UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x For the quarterly period ended June 30, 2008 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		~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the quarterly period ended September 30, 2007 or~~

o		~~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		33-0675505
(State or other jurisdiction of	~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)

19500 Jamboree Road, Irvine, California 92612

(Address of principal executive offices)

(949) 475-3600

(Registrant’s telephone number, including area code)

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 xo No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer xo Accelerated filer ox Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule

12b-2) Yes o No x

There were ~~76,083,865~~76,096,392 shares of common stock outstanding as of ~~December 14, 2007.~~September 12, 2008.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION
		~~Page~~
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS	2
	Consolidated Balance Sheets as of ~~September~~June 30, ~~2007~~2008 and December 31, ~~2006~~2007	21
	Consolidated Statements of Operations and Comprehensive ~~Loss~~Earnings (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007	32
	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007	54
	Notes to Unaudited Consolidated Financial Statements	76

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2423
	Forward-Looking Statements	2423
	The Mortgage Banking Industry and Discussion of Relevant Fiscal Periods	24
	~~Review~~Status of ~~Performance~~Operations, Liquidity and Capital Resources	2524
	Market Conditions	26
	Critical Accounting Policies	29
	~~Selected~~Fair Value of Financial ~~Results for the Third Quarter of 2007~~Instruments	30
	Interest Income and Expense	31
	~~Third Quarter and Year-to-date 2007~~Selected Financial Results for the Three Months Ended June 30, 2008	32
	Selected Financial Results for the Six Months Ended June 30, 2008	32
	Estimated Taxable Income	32
	Financial Condition and Results of Operations	34
	~~Liquidity and Capital Resources~~	5533

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5744

ITEM 4.	CONTROLS AND PROCEDURES	6044

	PART II. OTHER INFORMATION	61

ITEM 1.	LEGAL PROCEEDINGS	6145

ITEM 1A.	RISK FACTORS	6145

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6448

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	6448

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	6448

ITEM 5.	OTHER INFORMATION	6548

ITEM 6.	EXHIBITS	6550

	SIGNATURES	6650

	CERTIFICATIONS

	~~EXPLANATORY NOTE~~

	~~During the third quarter of 2007, the Company’s Board of Directors elected to discontinue the Alt-A mortgage operations (IFC), commercial operations (ICCC), and warehouse lending operations (IWLG). The information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.~~

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(~~dollar amounts~~ in thousands, except share data)

							June 30,			December 31,
	September 30, 2007			December 31, 2006			2008			2007
	(Unaudited)						(Unaudited)
ASSETS
Cash and cash equivalents	$	41,186		$	151,714		$	25,971		$	24,387
Securitized mortgage collateral	18,741,520			20,936,515
Allowance for loan losses	(911,218		)	(77,684		)
Mortgages held-for-sale - retail operations	133,497			—
Trust assets
Investment securities available-for-sale	16,274			31,582			8,644			15,248
Accrued interest receivable	103,255			107,913
Securitized mortgage collateral (at fair value at June 30, 2008)							11,055,382			16,532,633
Derivative assets	36,153			142,793			109			7,497
Real estate owned (REO), net	360,472			137,331
Real estate owned (REO) at net realizeable value							621,433			400,863
Total trust assets							11,685,568			16,956,241

Assets of discontinued operations	810,574			2,086,216			203,320			353,250
Other assets	78,663			82,575			48,684			57,194
Total assets	$	19,410,376		$	23,598,955		$	11,963,543		$	17,391,072

LIABILITIES
Securitized mortgage borrowings	$	18,712,217		$	20,527,001
Reverse repurchase agreements	148,116			163,890
Trust preferred securities	98,232			97,661
Trust liabilities
Securitized mortgage borrowings (at fair value at June 30, 2008)							$	11,497,132		$	17,780,060
Derivative liabilities							136,580			127,757
Total trust liabilities							11,633,712			17,907,817

Trust preferred securities (at fair value at June 30, 2008)							46,266			98,398
Liabilities of discontinued operations	832,216			1,774,371			253,334			405,341
Derivative liabilities	41,098			14,752
Other liabilities	71,813			11,750			5,723			57,244
Total liabilities	19,903,692			22,589,425			11,939,035			18,468,800

Commitments and contingencies

STOCKHOLDERS’ EQUITY

Series-A junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued and outstanding as of June 30, 2007 and December 31, 2006, respectively	—			—
Series-B 9.375% cumulative redeemable preferred stock, $0.01 par value; liquidation value $50,000; 2,000,000 shares authorized, 2,000,000 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively	20			20
Series-C 9.125% cumulative redeemable preferred stock, $0.01 par value; liquidation value $111,765; 5,500,000 shares authorized; 4,470,600 and 4,444,000 shares outstanding as of September 30, 2007 and December 31, 2006, respectively	45			44

Common stock, $0.01 par value; 200,000,000 shares authorized; 76,083,865 shares issued and outstanding as of September 30, 2007 and December 31, 2006	761			761
Series-A junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued and outstanding							—			—
Series-B 9.375% cumulative redeemable preferred stock, $0.01 par value; liquidation value $50,000; 2,000,000 shares authorized, issued and outstanding							20			20
Series-C 9.125% cumulative redeemable preferred stock, $0.01 par value; liquidation value $111,765; 5,500,000 shares authorized; 4,470,600 shares issued and outstanding as of June 30, 2008 and December 31, 2007							45			45
Common stock, $0.01 par value; 200,000,000 shares authorized; 76,096,392 shares issued and outstanding as of June 30, 2008 and December 31, 2007							761			761
Additional paid-in capital	1,173,350			1,170,872			1,175,125			1,173,562
Accumulated other comprehensive income	291			2,357			—			1,028
Net accumulated deficit:
Cumulative dividends declared	(800,191		)	(762,382		)	(811,355		)	(803,912		)
Retained earnings (deficit)	(867,592		)	597,858
Retained deficit							(340,088		)	(1,449,232		)
Net accumulated deficit	(1,667,783		)	(164,524		)	(1,151,443		)	(2,253,144		)
Total stockholders’ (deficit) equity	(493,316		)	1,009,530
Total stockholders’ equity (deficit)							24,508			(1,077,728		)
Total liabilities and stockholders’ equity	$	19,410,376		$	23,598,955		$	11,963,543		$	17,391,072

See accompanying notes to consolidated financial statements.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE ~~LOSS~~EARNINGS (LOSS)

(in thousands, except per share data)

(Unaudited)

Three Months
Ended September 30,

Nine Months
Ended September 30,

2007

2006

2007

2006

INTEREST INCOME:

Mortgage assets

$
313,307

$
259,359

$
932,580

$
843,845

Other

465

1,695

3,784

5,438

Total interest income

313,772

261,054

936,364

849,283

INTEREST EXPENSE:

Securitized mortgage borrowings

294,570

289,837

889,851

888,056

Reverse repurchase agreements

5,274

344

12,488

981

Other borrowings

2,230

2,299

6,721

6,986

Total interest expense

302,074

292,480

909,060

896,023

Net interest income (expense)

11,698

(31,426
)
27,304

(46,740
)
Provision for loan losses

789,445

3,533

979,740

3,638

Net interest expense after provision for loan losses

(777,747
)
(34,959
)
(952,436
)
(50,378
)

NON-INTEREST INCOME:

Change in fair value of derivative instruments

(137,553
)
(150,051
)
(138,334
)
(91,155
)
Realized gain from derivative instruments

28,815

60,595

103,840

156,582

Provision for repurchases

(4,553
)
—

(4,553
)
—

(Loss) gain on sale of other real estate owned

(5,571
)
485

(6,716
)
1,740

Amortization of mortgage servicing rights

(188
)
(380
)
(603
)
(1,112
)
Lower of cost or market writedown

(6,657
)
—

(7,396
)
—

Loss on sale of loans

(27,586
)
(20
)
(26,195
)
(1,407
)
Provision for REO losses

(40,371
)
—

(68,445
)
—

Other (expense) income

(1,056
)
8,383

4,367

26,664

Total non-interest income (expense)

(194,720
)
(80,988
)
(144,035
)
91,312

NON-INTEREST EXPENSE:

General and administrative and other expense

8,154

1,868

25,293

5,831

Occupancy expense

4,814

413

6,986

1,263

Personnel expense

6,127

2,234

14,089

4,151

Data processing expense

1,425

1,478

4,181

3,434

Professional services

622

285

2,212

1,464

Equipment expense

493

502

1,400

1,565

Total non-interest expense

21,635

6,780

54,161

17,708

Net (loss) earnings from continuing operations

(994,102
)
(122,727
)
(1,150,632
)
23,226

Income tax expense from continuing operations

3,056

1,700

12,012

8,070

Net (loss) earnings from continuing operations

(997,158
)
(124,427
)
(1,162,644
)
15,156

Loss from discontinued operations, net of tax

(194,077
)
(3,264
)
(302,806
)
(30,923
)
Net (loss) earnings

(1,191,235
)
(127,691
)
(1,465,450
)
(15,767
)
Cash dividends on cumulative redeemable preferred stock

(3,722
)
(3,672
)
(11,165
)
(11,016
)
Net loss available to common stockholders

$
(1,194,957
)
$
(131,363
)
$
(1,476,615
)
$
(26,783
)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
INTEREST INCOME:
Total interest income	$	407,855		$	316,443		$	679,811		$	621,191

INTEREST EXPENSE:
Total interest expense	403,599			308,569			668,206			605,374

Net interest income	4,256			7,874			11,605			15,817
Provision for loan losses	—			161,163			—			190,295
Net interest income (expense) after provision for loan losses	4,256			(153,289		)	11,605			(174,478		)

NON-INTEREST INCOME:
Change in fair value of derivative instruments	—			91,670			—			73,672
Change in fair value of net trust assets, excluding REO	(11,161		)	—			(7,633		)	—
Change in fair value of trust preferred securities	(997		)	—			(5,020		)	—
Losses from real estate owned	(4,830		)	(19,328		)	(9,086		)	(29,220		)
Real estate advisory fees	4,696			—			8,540			—
Other	1,544			(1,538		)	3,442			3,749
Total non-interest (expense) income	(10,748		)	70,804			(9,757		)	48,201

NON-INTEREST EXPENSE:
General and administrative	4,925			4,451			8,912			9,960
Personnel expense	2,820			1,620			5,150			2,464
Total non-interest expense	7,745			6,071			14,062			12,424
Net loss from continuing operations	(14,237		)	(88,556		)	(12,214		)	(138,701		)
Income tax expense from continuing operations	2,202			4,969			8,728			8,956
Net loss from continuing operations	(16,439		)	(93,525		)	(20,942		)	(147,657		)
Net loss from discontinued operations, net of tax	(11,048		)	(59,022		)	(10,360		)	(126,558		)
Net loss	(27,487		)	(152,547		)	(31,302		)	(274,215		)
Cash dividends on cumulative redeemable preferred stock	(3,722		)	(3,722		)	(7,443		)	(7,443		)
Net loss available to common stockholders	$	(31,209	)	$	(156,269	)	$	(38,745	)	$	(281,658	)

See accompanying notes to consolidated financial ~~statements~~statements.

