. In addition, delays in closing mortgage sales or
securitizations of our mortgages exposes us to additional credit and interest rate risk up to the closing of the transaction.
Several factors could affect our ability to complete securitizations of our mortgages or mortgage loan sales, including:
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● conditions in the securities and secondary markets;
● credit quality of the mortgages acquired or originated through our mortgage operations;
● volume of our mortgage loan acquisitions and originations;
● operational inefficiencies causing delay in settlement;
● our ability to obtain credit enhancements; and
● 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, of if we experience a delay in mortgage loan sales or
securities closings, then we could experience a liquidity shortage leading to lower net earnings or a loss for that period. 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.
We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to
implement and operate our business as planned.
Future financing sources may include borrowings in the form of credit facilities (including term loans and
revolving facilities), repurchase agreements, warehouse facilities, structured financing arrangements, public and private
equity and debt issuances and derivative instruments, in addition to transactions or asset specific funding arrangements.
Our access to sources of financing depends upon a number of factors some of which we have little or no control over,
including general market conditions, resources and policies or lenders. In addition, if regulatory capital requirements
imposed on our private lenders change, they may be required to limit, or increase the cost of, financing they provide to us.
This could potentially increase our financing costs and reduce our liquidity as well as limit our ability to expand our
mortgage operations. Depending on market conditions at the relevant time, we may have to rely more heavily on additional
equity issuances, which may be dilutive to our shareholders, or on less efficient forms of debt financing that require a larger
portion of our cash flow from operations, thereby reducing funds available for our operations and future business
opportunities. We cannot assure you that we will have access to such equity or debt capital on favorable terms (including,
without limitation, cost and term) at the desired times, or at all, which could negatively affect our results of operations. If
our access to such funds are restricted or are on terms that are materially changed, we may not be able to continue those
operations which may affect our income and loan origination volumes.
Loss of our current executive officers or other key management could significantly harm our business.
We depend on the diligence, skill and experience of our senior executives. We believe that our future results will
also depend in part upon our attracting and retaining highly skilled and qualified management. We seek to compensate our
executive officers, as well as other employees, through competitive salaries, bonuses and other incentive plans, but there
can be no assurance that these programs will allow us to retain key management executives or hire new key employees.
The loss of our senior executive officers and key management could have a material adverse effect on our operations
because other officers may not have the experience and expertise to readily replace these individuals. Competition for such
personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel. The loss
of, and changes in, key personnel and their responsibilities may be disruptive to our business and could have a material
adverse effect on our business, financial condition and results of operations.
We may become, and in some cases are, a defendant in lawsuits, some of which may be class action matters, and we may
not prevail in these matters.
Individual and class action lawsuits and regulatory actions alleging improper marketing practices, abusive loan
terms and fees, disclosure violations and other matters are risks faced by all mortgage originators. We are a defendant in
purported class actions pending in different states and could be named in other matters. We will incur defense costs and
other expenses in connection with the 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 any of these actions and any damages that we may suffer, our management’s efforts and
attention may be diverted from the ordinary business operations in order to address these claims. Plus, we may be deemed
in default of our warehouse lines if a judgment for money that exceeds specified thresholds is rendered against us. If the
final resolution is unfavorable to us in any of these actions, our financial condition, results of operations and cash flows
might be materially adversely affected. For additional information regarding ongoing litigation, refer to Note 13.
“Commitments and Contingencies” in the notes to the consolidated financial statements.
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Our hedging strategies implemented by our mortgage lending operations may not be successful in mitigating our risks
associated with the market movement of interest rates.
We use various derivative financial instruments to provide a level of protection against interest rate risks in our
mortgage lending operations, but no hedging strategy can protect us completely. When interest rates change, we expect to
record a gain or loss on derivatives which would be offset by an inverse change in the value of mortgage loans held-for-
sale, our held mortgage servicing rights, forward sale and interest rate lock commitments. We cannot assure you, however,
that our use of derivatives will offset the risks related to changes in interest rates. There have been periods, and it is likely
that there will be periods in the future, during which we will not have offsetting gains or losses in mortgage loans, forward
sale and interest rate lock commitment values after accounting for our derivative financial instruments. The derivative
financial instruments we select may not have the effect of reducing our interest rate risk. In addition, the nature and timing
of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies, improperly executed
and recorded transactions or inaccurate assumptions could actually increase our risk and losses. In addition, hedging
strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we
use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses.
Our ability to utilize our net operating losses and certain other tax attributes may be limited.
At the end of our 2021 taxable year, we had estimated federal and California net operating loss (NOL)
carryforwards of approximately $623.5 million and $435.2 million, respectively. Federal NOLs begin to expire in 2027 and
California NOLs begin to expire in 2028. We may not generate sufficient taxable income in future periods to be able to
realize fully the tax benefits of our NOL carryforwards. Although, under existing tax rules, we are generally allowed to use
those NOL carryforwards to offset taxable income in subsequent taxable years, our ability to use those NOL carryforwards
to offset income may be severely limited to the extent that we experience an ownership change within the meaning of
Section 382 of the Internal Revenue Code. These provisions could also limit our ability to deduct certain losses (built-in
losses) we recognize after an ownership change with respect to assets we own at the time of the ownership change. In
general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain
stockholders or public groups in our stock by more than 50% over a three-year period. In addition, the generation of taxable
income from cancellation of debt may further reduce the NOL. Any limitation on our NOL carryforwards that could be
used to offset taxable income would adversely affect our liquidity and cash flow, as and when we become profitable. On
October 23, 2019, our Board enacted the Tax Benefit Preservation Rights Agreement (NOL rights plan), which was
approved at the Company’s 2020 annual meeting of stockholders, is designed to mitigate the risk of losing net operating
loss carryforwards and certain other tax attributes from being limited in reducing future income taxes. Although our NOL
rights plan is intended to prevent an ownership change, we cannot provide any assurance that we will not experience an
ownership change or that we will otherwise be able to use, in full or in part, our NOLs.
We depend on the accuracy and completeness of information provided by customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may
rely on information furnished to us by, or on behalf of, customers and counterparties, including financial statements and
other financial information. We also may rely on representations of customers and counterparties as to the accuracy and
completeness of that information. In deciding whether to extend credit, we may rely upon our customers' representations
that their financial statements are accurate. We also may rely on customer representations and certifications, or other audit
or accountants' reports, with respect to the business and financial condition of our commercial clients. Our financial
condition, results of operations, financial reporting and reputation could be materially adversely affected if we rely on
materially misleading, false, inaccurate or fraudulent information.
Representations and warranties made by us in our loan sales, servicing rights sales and securitizations may subject us to
liability.
In connection with our loan and/or servicing rights sales to third parties and our prior securitizations, we
transferred mortgages and/or servicing rights to third parties or, to a lesser extent, into a trust in exchange for cash and, in
the case of a securitized mortgage, residual certificates issued by the trust. The trustee, purchaser, bondholder, guarantor or
other entities involved in the sales or issuance of the securities (which may include bond insurers) may have recourse to us
with respect to the breach of the representations and warranties made by us at the time such mortgages and/or servicing
rights are transferred or when the securities are sold. We attempt to mitigate the potential recourse from such purchasers by
seeking remedies from correspondent sellers and wholesale brokers who originated the mortgages if we did not originate
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the loan. However, many of the entities we acquired loans from in the past are no longer in business or may not be able to
financially cover the losses. 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. Changes in the timing, processes and procedures of
our primary investors’ review of loans which they purchase from us may affect the number of loans that are rejected, the
timing of our loan sales, or the frequency of repurchase demands issued to us. Also, similar changes by mortgage insurers
who agree to insure loans may also affect the frequency and timing of our loan sales. As a result, the effectiveness of our
loan sales, our repurchase reserves and our profitability may be adversely affected.
The geographic concentration of our mortgages increases our exposure to risks in those areas.
We do not set limitations on the percentage of mortgages 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 and mortgages held
in our long-term mortgage portfolio are secured by properties in California (approximately 77% of our mortgage
originations were generated from California in 2021) and, to a lesser extent, Arizona, Florida and Nevada. These states
have previously experienced, and may experience in the future, economic downturns and California and Florida have also
suffered the effects of certain natural hazards. During past economic downturns, real estate values in California and Florida
have decreased drastically, which could have a material adverse effect on our results of operations or financial condition. In
addition, Florida is among several states with higher than average costs for investors in circumstances of mortgage default
and foreclosure, since the foreclosure process takes significantly longer than average. Accordingly, to the extent the
mortgages we originate or are held in our long-term mortgage portfolio experience defaults or foreclosures in that area, we
may be exposed to higher losses.
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.
Our vendor relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us with financial, technology and other services to
support our mortgage loan servicing and origination businesses. Some of these outsourced services, such as technology,
could have a material effect on our business and operations if our third party provider was unable to, or failed to, properly
provide such services. With respect to vendors engaged to perform activities required by servicing criteria, we have elected
to take responsibility for assessing compliance with the applicable servicing criteria for the applicable vendor and are
required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material
respects with servicing criteria applicable to the vendor, including but not limited to, monitoring compliance with our
predetermined policies and procedures and monitoring the status of payment processing operations. In the event that a
vendor’s activities do not comply with the servicing criteria, it could negatively impact our servicing agreements. In
addition, if our current vendors were to stop providing services to us on acceptable terms, including as a result of one or
more vendor bankruptcies due to poor economic conditions, we may be unable to procure alternatives from other vendors
in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any
such disruptions in service and this could adversely affect our business, financial condition and results of operations.
Additionally, the CFPB has stated that supervised banks and non-banks could be held liable for actions of their service
providers. As a result, we could be exposed to liability, CFPB enforcement actions or other administrative penalties if the
vendors with whom we do business violate consumer protection laws.
If we are forced to liquidate, we may have few unpledged assets for distribution to unsecured creditors or equity holders.
In the event we were forced to liquidate and distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors and preferred equity holders. Similarly, our preferred
equity holders would share in our assets only after we satisfy any amounts owed to our creditors. The majority of our
assets are either collateral for specific borrowings or pledged as collateral for secured liabilities. Additionally, there is
volatility and significant judgement with respect to the valuation of a significant portion our assets and liabilities. If our
liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would
have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot provide any assurance that
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sufficient assets will remain available after the payment of our creditors to enable preferred equity holders and/or common
stock holders to receive any liquidation distribution with respect to any preferred equity or common stock, as applicable.
Our risk management policies and procedures may not be effective.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have
established policies and procedures intended to identify, monitor and manage the types of risk to which we are subject,
including credit risk, market and interest rate risk, liquidity risk, cyber risk, regulatory, legal and reputational risk. Although
we have devoted significant resources to develop our risk management policies and procedures and expect to continue to
do so in the future, these policies and procedures, as well as our risk management techniques such as our hedging
strategies, may not be fully effective. There may also be risks that exist, or that develop in the future, that we have not
appropriately anticipated, identified or mitigated. As regulations and markets in which we operate continue to evolve, our
risk management framework may not always keep sufficient pace with those changes. If our risk management framework
does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely
affected.
If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and
procedures, we may not be able to report our financial results accurately or prevent fraud, which could cause current
and potential stockholders to lose confidence in our financial reporting, adversely affect the trading price of our
securities or harm our operating results.
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. We cannot be
certain that our efforts to improve or maintain our internal control over financial reporting and disclosure controls and
procedures will be successful or that we will be able to maintain adequate controls over our financial processes and
reporting in the future. Any failure to develop or maintain effective controls or difficulties encountered in their
implementation or other effective improvement of our internal control over financial reporting and disclosure controls and
procedures could harm our operating results, or cause us to fail to meet our reporting obligations. 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’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 resolved in our favor, could cause us to
incur significant legal and other expenses or cause delays in our public reporting. Such events could harm our business,
affect our ability to raise capital and adversely affect the trading price of our securities.
Risks Related to Our Industry
Our earnings may decrease, or losses increase, because of changes in prevailing interest rates.
Our profitability is directly affected by changes in prevailing interest rates over which we have no control. The following
are certain material risks we face related to changes in interest rates:
Originations:
● an increase in interest rates could adversely affect our loan originations volume because refinancing an existing
loan would be less attractive for homeowners and qualifying for a purchase money loan may be more difficult for
consumers;
● an increase in interest rates could also adversely affect our production margins due to increased competition
among originators;
Servicing:
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● a decrease in interest rates may increase prepayment speeds which may lead to (i) increased MSR amortization;
(ii) decrease in servicing fees; and (iii) decrease in the value of our MSRs;
Debt:
● an increase in interest rates would increase the cost of servicing our outstanding debt or the costs associated with
financing new debt, including our ability to finance loan originations.
Any of the foregoing could materially and adversely affect our business, consolidated financial condition and results of
operations.
The pandemic has impaired and may continue to impair the ability of borrowers to repay outstanding loans or other
obligations, resulting in increases in forbearances and/or delinquencies, which could negatively impact our business.
Borrowers that have been negatively impacted by the pandemic may not remit payments of principal and interest
relating to their mortgage loans on a timely basis, or at all. This could be due to an inability to make such payments, an
unwillingness to make such payments, or a temporary or permanent waiver of the requirement to make such payments,
including under the terms of any applicable forbearance, modification, or maturity extension agreement or program. On
March 27, 2020, the CARES Act was enacted to provide financial assistance to individuals and businesses affected by the
pandemic. The CARES Act provides certain measures to support individuals in maintaining solvency through monetary
relief, including in the form of loan forgiveness/forbearance. The CARES Act, among other things, provides any
homeowner with a federally-backed mortgage who is experiencing financial hardship the option of up to six months of
forbearance on their mortgage payments, with a potential to extend that forbearance for another six months. During the
forbearance period, no additional fees, penalties or interest can accrue on the homeowner’s account. The CARES Act also
established a temporary moratorium on foreclosures. Transactions we enter into to finance loans with warehouse
counterparties and to sell whole loans to third parties, may be negatively impacted by the pandemic related payment
forbearances, waiver, or other payment deferral program, including but not limited to, reducing proceeds from these
transactions, require us to repurchase impacted loans and reduce proceeds or incur losses on loans sold that are within
forbearance or other deferred payment programs. To the extent borrower forbearance affects our ability to finance and sell
loans to third parties, it may have a material adverse effect on our financial condition, results of operations and cash flows.
A decline in real estate values may have a material adverse effect on our financial condition and results of operation.
If there is a decline in real estate values, borrowers may default on our residential loans. A reduction in real estate
values reduces a borrower’s equity in their home which generally increases the underlying loan to value ratio and leads to a
corresponding risk of default. If a borrower defaults and we have sold the loan or the servicing of the loan, we may violate
our representations and warranties from the sale and be obligated to repurchase the loan.
Our business is affected by changes in the state of the general economy and the financial markets, and a slowdown or
downturn in the general economy or the financial markets could adversely affect our results of operations.
Our customer activity is intrinsically linked to the health of the economy generally and of the financial markets
specifically. In addition to the economic factors, a downturn in the real estate or commercial markets generally could cause
our customers and potential customers to exit the market for loans. As a result, we believe that fluctuations, disruptions,
instability or downturns in the general economy and the financial markets could disproportionately affect demand for our
lending products. In addition, the spread of the Covid-19 virus has caused economic disruption worldwide, the effect of
which may be over an extended period of time and may have a material adverse effect on our financial condition or results
of operations. If such conditions occur and persist, our business and financial results, including our liquidity and our ability
to fulfill our debt obligations, could be materially adversely affected.
Replacement of the LIBOR benchmark interest rate may have an adverse impact on our business, financial condition or
results of operations.
On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United
Kingdom, announced that it intends to stop persuading or compelling banks to submit London Interbank Offered Rate
(LIBOR) rates after 2021. The Alternative Reference Rates Committee (ARRC), a group of private-market participants
convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition
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from U.S. dollar LIBOR (USD-LIBOR) to a more robust reference rate, proposed that the Secured Overnight Financing
Rate (SOFR) represents the best alternative to USD-LIBOR for use in derivatives and other financial contracts that are
currently indexed to USD-LIBOR. ARRC has proposed a transition plan with specific steps and timelines designed to
encourage the adoption of SOFR and guide the transition to SOFR from USD-LIBOR. The Financial Conduct Authority in
the United Kingdom and other regulatory bodies have issued statements encouraging cessation of new transactions
referencing USD LIBOR after December 31, 2021, while supporting extension of the publication of major USD-LIBOR
tenors to mid-2023, to allow additional legacy contracts to mature on their existing terms. Announcements by government-
sponsored entities such as Fannie Mae and Freddie Mac, suggest that the SOFR will become the LIBOR replacement for
the industry.
While regulators and market participants continue to promote the creation and functioning of post-LIBOR indices
(SOFR in particular), the impact of the discontinuance and replacement of LIBOR is uncertain. It is not currently possible
to know with certainty what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such
changes in views and alternatives may have on the financial markets for LIBOR-linked financial instruments for the
periods preceding and following LIBOR's cessation. Differences in contractual provisions of certain legacy assets and
liabilities and other factors may cause the consequences of the discontinuance of LIBOR to vary by instrument. While
enacted and pending legislation is intended to address issues with respect to legacy LIBOR-linked assets and liabilities, it is
unclear whether they will completely address the issues associated with legacy transactions. We are evaluating the potential
impact of the possible SOFR replacement of the LIBOR benchmark interest rate, but are not able to predict what the impact
of such a transition will have on our business, financial condition, or results of operations at this time. The market
transition away from LIBOR to an alternative reference rate is complex and could have a range of adverse effects on our
business, financial condition and results of operations. In particular any such transition could:
● adversely affect the interest rates paid or received on, the revenue and expenses associate with, and the value of
our floating-rate obligations, loans, derivatives, and other financial instruments tied to LIBOR rates, or other
securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
● legal and execution risks, relating to documentation changes for the transition of legacy contracts to alternate
benchmark rates; and/or
● require the transition to or development of appropriate systems and analytics to effectively transition our risk
management processes from LIBOR-based products to those based on the applicable alternative pricing
benchmark.
While cessation timelines have been agreed by the industry and regulatory authorities, we continue to assess how the
discontinuation of existing benchmark rates could materially affect our business, financial condition and results of
operations.
Litigation in the mortgage industry related to securitizations against issuers, sellers, servicers, originators, underwriters
and others may adversely affect our business operations.
As defaults, delinquencies, foreclosures, and losses in the real estate market occur, there have been lawsuits by
various investors, insurers, underwriters and others against various participants in securitizations, such as sponsors,
depositors, underwriters, servicers and loan sellers. Some lawsuits have alleged that the mortgage loans had origination
defects, that there were misrepresentations made about the mortgage loans and that the parties failed to properly disclose
the quality of the mortgage loans or repurchase defective loans wherein servicing standards were not maintained or that
there were other misrepresentations or false representations. Historically, we both securitized and sold mortgage loans to
third parties that may have been deposited or included in pools for securitizations. As a result, we may incur significant
legal and other expenses in defending against claims and litigation and we may be required to pay settlement costs,
damages, penalties or other charges which could adversely affect our financial condition and results of operations.
Risks Related to Regulation
Loss or suspension of our approvals, or limitations placed on our delivery volume, or the potential limitation or wind-
down of, the role Fannie Mae, Freddie Mac and Ginnie Mae play in the residential mortgage-backed security (MBS)
market have had, and could continue to have, an adverse effect on our business, operations and financial condition.
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We originate loans which are intended to be eligible for sale to Fannie Mae, Freddie Mac, (together, the GSEs),
government insured or guaranteed loans, such as FHA, VA and USDA loans, and loans eligible for Ginnie Mae securities
issuance (collectively, the Agencies), in addition to other investors and counterparties (collectively, the Counterparties). We
also have serviced loans sold to the GSEs, as well as securitized with the Agencies and other Counterparties. The role of
the GSEs, Agencies, and Counterparties may become limited over time in their ability to guarantee mortgages or purchase
mortgage loans. Conversely, the GSEs, Agencies, and Counterparties may propose to implement reforms relating to
borrowers, lenders, and investors in the mortgage market, including reducing the maximum size of a purchasable loan,
phasing-in a minimum down payment requirement for borrowers, changing underwriting standards, and increasing
accountability and transparency in the securitization process. The GSEs, Agencies, and Counterparties may also limit the
amount of loans a company can sell to them based upon the company’s net worth or the performance of loans sold to them.
These limitations and reforms could negatively impact our financial condition, net earnings and growth.
We have historically serviced loans on behalf of Fannie Mae and Freddie Mac, as well as loans that have been
delivered into securitization programs sponsored by Ginnie Mae and other Counterparties in connection with the issuance
of agency guaranteed mortgage-backed securities and other non-agency securitizations. These entities establish the base
service fee to compensate us for servicing loans as well as the assessment of fines and penalties that may be imposed upon
us for failing to meet servicing standards.
The extent and timing of any regulatory reform regarding the GSEs, Agencies, Counterparties and the home
mortgage market, as well as any effect on the Company’s business operations and financial results, are uncertain. It is
important for us to sell or securitize the loans we originate and, when doing so, maintain the option to also sell the related
MSR's associated with these loans. Prepayment speeds on loans generated through our retail direct channel have been a
concern for some investors dating back to 2016, which has resulted and could further result in adverse pricing or delays in
our ability to sell or securitize loans and related MSRs on a timely and profitable basis. During the fourth quarter of 2017,
Fannie Mae sufficiently limited the manner and volume for our deliveries of eligible loans such that we elected to cease
deliveries to them and we expanded our whole loan investor base for these loans. In 2019, with the creation of the uniform
mortgage-backed securities (UMBS) market, which was intended to improve liquidity and align prepayment speeds across
Fannie Mae and Freddie Mac securities, Freddie Mac raised concerns about the high prepayment speeds of our loans
generated through our retail direct channel. We have continued to expand our investor base and complete servicing released
loan sales to non-GSE whole loan investors and expect to continue to utilize these alternative exit strategies for Fannie Mae
and Freddie Mac eligible loans. In July 2020, we received notification from Freddie Mac that our eligibility to sell whole
loans to Freddie Mac was suspended, without cause. While we believe that the overall volume delivered under purchase
commitments to the GSEs was immaterial prior to the notification, we are committed to operating actively and in good
standing with our broad range of capital markets counterparties. We continue to take steps to manage our prepayment
speeds to be more consistent with our industry comparables and to reestablish the full confidence and delivery mechanisms
to our investor base, but we cannot provide any assurance that our eligibility to sell whole loans to Freddie Mac will be
restored.
Substantive changes to risk-based and collateral eligibility requirements by any of the GSEs, Agencies or
Counterparties may affect our ability to originate, deliver or securitize loans. These changes may also be implemented by a
GSE, Agency or Counterparty without advance notice. If the GSEs, Agencies or Counterparties cease to exist, wind down,
or otherwise significantly change their business operations or if we lose our approved seller/servicer or approved
counterparty status with the GSEs, Agencies or Counterparties, or if one of these parties materially limits the amount of
loans we can sell to them, or we are otherwise unable to sell loans to them there could be a material adverse effect on our
mortgage lending operations, financial condition, results of operations, and cash flows.
Regulatory laws affecting our operations, or interpretations of them, may affect our mortgage lending operations.
Existing laws, regulations, or regulatory policies and changes thereto or to the way they are interpreted can affect
whether and to what extent we may be able to expand our mortgage lending activities and compliance with such
requirements could expose us to fines, penalties or licensing restrictions that could affect our operations. Many states and
local governments and the Federal government have enacted or may enact laws or regulations that restrict or prohibit some
provisions in some programs or businesses that we currently participate in or plan to participate in the future. As such, we
cannot be sure that in the future we will be able to engage in activities that were similar to those we engaged or participated
in in the past thereby limiting our ability to commence new operations. As a result, we might be at a competitive
disadvantage which would affect our operations and profitability.
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We are subject to federal, state and local laws and regulations related to the mortgage industry that generally
regulate interest rates and other charges, require certain disclosures, and require applicable licensing. 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. Violations of
certain provisions of these federal and state laws and regulations 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 additional lawsuits, could result in the
mortgagors rescinding the loans whether held by us or subsequent holders of the loans, or could cause us to repurchase the
loan and thereby suffer a loss on the transaction. In addition, such violations could subject us to fines and penalties imposed
by state and federal regulators and cause us to be in default under our credit and repurchase lines and could result in the
loss of licenses held by us including the ability to expand or continue lending in certain areas.
The regulatory changes in loan originator compensation, qualified mortgage requirements and other regulatory
restrictions may put us at a competitive disadvantage to our competitors. Since some banks and financial institutions are not
subject to the same regulatory changes as mortgage lenders, they could have an advantage over independent mortgage
lenders. As a result of the nature of our operations, our capital, costs, source of funds and other similar factors may affect
our ability to maintain and grow lending.
The CFPB has implemented rules and interpretations with strict residential mortgage loan compliance and
underwriting standards as called for in the Dodd-Frank Act. The Act imposes significant liability for violation of those
underwriting standards, and offers certain protection from that liability only for loans that comply with tight limitations and
that do not contain certain alternative features (like balloon payments or interest only provisions). Those requirements and
subsequent changes may affect our ability to originate residential mortgage loans or the profitability of those operations.
The CFPB continues to be active in its monitoring of the loan origination and servicing sectors, and its rules increase
our regulatory compliance burden and associated costs.
We are subject to the regulatory, supervisory and examination authority of the CFPB, which has oversight of
federal and state non-depository lending and servicing institutions, including residential mortgage originators and loan
servicers. The CFPB has rulemaking authority with respect to many of the federal consumer protection laws applicable to
mortgage lenders and servicers, including TILA and RESPA and the Fair Debt Collections Practices Act. The CFPB has
issued a number of regulations under the Dodd-Frank Act relating to loan origination and servicing activities, including
ability-to-repay and “Qualified Mortgage” standards and other origination standards and practices as well as servicing
requirements that address, among other things, periodic billing statements, certain notices and acknowledgements, prompt
crediting of borrowers’ accounts for payments received, additional notice, review and timing requirements with respect to
delinquent borrowers, loss mitigation, prompt investigation of complaints by borrowers, and lender-placed insurance
notices. The CFPB has also amended provisions of Home Ownership and Equity Protection Act regarding the
determination of high-cost mortgages, and of Regulation B, to implement additional requirements under the Equal Credit
Opportunity Act with respect to valuations, including appraisals and automated valuation models. The CFPB has also
issued guidance to loan servicers to address potential risks to borrowers that may arise in connection with transfers of
servicing. Additionally, the CFPB has increased the focus on lender liability and vendor management across the mortgage
servicing and settlement services industries, which may vary depending on the services being performed.
The CFPB’s examinations have increased, and will likely continue to increase, our administrative and compliance
costs. They could also greatly influence the availability and cost of residential mortgage credit and increase servicing costs
and risks. These increased costs of compliance, the effect of these rules on the lending industry and loan servicing, and any
failure in our ability to comply with the new rules by their effective dates, could be detrimental to our business. The CFPB
also issued guidelines on sending examiners to banks and other institutions that service and/or originate mortgages to assess
whether consumers’ interests are protected. The CFPB has conducted routine examinations of our business and will
conduct future examinations.
The CFPB also has broad enforcement powers, and can order, among other things, rescission or reformation of
contracts, the refund of moneys or the return of real property, restitution, disgorgement or compensation for unjust
enrichment, the payment of damages or other monetary relief, public notifications regarding violations, limits on activities
or functions, remediation of practices, external compliance monitoring and civil money penalties. The CFPB has been
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active in investigations and enforcement actions and, when necessary, has issued civil money penalties to parties the CFPB
determines have violated the laws and regulations it enforces. We anticipate an increase in regulatory enforcement activity
by the CFPB under the new Biden administration. Our failure to comply with the federal consumer protection laws, rules
and regulations to which we are subject, whether actual or alleged, could expose us to enforcement actions or potential
litigation liabilities.
In addition, the occurrence of one or more of the foregoing events or a determination by any court or regulatory
agency that our policies and procedures do not comply with applicable law could impact our business operations. For
example, if the violation is related to our servicing operations it could lead to downgrades by one or more rating agencies, a
transfer of our servicing responsibilities, increased delinquencies on mortgage loans we service or any combination of these
events. Such a determination could also require us to modify our servicing standards. The expense of complying with new
or modified servicing standards may be substantial. Any such changes or revisions may have a material impact on our
servicing operations, which could be detrimental to our business.
Regulatory proceedings and related matters could adversely affect us.
We have been, and may in the future become, involved in regulatory proceedings. We consider most of the
proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to
assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial
cost and management diversion in such litigation and proceedings, and any adverse determination could have a material
adverse effect on our business, reputation, or our financial condition and results of our operations.
Risks Related to Our Common Stock
If we do not continue to satisfy the NYSE American continued listing requirements, our common stock could be delisted
from the NYSE American.
The listing of our common stock on the NYSE American is contingent on our compliance with the NYSE
American’s conditions for continued listing, including requirements relating to maintaining minimum stockholders’ equity.
We cannot assure you that we will be able to meet those listing conditions. If the NYSE American delists our common
stock from trading on its exchange due to our failure to meet the NYSE American’s listing conditions, we and our
securityholders could face significant material adverse consequences, including:
●
●
●
●
a limited availability of market quotations for our securities;
a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.
Our share price has been and may continue to be volatile and the trading of our shares may be limited.
The market price of our securities has been volatile. We cannot guarantee that a consistently active trading market
for our securities will continue. In addition, there can be no assurances that such markets will continue or that any shares
which may be purchased may be sold without incurring a loss. Any such market price variation of our shares may not
necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other
established criteria of value, and may not be indicative of the market price for the shares in the future. The market price of
our common stock is likely to continue to be highly volatile and could be significantly affected by factors including:
● unanticipated fluctuations in our operating results;
● general market and mortgage industry conditions;
● mortgage and real estate fees;
● delinquencies and defaults on outstanding mortgages;
● loss severities on loans and REO;
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● prepayments on mortgages;
● the regulatory environment and results of our mortgage originations;
● mark to market adjustments related to the fair value of loans held-for-sale, mortgage servicing rights, long-
term debt and derivatives;
● interest rates; and
● litigation.
In addition, significant price and volume fluctuations in the stock market have particularly affected the market
prices for the securities of mortgage companies such as ours. Furthermore, general conditions in the mortgage industry may
adversely affect the market price of our securities. These broad market fluctuations have adversely affected and may
continue to adversely affect the market price of our securities. If our results of operations fail to meet the expectations of
security 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.
Issuances of additional shares of our common stock or other securities may adversely affect the market price of our
common stock and significantly dilute stockholders.
In order to support our business objectives, we may raise capital through the sale of equity or convertible
securities. The issuance or sale, or the proposed sale, of substantial amounts of our common stock or other securities in the
public market or in private transactions could materially adversely affect the market price of our common stock or other
outstanding securities and dilute our book value per share.
We do not expect to pay dividends in the foreseeable future and we may be restricted in paying dividends on our
common stock.
We do not anticipate paying any dividends on our common stock in the foreseeable future as we intend to retain
any future earnings for funding growth. In addition, our existing and any future warehouse facilities or other contracts may
contain covenants prohibiting dividend payments upon an occurrence of a default or otherwise. We also are prohibited from
paying dividends on our common stock until our preferred stock dividends are paid under the terms of our Series B
Preferred Stock. As of December 31, 2021, we had cumulative undeclared dividends in arrears of approximately $19.1
million, or approximately $28.71 per outstanding share of Series B Preferred Stock. Additionally, every quarter the
cumulative undeclared dividends in arrears increases by $0.5859 per Preferred B share, or approximately $390 thousand.
As a result, you should not rely on an investment in our stock if you require dividend income. Capital appreciation, if any,
of our stock may be your sole source of gain for the foreseeable future.
Our principal stockholders beneficially own a large portion of our stock, and accordingly, may have control over
stockholder matters and sales may adversely affect the market price of our common stock.
As of February 28, 2022, Todd M. Pickup and Richard H. Pickup, and their respective affiliates beneficially
owned approximately 13.6% and 31.1%, respectively, of our outstanding common stock. Their beneficial ownership
includes 395,349 shares and 534,884 shares of our common stock that Todd Pickup and Richard Pickup, respectively, has
the right to acquire at any time by converting the outstanding $20.0 million in principal balance of Amended Convertible
Notes due May 9, 2022, at the initial conversion price of $21.50 per share. Additionally, their beneficial ownership also
includes 85,060 and 116,957 warrants that Todd Pickup and Richard Pickup, respectively, has the right to acquire at any
time by converting the warrants that expire April 15, 2025, at a cash exercise price of $2.97 per share . These stockholders
could exercise significant influence over our Company. Such ownership may have the effect of control over substantially
all matters requiring stockholder approval, including the election of directors. Furthermore, such ownership and control
may have the effect of delaying or preventing a change in control of our Company, impeding a merger, consolidation,
takeover or other business combination involving our Company or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of our Company. We do not expect that these stockholders will vote together
as a group. In addition, sales of significant amounts of shares held by these stockholders, or the prospect of these sales,
could adversely affect the market price of our common stock.
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Provisions in our charter documents and Maryland law, as well as our NOL Rights Plan, impose limitations that may
delay or prevent our acquisition by a third party.
Our charter and bylaws contain provisions that may make it more difficult for a third party to acquire control of us
without the approval of our board of directors. These provisions include, among other things, advance notice for raising
business issues or making nominations at meetings and blank check preferred stock that allows our board of directors,
without stockholder approval, to designate and issue additional series of preferred stock with rights and terms as our board
of directors may determine, including rights to dividends and proceeds in a liquidation that are senior to our common stock.
We are also subject to certain provisions of the Maryland General Corporation Law, which could delay, prevent or
deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders
receiving a premium over the price for their common stock or may otherwise be in the best interests of our stockholders.
This includes the “business combinations” statute that prohibits transactions between a Maryland corporation and
“interested stockholders,” which is any person who beneficially owns 10% or more of the voting power of our then-
outstanding voting stock for a period of five years unless the board of directors approved the transaction prior to the party’s
becoming an interested stockholder. The five-year period runs from the most recent date on which the interested
stockholder became an interested stockholder. The law also requires a super majority stockholder vote for such transactions
after the end of the five-year period.
Maryland law also provides that “control shares” of a Maryland corporation acquired in a “control share
acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the shares eligible to vote. The
control share acquisition statute would not apply to shares acquired in a merger, consolidation or share exchange if we were
a party to the transaction. The control share acquisition statute could have the effect of discouraging offers to acquire us
and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best
interests.
We have also adopted an NOL rights plan, pursuant to which each share of common stock also has a “right”
attached to it. Although the NOL rights plan was adopted to help preserve the value of certain deferred tax benefits,
including those generated by net operating losses, it also has the effect of deterring or delaying an acquisition of our
Company by a third party. The rights are not exercisable except upon the occurrence of certain takeover-related events—
most importantly, the acquisition by a third party (the “Acquiring Person”) of more than 4.99% of our outstanding voting
shares. Once triggered, the rights entitle the stockholders, other than the Acquiring Person, to certain “flip-in”, “flip-over”
and exchange rights. The effect of triggering the rights is to expose the Acquiring Person to severe dilution of its ownership
interest, as the shares of our common stock (or any surviving corporation) are offered to all of the stockholders other than
the Acquiring Person at a steep discount to their market value. We have in the past, and may in the future, grant waivers to
the limitations imposed by our NOL rights plan. This may affect the holdings of those shareholders who obtained the
waivers and may affect the protection of, and hence the ability to make use of, our NOL’s.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our primary executive and administrative offices are located at 19500 Jamboree Road, Irvine, California 92612
where we have a premises lease expiring in September 2024. The premises consist of four floors where we occupy
approximately 119,600 square feet.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 13 – Commitments and Contingencies in the
Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, which information is
incorporated herein by reference.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
PURCHASES OF EQUITY SECURITIES
Our common stock is currently listed on the NYSE American under the symbol “IMH”.
On March 4, 2022, the last quoted price of our common stock on the NYSE American was $0.75 per share. As of
March 4, 2022, there were 174 holders of record, including holders who are nominees for an undetermined number of
beneficial owners, of our common stock.
Our Board of Directors authorizes in its discretion the payment of cash dividends on its common stock, subject to
an ongoing review of our profitability, liquidity and future operating cash requirements. We and some of our subsidiaries
are subject to restrictions under our warehouse borrowings and long-term debt agreements on our ability to pay dividends if
there is an event of default or otherwise. Plus, certain debt arrangements require the maintenance of ratios and contain
restrictive financial covenants that could limit our ability, and the ability of our subsidiaries, to pay dividends. Furthermore,
we will be prohibited from paying dividends on our common stock until we satisfy all of the outstanding dividends owed
on our preferred stock. As of December 31, 2021, we had cumulative undeclared dividends in arrears of approximately
$19.1 million, or approximately $28.71 per outstanding share of Series B Preferred Stock. Additionally, every quarter the
cumulative undeclared dividends in arrears increases by $0.5859 per Preferred B share, or approximately $390 thousand.
The Board of Directors did not declare cash dividends on our common stock during the years ended December 31, 2021
and 2020. We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future.
ITEM 6. RESERVED
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s discussion and analysis of financial condition and results of operations contain certain forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Refer to Item 1. “Business—Forward- Looking Statements” for a complete description of forward-
looking statements. Refer to Item 1. “Business” for information on our businesses and operating segments.
Amounts are presented in thousands, except per share data or as otherwise indicated.
Market Conditions
The U.S. economy continued its recovery during 2021 despite concerns over rising inflation and a surge in
COVID-19 cases in the second half of the year. As previously discussed, the COVID-19 pandemic has resulted in
disruption to business and economic activity as well as to the capital markets. COVID-19's effects in the U.S. and globally
have been extreme, and the duration of the pandemic and its ultimate repercussions continue to remain unclear.
Unprecedented government economic intervention, including additional government support enacted during the first
quarter of 2021, has likely dampened the pandemic's effects, but at uncertain long-term cost. However, these government
support measures combined with progress on vaccinations along with the easing and removal of many restrictions by states,
have helped speed the economic recovery along considerably. These actions as well as several other factors, including
supply chain breakdowns and labor shortages, have contributed to higher inflation, which rose above the Federal Reserve
Board’s (FRB) target inflation rate in 2021. U.S. Gross Domestic Product (GDP) grew at an estimated annual rate of 5.7
percent in 2021, while the U.S. economy added over 1.7 million jobs during 2021 and the total unemployment rate fell to
3.9 percent at December 2021 as compared with 6.7 percent at December 2020. In December 2021, the FRB decided to
hold short-term interest rates steady (at near zero) while announcing it will accelerate the reduction of its monthly bond
buying program, which will bring the program to an end in early 2022. It is expected the FRB will start increasing short-
term interest rates in 2022 after the completion of its bond buying program.