Table of Contents

Three Months
Ended September 30,

Nine Months
Ended September 30,

2007

2006

2007

2006

Net loss

$
(1,191,235
)
$
(127,691
)
$
(1,465,450
)
$
(15,767
)
Net unrealized (losses) gains on securities:

Unrealized holding losses arising during year

(700
)
(237
)
(673
)
(2,015
)
Reclassification of (losses) gains included in net earnings

(243
)
—

(1,393
)
143

Net unrealized losses

(943
)
(237
)
(2,066
)
(1,872
)
Comprehensive loss

$
(1,192,178
)
$
(127,928
)
$
(1,467,516
)
$
(17,639
)

Net loss per common share - Basic:

Loss from Continuing Operations

$
(13.11
)
$
(1.63
)
$
(15.28
)
$
0.20

(Loss) earnings from Discontinuing Operations

(2.55
)
(0.04
)
(3.98
)
(0.41
)
Net Loss per share

$
(15.66
)
$
(1.68
)
$
(19.26
)
$
(0.21
)

Net loss per common share - Diluted:

Loss from Continuing Operations

$
(13.11
)
$
(1.63
)
$
(15.28
)
$
0.20

(Loss) earnings from Discontinuing Operations

(2.55
)
(0.04
)
(3.98
)
(0.41
)
Net Loss per share

$
(15.66
)
$
(1.68
)
$
(19.26
)
$
(0.21
)

Net Loss per share available to common shareholders

$
(15.71
)
$
(1.73
)
$
(19.41
)
$
(0.35
)
Dividends declared per common share

$
—

$
0.25

$
0.10

$
0.75

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
Net loss	$	(27,487	)	$	(152,547	)	$	(31,302	)	$	(274,215	)
Net unrealized losses on securities:
Unrealized holding losses arising during year	—			(1,656		)	—			(2,718		)
Reclassification of losses included in net earnings	—			1,596			—			1,596
Net unrealized losses	—			(60		)	—			(1,122		)
Comprehensive loss	$	(27,487	)	$	(152,607	)	$	(31,302	)	$	(275,337	)

Net loss per common share - Basic:
Loss from continuing operations	$	(0.26	)	$	(1.28	)	$	(0.37	)	$	(2.04	)
Loss from discontinued operations	(0.15		)	(0.78		)	(0.14		)	(1.66		)
Net loss per share	$	(0.41	)	$	(2.05	)	$	(0.51	)	$	(3.70	)

Net loss per common share - Diluted:
Loss from continuing operations	$	(0.26	)	$	(1.28	)	$	(0.37	)	$	(2.04	)
Loss from discontinued operations	(0.15		)	(0.78		)	(0.14		)	(1.66		)
Net loss per share	$	(0.41	)	$	(2.05	)	$	(0.51	)	$	(3.70	)

Dividends declared per common share	$	—		$	—		$	—		$	0.10

See accompanying notes to consolidated financial ~~statements~~statements.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

For the Nine Months

Ended September 30,

2007

2006

restated

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) earnings of continuing operations

$
(1,162,644
)
$
15,156

Continuing operations adjustments to reconcile net earnings to net cash used in operating activities:

Provision for loan losses

979,740

3,638

Provision for REO losses

68,445

—

Amortization of deferred charge, net

12,071

15,872

Amortization of premiums, securitization costs and debt issuance costs

117,180

181,769

Loss (gain) on sale of other real estate owned

6,716

(1,740
)
Loss on sale of loans

26,195

1,407

Provision for repurchases

4,553

—

Loss on lower of cost or market writedown

7,396

—

Change in fair value of derivative instruments

138,334

91,155

Purchase of mortgages held-for-sale

(686,271
)
—

Sale and principal reductions on mortgages held-for-sale

546,223

—

Stock-based compensation

1,960

1,628

Goodwill impairment

12,360

—

Impairment of long lived assets

1,200

—

Write-down of securities available-for-sale

11,304

Net change in other assets and liabilities

(13,994
)
(11,869
)
Net cash provided by operating activities of continuing operations

70,768

297,016

Net loss in discontinued operations

(302,806
)
(30,923
)
Discontinued operations adjustments to reconcile net earnings to net cash used in operating activities:

Provision for repurchases

41,883

7,233

Loss on lower of cost or market writedown

133,203

15,284

Provision for loan losses

4,867

(349
)
Purchase of mortgages held-for-sale

(4,162,759
)
(8,301,684
)
Sale and principal reductions on mortgages held-for-sale

1,549,318

6,397,450

Loss (gain) on sale of loans

47,401

(37,019
)
Depreciation and amortization

3,167

4,392

Impairment of long lived assets

11,614

—

Net change in other assets and liabilities

(16,887
)
935

Net cash used in operating activities of discontinued operations

(2,690,999
)
(1,944,681
)
Net cash used in by operating activities

(2,620,231
)
(1,647,665
)

For the Nine Months

Ended September 30,

2007

2006

restated

CASH FLOWS FROM INVESTING ACTIVITIES:

Net change in securitized mortgage collateral

4,749,658

6,865,027

Net change in mortgages held-for-investment

(2,061
)
87,560

Purchase of investment securities available-for-sale

—

34,909

Purchase of premises and equipment

(6,286
)
—

Net principal change on investment securities available-for-sale

2,816

(27,180
)
Proceeds from the sale of other real estate owned

163,437

61,963

Other investing cash flows from continuing operations

—

91

Net cash provided by investing activities of continuing operations

4,907,564

7,022,370

Finance receivable advances to customers

(2,077,204
)
(3,527,463
)
Repayments of finance receivables

2,348,536

3,579,915

Net change in securitized mortgage collateral

103,117

(136,004
)
Other investing cash flows from discontinued operations

23,342

68

Net cash (used in) provided by investing activities of discontinued operations

397,791

(83,484
)
Net cash provided by investing activities

5,305,355

6,938,886

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from securitized mortgage borrowings

3,858,143

2,863,509

Repayment of securitized mortgage borrowings

(5,690,970
)
(7,186,872
)
Common stock dividends paid

(26,644
)
(53,281
)
Preferred stock dividends paid

(11,165
)
(11,016
)
Purchases of common stock

—

(951
)
Proceeds from exercise of stock options

—

824

Proceeds from sale of cumulative redeemable preferred stock

608

203

Other financing cash flows from continuing operations

—

69,364

Net cash used in investing activities of continuing operations

(1,870,028
)
(4,318,220
)

Cash disbursements under reverse repurchase agreements

(7,323,114
)
(15,905,924
)
Cash receipts from reverse repurchase agreements

6,382,254

14,948,926

Other financing cash flows from discontinued operations

—

(723
)
Net cash used in investing activities of discontinued operations

(940,860
)
(957,721
)
Net cash used in financing activities

(2,810,888
)
(5,275,941
)

Net change in cash and cash equivalents

(125,764
)
15,280

Cash and cash equivalents at beginning of period

179,677

146,621

Cash and cash equivalents at end of period - Continuing Operations

41,186

125,659

Cash and cash equivalents at end of period - Discontinued Operations

12,727

36,242

Cash and cash equivalents at end of period

$
53,913

$
161,901

SUPPLEMENTARY INFORMATION:

Interest paid

$
962,336

$
862,033

Taxes paid

116

45

NON-CASH TRANSACTIONS:

Accumulated other comprehensive loss

$
(2,066
)
$
(1,872
)
Dividends declared but unpaid

—

19,021

Transfer of mortgages to other real estate owned

3,046

129,785

Transfer of securitized mortgage collateral to other real estate owned

419,411

—

Transfer of loans held-for-sale to securitized mortgage collateral

3,245,500

—

Transfer of securitized mortgage collateral to loans held-for-sale

27,040

—

Transfer of assets from discontinued operations to continuing operations

4,012

—

	For the Six Months
	Ended June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations	$	(20,942	)	$	(147,657	)

Provision for loan losses	—			190,295
Provision for REO losses	14,323			28,074
Loss (gain) on sale of REO	(5,237		)	1,145
Amortization of deferred charge, net	8,728			9,069
Amortization of debt issuance costs and mortgage servicing rights	948			807
Amortization of premiums and securitization costs	—			84,863
Change in fair value of derivative instruments	12,144			1,354
Change in fair value of net trust assets, excluding REO and derivatives	(75,878		)	—
Change in fair value of trust preferred securities	5,020			—
Accretion of interest income and expense	(25,191		)	—
Stock-based compensation	653			812
Net change in accrued interest receivable	—			(547		)
Net cash provided by (used in) operating activities of discontinued operations	91,219			(3,157,915		)
Net change in other assets and liabilities	(41,444		)	(8,968		)
Net cash used in operating activities	(35,657		)	(2,998,668		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Securitized mortgage collateral	1,342,015			3,468,817
Mortgages held-for-investment	22			(3,229		)
Purchase of premises and equipment	386			(873		)
Principal change on investment securities available-for-sale	1,196			6,404
Proceeds from the sale of real estate owned	197,796			76,532
Net cash provided by (used in) investing activities of discontinued operations	11,805			191,664
Net cash provided by investing activities	1,553,220			3,739,315

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash disbursements under reverse repurchase agreements	—			(90,642		)
Cash receipts from reverse repurchase agreements	—			92,392
Proceeds from securitized mortgage borrowings	—			3,858,143
Repayment of securitized mortgage borrowings	(1,393,987		)	(4,323,044		)
Common stock dividends paid	—			(30,326		)
Preferred stock dividends paid	(7,443		)	(7,443		)
Proceeds from sale of cumulative redeemable preferred stock	—			608
Net cash (used in) povided by investing activities of discontinued operations	(116,465		)	(306,831		)
Net cash used in financing activities	(1,517,895		)	(807,143		)

Net change in cash and cash equivalents	(332		)	(66,496		)
Cash and cash equivalents at beginning of period	26,462			179,677
Cash and cash equivalents at end of period - Continuing Operations	25,971			107,083
Cash and cash equivalents at end of period - Discontinued Operations	159			6,098
Cash and cash equivalents at end of period	$	26,130		$	113,181

See accompanying notes to consolidated financial statements.

Table of Contents

	For the Six Months
	Ended June 30,
	2008		2007
SUPPLEMENTARY INFORMATION (Continuing and Discontinued Operations):
Interest paid	$	315,545	$	651,736
Taxes paid	—		116

NON-CASH TRANSACTIONS (Continuing and Discontinued Operations):
Accumulated other comprehensive loss	$	—	$	(1,122	)
Transfer of loans held-for-sale and held-for-investment to real estate owned	—		20,872
Transfer of securitized mortgage collateral to real estate owned	435,038		255,051
Transfer of loans held-for-sale to securitized mortgage collateral	—		3,245,500
Transfer of securitized mortgage collateral to loans held-for-sale	—		27,040

See accompanying notes to consolidated financial statements.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data or as otherwise indicated)

Note A—Summary of Business and Significant Accounting Policies

1. Business Summary and Financial Statement Presentation

~~Market Conditions~~

Conditions in the secondary markets, which dramatically worsened during the third quarter, continue to be depressed as investor concerns over credit quality and a weakening of the United States housing market remain high. As a result, the capital markets remain very volatile and illiquid and, have effectively been unavailable to the Company. The Company believes the existing conditions in the secondary markets are unprecedented since the Company’s inception and, as such, inherently involve significant risks and uncertainty. These conditions could continue to adversely impact the performance of our long term investment portfolio. Until bond spreads and credit performance return to more rational levels, it will be impossible for the Company to execute securitizations and loan sales. As a result, in the third quarter the Company has been forced to further alter its business strategies and discontinue the correspondent and wholesale mortgage operations and the warehouse operations in response to the market conditions.