Although the U.S. economy continued to improve during 2021, the impact of the COVID-19 pandemic, including
the emergence of new variants, and higher inflation on economic conditions both in the United States and abroad continues
to create global uncertainty about the future economic environment, including the pace and extent of the economic
recovery. Concerns over interest rate levels, energy prices, domestic and global policy issues, trade policy in the U.S. and
geopolitical events as well as the implications of those events on the markets in general further add to the global
uncertainty. Interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary
policy and the level of regulatory and government scrutiny of financial institutions will continue to impact our results in
2022 and beyond.
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Selected Financial Results for 2021 and 2020
(in thousands, except per share data)
Revenues:
Gain on sale of loans, net
Servicing (expense) fees, net
(Loss) gain on mortgage servicing rights, net
Real estate services fees, net
Other
Total revenues, net
Expenses:
Personnel expense
Business promotion
General, administrative and other
Total expenses
Operating (loss) earnings:
Other income (expense):
Net interest income
Change in fair value of long-term debt
Change in fair value of net trust assets
Total other income (expense)
Earnings (loss) before income taxes
Income tax expense
Net earnings (loss)
Other comprehensive earnings (loss):
Change in fair value of instrument specific credit
risk
Total comprehensive earnings (loss)
Diluted weighted average common shares
Diluted earnings (loss) per share
Status of Operations
For the Three Months Ended
For the Year Ended
December 31, September 30, December 31, December 31, December 31,
2021
2021
2020
2021
2020
$
$
$
$
14,861
(39)
(68)
212
(29)
14,937
13,204
2,249
5,040
20,493
(5,556)
403
1,459
7,284
9,146
3,590
8
3,582
(1,148)
2,434
21,359
0.15
$
$
$
$
19,608
(124)
101
244
(11)
19,818
12,685
2,185
4,927
19,797
21
777
(1,803)
3,112
2,086
2,107
21
2,086
631
2,717
21,345
0.08
$
$
$
$
21,455
(131)
(1,624)
294
3
19,997
13,255
552
6,116
19,923
74
708
(1,802)
(1,092)
(2,186)
(2,112)
78
(2,190)
505
(1,685)
21,255
(0.10)
$
$
$
$
65,294
(432)
34
1,144
279
66,319
52,778
7,395
21,031
81,204
(14,885)
2,398
2,098
6,582
11,078
(3,807)
71
(3,878)
(2,722)
(6,600)
21,332
(0.22)
$
$
$
$
14,004
3,603
(28,509)
1,312
1,498
(8,092)
52,880
3,859
24,534
81,273
(89,365)
5,137
1,899
(5,688)
1,348
(88,017)
133
(88,150)
(20)
(88,170)
21,251
(4.15)
For the year ended December 31, 2021, net loss was $3.9 million, or $0.22 per diluted common share, as
compared to net loss of $88.2 million, or $4.15 per diluted common share in 2020. For the quarter ended
December 31, 2021, net earnings were $3.6 million, or $0.15 per diluted common share, as compared to net loss of $2.2
million, or $0.10 per diluted common share in the fourth quarter of 2020, and net earnings of $2.1 million, or $0.08 per
diluted common share, in the third quarter of 2021.
Net loss for the year ended December 31, 2021 decreased to $3.9 million as compared to $88.2 million for the
year ended December 31, 2021. The year over year decrease in net loss was primarily due to a $51.3 million increase in
gain on sale of loans, net, a $28.5 million decrease in loss on sale of mortgage servicing rights, net, as well as a $9.7
million increase in other income. The increase in gain on sale of loans, net for 2021 was due to origination volumes
increasing to $2.9 billion, with margins of 225 basis points (bps), as compared to $2.7 billion in originations in 2020, with
margins of approximately 51 bps. Margins increased year over year primarily due to the aforementioned temporary
suspension of lending in 2020, as well as an increase in NonQM production. The decrease in loss on sale of mortgage
servicing rights, net was due to a $28.5 million reduction as a result of the sale of $4.2 billion in unpaid principal balance
(UPB) of Freddie Mac and GNMA MSRs in the second and third quarters of 2020 resulting in losses of $6.5 million, as
well as losses of $22.0 million resulting from changes in fair value of MSRs as a result of prepayments and prepayment
assumptions during 2020. Additionally, other income increased $9.7 million year over year primarily due to a decrease in
residual discount rates on the long-term mortgage portfolio.
Non-GAAP Financial Measures
For the year ended December 31, 2021, core loss before tax (as defined below) was $12.4 million, or $0.58 per
diluted common share, as compared to core loss before tax of $58.7 million, or $2.76 per diluted common share, in 2020.
For the quarter ended December 31, 2021, core loss before tax was $5.0 million, or $0.23 per diluted common share, as
compared to core earnings before tax of $3.3 million, or $0.16 per diluted common share, for the fourth quarter of 2020,
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and core earnings before tax of $810 thousand, or $0.04 per diluted common share, for the third quarter of 2021.
To supplement our consolidated financial statements, which are prepared and presented in accordance with
generally accepted accounting principles in the United States (GAAP), we use the following non-GAAP financial
measures: core (loss) earnings before tax and diluted core (loss) earnings per share before tax. Core (loss) earnings and
diluted core (loss) earnings per share are financial measurements calculated by adjusting GAAP net (loss) earnings before
tax to exclude certain non-cash items, such as fair value adjustments and mark-to-market of mortgage servicing rights
(MSRs), and legacy non-recurring expenses. The fair value adjustments are non-cash items which management believes
should be excluded when discussing our ongoing and future operations. We use core (loss) earnings before tax as we
believe that it more accurately reflects our current business operations of mortgage originations and further aids our
investors in understanding and analyzing our core operating results and comparing them among periods. These non-GAAP
financial measures are not intended to be considered in isolation or as a substitute for net earnings (loss) before income
taxes, net (loss) earnings or diluted (loss) earnings per common share (EPS) prepared in accordance with GAAP. The
tables below provide a reconciliation of net earnings (loss) before tax and diluted earnings (loss) per common share to non-
GAAP core (loss) earnings before tax and per common share non-GAAP core (loss) earnings before tax:
(in thousands, except per share data)
Net earnings (loss) before tax:
Change in fair value of mortgage servicing rights
Change in fair value of long-term debt
Change in fair value of net trust assets, including
trust REO gains
Legal settlements and professional fees, for legacy
matters (1)
Legacy corporate-owned life insurance (2)
Core (loss) earnings before tax
Diluted weighted average common shares
Diluted core (loss) earnings per common share
before tax
Diluted earnings (loss) per common share
Adjustments:
Income tax benefit
Cumulative non-declared dividends on preferred
stock
Change in fair value of mortgage servicing rights
Change in fair value of long-term debt
Change in fair value of net trust assets, including
trust REO gains
Legal settlements and professional fees, for legacy
matters
Legacy corporate-owned life insurance
Diluted core (loss) earnings per common share
before tax
For the Three Months Ended
For the Year Ended
December 31, September 30, December 31, December 31, December 31,
2021
2021
2020
$
3,590
$
2,107
$
(2,112) $
2021
(3,807) $
2020
(88,017)
(32)
(1,459)
(150)
1,803
1,621
1,802
(221)
(2,098)
24,229
(1,899)
(7,284)
(3,112)
1,092
(6,582)
5,688
—
166
(5,019) $
—
162
810
21,359
21,345
(0.23) $
0.04
0.15
$
0.08
$
$
$
$
$
$
750
150
3,303
$
—
330
(12,378) $
750
577
(58,672)
21,255
21,332
21,251
0.16
$
(0.58) $
(2.76)
(0.10) $
(0.22) $
(4.15)
—
0.02
—
(0.07)
(0.34)
—
0.01
—
0.02
(0.01)
0.08
(0.14)
—
0.01
—
—
0.08
0.08
0.05
0.04
0.01
—
0.01
0.04
(0.01)
(0.10)
(0.31)
—
0.02
—
1.14
(0.09)
0.26
0.04
0.03
$
(0.23) $
0.04
$
0.16
$
(0.58) $
(2.76)
Key Metrics
● Total mortgage originations volumes were $759.4 million in the fourth quarter of 2021 and $2.9 billion in
2021 as compared to $810.0 million in the fourth quarter of 2020 and $2.7 billion in 2020.
● NonQM mortgage origination volumes increased to $382.1 million in the fourth quarter of 2021 and $683.6
million in 2021 as compared to $2.2 million in the fourth quarter of 2020 and $264.0 million in 2020.
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● Gain on sale of loans, net decreased to $14.9 million, with margins of approximately 196 bps in the fourth
quarter of 2021 as compared to $21.5 million, with margins of approximately 265 bps in the fourth quarter of
2020. Gain on sale of loans, net increased to $65.3 million, with margins of approximately 225 bps for 2021
as compared to $14.0 million, with margins of approximately 51 bps for 2020.
● Mortgage servicing portfolio increased to $71.8 million at December 31, 2021 as compared to $30.5 million
at December 31, 2020.
● Servicing (expense) fees, net was an expense of $39 thousand in the fourth quarter of 2021 and expense of
$432 thousand in 2021, as compared to expense of $131 thousand in the fourth quarter of 2020 and net
servicing fees of $3.6 million in 2020.
● Operating expenses (personnel, business promotion and general, administrative and other) remained
relatively flat at $20.5 million in the fourth quarter of 2021 and $81.2 million in 2021 as compared to $19.9
million in the fourth quarter of 2020 and $81.3 million in 2020.
Mortgage Lending
During the year ended 2021, total originations increased 6% to $2.9 billion as compared to $2.7 billion in 2020.
Retail originations represented the largest channel of originations with 80%, or $2.3 billion, of total originations in 2021,
which was down from 90% of total originations, or $2.5 billion, in 2020. The reduction in retail originations was due to
our pivot during the first quarter of 2021, to shift our origination focus to originate NonQM in both our Retail and third-
party originator (TPO) channels. For the fourth quarter of 2021, our total originations decreased to $759.4 million, a 6%
decrease, as compared to $810.0 million for the fourth quarter of 2020. The increase in originations as compared 2020,
was the result of our temporary suspension of lending activities during 2020, due to uncertainty caused by the COVID-19
pandemic. We continue to manage our headcount, pipeline and capacity to balance the risks inherent in an aggregation
execution model.
(in millions)
Originations by Channel:
Retail
Wholesale
Correspondent
Total originations
For the year ended December 31,
2021
%
2020
%
$
$
2,318.3
585.1
—
2,903.4
80 % $
20
0
100 % $
2,477.5
215.0
54.4
2,746.9
90 %
8
2
100 %
Our loan products include conventional loans for Fannie Mae and Freddie Mac, NonQM, jumbo and government
loans insured by FHA, VA and USDA.
Originations by Loan Type:
(in millions)
Conventional
NonQM
Jumbo
Government (1)
Total originations
Weighted average FICO (2)
Weighted average LTV (3)
Weighted average coupon
Avg. loan size (in thousands)
$
$
$
% Change
$
For the Year Ended December 31,
2020
2,401.6
264.0
10.7
70.6
2,746.9
2021
2,096.9
683.6
73.7
49.2
2,903.4
$
(13)%
159
589
(30)
6 %
759
57.7%
3.14%
$
362.4
762
60.5%
3.37%
367.9
Includes government-insured loans including FHA, VA and USDA.
(1)
(2) FICO—Fair Isaac Corporation credit score.
(3) LTV—loan to value—measures ratio of loan balance to estimated property value based upon third party appraisal.
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We continue to believe there is an underserved mortgage market for borrowers with good credit who may not meet
the qualified mortgage (QM) guidelines set out by the Consumer Financial Protection Bureau. During the first quarter of
2020, prior to the disruption caused by the pandemic, we originated $261.6 million in NonQM loans and were on pace to
exceed our fourth quarter 2019 NonQM originations. As financial markets became dislocated in March 2020, spreads
widened substantially on credit assets due to COVID-19 pandemic related payment delinquencies and forbearances,
causing a severe decline in the values assigned by investors and counterparties for NonQM assets. The dislocation in the
NonQM market diminished capital market distribution exits, increased the cost and liquidity to finance the product and
reduced the ability to finance additional NonQM loans. As a result, we paused NonQM originations in April 2020.
The third quarter of 2020 saw the re-emergence of the NonQM market including capital markets distribution exits
for the product. We re-engaged lending in the NonQM market during the fourth quarter of 2020, and have continued
throughout 2021 rebuilding our TPO NonQM origination team in anticipation of increasing mortgage interest rates and
declining conventional margins. With the increase in mortgage interest rates and margin compression seen in conventional
originations in the first quarter of 2021, we accelerated our pivot to NonQM in both our TPO and Retail channels. During
the year ended December 31, 2021, NonQM originations increased to $683.6 million, or 24% of total originations, as
compared to $264.0 million, or 10% of total originations, for the year ended December 31, 2020. In the fourth quarter of
2021, our NonQM originations exceeded conventional originations for the first time since the first quarter of 2019, which
we expect to continue for the foreseeable future.
In 2021, our NonQM originations had a weighted average Fair Isaac Company credit score (FICO) of 747 and a
weighted average LTV ratio of 65%. In 2020, our NonQM originations had a weighted average FICO of 730 and a
weighted average LTV ratio of 68%. In 2021, the retail channel accounted for 28% of NonQM originations while the TPO
channels accounted for 72% of NonQM production. In 2020, the retail channel accounted for 22% of NonQM originations
while the TPO channels accounted for 78% of NonQM production.
We believe the quality, consistency and performance of our NonQM originations has been demonstrated through
the previous issuance of 21 securitizations since 2018, whereby our originations were represented as the largest originator
in over half of the deals and represented no less than the third largest originator in the other deals. Four of the 21
securitizations were 100% backed by Impac NonQM collateral with the senior tranches receiving AAA ratings.
For the year ended December 31, 2021, refinance volume was flat at $2.6 billion as compared to 2020. Our
purchase money transactions increased 96% to $291.5 million for the year ended December 31, 2021, as compared to
$148.4 million in 2020.
(in millions)
Refinance
Purchase
Total originations
For the Year Ended December 31,
2021
%
2020
%
$
$
2,611.9
291.5
2,903.4
90 % $
10
100 % $
2,598.5
148.4
2,746.9
95 %
5
100 %
As of December 31, 2021, we have approximately 581 approved wholesale relationships with mortgage brokerage
companies and are approved to lend in 47 states. While we currently have no approved correspondent relationships with
banks, credit unions and mortgage companies, we are approved to lend in 50 states and anticipate reengaging correspondent
lending in 2022, to further increase our NonQM footprint outside of California.
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Mortgage Servicing
The following table includes information about our mortgage servicing portfolio:
(in millions)
Ginnie Mae
Freddie Mac
Fannie Mae
Total servicing portfolio
Number of loans
Weighted average coupon
Weighted average FICO
Weighted average LTV
Avg. portfolio balance (in millions)
Avg. loan size (in thousands)
(1) Based on loan count.
At December 31,
2021
% 60+ days
delinquent (1)
At December 31,
2020
% 60+ days
delinquent (1)
$
$
$
$
71.8
—
—
71.8
136
2.55%
742
82.1%
53.0
528.2
0.74 % $
0.00
0.00
0.74 % $
$
$
30.5
—
—
30.5
50
2.61%
738
85.0%
1,633.0
610.5
2.00 %
0.00
0.00
2.00 %
At December 31 2021, the mortgage servicing portfolio increased to $71.8 million as compared to $30.5 million at
December 31, 2020. We continue to sell whole loan sales on a servicing released basis to investors and selectively retain
GNMA mortgage servicing. The servicing portfolio generated net servicing expense of $ (0.4) thousand for the year ended
December 31, 2021, as compared to net servicing fees of $3.6 million for the year ended December 31, 2020, as a result of
the previous servicing sales in the second and third quarters of 2020 as well as portfolio runoff caused by the decrease in
mortgage interest rates. Despite the increase in UPB of the servicing portfolio during 2021, we continue to recognize a
servicing expense related to interim subservicing and other servicing costs due to the small UPB of our servicing portfolio.
Delinquencies within the servicing portfolio were 0.74% for 60+ days delinquent as of December 31, 2021 as
compared to 2.0% as of December 31, 2020. The decrease was the result of the small UPB of GNMA servicing we
retained during the year ended December 31, 2021.
Real Estate Services
We provide portfolio loss mitigation and real estate services including real estate owned (REO) surveillance and
disposition services, default surveillance and loss recovery services, short sale and real estate brokerage services, portfolio
monitoring and reporting services. The source of revenue for this segment is primarily from the long-term mortgage
portfolio, along with a small number of third party clients as well.
As the long-term mortgage portfolio continues to decline, we expect real estate services and the related revenues
to decline. For the year ended December 31, 2021, the real estate services segment posted a net loss of $265 thousand as
compared to a net loss of $173 thousand for the year ended December 31, 2020.
Long-Term Mortgage Portfolio
The long-term mortgage portfolio primarily includes (a) the residual interests in securitizations, (b) master
servicing rights from the securitizations and (c) long-term debt.
Although we have seen some stabilization and improvement in defaults, the portfolio is expected to continue to
suffer losses and may continue for the foreseeable future. Such losses have been included in estimating the fair value of the
related securitized mortgage collateral and borrowings.
For the year ended December 31, 2021, our residual interest in securitizations (represented by the difference
between total trust assets and total trust liabilities) generated cash flows of $3.1 million as compared to $2.1 million for the
year ended December 31, 2020. The increase in cash flows from our residual interest in securitizations during 2021 was
due to the historically low interest rate environment which has allowed for an increase in excess spread to be remitted to the
residual holder and an increase in prepayments which have paid off older vintage bonds as well as cure over-
collateralization deficiencies in certain trusts. At December 31, 2021, our residual interest in securitizations (represented
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Table of Contents
by the difference between total trust assets and total trust liabilities) increased to $27.9 million compared to $16.7 million at
December 31, 2020. The increase in residual fair value at December 31, 2021 was the result of a decrease in investor yield
requirements for certain securitized mortgage collateral and borrowings, as well as residual discount rates, as estimated
bond prices have continued to improve and corresponding yields have decreased.
For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of
Operations below.
Corporate
The corporate segment includes all corporate services groups, public company costs as well as debt expense
related to the Convertible Notes and capital leases. This corporate services group supports all operating segments. A
portion of the corporate services costs are allocated to the operating segments. The costs associated with being a public
company, unused space for growth as well as the interest expense related to the Convertible Notes and capital leases is not
allocated to our operating segments and remains in this segment.
For additional information regarding the corporate segment refer to Results of Operations by Business Segment
below.
Critical Accounting Policies
We define critical accounting policies as those that are important to the portrayal of our financial condition and
results of operations. Our critical accounting policies require management to make difficult and complex judgments that
rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions
and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with
respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We
believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly
susceptible to significant change to our financial condition and results of operations include the following:
● fair value measurements;
● variable interest entities and transfers of financial assets and liabilities;
● repurchase reserve;
● interest income and interest expense; and
● income taxes.
Fair Value Measurements
Financial Accounting Standards Board—Accounting Standards Codification FASB ASC 820-10-35 defines fair
value, establishes a framework for measuring fair value and outlines a fair value hierarchy based on the inputs to valuation
techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit
price). Fair value measurements are categorized into a three-level hierarchy based on the extent to which the measurement
relies on observable market inputs in measuring fair value. Level 1, which is the highest priority in the fair value hierarchy,
is based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 is based on observable
market-based inputs, other than quoted prices, in active markets for similar assets or liabilities. Level 3, which is the lowest
priority in the fair value hierarchy, is based on unobservable inputs. Assets and liabilities are classified within this hierarchy
in their entirety based on the lowest level of any input that is significant to the fair value measurement.
The use of fair value to measure our financial instruments is fundamental to our financial statements and is a
critical accounting estimate because a substantial portion of our assets and liabilities are recorded at estimated fair value.
Financial instruments classified as Level 3 are generally based on unobservable inputs, and the process to determine fair
value is generally more subjective and involves a high degree of management judgment and assumptions. These
assumptions may have a significant effect on our estimates of fair value, and the use of different assumptions, as well as
changes in market conditions and interest rates, could have a material effect on our results of operations or financial
condition.
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Mortgage loans held-for-sale—We elected to carry our mortgage loans held-for-sale originated or acquired from
the mortgage lending operation at fair value. Fair value is based on quoted market prices, where available, prices for other
traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market
participants.
Mortgage servicing rights—We elected to carry all of our mortgage servicing rights arising from our mortgage
lending operation at fair value. The fair value of mortgage servicing rights is based upon a discounted cash flow model.
The valuation model incorporates assumptions that market participants would use in estimating the fair value of servicing.
These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings,
contractual servicing fee income, prepayment and late fees, among other considerations.
Derivative financial instruments—We utilize certain derivative instruments in the ordinary course of our business
to manage our exposure to changes in interest rates. These derivative instruments include to-be-announced MBS and
forward loan sale commitments (TBA MBS or Hedging Instruments). We also issue interest rate lock commitments
(IRLCs) to borrowers in connection with single family mortgage loan originations. We recognize all derivative instruments
at fair value. The concept of fair value relating to IRLCs is no different than fair value for any other financial asset or
liability: fair value is the price at which an orderly transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market conditions. Because IRLCs do not trade in the
market, the Company determines the estimated fair value based on expectations of what an investor would pay to acquire
the Company’s IRLCs, which utilizes current market information for secondary market prices for underlying loan types
with similar characteristics using the TBA MBS market, which is actively quoted and easily validated through external
sources. The data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate,
loan program, and expected sale date of the loan, adjusted for current market conditions. These valuations are adjusted at
the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs,
the base value is then adjusted for the anticipated current secondary market prices for underlying loans and estimated
servicing value with similar coupons, maturities and credit quality, subject to the anticipated loan funding probability (Pull
through Rate). This value is adjusted for other costs that would be required by a market participant acquiring the IRLCs.
The fair value of the Hedging Instruments is based on the actively quoted TBA MBS market using observable inputs
related to characteristics of the underlying MBS stratified by product, coupon and settlement date and are recorded in other
liabilities in the consolidated balance sheets. The initial and subsequent changes in value of IRLCs and forward sale
commitments are a component of gain on sale of loans, net in the consolidated statements of operations and comprehensive
loss.
Long-term debt—Long-term debt (consisting of junior subordinated notes) is reported at fair value within the
long-term mortgage portfolio. These securities are measured based upon an analysis prepared by management, which
utilizes a discounted cash flow analysis which takes into consideration our credit risk. Unrealized gains and losses are
recognized in earnings in the accompanying consolidated statements of operations and comprehensive loss as change in fair
value of long-term debt. Our estimate of the fair value of the long-term debt requires us to exercise significant judgment as
to the timing and amount of the future obligation. Changes in assumptions resulting from changes in our credit risk profile
will affect the estimated fair value of the long-term debt and those changes are recorded as a component of net earnings. A
change in assumptions associated with the improvement in our credit risk profile could result in a significant increase in the
estimated fair value of the long-term debt which would result in a significant charge to net earnings.
Variable Interest Entities and Transfers of Financial Assets and Liabilities
Historically, we securitized mortgages in the form of collateralized mortgage obligations (CMO) and real estate
mortgage investment conduits (REMICs), (collectively, securitizations), which were either consolidated or unconsolidated
depending on the design of the securitization structure. These securitizations are evaluated for consolidation in accordance
with the variable interest model of FASB ASC 810-10-25. A variable interest entity (VIE) is consolidated in the financial
statements if the Company has the power to direct activities that most significantly impact the economic performance of the
VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant
to the VIE. We consolidate certain VIEs where we are both the primary beneficiary of the residual interests in the
securitization trusts as well as the master servicer. Being the master servicer provides control over the collateral through
the ability to direct the servicers to take specific loss mitigation efforts. The assets and liabilities that are included in the
consolidated VIEs include the mortgage loans and real estate owned collateralizing the debt securities which are included
in securitized mortgage trust assets on our consolidated balance sheets and the debt securities payable to investors which
are included in securitized mortgage trust liabilities on our accompanying consolidated balance sheets.
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Table of Contents
For consolidated securitizations that are structured as secured borrowings, we recognize interest income over the
life of the securitized mortgage collateral and interest expense incurred for the securitized mortgage borrowings.
Investors in the securities issued by the securitization trust have no recourse to our non-securitized assets or to us
and have no ability to require us to provide additional assets, but rather have recourse only to the assets transferred to the
trust.
Repurchase Reserve
When we sell loans through whole loan sales we are required to make normal and customary representations and
warranties about the loans to the purchaser. Our whole loan sale agreements generally require us to repurchase loans if we
breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a
result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale.
Investors may request us to repurchase loans or to indemnify them against losses on certain loans which the
investors believe either do not comply with applicable representations or warranties or defaulted shortly after its purchase.
Upon completion of our investigation regarding the investor claims, we may reject the investor claim, repurchase or
provide indemnification on certain loans, as appropriate. We maintain a liability reserve for expected losses on dispositions
of loans expected to be repurchased or on which indemnification is expected to be provided. We regularly evaluate the
adequacy of this repurchase liability reserve based on trends in repurchase and indemnification requests, actual loss
experience, settlement negotiations, and other relevant factors including economic conditions.
We record a provision for losses relating to such representations and warranties as part of each loan sale
transaction. The method used to estimate the liability for representations and warranties is a function of the representations
and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and
loan repurchase rates and the potential severity of loss in the event of defaults and the probability of reimbursement by the
correspondent loan seller. We establish a liability at the time loans are sold and continually update our estimated repurchase
liability. The level of the repurchase liability for representations and warranties is difficult to estimate and requires
considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors,
investor demand strategies, and other external conditions that may change over the lives of the underlying loans.
Interest Income and Interest Expense
Interest income on securitized mortgage collateral and interest expense on securitized mortgage borrowings are
recorded using the effective interest method for the period based on the previous quarter-end’s estimated fair value. Interest
expense on long-term debt is recorded using the effective interest method based on estimated future interest rates and cash
flows.
Income Taxes
Provision for income taxes is calculated using the asset and liability method, which requires the recognition of
deferred income taxes. Deferred tax assets and liabilities are recognized and reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes and certain changes in the valuation allowance. Deferred tax assets are recognized subject to
management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax
asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset
will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. We
provide a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In determining the adequacy of the valuation allowance,
we consider all forms of evidence, including: (1) historic earnings or losses; (2) the ability to realize deferred tax assets
through carry back to prior periods; (3) anticipated taxable income resulting from the reversal of taxable temporary
differences; (4) tax planning strategies; and (5) anticipated future earnings exclusive of the reversal of taxable temporary
differences.
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Financial Condition and Results of Operations
Financial Condition
For the years ended December 31, 2021 and 2020
The following table shows the condensed consolidated balance sheets for the following periods:
(in thousands, except per share data)
ASSETS
Cash
Restricted cash
Mortgage loans held-for-sale
Mortgage servicing rights
Securitized mortgage trust assets
Other assets
Total assets
LIABILITIES & EQUITY
Warehouse borrowings
Convertible notes
Long-term debt (Par value; $62,000)
Securitized mortgage trust liabilities
Repurchase reserve
Other liabilities
Total liabilities
Total equity
Total liabilities and stockholders’ equity
Book and tangible book value per share
December 31, December 31,
2021
2020
$
Change
%
Change
$
$
$
$
$
29,555
5,657
308,477
749
1,642,730
35,603
2,022,771
285,539
20,000
46,536
1,614,862
4,744
41,154
2,012,835
9,936
2,022,771
0.47
$
$
$
$
$
54,150
5,602
164,422
339
2,103,269
41,524
2,369,306
151,932
20,000
44,413
2,086,557
7,054
43,699
2,353,655
15,651
2,369,306
0.74
$
$
$
$
$
(24,595)
55
144,055
410
(460,539)
(5,921)
(346,535)
133,607
—
2,123
(471,695)
(2,310)
(2,545)
(340,820)
(5,715)
(346,535)
(45)%
1
88
121
(22)
(14)
(15)%
88 %
—
5
(23)
(33)
(6)
(14)
(37)
(15)%
(0.27)
(37)%
At December 31, 2021, cash decreased to $29.6 million from $54.2 million at December 31, 2020. Cash balances
decreased primarily due to payment of operating expenses as well as an increase in warehouse line haircuts due to an
increase in warehouse borrowings.
Mortgage loans held-for-sale increased $144.1 million to $308.5 million at December 31, 2021 as compared to
$164.4 million at December 31, 2020. During the year ended December 31, 2021, we had originations of $2.9 billion offset
by $2.8 billion in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any
period are generally sold within one or two subsequent months.
Mortgage servicing rights increased $410 thousand to $749 thousand at December 31, 2021 as compared to
$339 thousand at December 31, 2020. The increase was due to additions of $536 thousand from servicing retained loan
sales of $51.7 million in UPB. At December 31, 2021, we serviced $71.8 million in UPB for others as compared to
$30.5 million at December 31, 2020.
Warehouse borrowings increased $133.6 million to $285.5 million at December 31, 2021 as compared to
$151.9 million at December 31, 2020. The increase was due to a $144.1 million increase in mortgage loans held-for-sale at
December 31, 2021 as compared to December 31, 2020. During 2021, we increased our warehouse lending capacity by
$65 million to $615.0 million and increased our warehouse counterparties from three to four as a result of the increase in
NonQM origination volumes.
Repurchase reserve decreased $2.3 million to $4.7 million at December 31, 2021 as compared to $7.1 million at
December 31, 2020. The decrease was due to $2.4 million in settlements primarily related to repurchased loans and
indemnifications partially offset by $111 thousand increase in provision for repurchases as a result of an increase in
originations.
Book value per share decreased 37% to $0.47 at December 31, 2021 as compared to $0.74 at December 31, 2020.
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Book value per common share decreased 15% to ($1.96) as of December 31, 2021, as compared to ($1.70) as of
December 31, 2020 (inclusive of the remaining $51.8 million of liquidation preference on our preferred stock). Inclusive
of the Preferred B stock cumulative undeclared dividends in arrears of $19.1 million (as discussed further in Note 13 –
Commitments and Contingencies of the “Notes to Consolidated Financial Statements”), book value per common share was
($2.86) as of December 31, 2021.
The changes in our trust assets and trust liabilities as summarized below.
Securitized mortgage collateral
Real estate owned (REO)
Total trust assets (1)
December 31, December 31,
2021
$ 1,639,251
3,479
1,642,730
2020
$ 2,100,175
3,094
2,103,269
Securitized mortgage borrowings
Total trust liabilities (1)
Residual interests in securitizations
$ 1,614,862
1,614,862
27,868
$
$ 2,086,557
2,086,557
16,712
$
$
Change
(460,924)
385
(460,539)
(471,695)
(471,695)
11,156
$
$
$
%
Change
(22)%
12
(22)
(23)%
(23)
67 %
(1) At December 31, 2021, the UPB of trust assets and trust liabilities was approximately $1.8 billion and $1.7 billion, respectively. At December 31,
2020, the UPB of trust assets and trust liabilities was approximately $2.5 billion and $2.4 billion, respectively.
Since the consolidated securitization trusts are nonrecourse to us, trust assets and liabilities have been netted in the
table above to present our interest in these trusts more simply, which are considered the residual interests in securitizations.
The residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by
the fair value of securitized mortgage borrowings. We receive cash flows from our residual interests in securitizations to the
extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels
and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair
value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities,
was $27.9 million at December 31, 2021 compared to $16.7 million at December 31, 2020. The increase in residual fair
value at December 31, 2021 was the result of a decrease in investor yield requirements for certain securitized mortgage
collateral and borrowings, as well as residual discount rates, as estimated bond prices have continued to improve and
corresponding yields have decreased.
We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss
experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on
information derived from market participants. During the year ended December 31, 2021, actual losses declined as
compared to forecasted losses for the majority of trusts, including those with residual value. Principal payments,
prepayments and liquidations of securitized mortgage collateral and securitized mortgage borrowings also contributed to
the reduction in trust assets and liabilities.
● The estimated fair value of securitized mortgage collateral decreased $460.9 million during 2021 primarily due to
reductions in principal from borrower payments and transfers of loans to REO for single-family and multi-family
collateral. Additionally, other trust assets increased $385 thousand during the year ended December 31, 2021,
primarily due to a $8.0 million increase in REO from foreclosures as well as a $111 thousand increase in the net
realizable value (NRV) of REO. Partially offsetting the increase in REO was a decrease of $7.7 million in REO
from liquidations.
● The estimated fair value of securitized mortgage borrowings decreased $471.7 million during 2021 primarily due
to reductions in principal balances from principal payments during the period for single-family and multi-family
collateral partially offset by an increase in loss assumptions.
Prior to 2008, we securitized mortgage loans by transferring originated and acquired residential single-family
mortgage loans and multi-family commercial loans (the “transferred assets”) into non-recourse bankruptcy remote trusts
which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the
assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their
bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the
residual interest in each trust, and in most cases would perform the master servicing function. A trustee and sub-servicer,
38
Table of Contents
unrelated to us, was utilized for each securitization. Cash flows from the loans (the loan payments as well as liquidation of
foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master
servicer remits payments to the trustee who remits payments to the bondholders (investors). The sub-servicer collects loan
payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties
securing defaulted loans, which results in REO. Our real estate services segment also performs loss mitigation activities for
loans within the portfolio.
For the trusts we consolidate, the loans are included in the consolidated balance sheets as “securitized mortgage
trust assets”, the foreclosed loans are included in the consolidated balance sheets as “real estate owned” and the various
bond tranches owned by investors are included in the consolidated balance sheets as “securitized mortgage trust liabilities.”
To the extent there is excess overcollateralization (as defined in the securitization agreements) in these securitization trusts,
we receive cash flows from the excess interest collected monthly from the residual interest we own. Because (i) we elected
the fair value option on the securitized mortgage collateral, securitized mortgage borrowings, and (ii) real estate owned is
reflected at NRV, which closely approximates fair market value, the net of the trust assets and trust liabilities represents the
estimated fair value of the residual interests we own.
To estimate fair value of the assets and liabilities within the securitization trusts each reporting period,
management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real
estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal
process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes
referred to as “curves,” for defaults, loss severity, interest rates (LIBOR, which is currently available for periods beyond
2021, however there is a likelihood that this information will be replaced with the Secured Overnight Financing Rate
(SOFR) in the near future) and prepayments are input into the valuation model for each securitization trust. We hire third-
party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations.
Management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using
other information gathered from the mortgage and real estate market (i.e., third party home price indices, published
industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default
and foreclosure information for each trust from the respective trustees.
We use the valuation model to generate the expected cash flows to be collected from the trust assets and the
expected required bondholder distribution (trust liabilities). To the extent that the trusts are over collateralized, we may
receive the excess interest as the holder of the residual interest. The information above provides us with the future expected
cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings, and the residual
interests.
To determine the discount rates to apply to these cash flows, we gather information from the bond pricing services
and other market participants regarding estimated investor required yields for each bond tranche. Based on that information
and the collateral type and vintage, we determine an acceptable range of expected yields an investor would require
including an appropriate risk premium for each bond tranche. We use the blended yield of the bond tranches together with
the residual interests to determine an appropriate yield for the securitized mortgage collateral in each securitization.
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Table of Contents
The following table presents changes in the trust assets and trust liabilities for the year ended December 31, 2021:
Recorded fair value at December 31, 2020
Total gains/(losses) included in earnings:
Interest income
Interest expense
Change in FV of net trust assets, excluding REO (1)
Gains from REO – not at FV but at NRV (2)
Total gains (losses) included in earnings
Transfers in and/or out of level 3
Purchases, issuances and settlements
Recorded fair value at December 31, 2021
TRUST ASSETS
TRUST LIABILITIES
Level 3 Recurring Fair
Value Measurement
Securitized
mortgage
collateral
$
2,100,175
NRV
Real
estate
owned
$ 3,094
Level 3 Recurring Fair
Value Measurement
Securitized
mortgage
borrowings
Net
trust
assets
$
(2,086,557) $ 16,712
Total trust
assets
$ 2,103,269
(12,162)
151,759
139,597
—
—
—
—
—
—
111
111
—
274
$ 3,479
(12,162)
—
151,759
111
139,708
—
$
(600,521)
1,639,251
(600,247)
$ 1,642,730
$
—
(37,090)
(145,288)
— (12,162)
(37,090)
6,471
111
(42,670)
—
53,826
(1,614,862) $ 27,868
(182,378)
654,073
—
(1) Represents change in fair value of net trust assets, including trust REO gains in the consolidated statements of operations and
comprehensive loss for the year ended December 31, 2021.
(2) Accounted for at net realizable value.
Inclusive of gains from REO, total trust assets above reflect a net gain of $151.9 million as a result of an increase
in fair value from securitized mortgage collateral of $151.8 million coupled with gains from REO of $111 thousand. Net
losses on trust liabilities were $145.3 million as a result of the increase in fair value of securitized mortgage borrowings. As
a result, other income, change in fair value of net trust assets, including trust REO gains (losses) increased by $6.6 million
for the year ended December 31, 2021.
The table below reflects the net trust assets as a percentage of total trust assets (residual interests in
securitizations):
Net trust assets
Total trust assets
Net trust assets as a percentage of total trust assets
December 31,
2021
27,868
1,642,730
$
December 31,
2020
16,712
2,103,269
$
1.70 %
0.79 %
For the year ended December 31, 2021, the estimated fair value of the net trust assets increased as a percentage of
total trust assets as result of decreased the investor yield requirements for certain securitized mortgage collateral and
borrowings, as well as residual discount rates, as estimated bond prices have continued to improve and corresponding
yields have decreased.
Since the consolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual
interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to
present these residual interests more simply. Our residual interests in securitizations are segregated between our single-
family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust
assets and trust liabilities.
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The following tables present the estimated fair value of our residual interests by securitization vintage year and
other related assumptions used to derive these values at December 31, 2021 and December 31, 2020:
Origination Year
2002-2003 (1)
2004
2005
2006
Total
Estimated Fair Value of Residual
Interests by Vintage Year at
December 31, 2021
MF
Estimated Fair Value of Residual
Interests by Vintage Year at
December 31, 2020
MF
Total
$
SF
$ 13,167
7,661
851
—
$
$ 21,679
722
736
442
4,289
6,189
15.3 %
11.6 %
Total
$ 13,889
8,397
1,293
4,289
$ 27,868
$
$
SF
8,575
2,654
58
—
$
$ 11,287
15.4 %
11.7 %
10.1 %
17.4 %
524
775
68
4,058
5,425
13.3 %
18.0 %
$
9,099
3,429
126
4,058
$ 16,712
10.3 %
17.6 %
Weighted avg. prepayment rate
Weighted avg. discount rate
15.4 %
11.8 %
(1)
2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this
period.
We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and
residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral
prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for
securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash
flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the
residual interests. However, we use different investor yields (discount rates) assumptions for securitized mortgage collateral
and securitized mortgage borrowings and the discount rates used for residual interests based on underlying collateral
characteristics, vintage year, assumed risk and market participant assumptions.
At December 31, 2021, total weighted averaged prepayment assumptions increased 50% to 15.4% from 10.3% at
December 31, 2020, as a result of the historically low interest rate environment, which resulted in collateral runoff of 27%
during the year. At December 31, 2021, total weighted average discount rate decreased 34% to 11.7% from 17.6% at
December 31, 2020, as a result of continued improvement in bond prices resulting in a corresponding reduction in yields.
The table below reflects the estimated future credit losses and investor yield requirements for trust assets by
product (SF and MF) and securitization vintage at December 31, 2021:
2002-2003
2004
2005
2006
2007
Estimated Future
Losses (1)
SF
MF
Investor Yield
Requirement (2)
MF
SF
5 %
8
8
9
3
* % (3)
* (3)
* (3)
* (3)
* (3)
5 %
3
2
3
5
8 %
3
3
5
3
(1) Estimated future losses derived by dividing future projected losses by unpaid principal balances at December 31, 2021.
(2)
Investor yield requirements represent our estimate of the yield third-party market participants would require to price our trust assets
and liabilities given our prepayment, credit loss and forward interest rate assumptions.
(3) Represents less than 1%.
Long-Term Mortgage Portfolio Credit Quality
We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required
payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a
payment was received. Delinquencies for loans 60 days late or greater, foreclosures and delinquent bankruptcies were
$310.5 million or 17.3% of the long-term mortgage portfolio as of December 31, 2021, as compared to $514.0 million or
20.9% as of December 31, 2020.
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Table of Contents
The following table summarizes the unpaid principal balances of loans in our mortgage portfolio, included within
securitized mortgage collateral, that were 60 or more days delinquent (utilizing the MBA method) as of the periods
indicated:
Securitized mortgage collateral
60 - 89 days delinquent
90 or more days delinquent
Foreclosures (1)
Delinquent bankruptcies (2)
Total 60 or more days delinquent
Total collateral
December 31,
2021
Total
Collateral
December 31,
2020
Total
Collateral
$
21,086
147,387
89,181
52,854
$
310,508
$ 1,798,079
47,483
1.2 % $
290,621
8.2
126,802
5.0
49,069
2.9
17.3 % $
513,975
100.0 % $ 2,454,657
1.9 %
11.8
5.2
2.0
20.9 %
100.0 %
(1) Represents properties in the process of foreclosure.
(2) Represents bankruptcies that are 30 days or more delinquent.
At December 31, 2021, mortgage loans 60 or more days delinquent (whether or not subject to forbearance)
declined 40% as compared to December 31, 2020. Delinquency and forbearance are taken into account as part of our credit
loss assumptions when determining the estimated fair value of our residual interests. At December 31, 2021, residential
loss assumptions for certain trusts decreased as compared to December 31, 2020. To the extent delinquencies and loans in
forbearance increase in deals with residual fair value, the estimated fair value of our residual interests may decrease due to
a reduction or delay in the timing of estimated cash flows.
The following table summarizes the UPB of securitized mortgage collateral, mortgage loans held-for-sale and real
estate owned, that were non-performing as of the dates indicated (excludes 60-89 days delinquent):
90 or more days delinquent (including
forbearances),
foreclosures and delinquent bankruptcies
Real estate owned inside and outside trusts
Total non-performing assets
December 31,
2021
Total
Collateral
%
December 31,
2020
Total
Collateral
%
$
$
289,422
3,479
292,901
16.1 % $
0.2
16.3 % $
466,492
3,173
469,665
19.0 %
0.1
19.1 %
Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including
loans in foreclosure and delinquent bankruptcies plus REO). It is our policy to place a mortgage loan on nonaccrual status
when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on
securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to
advance principal and interest on loans within the securitization trusts to the extent the advances are considered
recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause the
loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the
status of their mortgages. As of December 31, 2021, non-performing assets as a percentage of the total collateral was
16.3%. At December 31, 2020, non-performing assets to total collateral was 19.1%. Non-performing assets decreased by
approximately $176.8 million at December 31, 2021 as compared December 31, 2020. At December 31, 2021, the
estimated fair value of non-performing assets was $101.7 million or 5.0% of total assets. At December 31, 2020, the
estimated fair value of non-performing assets was $135.0 million or 5.7% of total assets.
REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net
realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are
included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the
time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in
the consolidated statements of operations and comprehensive loss.
For the year ended December 31, 2021, we recorded a $111 thousand increase in net realizable value of the REO
compared to an increase of $7.4 million for the comparable 2020 period. Increases and write-downs of the net realizable
value reflect increases or declines in value of the REO subsequent to foreclosure date, but prior to the date of
42
Table of Contents
sale.
The following table presents the balances of the REO:
REO
Impairment (1)
Ending balance
REO inside trusts
REO outside trusts
Total
$
$
$
$
December 31,
2021
December 31,
2020
$
10,335
(6,856)
3,479
3,479
$
$
—
$
3,479
10,140
(6,967)
3,173
3,094
79
3,173
(1)
Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.
In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future
losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into
consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data
is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance.
The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both
the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the
loans based on their attributes (e.g., original loan-to-value, borrower credit score, documentation type, geographic location,
etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss
severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that
analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages
with similar characteristics is an appropriate methodology in which to evaluate the future loan losses.
Management recognizes that there are qualitative factors that must be taken into consideration when evaluating
and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect
the borrower’s ability to pay, changes in value of collateral, political factors, employment and market conditions,
competitor’s performance, market perception, historical losses, COVID-19 pandemic and industry statistics. The
assessment for losses is based on delinquency trends and prior loss experience and management’s judgment and
assumptions regarding various matters, including general economic conditions and loan portfolio composition.
Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent
losses.
Results of Operations
For the year ended December 31, 2021 as compared to 2020
Revenues (losses)
Expenses
Net interest income
Change in fair value of long-term debt
Change in fair value of net trust assets, including trust REO
gains
Income tax expense
Net loss
Loss per share available to common stockholders—basic
Loss per share available to common stockholders—diluted
43
For the Year Ended December 31,
2021
66,319
(81,204)
2,398
2,098
$
2020
(8,092)
(81,273)
5,137
1,899
6,582
(71)
(3,878)
(0.22)
(0.22)
(5,688)
(133)
$ (88,150)
(4.15)
$
(4.15)
$
$
$
$
$
$
Change
%
Change
$
$
$
$
74,411
69
(2,739)
199
12,270
62
84,272
3.93
3.93
920 %
0
(53)
10
216
47
96 %
95 %
95 %
Table of Contents
Revenues
Gain on sale of loans, net
Servicing (expenses) fees, net
Real estate services fees, net
Gain (loss) on mortgage servicing rights, net
Other revenues
Total revenues (losses)
2021
$ 65,294
(432)
1,144
34
279
$ 66,319
For the Year Ended December 31,
$
2020
$ 14,004
3,603
1,312
(28,509)
1,498
(8,092) $
$
$
Change
%
Change
51,290
(4,035)
(168)
28,543
(1,219)
74,411
366 %
(112)
(13)
100
(81)
920 %
Gain on sale of loans, net. For the year ended December 31, 2021, gain on sale of loans, net totaled $65.3 million
compared to $14.0 million in the comparable 2020 period. The increase in gain on sale of loans, net was most notably due
to a $22.0 million increase in gain on sale of loans, a $19.4 million increase in mark-to-market gains on LHFS, a $8.9
million decrease in realized and unrealized net losses on derivative financial instruments and a $5.1 million decrease in
provision for repurchases. Partially offsetting the increase in gain on sale of loans, net was a $2.6 million increase in direct
origination expenses and a $1.6 million decrease in premiums from servicing retained loan sales.
As previously discussed, for the year ended December 31, 2021, the increase in gain on sale of loans, net was the
result of our temporary suspension of lending activities during the second quarter of 2020 due to the uncertainty caused by
the pandemic. The uncertainty and corresponding temporary suspension of lending activities resulted in a substantial
remarking of our NonQM loan portfolio held-for-sale as a result of credit spreads widening substantially due to potential
pandemic related payment delinquencies and forbearances, which caused a severe decline in the values assigned by
counterparties for NonQM assets. For the year ended December 31, 2021, we originated and sold $2.9 billion and $2.8
billion of loans, respectively, as compared to $2.7 billion and $3.3 billion of loans originated and sold, respectively, during
the same period in 2020. During the year ended December 31, 2021, margins increased to approximately 225 bps as
compared to 51 bps for the same period in 2020 as a result the aforementioned uncertainty caused by the pandemic.
Servicing (expenses) fees, net. For the year ended December 31, 2021, servicing expenses was $(0.4) million
compared to servicing fees, net of $3.6 million in the comparable 2020 period. The decrease in servicing fees, net was the
result of the sale of $4.2 billion in UPB of Freddie Mac and GNMA MSRs, in the second and third quarters of 2020. In
addition, the substantial decrease in mortgage interest rates during 2020 caused a significant increase in runoff of our
mortgage servicing portfolio which combined with the servicing sales decreased the servicing portfolio average balance
97% to $51.2 million for the year ended December 31, 2021 as compared to an average balance of $1.6 billion for the
comparable period in 2020. As a result of the servicing sales in the second and third quarters of 2020, we will continue to
recognize a servicing expense related to interim subservicing and other servicing costs related to the small UPB of
remaining servicing portfolio. For the years ended December 31, 2021 and 2020, we had $51.7 million and $223.7
million, respectively, in servicing retained loan sales.
Gain (loss) on mortgage servicing rights, net.
Gain (loss) on sale of mortgage servicing rights
Changes in fair value:
Due to changes in valuation market rates, inputs or assumptions
Other changes in fair value:
Scheduled principal prepayments
Voluntary prepayments
Total changes in fair value
Gain (loss) on mortgage servicing rights, net
For the Year Ended December 31,
2021
$
160
2020
$ (6,547)
$
Change
%
Change
$
6,707
102 %
61
(17,682)
17,743
100
(48)
(139)
(126)
(500)
(3,780)
$ (21,962)
452
3,641
$ 21,836
90
96
99
34
$ (28,509)
$ 28,543
100 %
$
$
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Table of Contents
The year over year reduction in loss on mortgage servicing rights, net was primarily due to the aforementioned
servicing sales during the second and third quarters of 2020. For the year ended December 31, 2021, gain on MSRs, net
was $34 thousand compared to a loss of $28.5 million in the comparable 2020 period. For the year ended
December 31, 2021, we recorded a $126 thousand loss from change in fair value of MSRs due to voluntary and scheduled
prepayments partially offset by an increase in fair value changes associated with changes in market interest rates, inputs
and assumptions. For the year ended December 31, 2020, we recorded a $22.0 million loss from change in fair value of
MSRs primarily due to prepayments, with $17.7 million due to an increase in prepayment speed assumptions and $3.8
million due to voluntary prepayments. Additionally, during the year ended December 31, 2021, we recorded a $160
thousand gain on mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved
for amounts on prior period mortgage servicing sales. During the year ended December 31, 2020, we recorded a net loss of
$6.5 million on the aforementioned loan servicing sales.
Real estate services fees, net. For the year ended December 31, 2021, real estate services fees, net were $1.1
million compared to $1.3 million in the comparable 2020 period. The $0.2 million decrease was primarily the result of a
decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as
compared to 2020. We expect the real estate services fee, net to continue to decline as the long-term mortgage portfolio
declines in size.
Other revenues. For the year ended December 31, 2021, other revenues were $280 thousand as compared to $1.5
million in the comparable 2020 period. The $1.2 million decrease in other revenues was primarily the result of a decrease
in the cash surrender value associated with the corporate-owned life insurance trusts as compared to 2020, as a result of the
payment of premiums. In addition, other revenues declined $133 thousand as a result of a reduction in contract
underwriting which was performed during the second and third quarters of 2020 during our pause in lending.
Expenses
Personnel expense
General, administrative and other
Business promotion
Total expenses
For the Year Ended December 31,
2021
52,778
21,031
7,395
81,204
$
$
2020
52,880
24,534
3,859
81,273
$
$
$
Change
$
$
(102)
(3,503)
3,536
(69)
%
Change
(0)%
(14)
92
(0)%
Total expenses decreased slightly to $81.2 million for the year ended December 31, 2021 compared to
$81.3 million for the comparable period 2020. Personnel expense decreased $102 thousand to $52.8 million for the year
ended December 31, 2021 as compared to the same period in 2020. We continue to expand our NonQM platform as well as
balance the industry wide escalation in cost of production and operational talent as we manage our headcount, pipeline and
capacity to balance the risks inherent in an aggregation execution model. As a result, average headcount increased 1% for
the year ended December 31, 2021 as compared to the same period in 2020. Personnel expense decreased to 182 bps of
funding’s during the year ended December 31, 2021 as compared to 193 bps for the comparable 2020 period.
General, administrative and other expenses decreased to $21.0 million for the year ended December 31, 2021
compared to $24.5 million for the same period in 2020. The decrease in general, administrative and other expenses was
primarily due to a $1.4 million decrease in premiums associated with the corporate-owned life insurance trusts liability, a
$1.0 million decrease in other various general and administrative expenses, an $889 thousand decrease in legal and
professional fees, a $724 thousand decrease in occupancy expense partially due to right of use (ROU) asset impairment
during the first quarter of 2020 and a reduction in occupancy expense associated with the vacated space. Partially
offsetting these decreases in general, administrative and other expenses was a $499 thousand increase in insurance expense.
Business promotion increased $3.5 million to $7.4 million for the year ended December 31, 2021 compared to
$3.9 million for the comparable period in 2020. Business promotion had remained low as a result of the interest rate
environment which required significantly less business promotion to source leads. Beginning in second quarter of 2021,
we began to increase our marketing expenditures in an effort to target NonQM production in the retail channel, continue to
expand production outside of California and maintain our lead volume as competition increased. Although we continue to
source leads through digital campaigns, which allows for a more cost effective approach, the competitiveness within the
California market has driven up advertising costs.
45
Table of Contents
Other Income
Interest income
Interest expense
Net interest income
Change in fair value of long-term debt
Change in fair value of net trust assets, including trust REO gains
Total other income
Net Interest Income
For the Year Ended December 31,
2021
65,666
(63,268)
2,398
2,098
6,582
11,078
$
$
2020
118,908
(113,771)
5,137
1,899
(5,688)
1,348
$
$
We earn net interest income primarily from mortgage assets which include securitized mortgage collateral and
loans held-for-sale, or collectively, “mortgage assets,” and, to a lesser extent, interest income earned on cash and cash
equivalents. Interest expense is primarily interest paid on borrowings secured by mortgage assets, which include securitized
mortgage borrowings and warehouse borrowings and, to a lesser extent, interest expense paid on long-term debt,
Convertible Notes, MSR Financing and corporate owned life insurance trusts. Interest income and interest expense during
the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities.
The following tables summarize average balance, interest and weighted average yield on interest-earning assets
and interest-bearing liabilities, for the periods indicated.
ASSETS
Securitized mortgage collateral
Mortgage loans held-for-sale
Other
Total interest-earning assets
LIABILITIES
Securitized mortgage borrowings
Warehouse borrowings
MSR financing facilities
Long-term debt
Convertible notes
Other
Total interest-bearing liabilities
Net interest spread (1)
Net interest margin (2)
For the Year Ended December 31,
2021
2020
Average
Balance
Interest
Yield
Average
Balance
Interest
Yield
$ 1,872,153
199,796
44,376
$ 2,116,325
$ 59,022
6,634
10
$ 65,666
3.15 % $ 2,281,574
275,874
3.32
0.02
51,243
3.10 % $ 2,608,691
$ 106,959
11,837
112
$ 118,908
$ 1,856,869
191,794
—
45,534
20,000
12,779
$ 2,126,976
$ 50,897
6,543
—
3,965
1,404
459
$ 63,268
2,398
$
2.74 % $ 2,269,727
252,565
3.41
3,014
—
42,825
8.71
24,241
7.02
8,942
3.59
2.97 % $ 2,601,314
0.13 %
0.11 %
$ 98,030
9,444
119
3,797
1,982
399
$ 113,771
5,137
$
4.69 %
4.29
0.22
4.56 %
4.32 %
3.74
3.95
8.87
8.18
4.46
4.37 %
0.19 %
0.20 %
(1) Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average
yield on interest-earning assets.
(2) Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.
Net interest spread decreased $2.7 million for the year ended December 31, 2021, primarily attributable to a
decrease in the net interest spread between loans held-for-sale and their related warehouse borrowings (a negative spread of
9 bps for the years ended December 31, 2021 as compared to a positive spread of 55 bps for the same period in the prior
year), an increase in interest expense on the corporate-owned life insurance trusts (within other liabilities), a decrease in the
net interest spread income on the securitized mortgage collateral and securitized mortgage borrowings and an increase in
interest expense on the long-term debt. Offsetting the decrease in net interest spread income was a decrease in interest
expense on the Convertible Notes and MSR financing facilities. As a result, net interest margin decreased to 0.11% for the
year ended December 31, 2021 as compared to 0.20% for the year ended December 31, 2020.
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During the year ended December 31, 2021, the yield on interest-earning assets decreased to 3.10% from 4.56% in
the comparable 2020 period. The yield on interest-bearing liabilities decreased to 2.97% for the year ended
December 31, 2021 from 4.37% for the comparable 2020 period. In connection with the fair value accounting for
securitized mortgage collateral, borrowings and long-term debt, interest income and interest expense are recognized using
effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage
collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which
resulted in a decrease in yield as compared to the previous period.
Change in the fair value of long-term debt
Long-term debt (consisting of junior subordinated notes) is measured based upon an internal analysis which
considers our own credit risk and discounted cash flow analyses. Improvements in our financial results and financial
condition in the future could result in additional increases in the estimated fair value of the long-term debt, while
deterioration in financial results and financial condition could result in a decrease in the estimated fair value of the long-
term debt.
During 2021, the fair value of long-term debt increased by $2.1 million to $46.5 million from $44.4 million at
December 31, 2020. The increase in estimated fair value was the result of a $2.7 million change in the instrument specific
credit risk and a $1.5 million increase due to accretion, partially offset by a $2.1 million change in the market specific
credit risk as a result of an increase in the risk free rate component of the discount rate as compared to 2020.
During 2020, the fair value of long-term debt decreased by $1.0 million to $44.4 million from $45.4 million at
December 31, 2019. The decrease in estimated fair value was the result of a $1.9 million change in the market specific
credit risk as a result of a decrease in the forward LIBOR partially offset by a $28 thousand change in the instrument
specific credit risk and a $850 thousand increase due to accretion.
Change in fair value of net trust assets, including trust REO gains
Change in fair value of net trust assets, excluding REO
Gains from REO
Change in fair value of net trust assets, including trust REO gains
For the Year Ended
December 31,
2021
$
$
6,471 $
111
6,582
$
2020
(13,081)
7,393
(5,688)
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $6.6
million for the year ended December 31, 2021. The change in fair value of net trust assets, excluding trust REO was due to
$6.5 million in gains from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a
result of a decrease in residual discount rates as estimated bond prices have continued to improve and corresponding yields
have decreased. Additionally, the NRV of REO increased $111 thousand during the period attributed to lower expected loss
severities on properties within certain states held in the long-term mortgage portfolio during the period.
The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $5.7
million for the year ended December 31, 2020. The change in fair value of net trust assets, excluding trust REO was due to
$13.1 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral
as a result of increases in loss assumptions on certain trusts during the period partially offset by a decrease in LIBOR
during 2020 as compared to 2019. These losses were partially offset by an increase in the NRV of REO of $7.4 million
during the period attributed to lower expected loss severities on properties within certain states held in the long-term
mortgage portfolio during the year ended December 31, 2020.
Income Taxes
We recorded income tax expense of $71 thousand and $133 thousand for the years ended December 31, 2021 and
2020, respectively. The income tax expense for the years ended December 31, 2021 and 2020, is primarily the result of
state income taxes from states where we do not have net operating loss (NOL) carryforwards or state minimum taxes.
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As of December 31, 2021, we had federal NOL carryforwards of $623.5 million. As of December 31, 2021, the
estimated Federal NOL carryforward expiration schedule is as follows (in millions):
Tax Year Established
12/31/2007
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021 (1)
Total Federal NOLs
Amount
166.9
3.6
101.6
89.7
44.1
—
28.5
—
30.5
55.0
37.7
—
3.3
47.8
14.8
623.5
$
$
Expiration Date
12/31/2027
12/31/2028
12/31/2029
12/31/2030
12/31/2031
12/31/2032
12/31/2033
12/31/2034
12/31/2035
12/31/2036
12/31/2037
n/a
n/a
n/a
n/a
(1) NOL amounts are estimates until the final tax returns are filed in October 2022. Additionally, any NOLs that are generated
subsequent to the enactment of the Tax Act on January 1, 2018, have an indefinite life.
As of December 31, 2021, we had California NOL carryforwards of $435.2 million, which begin to expire in
2028. We may not be able to realize the maximum benefit due to the nature and tax entities that holds the NOL.
Our deferred tax assets are primarily the result of net operating losses and basis differences on mortgage securities.
We have recorded a full valuation allowance against our deferred tax assets at December 31, 2021 as it is more likely than
not that the deferred tax assets will not be realized. The valuation allowance is based on the management's assessment that
it is more likely than not that certain deferred tax assets, primarily net operating loss carryforwards, may not be realized in
the foreseeable future due to objective negative evidence that we may not generate sufficient taxable income to realize the
deferred tax assets.
A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is
more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant
weight is given to evidence that can be objectively verified. In determining the adequacy of the valuation allowance, we
consider all forms of evidence, including: (1) historic earnings or losses; (2) the ability to realize deferred tax assets
through carry back to prior periods; (3) anticipated taxable income resulting from the reversal of taxable temporary
differences; (4) tax planning strategies; and (5) anticipated future earnings exclusive of the reversal of taxable temporary
differences.
We are subject to federal income taxes as a regular (Subchapter C) corporation and file a consolidated U.S. federal
income tax return.
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Results of Operations by Business Segment
We have three primary operating segments: Mortgage Lending, Real Estate Services and Long-Term Mortgage
Portfolio. Unallocated corporate and other administrative costs, including the cost associated with being a public company
as well as the interest expense related to the Convertible Notes and capital leases, are presented in Corporate. Segment
operating results are as follows:
Mortgage Lending
Condensed Statements of Operations Data
Gain on sale of loans, net
Servicing (expenses) fees, net
Gain (loss) on mortgage servicing rights, net
Total revenues (expenses)
Other income
Personnel expense
Business promotion
General, administrative and other
Earnings (loss) before income taxes
For the Year Ended December 31,
$
2021
65,294
(432)
34
64,896
2020
14,004
3,603
(28,509)
(10,902)
$
Change
%
Change
$
51,290
(4,035)
28,543
75,798
366 %
(112)
100
695
122
2,501
(2,379)
(95)
(46,656)
(7,386)
(8,563)
2,413
$
(46,445)
(3,845)
(10,579)
(69,270)
$
(211)
(3,541)
2,016
71,683
(0)
(92)
19
103 %
$
$
For the year ended December 31, 2021, gain on sale of loans, net totaled $65.3 million compared to $14.0 million
in the comparable 2020 period. The increase in gain on sale of loans, net was most notably due to a $22.0 million increase
in gain on sale of loans, a $19.4 million increase in mark-to-market gains on LHFS, a $8.9 million decrease in realized and
unrealized net losses on derivative financial instruments and a $5.1 million decrease in provision for repurchases. Partially
offsetting the increase in gain on sale of loans, net was a $2.6 million increase in direct origination expenses and a $1.6
million decrease in premiums from servicing retained loan sales.
As previously discussed, for the year ended December 31, 2021, the increase in gain on sale of loans, net was the
result of our temporary suspension of lending activities during the second quarter of 2020 due to the uncertainty caused by
the pandemic. The uncertainty and corresponding temporary suspension of lending activities resulted in a substantial
remarking of our NonQM loan portfolio held-for-sale as a result of credit spreads widening substantially due to potential
pandemic related payment delinquencies and forbearances, which caused a severe decline in the values assigned by
counterparties for NonQM assets. For the year ended December 31, 2021, we originated and sold $2.9 billion and $2.8
billion of loans, respectively, as compared to $2.7 billion and $3.3 billion of loans originated and sold, respectively, during
the same period in 2020. During the year ended December 31, 2021, margins increased to approximately 225 bps as
compared to 51 bps for the same period in 2020 as a result the aforementioned uncertainty caused by the pandemic.
For the year ended December 31, 2021, servicing expenses, net was $ (0.4) million compared to servicing fees, net
of $3.6 million in the comparable 2020 period. The decrease in servicing fees, net was the result of the sale of $4.2 billion
in UPB of Freddie Mac and GNMA MSRs, in the second and third quarters of 2020. In addition, the substantial decrease
in mortgage interest rates during 2020 caused a significant increase in runoff of our mortgage servicing portfolio which
combined with the servicing sales decreased the servicing portfolio average balance 97% to $51.2 million for the year
ended December 31, 2021 as compared to an average balance of $1.6 billion for the comparable period in 2020. As a result
of the servicing sales in the second and third quarters of 2020, we will continue to recognize a servicing expense related to
interim subservicing and other servicing costs related to the small UPB of remaining servicing portfolio. For the years
ended December 31, 2021 and 2020, we had $51.7 million and $223.7 million, respectively, in servicing retained loan
sales.
The year over year reduction in loss on mortgage servicing rights, net was due to losses on the aforementioned
servicing sales during the second and third quarters of 2020. For the year ended December 31, 2021, gain on MSRs, net
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Table of Contents
was $34 thousand compared to a loss of $28.5 million in the comparable 2020 period. For the year ended December 31,
2021, we recorded a $126 thousand loss from change in fair value of MSRs due to voluntary and scheduled prepayments
partially offset by an increase in fair value changes associated with changes in market interest rates, inputs and
assumptions. For the year ended December 31, 2020, we recorded a $22.0 million loss from change in fair value of MSRs
primarily due to prepayments, with $17.7 million due to an increase in prepayment speed assumptions and $3.8 million due
to voluntary prepayments. Additionally, during the year ended December 31, 2021, we recorded a $160 thousand gain on
mortgage servicing rights, net as a result of the collection of holdbacks in excess of previously reserved for amounts on
prior period mortgage servicing sales. During the year ended December 31, 2020, we recorded a net loss of $6.5 million on
the aforementioned loan servicing sales.
loans held-for-sale and
For the year ended December 31, 2021, other income decreased to $122 thousand as compared to $2.5 million in
the comparable 2020 period. The $2.4 million decrease in other income was primarily due to a $2.3 million decrease in net
interest spread between
the year ended
December 31, 2021 as compared to the comparable period in 2020. As a result of the low interest rate environment
throughout 2021, the base interest rates for most of our warehouse lines of credit hit their floor, which was greater than the
note rate on the underlying mortgage loan financed in most instances, resulting in negative spread on our financing for the
majority of the year. In addition, other income also decreased a $133 thousand due to a reduction in contract underwriting,
which was performed during the second and third quarters of 2020 during our pause in lending. Partially offsetting the
decrease in other income was a $119 thousand decrease in interest expense related to MSR financing as a result of the
aforementioned sale of our mortgage servicing portfolio in 2020.
their related warehouse borrowings during
Personnel expense decreased $211 thousand to $46.7 million for the year ended December 31, 2021 as compared
to the same period in 2020. We continue to expand our NonQM platform as well as balance the industry wide escalation in
cost of production and operational talent as we manage our headcount, pipeline and capacity to balance the risks inherent in
an aggregation execution model. As a result, average headcount increased 4% for the year ended December 31, 2021 as
compared to the same period in 2020. Personnel expense decreased to 161 bps of funding’s during the year ended
December 31, 2021 as compared to 169 bps for the comparable 2020 period.
Business promotion increased $3.5 million to $7.4 million for the year ended December 31, 2021 compared to
$3.9 million for the comparable period in 2020. Business promotion had remained low as a result of the interest rate
environment which required significantly less business promotion to source leads. Beginning in second quarter of 2021,
we began to increase our marketing expenditures in an effort to target NonQM production in the retail channel, continue to
expand production outside of California and maintain our lead volume as competition increased. Although we continue to
source leads through digital campaigns, which allows for a more cost effective approach, the competitiveness within the
California market has driven up advertising costs.
General, administrative and other expenses decreased to $8.6 million for the year ended December 31, 2021
compared to $10.6 million for the same period in 2020. The decrease in general, administrative and other expenses was
primarily due to a $1.3 million decrease in occupancy expense partially due to right of use (ROU) asset impairment during
the first quarter of 2020 as well as a reduction in occupancy expense associated with the vacated space and a $761 thousand
decrease in other various general and administrative expenses. Partially offsetting these decreases in general, administrative
and other expenses was a $74 thousand increase in legal and professional fees.
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Long-Term Mortgage Portfolio
Other revenue
Personnel expense
General, administrative and other
Total expenses
For the Year Ended December 31,
2021
2020
$
Change
%
Change
$
110
$
143 $
(33)
(23)%
(108)
(670)
(778)
(131)
(502)
(633)
23
(168)
(145)
18
(33)
(23)
Net interest income
Change in fair value of long-term debt
Change in fair value of net trust assets, including trust REO gains
Total other income
Earnings before income taxes
4,160
2,098
6,582
12,840
12,172
$
5,133
1,899
(5,688)
1,344
854
(973)
199
12,270
11,496
$ 11,318
$
(19)
10
216
855
1325 %
For the year ended December 31, 2021, net interest income totaled $4.2 million as compared to $5.1 million for
the comparable 2020 period. Net interest income decreased $973 thousand for the year ended December 31, 2021 primarily
attributable to a $804 thousand decrease in net interest spread on the long-term mortgage portfolio as previously discussed,
and a $168 thousand increase in interest expense on the long-term debt associated with an increase in interest expense
accretion.
During 2021, the fair value of long-term debt increased by $2.1 million to $46.5 million from $44.4 million at
December 31, 2020. The increase in estimated fair value was the result of a $2.7 million change in the instrument specific
credit risk and a $1.5 million increase due to accretion, partially offset by a $2.1 million change in the market specific
credit risk as a result of an increase in the risk free rate component of the discount rate as compared to 2020.
The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $6.6
million for the year ended December 31, 2021. The change in fair value of net trust assets, excluding trust REO was due to
$6.5 million in gains from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a
result of a decrease in residual discount rates as estimated bond prices have continued to improve and corresponding yields
have decreased. Additionally, the NRV of REO increased $111 thousand during the period attributed to lower expected loss
severities on properties within certain states held in the long-term mortgage portfolio during the period.
Real Estate Services
Real estate services fees, net
Personnel expense
General, administrative and other
Loss before income taxes
For the Year Ended December 31,
2021
1,144
(1,170)
(239)
(265)
$
$
2020
1,312
(1,151)
(334)
(173)
$
$
$
$
$
Change
%
Change
(168)
(19)
95
(92)
(13)%
(2)
28
(53)%
For the year ended December 31, 2021, real estate services fees, net were $1.1 million compared to $1.3 million in
the comparable 2020 period. The $168 thousand decrease in real estate services fees, net was primarily the result of a $297
thousand decrease in real estate service fees, partially offset by a $178 thousand increase in loss mitigation fees. Real
estate services fees, net have declined and will continue to decline over time as a result of the decline in the number of
loans and the UPB of the long-term mortgage portfolio.
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Corporate
Interest expense
Other expenses
Loss before income taxes
For the Year Ended December 31,
2021
(1,860)
(16,267)
(18,127)
$
$
2020
(2,362)
(17,066)
(19,428)
$
$
$
$
$
Change
%
Change
502
799
1,301
21 %
5
7 %
For the year ended December 31, 2021, interest expense decreased to $1.9 million as compared to $2.4 million in
the comparable 2020 period. The $502 thousand decrease in interest expense was primarily a $578 thousand decrease in
interest expense attributable to the convertible note extension entered into in 2020, partially offset by a $59 thousand
increase in interest expense associated with the premium financing associated with the corporate-owned life insurance
trusts liability.
For the year ended December 31, 2021, other expenses decreased to $16.3 million as compared to $17.1 million
for the comparable 2020 period. During the year ended December 31, 2021, the primary decrease in other expenses was a
$1.4 million decrease in premiums associated with the corporate-owned life insurance trusts liability as compared to the
same period in 2020 and a $1.2 million decrease in legal and professional fees and a $310 thousand decrease in personnel
expense. Partially offsetting these decreases was a $1.1 million reduction due to a decrease in the cash surrender value
associated with the corporate-owned life insurance trusts as compared to 2020 as a result of the payment of premiums, a
$620 thousand increase in occupancy expense, a $532 thousand increase in insurance expense and a $197 thousand
decrease in various other general and administrative expenses.
Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when
applicable, the retirement of our debt and margin calls relating to our Hedging Instruments and warehouse lines), fund new
originations and purchases, meet servicing and master servicing requirements, and make investments as we identify them.
As of December 31, 2021, unrestricted cash and cash equivalents were $29.6 million and uncommitted capacity under our
warehouse lines was $615.0 million of which $285.5 million was outstanding as of December 31, 2021. Although we
currently forecast adequate liquidity to operate our business, in the event we have to repay the $20.0 million in principal
amount of Convertible Notes at maturity with no additional added capital or liquidity, there would be a limited amount of
liquidity to operate our business. We may seek to raise secured or unsecured debt, raise equity or working capital,
monetize certain assets, including but not limited to our residual interests, retire or restructure the Convertible Notes which
mature on May 9, 2022, pursue actions to reorganize the capital structure or redeploy the alternative liquidity to fund the
future growth of our business.
Sources of Liquidity
During the year ended December 31, 2021, we funded our operations primarily from mortgage lending revenues
and, to a lesser extent, cash flows from our residual interests in securitizations and real estate services fees. Mortgage
lending revenues include gain on sale of loans, net, servicing (expenses) fees, net, and other mortgage related income. We
funded mortgage loan originations using warehouse facilities, which are repaid once the loan is sold.
Cash flows from our mortgage lending operations. We receive loan fees from loan originations. Fee income
consists of application and underwriting fees and fees on cancelled loans. These loan fees are offset by the related direct
loan origination costs including broker fees related to our wholesale and correspondent channels. In addition, we generally
recognize net interest income on loans held-for-sale from the date of origination through the date of disposition. We sell or
securitize substantially all of the loans we originate in the secondary mortgage market, with servicing rights released or
retained. Loans are sold on a whole loan basis by entering into sales transactions with third-party investors in which we
receive a premium for the loan and related servicing rights, if applicable. The mortgage lending operations sold $2.8 billion
and $3.3 billion of mortgages through whole loan sales and securitizations during 2021 and 2020, respectively.
Additionally, the mortgage lending operations enter into IRLCs and utilize Hedging Instruments and forward delivery
commitments to hedge interest rate risk. We may be subject to pair-off gains and losses associated with these instruments.
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Since we rely significantly upon loan sales to generate cash proceeds to repay warehouse borrowings and to create credit
availability, any disruption in our ability to complete loan sales may require us to utilize other sources of financing, which,
if available at all, may be on less favorable terms. In addition, delays in the disposition of our mortgage loans increase our
risk by exposing us to credit and interest rate risk for this extended period of time.
In May 2020, we completed the sale of $4.1 billion in UPB of Freddie Mac MSRs for approximately $20.1
million, receiving $15.0 million in proceeds upon sale, with the remaining received upon transfer of the servicing and
transfer of all trailing documents. The Company used the $15.0 million in proceeds from the MSR sale to pay off the MSR
financing. In July 2020, we sold the majority of the GNMA mortgage servicing for approximately $225 thousand.
We receive servicing income net of subservicing cost and other related servicing expenses from our mortgage
servicing portfolio. Servicing (expense) fees, net declined to an expense of $(432) thousand as a result of the servicing
portfolio decreasing to an average balance of $51.2 million for the year ended December 31, 2021 as compared to an
average balance of $1.6 billion for the comparable period in 2020. The decrease in servicing fees, net was the result of the
sale of substantially all of our servicing portfolio, $4.2 billion in UPB of Freddie Mac and GNMA MSRs, in the second and
third quarters of 2020. As a result of the servicing sales in the second and third quarters of 2020, we will continue to
recognize a servicing expense related to interim subservicing and other servicing costs related to the small UPB of
remaining servicing portfolio. For the years ended December 31, 2021 and 2020, we had $51.7 million and $223.7 million,
respectively, in servicing retained loan sales.
Cash flows from our long-term mortgage portfolio (residual interests in securitizations). We receive residual cash
flows on mortgages held as securitized mortgage collateral after distributions are made to investors on securitized mortgage
borrowings to the extent required credit enhancements are maintained and performance covenants are complied with for
credit ratings on the securitized mortgage borrowings. For the year ended December 31, 2021 and 2020, our residual
interests generated cash flows of $3.2 million and $2.1 million, respectively. These cash flows represent the difference
between principal and interest payments on the underlying mortgages and are affected by the following:
● servicing and master servicing fees paid;
● premiums paid to mortgage insurers;
● cash payments/receipts on derivatives;
● interest paid on securitized mortgage borrowings;
● principal payments and prepayments paid on securitized mortgage borrowings;
● overcollateralization requirements;
● actual losses, net of any gains incurred upon disposition of other real estate owned or acquired in settlement
of defaulted mortgages;
● unpaid interest shortfall; and
● basis risk shortfall.
Additionally, we act as the master servicer for mortgages included in our long-term mortgage portfolio, which
consists of CMO and REMIC securitizations. The master servicing fees we earn are generally 0.03% per annum (3 basis
points) on the declining principal balances of these mortgages plus interest income on cash held in custodial accounts until
remitted to investors, less any interest shortfall.
Fees from our real estate service business activities. We earn fees from various real estate business activities,
including loss mitigation, real estate disposition, monitoring and surveillance services and real estate brokerage. We
provide services to investors, servicers and individual borrowers primarily by focusing on loss mitigation and performance
of our long-term mortgage portfolio. Real estate services fees, net have declined and will continue to decline over time as a
result of the decline in the number of loans and the UPB of the long-term mortgage portfolio.