During the second quarter of 2007 the Company accumulated mortgages in the normal course of business; however, starting in July 2007, the secondary mortgage market halted their purchase of investments backed by mortgage loans. As a result the Company was unable to securitize the mortgage loans, which led to significant margin calls during the third quarter of 2007, reducing the Company’s cash position.

The Company has taken steps to reduce operating costs, including reducing staff and lease costs, to a level at which the cashflows from the long-term mortgage portfolio and its master servicing portfolio could support the Company’s ongoing operations. The Company continues to re-size the organization to a level more in line with its ongoing operations. Once the Company is able to eliminate the remaining reverse repurchase lines in discontinued operations the Company should be able to meet its liquidity needs from cash flows generated from the long-term mortgage portfolio and its master servicing fees. In an effort to maintain capital, ~~the Company did not declare a cash dividend on our common stock during the~~ ~~third~~ ~~quarter of 2007.~~

As of September 30, 2007, the Company has negative net worth. While the Company continues to pay its obligations as they become due, the ability of the Company to continue is dependent upon many factors, particularly the Company’s ability to realize the value of its investment portfolio. There can be no assurance of the Company’s ability to do so.

~~Discontinued Operations~~

~~As a result of the Company’s inability to sell or securitize non-conforming loans, the Company has discontinued funding loans other than conforming agency loans.~~

~~As a result of the market conditions as described above, the Company discontinued the following businesses:~~

• ~~the non-conforming Mortgage Operations conducted by IFC and ISAC;~~

• ~~the Commercial Operations conducted by ICCC; and~~

• ~~the Warehouse Lending Operations conducted by IWLG.~~

The Company announced plans to exit certain operations in August 2007. The amounts presented in the notes to the financial statements, include amounts solely from continuing operations, excluding Note 2, Note 4 and Note K, which include amounts related to discontinued operations.

~~Asset Purchase and Related Impairment~~

In May 2007, the Company completed the acquisition of certain production facilities from Pinnacle Financial Corporation (PFC), which is primarily located in the East Coast of the United States. In conjunction with the acquisition the Company created the Impac Home Loans (IHL) a division of IFC. The IHL retail platform originates agency loans. This transaction was recorded as a business combination for accounting purposes resulting in the Company initially recording $12.4 million in goodwill. Because of the current market environment, the goodwill was impaired and the Company had recorded an impairment charge for the full amount during the second quarter of 2007.

Business Summary

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Maryland corporation incorporated in August 1995 and has the following subsidiaries: IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), ~~and~~ Impac Commercial Capital Corporation (ICCC).

During ~~the third quarter of~~late 2007, the Company’s board of directors elected to discontinue the non-conforming mortgage operations ~~(IFC),~~conducted by IFC, commercial operations ~~(ICCC),~~conducted by ICCC, retail mortgage operations conducted by IHL, and warehouse lending operations (~~IWLG).~~

~~Currently, the Company consists of:~~conducted by IWLG.

•The Company consists of the ~~Long-Term Investment~~continuing operations which includes the long-term mortgage portfolio (residual interests in securitizations) conducted by IMH and IMH ~~Assets; and~~

• ~~the Retail Mortgage operations~~Assets, master servicing portfolio conducted by ~~Impac Home Lending (IHL),~~IFC and real estate advisory fees from IMH’s advisory services agreement with a ~~division of IFC.~~real estate marketing company.

The ~~long-term investment operations generate earnings primarily from net interest income earned~~information contained throughout this document is presented on mortgages held as securitized mortgage collateral and mortgages held-for-investment collectively (long-term mortgage portfolio) and associated hedging derivative cash flows. The long-term mortgage portfolio, as reported on the Company’s consolidated balance sheet, consist of mortgages held as securitized mortgage collateral and mortgages held-for-investment.

The retail mortgage operations continue to originate and sell agency conforming adjustable rate mortgages (ARMs) and fixed rate mortgages (FRMs). The retail mortgage operations generate income by selling mortgages to permanent investors. These operations also earn interest income on mortgages held-for-sale. The retail mortgage operations use short term reverse warehouse facilities to finance the origination of mortgages. The Company has been notified that its lender to the retail operations is considering winding down the available line. The Company will either dispose of the retail mortgage operations, or discontinue and wind down the operations by March 31, 2008.a continuing basis, unless otherwise stated.

Financial Statement Presentation

The accompanying unaudited consolidated financial statements of IMH and ~~our~~its subsidiaries (as defined above) have been prepared in accordance with ~~GAAP~~Accounting Principles Generally Accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by ~~generally accepted accounting principles (GAAP)~~GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the ~~nine-month period~~three-month and six month periods ended ~~September~~June 30, ~~2007~~2008 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2007.~~2008.

All significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current year presentation.

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with GAAP. The items affected by management’s estimates and assumptions include ~~allowance for loan losses,~~the valuation of ~~derivative financial instruments, net realizable value~~trust assets and liabilities (including investment securities available-for-sale), the valuation of ~~real estate owned (REO), lower of cost or market adjustment to loans held-for-sale,~~ repurchase liabilities related to sold loans, the valuation of ~~residual interests, asset impairment charges, restructuring charges,~~trust preferred securities, and the ~~amortization~~valuation of ~~various loan premiums and discounts due to prepayment estimates.~~loans held-for-sale. Actual results could differ ~~materially~~ from those estimates.

2.Market Conditions, Status of Operations, Liquidity and Capital Resources ~~Discontinued Operations~~

~~During~~In 2007 and 2008, management has been seriously challenged by the ~~third~~unprecedented turmoil in the mortgage market, including the following: significant increases in delinquencies and foreclosures; significant increases in credit-related losses; decline in originations; tightening of warehouse credit and the virtual elimination of the market for loan securitizations. As a result, the Company discontinued certain operations, resolved and terminated all but one of the Company’s reverse repurchase facilities and settled a portion of its outstanding repurchase claims, while also reducing its operating costs and liabilities. In the first quarter of ~~2007,~~2008, the Company ~~announced plans~~also entered into an agreement with a real estate marketing company to exit substantially all of its mortgage, the commercial, and the warehouse lending operations. Consequently, the amounts related to these operations are presented as discontinued operations in our consolidated statements of income and our consolidated statements of cash flows, and the asset groups to be exited are reported as assets and liabilities of discontinued operations in our consolidated balance sheets for the periods presented.generate advisory fees.

~~The following tables present discontinued operations condensed balance sheets for the periods ended September 30, 2007 and December 31, 2006;~~

Discontinued Operations

as of September 30,

2007

Mortgage

Total

Warehouse

Operations (2)

Commercial

Inter-

Discontinued

Balance Sheet Items:

Lending

(IFC)

Operations

Company (1)

Operations

Securitized mortgage collateral and mortgages held-for-investment

$
—

$
—

$
—

$
—

$
—

Mortgages held-for-sale

—

592,376

129,295

—

721,671

Finance receivables

994,768

—

—

(959,818
)
34,950

Allowance for loan losses

(7,759
)
—

—

—

(7,759
)
Total assets

1,179,849

804,543

129,680

(1,303,498
)
810,574

Reverse repurchase agreements

923,733

714,182

130,581

(992,850
)
775,646

Discontinued Operations

as of December 31,

2006

Mortgage

Total

Warehouse

Operations (2)

Commercial

Inter-

Discontinued

Balance Sheet Items:

Lending

(IFC)

Operations

Company (1)

Operations

Securitized mortgage collateral and mortgages held-for-investment

$
—

$
114,315

$
—

$
—

$
114,315

Mortgages held-for-sale

—

1,382,626

179,293

—

1,561,919

Finance receivables

1,847,097

—

—

(1,540,816
)
306,281

Allowance for loan losses

(10,598
)
(3,493
)
—

—

(14,091
)
Total assets

1,966,317

1,629,180

181,406

(1,690,687
)
2,086,216

Reverse repurchase agreements

1,716,512

1,356,524

176,800

(1,533,331
)
1,716,505

~~The following tables present discontinued operations condensed statement of operations for the three and nine month periods ended September 30, 2007 and 2006.~~

Discontinued Operations

for the nine months ended September 30,

2007

Mortgage

Total

Warehouse

Operations (2)

Commercial

Inter-

Discontinued

Income Statement Items:

Lending

(IFC)

Operations

Company (1)

Operations

Net interest income (expense)

$
18,203

$
(7,622
)
$
(2,424
)
$
5,758

$
13,915

Provision (benefit) for loan losses

4,979

(112
)
—

—

4,867

Realized gain from derivative instruments

—

910

270

—

1,180

Change in fair value of derivative instruments

—

(3,479
)
(1,479
)
—

(4,958
)
Other non-interest (expense) income

1,481

(194,106
)
(6,376
)
(24,671
)
(223,672
)
Non-interest expense and income taxes

8,508

67,267

8,629

—

84,404

Net earnings (loss)

$
6,197

$
(271,452
)
$
(18,638
)
$
(18,913
)
$
(302,806
)
9

Discontinued Operations

for the three months ended September 30,

2007

Mortgage

Total

Warehouse

Operations (2)

Commercial

Inter-

Discontinued

Income Statement Items:

Lending

(IFC)

Operations

Company (1)

Operations

Net interest income (expense)

$
6,025

$
(1,691
)
$
(2,041
)
$
789

$
3,082

Provision for loan losses

2,637

170

—

—

2,807

Realized gain from derivative instruments

—

54

52

—

106

Change in fair value of derivative instruments

—

(1,098
)
(2,780
)
—

(3,878
)
Other non-interest (expense) income

267

(146,028
)
(6,106
)
—

(151,867
)
Non-interest expense and income taxes

3,966

31,768

2,979

—

38,713

Net (loss) earnings

$
(311
)
$
(180,701
)
$
(13,854
)
$
789

$
(194,077
)

Discontinued Operations

for the nine months ended September 30,

2006

Mortgage

Total

Warehouse

Operations (2)

Commercial

Inter-

Discontinued

Income Statement Items:

Lending

(IFC)

Operations

Company (1)

Operations

Net interest income (expense)

$
24,229

$
(4,421
)
$
251

$
(1,101
)
$
18,958

Provision for loan losses

(350
)
—

—

—

(350
)
Realized gain from derivative instruments

—

21

30

—

51

Change in fair value of derivative instruments

—

4,877

(6,324
)
—

(1,447
)
Other non-interest (expense) income

2,426

31,787

3,387

(23,059
)
14,541

Non-interest expense and income taxes

5,578

51,684

6,114

—

63,376

Net earnings (loss)

$
21,427

$
(19,420
)
$
(8,770
)
$
(24,160
)
$
(30,923
)

Discontinued Operations

for the three months ended September 30,

2006

Mortgage

Total

Warehouse

Operations (2)

Commercial

Inter-

Discontinued

Income Statement Items:

Lending

(IFC)

Operations

Company (1)

Operations

Net interest income (expense)

$
9,659

$
(3,183
)
$
61

$
378

$
6,915

Provision for loan losses

(350
)
—

—

—

(350
)
Realized gain from derivative instruments

—

18

17

—

35

Change in fair value of derivative instruments

—

623

(6,106
)
—

(5,483
)
Other non-interest (expense) income

878

31,861

286

(12,065
)
20,960

Non-interest expense and income taxes

2,077

22,955

1,009

—

26,041

Net earnings (loss)