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Uses of Liquidity
Acquisition and origination of mortgage loans. For the year ended December 31, 2021 and 2020, the mortgage
lending operations originated or acquired $2.9 billion and $2.7 billion, respectively, of mortgage loans. When we originate
mortgage loans and draw on the warehouse lines, we must pledge eligible loan collateral and make a capital investment,
which is outstanding until we sell the loans. Initial capital invested in mortgage loans includes premiums paid when
mortgages are acquired and originated and our capital investment, or “haircut,” required upon financing, which is generally
determined by the type of collateral provided and the warehouse facility terms. The haircuts are normally recovered from
sales proceeds.
Investment in mortgage servicing rights. As part of our business plan, we have selectively invested in mortgage
servicing rights through the sale of mortgage loans on a servicing retained basis and to a lesser extent the purchase of MSR
pools. Beginning in 2020, we retained less servicing by doing more whole loan sales, servicing released. For the years
ended December 31, 2021 and 2020, we capitalized $536 thousand and $2.1 million in mortgage servicing rights,
respectively, from selling $51.7 million and $223.7 million, respectively, in loans with servicing retained.
Cash flows from financing facilities and other lending relationships. We primarily fund our mortgage originations
on a short-term basis through warehouse facilities with third-party lenders which are primarily with national and regional
banks. Our warehouse facilities are short-term borrowings which mature in less than one year. At December 31, 2021, the
warehouse facilities borrowing capacity amounted to $615.0 million, of which $285.5 million was outstanding. The
warehouse facilities are secured by and used to fund single-family residential mortgage loans until such loans are sold.
Under the terms of these warehouse lines, the Company is required to maintain various financial and other covenants.
These financial covenants include, but are not limited to, maintaining (i) minimum tangible net worth, (ii) minimum
liquidity, (iii) a maximum leverage ratio and (iv) pre-tax net income requirements. As of December 31, 2021, we were not
in compliance with certain warehouse lending related covenants, and received the necessary waivers. In order to mitigate
the liquidity risk associated with warehouse borrowings, we attempt to sell or securitize our mortgage loans expeditiously.
Our ability to meet liquidity requirements and the financing needs of our customers is subject to the renewal of our
warehouse facilities or obtaining other sources of financing, if required, including additional debt or equity from time to
time. Any decision our lenders or investors make to provide available financing to us in the future will depend upon a
number of factors, including:
● our compliance with the terms of existing warehouse lines and credit arrangements, including any financial
covenants;
● the ability to obtain waivers upon any noncompliance;
● our financial performance;
● industry and market trends in our various businesses;
● the general availability of, and rates applicable to, financing and investments;
● our lenders or investors resources and policies concerning loans and investments; and
● the relative attractiveness of alternative investment or lending opportunities.
Repurchase Reserve. When we sell loans through whole loan sales we are required to make normal and customary
representations and warranties about the loans to the purchaser. Our whole loan sale agreements generally require us to
repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to
repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale.
From time to time, investors have requested us to repurchase loans or to indemnify them against losses on certain
loans which the investors believe either do not comply with applicable representations or warranties or defaulted shortly
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after its purchase. We record an estimated reserve for these losses at the time the loan is sold, and adjust the reserve to
reflect the estimated loss.
Financing Activities
MSR Advance Financing. In April 2020, Ginnie Mae announced they revised and expanded their issuer assistance
program to provide financing to fund servicer advances through the PTAP. The PTAP funds advanced by Ginnie Mae bear
interest at a fixed rate that will apply to a given months pass-through assistance and will be posted on Ginnie Mae’s website
each month. The maturity date was the earlier of the seven months from the month the request and repayment agreement
was approved, or July 30, 2021. In July 2020, the outstanding PTAP funds were repaid. At December 31, 2021 and 2020,
the Company had no PTAP funds outstanding.
Long-term Debt (consisting of Junior Subordinated Notes). The Junior Subordinated Notes are redeemable at par
at any time with a stated maturity of March 2034 and require quarterly distributions at 3-month LIBOR plus 3.75% per
annum. At December 31, 2021, the interest rate was 3.96%. We are current on all interest payments. At
December 31, 2021, long-term debt had an outstanding principal balance of $62.0 million with an estimated fair value of
$46.5 million and is reflected on our consolidated balance sheets as long-term debt.
Convertible Notes. In May 2015, we issued $25.0 million Convertible Promissory Notes (Notes) to purchasers,
some of which are related parties. The Notes were originally due to mature on or before May 9, 2020 and accrue interest at
a rate of 7.5% per annum, paid quarterly.
Noteholders may convert all or a portion of the outstanding principal amount of the Notes into shares of the
Company’s common stock (Conversion Shares) at a rate of $21.50 per share, subject to adjustment for stock splits and
dividends (Conversion Price). The Company has the right to convert the entire outstanding principal of the Notes into
Conversion Shares at the Conversion Price if the market price per share of the common stock, as measured by the average
volume-weighted closing stock price per share of the common stock on the NYSE AMERICAN (or any other U.S. national
securities exchange then serving as the principal such exchange on which the shares of common stock are listed), reaches
the level of $30.10 for any twenty (20) trading days in any period of thirty (30) consecutive trading days after the Closing
Date (as defined in the Convertible Notes). Upon conversion of the Notes by the Company, the entire amount of accrued
and unpaid interest (and all other amounts owing) under the Notes are immediately due and payable. To the extent the
Company pays any cash dividends on its shares of common stock prior to conversion of the Notes, upon conversion of the
Notes, the noteholders will also receive such dividends on an as-converted basis of the Notes less the amount of interest
paid by the Company prior to such dividend.
On April 15, 2020, the Company amended and restated the outstanding Notes in the principal amount of $25.0
million originally issued in May 2015 pursuant to the terms of the Note Agreement between the Company and the
noteholders of the Notes. The Notes were amended to extend the maturity date by six months (until November 9, 2020) and
to reduce the interest rate on such Notes to 7.0% per annum. In connection with the issuance of the Amended Notes, the
Company issued to the noteholders of the Notes, warrants to purchase up to an aggregate of 212,649 shares of the
Company’s common stock at a cash exercise price of $2.97 per share. The relative fair value of the warrants were $244
thousand and recorded as debt discounts, which are accreted over the term of the warrants (October 2020), using an
effective interest rate of 8.9%. The warrants are exercisable commencing on October 16, 2020 and expire on April 15,
2025.
On October 28, 2020, the Company entered into agreements with certain holders of its Notes due November 9,
2020 in the aggregate principal amount of $25.0 million to further extend the maturity date of the Notes from November 9,
2020, by an additional 18-months to May 9, 2022 and to decrease the aggregate principal amount of the Notes to $20.0
million, following the pay-down of $5.0 million in principal of the Notes on November 9, 2020. The interest rate on the
Notes remains at 7.0% per annum. We are currently evaluating various options as to the appropriate settlement of the
Notes, which could include retiring or restructuring the Notes.
Operating activities. Net cash (used in) provided by operating activities was $(104.5) million for 2021 as
compared to $633.9 million for 2020, primarily due to the timing of originations and sales of loans held-for-sale between
2021 and 2020. During 2021 and 2020, the primary sources of cash in operating activities were cash received from fees
generated by our mortgage and real estate service business activities, cash received from mortgage lending and excess cash
flows from our residual interests in securitizations offset by operating expenses.
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Investing activities. Net cash provided by investing activities was $600.0 million for 2021 as compared to
$460.3 million for 2020. For 2021 and 2020, the primary source of cash from investing activities was provided by
principal repayments on our securitized mortgage collateral, the sale of mortgage servicing rights and proceeds from the
liquidation of REO.
Financing activities. Net cash used in financing activities was $520.0 million for 2021 as compared to $1.1 billion
for 2020. For 2021, significant uses of cash in financing activities were primarily for principal repayments on securitized
mortgage borrowings, partially offset by net borrowings against warehouse agreements. For 2020, significant uses of cash
in financing activities were primarily for principal repayments on securitized mortgage borrowings as well as repayments
of warehouse borrowings.
Inflation. The consolidated financial statements and corresponding notes to the consolidated financial statements
have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative purchasing power of money over time due to
inflation. For the years ended December 31, 2021 and 2020, inflation had no significant impact on our revenues or net
income. Almost all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates have a greater
effect on our performance than do the effects of general levels of inflation. Inflation affects our operations primarily
through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease
during periods of low inflation.
Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and
mortgage-related assets, as well as the broader financial markets and the general economy. Concerns over economic
recession, geopolitical issues, unemployment, the availability and cost of financing, the mortgage market and real estate
market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility
and uncertainty in the marketplace may make it more difficult for us to obtain financing or raise capital on favorable terms
or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing and
profitable and stable capital market distribution exits.
We originate loans which are intended to be eligible for sale to Fannie Mae, Freddie Mac, (together, the GSEs),
government insured or guaranteed loans, such as FHA, VA and USDA loans, and loans eligible for Ginnie Mae securities
issuance (collectively, the Agencies), in addition to other investors and counterparties (collectively, the Counterparties). It
is important for us to sell or securitize the loans we originate and, when doing so, maintain the option to also sell the related
MSRs associated with these loans. Prepayment speeds on loans generated through our retail direct channel have been a
concern for some investors dating back to 2016 which has resulted and could further result in adverse pricing or delays in
our ability to sell or securitize loans and related MSRs on a timely and profitable basis. During the fourth quarter of 2017,
Fannie Mae sufficiently limited the manner and volume for our deliveries of eligible loans such that we elected to cease
deliveries to them and we expanded our whole loan investor base for these loans. In 2019, with the creation of the uniform
mortgage-backed securities (UMBS) market, which was intended to improve liquidity and align prepayment speeds across
Fannie Mae and Freddie Mac securities, Freddie Mac raised concerns about the high prepayment speeds of our loans
generated through our retail direct channel. We have continued to expand our investor base and complete servicing
released loan sales to non-GSE whole loan investors and expect to continue to utilize these alternative exit strategies for
Fannie Mae and Freddie Mac eligible loans. In July 2020, we received notification from Freddie Mac that our eligibility to
sell whole loans to Freddie Mac was suspended, without cause. While we believe that the overall volume delivered under
purchase commitments to the GSEs was immaterial prior to the notification, we are committed to operating actively and in
good standing with our broad range of capital markets counterparties. We continue to take steps to manage our prepayment
speeds to be more consistent with our industry peers and to reestablish the full confidence and delivery mechanisms to our
investor base. We seek to satisfy the requirements as outlined by Freddie Mac to achieve reinstatement, while we continue
to satisfy our obligations on a timely basis to our other counterparties, as we have done without exception. Despite being in
a suspended status with Freddie Mac, we remain an approved originator and/or seller/servicer with the GSEs, Agencies and
Counterparties for agency, non-agency, and government insured or guaranteed loan programs.
We believe that current cash balances, cash flows from our mortgage lending operations, real estate services fees
generated from our long-term mortgage portfolio, availability on our warehouse lines of credit and residual interest cash
flows from our long-term mortgage portfolio are adequate for our current operating needs based on the current operating
environment. We are currently evaluating various options as to the appropriate settlement of the Notes due May 9, 2022.
This could include extending or restructuring the Notes, raising secured or unsecured debt, raising equity or working
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capital, or monetizing certain assets, including but not limited to the residual interests, and retiring the Notes or redeploying
the alternative liquidity to fund the future growth of our business.
We believe the mortgage and real estate services market is volatile, highly competitive and subject to increased
regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions and
other finance companies which operate in our market area as well as throughout the United States. We compete for loans
principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of
services we provide to borrowers, brokers and sellers. Additionally, performance of the long-term mortgage portfolio is
subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations
are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current
estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio.
While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-
term obligations is dependent upon many factors, particularly our ability to successfully operate our mortgage lending and
real estate services segment and realize cash flows from the long-term mortgage portfolio. Our future financial performance
and profitability are dependent in large part upon the ability to expand our mortgage lending platform successfully.
Operational and Market Risks
We are exposed to a variety of operation and market risks which include interest rate risk, credit risk, operational
risk, real estate risk, prepayment risk, and liquidity risk.
Interest Rate Risk
Interest Rate Risk—Mortgage Lending. We are exposed to interest rate risks relating to our ongoing mortgage
lending operations. We use derivative instruments to manage some of our interest rate risk. However, we do not attempt to
hedge interest rate risk completely. Our interest rate risk arises from the financial instruments and positions we hold. This
includes mortgage loans held-for-sale, MSRs and derivative financial instruments. These risks are regularly monitored by
executive management that identify and manage the sensitivity of earnings or capital to changing interest rates to achieve
our overall financial objectives.
Our principal market exposure is to interest rate risk, specifically changes in long-term Treasury rates and
mortgage interest rates due to their impact on mortgage-related assets and commitments. We are also exposed to changes in
short-term interest rates, such as LIBOR, on certain variable rate borrowings including our term financing and mortgage
warehouse borrowings. The withdrawal and replacement of LIBOR with an alternative benchmark rate may introduce a
number of risks for our business and the financial services industry. While cessation timelines have been agreed by the
industry and regulatory authorities, we continue to assess how the discontinuation of existing benchmark rates could
materially affect our business, financial condition and results of operations. Refer to “Risk Factors” for additional
discussion regarding risks associated with the replacement of LIBOR.
Our business is subject to variability in results of operations in both the mortgage origination and mortgage
servicing activities due to fluctuations in interest rates. In a declining interest rate environment, we would expect our
mortgage production activities’ results of operations to be positively impacted by higher loan origination volumes and gain
on sale margins. Furthermore, with declining rates, we would expect the market value of our MSRs to decline due to higher
actual and projected loan prepayments related to our loan servicing portfolio. Conversely, in a rising interest rate
environment, we would expect a negative impact on the results of operations of our mortgage production activities but a
positive impact on the market values of our MSRs. The interaction between the results of operations of our mortgage
activities is a core component of our overall interest rate risk strategy.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest
rate shifts on MSRs. The primary assumptions in this model are prepayment speeds, discount rates, costs of servicing and
default rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the
benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS,
swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. We use a forward yield
curve, which we believe better presents fair value of MSRs because the forward yield curve is the market’s expectation of
future interest rates based on its expectation of inflation and other economic conditions.
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Interest rate lock commitments (IRLCs) represent an agreement to extend credit to a mortgage loan applicant, or
an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding.
Our mortgage loans held-for-sale, which are held in inventory awaiting sale into the secondary market, and our interest rate
lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of
the loan into the secondary market. As such, we are exposed to interest rate risk and related price risk during the period
from the date of the lock commitment through the earlier of (i) the lock commitment cancellation or expiration date; or
(ii) the date of sale into the secondary mortgage market. Loan commitments generally range between 15 and 60 days; and
our holding period of the mortgage loan from funding to sale is typically within 15 - 45 days for agency loans and 45 – 75
days for NonQM loans.
We manage the interest rate risk associated with our outstanding IRLCs and mortgage loans held-for-sale by
entering into derivative loan instruments such as forward loan sales commitments or To-Be-Announced mortgage backed
securities (TBA Forward Commitments). We expect these derivatives will experience changes in fair value opposite to
changes in fair value of the derivative IRLCs and mortgage loans held-for-sale, thereby reducing earnings volatility. We
take into account various factors and strategies in determining the portion of the mortgage pipeline (derivative loan
commitments) and mortgage loans held-for-sale we want to economically hedge. Our expectation of how many of our
IRLCs will ultimately close is a key factor in determining the notional amount of derivatives used in hedging the position.
Mortgage loans held-for-sale are financed by our warehouse lines of credit which generally carry variable rates.
Mortgage loans held-for-sale are carried on our consolidated balance sheets on average for only 15 to 45 days after closing
and prior to being sold. As a result, we believe that any negative impact related to our variable rate warehouse borrowings
resulting from a shift in market interest rates would not be material to our consolidated financial statements.
Interest Rate Risk—Securitized Trusts and Long-term Debt. Our earnings from the long-term mortgage portfolio
depend largely on our interest rate spread, represented by the relationship between the yield on our interest-earning assets
(primarily securitized mortgage collateral) and the cost of our interest-bearing liabilities (primarily securitized mortgage
borrowings and long-term debt). Our interest rate spread is impacted by several factors, including general economic factors,
forward interest rates and the credit quality of mortgage loans in the long-term mortgage portfolio.
The residual interests in our long-term mortgage portfolio are sensitive to changes in interest rates on securitized
mortgage collateral and the related securitized mortgage borrowings as any reduction in interest rate spread could result in
a reduction in residual cash flows received. Changes in interest rates can affect the cash flows and fair values of our trust
assets and liabilities, as well as our earnings and stockholders’ equity.
We are also subject to interest rate risk on our long-term debt (consisting of junior subordinated notes). These
interest bearing liabilities include adjustable rate periods based on three-month LIBOR plus a margin (junior subordinated
notes). We do not currently hedge our exposure to the effect of changing interest rates related to these interest-bearing
liabilities. Significant fluctuations in interest rates could have a material adverse effect on our business, financial condition,
results of operations or liquidity.
Credit Risk
We are subject to credit risk in connection with our loan sale transactions. We provide representations and
warranties to purchasers and insurers of the loans sold that typically are in place for the life of the loan. In the event of a
breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the
purchaser, and any subsequent loss on the mortgage loan may be borne by us unless we have recourse to our correspondent
seller.
We maintain a reserve for losses on loans repurchased or indemnified as a result of breaches of representations and
warranties on our sold loans. Our estimate is based on our most recent data regarding loan repurchases and indemnity
payments, actual losses on repurchased loans, and recovery history, among other factors. Our assumptions are affected by
factors both internal and external in nature. Internal factors include, among other things, level of loan sales, the expectation
of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to
recover any losses from third parties. External factors that may affect our estimate includes, among other things, the overall
economic condition in the housing market, the economic condition of borrowers, the political environment at investor
agencies and the overall U.S. and world economy. Many of the factors are beyond our control and may lead to judgments
that are susceptible to change.
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Counterparty Credit Risk. We are exposed to counterparty credit risk in the event of non-performance by
counterparties to various agreements. In general, we manage such risk by selecting only counterparties that we believe to
be financially strong and disperse risk among multiple counterparties when possible. We monitor our counterparties and
currently do not anticipate losses due to counterparty non-performance. As of December 31, 2021, we believe there were
no significant concentrations of credit risk related to our exposure with any individual counterparty.
Credit Risk-Securitized Trusts. We manage credit risk by actively managing delinquencies and defaults through
our servicers. Starting with the second half of 2007, we have not retained any additional mortgages in our long-term
mortgage portfolio. Our securitized mortgage collateral primarily consists of non-conforming mortgages which when
originated were generally within typical Fannie Mae and Freddie Mac guidelines but had loan characteristics, which may
have included higher loan balances, higher loan-to-value ratios or lower documentation requirements (including stated-
income loans), that made them non-conforming under those guidelines.
Using historical losses, current portfolio statistics and market conditions and available market data, we have
estimated future loan losses on the long- term mortgage portfolio, which are included in the fair value adjustment to our
securitized mortgage collateral. The credit performance for the loans has been clearly far worse than our initial expectations
when the loans were originated. We have seen some restoration of real estate values, however the ultimate level of realized
losses will largely be influenced by local real estate conditions in areas where underlying properties are located, including
the recovery of the housing market and overall strength of the economy. If market conditions deteriorate in excess of our
expectations, we may need to recognize additional fair value reductions to our securitized mortgage collateral, which may
also affect the value of the related securitized mortgage borrowings and residual interests.
We monitor our servicers to attempt to ensure that they perform loss mitigation, foreclosure and collection
functions according to their servicing practices and each securitization trust’s pooling and servicing agreement. We have
met with the management of our servicers to assess our borrowers’ current ability to pay their mortgages and to make
arrangements with selected delinquent borrowers which will result in the best interest of the trust and borrower, in an effort
to minimize the number of mortgages which become seriously delinquent. When resolving delinquent mortgages, servicers
are required to take timely action. The servicer is required to determine payment collection under various circumstances,
which will result in the maximum financial benefit. This is accomplished by either working with the borrower to bring the
mortgage current by modifying the loan with terms that will maximize the recovery or by foreclosing and liquidating the
property. At a foreclosure sale, the trusts consolidated on our consolidated balance sheets generally acquire title to the
property.
Operational Risk
Operational risk is inherent in our business practices and related support functions. Operational risk is the risk of
loss resulting from inadequate or failed internal processes or systems, human factors or external events. Operational risk
may occur in any of our business activities and can manifest itself in various ways including, but not limited to, errors
resulting from business process failures, material disruption in business activities, system breaches and misuse of sensitive
information and failures of outsourced business processes. These events could result in non-compliance with laws or
regulations, regulatory fines and penalties, litigation or other financial losses, including potential losses resulting from lost
client relationships.
Our business is subject to extensive regulation by federal, state and local government authorities, which require us
to operate in accordance with various laws, regulations, and judicial and administrative decisions. While we are not a bank,
our business subjects us to both direct and indirect banking supervision (including examinations by our clients' regulators),
and each client may require a unique compliance model. In recent years, there have been a number of developments in laws
and regulations that have required, and will likely continue to require, widespread changes to our business. The frequent
introduction of new rules, changes to the interpretation or application of existing rules, increased focus of regulators, and
near-zero defect performance expectations have increased our operational risk related to compliance with laws and
regulations.
Our operational risk includes managing risks relating to information systems and information security. As a
service provider, we actively utilize technology and information systems to operate our business and support business
development. We also must safeguard the confidential personal information of our customers, as well as the confidential
personal information of the employees and customers of our clients. We consider industry best practices to manage our
technology risk, and we continually develop and enhance the controls, processes and systems to protect our information
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systems and data from unauthorized access.
To monitor and control this risk, we have established policies, procedures and a controls framework that are
designed to provide sound and consistent risk management processes and transparent operational risk reporting.
Real Estate Risk
Residential property values are subject to volatility and may be negatively affected by numerous factors,
including, but not limited to, national, regional and local economic conditions such as unemployment and interest rate
environment; local real estate conditions including housing inventory and foreclosures; and demographic factors. Decreases
in property values reduce the value of the collateral securing and the potential proceeds available to a borrower to repay our
loans, which could cause us to suffer losses.
Prepayment Risk
Prepayment speed is a measurement of how quickly UPB is reduced. Items reducing UPB include normal monthly
loan principal payments, loan refinancing’s, voluntary property sales and involuntary property sales such as foreclosures or
short sales. Prepayment speed impacts future servicing fees, fair value of mortgage servicing rights and float income. When
prepayment speed increases, our servicing fees decrease faster than projected due to the shortened life of a portfolio. Faster
prepayment speeds will cause our mortgage servicing rights fair value to decrease.
We historically used prepayment penalties as a method of partially mitigating prepayment risk for those borrowers
that have the ability to refinance. The historically low interest rate environment, availability of credit and home price
appreciation has increased borrower’s ability to refinance and has significantly increased prepayment speeds within the
long-term mortgage portfolio. With the seasoning of the long-term mortgage portfolio, prepayment penalty terms have
expired, thereby eliminating prepayment penalty income.
Liquidity Risk
We are exposed to liquidity risks relating to our ongoing mortgage lending operations. We primarily fund our
mortgage lending originations through warehouse facilities with third-party lenders. Refer to “Liquidity and Capital
Resources” for additional information regarding liquidity.
Off Balance Sheet Arrangements
When we sell or broker loans through whole-loan sales, we are required to make normal and customary
representations and warranties to the loan originators or purchasers, including guarantees against early payment defaults
typically 90 days, and fraudulent misrepresentations by the borrowers. Our agreements generally require us to repurchase
loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase
loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. Because the
loans are no longer on our consolidated balance sheets, the representations and warranties are considered a guarantee.
During 2021 and 2020, we sold $2.8 billion and $3.3 billion, respectively, of loans subject to representations and
warranties. At December 31, 2021, we had $4.7 million in repurchase reserve as compared to a reserve of $7.1 million as of
December 31, 2020.
See disclosures in the notes to the consolidated financial statements under “Commitments and Contingencies” for
other arrangements that qualify as off balance sheets arrangements.
Contractual Obligations
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to Impac Mortgage Holdings, Inc.’s
Consolidated Financial Statements and Independent Auditors’ 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
The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted
under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
The Company’s management, with the participation of its chief executive officer (CEO) and its principal financial
officer (PFO), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based on
that evaluation, the Company’s CEO and PFO concluded that, as of that date, the Company’s disclosure controls and
procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
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 Exchange Act). Internal control over financial reporting is a
process designed by, or under the supervision of, the Company’s CEO and PFO to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Company’s financial statements for reporting purposes in
accordance with accounting principles generally accepted in the United States of America 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 dispositions 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’s assets that could have a material effect on the financial statements.
As of December 31, 2021, management conducted an assessment of the effectiveness of the Company’s internal
control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO). Based on the
criteria established by COSO, management concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2021.
Our management, including our CEO and PFO, does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
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breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by improper management override of the controls. Over time,
controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with
associated policies or procedures. Because of the inherent limitations in a cost-effective control system, there is a risk that
material misstatements due to error or fraud may occur and will not be detected on a timely basis.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2021, there were no changes in our internal control over financial
reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.’s fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.’s fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 including Equity Compensation Plan Information is hereby incorporated
by reference to Impac Mortgage Holdings, Inc.’s definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of Impac Mortgage Holdings, Inc.’s fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.’s fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.’s fiscal year.
62
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)(1) Financial Statements - Consolidated financial statements are included under Item 8 of Part II of this Form 10-K.
(a)(2) Financial Statement Schedules - All financial statement schedules have been omitted either because they are not
applicable or because the required information is included in the consolidated financial statements.
(a)(3) Exhibits - The exhibits listed on the accompanying Exhibit Index are incorporated by reference into this Item 15 of
this Annual Report on Form 10-K.
Exhibit
Number
Description
3.1(P)
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)
Articles of Amendment and Restatement (Charter) of the Company (incorporated by reference to the corresponding
exhibit number to the Company’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 to the Company’s Charter (incorporated by reference to Exhibit 3.1(a) of the Company’s 10-K
filed with the Securities and Exchange Commission on March 16, 1999).
Articles of Amendment to the Company’s Charter to correct certain sections of Article VII (Restriction Transfer and
Redemption of Shares) (incorporated by reference to Exhibit 3.1(b) of the Company’s 10-K filed with the Securities and
Exchange Commission on March 16, 1999).
Articles of Amendment to the Company’s Charter for change of name of the Company (incorporated by reference to
Exhibit 3.1(a) of the Company’s Current Report on Form 8-K/A Amendment No. 1, filed with the Securities and Exchange
Commission on February 12, 1998).
Articles of Amendment to the Company’s Charter, increasing authorized shares of Common Stock of the Company
(incorporated by reference to Exhibit 10 of the Company’s Form 8-A/A, Amendment No. 2, filed with the Securities and
Exchange Commission on July 30, 2002).
Articles of Amendment to the Company’s Charter, amending and restating Article VII [Restriction or Transfer, Acquisition
and Redemption of Shares] (incorporated by reference to Exhibit 7 of the Company’s Form 8-A/A, Amendment No. 1,
filed with the Securities and Exchange Commission on June 30, 2004).
Articles Supplementary to Company’s Charter designating 9.375 percent Series B Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 per share, par value $0.01 per share, (incorporated by reference to Exhibit 3.8 of the
Company’s Form 8-A/A, Amendment No. 1, filed with the Securities and Exchange Commission on June 30, 2004).
Articles Supplementary to Company’s Charter designating 9.125 percent Series C Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 per share, par value $0.01 per share, (incorporated by reference to Exhibit 3.10 of the
Company’s Form 8-A filed with the Securities and Exchange Commission on November 19, 2004).
Articles of Amendment to the Company’s Charter, effecting 1-for-10 reverse stock split (incorporated by reference to
Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 30, 2008).
Articles of Amendment to the Company’s Charter, to decrease Common Stock par value (incorporated by reference to
Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 30, 2008).
RESERVED
Articles of Amendment to the Company’s Charter, to amend and restate Series C Preferred Stock (incorporated by
reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 30, 2009).
63
Table of Contents
Exhibit
Number
3.1(l)
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1(a)
10.2
10.2(a)
10.3*
10.3(a)*
10.3(b)*
10.3(c)*
10.4*
10.4(a)*
10.5
10.6
Description
Articles Supplementary to the Company’s Charter to reclassify and designate Series A-1 Junior Participating Preferred
Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 4, 2013).
Amended and Restated Bylaws, as amended to date (incorporated by reference from Exhibit 3.2 the Company’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2020).
Form of Stock Certificate of the Company (incorporated by reference to the corresponding exhibit number to the
Company’s Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the Securities and Exchange
Commission on September 7, 1995).
Junior Subordinated Indenture between Impac Mortgage Holdings, Inc. and The Bank of New York Mellon Trust
Company, National Association, as Trustee, related to Junior Subordinated Note due 2034 in the principal amount of
$30,244,000 (incorporated by reference to exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 10, 2019).
Junior Subordinated Indenture between Impac Mortgage Holdings, Inc. and The Bank of New York Mellon Trust
Company, National Association, as Trustee, related to Junior Subordinated Note due 2034 in the principal amount of
$31,756,000 (incorporated by reference to exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 10, 2019).
Tax Benefits Preservation Rights Agreement dated as of October 23, 2019 by and between Impac Mortgage Holdings, Inc.
and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by referenced to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 23, 2019).
Description of Impac Mortgage Holdings, Inc. securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended.
Form of Warrant, dated April 15, 2020 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on
Form 8-k filed with the Securities and Exchange Commission on April 16, 2020)
Form of 2018 Indemnification Agreement with Officers and Directors (incorporated by reference to Exhibit 10.3 of the
Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2018).
Lease dated March 1, 2005 regarding 19500 Jamboree Road, Irvine, California (incorporated by reference to Exhibit 10.8
of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2005).
Amendment to Office Lease (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 28, 2016).
Impac Mortgage Holdings, Inc. 2010 Omnibus Incentive Plan, (as amended) (incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 26, 2019).
Form of Notice of Grant of Incentive/Non Qualified Stock Option Award Agreement for 2010 Omnibus Incentive Plan
(incorporated by reference to Exhibit 99.6 of the Company’s Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on September 10, 2010).
Form of Notice of Grant of Restricted Stock Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to
Exhibit 99.7 of the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on
September 10, 2010).
Form of Stock Option Agreement for 2001 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by
reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 9, 2004).
Non-Employee Director Deferred Stock Unit Award Program (incorporated by reference to Exhibit 10.6 of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2010).
Form of Notice of Grant Under Non-Employee Director Deferred Stock Unit Award Program (incorporated by reference
to Exhibit 10.6(a) of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 31, 2011).
RESERVED
Note Purchase Agreement, dated as of May 8, 2015 by and among Impac Mortgage Holdings, Inc. and the purchasers
identified therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on
August 12, 2015).
64
Table of Contents
Exhibit
Number
10.6 (a)
10.7
10.7(a)
10.8
10.9(a)
10.9(b)
10.9(c)
10.9(d)
10.10*
10.11*
10.11(a)*
10.11(b)*
10.11(c)*
10.12*
10.13*
10.14*
10.15*
21.1
23.1
31.1
31.2
32.1**
Description
Form of Second Amended and Restated Convertible Promissory Note Due May 9, 2022 (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-k filed on October 29, 2020).
Loan and Security Agreement dated as of February 10, 2017 between Impac Mortgage Corp. and Western Alliance Bank
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 16, 2017).
Promissory Note dated as of February 10, 2017 issued by Impac Mortgage Corp. to Western Alliance Bank (incorporated
by reference to Exhibit 10.1(a) of the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 16, 2017).
Line of Credit Promissory Note with Merchants Bank of Indiana, dated August 17, 2017 (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
August 22, 2017).
Security Agreement executed by Impac Mortgage Corp. in favor of Merchants Bank of Indiana, dated August 17, 2017
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 22, 2017).
Amendment dated February 7, 2018 to Line of Credit Promissory Note with Merchants Bank of Indiana. (incorporated by
reference from Exhibit 10.15(b) the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 16, 2018).
Amendment dated May 16, 2018 to Line of Credit Promissory Note with Merchants Bank of Indiana (incorporated by
reference from Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 19, 2018.
Confirmation and Amendment dated April 18, 2019 to Line of Credit Promissory Note with Merchants Bank of Indiana
(incorporated by reference from Exhibit 10.2 of the Company’s Quarterly report on Form 10-Q filed with the Securities
and Exchange Commission on August 9, 2019).
Key Executive Employment Agreement effective as of January 1, 2018 between Impac Mortgage Corp, Impac Mortgage
Holdings, Inc. and George Mangiaracina (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on May 10, 2018).
Impac Mortgage Holdings, Inc. 2020 Equity Incentive Plan (“2020 Equity Incentive Plan”) (incorporated by reference to
Appendix A to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on April 28,
2020).
Form of Stock Option Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on June 25, 2020).
Form of Restricted Stock Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on June 25, 2020).
Form of Restricted Stock Unit Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on June 25, 2020).
Compensation and Severance Summary with Joseph Joffrion, dated October 7, 2020.
Compensation and Severance Summary with Justin Moisio, dated October 7, 2020.
Compensation and Severance Summary with Tiffany Entsminger, dated October 7, 2020.
Employment Offer Letter with Obi Nwokorie, dated April 23, 2021.
Subsidiaries of the Company.
Consent of Baker Tilly US, LLP.
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 Interim Principal Financial and Accounting 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 Interim Principal Financial and Accounting Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
65
Table of Contents
Exhibit
Number
101
Description
The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2021,
formatted in XBRL (Extensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the
Condensed Consolidated Statements of Operations and Comprehensive Loss, (3) the Condensed Consolidated Statements
of Stockholders’ Equity, (4) the Condensed Consolidated Statements of Cash Flows, and (5) Notes to Consolidated
Financial Statements, tagged as blocks of text.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* 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 “filed” 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.
NOTE: Filings on Form 10-K, 10-Q and 8-K are under SEC File No. 001-14100.
ITEM 16. FORM 10-K SUMMARY
None
66
Table of Contents
SIGNATURES
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 Irvine, State
of California, on the 11th day of March 2022.
IMPAC MORTGAGE HOLDINGS, INC.
by /s/ GEORGE A MANGIARACINA
George A Mangiaracina
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/ GEORGE A. MANGIARACINA
George A. Mangiaracina
Chairman of the Board, Chief Executive Officer and
Director (Principal Executive Officer)
March 11, 2022
/s/ JON GLOECKNER
Jon Gloeckner
/s/ KATHERINE BLAIR
Katherine Blair
/s/ FRANK P. FILIPPS
Frank P. Filipps
/s/ STEWART B. KOENIGSBERG
Stewart B Koenigsberg
/s/ JOSEPH PISCINA
Joseph Piscina
/s/ OBI NWOKORIE
Obi Nwokorie
March 11, 2022
March 11, 2022
March 11, 2022
March 11, 2022
March 11, 2022
March 11, 2022
SVP, Treasury & Financial Reporting (Interim Principal
Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
67
Table of Contents
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Report of Independent Registered Public Accounting Firm (PCAOB ID 23)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and 2020
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
F-2
F-5
F-6
F-7
F-8
F-9
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Impac Mortgage Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Impac Mortgage Holdings, Inc. and subsidiaries (the
Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss,
changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2021, and the
related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020,
and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts
or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Table of Contents
Fair Value Measurements of Level 3 Assets and Liabilities
Critical Audit Matter Description:
As described in Note 9 to the consolidated financial statements, at December 31, 2021, approximately 83% of the
Company’s consolidated assets and approximately 84% of the Company’s consolidated liabilities are measured at fair value
on a recurring basis utilizing models and unobservable inputs. Unlike the fair value of Level 1 financial assets and
liabilities which are readily observable, these financial assets and liabilities are not actively traded, and fair value is
determined based on valuation methodologies, valuation models, and unobservable inputs to those models, supplemented
with third party pricing data and investor bids, where applicable.
We identified the valuation of Level 3 financial assets and liabilities as a critical audit matter because of the significance of
Level 3 financial assets and liabilities to the total consolidated assets and liabilities of the Company, and the unobservable
inputs, complexity of models and methodologies used by management to estimate fair value for these Level 3 financial
assets and liabilities. The valuations involve a high degree of auditor judgment and increased efforts, including the
involvement of a valuation specialist who possesses significant quantitative analysis and modeling experience, to assist
with the audit and evaluation of the appropriateness of the models utilized and the evaluation of the appropriateness of
unobservable inputs used by management. The unobservable inputs used by management to estimate the fair value of Level
3 financial assets and liabilities include, among others, prepayment speeds, default rates, discount rates and yields, loss
severities and pull-through rates.
How We Addressed the Matter in Our Audit:
The primary procedures we performed to address this critical audit matter included, among others:
● Evaluating the design effectiveness of the Company’s valuation controls, including:
Ø Independent price verification controls to determine yields, where applicable.
Ø Data validation controls (data inputs to models).
Ø Management review of reasonableness of underlying assumptions.
● Evaluating the reasonableness of management’s valuation methodologies and estimates:
Ø Testing the mathematical accuracy of the valuation models utilized by the Company and agreeing the resulting
values in the models to the Company’s books and records.
Ø Evaluating the valuation methodologies utilized by the Company by comparing the methodologies to those
utilized by other companies holding similar financial instruments.
Ø Where applicable, developing valuation estimates using valuation models created by our valuation specialist
and inputting the underlying loan‐level data and assumptions inputs from the Company into our models and
comparing the results against the results of the Company.
Ø Evaluating the reasonableness of significant unobservable inputs by comparing management’s inputs with
inputs from external sources and available economic forecasts and data. Additionally, evaluating the
competency and objectivity of third-party specialists engaged by the Company to assist in developing
management’s inputs.
Ø Comparing actual cash flows to management’s projections.
F-3
Table of Contents
We evaluated management’s ability to estimate fair value by 1) comparing management’s historical projected prepayment
and loss curves to actual results, where applicable and 2) comparing management’s valuation estimates to subsequent
transactions with a reconciliation of subsequent market events, when available.
BAKER TILLY US, LLP
We have served as the Company's auditor since 2008.