$
8,810

$
6,364

$
(6,751
)
$
(11,687
)
$
(3,264
)
~~(1)~~         Corporate overhead expenses are allocated to the segments based on the percentage of time devoted to the segment, headcount, loan production, or other relevant measures. Income statement items include inter-company loan sale transactions and the elimination of related gains or losses. Balance sheet items include inter-company warehouse borrowings and the elimination of related interest income and interest expense.
~~(2)~~         ~~Alt-A mortgage operations of IFC.~~
106

Table of Contents
~~Segments Discontinued Summary~~
As describes in Note L, in September 2008, the Company executed definitive agreements, which require scheduled principal paydowns and remove any and all technical defaults that existed under the previous reverse repurchase facility.
In order to reduce dividend payments on its preferred stock, the Company is considering exchanging the preferred stock for common stock. In July 2008, the Company’s stockholders approved the potential issuance of common shares in excess of 20 percent of the existing common shares.
The Company earns advisory fees from a real estate marketing company specializing in the marketing and disposition of foreclosed properties. During the three and six months ended June 30, 2008, the Company earned $4.7 million and $8.5 million, respectively, from this relationship. The amount of real estate advisory fees the Company receives from this relationship are based on numerous factors, including real estate market conditions, the level of foreclosure activity, the ability of the marketing company to attract new business, and the Company retaining its CEO and avoiding liquidation. The agreement terminates in 2010 with the Company having an option to extend the agreement for an additional three years.
In July 2008, the Company executed a letter of intent, subject to execution of definitive agreements, to acquire a special servicing platform, whereby the seller will contribute specified balances of loans (mostly distressed) to the platform in order to provide sufficient cash flows to maintain the business during its initial operations.
There can be no assurance that the Company will be successful in executing the agreements outlined above. Also, there can be no assurance that the restructuring of the trust preferred securities or the preferred stock will occur. In this event, the Company intends to reduce operating expenses to a level that is supportable by the revenues from the existing long-term mortgage portfolio (residual interests in securitizations), master servicing portfolio and real estate advisory fees. Nevertheless, if the Company is not successful in completing the objectives outlined above, it may not be able to meet its contractual obligations for the next year, including repayment of the reverse repurchase line, interest payments on trust preferred securities and preferred stock dividends.
2.     Adoption of New Accounting Standards
Adoption of SFAS 157—Fair Value Measurements
The Company prospectively adopted the provisions of Financial Accounting Standards Board (FASB) Statement No. 157 “Fair Value Measurements” (SFAS 157), as of January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation 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 for identical instruments in active markets.
·                  Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
·                  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 determining fair value.
For some products or in certain market conditions, observable inputs may not always be available. Through the second quarter of 2008, certain markets remained illiquid, and some key observable inputs used in valuing certain exposures were unavailable. When and if these markets are liquid, the Company will use the related observable inputs available at that time from these markets.
7

Table of Contents
Under fair value accounting, the Company is required to take into account its own credit risk when measuring the fair value of assets and liabilities.
Adoption of SFAS 159 - Fair Value Option
The adoption of Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) has also resulted in new valuation techniques used by the Company when determining fair value, most notably to value its securitized mortgage collateral and borrowings and trust preferred securities, which had not previously been carried at fair value. The Company prospectively adopted SFAS 159 as of January 1, 2008. SFAS 159 provides an option on an instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial adoption, the election is made at the acquisition of a financial asset, financial liability, or a firm commitment and it may not be revoked. Management believes that the adoption of SFAS 159 provides an opportunity to mitigate volatility in reported earnings and provides a better representation of the economics of the trust assets and liabilities.
Under the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments (certain trust assets, trust liabilities and trust preferred securities) held at January 1, 2008. Differences between the December 31, 2007 carrying values and the January 1, 2008 fair values were recognized as an adjustment to retained deficit. The adoption of SFAS 159 resulted in a $1.1 billion decrease to retained deficit on January 1, 2008 from $(1.4) billion at December 31, 2007 to $(308.8) million at January 1, 2008.

As a result of deterioration in the real estate market ~~conditions as described above,~~since the second half of 2007, the Company ~~discontinued~~significantly added to its allowance for loan losses during the ~~following businesses:~~
•third and fourth quarters of 2007. Principally, because of the ~~Non-Conforming Mortgage Operations conducted by IFC~~increase in the allowance for loan losses, the Company reported a stockholders’ deficit as of December 31, 2007. This stockholders’ deficit was created primarily because the Company was required under GAAP to record an allowance for loan losses that reduced securitized mortgage collateral in its consolidated trusts below the balance of the related securitized mortgage borrowings, resulting in a negative investment in certain consolidated trusts, even though the related trust agreements are nonrecourse to the Company. However, with the adoption of SFAS 159, the Company’s net investment position is unable to go below zero since the related trust liabilities are also recorded at fair value. Therefore the difference between the fair value of the trust assets and ~~ISAC;~~
•trust liabilities represents the ~~Commercial Operations conducted by ICCC; and~~
•net investment interests (residual interests in securitizations) in the ~~Warehouse Lending Operations conducted by IWLG.~~trust at fair value.

The mortgage operations acquired, originated, sold and securitized primarily Alt-A adjustable rate mortgages (ARMs) and fixed rate mortgages (FRMs) from correspondents, mortgage brokers and retail customers. Correspondents originated and closed mortgages under our mortgage programs and then soldfollowing table summarizes the ~~closed mortgages~~initial retained earnings charge related to the ~~mortgage operations on a flow (loan-by-loan basis) or through bulk sale commitments. Correspondents include savings~~prospective adoption SFAS 159 as of January 1, 2008 and ~~loan associations, commercial banks and mortgage bankers. The mortgage operations generated income by securitizing and selling mortgages to permanent investors, including~~ the ~~long-term investment operations. The mortgage operations used warehouse facilities provided by the warehouse lending operations to finance the acquisition and origination~~related fair value balances as of ~~mortgages.~~January 1, 2008.

Ending Balance as of

Fair Value Balance

December 31,2007

Adoption Net

as of January 1, 2008

(Prior to Adoption)

Gain/(Loss)

(After Adoption) (5)

Impact of electingthe fair value option under SFAS 159:

Investment securities available-for-sale

$
15,248

$
1,028
(1)
$
15,248

Securitized mortgage collateral (2)

16,532,633

(821,311
)
15,711,322

Securitized mortgage borrowings (3)

(17,780,060
)
1,903,283

(15,876,777
)
Trust preferred securities

(98,398
)
57,446

(40,952
)
Cumulative-effect adjustment (pre-tax)

1,140,446

Tax impact (4)

—

Cumulative-effect adjustment to reduce retained deficit

$
1,140,446

Total retained deficit as of December 31, 2007

(1,449,232
)

Cumulative-effect adjustment to reduce retained deficit

$
1,140,446

Total retained deficit as of January 1, 2008 (6)

$
(308,786
)

(1)
Investment securities available-for-sale are recorded at fair value at December 31, 2007, with a corresponding $1,028 thousand unrealized gain included in accumulated other comprehensive income. Included in the cumulative-effect adjustment was $1,028 thousand in unrealized holding gains that were reclassified from accumulated other comprehensive income to retained deficit. Due to the effect of reclassifying the $1,028 thousand from accumulated other comprehensive income to retained deficit, the investment securities available-for-sale balances do not add across.
8

Table of Contents
(2)
Components of securitized mortgage collateral at December 31, 2007 include the allowance for loan loss of $1.2 billion, accrued interest of $99.7 million and premiums of $183.1 million, which were part of its fair value for the adoption of SFAS 159. At June 30, 2008 and December 31, 2007, securitized mortgage collateral included $10.1 million and $9.1 million, respectively in master servicing rights, recorded at the lower of cost or market, related to consolidated securitizations and recorded at the lower of cost or market.
(3)
Components of securitized mortgage borrowings at December 31, 2007 include accrued interest of $17.1 million and securitization costs of $37.5 million, which were part of its fair value for the adoption of SFAS 159.
(4)
There was no tax effect of the adoption of SFAS 159 as the Company qualifies as a REIT for federal income tax purposes and its tax liabilities are only related to it deferred charges associated with previous inter-company loan sales.
(5)
The securitized mortgage collateral and securitized mortgage borrowings include the mortgage insurance and bond insurance proceeds to be received from third parties.
(6)
As of January 1, 2008, after adoption of SFAS 159, total stockholder’s equity was $61.7 million
Changes in Significant Accounting Policies
Investment Securities Available-for-Sale

The ~~commercial operations originated commercial mortgages, that were primarily adjustable rate mortgages with initial fixed interest rate periods~~Company elected to continue to account for all of three-, five-, seven- and ten-years that subsequently convert to adjustable rate mortgages, or “hybrid ARMs,” with balances that generally ranged from $500,000 to $5.0 million or by additional underwriting exceptions up to $10 million. Commercial mortgages have an interest rate floor, whichits existing investment securities available-for-sale at fair value. Interest income is recorded based on the ~~initial start rate; in some circumstances have lock out periods, and prepayment penalty periods of three-, five-, seven- and ten-years.~~
The warehouse lending operations provided short-term financing to mortgage loan originators, including the mortgage and commercial operations, by funding mortgages from their closing date until sale to pre-approved investors. This business earned fees from warehouse transactions as well as net interest income from the difference between its cost of borrowings and the interest earned on warehouse advances, both of which were tied to the one-month London Inter-Bank Offered Rate (LIBOR) rate.
~~Mortgage Loans Held-for-Sale~~
~~Mortgages held-for-sale~~effective yield for the ~~discontinued operations for~~period based on the ~~periods indicated consisted~~valuation of the ~~following:~~

At September 30,

At December 31,

2007

2006

Mortgages held-for-sale - residential

$
714,359

$
1,381,264

Mortgages held-for-sale - commercial

128,869

177,619

Net premiums on mortgages held-for-sale - residential

2,438

18,024

Net premiums on mortgages held-for-sale - commercial

79

857

Change in fair value of residential mortgages held-for-sale

(126,849
)
(18,717
)
Net deferred costs

2,775

2,872

Total mortgages held-for-sale

$
721,671

$
1,561,919

~~Mortgage loans held-for-sale~~previous quarter. Net gains and losses resulting from changes in fair value of investment securities available-for-sale are recorded ~~at the lower of cost or market determined on an aggregate basis. The~~within change in fair value of net trust assets in the ~~loans held-for-sale~~Company’s consolidated statement of operations.
The Company’s election to account for its investment securities available-for-sale at fair value was based on the Company’s overall objective of moving toward fair value accounting for significant financial assets and liabilities. The election of SFAS 159 for these investment securities results in increased volatility within net earnings as a result of the recognition of fair value changes with no offsetting amounts that would result if these assets were economically hedged. However, management believes that electing fair value accounting for its investment securities results in a stronger reflection of the value, while furthering its objective of migrating toward fair value accounting.
Securitized Mortgage Collateral and Borrowings
The Company elected to account for certain of its securitized assets at fair value. Interest income on securitized mortgage collateral and interest expense on securitized mortgage borrowings, respectively, is recorded ~~as an increase or decrease to~~based on the effective yield for the period based on the previous quarter’s valuation resulting in interest income and expense accretion. Net gains (losses) resulting from the changes in fair value of these items, are included in non-interest ~~income. During~~income in the ~~three and nine months ended September 30, 2007,~~Company’s consolidated statement of operations. Electing the ~~discontinued operations sold $610.9 million and $1.6 billion of loans, respectively. Subsequent to September 30, 2007~~fair value option allows the Company ~~sold $393.4 million~~to avoid the burden of recording losses on collateral for which the Company will not ultimately bare the loss. In addition, recording the collateral and borrowings at fair value will help to reflect the true economics of the ~~loans held-for-sale.~~transactions within the consolidated statement of operations. Upon the adoption of SFAS 159, all deferred costs associated with securitized mortgage collateral and borrowings have been recognized as a cumulative effect of a change in accounting principle within retained deficit as of January 1, 2008.