Irvine, California
March 11, 2022
F-4
Table of Contents
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
LIABILITIES
Cash and cash equivalents
Restricted cash
Mortgage loans held-for-sale
Mortgage servicing rights
Securitized mortgage trust assets
Other assets
Total assets
Warehouse borrowings
Convertible notes, net
Long-term debt
Securitized mortgage trust liabilities
Other liabilities
Total liabilities
Commitments and contingencies (See Note 13)
STOCKHOLDERS’ EQUITY
Series A-1 junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued or
outstanding
Series B 9.375% redeemable preferred stock, $0.01 par value; liquidation value $35,750; 2,000,000 shares
authorized, 665,592 cumulative shares issued and outstanding as of December 31, 2021 and December 31, 2020
(See Note 8)
Series C 9.125% redeemable preferred stock, $0.01 par value; liquidation value $35,127; 5,500,000 shares
authorized; 1,405,086 cumulative shares issued and outstanding as of December 31, 2021 and
December 31, 2020 (See Note 8)
Common stock, $0.01 par value; 200,000,000 shares authorized; 21,332,684 and 21,238,191 shares issued and
outstanding as of December 31, 2021 and December 31, 2020, respectively
Additional paid-in capital
Accumulated other comprehensive earnings, net of tax
Total accumulated deficit:
Cumulative dividends declared
Accumulated deficit
Total accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31, December 31,
2021
2020
$
$
$
$
$
$
$
29,555
5,657
308,477
749
1,642,730
35,603
2,022,771
285,539
20,000
46,536
1,614,862
45,898
2,012,835
54,150
5,602
164,422
339
2,103,269
41,524
2,369,306
151,932
20,000
44,413
2,086,557
50,753
2,353,655
—
7
14
—
7
14
213
1,237,986
22,044
(822,520)
(427,808)
(1,250,328)
9,936
2,022,771
$
212
1,237,102
24,766
(822,520)
(423,930)
(1,246,450)
15,651
2,369,306
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Revenues
Gain on sale of loans, net
Real estate services fees, net
Gain (loss) on mortgage servicing rights, net
Servicing (expense) fees, net
Other
Total revenues, net
Expenses
Personnel
General, administrative and other
Business promotion
Total expenses
Operating loss
Other income (expense)
Interest income
Interest expense
Change in fair value of long-term debt
Change in fair value of net trust assets, including trust REO gains
Total other income, net
Loss before income taxes
Income tax expense
Net loss
Other comprehensive loss
Change in fair value of instrument specific credit risk of long-term debt
Total comprehensive loss
Net loss per common share:
Basic
Diluted
For the Year Ended
December 31,
2021
2020
65,294
1,144
34
(432)
279
66,319
52,778
21,031
7,395
81,204
(14,885)
65,666
(63,268)
2,098
6,582
11,078
(3,807)
71
(3,878)
(2,722)
(6,600)
(0.22)
(0.22)
$
$
$
$
$
14,004
1,312
(28,509)
3,603
1,498
(8,092)
52,880
24,534
3,859
81,273
(89,365)
118,908
(113,771)
1,899
(5,688)
1,348
(88,017)
133
(88,150)
(20)
(88,170)
(4.15)
(4.15)
$
$
$
$
$
See accompanying notes to consolidated financial statements
F-6
Table of Contents
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Preferred
Shares
Outstanding
Preferred
Stock
Common
Shares
Outstanding
Additional Cumulative
Accumulated Other
Common
Stock
Paid-In
Capital
Dividends Accumulated Comprehensive
Declared
Earnings, net of tax
Deficit
Total
Stockholders’
Equity
Balance,
December 31, 2019
Proceeds from
exercise of stock
options
Stock based
compensation
Retirement of
restricted stock
Issuance of
restricted stock
units
Issuance of
warrants in
connection with
debt financing
Other
comprehensive loss
Consolidation of
corporate-owned
life insurance trusts
Net loss
Balance,
December 31, 2020
Issuance of
restricted stock
units
Stock based
compensation
Other
comprehensive loss
Net loss
Balance,
December 31, 2021
2,070,678
$
21 21,255,426
$
212
$1,236,237
$(822,520) $ (334,499)$
24,786
$
104,237
—
—
9,500
—
46
—
—
—
—
702
—
—
—
—
—
(35,069)
—
8,334
—
—
—
—
—
—
—
—
(125)
—
242
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(20)
46
702
(125)
—
242
(20)
—
—
—
—
—
—
—
—
—
—
—
—
(1,281)
(88,150)
—
—
(1,281)
(88,150)
2,070,678
$
21 21,238,191
$
212
$1,237,102
$(822,520) $ (423,930)$
24,766
$
15,651
—
—
94,493
1
—
—
—
—
—
884
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
884
—
(3,878)
(2,722)
—
(2,722)
(3,878)
2,070,678
$
21 21,332,684
$
213
$1,237,986
$(822,520) $ (427,808)$
22,044
$
9,936
See accompanying notes to consolidated financial statements
F-7
Table of Contents
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
(Gain) loss on sale of mortgage servicing rights
Change in fair value of mortgage servicing rights
Gain on sale of mortgage loans
Change in fair value of mortgage loans held-for-sale
Change in fair value of derivatives lending, net
Change in provision for repurchases
Origination of mortgage loans held-for-sale
Sale and principal reduction on mortgage loans held-for-sale
Gain from trust REO
Change in fair value of net trust assets, excluding trust REO
Change in fair value of long-term debt
Accretion of interest income and expense
Amortization of debt issuance costs and discount on note payable
Stock-based compensation
Accretion of interest expense on corporate debt
Loss on disposal of premises and equipment
Net change in other assets
Net change in other liabilities
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securitized mortgage collateral
Proceeds from the sale of mortgage servicing rights
Investment in corporate-owned life insurance
Purchase of premises and equipment
Proceeds from the sale of trust REO
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of MSR financing
Borrowings under MSR financing
Repayment of warehouse borrowings
Borrowings under warehouse agreements
Repayment of securitized mortgage borrowings
Net change in liabilities related to corporate-owned life insurance
Repayment of convertible notes
Issuance of restricted stock
Retirement of restricted stock
Proceeds from exercise of stock options
Net cash used in financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
SUPPLEMENTARY INFORMATION
Interest paid
Taxes (paid) refunded, net
NON-CASH TRANSACTIONS
Transfer of securitized mortgage collateral to trust REO
Mortgage servicing rights retained from issuance of mortgage backed securities and loan sales
Recognition of corporate-owned life insurance cash surrender value (included in Other assets)
Recognition of corporate-owned life insurance trusts (included in Other liabilities)
Issuance of warrants
Recognition of operating lease right of use assets
Recognition of operating lease liabilities
For the Year Ended
December 31,
2021
2020
$
$
$
$
$
$
$
$
(3,878)
(160)
126
(66,086)
(3,395)
4,076
111
(2,903,454)
2,828,344
(111)
(6,471)
(2,098)
50,751
—
884
—
99
2,307
(5,559)
(104,514)
592,545
160
(129)
(298)
7,703
599,981
—
—
(2,640,818)
2,774,425
(654,073)
458
—
1
—
—
(520,007)
(24,540)
59,752
35,212
25,719
(41)
7,976
536
—
—
—
—
—
(88,150)
6,547
21,962
(35,193)
15,955
7
5,227
(2,746,893)
3,381,758
(7,393)
13,081
(1,899)
65,524
4
702
242
—
18,289
(15,918)
633,852
425,152
14,716
(1,183)
(402)
21,977
460,260
(15,448)
15,448
(3,200,268)
2,650,637
(518,594)
1,812
(5,000)
—
(125)
46
(1,071,492)
22,620
37,132
59,752
50,647
370
10,922
2,094
9,476
10,757
242
125
125
See accompanying notes to consolidated financial statements
F-8
Table of Contents
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data or as otherwise indicated)
Note 1.—Summary of Business and Financial Statement Presentation including Significant Accounting Policies
Business Summary
Impac Mortgage Holdings, Inc. (the Company or IMH) is a financial services company incorporated in Maryland
with the following direct and indirect wholly-owned operating subsidiaries: Integrated Real Estate Service Corporation
(IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), Impac Funding Corporation (IFC) and
Copperfield Capital Corporation (CCC). The Company’s operations include the mortgage lending operations and real
estate services conducted by IRES, IMC and CCC and the long-term mortgage portfolio (residual interests in
securitizations reflected as securitized mortgage trust assets and liabilities in the consolidated balance sheets) conducted by
IMH. IMC’s mortgage lending operations include the activities of its division, CashCall Mortgage.
Financial Statement Presentation
Basis of Presentation
The accompanying consolidated financial statements of IMH and its subsidiaries (as defined above) have been
prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All
significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain immaterial
amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current year
presentation.
Management has made a number of material estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements
in conformity with GAAP. Additionally, other items affected by such estimates and assumptions include the valuation of
trust assets and trust liabilities, contingencies, the estimated obligation of repurchase liabilities related to sold loans, the
valuation of long-term debt, mortgage servicing rights (MSRs), mortgage loans held-for-sale (LHFS) and derivative
instruments, including interest rate lock commitments (IRLCs). Actual results could differ from those estimates and
assumptions.
Principles of Consolidation
The accompanying consolidated financial statements include accounts of IMH and its wholly-owned subsidiaries.
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 variable interest entities (VIEs), through
arrangements that do not involve voting interests.
The VIE framework requires a variable interest holder (counterparty to a VIE) to consolidate the VIE if that party
has the power to direct activities of the VIE that most significantly impact the entity’s economic performance, will absorb a
majority of the expected losses of the VIE, will receive a majority of the residual returns of the VIE, or both, and directs the
significant activities of the entity. 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. The
assessment of whether or not the Company is the primary beneficiary of the VIE is performed on an ongoing basis.
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Significant Accounting Policies
Fair Value and the Fair Value Option
Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities,
observable market transactions or market information might be available. For other assets and liabilities, observable market
transactions and market information might not be available. However, the objective of a fair value measurement in both
cases is the same—to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would
take place between market participants at the measurement date under current market conditions (that is, an exit price at the
measurement date from the perspective of a market participant that holds the asset or owes the liability).
The fair value option permits entities to choose, at specified election dates, to measure eligible financial assets and
financial liabilities at fair value. The decision to elect the fair value option is applied on an instrument by instrument basis,
is irrevocable unless a new election date occurs, and is applied to an entire instrument. The Company has elected the fair
value option for mortgage servicing rights, mortgage loans held-for-sale, long-term debt and its consolidated non-recourse
securitizations (securitized mortgage collateral and securitized mortgage borrowings). Elections were made to mitigate
income statement volatility caused by differences in the measurement basis of elected instruments.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less at
the date of acquisition. The carrying amount of cash and cash equivalents approximates fair value.
Cash balances that have restrictions as to the Company’s ability to withdraw funds are considered restricted cash.
At December 31, 2021 and 2020, restricted cash totaled $5.7 million and $5.6 million, respectively. The restricted cash is
the result of the terms of the Company’s warehouse borrowing agreements as well as collateral against letter of credit
financing associated with corporate-owned life insurance (See Note 13.—Commitments and Contingencies). In accordance
with the terms of the Master Repurchase Agreements related to the warehouse borrowings, the Company is required to
maintain cash balances with the lender as additional collateral for the borrowings (See Note 5.—Debt).
Mortgage Loans Held-for-Sale
Mortgage LHFS are accounted for using the fair value option, with changes in fair value recorded in gain on sale
of loans, net in the accompanying consolidated statements of operations and comprehensive loss. In accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825, Financial Instruments, loan
origination fees and expenses are recognized in earnings as incurred and not deferred.
Revenue derived from the Company’s mortgage lending activities includes loan fees collected at the time of
origination and gain or loss from the sale of LHFS. Loan fees consist of fee income earned on all loan originations,
including loans closed and held-for-sale. Loan fees are recognized as earned and consist of amounts collected for
application and underwriting fees, fees on cancelled loans and discount points. The related direct loan origination costs are
recognized when incurred and consists of broker fees and commissions. Gain or loss from the sale and mark-to-market
adjustments of LHFS includes both realized and unrealized gains and losses and are included in gain on sale of loans, net in
the accompanying consolidated statements of operations and comprehensive loss. The valuation of LHFS approximates a
whole-loan price, which includes the value of the related mortgage servicing rights.
The Company primarily sells its LHFS to investors and government sponsored entities (GSEs). The Company
evaluates its loan sales for sales treatment. To the extent the transfer of loans qualifies as a sale, the Company derecognizes
the loans and records a realized gain or loss on the sale date. In the event the Company determines that the transfer of loans
does not qualify as a sale, the transfer would be treated as a secured borrowing. Interest on loans is recorded as income
when earned and deemed collectible. LHFS are placed on nonaccrual status when any portion of the principal or interest is
90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable.
Interest received from loans on nonaccrual status is recorded as income when collected. Loans return to accrual status when
the principal and interest become current and it is probable that the amounts are fully collectible.
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Mortgage Servicing Rights
The Company accounts for mortgage loan sales in accordance with FASB ASC 860, Transfers and Servicing.
Upon sale of mortgage loans on a service-retained basis, the LHFS are removed from the consolidated balance sheets and
mortgage servicing rights (MSRs) are recorded as an asset for servicing rights retained. The Company elects to measure
MSRs at fair value as prescribed by FASB ASC 860-50-35, and as such, servicing assets or liabilities are valued using
discounted cash flow modeling techniques using assumptions regarding future net servicing cash flow, including
prepayment rates, discount rates, servicing cost and other factors. Changes in estimated fair value are reported in the
accompanying consolidated statements of operations and comprehensive loss within loss on mortgage servicing rights, net.
When the Company sells mortgage servicing rights, the Company records a gain or loss on such sale based on the
selling price of the mortgage servicing rights less the carrying value and transaction costs. Gains and losses are reported in
the accompanying consolidated statements of operations and comprehensive loss within loss on mortgage servicing rights,
net.
Consolidated Non-recourse Securitizations
Securitized Mortgage Collateral
The Company’s long-term mortgage portfolio primarily includes adjustable rate and, to a lesser extent, fixed rate
non-conforming mortgages and commercial mortgages that were acquired and originated by the Company’s mortgage and
commercial operations prior to 2008.
Historically, the Company securitized mortgages in the form of collateralized mortgage obligations (CMO) or real
estate mortgage investment conduits (REMICs). These securitizations are evaluated for consolidation based on the
provisions of FASB ASC 810-10-25. Amounts consolidated are included in trust assets and liabilities as securitized
mortgage collateral, real estate owned (REO) and securitized mortgage borrowings in the accompanying consolidated
balance sheets. The Company also retained the master servicing rights associated with these securitizations which pays the
Company approximately 3 basis points on the outstanding unpaid principal balance (UPB) of each securitization trust. The
retention of the master servicing rights or the retained economic subordinated residual interests provide the Company with
clean up call rights on these securitizations.
The Company accounts for securitized mortgage collateral at fair value, with changes in fair value during the
period reflected in earnings. Fair value measurements are based on the Company’s estimated cash flow models, which
incorporate assumptions, inputs of other market participants and quoted prices for the underlying bonds. The Company’s
assumptions include its expectations of inputs that other market participants would use. These assumptions include
judgments about the underlying collateral, prepayment speeds, credit losses, investor yield requirements, forward interest
rates and certain other factors.
Interest income on securitized mortgage collateral is recorded using the effective yield for the period based on the
previous quarter-end’s estimated fair value. Securitized mortgage collateral is generally not placed on nonaccrual status as
the servicer advances the interest payments to the trust regardless of the delinquency status of the underlying mortgage
loan, until it becomes apparent to the servicer that the advance is not collectible.
Real Estate Owned
Real estate owned on the consolidated balance sheets are primarily assets within the securitized trusts but are
recorded as a separate asset for accounting and reporting purposes and are within the long-term mortgage portfolio. REO,
which consists of residential real estate acquired in satisfaction of loans, is carried at net realizable value, which includes
the estimated fair value of the residential real estate less estimated selling and holding costs. Adjustments to the loan
carrying value required at the time of foreclosure affect the carrying amount of REO. Subsequent write-downs in the net
realizable value of REO are included in change in fair value of net trust assets, including trust REO gains (losses) in the
consolidated statements of operations and comprehensive loss.
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Securitized Mortgage Borrowings
The Company records securitized mortgage borrowings in the accompanying consolidated balance sheets for the
consolidated CMO and REMIC securitized trusts within the long-term mortgage portfolio. The debt from each issuance of
a securitized mortgage borrowing is payable from the principal and interest payments on the underlying mortgages
collateralizing such debt, as well as the proceeds from liquidations of REO. If the principal and interest payments are
insufficient to repay the debt, the shortfall is allocated first to the residual interest holders (generally owned by the
Company) then, if necessary, to the certificate holders (e.g. third party investors in the securitized mortgage borrowings) in
accordance with the specific terms of the various respective indentures. Securitized mortgage borrowings typically are
structured as one-month London Interbank Offered Rate (LIBOR) “floaters” and fixed rate securities with interest payable
to certificate holders monthly. The maturity of each class of securitized mortgage borrowing is directly affected by the
amount of net interest spread, overcollateralization and the rate of principal prepayments and defaults on the related
securitized mortgage collateral. The actual maturity of any class of a securitized mortgage borrowing can occur later than
the stated maturities of the underlying mortgages.
When the Company issued securitized mortgage borrowings, the Company generally sought an investment grade
rating for the Company’s securitized mortgages by nationally recognized rating agencies. To secure such ratings, it was
often necessary to incorporate certain structural features that provide for credit enhancement. This generally included 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. These securitization transactions are non-
recourse to the Company and the total loss exposure is limited to the Company’s initial net economic investment in each
trust, which is referred to as a residual interest.
The Company accounts for securitized mortgage borrowings at fair value, with changes in fair value during the
period reflected in earnings. Fair value measurements are based on the Company’s estimated cash flow models, which
incorporate assumptions, inputs of other market participants and quoted prices for the underlying bonds. The Company’s
assumptions include its expectations of inputs that other market participants would use. These assumptions include
judgments about the underlying collateral, prepayment speeds, credit losses, investor yield requirements, forward interest
rates and certain other factors. Interest expense on securitized mortgage borrowings are recorded quarterly using the
effective yield for the period based on the previous quarter-end’s estimated fair value.
Leases
The Company has three operating leases for office space expiring at various dates through 2024 and one financing
lease which concludes in 2023. The Company determines if a contract is a lease at the inception of the arrangement and
reviews all options to extend, terminate, or purchase its right of use (ROU) assets at the inception of the lease and accounts
for these options when they are reasonably certain of being exercised. Regarding the discount rate, Accounting Standards
Update (ASU) 2016-02, “Leases (Topic 842)”, requires the use of the rate implicit in the lease whenever this rate is readily
determinable. When the Company cannot readily determine the rate implicit in the lease, the Company determines its
incremental borrowing rate by using the rate of interest that it would have to pay to borrow on a collateralized basis over a
similar term. As a practical expedient permitted under Topic 842, the Company elected to account for the lease and non-
lease components as a single lease component for all leases of which it is the lessee. Leases with an initial term of 12
months or less are not recorded in the consolidated balance sheets and lease expense for these leases is recognized on a
straight-line basis over the lease term.
Derivative Instruments
In accordance with FASB ASC 815-10 Derivatives and Hedging—Overview, the Company records all derivative
instruments at fair value. The Company has accounted for all its derivatives as non-designated hedge instruments or free-
standing derivatives.
The mortgage lending operation enters into IRLCs with consumers to originate mortgage loans at a specified
interest rate. These IRLCs are accounted for as derivative instruments and reported at fair value. The concept of fair value
relating to IRLCs is no different than fair value for any other financial asset or liability: fair value is the price at which an
orderly transaction to sell the asset or to transfer the liability would take place between market participants at the
measurement date under current market conditions. Because IRLCs do not trade in the market, the Company determines
the estimated fair value based on expectations of what an investor would pay to acquire the Company’s IRLCs, which
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utilizes current market information for secondary market prices for underlying loans and estimated servicing value with
similar coupons, maturities and credit quality, subject to the anticipated loan funding probability (pull-through rate). This
value is adjusted for other costs that would be required by a market participant acquiring the IRLCs. The fair value of
IRLCs is subject to change primarily due to changes in interest rates and the estimated pull-through rate. The Company
reports IRLCs within other assets and other liabilities at fair value with changes in fair value being recorded in the
accompanying consolidated statements of operations and comprehensive loss within gain on sale of loans, net.
The Company hedges the changes in fair value associated with changes in interest rates related to IRLCs and
uncommitted LHFS by using forward delivery commitments on mortgage-backed securities, including Federal National
Mortgage Association (Fannie Mae or FNMA) and Government National Mortgage Association (Ginnie Mae or GNMA)
mortgage-backed securities known as to-be-announced mortgage-backed securities (TBA MBS or Hedging Instruments) as
well as forward delivery commitments on whole loans. The Hedging Instruments and forward delivery loan commitments
are used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market and
are accounted for as derivative instruments. The fair value of Hedging Instruments and forward delivery loan commitments
are subject to change primarily due to changes in interest rates. The Company reports Hedging Instruments and forward
delivery loan commitments within other assets and other liabilities at fair value with changes in fair value being recorded in
the accompanying consolidated statements of operations and comprehensive loss within gain on sale of loans, net.
The fair value of IRLCs and Hedging Instruments are represented as derivative assets, lending, net and derivative
liabilities, lending, net in Note 9.—Fair Value of Financial Instruments.
Long-term Debt
Long-term debt (junior subordinated notes) is reported at fair value. These securities are measured based upon an
analysis prepared by management, which considers the Company’s own credit risk and discounted cash flow analysis. With
the adoption of FASB ASU 2016-01 in 2018, which applies when the Company elects the fair value election on its own
debt, the Company effectively bifurcates the market and instrument specific credit risk components of changes in long-term
debt. The market portion continues to be a component of net loss as the change in fair value of long-term debt, but the
instrument specific credit risk portion is a component of accumulated other comprehensive loss in the accompanying
consolidated statements of operations and comprehensive loss.
Repurchase Reserve
The Company sells mortgage loans in the secondary market, including U.S. GSEs, and issues mortgage-backed
securities through Ginnie Mae and Fannie Mae. When the Company sells or issues securities, it makes customary
representations and warranties to the purchasers about various characteristics of each loan such as the origination and
underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower
credit, income and asset requirements, and compliance with applicable federal, state and local laws. In the event of a breach
of its representations and warranties, the Company may be required to either repurchase the mortgage loans with the
identified defects or indemnify the investor or insurer for any loss. In addition, the Company may be required to
repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. The
Company’s loss may be reduced by proceeds from the sale or liquidation of the repurchased loan. Also, the Company’s loss
may be reduced by any recourse it has to correspondent lenders that, in turn, had sold such mortgage loans to the Company
and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery
of related repurchase losses from that correspondent lender.
The Company records a provision for losses relating to such representations and warranties as part of its loan sale
transactions. The method used to estimate the liability for representations and warranties is a function of the representations
and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and
loan repurchase rates and the potential severity of loss in the event of defaults including any loss on sale or liquidation of
the repurchased loan and the probability of reimbursement by the correspondent loan seller. The Company establishes a
liability at the time loans are sold and continually updates its estimated repurchase liability. The level of the repurchase
liability for representations and warranties is difficult to estimate and requires considerable management judgment. The
level of mortgage loan repurchase losses is dependent on economic factors, investor demands for loan repurchases and
other external conditions that may change over the lives of the underlying loans.
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Revenue Recognition for Fees from Services
The Company follows FASB ASC 606, Revenue Recognition, which provides guidance on the application of
GAAP to selected revenue recognition issues related to the Company’s real estate services fees. Under FASB ASC 606, the
Company must identify the contract with a customer, identify the performance obligations in the contract, determine the
transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when
(or as) the Company satisfies a performance obligation.
The Company’s primary sources of revenue are derived from financial instruments that are not within the scope of
FASB ASC 606. The Company has evaluated the nature of its contracts with customers and determined that further
disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the
consolidated statements of operations and comprehensive loss, was not necessary. The Company generally fully satisfies its
performance obligations on its contracts with customers as services are rendered and the transaction prices are typically
fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are
rendered and the transaction prices are fixed, the Company has made no significant judgments in applying the revenue
guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from contracts with
customers. The revenues from these services are recognized in income in the period when services are rendered and
collectability is reasonably certain.
Advertising Costs
Advertising costs are expensed as incurred and are included in business promotion expense in the accompanying
consolidated statements of operations and comprehensive loss. For the years ended December 31, 2021 and 2020, business
promotion expense was $7.4 million and $3.9 million, respectively.
Equity-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718 Compensation—Stock
Compensation. The Company uses the grant-date fair value of equity awards to determine the compensation cost associated
with each award. Grant-date fair value is determined using the Black-Scholes pricing model and assumptions noted in Note
14.—Share Based Payments and Employee Benefit Plans, adjusted for unique characteristics of the specific awards.
Compensation cost for service-based equity awards is recognized on a straight-line basis over the requisite service period,
which is generally the vesting period.
FASB ASC 718 requires forfeitures to be estimated at the time of grant and prospectively revised, if necessary, in
subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of
estimated forfeitures for the years ended December 31, 2021 and 2020, such that the expense was recorded only for those
stock-based awards that were expected to vest during such periods. The cost of equity-based compensation is recorded to
personnel expense. Refer to Note 14.—Share Based Payments and Employee Benefit Plans.
Income Taxes
In accordance with FASB ASC 740, Income Taxes, the Company records income tax expense as well as deferred
tax assets and liabilities. Current income tax expense or benefit approximates taxes to be paid or refunded for the current
period, respectively, and includes income tax expense related to uncertain tax positions. The Company determines deferred
income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax
effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax
rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets
and liabilities between periods. Deferred tax assets are recognized subject to management’s judgment that realization is
“more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to
determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that
management believes has a greater than 50% likelihood of realization upon settlement.
The Company is subject to federal income taxes as a regular (Subchapter C) corporation and files a consolidated
U.S. federal income tax return on qualifying subsidiaries. The Company files federal and various states income tax returns
in the U.S.
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Table of Contents
The Company adopted FASB ASU 2019-12 on a prospective basis on January 1, 2020 (See Note 11.—Income
Taxes). The most significant impact to the Company included the removal of the exception to the incremental approach for
intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for
example, discontinued operations or other comprehensive income). The changes also add a requirement for an entity to
reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period
that includes the enactment date. The adoption of this standard did not have a material impact on the Company's
consolidated financial statements.
Loss Per Common Share
Basic loss per common share is computed on the basis of the weighted average number of shares outstanding for
the year divided by net loss for the year. Diluted loss per common share is computed on the basis of the weighted average
number of shares and dilutive common equivalent shares outstanding for the year divided by net loss for the year, unless
anti-dilutive. Refer to Note 10.—Reconciliation of Loss Per Common Share.
Recent Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments,” (ASU 2016-13), which changes the impairment model for most financial assets
and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments,
entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss”
model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with
unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be
recognized as an allowance. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19, “Codification
Improvements to Topic 326, Financial Instruments—Credit Losses”, for the purpose of clarifying certain aspects of ASU
2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. In April 2019, the FASB
issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815,
Derivatives and Hedging,” and “Topic 825, Financial Instruments (ASU 2019-04),” which is effective with the adoption of
ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326)”, which
is also effective with the adoption of ASU 2016-13. In October 2019, the FASB voted to delay the implementation date for
smaller reporting companies until January 1, 2023. We will adopt this ASU on its effective date of January 1, 2023. The
Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial
statements.
In March 2020 and January 2021, the FASB issued ASU 2020-04 and ASU 2021-01, “Reference Rate Reform
(Topic 848)”. Together, the ASUs provide temporary optional expedients and exceptions to the U.S. GAAP guidance on
contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market
transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates.
This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments
prospectively through December 31, 2022. The Company does not expect the adoption of this ASU to have a material
impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-
20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity. FASB ASU 2020-06 will simplify the accounting for convertible
instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock.
Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the
host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are
(1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the
definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt
instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also
amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-
substance-based accounting conclusions. ASU 2020-06 will be effective January 1, 2024, for the Company. Early adoption
is permitted, but no earlier than January 1, 2021, including interim periods within that year. The Company does not expect
the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.
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In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and
Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—
Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of
Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)”. The
amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including
interim periods within those fiscal years. The Company adopted this ASU on January 1, 2022 and the adoption of this
ASU did not have a material impact on the Company’s consolidated financial statements.
Note 2.—Mortgage Loans held-for-sale
A summary of the UPB of mortgage LHFS by type is presented below:
Government (1)
Conventional (2)
Jumbo & Non-qualified mortgages (NonQM)
Fair value adjustment (3)
Total mortgage loans held-for-sale
December 31,
2021
December 31,
2020
$
$
6,886 $
62,759
231,142
7,690
308,477
$
7,924
141,139
11,064
4,295
164,422
(1)
Includes all government-insured loans including Federal Housing Administration (FHA), Veterans Affairs (VA) and United States
Department of Agriculture (USDA).
Includes loans eligible for sale to Fannie Mae and Federal home Loan Mortgage Corporation (Freddie Mac or FHLMC).
(2)
(3) Changes in fair value are included in gain on sale of loans, net on the accompanying consolidated statements of operations and
comprehensive loss.
As of December 31, 2021, the Company had no mortgage LHFS that were 90 days or more delinquent. As of
December 31, 2020, there were $1.2 million in UPB of mortgage LHFS that were in nonaccrual status as the loans were 90
days or more delinquent. The carrying value of these nonaccrual loans as of December 31, 2020 was $1.1 million.
Gain on sale of loans, net in the consolidated statements of operations and comprehensive loss is comprised of the
following for the years ended December 31, 2021 and 2020:
Gain on sale of mortgage loans
Premium from servicing retained loan sales
Unrealized loss from derivative financial instruments
Gain (loss) from derivative financial instruments
Mark to market gain (loss) on LHFS
Direct origination expenses, net
Change in provision for repurchases
Gain on sale of loans, net
For the Year Ended
December 31,
2021
2020
$
81,362 $
536
(4,076)
1,934
3,395
(17,746)
(111)
65,294
$
$
59,330
2,094
(7)
(11,040)
(15,955)
(15,191)
(5,227)
14,004
On July 7, 2020, the Company received notification from Freddie Mac that the Company’s eligibility to sell whole
loans to Freddie Mac was suspended, without cause. As noted in Freddie Mac’s Seller/Servicer Guide, Freddie Mac may
elect, in its sole discretion, to suspend a Seller from eligibility, without cause, thereby restricting the Seller from obtaining
new purchase commitments during the suspension period.
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Note 3.—Mortgage Servicing Rights
The Company selectively retains MSRs from its sales and securitization of certain mortgage loans or as a result of
purchase transactions. MSRs are reported at fair value based on the expected income derived from the net projected cash
flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the UPB of
the underlying mortgage loans. The servicing fees are collected from the monthly payments made by the mortgagors, or if
delinquent, when the underlying real estate is foreclosed upon and liquidated. The Company may receive other
remuneration from rights to various mortgagor-contracted fees, such as late charges, collateral reconveyance charges and
nonsufficient fund fees, and the Company is generally entitled to retain the interest earned on funds held pending
remittance (or float) related to its collection of mortgagor principal, interest, tax and insurance payments.
In May 2020, the Company sold all of its conventional MSRs for approximately $20.1 million, receiving $15.0
million in proceeds upon sale, with the remaining received upon transfer of the servicing and transfer of all trailing
documents. The Company used the proceeds from the MSR sale to pay off the MSR financing. (See Note 5.—Debt– MSR
Financings).
In July 2020, the Company sold the majority of its government insured MSRs for approximately $225 thousand,
receiving $163 thousand in proceeds upon sale, with the remaining received upon transfer of the servicing and transfer of
all trailing documents.
The following table summarizes the activity of MSRs for the years ended December 31, 2021 and 2020:
Balance at beginning of year
Additions from servicing retained loan sales
Reductions from bulk sales
Changes in fair value (1)
Fair value of MSRs at end of period
December 31,
2021
December 31,
2020
$
$
339 $
536
—
(126)
749
$
41,470
2,094
(21,263)
(21,962)
339
(1) Changes in fair value are included within gain (loss) on mortgage servicing rights, net in the accompanying consolidated statements
of operations and comprehensive loss.
At December 31, 2021 and 2020, the UPB of the mortgage servicing portfolio was comprised of the
following:
Government insured
Conventional
Total loans serviced
December 31,
2021
December 31,
2020
$
$
71,841 $
—
71,841
$
30,524
—
30,524
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The table below illustrates hypothetical changes in the fair value of MSRs, caused by assumed immediate changes
to key assumptions that are used to determine fair value. See Note 9.—Fair Value of Financial Instruments for a description
of the key assumptions used to determine the fair value of MSRs.
Mortgage Servicing Rights Sensitivity Analysis
Fair value of MSRs
Prepayment Speed:
Decrease in fair value from 10% adverse change
Decrease in fair value from 20% adverse change
Decrease in fair value from 30% adverse change
Discount Rate:
Decrease in fair value from 10% adverse change
Decrease in fair value from 20% adverse change
Decrease in fair value from 30% adverse change
December 31,
2021
December 31,
2020
$
749 $
339
(24)
(48)
(70)
(31)
(59)
(85)
(13)
(26)
(38)
(13)
(25)
(37)
Sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of changes
in assumptions to changes in fair value may not be linear. Also, the effect of a variation in a particular assumption is
calculated without changing any other assumption, whereas a change in one factor may result in changes to another.
Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates. As a
result, actual future changes in MSR values may differ significantly from those displayed above.
Gain (loss) on mortgage servicing rights, net is comprised of the following for the years ended December 31, 2021
and 2020:
Change in fair value of mortgage servicing rights
Gain (loss) on sale of mortgage servicing rights
Gain (loss) on mortgage servicing rights, net
For the Year Ended
December 31,
2021
2020
$
$
(126)
160
34
$
$
(21,962)
(6,547)
(28,509)
Servicing (expense) fees, net is comprised of the following for the years ended December 31, 2021 and 2020:
Contractual servicing fees
Late and ancillary fees
Subservicing and other costs
Servicing (expense) fees, net
For the Year Ended
December 31,
2021
2020
$
193
—
(625)
(432)
$
5,159
67
(1,623)
3,603
$
$
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Note 4.—Other Assets
Other assets consisted of the following:
Corporate-owned life insurance (See Note 13)
Right of use asset (See Note 13)
Accounts receivable, net
Prepaid expenses
Derivative assets – lending (See Note 7)
Other
Premises and equipment, net
Accrued interest receivable
Servicing advances
Loans eligible for repurchase from Ginnie Mae
Real estate owned – outside trusts
Total other assets
December 31,
2021
December 31,
2020
$
$
10,788
10,209
4,770
3,460
3,111
1,102
636
625
565
337
—
35,603
$
$
10,659
13,512
3,190
3,429
7,275
1,103
930
286
947
114
79
41,524
Accounts Receivable, net
Accounts receivable are primarily loan sales that have not settled, and fees earned for real estate services rendered,
generally collected one month in arrears. Accounts receivable are stated at their carrying value, net of $50 thousand and
$329 thousand reserve for doubtful accounts as of December 31, 2021 and 2020, respectively.
Servicing Advances
The Company is required to advance certain amounts to meet its contractual loan servicing requirements. The
Company advances principal, interest, property taxes and insurance for borrowers that have insufficient escrow accounts,
plus any other costs to preserve the properties. Also, the Company will advance funds to maintain, repair and market
foreclosed real estate properties. The Company is entitled to recover advances from the borrowers for reinstated and
performing loans or from proceeds of liquidated properties.
Loans Eligible for Repurchase from Ginnie Mae
The Company sells loans in Ginnie Mae guaranteed mortgage-backed securities (MBS) by pooling eligible loans
through a pool custodian and assigning rights to the loans to Ginnie Mae. When these Ginnie Mae loans are initially pooled
and securitized, the Company meets the criteria for sale treatment and de-recognizes the loans. The terms of the Ginnie
Mae MBS program allow, but do not require, the Company to repurchase mortgage loans when the borrower has made no
payments for three consecutive months. When the Company has the unconditional right, as servicer, to repurchase Ginnie
Mae pool loans it has previously sold and are more than 90 days past due, and the repurchase will provide a “more than
trivial benefit”, the Company then re-recognizes the loans on its consolidated balance sheets in other assets, at their UPB
and records a corresponding liability in other liabilities in the consolidated balance sheets. At December 31, 2021 and
2020, loans eligible for repurchase from GNMA totaled $337 thousand and $114 thousand, respectively, in UPB. As part of
the Company’s repurchase reserve, the Company records a repurchase provision to provide for estimated losses from the
sale or securitization of all mortgage loans, including these loans.
Premises and Equipment, net
Premises and equipment
Less: Accumulated depreciation
Total premises and equipment, net
December 31,
2021
2020
$
$
6,391 $
(5,755)
636
$
6,230
(5,300)
930
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The Company recognized $493 thousand and $722 thousand of depreciation expense within general,
administrative and other expense in the accompanying consolidated statements of operations and comprehensive loss, for
the years ended December 31, 2021 and 2020, respectively.
Note 5.—Debt
The following table shows contractual future debt maturities as of December 31, 2021:
Less Than
One Year
Payments Due by Period
One to
Three Years
Three to
Five Years
More Than
Five Years
Total
Warehouse borrowings
Convertible notes
Long-term debt
Total debt obligations
Warehouse Borrowings
$ 285,539 $ 285,539 $
20,000
62,000
$ 367,539
20,000
—
$ 305,539
$
— $
—
—
— $
— $
—
—
— $
—
—
62,000
62,000
The Company, through its subsidiaries, enters into Master Repurchase Agreements with lenders providing
warehouse facilities. The warehouse facilities are used to fund, and are secured by, residential mortgage loans that are held
for sale. The warehouse and revolving lines of credit are repaid using proceeds from the sale of loans. The base interest
rates on the Company’s warehouse lines bear interest at 1-month LIBOR plus a margin or note rate minus a margin. Some
of the lines carry additional fees in the form of annual facility fees charged on the total line amount, commitment fees
charged on the committed portion of the line and non-usage fees charged when monthly usage falls below a certain
utilization percentage. The Company’s warehouse lines are scheduled to expire in 2022 under one year terms and all lines
are subject to renewal based on an annual credit review conducted by the lender.
The base interest rates for all warehouse lines of credit are subject to increase based upon the characteristics of the
underlying loans collateralizing the lines of credit, including, but not limited to product type and number of days held for
sale. Certain of the warehouse line lenders require the Company, at all times, to maintain cash accounts with minimum
required balances. As of December 31, 2021 and 2020, there was $1.3 million and $1.3 million, respectively, held in these
accounts which are recorded as a component of restricted cash on the consolidated balance sheets.