11Trust Preferred Securities
The Company elected to account for all of its trust preferred securities at fair value. Interest expense on these items is recorded based on the effective yield for the period. Gains and losses resulting from the changes in fair value of these items are recorded within change in fair value of trust preferred securities in the Company’s consolidated statement of operations.
The Company’s election to account for its trust preferred securities at fair value was based on the Company’s overall objective of moving toward fair value accounting for significant financial assets and liabilities. The election of SFAS 159 for these liabilities results in increased volatility within net earnings as a result of the recognition of fair value changes with no offsetting amounts that would result if these liabilities were economically hedged. However, management believes that electing fair value accounting for its trust preferred securities results in a stronger reflection of the value, while furthering its objective to migrate toward fair value accounting.
3.     Recent Accounting Pronouncements
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161), an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), to expand disclosure requirements for an entity’s derivative and hedging activities. Under SFAS 161, entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative
9

~~Repurchase Reserve~~Table of Contents

~~Repurchase reserve~~instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In order to meet these requirements, entities shall include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with early adoption encouraged. The Company plans to adopt this Statement on January 1, 2009, and there should be no impact on the ~~discontinued operations for the periods indicated consisted of the following:~~

At September 30,

At December 31,

2007

2006

Reserve for early payment defaults (1)

$
20,225

$
12,220

Reserve for misrepresentations and warranties

11,187

—

Other

791

3,126

Total repurchase reserve

$
32,203

$
15,346

~~(1)~~         ~~This figure at December 31, 2006 includes both the reserve for early payment default and the reserve for misrepresentations.~~consolidated financial statements as this Statement only addresses disclosures.

~~This repurchase liability~~In April 2008, the FASB voted to eliminate qualifying special purpose entities (QSPEs) from the guidance in FASB Statement No. 140 “Accounting for ~~discontinued operations is included in liabilities~~Transfers and Servicing of ~~discontinued operations~~Financial Assets and ~~represents estimated losses~~Extinguishment of Liabilities” (SFAS 140).   While the revised standard has not been finalized and the FASB’s proposals will be subject to a public comment period, this change may have a significant impact on the Company’s consolidated financial statements as it may lose sales treatment for ~~normal representation and warranty terms related to~~assets previously sold ~~whole loans. The reserve totaled approximately $32.2 million at September~~to a QSPE, as well as for future sales. An effective date for any proposed revisions has not been determined by the FASB. As of June 30, ~~2007, compared~~2008, the current principal balance of QSPEs to $15.3 million at December 31, 2006. In determining the adequacy of the reserve for mortgage repurchases, management considers such factors as specific requests for repurchase, known problem loans, underlying collateral values, recent sales activity of similar loans, historical experience, current market conditions and other appropriate information. For the three and nine months ended September 30, 2007,which the Company, ~~recorded a provision~~acting as principal, has transferred assets and received sales treatment were $727.1 million. The Company’s investment in these QSPE’s consists of residual interests accounted for ~~repurchase losses~~as investment securities available-for-sale in its consolidated balance sheets.
In connection with the proposed changes to SFAS 140, the FASB also is proposing three key changes to the consolidation model in FASB Interpretation No. 46(R), “Consolidation of ~~$11.2 million and $41.9 million as compared~~Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51” (FIN 46(R)). First, the FASB will now include former QSPEs in the scope of FIN 46(R). In addition, the FASB supports amending FIN 46(R) to change the method of analyzing which party to a ~~benefit~~variable interest entity (VIE) should consolidate the VIE to a primarily qualitative determination of ~~$15.9 million~~control instead of today’s risks and ~~a provision~~rewards model. Finally, the proposed amendment is expected to require all VIEs and their primary beneficiaries to be reevaluated quarterly. The previous rules required reconsideration only when specified reconsideration events occurred. As of ~~$7.2 million for~~June 30, 2008, the ~~same periods in 2006, included in loss from discontinued operations.~~current principal balance of significant unconsolidated VIEs with which the Company is involved were approximately $727.1 million.

~~Income Taxes~~The Company will be evaluating the impact of these changes on the Company’s consolidated financial statements once the standard is approved and issued.

During the three and nine months ended September 30, 2007, income tax expense was a benefit of $0.4 million and an expense of $4.3 million, respectively, as compared to an benefit of $5.4 million and an expense of $3.8 million, respectively, during the same periods in 2006. The amount of income tax benefit for the quarter ended September 30, 2007 was the result of the loss carrybacks available to the Company for current year tax losses.4.     Legal Proceedings
~~Fixed Asset and Lease Impairment~~

InThe Company is party to litigation and claims which are normal in the course of its operations. While the results of such 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 the Company’s financial condition or results of operations.
On November 9, 2007, and separately on August 25, 2008, two matters were filed against IFC in Orange County in the Superior Court of California, as case nos. 07CC11612 and 00110553, respectively, by Citimortgage, Inc., alleging claims for breach of contract and damages based upon representations and warranties made in conjunction with the discontinued operations, the Company has recorded a $11.6 million impairment charge on the property plant and equipment that the Company no longer will be utilizing. Additionally, assets with fair values that were deemed recoverable were transferred to continuing operations. During third quarter the discontinued operations of the Company incurred a lease impairment chargewhole loan sales. These actions seek combined damages in ~~the amount~~excess of $4.2 million.

3.              ~~Restated Consolidated Cash Flows for 2006 Interim Periods and Reclassifications~~
~~Certain interim amounts~~On June 28, 2008 a matter was filed against IFC in the ~~nine months ended September 30, 2006 Consolidated Statement~~Circuit Court of ~~Cash Flows have been restated to reflect properly~~ the ~~specific intercompany activities related to cash receipts from loan sales~~Eighteenth Judicial District, Dupage County in Illinois, as case no. 2008L000721, by TR Mid America Plaza Corp., seeking damages for breach of contract (a lease agreement) in excess of $0.6 million plus such amount as determined through the date of judgment and ~~cash disbursements for loan purchases between consolidated companies. Such intercompany loan sale~~payment of attorneys fees and purchase transaction activities had the effect of presenting separate cash inflows and outflows even though there was no cash inflow or outflow on a consolidated basis. This restatement serves to eliminate this intercompany activity from its Consolidated Statements of Cash Flows and present them as non-cash transactions.
The restatement increases cash used in operating activities and increases cash provided by investing activities. The restatement of these transactions does not change total cash and cash equivalents as previously reported. Furthermore, the restatement has no effect on the Company’s Consolidated Statements of Operations and Comprehensive Earnings, or Consolidated Balance Sheets.costs.

The Company believes that it has reclassified the presentation of the Consolidated Statement of Operations and Comprehensive Earnings (Loss) to reflect “Amortization of mortgage servicing rights,” “Write-down on investment securities available-for-sale,” and “Loss (gain) on sale of other real estate owned” as other non-interest income rather than non-interest expense, for the third quarter of 2006 to conformmeritorious defenses to the ~~current period presentation. In addition,~~above claims and intends to defend these claims vigorously. Nevertheless, litigation is uncertain and the ~~“Amortization~~Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of ~~deferred charge” for 2006 was reclassified as income tax expense (benefit) rather than non-interest expense.~~these matters could have a material adverse effect on the Company.

Please refer to ~~the Company’s~~IMH’s report on Form 10-K for the year ended December 31, ~~2006,~~2007 for a description of other litigation and claims.
10

Table of Contents
5.Income Taxes and Deferred Charge
In accordance with Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” the Company records a deferred charge representing the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. The deferred charge is included in other assets in the accompanying consolidated balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statements of operations over the estimated life of the mortgages retained in the securitized mortgage collateral. The Company recorded a tax provision of $2.2 million and $8.7 million for the three and six months ending June 30, 2008 and $5.0 million and $9.0 million for the three and six months ending June 30, 2007, respectively. The net provision is predominately the result of the amount of the deferred charge amortized and/or impaired resulting from credit losses, which does not result in any tax liability required to be paid.
Note B—Fair Value of Financial Instruments
The Company’s consolidated financial statements include financial assets and liabilities that are measured based on their estimated fair values. 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.
The application of fair value estimates 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 as discussed previously.
Effective January 1, 2008, the Company adopted two pronouncements affecting its fair value measurements and accounting: SFAS 157 and SFAS 159.
SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 establishes a three-tiered fair value hierarchy that prioritizes the inputs used to estimate fair value into three broad levels, considering the relative reliability of the inputs:
·                  Level 1— Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
·                  Level 2— Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include securities with quoted prices that are traded less frequently than exchange-traded instruments, securities and derivative contracts and financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes trust assets or liabilities where more ~~information regarding~~than a significant percentage of the fair values were derived using a pricing process that was based upon observable inputs.
·                  Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes those assets and liabilities that were not included in Level 1 or Level 2.
11

Table of Contents
The following table presents for each of these ~~reclassifications.~~hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option at June 30, 2008.

Recurring Fair Value Measurements

At June 30, 2008

Level 1

Level 2

Level 3

Total

Assets

Investment securities available-for-sale

$
—

$
—

$
8,644

$
8,644

Securitized mortgage collateral (1)

—

10,747,133

298,189

11,045,322

Total Assets at Fair Value

$
—

$
10,747,133

$
306,833

$
11,053,966

Liabilities

Securitized mortgage borrowings

$
—

$
11,180,164

$
316,968

$
11,497,132

Derivative liabilities, net (2)

—

136,471

—

136,471

Trust preferred securities

—

—

46,266

46,266

Total Liabilities at Fair Value

$
—

$
11,316,635

$
363,234

$
11,679,869

(1)
Excluded from securitized mortgage collateral above is $10.1 million in master servicing rights related to consolidated securitizations and recorded at the lower of cost or market.
(2)
Derivative liabilities, net includes $109 thousand in derivative assets and $136.6 million in derivative liabilities, included within trust assets and trust liabilities, respectively.
Level 3 assets and liabilities were 2.6 percent and 3.0 percent of total assets at fair value and total liabilities at fair value, respectively.
The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2008:

Level 3 Recurring Fair Value Measurements

Three Months Ended June 30, 2008

Fair Value -March 31, 2008

Total Gains
(Losses)
Included in
Earnings

Transfers in
and/or out of
Level 3

Purchases,
issuances and
settlements

Fair Value -
June 30, 2008

Unrealized gains
(losses) still held
(1)

Investment securities available-for-sale

$
10,621

$
(1,318
)
$
—

$
(659
)
$
8,644

$
(1,977
)
Securitized mortgage collateral

966,958

12,581

(645,986
)
(35,364
)
298,189

(22,783
)
Securitized mortgage borrowings

(998,395
)
(12,388
)
661,157

32,658

(316,968
)
20,270

Trust preferred securities

(45,129
)
(1,137
)
—

—

(46,266
)
(1,137
)

Level 3 Recurring Fair Value Measurements

Six Months Ended June 30, 2008

Fair Value -
January 1, 2008

Total Gains
(Losses)
Included in
Earnings

Transfers in
and/or out of
Level 3

Purchases,
issuances and
settlements

Fair Value -
June 30, 2008

Unrealized gains
(losses) still held
(1)

Investment securities available-for-sale

$
15,248

$
(5,408
)
$
—

$
(1,196
)
$
8,644

$
(5,006
)
Securitized mortgage collateral

782,574

(236,490
)
(119,516
)
(128,379
)
298,189

(189,290
)
Securitized mortgage borrowings

(767,704
)
265,815

98,688

86,233

(316,968
)
183,216

Trust preferred securities

(40,952
)
(5,314
)
—

—

(46,266
)
(5,020
)
(1)
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held at June 30, 2008.