Under the terms of these warehouse lines, the Company is required to maintain various financial and other
covenants. At December 31, 2021, the Company was not in compliance with certain financial covenants from its lenders
and received the necessary waivers.
The following table presents certain information on warehouse borrowings for the periods indicated:
Short-term borrowings:
Repurchase agreement 1 (1)
$
65,000
$
30,009
$
49,963
90 - 98
1ML + 2.00 - 2.25%
Maximum
Borrowing
Capacity
Balance Outstanding at
December 31,
2021
December 31,
2020
Allowable
Advance
Rates (%)
Rate
Range
Repurchase agreement 2
200,000
153,006
51,310
Maturity Date
March 24, 2022
September 13,
2022
September 23,
2022
100
100
99
1ML + 1.75%
Note Rate - 0.375%
Note Rate - 0.50 - 0.75% March 31, 2022
Repurchase agreement 3
Repurchase agreement 4
300,000
50,000
615,000
56,794
45,730
285,539
50,659
—
151,932
Total warehouse borrowings
_________________________
(1) The maximum borrowing capacity of repurchase agreement 1 was temporarily increased to $65.0 million from $50.0 million until
$
$
$
February 25, 2022.
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The following table presents certain information on warehouse borrowings for the periods indicated:
Maximum outstanding balance during the year
Average balance outstanding for the year
UPB of underlying collateral (mortgage loans)
Weighted average interest rate for period
MSR Financings
$
For the Year Ended
December 31,
2021
336,648 $
191,794
296,841
2020
810,818
252,565
153,675
3.41 %
3.74 %
In May 2018, IMC (Borrower) amended the Line of Credit Promissory Note (FHLMC and GNMA Financing)
originally entered into in August 2017, increasing the maximum borrowing capacity of the revolving line of credit to $60.0
million, increasing the borrowing capacity up to 60% of the fair market value of the pledged mortgage servicing rights and
reducing the interest rate per annum to one-month LIBOR plus 3.0%. As part of the May 2018 amendment, the obligations
under the Line of Credit were secured by FHLMC and GNMA pledged mortgage servicing rights (subject to an
acknowledgement agreement) and was guaranteed by IRES. In January 2020, the maturity of the line was extended to
March 31, 2020. In April 2020, the maturity of the line was extended to May 31, 2020. In May 2020, the line was repaid
with the proceeds from the MSR sale (as disclosed in Note 3.—Mortgage Servicing Rights) and the line expired.
The following table presents certain information on MSR Financings for the periods indicated:
Maximum outstanding balance during the year
Average balance outstanding for the year
Weighted average rate for period
MSR Advance Financing
$
For the Year Ended
December 31,
2021
2020
— $
—
— %
15,000
2,943
3.91 %
In April 2020, Ginnie Mae announced they revised and expanded their issuer assistance program to provide
financing to fund servicer advances through the Pass-Through Assistance Program (PTAP). The PTAP funds advanced by
Ginnie Mae bear interest at a fixed rate that will apply to a given months pass-through assistance and will be posted on
Ginnie Mae’s website each month. The maturity date was the earlier of the seven months from the month the request and
repayment agreement was approved, or July 30, 2021. In July 2020, the outstanding PTAP funds were repaid. At
December 31, 2021 and 2020, the Company had no PTAP funds outstanding.
Convertible Notes
In May 2015, the Company issued $25.0 million Convertible Promissory Notes (Notes) to purchasers, some of
which are related parties. The Notes were originally due to mature on or before May 9, 2020 and accrued interest at a rate
of 7.5% per annum, to be paid quarterly.
Noteholders may convert all or a portion of the outstanding principal amount of the Notes into shares of the
Company’s common stock (Conversion Shares) at a rate of $21.50 per share, subject to adjustment for stock splits and
dividends (Conversion Price). The Company has the right to convert the entire outstanding principal of the Notes into
Conversion Shares at the Conversion Price if the market price per share of the common stock, as measured by the average
volume-weighted closing stock price per share of the common stock on the NYSE AMERICAN (or any other U.S. national
securities exchange then serving as the principal such exchange on which the shares of common stock are listed), reaches
the level of $30.10 for any twenty (20) trading days in any period of thirty (30) consecutive trading days after the Closing
Date (as defined in the Notes). Upon conversion of the Notes by the Company, the entire amount of accrued and unpaid
interest (and all other amounts owing) under the Notes are immediately due and payable. To the extent the Company pays
any cash dividends on its shares of common stock prior to conversion of the Notes, upon conversion of the Notes, the
noteholders will also receive such dividends on an as-converted basis of the Notes less the amount of interest paid by the
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Company prior to such dividend.
On April 15, 2020, the Company and the noteholders agreed to extend the outstanding Notes in the principal
amount of $25.0 million originally issued in May 2015, at the conclusion of the original note term (First Amendment). The
new Notes were issued with a six month term (November 9, 2020) and reduced the interest rate on such Notes to 7.0% per
annum. In connection with the issuance of the First Amendment, the Company issued to the noteholders of the Notes,
warrants to purchase up to an aggregate of 212,649 shares of the Company’s common stock at a cash exercise price of
$2.97 per share. The relative fair value of the warrants were $242 thousand and recorded as debt discounts, which are
accreted over the term of the warrants (October 2020), using an effective interest rate of 8.9%. The warrants are
exercisable commencing on October 16, 2020 and expire on April 15, 2025. The First Amendment was accounted for as an
extinguishment.
On October 28, 2020, the Company and certain holders of its Notes due November 9, 2020 in the aggregate
principal amount of $25.0 million agreed to extend the maturity date of the Notes upon conclusion of the term on
November 9, 2020. The new notes have an 18-month term due May 9, 2022 and the Company decreased the aggregate
principal amount of the Notes to $20.0 million, following the pay-down of $5.0 million in principal of the Notes on
November 9, 2020 (Second Amendment). The interest rate on the Notes remains at 7.0% per annum. The Second
Amendment was accounted for as an extinguishment.
Long-term Debt
The Company carries its Junior Subordinated Notes at estimated fair value as more fully described in Note 9.—
Fair Value of Financial Instruments. The following table shows the remaining principal balance and fair value of Junior
Subordinated Notes issued as of December 31, 2021 and 2020:
December 31,
Junior Subordinated Notes (1)
Fair value adjustment
Total Junior Subordinated Notes
2021
62,000 $
$
(15,464)
46,536
$
2020
62,000
(17,587)
44,413
$
(1) Stated maturity of March 2034; requires quarterly interest payments at a variable rate of 3-month LIBOR plus 3.75% per annum.
At December 31, 2021, the interest rate was 3.97%.
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Note 6.—Securitized Mortgage Trusts
Securitized Mortgage Trust Assets
Securitized mortgage trust assets are comprised of the following at December 31, 2021 and 2020:
Securitized mortgage collateral, at fair value
REO, at net realizable value (NRV)
Total securitized mortgage trust assets
Securitized Mortgage Collateral
Securitized mortgage collateral consisted of the following:
December 31,
2021
$
$
1,639,251
3,479
1,642,730
December 31,
2020
2,100,175
3,094
2,103,269
$
$
Mortgages secured by residential real estate
Mortgages secured by commercial real estate
Fair value adjustment
Total securitized mortgage collateral, at fair value
$
$
December 31,
2020
December 31,
2021
1,653,749 $ 2,205,575
170,418
(275,818)
$ 2,100,175
89,801
(104,299)
1,639,251
As of December 31, 2021, the Company was also a master servicer of mortgages for others of approximately
$164.6 million in UPB that were primarily collateralizing REMIC securitizations, compared to $216.3 million at
December 31, 2020. Related fiduciary funds are held in trust for investors in non-interest bearing accounts and are not
included in the Company’s consolidated balance sheets. The Company may also be required to advance funds or cause loan
servicers to advance funds to cover principal and interest payments not received from borrowers depending on the status of
their mortgages.
Real Estate Owned
The Company’s REO consisted of the following:
REO
Impairment (1)
Ending balance
REO inside trusts
REO outside trusts
Total
$
$
$
$
December 31,
December 31,
2021
2020
10,335 $
(6,856)
3,479
3,479
—
3,479
$
$
$
10,140
(6,967)
3,173
3,094
79
3,173
(1)
Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.
Securitized Mortgage Trust Liabilities
Securitized mortgage trust liabilities, which are recorded at estimated fair market value as more fully described in
Note 9.—Fair Value of Financial Instruments, are comprised of the following at December 31, 2021 and 2020:
Securitized mortgage borrowings
December 31,
2021
December 31,
2020
$ 1,614,862 $ 2,086,557
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Securitized Mortgage Borrowings – Non-recourse
Selected information on securitized mortgage borrowings for the periods indicated consisted of the following
(dollars in millions):
Securitized
mortgage
borrowings
outstanding as of
December 31,
Range of Interest Rates (%)
Interest
Rate
Interest
Rate
Year of Issuance
2002
2003
2004
2005
2006
2007
Subtotal contractual principal balance (3)
Fair value adjustment (4)
Total securitized mortgage borrowings
Original
Issuance
Amount
$ 3,876.1 $
5,966.1
17,710.7
13,387.7
5,971.4
3,860.5
2021
2020
Fixed
Interest
Rates
2.7 $
12.9
210.9
1,198.2
1,626.0
882.5
3,933.2
(2,318.3)
$ 1,614.9
3.4 5.25 - 12.00
19.1 4.34 - 12.75
3.58 - 5.56
287.3
1,404.6
—
6.25
1,860.3
1,012.5
—
4,587.2
(2,500.6)
$ 2,086.6
Margins over Margins after
One-Month
LIBOR (1)
0.27 - 2.75
0.27 - 3.00
0.25 - 2.50
0.24 - 2.90
0.10 - 2.75
0.06 - 2.00
Contractual
Call Date (2)
0.54 - 3.68
0.54 - 4.50
0.50 - 3.75
0.48 - 4.35
0.20 - 4.13
0.12 - 3.00
(1) One-month LIBOR was 0.10% as of December 31, 2021.
(2)
Interest rate margins are generally adjusted when the unpaid principal balance is reduced to less than 10-20% of the original
issuance amount, or if certain other triggers are met.
(3) Represents the outstanding balance in accordance with trustee reporting.
(4) Fair value adjustment is inclusive of $2.2 billion in bond losses at December 31, 2021 and 2020.
As of December 31, 2021, expected principal reductions of the securitized mortgage borrowings, which is based
on contractual principal payments and expected prepayment and loss assumptions for securitized mortgage collateral, was
as follows (dollars in millions):
Securitized mortgage borrowings (1)
Total
3,933.2 $
$
Less Than
One Year
Payments Due by Period
One to
Three Years
Three to
Five Years
More Than
Five Years
420.8 $
511.4 $
296.4 $
2,704.6
(1) Represents the outstanding balance in accordance with trustee reporting.
Change in Fair Value of Net Trust Assets, including Trust REO Losses
Changes in fair value of net trust assets, including trust REO losses are comprised of the following for the years
ended December 31, 2021 and 2020:
For the Year Ended
December 31,
2021
2020
Change in fair value of net trust assets, excluding REO
Gains from trust REO
Change in fair value of net trust assets, including trust REO gains
$
$
6,471 $
111
6,582
$
(13,081)
7,393
(5,688)
Call Rights
The Company holds cleanup call options (call rights) with respect to its securitized trusts whereby, when the UPB
of the underlying residential mortgage loans falls below a pre-determined threshold, the Company can purchase the
underlying residential mortgage loans at par, plus unreimbursed servicer advances, resulting in the repayment of all of the
outstanding securitization financing at par. The Company’s ability to exercise its call rights is limited based available
capital and liquidity, and/or in situations where the related securitization trustee does not permit the exercise of such rights.
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The Company holds the cleanup call options through either its economically owned residuals interests or its
master servicing rights. To date, the Company has not exercised any call rights with respect to these securitized trusts
however evaluates the potential economic benefits within its fair value estimation process.
Note 7.—Derivative Instruments
The mortgage lending operation enters into IRLCs with prospective borrowers to originate mortgage loans at a
specified interest rate and Hedging Instruments and forward delivery loan commitments to hedge the fair value changes
associated with changes in interest rates relating to its mortgage loan origination operations. The fair value of IRLCs,
Hedging Instruments and forward delivery loan commitments related to mortgage loan origination are included in other
assets or liabilities in the consolidated balance sheets. As of December 31, 2021, the estimated fair value of IRLCs was an
asset of $3.1 million while Hedging Instruments were a liability of $55 thousand. As of December 31, 2020, the estimated
fair value of IRLCs was an asset of $7.3 million while Hedging Instruments were a liability of $143 thousand. At
December 31, 2021, there were no forward delivery commitments accounted for as derivate instruments as the forward
delivery commitments had no pair-off mechanism. At December 31, 2020, forward delivery commitments had no fair
value as they were marked within LHFS to the price of the trades.
The following table includes information for the derivative assets and liabilities, lending for the periods presented:
Derivative – IRLC's (1)
Derivative – TBA MBS (1)
Derivative – Forward delivery loan commitment (2)
$
Notional Amount
December 31,
2021
255,150 $
102,000
—
December 31,
2020
450,913
45,000
20,000
Total Gains (Losses)
For the Year Ended
December 31,
$
2021
(4,164)
2,022
—
$
2020
(516)
(10,531)
—
(1) Amounts included in gain on sale of loans, net within the accompanying consolidated statements of operations and comprehensive
loss.
(2) As of December 31, 2021, there were no forward delivery loan commitments accounted for as derivative instruments. As of
December 31, 2020, $20.0 million in mortgage loans had been allocated to forward delivery loan commitments and were recorded
at fair value within LHFS in the accompanying consolidated balance sheets.
Note 8.—Redeemable Preferred Stock
As disclosed within Note 13.—Commitments and Contingencies, on July 15, 2021, the Maryland Court of
Appeals affirmed the decision of the Circuit Court (and the Court of Special Appeals) in granting summary judgment in
favor of the plaintiffs on the Preferred B voting rights and, although the Court of Appeals found the voting rights provision
to be ambiguous, it concluded that the extrinsic evidence presented to the Circuit Court, which it found to be undisputed,
supported the plaintiffs’ interpretation that the voting rights provision required separate voting by the Preferred B
stockholders to amend the Preferred B Articles Supplementary. Accordingly, the 2009 amendments to the Preferred B
Articles Supplementary were not validly adopted and the 2004 Preferred Articles Supplementary remain in effect.
As a result, as of December 31, 2021, the Company has cumulative undeclared dividends in arrears of
approximately $19.1 million, or approximately $28.71 per outstanding share of Preferred B, thereby increasing the
liquidation value to approximately $53.71 per share. Additionally, every quarter the cumulative undeclared dividends in
arrears will increase by $0.5859 per Preferred B share, or approximately $390 thousand. The liquidation preference,
inclusive of Preferred B cumulative undeclared dividends in arrears, is only payable upon declaration by the Board of
Directors, settlement, voluntary or involuntary liquidation, dissolution or winding up of the Company’s affairs. In addition,
once the Circuit Court determines basis for an appropriate record date, the Company will be required to pay the three
quarters of dividends on the Preferred B stock under the 2004 Preferred B Articles Supplementary (approximately $1.2
million, which had been previously accrued for.) Co-Plaintiff Camac Fund LP called for a special meeting of the Preferred
B stockholders for the election of two additional directors, which was originally convened at approximately 9:00 a.m.
pacific time on October 13, 2021. A quorum was not present at the meeting as originally convened and all of the shares
present at the Special Meeting voted in favor of adjourning the Special Meeting to Tuesday, November 23, 2021 at 9:00
a.m., Pacific Time. A quorum was not present at the meeting as reconvened on Tuesday, November 23, 2021 at 9:00 a.m.
F-25
Table of Contents
pacific time, and the Special Meeting was further adjourned to January 6, 2022 at 9:00 a.m. pacific time. At the reconvened
Special Meeting held on Thursday, January 6, 2022, a quorum was not present, and the meeting was concluded. As a
quorum was not established at the Special Meeting, no Preferred Directors have yet been elected by the holders of Series B
Preferred Shares.
At December 31, 2021, the Company had $70.9 million in outstanding liquidation preference of Series B and
Series C Preferred Stock. The holders of each series of Preferred Stock, which are non-voting and redeemable at the option
of the Company, retain the right to a $25.00 per share liquidation preference (plus cumulative unpaid dividends in the case
of the Series Preferred Stock) in the event of a liquidation of the Company and the right to receive dividends on the
Preferred Stock if any such dividends are declared.
Common and preferred dividends are included in the reconciliation of earnings per share beginning July 15, 2021,
which was the date the Maryland Court of Appeals affirmed the decision in granting summary judgment in favor of the
plaintiffs on the Preferred B voting rights. Cumulative preferred dividends, whether or not declared, are reflected in basic
and diluted earnings per share in accordance with FASB ASC 260-10-45-11, despite not being accrued for on the
consolidated balance sheets.
Note 9.—Fair Value of Financial Instruments
The use of fair value to measure the Company’s financial instruments is fundamental to its consolidated financial
statements and is a critical accounting estimate because a substantial portion of its assets and liabilities are recorded at
estimated fair value.
FASB ASC 825 requires disclosure of the estimated fair value of certain financial instruments and the methods
and significant assumptions used to estimate such fair values. The Company uses exit price notion when measuring the fair
values of financial instruments for disclosure purposes. The following table presents the estimated fair value of financial
instruments included in the consolidated financial statements as of the dates indicated:
December 31, 2021
December 31, 2020
Carrying
Amount
Estimated Fair Value
Level 1
Level 2
Level 3
Carrying
Amount
Estimated Fair Value
Level 1
Level 2
Level 3
Assets
Cash and cash equivalents
Restricted cash
Mortgage loans held-for-sale
Mortgage servicing rights
Derivative assets, lending, net (1)
Securitized mortgage collateral
Liabilities
Warehouse borrowings
Convertible notes
Long-term debt
Securitized mortgage borrowings
Derivative liabilities, lending, net (2)
$
29,555
5,657
308,477
749
3,111
1,639,251
$ 29,555
5,657
$
— $
—
— $
—
—
749
—
—
3,111
— 1,639,251
54,150
5,602
164,422
339
7,275
2,100,175
— 308,477
—
—
—
$ 54,150
5,602
$
— $
—
—
—
—
339
—
—
7,275
— 2,100,175
— 164,422
—
—
—
$
$
285,539
20,000
46,536
1,614,862
55
— $
$
— $ 285,539
20,000
—
—
—
—
46,536
— 1,614,862
—
55
—
—
151,932
20,000
44,413
2,086,557
143
$
$
—
— $ 151,932
20,000
—
—
—
—
44,413
— 2,086,557
—
—
143
—
(1) Represents IRLCs and are included in other assets in the accompanying consolidated balance sheets.
(2) Represents Hedging Instruments and are included in other liabilities in the accompanying consolidated balance sheets.
The fair value amounts above have been estimated 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 in both inactive and orderly markets. 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.
For the consolidated non-recourse securitizations, the fair value of the financial liabilities of the consolidated non-
recourse securitizations (securitized mortgage borrowings) is more observable than the fair value of the financial assets of
the consolidated non-recourse securitizations (securitized mortgage collateral). In accordance with FASB ASU 2014-13,
the financial liabilities of the consolidated non-recourse securitizations are the more observable input and measured at fair
value and the financial assets are being measured in consolidation as: (1) the sum of the fair value of the securitized
F-26
Table of Contents
mortgage borrowings and the fair value of the beneficial interests retained by the Company less (2) the carrying value of
any REO. The resulting amount is allocated to securitized mortgage collateral.
For securitized mortgage collateral and securitized mortgage borrowings, the underlying Alt-A (non-conforming)
residential and commercial loans and mortgage-backed securities market have experienced significant declines in market
activity, along with a lack of orderly transactions. The Company’s methodology to estimate fair value of these assets and
liabilities include the use of internal pricing techniques such as the net present value of future expected cash flows (with
observable market participant assumptions, where available) discounted at a rate of return based on the Company’s
estimates of market participant requirements. The significant assumptions utilized in these internal pricing techniques,
which are based on the characteristics of the underlying collateral, include estimated credit losses, estimated prepayment
speeds and appropriate discount rates.
Fair Value Hierarchy
The application of fair value measurements may be on a recurring or nonrecurring basis depending on the
accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its
estimated fair value.
FASB ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those
techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value
hierarchy:
● Level 1—Quoted prices (unadjusted) in active markets for identical instruments or liabilities that an entity
has the ability to assess at measurement date.
● Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; inputs other than quoted prices that are observable for an asset or
liability, including interest rates and yield curves observable at commonly quoted intervals, prepayment
speeds, loss severities, credit risks and default rates; and market-corroborated inputs.
● Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of
unobservable inputs when estimating fair value.
As a result of the lack of observable market data resulting from inactive markets, the Company has classified its
securitized mortgage collateral and borrowings, derivative assets (IRLCs), Notes and long-term debt as Level 3 fair value
measurements. Level 3 assets and liabilities measured at fair value on a recurring basis were approximately 83% and 84%
and 90% and 93%, respectively, of total assets and total liabilities measured at estimated fair value at December 31, 2021
and 2020.
Recurring Fair Value Measurements
The Company assesses its financial instruments on a quarterly basis to determine the appropriate classification
within the fair value hierarchy, as defined by FASB ASC Topic 810. Transfers between fair value classifications occur
when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the
beginning of the reporting period. There were no material transfers into Level 3 classified instruments during the year
ended December 31, 2021.
F-27
Table of Contents
The following tables present the Company’s assets and liabilities that are measured at estimated fair value on a
recurring basis, including financial instruments for which the Company has elected the fair value option at
December 31, 2021 and 2020, based on the fair value hierarchy:
Level 1
December 31, 2021
Level 2
Level 3
Level 1
December 31, 2020
Level 2
Level 3
Recurring Fair Value Measurements
Assets
Mortgage loans held-for-sale
Derivative assets, lending, net (1)
Mortgage servicing rights
Securitized mortgage collateral
Total assets at fair value
Liabilities
Securitized mortgage borrowings
Long-term debt
Derivative liabilities, lending, net (2)
Total liabilities at fair value
$
$
$
$
— $
—
—
—
— $
— $
—
—
— $
308,477
—
—
—
308,477
$
— $
3,111
749
1,639,251
$ 1,643,111
— $ 1,614,862
46,536
—
55
—
$ 1,661,398
55
$
$
$
— $
—
—
—
— $
— $
—
—
— $
164,422
—
—
—
164,422
$
—
7,275
339
2,100,175
$ 2,107,789
— $ 2,086,557
44,413
—
143
—
$ 2,130,970
143
(1) At December 31, 2021, derivative assets, lending, net included $3.1 million in IRLCs and is included in other assets in the
accompanying consolidated balance sheets. At December 31, 2020, derivative assets, lending, net included $7.3 million in IRLCs
and is included in other assets in accompanying consolidated balance sheets.
(2) At December 31, 2021 and 2020, derivative liabilities, lending, net are included in other liabilities in the accompanying
consolidated balance sheets.
The following tables present reconciliation for all assets and liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020:
Fair value, December 31, 2020
Total (losses) gains included in earnings:
Interest income (1)
Interest expense (1)
Change in fair value
Change in instrument specific credit risk
Total gains (losses) included in earnings
Transfers in and/or out of Level 3
Purchases, issuances and settlements:
Purchases
Issuances
Settlements
Fair value, December 31, 2021
Unrealized (losses) gains still held (3)
Level 3 Recurring Fair Value Measurements
For the Year Ended December 31, 2021
Securitized
mortgage
collateral
$ 2,100,175
Securitized
mortgage
borrowings
$ (2,086,557)
$
Mortgage
servicing
rights
Interest
rate lock
commitments,
net
339
$
7,275
$
Long-
term
debt
(44,413)
(12,162)
—
151,759
—
139,597
—
—
(37,090)
(145,288)
—
(182,378)
—
—
—
(126)
—
(126)
—
—
—
(4,164)
—
(4,164)
—
—
(1,499)
2,098
(2,722)(2)
(2,123)
—
—
—
(600,521)
$ 1,639,251
(104,299)
$
—
—
654,073
$ (1,614,862)
2,318,296
$
$
$
—
536
—
749
749
$
$
—
—
—
3,111
3,111
$
$
—
—
—
(46,536)
15,464
(1) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated
fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $8.1 million for the year
ended December 31, 2021. The difference between accretion of interest income and expense and the amounts of interest income and
expense recognized in the consolidated statements of operations and comprehensive loss is primarily from contractual interest on
the securitized mortgage collateral and borrowings.
(2) Amount represents the change in instrument specific credit risk in other comprehensive loss in the consolidated statements of
operations and comprehensive loss.
(3) Represents the amount of unrealized (losses) gains relating to assets and liabilities classified as Level 3 that are still held and
reflected in the fair values at December 31, 2021.
F-28
Table of Contents
Fair value, December 31, 2019
Total (losses) gains included in earnings:
Interest income (1)
Interest expense (1)
Change in fair value
Change in instrument specific credit risk
Total (losses) gains included in earnings
Transfers in and/or out of Level 3
Purchases, issuances and settlements:
Purchases
Issuances
Settlements
Fair value, December 31, 2020
Unrealized (losses) gains still held (3)
Level 3 Recurring Fair Value Measurements
For the Year Ended December 31, 2020
Securitized
mortgage
collateral
$ 2,628,064 $ (2,619,210) $
Securitized
mortgage
borrowings
Mortgage
servicing
rights
Interest
rate lock
commitments,
net
41,470 $
7,791 $
Long-
term
debt
(45,434)
747
—
(92,562)
—
(91,815)
—
—
(65,421)
79,481
—
14,060
—
—
—
(436,074)
$ 2,100,175
(275,818)
$
—
—
518,593
$ (2,086,557)
$ 2,500,674
$
$
—
—
(21,962)
—
(21,962)
—
—
2,094
(21,263)
339
339
$
$
—
—
(516)
—
(516)
—
—
—
—
7,275
7,275
—
(850)
1,899
(28)(2)
1,021
—
—
—
—
(44,413)
17,587
$
$
(1) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated
fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $8.9 million for the year
ended December 31, 2020. The difference between accretion of interest income and expense and the amounts of interest income and
expense recognized in the consolidated statements of operations and comprehensive loss is primarily from contractual interest on
the securitized mortgage collateral and borrowings.
(2) Amount represents the change in instrument specific credit risk in other comprehensive loss in the consolidated statements of
operations and comprehensive loss.
(3) Represents the amount of unrealized (losses) gains relating to assets and liabilities classified as Level 3 that were still held and
reflected in the fair values at December 31, 2020.
The following table presents quantitative information about the valuation techniques and unobservable inputs
applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and non-
recurring basis at December 31, 2021.
Financial Instrument
Assets and liabilities backed by real estate
Securitized mortgage collateral, and
Securitized mortgage borrowings
Other assets and liabilities
Mortgage servicing rights
Derivative assets - IRLCs, net
Long-term debt
Estimated
Fair Value
Valuation
Technique
Unobservable
Input
Range of
Inputs
Weighted
Average
$
$
1,639,251
(1,614,862)
Discounted Cash Flow
Prepayment rates
Default rates
Loss severities
Discount rates
749
Discounted Cash Flow Discount rates
3,111
(46,536)
Market pricing
Prepayment rates
Pull-through rates
Discounted Cash Flow Discount rates
2.9 - 46.3 %
0.06 - 4.3 %
0.01 - 97.6 %
2.1 - 13.0 %
12.5 - 15.0 %
8.01 - 29.1 %
50.0 - 98.0 %
8.6 %
10.7 %
1.7 %
70.1 %
3.6 %
12.8 %
10.3 %
79.0 %
8.6 %
For assets and liabilities backed by real estate, a significant increase in discount rates, default rates or loss
severities would result in a significantly lower estimated fair value. The effect of changes in prepayment speeds would have
differing effects depending on the seniority or other characteristics of the instrument. For other assets and liabilities, a
significant increase in discount rates would result in a significantly lower estimated fair value. A significant increase or
decrease in pull-through rate assumptions would result in a significant increase or decrease, respectively, in the fair value of
IRLCs. The Company believes that the imprecision of an estimate could be significant.
F-29
Table of Contents
The following tables present the changes in recurring fair value measurements included in net losses for the years
ended December 31, 2021 and 2020:
Recurring Fair Value Measurements
Changes in Fair Value Included in Net Earnings (Loss)
For the Year Ended December 31, 2021
Change in Fair Value of
Securitized mortgage collateral
Securitized mortgage borrowings
Long-term debt
Mortgage servicing rights (2)
Mortgage loans held-for-sale
Derivative assets — IRLCs
Derivative liabilities — Hedging
Instruments
Total
Net Trust
Assets
151,759
(145,288)
Interest
Interest
— $
Income (1) Expense (1)
$ (12,162) $
—
—
—
—
—
(37,090)
(1,499)
—
—
—
$
—
—
—
—
— $
—
2,098
—
—
—
—
$ (12,162) $
—
(38,589) $
—
6,471 (3)$
—
$
2,098
— $
—
—
(126)
—
—
—
(126) $
— $ 139,597
— (182,378)
599
—
(126)
—
3,395
(4,164)
3,395
(4,164)
88
(681) $
88
(42,989)
Long-term Other Income Gain (Loss) on Sale
Debt
and Expense
of Loans, net
Total
(1) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated
fair values for trust assets and trust liabilities.
Included in gain (loss) on mortgage servicing rights, net in the consolidated statements of operations and comprehensive loss.
(2)
(3) For the year ended December 31, 2021, change in the fair value of trust assets, excluding REO was $6.5 million.
Recurring Fair Value Measurements
Changes in Fair Value Included in Net Earnings (Loss)
For the Year Ended December 31, 2020
Change in Fair Value of
Securitized mortgage collateral
Securitized mortgage borrowings
Long-term debt
Mortgage servicing rights (2)
Mortgage loans held-for-sale
Derivative assets — IRLCs
Derivative liabilities — Hedging
Instruments
Total
Interest
Interest
Income (1) Expense (1)
$
— $
747
$
—
—
—
—
—
(65,421)
(850)
—
—
—
Net Trust
Assets
(92,562)
79,481
Long-term Other Income Gain (Loss) on Sale
Debt
and Expense
of Loans, net
$
—
—
—
—
— $
—
1,899
—
—
—
— $
—
—
(21,962)
—
—
— $
—
—
—
(15,955)
(516)
Total
(91,815)
14,060
1,049
(21,962)
(15,955)
(516)
—
$
747
—
(66,271) $
—
(13,081)(3)$
—
$
1,899
—
(21,962) $
$
509
509
(15,962) $ (114,630)
(1) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated
fair values for trust assets and trust liabilities.
Included in gain (loss) on mortgage servicing rights, net in the consolidated statements of operations and comprehensive loss.
(2)
(3) For the year ended December 31, 2020, change in the fair value of trust assets, excluding REO was $13.1 million.
The following is a description of the measurement techniques for items recorded at estimated fair value on a
recurring basis.
Mortgage servicing rights—The Company elected to carry its mortgage servicing rights arising from its mortgage
loan origination operation at fair value. The fair value of mortgage servicing rights is based upon a discounted cash flow
model. The valuation model incorporates assumptions that market participants would use in estimating the fair value of
servicing. These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account
earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Mortgage servicing
rights are considered a Level 3 measurement at December 31, 2021 and 2020.
Mortgage loans held-for-sale—The Company elected to carry its mortgage LHFS originated or acquired from its
mortgage lending operation at fair value. Fair value is based on quoted market prices, where available, prices for other
traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market
participants. Given the meaningful level of secondary market activity for mortgage loans, active pricing is available for
similar assets and accordingly, the Company classifies its mortgage LHFS as a Level 2 measurement at December 31, 2021
and 2020.
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Table of Contents
Securitized mortgage collateral—The Company elected to carry its securitized mortgage collateral at fair value.
These assets consist primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value
measurements are based on the Company’s internal models used to compute the net present value of future expected cash
flows, with observable market participant assumptions, where available. The Company’s assumptions include its
expectations of inputs that other market participants would use in pricing these assets. These assumptions include
judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates,
investor yield requirements and certain other factors. As of December 31, 2021, securitized mortgage collateral had an
unpaid principal balance of $1.7 billion, compared to an estimated fair value on the Company’s consolidated balance sheets
of $1.6 billion. The aggregate unpaid principal balance exceeds the fair value by $0.1 billion at December 31, 2021. As of
December 31, 2021, the unpaid principal balance of loans 90 days or more past due was $0.3 billion compared to an
estimated fair value of $0.1 billion. The aggregate unpaid principal balances of loans 90 days or more past due exceed the
fair value by $0.2 billion at December 31, 2021. Securitized mortgage collateral is considered a Level 3 measurement at
December 31, 2021 and 2020.
Securitized mortgage borrowings—The Company elected to carry all of its securitized mortgage borrowings at
fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed
by non-conforming mortgage loans. Fair value measurements include the Company’s judgments about the underlying
collateral and assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield
requirements and certain other factors. As of December 31, 2021, securitized mortgage borrowings had an outstanding
principal balance of $1.7 billion, net of $2.2 billion in bond losses, compared to an estimated fair value of $1.6 billion. The
aggregate outstanding principal balance exceeds the fair value by $0.1 billion at December 31, 2021. Securitized mortgage
borrowings are considered a Level 3 measurement at December 31, 2021 and 2020.
Long-term debt—The Company elected to carry its remaining long-term debt (consisting of junior subordinated
notes) at fair value. These securities are measured based upon an analysis prepared by management, which considered the
Company’s own credit risk, including settlements with trust preferred debt holders and discounted cash flow analysis. As of
December 31, 2021, long-term debt had an unpaid principal balance of $62.0 million compared to an estimated fair value
of $46.5 million. The aggregate unpaid principal balance exceeds the fair value by $15.5 million at December 31, 2021.
The long-term debt is considered a Level 3 measurement at December 31, 2021 and 2020.
Derivative assets and liabilities, Lending—The Company’s derivative assets and liabilities are carried at fair value
as required by GAAP and are accounted for as free standing derivatives. The derivatives include IRLCs with prospective
residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have
locked in that interest rate. These commitments are determined to be derivative instruments in accordance with GAAP. The
derivatives also include hedging instruments (typically TBA MBS and forward loan commitments) used to hedge the fair
value changes associated with changes in interest rates relating to its mortgage lending originations. The Company hedges
the period from the interest rate lock (assuming a fall-out factor) to the date of the loan sale. The estimated fair value of
IRLCs are based on underlying loan types with similar characteristics using the TBA MBS market, which is actively
quoted and validated through external sources. The data inputs used in this valuation include, but are not limited to, loan
type, underlying loan amount, note rate, loan program, expected sale date of the loan, and current market interest rates.
These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments
specific to each loan. For all IRLCs, the base value is then adjusted for the anticipated Pull-through Rate, less discounts that
would be required by a market participant acquiring the IRLCs. The anticipated Pull-through Rate is an unobservable input
based on historical experience, which results in classification of IRLCs as a Level 3 measurement at December 31, 2021
and 2020. The fair value of the Hedging Instruments is based on the actively quoted TBA MBS market using observable
inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date. Therefore, the
Hedging Instruments are classified as a Level 2 measurement at December 31, 2021 and 2020.
Nonrecurring Fair Value Measurements
The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These
fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair
value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.
F-31
Table of Contents
The following table presents financial and non-financial assets and liabilities measured using nonrecurring fair
value measurements at December 31, 2021 and 2020, respectively:
REO (1)
ROU asset
Nonrecurring Fair Value Measurements
Level 1
December 31, 2021
Level 2
Level 3
Level 1
December 31, 2020
Level 2
Level 3
$
— $
—
3,479 $
—
— $
10,209
— $
—
3,173 $
—
—
13,512
(1) Balance represents REO at December 31, 2021 and December 31, 2020 which has been impaired subsequent to foreclosure.
The following table presents total gains on financial and non-financial assets and liabilities measured using
nonrecurring fair value measurements for the years ended December 31, 2021 and 2020, respectively:
REO (2)
Total Gains (1)
For the Year Ended December 31,
2021
2020
$
111
$
7,393
(1) Total gains reflect gains from all nonrecurring measurements during the year.
(2) For the years ended December 31, 2021 and 2020, the Company recorded $111 thousand and $7.4 million, respectively, of gains
related to changes in the NRV of REO. Gains represent recovery of the NRV attributable to an improvement in state specific loss
severities on properties held during the period which resulted in an increase to NRV.
Real estate owned—REO consists of residential real estate acquired in satisfaction of loans. Upon foreclosure,
REO is adjusted to the estimated fair value of the residential real estate less estimated selling and holding costs, offset by
expected contractual mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of
carrying value or estimated fair value less costs to sell. REO balance representing REOs which have been impaired
subsequent to foreclosure are subject to nonrecurring fair value measurement and included in the nonrecurring fair value
measurements tables. Fair values of REO are generally based on observable market inputs, and considered Level 2
measurements at December 31, 2021 and 2020.
ROU asset—The Company performs reviews of its ROU assets for impairment when evidence exists that the
carrying value of an asset may not be recoverable. During the first quarter of 2020, the Company recorded a $393 thousand
ROU asset impairment charge related to the consolidation of one floor of the Company’s corporate office. The impairment
charge is included in general, administrative and other expense in the consolidated statements of operations and
comprehensive loss. ROU asset was considered a Level 3 fair value measurement at December 31, 2021 and December 31,
2020.
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Table of Contents
Note 10.—Reconciliation of Loss Per Common Share
The following table presents the computation of basic and diluted loss per common share, including the dilutive
effect of stock options, restricted stock awards (RSAs), restricted stock units (RSUs), deferred stock units (DSUs), Notes
and cumulative redeemable preferred stock outstanding for the periods indicated, when dilutive:
Numerator for basic loss per share:
Net loss
Less: Cumulative non-declared dividends on preferred stock (1)
Net loss attributable to common stockholders
Numerator for diluted loss per share:
Net loss
Interest expense attributable to convertible notes (2)
Net loss plus interest expense attributable to convertible notes
Denominator for basic loss per share (3):
Basic weighted average common shares outstanding during the period
Denominator for diluted loss per share (3):
Basic weighted average common shares outstanding during the period
Net effect of dilutive convertible notes and warrants (2)
Net effect of dilutive stock options, DSU’s, RSA's and RSU's (2)
Diluted weighted average common shares
Net loss per common share:
Basic
Diluted
$
$
$
$
$
$
For the Year Ended
December 31,
2021
2020
(3,878)
(780)
(4,658)
$
$
(88,150)
—
(88,150)
(4,658)
$
—
$
(4,658)
(88,150)
—
(88,150)
21,332
21,251
21,332
—
—
21,332
21,251
—
—
21,251
(0.22)
(0.22)
$
$
(4.15)
(4.15)
(1) Cumulative non-declared dividends in arrears are included beginning July 15, 2021, which was the date the Maryland Court of
Appeals affirmed the decision in granting summary judgment in favor of the plaintiffs on the Preferred B voting rights (see Note 13.