12

Table of Contents
The tables below summarize gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the three and six months ended June 30, 2008.

Recurring Fair Value Measurements

Level 3 - Total Gains (Losses) Included in Net Loss

Three Months Ended June 30, 2008

Investment Securities
Available-for-Sale

Securitized Mortgage
Collateral

Securitized Mortgage
Borrowings

Trust Preferred
Securities

Interest income

$
199

$
10,306

$
—

$
—

Interest expense

—

—

(6,275
)
(140
)
Change in fair value of net trust assets, excluding REO

(1,517
)
2,275

(6,113
)
—

Change in fair value of trust preferred securities

—

—

—

(997
)
Total

$
(1,318
)
$
12,581

$
(12,388
)
$
(1,137
)

Recurring Fair Value Measurements

Level 3 - Total Gains (Losses) Included in Net Loss

Six Months Ended June 30, 2008

Investment Securities
Available-for-Sale

Securitized Mortgage
Collateral

Securitized Mortgage
Borrowings

Trust Preferred
Securities

Interest income

$
399

$
10,217

$
—

$
—

Interest expense

—

—

(15,176
)
(294
)
Change in fair value of net trust assets, excluding REO

(5,807
)
(246,707
)
280,991

—

Change in fair value of trust preferred securities

—

—

—

(5,020
)
Total

$
(5,408
)
$
(236,490
)
$
265,815

$
(5,314
)
SFAS 159 permits fair value accounting to be elected for certain assets and liabilities on an individual contract basis at the time of acquisition or under certain other circumstances referred to as “remeasurement event dates.” For those items for which fair value accounting is elected, changes in fair value will be recognized in earnings, and fees and costs associated with the origination or acquisition of such items will be recognized as incurred rather than deferred. In addition, SFAS 159 allows application of the Statement’s provisions to eligible items existing at the effective date and management has elected to apply SFAS 159 to certain of those items as discussed below.
The following is a description of the measurement techniques for items recorded at fair value on a recurring basis and a non-recurring basis.

4.Recurring basis
Investment Securities Available-for-Sale. Pursuant to the Company’s adoption of SFAS 159, the Company elected to carry all of its investment securities available-for-sale at fair value. These investment securities are recorded at fair value and consist primarily of non-investment grade mortgage-backed securities. The fair value of the investment securities are measured based upon the Company’s expectation of inputs that other market participants would use. Such assumptions include judgments about the underlying collateral, prepayment speeds, credit losses, and certain other factors. Given the market disruption and lack of observable market data as of June 30, 2008, the fair value of the investment securities available-for-sale were measured using significant internal expectations of market participants’ assumptions. At June 30, 2008, investment securities available-for-sale were classified as Level 3 fair value measurements.
Securitized Mortgage Collateral – Pursuant to the Company’s adoption of SFAS 159, the Company elected to carry all of its securitized mortgage collateral at fair value. These assets consist primarily of Alt-A mortgage loans securitized between 2002 and 2007. 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, and certain other factors. At June 30, 2008, securitized mortgage collateral was classified as Level 2 or Level 3 measurements depending on the observability of significant inputs to the model. As of June 30, 2008, the unpaid principal balance and fair values of loans 90 days or more past due was $2.7 billion and estimated at $1.6 billion, respectively. The aggregate unpaid principal balances exceed the fair value by $1.1 billion at June 30, 2008.
13

Table of Contents
Securitized Mortgage Borrowings - Pursuant to the Company’s adoption of SFAS 159, 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 Alt-A mortgage loans. Fair value measurements include the Company’s judgments about the underlying collateral assumptions such as prepayment speeds, credit losses, and certain other factors and are based upon quoted prices for the individual tranches of bonds, if available. At June 30, 2008, securitized mortgage borrowings were classified as Level 2 or Level 3 measurements depending on the observability of significant inputs to the model. As of June 30, 2008, the unpaid principal balance and fair value of securitized mortgage borrowings was $16.5 billion and estimated at $11.5 billion, respectively. The aggregate unpaid principal balance exceeds the fair value by $5 billion at June 30, 2008.
Trust Preferred Securities - Pursuant to the Company’s adoption of SFAS 159, the Company elected to carry all of its trust preferred securities at fair value. These securities were measured based upon using other preferred stock issued by the Company adjusted for differences between the securities. The fair value of the trust preferred securities resulted in adjustments to reduce the par value for the following factors:
·
Stated interest rate adjustments to account for the stated yield difference between the trust preferred securities and the preferred stock issued by the Company,
·
Liquidity adjustments to reflect the presence of a lack of an actively traded market for these securities.
·
Preference adjustments to reflect the rights of the trust preferred securities as compared to the preferred securities.
At June 30, 2008 trust preferred securities were classified as Level 3 measurements. As of June 30, 2008, the unpaid principal balance and fair value of trust preferred securities was $99.2 million and $46.3 million, respectively. The aggregate unpaid principal balance exceeds the fair value by $52.9 million at June 30, 2008.
Derivative Assets and Liabilities.For non-exchange traded contracts, fair value is based on the amounts that would be required to settle the positions with the related counterparties as of the valuation date.   Valuations of derivative assets and liabilities reflect the value of the instruments, including the values associated with counterparty risk. With the issuance of SFAS 157, these values must also take into account the Company’s own credit standing, to the extent applicable, thus included in the valuation of the derivative instrument is the value of the net credit differential between the counterparties to the derivative contract. At June 30, 2008, derivative assets and liabilities were classified as Level 2 measurements.
Non-recurring basis
The Company is required to measure certain assets at 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 non-recurring fair value measurements under SFAS 157.
Loans Held-for-Sale - Loans held-for-sale for which the fair value option was not elected are carried at lower of cost or market (LOCOM). When available, such measurements are based upon what secondary markets offer for portfolios with similar characteristics, and are considered Level 2 measurements. If market pricing is not available, such measurements are significantly impacted by the Company’s expectations of other market participants’ assumptions, and are considered Level 3 measurements. The Company utilizes internal pricing processes to estimate the fair value of loans held-for-sale, which is based on recent loan sales and estimates of the fair value of the underlying collateral. Loans held-for-sale, which are primarily included in assets of discontinued operations, are considered Level 3 measurements at June 30, 2008.
Mortgage Servicing Rights - Mortgage servicing rights (MSRs) for which the fair value option was not elected are carried at LOCOM. MSRs are not traded in an active market with observable prices. The Company utilizes internal pricing processes to estimate the fair value of MSRs, which are based on assumptions the Company believes would be used by market participants, including market discount rates, float, prepayment speeds and master servicing fees. MSRs, which are included in other assets, are considered Level 3 measurements at June 30, 2008.
14

Table of Contents
The following table presents the fair values of those financial assets measured at fair value on a non-recurring basis at June 30, 2008.

Total Gains (Losses)

Non-recurring Fair Value Measurements

For the Periods Ended

As of June 30, 2008

June 30, 2008

Level 1

Level 2

Level 3

Total

Three
Months

Six
Months

Loans held-for-sale (1)

$
—

$
—

$
167,420

$
167,420

$
(7,885
)
$
(16,249
)
Mortgage servicing rights

$
—

$
—

$
1,677

$
1,677

$
(301
)
$
(948
)
(1)           Includes $1.8 million and $165.6 million of loans held-for-sale within continuing and discontinued operations, respectively at June 30, 2008.
The following table represents changes in fair value of recurring fair value measurements for the three and six months ended June 30, 2008.

Recurring Fair Value Measurements

Changes in Fair Value Included in Net Loss

Three Months Ended June 30, 2008

Change in Fair Value of

Interest Income

Interest Expense

Net Trust Assets

Trust Preferred
Securities

Total

Investment securities available-for-sale

$
687

$
—

$
(1,517
)
$
—

$
(830
)
Securitized mortgage collateral

406,988

—

(19,062
)
—

387,926

Securitized mortgage borrowings

—

(401,431
)
(88,886
)
—

(490,317
)
Trust preferred securities

—

(2,168
)
—

(997
)
(3,165
)
Derivative instruments

—

—

98,304

—

98,304

Total

$
407,675

$
(403,599
)
$
(11,161
)
$
(997
)
$
(8,082
)

Recurring Fair Value Measurements

Changes in Fair Value Included in Net Loss

Six Months Ended June 30, 2008

Change in Fair Value of

Interest Income

Interest Expense

Net Trust Assets

Trust Preferred
Securities

Total

Investment securities available-for-sale

$
1,420

$
—

$
(5,807
)(1)
$
—

$
(4,387
)
Securitized mortgage collateral

676,886

—

(3,248,563
)(1)
—

(2,571,677
)
Securitized mortgage borrowings

—

(663,248
)
3,330,248
(1)
—

2,667,000

Trust preferred securities

—

(4,350
)
—

(5,020
)
(9,370
)
Derivative instruments

—

—

(83,511
)(2)
—

(83,511
)
Total

$
678,306
(3)
$
(667,598
)(3)
$
(7,633
)
$
(5,020
)
$
(1,945
)
(1)
The $75.9 million total change in fair value of these financial instruments is included as change in fair value of trust assets, excluding REO and derivatives, in the accompanying statement of cash flows for the six months ended June 30, 2008.
(2)
Included in this amount is $(12.1) million in non-cash changes in the fair value of derivative instruments, which are included in the accompanying statement of cash flows for the six months ended June 30, 2008, and $(71.4) million in cash settlements paid.
(3)
The totals include $(370.1) million and $344.9 million of accretion of interest income and expense, respectively.
The change in fair value of the asset and liabilities above, excluding derivative instruments, are primarily due to the changes in credit risk. The change in fair value for derivative instruments is primarily due to the change in the forward LIBOR curve for the quarter.
15

Table of Contents
Note C— Stock Options

The fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions:

Nine Months

Six Months

Ended September 30,

Ended June 30,

2007

2006

2008

2007

Risk-free interest rate

4.28% to 4.60%

3.90% to 4.26%

1.88% to 2.13%

—

Expected lives (in years)

3

3

3.25

—

Expected volatility (1)

75.09%

34.75%

87.3% - 89.9%

—

Expected dividend yield (2)

0.00%

11.00%

0.00%

—

Grant date fair value of share options

$0.60

$1.41

$ 0.71 - 0.78

—

(1)Expected volatilities are based on the historical volatility of the Company’s stock over the expected option life.
(2)Expected dividend yield is zero asbecause a dividend on the common stock is currently not probable over the expected life of the options granted during the ~~nine~~six months ended ~~September~~June 30, 2008.
There were no stock options granted during the six months ended June 30, 2007.