- Commitments and Contingencies).
(2) Adjustments to diluted loss per share for the Notes for the years ended December 31, 2021 and 2020, were excluded from the
calculation, as they were anti-dilutive.
(3) Share amounts presented in thousands.
The anti-dilutive stock options, RSAs, RSUs and DSUs outstanding for the years ending December 31, 2021 and
2020 were 1.0 million and 829 thousand shares in the aggregate, respectively. Additionally, for the years ended December
2021 and 2020, there were 930 thousand shares attributable to the Notes that were anti-dilutive.
Common and preferred dividends are included in the reconciliation of earnings per share beginning July 15, 2021,
which was the date the Maryland Court of Appeals affirmed the decision in granting summary judgment in favor of the
plaintiffs on the Preferred B voting rights. Cumulative preferred dividends, whether or not declared, are reflected in basic
and diluted earnings per share in accordance with ASC 260-10-45-11, despite not being accrued for on the consolidated
balance sheets.
Note 11.—Income Taxes
The Company is subject to federal income taxes as a regular (Subchapter C) corporation and files a consolidated
U.S. federal income tax return.
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Income taxes for the years ended December 31, 2021 and 2020 were as follows:
Current income taxes:
Federal
State
Total current income tax expense
Deferred income taxes:
Federal
State
Total deferred income tax expense
Total income tax expense
For the Year Ended December 31,
2021
2020
$
$
— $
71
71
—
—
—
71
$
8
125
133
—
—
—
133
The Company recorded income tax expense of $71 thousand and $133 thousand for the years ended
December 31, 2021 and 2020, respectively. The income tax expense for the year endeds December 31, 2021 and 2020, was
primarily the result of state minimum taxes and franchise taxes.
Deferred tax assets are recognized subject to management's judgment that realization is "more likely than not". A
valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely
than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is
given to evidence that can be objectively verified. As of each reporting date, the Company considers new evidence, both
positive and negative, that could impact management's view with regard to future realization of deferred tax assets.
Significant judgment is required in assessing future earnings trends, the availability of tax planning strategies, recent pretax
losses and the timing of reversals of temporary differences. The Company's evaluation is based on current tax laws as well
as management's expectation of future performance.
The Company's deferred tax assets are primarily the result of net operating losses and basis differences on
mortgage securities and goodwill. The Company has recorded a full valuation allowance against its deferred tax assets at
December 31, 2021 as it is more likely than not that the deferred tax assets will not be realized. The valuation allowance is
based on the management's assessment that it is more likely than not that certain deferred tax assets, primarily net operating
loss carryforwards, may not be realized in the foreseeable future due to objective negative evidence.
Deferred tax assets are comprised of the following temporary differences between the financial statement carrying
value and the tax basis of assets:
Deferred tax assets:
Federal and state net operating losses
Mortgage securities
Depreciation and amortization
Capital loss carryover
Compensation and other accruals
Repurchase reserve
Total gross deferred tax assets
Deferred tax liabilities:
Fair value adjustments on long-term debt
Mortgage servicing rights
Corporate-owned life insurance
Total gross deferred tax liabilities
Valuation allowance
Total net deferred tax assets
F-34
For the Year Ended December 31,
2021
2020
$
$
178,194
55,283
24,355
172
3,058
1,493
262,555
(3,980)
(236)
(1,017)
(5,233)
(257,322)
$
— $
173,652
54,624
26,752
171
3,060
2,200
260,459
(4,639)
(106)
(968)
(5,713)
(254,746)
—
Table of Contents
The following is a reconciliation of income taxes to the expected statutory federal corporate income tax rates for
the years ended December 31, 2021 and 2020:
For the Year Ended December 31,
Expected income tax expense
State tax expense, net of federal benefit
State rate change
Change in valuation allowance
Corporate-owned life insurance interest and premiums
Other
Total income tax expense
$
2021
$
(799) $
2020
(18,483)
99
(731)
19,016
170
62
133
56
(640)
1,218
96
140
71
$
At December 31, 2021, the Company had accumulated other comprehensive earnings of $22.0 million, which was
net of tax of $10.5 million.
As of December 31, 2021, the Company had estimated NOL carryforwards of approximately $623.5 million.
Federal NOL carryforwards begin to expire in 2027. Included in the estimated NOL carryforward is $65.9 million of
NOLs with an indefinite carryover period. As of December 31, 2021, the Company had estimated California NOL
carryforwards of approximately $435.2 million, which begin to expire in 2028. The Company may not be able to realize
the maximum benefit due to the nature and tax entities that hold the NOL.
On October 23, 2019, the Company adopted a Tax Benefits Preservation Rights Agreement (Rights Plan) to help
preserve the value of certain deferred tax benefits, including those generated by net operating losses (collectively, Tax
Benefits). In general, the Company may “carry forward” net operating losses in certain circumstances to offset current and
future taxable income, which will reduce federal and state income tax liability, subject to certain requirements and
restrictions. The Company’s ability to use these Tax Benefits would be substantially limited and impaired if it were to
experience an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the
Code) and the Treasury Regulations promulgated thereunder. Generally, the Company will experience an “ownership
change” if the percentage of the shares of Common Stock owned by one or more “five-percent shareholders” increases by
more than 50 percentage points over the lowest percentage of shares of Common Stock owned by such stockholder at any
time during the prior three year on a rolling basis. As such, the Rights Plan has a 4.99% “trigger” threshold that is intended
to act as a deterrent to any person or entity seeking to acquire 4.99% or more of the outstanding Common Stock without the
prior approval of the board of directors. The Rights Plan also has certain ancillary anti-takeover effects. The rights
accompany each share of common stock of the Company and are evidenced by ownership of common stock. The rights are
not exercisable except upon the occurrence of certain change of control events. Once triggered, the rights would entitle the
stockholders, other than a person qualifying as an “Acquiring Person” pursuant to the rights plan, to certain “flip in”, “flip
over” and exchange rights. The rights issued under the Rights Plan may be redeemed by the board of directors at a nominal
redemption price of $0.001 per right, and the board of directors may amend the rights in any respect until the rights are
triggered. The Rights Plan was approved at the Company’s 2020 annual meeting of stockholders and will expire on the
three-year anniversary of its adoption.
The Company adopted ASU 2019-12 on a prospective basis on January 1, 2020. The most significant impact to
the Company included the removal of the exception to the incremental approach for intraperiod tax allocation when there is
a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other
comprehensive earnings). The changes also add a requirement for an entity to reflect the effect of an enacted change in tax
laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The
adoption of this standard did not have a material impact on the Company's consolidated financial statements.
The Company files numerous tax returns in various jurisdictions. While the Company is subject to examination by
various taxing authorities, the Company believes there are no unresolved issues or claims likely to be material to its
financial position. The Company classifies interest and penalties on taxes as provision for income taxes. As of
December 31, 2021 and 2020, the Company has no material uncertain tax positions. The Company has state alternative
minimum tax (AMT) credits in the amount of $404 thousand as of December 31, 2021.
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Note 12.—Segment Reporting
The Company has three primary reporting segments which include mortgage lending, real estate services and
long-term mortgage portfolio. Unallocated corporate and other administrative costs, including the costs associated with
being a public company, are presented in corporate and other.
The following table presents selected balance sheet data by reporting segment as of the dates indicated:
Balance Sheet Items as of
December 31, 2021:
Cash and cash equivalents
Restricted cash
Mortgage loans held-for-sale
Mortgage servicing rights
Trust assets
Other assets (1)
Total assets
Total liabilities
Balance Sheet Items as of
December 31, 2020:
Cash and cash equivalents
Restricted cash
Mortgage loans held-for-sale
Mortgage servicing rights
Trust assets
Other assets (1)
Total assets
Total liabilities
Mortgage
Lending
Real Estate
Services
Long-term
Portfolio
Corporate
and other
26,239 $
5,657
308,477
749
—
10,051
351,173
298,726
$
$
500 $
—
—
—
—
2
502
$
— $
—
—
—
—
1,642,730
141
1,642,871
1,661,729
$
$
2,816 $
—
—
—
—
25,409
28,225
52,380
$
$
Consolidated
29,555
5,657
308,477
749
1,642,730
35,603
2,022,771
2,012,835
Mortgage
Lending
Real Estate
Services
Long-term
Portfolio
Corporate
and other
Consolidated
50,968 $
5,602
164,422
339
—
12,510
233,841
166,285
$
$
501 $
—
—
—
—
2
$
503
— $
— $
—
—
—
2,103,269
130
2,103,399
2,131,178
$
$
2,681 $
—
—
—
—
28,882
31,563
56,192
$
$
54,150
5,602
164,422
339
2,103,269
41,524
2,369,306
2,353,655
$
$
$
$
$
$
(1) All segment asset balances exclude intercompany balances.
The following table presents selected statement of operations information by reporting segment for the years
ended December 31, 2021 and 2020:
Statement of Operations Items for the
Year Ended December 31, 2021:
Gain on sale of loans, net
Servicing expense, net
Gain on mortgage servicing rights, net
Real estate services fees, net
Other revenue
Other operating expense
Other income (expense)
$
Net earnings (loss) before income tax expense
$
Income tax expense
Net loss
Mortgage
Lending
Real Estate
Services
Long-term
Portfolio
Corporate
and other
Consolidated
65,294 $
(432)
34
—
24
(62,605)
98
2,413
$
— $
—
—
1,144
—
(1,409)
—
$
(265)
— $
—
—
—
110
(778)
12,840
12,172
$
— $
—
—
—
145
(16,412)
(1,860)
(18,127)
$
65,294
(432)
34
1,144
279
(81,204)
11,078
(3,807)
71
(3,878)
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Statement of Operations Items for the
Year Ended December 31, 2020:
Gain on sale of loans, net
Servicing fees, net
Loss on mortgage servicing rights, net
Real estate services fees, net
Other revenue
Other operating expense
Other income (expense)
$
Net (loss) earnings before income tax expense
$
Income tax expense
Net loss
Note 13.—Commitments and Contingencies
Legal Proceedings
Mortgage
Lending
Real Estate
Long-term Corporate
Services
Portfolio
and other
14,004 $
3,603
(28,509)
—
135
(60,869)
2,366
(69,270)
$
— $
—
—
1,312
—
(1,485)
—
$
(173)
— $
—
—
—
143
(633)
1,344
854
$
— $
—
—
—
Consolidated
14,004
3,603
(28,509)
1,312
1,498
(81,273)
1,348
(88,017)
133
(88,150)
$
$
1,220
(18,286)
(2,362)
(19,428)
The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary
course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the
Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company
generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate
resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation
when those matters present loss contingencies that are both probable and estimable. In any case, there may be exposure to
losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is
based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters
underlying the estimated loss will change from time to time, and actual results may vary significantly from the current
estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss
only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.
Based on the Company’s current understanding of pending legal actions and proceedings, management does not
believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will
have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company.
However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control,
and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these
matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
The legal matters summarized below are ongoing and may have an effect on the Company’s business and future
financial condition and results of operations:
On December 7, 2011, a purported class action was filed in the Circuit Court of Baltimore City entitled Timm v.
Impac Mortgage Holdings, Inc., et al. alleging on behalf of holders of the Company’s 9.375% Series B Cumulative
Redeemable Preferred Stock (Preferred B) and 9.125% Series C Cumulative Redeemable Preferred Stock (Preferred C)
who did not tender their stock in connection with the Company’s 2009 completion of its Offer to Purchase and Consent
Solicitation that the Company failed to achieve the required consent of the Preferred B and C holders, the consents to
amend the Preferred stock were not effective because they were given on unissued stock (after redemption), the Company
tied the tender offer with a consent requirement that constituted an improper “vote buying” scheme, and that the tender
offer was a breach of a fiduciary duty. The action sought the payment of two quarterly dividends for the Preferred B and C
holders, the unwinding of the consents and reinstatement of the cumulative dividend on the Preferred B and C stock, and
the election of two directors by the Preferred B and C holders. The action also sought punitive damages and legal expenses.
On July 16, 2018, the Circuit Court entered a Judgment Order (“Judgment Order”) whereby it (1) declared and entered
judgment in favor of all defendants on all claims related to the Preferred C holders and all claims against all individual
defendants thereby affirming the validity of the 2009 amendments to the Preferred C Articles Supplementary; (2) declared
its interpretation of the voting provision language in the Preferred B Articles Supplementary to mean that consent of two-
thirds of the Preferred B stockholders was required to approve the 2009 amendments to the Preferred B
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Articles Supplementary, which consent was not obtained, thus rendering the amendments invalid and leaving the 2004
Preferred B Articles Supplementary in effect; (3) ordered the Company to hold a special election within sixty days for the
Preferred B stockholders to elect two directors to the Board of Directors pursuant to the 2004 Preferred B Articles
Supplementary (which Directors will remain on the Company’s Board of Directors until such time as all accumulated
dividends on the Preferred B have been paid or set aside for payment); and (4) declared that the Company is required to pay
three quarters of dividends on the Preferred B stock under the 2004 Preferred B Articles Supplementary (approximately,
$1.2 million, but did not order the Company to make any payment at that time). The Circuit Court declined to certify any
class pending the outcome of appeals and certified its Judgment Order for immediate appeal. On October 2, 2019, the Court
of Special Appeals held oral argument for all appeals in the matter. On April 1, 2020, the Court of Special Appeals issued
an opinion affirming the judgment in favor of the plaintiffs on all claims involving Preferred C, and affirming judgment for
plaintiffs on the Preferred B voting rights finding that the voting rights provision was not ambiguous. In response, the
Company filed a petition for a writ of certiorari to the Maryland Court of Appeals appealing the Court of Special Appeals
opinion, which was granted on July 13, 2020. All parties submitted their briefs and oral argument was held on December 4,
2020. On July 15, 2021, the Maryland Court of Appeals affirmed the decision of the Circuit Court (and the Court of Special
Appeals) in granting summary judgment in favor of the plaintiffs on the Preferred B voting rights and, although the Court
of Appeals found the voting rights provision to be ambiguous, it concluded that the extrinsic evidence presented to the
Circuit Court, which it found to be undisputed, supported the plaintiffs’ interpretation that the voting rights provision
required separate voting by the Preferred B stockholders to amend the 2004 Preferred B Articles Supplementary.
Accordingly, the 2009 amendments to the Preferred B Articles Supplementary were not validly adopted and the 2004
Preferred Articles Supplementary remain in effect. On August 17, 2021, the Court of Appeals issued its mandate returning
the case to the Circuit Court for final proceedings. On October 25, 2021, the case was assigned to a judge of the Circuit
Court to oversee final disposition of outstanding issues. Thereafter, and in consideration of the Circuit Court’s outstanding
Order, co-Plaintiff Camac Fund LP called upon the Company to hold a special meeting of the Preferred B stockholders for
the election of two directors (“Special Meeting”) under the 2004 Preferred B Articles Supplementary. The Special Meeting
was convened on October 13, 2021, then adjourned by a vote of all shares present to November 23, 2021 due to lack of a
quorum sufficient for election of directors. A quorum was not present at the meeting as reconvened on November 23, 2021,
and the Special Meeting was further adjourned to January 6, 2022. At the reconvened Special Meeting held on January 6,
2022, a quorum was again not present, and the meeting was concluded. As a quorum was not established at the Special
Meeting, no directors have yet been elected by the holders of Series B Preferred Shares.
On April 20, 2017, a purported class action was filed in the United States District Court, Central District of
California, entitled Nguyen v. Impac Mortgage Corp. dba CashCall Mortgage et al. The plaintiffs contend the defendants
did not pay purported class members overtime compensation or provide meal and rest breaks, as required by law. The
action seeks to invalidate any waiver signed by a purported class member of their right to bring a class action and seeks
damages, restitution, penalties, attorney’s fees, interest, and an injunction against unfair, deceptive, and unlawful activities.
On August 23, 2018, the court (1) granted the defendants motion to compel arbitration as to all claims, except for the
plaintiffs’ claims under California’s Labor Code Private Attorneys General Act (PAGA); (2) ordered the plaintiffs to submit
their claims (other than PAGA claims) to arbitration on an individual, non-class, non-collective, and non-representative
basis; (3) dismissed all class and collective claims with prejudice to the plaintiffs and without prejudice to putative class
members; and (4) stayed all claims that were compelled to arbitration, as well as the PAGA claims. Plaintiffs Jason Nguyen
and Tam Nguyen each submitted their respective demands for individual arbitration to the American Arbitration
Association. The Company settled all individual claims brought by Jason Nguyen and Tam Nguyen and each of their
arbitration claims were dismissed with prejudice on September 1, 2021.
On September 18, 2018, a purported class action was filed in the Superior Court of California, Orange County,
entitled McNair v. Impac Mortgage Corp. dba CashCall Mortgage. The plaintiff contends the defendant did not pay the
plaintiff and purported class members overtime compensation, provide required meal and rest breaks, or provide accurate
wage statements. The action seeks damages, restitution, penalties, interest, attorney’s fees, and all other appropriate
injunctive, declaratory, and equitable relief. On March 8, 2019, a First Amended Complaint was filed, which added a claim
alleging PAGA violations. On March 12, 2019, the parties filed a stipulation with the court stating (1) the plaintiff’s
individual claims should be arbitrated pursuant to the parties’ arbitration agreement, (2) the class claims should be struck
from the First Amended Complaint, and (3) the plaintiff will proceed solely with regard to her PAGA claims. This case was
consolidated with the Batres v. Impac Mortgage Corp. dba CashCall Mortgage case discussed below with a rescheduled
trial date of January 18, 2022. On October 28, 2021, the Company entered into a settlement agreement, which is subject to
court review and approval, to resolve all claims brought by Plaintiff McNair and the class members. No assurances can be
given that such settlement will be approved by the court. On December 27, 2018, a purported class
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action was filed in the Superior Court of California, Orange County, entitled Batres v. Impac Mortgage Corp. dba CashCall
Mortgage. The plaintiff contends the defendant did not pay the plaintiff and purported class members overtime
compensation, provide required meal and rest breaks, or provide accurate wage statements. The action seeks damages,
restitution, penalties, interest, attorney’s fees, and all other appropriate injunctive, declaratory, and equitable relief. On
March 14, 2019, the plaintiff filed an amended complaint alleging only PAGA violations and seeking penalties, attorneys’
fees, and such other appropriate relief. This case was consolidated with the McNair v. Impac Mortgage Corp. dba CashCall
Mortgage discussed above with a rescheduled trial date of January 18, 2022. On October 28, 2021, the Company entered
into a settlement agreement, which is subject to court review and approval, to resolve all claims brought by Plaintiff
McNair and the class members. No assurances can be given that such settlement will be approved by the court.
On July 3, 2019, a representative action was filed in the Superior Court of California, Orange County, entitled
Law v. Impac Mortgage Corp. dba CashCall Mortgage under PAGA. The plaintiff contends the defendant did not pay its
employees overtime compensation, provide required meal and rest breaks, or provide accurate wage statements as required
by law. The action seeks penalties, attorneys’ fees, and such other appropriate relief. The Law action was deemed related to
the McNair action on August 19, 2019. On January 13, 2020, the Law action was stayed pending resolution of the above-
referenced McNair action. On March 2, 2021, Law submitted his individual claims related to his wage and hour claims to
arbitration. The Company settled all claims brought by Law and his arbitration matter was closed and his action with the
Superior Court of California was dismissed with prejudice on August 12, 2021.On December 17, 2021, a lawsuit was filed
in the Supreme Court of the State of New York, County of New York, entitled UBS Americas Inc., et al. v. Impac Funding
Corporation et ano. The plaintiffs contend that the defendants are required to indemnify payments that plaintiffs made to
resolve claims asserted by the Federal Home Loan Bank of San Francisco and HSH Nordbank AG related to certain
residential mortgage-backed securities (RMBS). Plaintiffs contend that the RMBS included loans that the Company’s
former subsidiary, Novelle Financial Services, Inc., sold to certain UBS entities in breach of contractual representations and
warranties. Plaintiffs further contend that they settled the cases for which plaintiffs are demanding indemnification in
December 2015 and March 2016. The lawsuit has not been served. The Company believes the claims are without merit
and intends to defend itself vigorously.
The Company is a party to other litigation and claims which are normal in the course of the Company’s
operations. While the results of such other litigation and claims cannot be predicted with certainty, the Company believes
the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations.
The Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously
and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial
condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits. An
adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and
results of operations.
Lease Commitments
The following table presents the operating and finance lease balances within the consolidated balance sheets,
weighted average remaining lease term, and weighted average discount rates related to the Company’s leases as of
December 31, 2021:
Lease Assets and Liabilities
Classification
Assets
Lease ROU assets
Liabilities
Lease liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
Other assets
Other liabilities
December 31,
2021
$ 10,209
$ 12,562
2.7
4.8 %
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The following table presents the maturities of the Company’s operating lease liabilities as of December 31, 2021:
Year 2022
Year 2023
Year 2024
Total lease commitments
Less: imputed interest
Total lease liability
$
$
$
4,809
4,909
3,729
13,447
(885)
12,562
During the years ended December 31, 2021 and 2020, cash paid for operating leases was $4.6 million and $5.2
million, respectively. Total operating lease expense for the years ended December 31, 2021 and 2020 was $4.0 million and
$4.7 million, respectively. Operating lease expense includes short-term leases and sublease income, both of which are
immaterial.
During the year ended December 31, 2020, the Company recognized ROU asset impairment of $393 thousand
related to the consolidation of one floor of the Company’s corporate office, reducing the carrying value of the lease asset to
its estimated fair value. The impairment charge is included in general, administrative and other expense in the consolidated
statements of operations and comprehensive loss.
As of December 31, 2021, the Company had no additional operating leases that had not yet commenced.
Repurchase Reserve
The provision for repurchases represents an estimate of losses to be incurred on the repurchase of loans or
indemnification of purchaser's losses related to loan sales. Certain sale contracts and GSE standards require the Company
to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if
the accompanying mortgage loan fails to meet certain customary representations and warranties.
In the event of a breach of the representations and warranties, the Company may be required to either repurchase
the loan or indemnify the purchaser for losses it sustains on the loan. In addition, an investor may request that the Company
refund a portion of the premium paid on the sale of mortgage loans if a loan is prepaid within a certain amount of time from
the date of sale. The Company records a reserve for estimated losses associated with loan repurchases, purchaser
indemnification and premium refunds. The provision for repurchase losses is charged against gain on sale of loans, net in
the consolidated statements of operations and comprehensive loss. A release of repurchase reserves is recorded when the
Company's assessment reveals that previously recorded reserves are no longer needed.
Loans sold to Ginnie Mae are insured by the FHA or are guaranteed by the VA. As servicer, the Company may
elect to repurchase delinquent loans in accordance with Ginnie Mae guidelines; however, the loans continue to be insured.
The Company may also indemnify the FHA and VA for losses related to loans not originated in accordance with their
guidelines.
A selling representation and warranty framework was introduced by the GSEs in 2013 and enhanced in 2014 that
helps address concerns of loan sellers with respect to loan repurchase risk. Under the framework, a GSE will not exercise
its remedies, including the issuance of repurchase requests, for breaches of certain selling representations and warranties if
a mortgage meets certain eligibility requirements. For loans sold to GSEs on or after January 1, 2013, repurchase risk for
Home Affordable Refinance Program (HARP) loans is lowered if the borrower stays current on the loan for 12 months and
representation and warranty risks are limited for non-HARP loans that stay current for 36 months.
The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase and
indemnification requests, actual loss experience, settlement negotiation, estimated future loss exposure and other relevant
factors including economic conditions. The Company sold $2.8 billion and $3.3 billion of loans for the years ended
December 31, 2021 and 2020, respectively, which are subject to repurchase representations and warranties. The Company
believes its reserve balances as of December 31, 2021 are sufficient to cover loss exposure associated with repurchase
contingencies.
F-40
Table of Contents
The following table summarizes the repurchase reserve activity (included in other liabilities in the accompanying
consolidated balance sheets) related to previously sold loans for the years ended December 31, 2021 and 2020:
Beginning balance
Provision for repurchases (1)
Settlements
Total repurchase reserve
(1) All segment asset balances exclude intercompany balances.
Corporate-owned Life Insurance Trusts
December 31,
2021
December 31,
2020
$
7,054 $
111
(2,421)
4,744
$
$
8,969
5,227
(7,142)
7,054
During the first quarter of 2020, there was a triggering event that caused the Company to reevaluate the
consolidation of certain corporate-owned life insurance trusts. As a result, the Company has consolidated life insurance
trusts for three former executive officers. The corporate-owned life insurance contracts are recorded at cash surrender
value, which is provided by a third party and held within trusts. At December 31, 2021, the cash surrender value of the
policies was $10.8 million and were recorded within other assets on the consolidated balance sheets. At December 31,
2021, the liability associated with the corporate-owned life insurance trusts was $13.0 million and was recorded within
other liabilities on the consolidated balance sheets.
Corporate-owned life insurance trusts:
Corporate-owned life insurance cash surrender value
Corporate-owned life insurance liability
Corporate-owned life insurance shortfall (1)
At December 31, 2021
Trust #1
Trust #2
Trust #3
Total
$
$
4,972
6,015
(1,043)
$
$
3,821
4,715
(894)
$
$
1,995
2,297
(302)
$
$
10,788
13,027
(2,239)
(1) $1.3 million of the total shortfall was recorded as a change in retained deficit at the time of the consolidation of the trusts in 2020.
The additional shortfall was recorded in the accompanying consolidated statements of operations and comprehensive loss.
Concentration of Risk
The aggregate unpaid principal balance of loans in the Company’s long-term mortgage portfolio secured by
properties in California and Florida was $817.1 million and $204.6 million, or 46% and 12%, respectively, at December 31,
2021.
The Company sells mortgage loans to various third-party investors. The largest seven investors accounted for 81%
of the Company’s loan sales for the year ended December 31, 2021. No other investors accounted for more than 5% of the
loan sales for the year ended December 31, 2021. The Company also has geographic concentration risk because 77% of the
Company’s mortgage loan originations during 2021 were for borrowers located in California.
Note 14.—Share Based Payments and Employee Benefit Plans
The Company maintains an equity-based incentive compensation plan, the terms of which are governed by the
2020 Equity Incentive Plan (the 2020 Incentive Plan). The 2020 Incentive Plan provides for the grant of stock appreciation
rights, RSUs, DSUs, performance shares and other stock and cash-based incentive awards. Employees, directors,
consultants or other persons providing services to the Company or its affiliates are eligible to receive awards pursuant to
the 2020 Incentive Plan. In connection with the adoption of the 2020 Incentive Plan, the Company’s 2010 Omnibus
Incentive Plan (2010 Plan), which was scheduled to expire in July 2020, was frozen for new grants. The 2010 Plan will
remain in place only for the issuance of shares of common stock pursuant to equity compensation awards outstanding under
the 2010 Plan, which awards will continue to be governed by the terms of the 2010 Plan. As of December 31, 2021, the
aggregate number of shares reserved under the 2020 Incentive Plan and 2010 Plan, is 2,000,000 and 952,646 shares,
respectively, and there were 1,477,760 shares available for grant as stock options, RSUs, DSUs or other stock and cash-
based incentive awards under the 2020 Incentive Plan. The Company issues new shares of common stock to satisfy stock
option exercises, RSU vesting, DSU issuances and other stock-based incentive awards.
F-41
Table of Contents
The fair value of options granted, which is amortized to expense over the option service period, is estimated on the
date of grant with the following weighted average assumptions:
Risk-free interest rate
Expected lives (in years)
Expected volatility
Expected dividend yield
Fair value per share
For the Year Ended December 31,
2021
0.50%
4.54
77.55%
0.00%
1.96
$
2020
1.45%
4.94
61.21%
0.00%
3.13
$
The following table summarizes activity, pricing and other information for the Company’s stock options for the
years presented below:
For the Year Ended December 31,
2021
2020
Options outstanding at the beginning of the year
Options granted
Options exercised
Options forfeited/cancelled
Options outstanding at the end of the period
Options exercisable at the end of the period
Number of
Shares
524,357 $
85,154
—
(39,283)
570,228
406,361
$
Weighted-
Average
Exercise
Price
Number of
Shares
Weighted-
Average
Exercise
Price
8.58 914,470 $
3.29
—
7.15
7.89
9.65
30,000
(9,500)
(410,613)
524,357
327,366
$
8.10
5.34
4.84
7.35
8.58
11.46
The aggregate intrinsic value in the following table represents the total pre-tax intrinsic value, based on the
Company’s closing stock price of $1.11 and $3.04 per common share as of December 31, 2021 and 2020, respectively.
Aggregate intrinsic value represents the amount of proceeds the option holders would have received had all option holders
exercised their options and sold the stock as of that date.
Options outstanding at end of year
Options exercisable at end of year
As of December 31,
2021
2020
Weighted-
Average
Remaining
Life
(Years)
Aggregate
Intrinsic
Value
(in thousands)
Weighted-
Average
Remaining
Life
(Years)
Aggregate
Intrinsic
Value
(in thousands)
6.17 $
$
5.43
-
-
6.77 $
$
5.96
-
-
As of December 31, 2021, there was approximately $127 thousand of total unrecognized compensation cost
related to stock option compensation arrangements granted, net of estimated forfeitures. That cost is expected to be
recognized over the remaining weighted average period of 1.5 years.
For the years ended December 31, 2021 and 2020, the aggregate grant-date fair value of stock options granted was
approximately $167 thousand and $94 thousand, respectively.
For the years ended December 31, 2021 and 2020, total stock-based compensation expense was $884 thousand
and $702 thousand, respectively.
F-42
Table of Contents
Additional information regarding stock options outstanding as of December 31, 2021 is as follows:
Stock Options Outstanding
Options Exercisable
$
Exercise
Price
Range
3.22 - 3.74
3.75 - 5.38
5.39 - 9.85
9.86 - 17.39
17.40 - 20.49
20.50 - 20.50
$ 3.22 - 20.50
Number
Outstanding
150,872
200,000
27,582
86,524
51,250
54,000
570,228
Weighted-
Average
Remaining
Contractual
Life in Years
Weighted-
Average
Exercise
Price
7.91
7.16
4.01
4.15
4.55
3.56
6.17
$
$
3.45
3.75
7.01
11.99
17.40
20.50
7.89
Number
Exercisable
53,671
133,334
27,582
86,524
51,250
54,000
406,361
$
$
Weighted-
Average
Exercise
Price
3.59
3.75
7.01
11.99
17.40
20.50
9.65
In addition to the options granted, the Company has granted DSUs, which vest between one and three year
periods. The fair value of each DSU was measured on the date of grant using the grant date price of the Company’s stock.
In 2021, the Company did not grant any DSUs.
The following table summarizes activity, pricing and other information for the Company’s DSUs for the year
ended December 31, 2021:
DSUs outstanding at the beginning of the year
DSUs granted
DSUs issued
DSUs forfeited/cancelled
DSUs outstanding at the end of the period
Number of
Shares
54,500 $
—
—
—
54,500
$
Weighted-
Average
Grant Date
Fair Value
6.61
—
—
—
6.61
As of December 31, 2021, there was approximately $6 thousand of total unrecognized compensation cost related
to the DSU compensation arrangements granted under the plan. This cost is expected to be recognized over a weighted
average period of 0.2 years.
The following table summarizes activity, pricing and other information for the Company’s RSUs for the ended
December 31, 2021:
RSUs outstanding at beginning of the year
RSUs granted
RSUs issued
RSUs forfeited/cancelled
RSUs outstanding at end of the period
Number of
Shares
267,221 $
245,332
(94,493)
(20,231)
397,829
$
Weighted-
Average
Grant Date
Fair Value
5.04
3.29
4.78
3.29
4.11
For the year ended December 31, 2021, the aggregate grant-date fair value of RSUs granted was approximately
$807 thousand. As of December 31, 2021, there was approximately $1.0 million of total unrecognized compensation cost
related to the RSU compensation arrangements granted under the plan. This cost is expected to be recognized over a
weighted average period of 1.7 years.
401(k) Plan
F-43
Table of Contents
After meeting certain employment requirements, employees can participate in the Company’s 401(k) plan. Under
the 401(k) plan, employees may contribute up to 25% of their salaries, pursuant to certain restrictions. Effective January 1,
2020, the Company matches 50% of the first 6% of employee contributions. Additional contributions may be made at the
discretion of the board of directors. During the years ended December 31, 2021 and 2020, the Company recorded
compensation expense of approximately $1.0 million and $1.0 million for basic matching contributions, respectively. There
were no discretionary matching contributions recorded during the years ended December 31, 2021 or 2020.
Note 15.—Related Party Transactions
In May 2015, the Company issued the 2015 Convertible Notes to purchasers, some of which are related parties.
See Note 5.—Debt—Convertible Notes.
Note 16.—Subsequent Events
Subsequent events have been evaluated through the date of this filing.
F-44
Exhibit 4.5
Description of Impac Mortgage’s (the “Company”) Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934
The following description summarizes the material terms and provisions of the common stock and the
preferred stock purchase rights that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended. This description is not complete and is qualified in its entirety by reference to the provisions of our (the
“Corporation’s”) Articles of Incorporation, as amended (“Charter”), and Bylaws, as amended, (“bylaws”), each of
which is incorporated herein by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit is a
part, and the applicable provisions of the Maryland General Corporation Law. The Preferred Stock described below is
not registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Authorized Capitalization
We have 210,000,000 shares of capital stock authorized under our Charter, consisting of 200,000,000 shares
of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, of which 2,500,000 have been
designated as Series A-1 junior participating preferred stock, par value $0.01 per share (“Series A-1 Preferred Stock”),
2,000,000 have been designated as Series B 9.375% redeemable preferred stock, par value $0.01 per share (“Series B
Preferred Stock”), and 5,500,000 have been designated as Series C 9.125% redeemable preferred stock, par value
$0.01 per share (“Series C Preferred Stock”).
Common Stock
Subject to the preferential rights of any other class or series of stock, including the preferred stock, and to the
provisions of the Charter regarding the restrictions on transfer of stock, holders of shares of our common stock are
entitled to receive dividends on such stock when, as and if authorized by our Board of Directors out of funds legally
available therefor and declared by us and to share ratably in the assets of the Company legally available for distribution
to our common stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate
provision for all known debts and liabilities of the Company, including the preferential rights on dissolution of any
class or classes of preferred stock, including the Preferred Stock.
Each share of common stock is entitled to one vote, subject to the provisions of our Charter regarding
restrictions on transfer of stock, and will be fully paid and nonassessable upon issuance. Shares of common stock have
no preference, conversion, exchange, redemption, appraisal, sinking fund, preemptive or cumulative voting rights. Our
authorized stock may be increased and altered from time to time in the manner prescribed by Maryland law upon the
affirmative vote of stockholders entitled to cast at least a majority of all the votes entitled to be cast on the matter. Our
Charter authorizes our Board to reclassify any unissued shares of common stock in one or more classes or series of
stock, including preferred stock.
Preferred Stock
Each of the Series B Preferred Stock and the Series C Preferred Stock was governed by Articles
Supplementary, filed with and accepted for record by the State Department of Assessments and Taxation of Maryland
(the “SDAT”) on May 26, 2004 and November 18, 2004, respectively (the “Original Articles”). In 2009 our Board of
Directors, and the holders of the Series B Preferred Stock and the Series C Preferred Stock (voting together as a single
class) approved amendments to each of the Original Articles. Articles of Amendment were filed with and accepted for
record by the SDAT on June 29, 2009, for each series (the “Amended Articles”).
Under both the Original Articles and the Amended Articles, upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of shares of Series B Preferred Stock and Series C
Preferred Stock then outstanding are entitled to be paid out of the assets of the Company, legally available for
distribution to its stockholders, a liquidation preference of $25.00 per share, before any distribution of assets is made to
holders of common stock or any series of preferred stock of the Company that ranks junior to the Series B Preferred
Stock and Series C Preferred Stock. The Series B Preferred Stock and Series C Preferred Stock have no stated maturity
and are not subject to any sinking fund or mandatory redemption. Neither the Series B Preferred Stock nor the Series C
Preferred Stock is convertible into or exchangeable for any property or securities of the
Company and neither of such series is registered under the Securities Exchange Act of 1934, as amended.
Under the Original Articles, holders of Series B Preferred Stock and Series C Preferred Stock would have the
right to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at a rate of
9.375% or 9.125%, respectively, of the $25.00 liquidation preference per annum payable on a quarterly basis, for all
past dividend periods and the then-current dividend period, before any dividends may be paid or other distributions
made on the Common Stock or other securities raking junior to or on parity with the Series B Preferred Stock and the
Series C Preferred Stock, including repurchases of Common Stock or other junior or parity securities. In addition,
under the Original Articles, whenever dividends are in arrears for six or more quarters, whether or not consecutive, the
holders of Series B Preferred Stock and Series C Preferred Stock will be entitled to call a special meeting for the
election of two additional directors, and holders of Series B Preferred Stock and Series C Preferred Stock would have
the right to approve the issuance of any class or series of our preferred stock ranking senior to the Series B Preferred
Stock, amendments of any provisions of our Charter that would materially and adversely affect the Series B Preferred
Stock or Series C Preferred Stock, or a merger or similar transaction unless the Series B Preferred Stock or Series C
Preferred Stock remain outstanding and materially unchanged.
Under the Amended Articles, dividends on the Series B Preferred Stock and the Series C Preferred Stock are
noncumulative and the terms of the Series B Preferred Stock and Series C Preferred Stock allow us to declare and pay
dividends on shares of common stock or shares of any other class or series of our capital stock, with certain
exceptions, or redeem, repurchase or otherwise acquire shares of any class or series of our capital stock, including
common stock and any other series of preferred stock, without paying or setting apart for payment any dividends on
shares of either series of Preferred Stock. Under the Amended Articles, holders of the Series B Preferred Stock and
Series C Preferred Stock do not have any voting rights, except for the right to approve certain amendments to our
Charter.
After the Amended Articles were declared to be effective, holders of Series B and Series C Preferred Stock
filed a class action in the Circuit Court for Baltimore City, Maryland seeking a determination that the Amended
Articles were not effective (as to either Series) on grounds that the Amended Articles had not been validly approved by
the holders of the outstanding shares of Series B and Series C Preferred Stock. The plaintiff holders claimed that the
Original Articles required separate voting by each Series to approve the Amended Articles and that two-thirds of the
outstanding shares of Series B Preferred Stock had to approve the Amended Series B Articles and two-thirds of the
outstanding shares of Series C Preferred Stock had to approve the Amended Series C Articles. Although two-thirds of
the combined outstanding shares of Series B and Series C Preferred Stock and two-thirds of the outstanding shares of
Series C Preferred Stock had in fact approved the Amended Articles, two-thirds of the outstanding shares of Series B
Preferred Stock had not approved the Amended Articles.
However, the Series C plaintiff holders further claimed that the Company had voted, as opposed to the Series
C holders, shares for the Amended Series C Articles because, they argued, the Company acquired those shares before
the vote was actually taken on the Amended Articles. The Series C plaintiff holders, therefore, claimed that the Series
C Amended Articles had not been validly approved by the Series C holders. As relief, the plaintiff holders sought a
declaration that the Original Articles remained effective and in place. The trial court interpreted the Original Articles to
require separate voting by each series for the Amended Articles governing that Series of Preferred Stock and declared
that, because two-thirds of the outstanding shares of Series B Preferred Stock had not approved the Amended Series B
Articles, those Amended Articles were not effective and the Original Series B Articles remained in effect. The trial
court rejected the claim of the Series C plaintiff holders about the timing of the voting on the Amended Articles, and
the Amended Series C Articles are currently in effect.
On October 2, 2019, the Court of Special Appeals held oral argument for all appeals in the matter. On
February 5, 2020, the Court of Special Appeals requested that the parties provide a supplemental memorandum
explaining the appealability of the original Circuit Court opinion which the Company responded to on February 21,
2020. On April 1, 2020, the Court of Special Appeals issued an opinion affirming the judgment in favor of plaintiffs on
the Series B voting rights arguing that the voting rights provision was not ambiguous. In response, the Company filed a
petition for a writ of certiorari to the Maryland Court of Appeals appealing the Court of Special Appeals opinion. The
Maryland Court of Appeals granted the writ of certiorari on July 13, 2020, agreeing to hear the Company’s appeal. The
Company submitted its opening brief on August 21, 2020 and the plaintiffs submitted their respective opposing briefs
on October 13 and 14, 2020. In response, the Company filed a petition for a writ of
certiorari to the Maryland Court of Appeals appealing the Court of Special Appeals opinion. The Maryland Court of
Appeals granted the writ of certiorari on July 13, 2020, agreeing to hear the Company’s appeal. All parties submitted
their briefs and oral argument was held on December 4, 2020.
On July 15, 2021, the Maryland Court of Appeals affirmed the decision of the Circuit Court (and the Court of
Special Appeals) in granting summary judgment in favor of the plaintiffs on the Preferred B voting rights and,
although the Court of Appeals found the voting rights provision to be ambiguous, it concluded that the extrinsic
evidence presented to the Circuit Court, which it found to be undisputed, supported the plaintiffs’ interpretation that
the voting rights provision required separate voting by the Preferred B stockholders to amend the Preferred B Articles
Supplementary. Accordingly, the 2009 amendments to the Preferred B Articles Supplementary were not validly
adopted and the 2004 Preferred Articles Supplementary remain in effect.
As a result, as of December 31, 2021, the Company has cumulative undeclared dividends in arrears of
approximately $19.1 million, or approximately $28.71 per outstanding share of Preferred B, thereby increasing the
liquidation value to approximately $53.71 per share. Additionally, every quarter the cumulative undeclared dividends
in arrears will increase by $0.5859 per Preferred B share, or approximately $390 thousand. The liquidation preference,
inclusive of Preferred B cumulative undeclared dividends in arrears, is only payable upon voluntary or involuntary
liquidation, dissolution or winding up of the Company’s affairs. In addition, the Company is required to pay the three
quarters of dividends on the Preferred B stock under the 2004 Preferred B Articles Supplementary (approximately $1.2
million), and the Preferred B stockholders are entitled to call a special meeting for the election of two additional
directors.
The 2004 Preferred Articles Supplementary also provide for certain other voting rights prior to amendment of
any provisions of the Company’s charter so as to materially and adversely affect the Series B Preferred Stock, or
approve a merger or similar transaction unless the Series B Preferred Stock remain outstanding and materially
unchanged. The Company is also prohibited from paying any dividend on its common stock until dividends on the
Series B Preferred Stock are paid in full for all past dividend periods and the then-current dividend period.
Removal of Directors
Our Charter provides that a director may be removed from the Board of Directors only by the affirmative vote
of at least two-thirds of the votes entitled to be cast in the election of directors.
Nominations and Stockholder Business.
Our Bylaws provide that nominations of persons for election to the Board of Directors and the proposal of
business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to our
notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder who was a stockholder
of record at the time of giving of notice, who is entitled to vote at the meeting and who complied with the notice
procedures set forth in the Bylaws.
For nominations or other business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary.
To be timely, a stockholder’s notice shall be delivered to the secretary at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year’s annual
meeting; provided, however, that 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 such anniversary date, notice by the stockholder to be timely must be so 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
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. Such stockholder’s notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, 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 of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name
and address of such stockholder, as they appear on our books, and of such beneficial owner and (y) the number of
shares of each class of stock of ours which are owned beneficially and of record by such stockholder and such
beneficial owner.
Notwithstanding anything set forth above to the contrary, in the event that 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’s annual meeting, a stockholder’s notice required by this Section 12(a) shall also be
considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be
delivered to the secretary at our principal executive offices not later than the close of business on the tenth day
following the day on which such public announcement is first made by us.
Special Meetings of Stockholders
The president, chief executive officer; two-thirds (2/3) of the entire Board of Directors or a majority
of the Unaffiliated Directors (as defined in the Bylaws) may call special meetings of the stockholders. Special
meetings of stockholders may also be called by the secretary of the Corporation upon the written request of the holders
of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. Such request shall
state the purpose of such meeting and the matters proposed to be acted on at such meeting and must otherwise comply
with the provisions of the Bylaws.
Extraordinary Transactions
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, convert, engage in a share exchange or engage in similar transactions outside the ordinary
course of business, unless approved by the affirmative vote of stockholders holding at least two thirds of the shares
entitled to vote on the matter. However, a Maryland corporation may provide in its charter for approval of these
matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our
Charter provides that these matters (except for amendments to the Charter provision relating to the removal of
directors, which must be approved by the affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter) may be approved by a majority of all of the votes entitled to be cast on the matter.
Tax Benefits Preservation Rights Agreement
On October 23, 2019, the Board of the Company authorized and declared a dividend distribution of one right
(a “Right”) for each outstanding share of common stock of the Company to stockholders of record as of the close of
business on November 5, 2019 (the “Record Date”). Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A-1 Preferred Stock, of the Company at an exercise price of $45.00
per one one-thousandth of a Preferred Share, subject to adjustment (the “Purchase Price”). The complete terms of the
Rights are set forth in a Tax Benefits Preservation Rights Agreement, dated as of October 23, 2019, between American
Stock Transfer & Trust Company, LLC (the “Rights Agent”) and the Company (the “Rights Agreement”). The Final
Expiration Date (as defined in the Rights Agreement) is October 22, 2022, unless otherwise extended as described
below.
By adopting the Rights Agreement, the Board is helping to preserve the value of certain deferred tax benefits,
including those generated by net operating losses (collectively, the “Tax Benefits”). In general, the Company may
“carry forward” net operating losses in certain circumstances to offset current and future taxable income, which will
reduce federal and state income tax liability, subject to certain requirements and restrictions. The Rights Agreement
also has certain ancillary anti-takeover effects.
The Tax Benefits can be valuable to the Company. However, the Company’s ability to use these Tax
Benefits would be substantially limited and impaired if it were to experience an “ownership change” for purposes of
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) and the Treasury Regulations
promulgated thereunder. Generally, the Company will experience an “ownership change” if the percentage of the
shares of common stock owned by one or more “five-percent shareholders” increases by more than 50 percentage
points over the lowest percentage of shares of common stock owned by such stockholder at any time during the prior
three year on a rolling basis. The Rights Agreement reduces the likelihood that changes in the Company’s investor
base have the unintended effect of limiting the Company’s use of its Tax Benefits. As such, the Rights Agreement has
a 4.99% “trigger” threshold that is intended to act as a deterrent to any person or entity seeking to acquire 4.99% or
more of the outstanding common stock without the prior approval of the Board. This would protect the Tax Benefits
because changes in ownership by a person owning less than 4.99% of the Company’s stock are not included in the
calculation of “ownership change” for purposes of Section 382 of the Code. The Board has established procedures to
consider requests to exempt certain acquisitions of the Company’s securities from the Rights Agreement if the Board
determines that doing so would not limit or impair the availability of the Tax Benefits or is otherwise in the best
interests of the Company.
Issuance and Transfer of Rights; Rights Certificates
The Board declared a dividend of one Right for each outstanding share of common stock. Until the
Distribution Date (as defined below):
•
the Rights will be evidenced by and trade with the certificates for shares of common stock (or, with
respect to any uncertificated shares of common stock registered in book entry form, by notation in book entry), and no
separate rights certificates will be distributed;
•
new common stock certificates issued after the Record Date will contain a legend incorporating the
Rights Agreement by reference (for uncertificated shares of common stock registered in book entry form, this legend
will be contained in a notation in book entry); and
•
the surrender for transfer of any certificates for shares of common stock (or the surrender for transfer
of any uncertificated common stock registered in book entry form) will also constitute the transfer of the Rights
associated with such common stock.
Distribution Date; Separation of Rights
Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the common
stock and become separately tradable and exercisable only upon the earlier of:
(i) ten business days (or such later day as the Board may determine) following a public announcement that a
person or group of affiliated or associated persons (collectively, an “Acquiring Person”) has acquired beneficial
ownership of 4.99% or more of the outstanding common stock; or (ii) ten business days (or such later day as the Board
may determine) following the announcement of a tender offer or exchange offer that would result in a person or group
becoming an Acquiring Person.
The date on which the Rights separate from the common stock and become exercisable is referred to as the
“Distribution Date.” As soon as practicable after the Distribution Date, the Company will mail Rights certificates to
the Company’s stockholders as of the close of business on the Distribution Date and the Rights will become
transferable apart from the common stock. Thereafter, such Rights certificates alone will represent the Rights.
The Rights Agreement includes a procedure whereby the Board will consider requests to exempt certain
acquisitions of common stock from the applicable ownership trigger if the Board determines that the requested
acquisition will not adversely impact in any material respect the time period in which the Company could use the Tax
Benefits or limit or impair the availability to the Company of the Tax Benefits, or is in the best interests of the
Company despite the fact it may adversely impact in a material respect the time period in which the Company could
use the Tax Benefits or limit or impair the availability of the Tax Benefits.
Until a Right is exercised, the holder of such Right will have no rights as a stockholder of the Company
(beyond those possessed as an existing stockholder), including, without limitation, the right to vote or to receive
dividends with respect to the Right.
The Rights Agreement provides that any person or entity who otherwise would be an Acquiring Person on the
date the Rights Agreement was adopted (each, an “Existing Holder”) will not be deemed to be an “Acquiring Person”
for purposes of the Rights Agreement unless such Existing Holder increases its beneficial ownership over such
Existing Holder’s lowest percentage of ownership of the common stock after the adoption of the Rights Agreement,
subject to specified exceptions.
Preferred Shares Purchasable Upon Exercise of Right
After the Distribution Date, each Right will entitle the holder to purchase, for $45.00 (the “Purchase Price”),
one one-thousandth of a Preferred Share having economic and other terms similar to that of one share of common
stock. This portion of a Preferred Share is intended to give the stockholder approximately the same dividend, voting
and liquidation rights as would one share of common stock, and should approximate the value of one share of common
stock.
More specifically, each one one-thousandth of a Preferred Share, if issued, will:
•
•
not be redeemable;
entitle holders to quarterly dividend payments of $0.00001 per share, or an amount equal to the
dividend paid on one share of common stock, whichever is greater;
•
entitle holders upon liquidation either to receive $1.00 per share or an amount equal to the payment
made on one share of common stock, whichever is greater;
•
•
have the same voting power as one share of common stock; and
entitle holders to a per share payment equal to the payment made on one share of common stock if
the common stock is exchanged via merger, consolidation or a similar transaction.
“Flip-in” Rights
At any time after a Distribution Date has occurred, each holder of a Right, other than the Acquiring Person,
will thereafter have the right to receive, upon paying the Purchase Price and in lieu of a number of one one-
thousandths of a share of Preferred Stock, common stock (or, in certain circumstances, cash or other of our securities)
having a market value equal to two times the Purchase Price of the Right. However, the Rights are not exercisable
following the occurrence of the foregoing event until such time as the Rights are no longer redeemable by the
Company, as further described below. Following the occurrence of an event set forth above, all Rights that are or,
under certain circumstances specified in the Rights Agreement, were beneficially owned by an Acquiring Person or
certain of its transferees will be null and void.
“Flip-over” Rights
In the event any person or group becomes an Acquiring Person and the Company merges into or engages in
certain other business combinations with an Acquiring Person, or 50% or more of the Company’s consolidated assets
or earning power are sold to an Acquiring Person, each holder of a Right (other than void Rights owned by an
Acquiring Person) will thereafter have the right to receive, upon payment of the Purchase Price, common stock of the
acquiring company that at the time of such transaction will have a market value equal to two times the Purchase Price
of the Right.
Exchange of Rights
At any time after a person becomes an Acquiring Person, in lieu of allowing the “flip-in” to occur, the Board
may exchange the Rights (other than void Rights owned by an Acquiring Person), in whole or in part, at an exchange
ratio of one share of the common stock (or, under certain circumstances, cash, property or other securities of the
Company, including fractions of a share of preferred stock) per Right (subject to adjustment). Notwithstanding the
foregoing, the Board may not conduct such an exchange at any time any person (other than the Company or certain
entities affiliated with the Company) together with such person’s affiliates or associates becomes the beneficial owner
of 50% or more of the common stock.
Redemption of Rights
At any time prior to a Distribution Date, the Board may redeem the Rights in whole, but not in part, at a price
of $0.001 per Right and on such terms and conditions as the Board may establish. Immediately upon the action of the
Board ordering redemption of the Rights, the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the redemption price. The redemption price will be adjusted if the Company
undertakes a stock dividend or a stock split.
Expiration Date of the Rights
The Rights will expire on the earliest of:
•
•
•
October 22, 2022, unless extended;
the time at which the Rights are redeemed or exchanged under the Rights Agreement;
the final adjournment of the Company’s 2020 annual meeting of stockholders if stockholders fail to
approve the Rights Agreement with a majority of the votes cast by holders of shares of common stock at the 2020
annual meeting of stockholders;
•
the repeal of Section 382 or any successor statute, if the Board determines that the Plan is no longer
necessary for the preservation of Tax Benefits;
•
the beginning of a taxable year with respect to which the Board determines that no Tax Benefits may
be carried forward; or
•
such time when the Board determines that a limitation on the use of Tax Benefits under Section 382
would no longer be material to the Company.
Amendment of Rights
The terms of the Rights may be amended by a resolution of the Board without the consent of the holders of
the Rights prior to the Distribution Date. Thereafter, the terms of the Rights and the Rights Agreement may be
amended without the consent of the holders of Rights in order to (i) cure any ambiguities, (ii) shorten or lengthen any
time period pursuant to the Rights Agreement or (iii) make changes that do not adversely affect the interests of holders
of the Rights.
Anti-Dilution Provisions
The Board may adjust the Purchase Price, the number of shares of Preferred Stock issuable and the number of
outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split or a reclassification of the
Preferred Stock or common stock. With certain exceptions, no adjustments to the Purchase Price will be made until the
cumulative adjustments amount to at least 1% of the Purchase Price. No fractional shares of Preferred Stock will be
issued and, in lieu thereof, an adjustment in cash will be made based on the current market price of the Preferred
Stock.
Terms of the Preferred Stock
In connection with the Rights Agreement, the Board designated 2,500,000 shares of the Preferred Stock, as
set forth in the Articles Supplementary for Series A-1 Junior Participating Preferred Stock (the “Articles
Supplementary”) filed with the State Department of Assessments and Taxation of Maryland on September 4, 2013.
Limitation of Liability
The Maryland General Corporation Law permits the Charter of a Maryland corporation to include a provision
limiting the liability of its directors and officers to the corporation and its stockholders for money damages, except to
the extent that (1) it is proved that the person actually received an improper benefit or profit in money, property or
services or (2) a judgment or other final adjudication is entered in a proceeding based on a finding that the person’s
action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. The Charter provides for elimination of the personal liability of our directors and
officers to us or our stockholders for money damages to the maximum extent permitted by Maryland law, as amended
from time to time.
Maryland Business Combination Statute
The Maryland General Corporation Law establishes special requirements for certain “business combinations”
between a Maryland corporation and “interested stockholders” unless exemptions are applicable. “Business
combinations” include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset
transfer or issuance or reclassification of equity securities. An interested stockholder is any person who beneficially
owns 10% or more of the voting power of the outstanding voting stock or is an affiliate or associate of the corporation
who, at any time within the two-year period prior to the date on which interested stockholder status is determined, was
the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock. Among other things, the
law prohibits any business combination between us and an interested stockholder or an affiliate of an interested
stockholder for a period of five years after the most recent date on which the interested stockholder became an
interested stockholder unless the Board approved in advance the transaction in which the person became an interested
stockholder. The Board may provide that its approval is subject to compliance with any terms and conditions
determined by the Board.
The business combination statute requires payment of a fair price to stockholders to be determined as set forth
in the statute or a supermajority stockholder approval of any transactions between us and an interested stockholder
after the end of the five-year period. This approval means that the transaction must be recommended by the Board and
approved by at least:
•
•
80% of the votes entitled to be cast by holders of outstanding voting shares; and
66 2/3% of the votes entitled to be cast by holders of outstanding voting shares other than shares
held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested stockholder.
The business combination statute restricts the ability of third parties who acquire, or seek to acquire, control
of us to complete mergers and other business combinations without the approval of the Board even if such a
transaction would be beneficial to stockholder.
The Board has exempted any business combination with any person from the business combination statute, so
long as the Board first approves such business combination.
Maryland Control Share Acquisition Statute
The Maryland General Corporation Law provides that “control shares” of a Maryland corporation acquired in
a “control share acquisition” have no voting rights except to the extent approved by 66 2/3% of the votes entitled to be
cast on the matter. The acquiring person, officers, and directors who are also employees are not entitled to vote on the
matter. “Control shares” are shares of stock that, taken together with all other shares of stock owned by the acquiring
person or in respect of which the acquiring person is entitled to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would entitle the acquiring person to exercise voting power in
electing directors in one of the following ranges: 10% or more but less than 33 1/3%; 33 1/3% or more but less than
50%; or 50% or more. Control shares do not include shares of stock that the acquiring person is then entitled to vote as
a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of
control shares, subject to certain exceptions.
A person who has made (or proposes to make) a control share acquisition and who satisfies certain conditions
(including agreeing to pay the expenses of the meeting) may compel the Board to call a special meeting of
stockholders to be held within 50 days of the demand to consider the voting rights of the shares. If such a person
makes no request for a meeting, we have the option to present the question at any stockholders’ meeting.
If voting rights are not approved at a meeting of stockholders or if the acquiring person does not deliver an
acquiring person statement as required by the statute, then we may redeem any or all of the control shares (except
those for which voting rights have previously been approved) for fair value. We will determine the fair value of the
shares, without regard to the absence of voting rights, as of the date of either:
•
•
the last control share acquisition by the acquiring person; or
any meeting where stockholders considered and did not approve voting rights of the control shares.
If voting rights for control shares are approved at a stockholders’ meeting and the acquiring person becomes
entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights.
This means that stockholders would be able to require us to redeem shares of our stock from them for fair value. For
this purpose, the fair value may not be less than the highest price per share paid by the acquiring person in the control
share acquisition. Furthermore, certain limitations otherwise applicable to the exercise of appraisal rights would not
apply in the context of a control share acquisition.
The control share acquisition statute would not apply to shares acquired in a merger, consolidation or share
exchange if we were a party to the transaction or acquisitions of shares approved or exempted by the Charter or the
Bylaws.
The Bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions
by any person of shares of our stock. There can be no assurance that the Board will not amend or eliminate this
provision in the future. The control share acquisition statute could have the effect of discouraging offers to acquire us
and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’
best interests.
M E M O R A N D U M
Exhibit 10.12
To:
Joe Joffrion
From: George A. Mangiaracina
Date: October 7, 2020
Re:
2020 Annual Salary and Bonus Target Summary
Base Salary:
$360,000
Target Cash Bonus:
$75,000
Target RSU Bonus
Award:
Target Option Bonus
Award:
Equivalent of $25,000 vesting over 3 years
Example: $25,000 / $1.50 share price = 16,666 RSUs
For every 1 RSU share awarded, 0.5 options will also be awarded with standard exercise
price calculation
Example: $25,000 / $1.50 share price = 16,666 RSUs
16,666 RSUs / 2 = 8,333 options awarded vesting over 3 years
Severance Terms:
Change of Control: 3 months base salary and 6 months COBRA coverage. At 2 years of
service this shall be changed to 12 months base salary and 12 months COBRA coverage.
Change of Control generally means an acquiring entity purchases more than 50% of the
Common Stock of IMH and your position is eliminated within 12 months thereafter.
Termination without Cause: 3 months base salary and 6 months COBRA coverage. At 2
years of service this shall be changed to 6-12 months base salary at the discretion of the
company and matching period for COBRA coverage. Cause generally means a material
reason to terminate your employment, such as a material violation of company policies and
procedures.
Nothing contained herein modifies the at-will status of your employment with the company.
Receipt Acknowledged:
/s/ JOE JOFFRION
Date: October 7, 2020
M E M O R A N D U M
Exhibit 10.13
To:
Justin Moisio
From: George A. Mangiaracina
Date: October 7, 2020
Re:
2020 Annual Salary and Bonus Target Summary
Base Salary:
$360,000
Target Cash Bonus:
$135,000
Target RSU Bonus
Award:
Equivalent of $45,000 vesting over 3 years
Example: $45,000 / $1.50 share price = 30,000 RSUs
Target Option Bonus
Award:
For every 1 RSU share awarded, 0.5 options will also be awarded with standard exercise
price calculation
Example: $45,000 / $1.50 share price = 30,000 RSUs
30,000 RSUs / 2 = 15,000 options awarded vesting over 3 years
Severance Terms:
Change of Control: 12 months base salary and 12 months COBRA coverage. Change of
Control generally means an acquiring entity purchases more than 50% of the Common
Stock of IMH and your position is eliminated within 12 months thereafter.
Termination without Cause: 6-12 months base salary at the discretion of the company and
matching period for COBRA coverage. Cause generally means a material reason to
terminate your employment, such as a material violation of company policies and
procedures.
Nothing contained herein modifies the at-will status of your employment with the company.
Receipt Acknowledged:
/s/ JUSTIN MOISIO
Date: October 7, 2020
M E M O R A N D U M
Exhibit 10.14
To:
Tiffany Entsminger
From: George A. Mangiaracina
Date: October 7, 2020
Re:
2020 Annual Salary and Bonus Target Summary
Base Salary:
$400,000
Target Cash Bonus:
$150,000
Target RSU Bonus
Award:
Equivalent of $50,000 vesting over 3 years
Example: $50,000 / $1.50 share price = 33,333 RSUs
Target Option Bonus
Award:
For every 1 RSU share awarded, 0.5 options will also be awarded with standard exercise
price calculation
Example: $50,000 / $1.50 share price = 33,333 RSUs
33,333 RSUs / 2 = 16,666 options awarded vesting over 3 years
Severance Terms:
Change of Control: 12 months base salary and 12 months COBRA coverage. Change of
Control generally means an acquiring entity purchases more than 50% of the Common
Stock of IMH and your position is eliminated within 12 months thereafter.
Termination without Cause: 6-12 months base salary at the discretion of the company and
matching period for COBRA coverage. Cause generally means a material reason to
terminate your employment, such as a material violation of company policies and
procedures.
Nothing contained herein modifies the at-will status of your employment with the company.
/s/ TIFFANY ENTSMINGER
Date: October 7, 2020
Exhibit 10.15
April 22, 2021
Obi Nwokorie
1 Red Oak Lane
Cortlandt Manor, NY 10567
Dear Obi:
This is to confirm our offer and your acceptance of employment with Impac Mortgage Holdings, Inc. (“IMH” or the
“Company”). This offer of employment is contingent on the receipt of acceptable references and background check. The
terms of our offer include:
Start Date:
June 1, 2021
Title:
EVP, Alternative Credit Products and Chief Investment Officer
Reporting To:
CEO and Chairman, George A. Mangiaracina
Base Salary:
You will receive an annual salary of $400,000, paid semi-monthly on the 7th and 22nd
of each month.
Guaranteed Bonus:
For the first four full calendar quarters of employment, you will receive a guaranteed bonus of
$25,000 per quarter (i.e. if starting June 1, then first bonus payment is earned if still
employed as of September 30, 2021 and is payable in the first pay period of October 2021)
Discretionary Bonus:
Severance:
You will be eligible to receive a discretionary, annual bonus for 2021 with a target of
$100,000, payable as 50% cash and 50% equivalent value of Restricted Stock Units with 3-
year vesting, and with an additional number of Stock Options in an amount of options equal
to 50% of the number of RSUs granted (if you are granted 10,000 RSUs then you would
also be granted 5,000 Options), also with 3-year vesting and all pursuant to the other terms
and conditions contained in the Company’s 2020 Incentive Equity Plan and corresponding
award agreements. The cash payment and the grant shall occur during the Company’s
regular annual bonus cycle (i.e. February 2022). Discretionary bonuses for 2022 and
beyond shall be consistent with other senior executives of the Company unless otherwise
agreed to between you and the CEO. Discretionary bonuses are not guaranteed and will be
based on a combination of individual and company performance.
If you are terminated without Cause within first 18 months of your employment, your
severance shall be the payment of base salary equal to (i) 18th months less (ii) the period of
time employed, but in no event less than 6 months (i.e. if terminated at 9 months, then 9
months’ severance owed; if terminated after 15 months, then 6 months’ severance owed).
In addition, if you are terminated without Cause prior to the full payment of the Guaranteed
Bonus set forth above, then you shall receive any remaining Guaranteed Bonus payments.
“Cause” means the occurrence or existence of any of the following with respect to you, as
determined by an affirmative majority vote of the Company’s Board of Directors:
(1) You are convicted of or plead nolo contendere to (A) a crime of dishonesty or breach of
trust, including such a crime involving either the property of the Company (or any
Exhibit 10.15
affiliate, subsidiary, or related entity of the Company) or, the property entrusted to the
Company (or any affiliate, subsidiary, or related entity of the Company) by its clients,
including fraud, or embezzlement or other misappropriation of funds belonging to the
Company (or any affiliate, subsidiary, or related entity of the Company) or any of their
respective clients, or (B) a felony leading to incarceration of more than ninety (90) days or
the payment of a penalty or fine of $100,000 or more;
(2) You materially and substantially fail to perform your job duties properly assigned to you
after being provided thirty (30) days prior written notification by the Board of Directors of
the Company setting forth those duties that are not being performed by you; provided that
you shall have a reasonable period of time to correct any such failures to the extent that
such failures are correctable and the Company may not terminate you for “Cause” on the
basis of any such failure that is cured with a reasonable time;
(3) You have engaged in willful misconduct or gross negligence in connection with your
service to the Company (or any affiliate, subsidiary, or related entity of the Company) that
has caused or is causing material harm to the Company (or any affiliate, subsidiary, or
related entity of the Company);
(4) Your material breach of any obligation that you owe to the Company (or any affiliate,
subsidiary, or related entity of the Company), including a material breach of trust or
fiduciary duty or material breach of any proprietary right and inventions or confidentiality
agreement between the Company and you (or between you and any affiliate, subsidiary, or
related entity of the Company) as such agreements may be adopted or amended from time
to time by the Company and you;
(5) Your death; and/or
(6) You are declared legally incompetent or have a mental or physical condition that can
reasonably be expected to prevent you from carrying out your essential duties and
obligations of your employment for a period of greater than ninety (90) days,
notwithstanding the Company’s reasonable accommodation to the extent required by law.
Board of IMH:
You shall be recommended to the Company’s Governance and Nomination Committee as a
prospective board member to potentially be nominated in the 2022 Proxy for voting to the
board by the shareholders of the Company.
Employee Benefits:
Your vacation will begin to accrue upon the completion of 90 days of employment with the
company. You will be eligible to take paid vacation after six (6) months of employment.
Vacation is accrued at the rate of 6.67 hours per pay period.
Should you elect coverage under our available Medical and Dental plans, benefit provisions
will become effective upon the first day of the month following your hire date of
employment. Noncontributory insurance coverage (including Life Insurance, Accidental
Death and Dismemberment and Long Term Disability) are available and become effective
based upon the provisions of the policies in effect at the time.
You will receive information in the mail regarding participation in our 401(k) Plan within 30
days of your date of hire. If your contribution is 6% or more, Impac will match you 3.5%
max match cap and your company match contribution deposit will take place on a quarterly
basis. Note that all new employees with automatically be enrolled at 5% in which can be
changed at the time of benefit enrollment. Please review the enclosed Benefits Guide for
more details including the vesting schedule.
Exhibit 10.15
Also enclosed is an Impac Employment Agreement. Your signature at the bottom of the document indicates your
acceptance of the terms in the Employment Agreement and is required as a condition of employment.
As a condition of employment with the Company, you may be requested to complete a background check from a pre-
employment background screening firm. A background report containing information as to your character, general
reputation, personal characteristics and mode of living may be issued. Background checks could include checking
criminal records, civil records, driving records, credit reports and Social Security Numbers. The Company will obtain
and use this information in accordance with the federal Fair Credit Report Act, the California Investigative Consumer
Reporting Agencies Act, the California Consumer Credit Reporting Agencies Act and the California Fair Employment
and Housing Act, including providing you with necessary disclosures and obtaining your written authorization.
You will be provided with a brief orientation at your respective location within the first week of employment. During the
orientation, you will complete new hire information and receive insurance forms. Be sure to bring employment eligibility
verification (e.g., valid driver's license, social security card, a current and not expired U.S. Passport, etc.). This
information must be received by Human Resources within three (3) days of employment.
Please sign this letter below indicating your acceptance of this offer and employment terms in this letter and return the
original in its entirety to us within three (3) business days.
Should you have any questions, please contact me at (949) 475-3713.
Obi, we are pleased to have you join us at Impac.
Sincerely,
/s/ LISA LIVINGSTON
Lisa Livingston
Talent Acquisition Manager
Acknowledged:
/s/ OBI NWOKORIE
Obi Nwokorie
Date: April 23, 2021
Exhibit 10.15
Employment Agreement
In return for Impac Mortgage Corp. or its affiliates ("Impac" or the "Company") agreement to employ me, it is agreed
that:
1. You are responsible for reading and becoming familiar with the Human Resources practices of Impac as set forth in the
Employee Handbook. You understand that with the exception of the employment at-will provision, these policies may
be revised, modified, deleted or expanded at any time. You understand that your employment is at-will, meaning that
it can be terminated by either party with or without cause; with or without notice and that no term of employment is
expressed or implied. Your at-will status cannot be changed unless done so in writing signed by you and the
President of Impac or his designee. Additionally, Impac reserves the right to change the terms of your employment
with or without notice, with or without cause, including, but not limited to demotion, promotion, transfer,
compensation, benefits, job duties and location of work. No contrary representations have been made to you
regarding the term of my employment. Your signature below confirms that you have received an Employee
Handbook and agree to abide by its provisions during your employment with Impac.
2. You have received and read Impac’s Code of Business Conduct and you understand that it sets forth a number of the
Company's policies, rules, standards and guidelines that you are responsible for reading, knowing and following. You
agree to abide by all terms in the Code of Business Conduct.
3. You represent that performance of all the terms of employment required by Impac does not, and will not, place you in
breach of any agreement by you to keep in confidence proprietary information of third parties acquired by you in
confidence or in trust prior to employment by Impac. You have not brought and will not bring to Impac or use in the
performance of your responsibilities at Impac any materials, documents or other information of a former employer that
are not generally available to the public. You also acknowledge that, in your employment with Impac, you are not to
breach any obligation of confidentiality that you have to former employers, and you agree to fulfill all such obligations
during employment with Impac.
4. You will keep information about Impac's operations, customers and transactions strictly confidential. You recognize
that this information is highly confidential and must be treated with the utmost care and discretion. You will not
disclose this information during your employment or at any time thereafter to anyone without Impac's prior written
permission. You will not use this information for any purpose other than those directly related to the performance of
your job with Impac. You agree not to use or permit, directly or indirectly, any other person or entity to use any
confidential information in connection the business transactions by or on behalf of anyone but Impac. You understand
that it is your obligation to protect the confidentiality of Impac's customers as well as the Company's information.
5. To the extent consistent with state law, you agree that during your employment by Impac and for a period of one year
following my termination of my employment for any reason you will not solicit any of Impac's employees to
terminate their employment at Impac to work for any business, individual, partnership, firm, corporation, or other
entity.
6. You acknowledge that any creations, developments, products, programs, inventions or results or proceeds of your
services for, or while you are employed at Impac, whether in final, conceptual or developmental stage, shall be, to the
extent consistent with state law, the sole and exclusive property of Impac and, if requested by Impac, you agree to take
any action to perfect, protect or evidence such rights in Impac. This agreement does not apply to an invention for
which no equipment, supplies, facility, or trade secret information of Impac was used and which was developed
entirely on your own time, unless (a) the invention relates (i) directly to the business of Impac, or (ii) to Impac’s
actual or demonstrably anticipated research or development, or (b) the invention results from any work performed
by you for Impac.
Exhibit 10.15
7. You represent as of the commencement date of your employment and at all times during your employment that (i)
You are not the subject of any orders, judgments or decrees of any state or federal court or regulatory agency limiting
or otherwise affecting your professional activity or addressing any issue related to whether your professional conduct
has been in compliance with applicable law or mortgage industry professional standards, (ii) no claim, action or
investigation involving any such matters is pending, or to your knowledge, threatened, (iii) my execution, delivery
and performance of this Agreement will not violate or conflict with any contract or arrangement to which you are a
party or by which you are bound.
8. Both you and the Company agree that any controversy or claim arising out of or relating to this Agreement or
interpretation or application of this agreement, or the employment relationship between you and Impac will be settled
by arbitration in accordance with the Arbitration Rules of the American Arbitration Association via final and binding
arbitration in the county and state in which the Applicant applied for employment, and/or if hired, is or was
employed. Both you and the Company waive any right either may otherwise have to pursue, file, participate in, or be
represented in any Arbitrable Dispute brought in any court on a class basis, or as a collection action, or as a
representative action. All disputes subject to this agreement must be arbitrated as individual claims. This Agreement
specifically prohibits the arbitration of any dispute on a class basis, or as a collection action, or as a representative
action, and the arbitrator shall have no authority or jurisdiction to enter an award or otherwise provide relief on a
class, collective or representative basis. This Policy is governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq.
Where required by law, Impac will pay the arbitrator’s and arbitration fees. If under applicable law Impac is not
required to pay the arbitrator’s and/or arbitration fees, such fee(s) will be apportioned as determined by the
arbitrator in accordance with applicable law. The arbitrator may award any party any remedy to which that party is
entitled under applicable law, but such remedies shall be limited to those that would be available to a party in a court
of law for the claim or defenses presented to and decided by the arbitrator. The award of the arbitrator shall be final
and binding. The arbitrator will issue a decision or award in writing, stating the essential findings of fact and
conclusions of law. Judgment upon the award may be entered in any court having jurisdiction thereof. If any
provision of this agreement to arbitrate is adjudged to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of this Employment Agreement.
9. This agreement supersedes all prior agreements and representations, whether written or oral, regarding the terms of
my agreement and the subject matter herein except for any prior or subsequent agreements regarding the resolution
of any disputes between me and Impac (including its employees).
/s/ OBI NWOKORIE
Name (Please print)
/s/ OBI NWOKORIE
Signature
/s/ RUBEN ESCANDON
HR Representative
Date: April 23, 2021
Date: April 23, 2021
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Impac Funding Corporation
IMH Assets Corp.
Copperfield Capital Corporation.
Integrated Real Estate Service Corporation (1)
Exhibit 21.1
State of Incorporation
California
California
Delaware
Maryland
(1) IRES owns 100% of Impac Mortgage Corp., a California corporation formerly known as Excel Mortgage
Servicing, Inc.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-169316, 333-
185195, 333-193489, 333-213037, 333-220393, 333-227015, 333-235404, and 333-239842) and on Form S-3 (No. 333-
235405) of Impac Mortgage Holdings, Inc. (the Company) of our reports dated March 11, 2022 with respect to the
consolidated balances sheets of the Company as of December 31, 2021 and 2020, and the related consolidated statements
of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended, included in
this Annual Report (Form 10-K) for the year ended December 31, 2021.
Exhibit 23.1
/s/ BAKER TILLY US, LLP
Irvine, California
March 11, 2022
Exhibit 31.1
I, George A. Mangiaracina, certify that:
CERTIFICATION
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’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.
b.
c.
d.
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;
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;
evaluated the effectiveness of the registrant’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;
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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’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’s internal control over financial reporting.
/s/ GEORGE A. MANGIARACINA
George A. Mangiaracina
Chief Executive Officer
March 11, 2022
Exhibit 31.2
I, Jon Gloeckner, certify that:
CERTIFICATION
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’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.
b.
c.
d.
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;
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;
evaluated the effectiveness of the registrant’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;
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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’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’s internal control over financial reporting.
/s/ JON GLOECKNER
Jon Gloeckner
SVP Treasury & Financial Reporting
(Interim Principal Financial and Accounting Officer)
March 11, 2022
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 Company) on Form 10-K for the
period ending December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the Report),
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)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ GEORGE A. MANGIARACINA
George A. Mangiaracina
Chief Executive Officer
March 11, 2022
/s/ JON GLOECKNER
Jon Gloeckner
SVP Treasury & Financial Reporting
(Interim Principal Financial and Accounting Officer)
March 11, 2022