The following table summarizes activity, pricing and other information for the Company’s stock options for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2007:~~2008:

Weighted-

Weighted-

Average

Average

Number of

Exercise

Number of

Exercise

Shares

Price ($)

Shares

Price ($)

Options outstanding at January 1, 2007

7,048,755

$
12.91

Options outstanding at January 1, 2008

5,939,914

$
9.75

Options granted

2,158,500

2.56

7,810,000

1.28

Options exercised

—

—

—

—

Options forfeited / cancelled

(1,887,173
)
12.75

(1,131,164
)
4.69

Options outstanding at end of period

7,320,082

$
9.90

Options exercisable at end of period

3,468,038

$
13.60

Options outstanding at June 30, 2008

12,618,750

$
4.91

Options exercisable at June 30, 2008

2,661,559

$
12.94

As of ~~September~~June 30, ~~2007,~~2008, there was approximately ~~$3.0~~$5.6 million ~~and $300 thousand~~ of total unrecognized compensation cost related to nonvested share-based ~~and nonvested stock-based~~ compensation arrangements ~~respectively,~~ granted under the plan. That cost is expected to be recognized over a weighted average period of ~~1.12 and 1.04 years, respectively.~~1.2 years.
5.              ~~Recent Accounting Pronouncements~~
~~In June 2006, the FASB issued Interpretation No. 48,~~ ~~Accounting for Uncertainty in Income Taxes,~~ ~~(“FIN 48”) which expands on the accounting guidance of FASB Statement No. 109,~~ ~~Accounting for Income Taxes~~. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this interpretation by the Company has not had a significant effect on the consolidated financial statements.
~~In September 2006, the FASB issued SFAS No. 157,~~ ~~Fair Value Measurement~~ (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the effects SFAS 157 will have on the consolidated financial statements.
~~In February 2007, the FASB issued SFAS No. 159,~~ ~~The Fair Value Option for Financial Assets and Financial Liabilities~~ (“SFAS 159”), which provides reporting entities an option to report selected financial assets, which includes investment securities designated as available for sale, and liabilities, at fair value. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The standard also requires additional information to aid financial statement users’ understanding of a reporting entity’s choice to use fair value on its earnings and also requires entities to display on the face of the balance sheet the fair value of those assets and liabilities which the reporting entity has chosen to measure at fair value. SFAS 159 is effective as of the beginning of a reporting entity’s first fiscal year beginning after November 15, 2007.
13

~~The Company intends to adopt SFAS 157 and SFAS 159 as of January 1, 2008, and the effect of adoption will be reflected in the consolidated financial statements for the quarter ended March 31, 2008.~~
6.              ~~Net Investment in Securitized Trusts~~
~~Certain of the Company’s securitizations are required to be consolidated due to the following factors related to SFAS No. 140,~~ ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125~~: the transfer of the Company’s mortgage loans to these trusts were not accounted for as sales; and the trusts did not meet the characteristics of qualifying special purpose entities. These trusts were considered variable interest entities and were consolidated because the Company was initially considered the primary beneficiary pursuant to FASB Interpretation No. 46, “~~Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.~~”
The negative net investment positions in certain trusts occured because the trusts’ liabilities are greater than the trusts’ assets primarily due to large increases in the allowance for loan losses. The trust agreements are non-recourse for which the Company cannot ultimately lose more than its original net investment in each trust. Therefore, the Company is not responsible to fund losses in excess of its equity investment and subsequently is not required to advance any cash to trusts for credit or derivative loss.
~~The following table presents the summation of the consolidated trusts with positive and negative net investment positions, as of September 30, 2007 (in thousands):~~

Securitized
Mortgage Collateral

Net Investment

Trusts with positive net investment positions

$
5,353,083

$
143,694

Trusts with negative net investment positions

13,388,437

(561,673
)

$
18,741,520

$
(417,979
)
If the securitizations with negative equity (liabilities greater than assets) had been accounted for as sales, the Company’s estimate of the fair value of the trusts would be minimal. However, some of these positive and negative net investment positions could continue to provide cash flows to the Company until estimated losses on disposition have been realized.
7.              ~~Legal Proceedings~~
The Company is party to litigation and claims which are normal in the course of our operations. While the results of such 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 our financial condition or results of operations.
On August 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and several of its senior officers entitled Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al. The action alleges against all defendants violations of Section 10(b) and 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”) and against the individual defendants violations of Section 20(a) of the Exchange Act. Plaintiffs contend that the defendants caused the Company’s stock to trade at artificially inflated prices through false and misleading statements
14

and intentional or reckless disregard of basic accounting principles. The complaint seeks compensatory damages for all damages sustained as a result of the defendants’ actions, including reasonable costs and expenses and other relief as the court may deem proper. On October 3, 2007, a similar case was filed in the same Court entitled Richard Abrams v. Impac Mortgage Holdings, Inc., et al. This action makes allegations similar to those in the Pittleman action and also seeks similar recovery.
On October 4, 2007, a purported class action matter was filed in the United States District Court, Central District of California against Impac Funding Corporation and Impac Mortgage Holdings, Inc. entitled Vincent Marshell v. Impac Funding Corporation, et al. The action alleges violations of Truth in Lending Act, Violation of California Business and Professional Code Section 17200, et seq, breach of contract, and an additional claim under Business and Professional Code Section 17200. The complaint alleges that the defendants failed to disclose pertinent information in a clear conspicuous manner as called for in the Truth in Lending Act, and that they misled the plaintiff. The action seeks to recover actual damages, compensatory damages, consequential damages, punitive damages, rescission, reasonable attorneys fees and costs, statutory damages, a disgorgement of all profits obtained as a result of the unfair competition, equitable relief including restitution and such other relief as is just and proper.
On October 11, 2007, a shareholder derivative action was filed in the Superior Court of California, Orange County against the Company and certain of its officers and directors. The complaint alleges claims for a breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, a violation of California Civil Code Sections 1709 and 1710 for deceit and for contribution and indemnification. The action seeks to recover for the company the damages suffered by the Company as a result of the individuals breach of fiduciary duty, abuse of control, gross mismanagement and waste of corporate assets. It also seeks to impose a constructive trust on the proceeds of any individuals trading activity, disgorgement of profits benefits of other compensation of the individual defendants, costs and disbursements in the action including reasonable attorney’s fees, expert fees, accountant’s fees, expenses and such other relief as the court may deem proper.
On December 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and several of its senior officers entitled Sharon Page v. Impac Mortgage Holdings, Inc., et al. The action is a complaint for violations of the Employee Retirement Income Security Act in relation to the Company’s 401(k) plan. The complaint alleges breach of fiduciary duties, breach of duty to avoid conflicts of interest, allegations of co-fiduciary liability and knowing participation in a breach of fiduciary duty by IMH. Plaintiffs contend that the defendants breached their fiduciary duties in violation of ERISA by failing to prudently and loyally manage the plan’s investment in IMH stock by continuing to offer IMH stock as an investment option and to make contributions in stock, provide complete and accurate information to participants, and monitor appointed plan fiduciaries and provide them with accurate information. The complaint seeks monetary payment to the plan for the losses in an amount to be proven, injunctive and other appropriate equitable relief, a constructive trust on amounts by which any defendant was unjustly enriched, an appointment of one or more independent fiduciaries, actual damages, reasonable attorney fees and expenses, taxable costs, interests on these amounts and other legal or equitable relief as may be just and proper.
Please refer to IMH’s report on Form 10-K for the year ended December 31, 2006 and reports on Form 10-Q for the periods ending March 31, 2007 and June 30, 2007 for a description of other litigation and claims.
15

Note B—D—Reconciliation of Earnings Per Share

The following table presents the computation of basic and diluted net earnings per share including the dilutive effect of stock options and cumulative redeemable preferred stock outstanding for the periods indicated:

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2007

2006

2007

2006

Numerator for basic earnings per share:

Net (loss) earnings from continuing operations

$
(997,158
)
$
(124,427
)
$
(1,162,644
)
$
15,156

Net (loss) earnings from discontinuing operations

(194,077
)
(3,264
)
(302,806
)
(30,923
)
Less: Cash dividends on cumulative redeemable preferred stock

(3,722
)
(3,672
)
(11,165
)
(11,016
)
Net loss available to common stockholders

$
(1,194,957
)
$
(131,363
)
$
(1,476,615
)
$
(26,783
)
Denominator for basic earnings per share:

Basic weighted average number of common shares outstanding during the period

76,084

76,132

76,084

76,119

Denominator for diluted earnings per share:

Diluted weighted average number of common shares outstanding during the period

76,084

76,132

76,084

76,119

Net effect of dilutive stock options

—

—

—

—

Diluted weighted average common shares

76,084

76,132

76,084

76,119

Net loss per common share - Basic:

(Loss) earnings from Continuing Operations

$
(13.11
)
$
(1.63
)
$
(15.28
)
$
0.20

Loss from Discontinuing Operations

$
(2.55
)
$
(0.04
)
$
(3.98
)
$
(0.41
)
Net loss per share

$
(15.66
)
$
(1.68
)
$
(19.26
)
$
(0.21
)

Net loss per common share - Diluted:

(Loss) earnings from Continuing Operations

$
(13.11
)
$
(1.63
)
$
(15.28
)
$
0.20

Loss from Discontinuing Operations

$
(2.55
)
$
(0.04
)
$
(3.98
)
$
(0.41
)
Net loss per share

$
(15.66
)
$
(1.68
)
$
(19.26
)
$
(0.21
)

Net loss per share available to common shareholders

$
(15.71
)
$
(1.73
)
$
(19.41
)
$
(0.35
)
16

Table of Contents

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

2008

2007

2008

2007

Numerator for basic earnings per share:

Net loss from continuing operations

$
(16,439
)
$
(93,525
)
$
(20,942
)
$
(147,657
)
Net (loss) earnings from discontinued operations

(11,048
)
(59,022
)
(10,360
)
(126,558
)
Less: Cash dividends on cumulative redeemable preferred stock

(3,722
)
(3,722
)
(7,443
)
(7,443
)
Net loss available to common stockholders

$
(31,209
)
$
(156,269
)
$
(38,745
)
$
(281,658
)
Denominator for basic earnings per share:

Basic weighted average number of common shares outstanding during the period

76,096

76,081

76,096

76,081

Denominator for diluted earnings per share:

Diluted weighted average number of common shares outstanding during the period

76,096

76,081

76,096

76,081

Net effect of dilutive stock options

—

—

—

—

Diluted weighted average common shares

76,096

76,081

76,096

76,081

Net loss per common share - Basic:

Loss from continuing operations

$
(0.26
)
$
(1.28
)
$
(0.37
)
$
(2.04
)
Loss from discontinued operations

(0.15
)
(0.78
)
(0.14
)
(1.66
)
Net loss per share

$
(0.41
)
$
(2.05
)
$
(0.51
)
$
(3.70
)

Net loss per common share - Diluted:

Loss from continuing operations

$
(0.26
)
$
(1.28
)
$
(0.37
)
$
(2.04
)
Loss from discontinued operations

(0.15
)
(0.78
)
(0.14
)
(1.66
)
Net loss per share

$
(0.41
)
$
(2.05
)
$
(0.51
)
$
(3.70
)

For the three and ~~nine~~six month periods ended ~~September~~June 30 ~~2007,~~, 2008, stock options to purchase ~~7.3~~12.6 million shares were outstanding but not included in the above weighted average calculations because they were anti-dilutive.

For the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2006,~~2007, stock options to purchase ~~7.1~~6.7 million shares were outstanding but not included in the above weighted average calculations because they were anti-dilutive.

16

Note C—E—Segment Reporting

~~During~~The Company has two reporting segments, the ~~quarter ended September 30, 2007, the Company segregated the retail mortgage origination entity from the mortgage operations as that component was deemed to be~~ continuing operations ~~at September 30, 2007.~~and discontinued operations. The following tables present the selected financial data and operating results by reporting segments ~~consolidated balance sheets~~ for the periods ~~ended September 30, 2007 and December 31, 2006:~~indicated:

Reporting Segments as of the Nine Months

Ended September 30, 2007

Long-Term

Investment

Retail

Discontinued

Inter-

Balance Sheet Items:

Operations

Operations

Operations

Company (1)

Consolidated

Securitized mortgage collateral and mortgages held-for-investment

$
18,866,749

$
—

$
—

$
(124,721
)
$
18,742,029

Mortgages held-for-sale

2,201

131,296

721,671

—

855,168

Finance receivables

—

185

34,950

(6
)
35,129

Allowance for loan losses

(911,218
)
—

(7,759
)
—

(918,977
)
Total assets

18,516,644

167,886

810,574

(84,728
)
19,410,376

Total stockholders’ equity

(351,016
)
(39,614
)
299,664

(402,350
)
(493,316
)

Reporting Segments as of the year

Ended December 30, 2006

Long-Term

Investment

Discontinued

Inter-

Balance Sheet Items:

Operations

Operations

Company (1)

Consolidated

Securitized mortgage collateral and mortgages held-for-investment

$
21,072,413

$
114,315

$
(134,018
)
$
21,052,710

Mortgages held-for-sale

—

1,561,919

—

1,561,919

Finance receivables

—

306,281

13

306,294

Allowance for loan losses

(77,684
)
(14,091
)
—

(91,775
)
Total assets

21,516,202

2,086,216

(3,463
)
23,598,955

Total stockholders’ equity

829,494

319,792

(139,756
)
1,009,530

~~The following tables present reporting segments consolidated statements of operations for the three and nine month periods ended September 30, 2007 and 2006:~~

Reporting Segments as of and for the Nine Months

Ended September 30, 2007

Long-Term

Investment

Retail

Discontinued

Inter-

Income Statement Items:

Operations

Operations

Operations

Company (1)

Consolidated

Net interest income (expense)

$
383

$
(312
)
$
13,915

$
27,233

$
41,219

Provision for loan losses

979,740

—

4,867

—

984,607

Realized gain from derivative instruments

103,840

—

1,180

—

105,020

Change in fair value of derivative instruments

(136,701
)
(1,633
)
(4,958
)
—

(143,292
)
Other non-interest (expense) income

(102,767
)
(8,921
)
(223,672
)
2,147

(333,213
)
Non-interest expense and income taxes

19,702

34,459

84,404

12,012

150,577

Net (loss) earnings

$
(1,134,687
)
$
(45,325
)
$
(302,806
)
$
17,368

$
(1,465,450
)

Continuing

Discontinued

Operations

Operations

Consolidated

Balance Sheet Items as of June 30, 2008:

Securitized mortgage collateral

$
11,055,382

$
—

$
11,055,382

Loans held-for-sale

1,785

165,635

167,420

Total assets

11,760,223

203,320

11,963,543

Total liabilities

11,685,701

253,334

11,939,035

Total stockholders’ equity (deficit)

$
74,522

$
(50,014
)
$
24,508

Balance Sheet Items as of December 31, 2007:

Securitized mortgage collateral

$
16,532,633

$
—

$
16,532,633

Loans held-for-sale

1,684

279,659

281,343

Finance receivables

336

12,458

12,794

Total assets

17,037,822

353,250

17,391,072

Total liabilities

18,063,459

405,341

18,468,800

Total stockholders’ deficit

$
(1,025,637
)
$
(52,091
)
$
(1,077,728
)

17

Table of Contents

Reporting Segments as of and for the Nine Months

Ended September 30, 2006

Long-Term

Investment

Discontinued

Inter-

Income Statement Items:

Operations

Operations

Company (1)

Consolidated

Net interest (expense) income

$
(91,593
)
$
18,958

$
44,853

$
(27,782
)
Provision for loan losses

3,638

(350
)
—

3,288

Realized gain from derivative instruments

156,582

51

—

156,633

Change in fair value of derivative instruments

(95,185
)
(1,447
)
4,030

(92,602
)
Other non-interest income

21,332

14,541

4,553

40,426

Non-interest expense and income taxes

17,708

63,376

8,070

89,154

Net (loss) earnings

$
(30,210
)
$
(30,923
)
$
45,366

$
(15,767
)

Reporting Segments as of and for the Three Months

Ended September 30, 2007

Long-Term

Investment

Retail

Discontinued

Inter-

Income Statement Items:

Operations

Operations

Operations

Company (1)

Consolidated

Net interest income (expense)

$
3,040

$
(116
)
$
3,082

$
8,774

$
14,780

Provision for loan losses

789,445

—

2,807

—

792,252

Realized gain from derivative instruments

28,815

—

106

—

28,921

Change in fair value of derivative instruments

(135,347
)
(2,206
)
(3,878
)
—

(141,431
)
Other non-interest (expense) income

(76,159
)
(10,832
)
(151,867
)
1,009

(237,849
)
Non-interest expense and income taxes

7,262

14,373

38,713

3,056

63,404

Net (loss) earnings

$
(976,358
)
$
(27,527
)
$
(194,077
)
$
6,727

$
(1,191,235
)

Continuing

Discontinued

Operations

Operations

Consolidated

Statement of Operations Items for the three months ended June 30, 2008:

Net interest income

$
4,256

$
1,543

$
5,799

Change in fair value of derivatives, net

—

258

258

Change in fair value of net trust assets

(11,161
)
—

(11,161
)
Other non-interest income (expense)

413

(8,612
)
(8,199
)
Non-interest expense and income taxes

(9,947
)
(4,237
)
(14,184
)
Net loss

$
(16,439
)
$
(11,048
)
$
(27,487
)

Statement of Operations Items for the six months ended June 30, 2008:

Net interest income

$
11,605

$
3,213

$
14,818

Change in fair value of derivatives, net

—

112

112

Change in fair value of net trust assets

(7,633
)
—

(7,633
)
Other non-interest income (expense)

(2,124
)
867

(1,257
)
Non-interest expense and income taxes

(22,790
)
(14,552
)
(37,342
)
Net loss

$
(20,942
)
$
(10,360
)
$
(31,302
)

Reporting Segments as of and for the Three Months

Ended September 30, 2006

Long-Term

Investment

Discontinued

Inter-

Income Statement Items:

Operations

Operations

Company (1)

Consolidated

Net interest (expense) income

$
(44,131
)
$
6,915

$
12,705

$
(24,511
)
Provision for loan losses

3,533

(350
)
—

3,183

Realized gain from derivative instruments

60,595

35

—

60,630

Change in fair value of derivative instruments

(150,051
)
(5,483
)
—

(155,534
)
Other non-interest income

6,803

20,960

1,665

29,428

Non-interest expense and income taxes

6,780

26,041

1,700

34,521

Net (loss) earnings

$
(137,097
)
$
(3,264
)
$
12,670

$
(127,691
)
~~(1)~~          Corporate overhead expenses are allocated to the segments based on the percentage of time devoted to the segment, headcount, loan production, or other relevant measures. Income statement items include inter-company loan sale transactions and the elimination of related gains or losses. Balance sheet items include inter-company warehouse borrowings and the elimination of related interest income and interest expense.

Continuing

Discontinued

Operations

Operations

Consolidated

Statement of Operations Items for the three months ended June 30, 2007:

Net interest income

$
7,874

$
5,109

$
12,983

Provision for loan losses

(161,163
)
(1,818
)
(162,981
)
Change in fair value of derivatives, net

91,670

3,870

95,540

Other non-interest income (expense)

(20,866
)
(38,159
)
(59,025
)
Non-interest expense and income taxes

(11,040
)
(28,024
)
(39,064
)
Net loss

$
(93,525
)
$
(59,022
)
$
(152,547
)

Statement of Operations Items for the six months ended June 30, 2007:

Net interest income

$
15,817

$
10,622

$
26,439

Provision for loan losses

(190,295
)
(2,061
)
(192,356
)
Change in fair value of derivatives, net

73,672

567

74,239

Other non-interest income (expense)

(25,471
)
(82,814
)
(108,285
)
Non-interest expense and income taxes

(21,380
)
(52,872
)
(74,252
)
Net loss

$
(147,657
)
$
(126,558
)
$
(274,215
)

18

~~Note D—Mortgages Held-for-Sale~~
~~Mortgages held-for-sale for the periods indicated consisted~~Table of ~~the following:~~

At September 30,

At December 31,

2007

2006 (1)

Mortgages held-for-sale - residential

$
139,561

$
—

Net (discount) premiums on mortgages held-for-sale - residential

(217
)
—

Change in fair value of residential mortgages held-for-sale

(6,484
)
—

Net deferred costs

637

—

Total mortgages held-for-sale

$
133,497

$
—

~~(1)There were no loans included in held-for-sale at December 31, 2006, for continuing operations as the retail operations were acquired during the second quarter of 2007.~~
Mortgage loans held-for-sale are recorded at the lower of cost or market determined on an aggregate basis. The change in fair value of the loans held-for-sale is recorded as an increase or decrease to non-interest income.
~~Note E—~~~~Securitized Mortgage Collateral~~Contents
~~Securitized mortgage collateral for the periods indicated consisted of the following:~~

At September 30,

At December 31,

2007

2006

Mortgages secured by single-family residential real estate

$
16,725,348

$
18,978,268

Mortgages secured by commercial real estate

1,818,439

1,728,240

Net unamortized premiums on mortgages - residential (1)

173,874

212,045

Net unamortized premiums on mortgages - commercial (1)

23,859

17,962

Total securitized mortgage collateral

$
18,741,520

$
20,936,515

~~(1)Net unamortized premiums on mortgages include loan discounts from intercompany transfers of $152.5 million and $165.1 million at September 30, 2007 and December 31, 2006, respectively.~~
Securitized mortgage collateral includes our CMOs and REMICs. The Company’s exposure to losses from consolidated securitizations is limited to the carrying value of the collateral in excess of the carrying value of the debt, which is non-recourse to the Company in each of its securitizations.
~~Note F—Allowance for Loan Losses~~
~~The allowance for loan losses for the periods indicated consisted of the following:~~

At September 30,

At December 31,

2007

2006

Securitized mortgage collateral and held-for-investment - Residential

$
900,495

$
69,711

Securitized mortgage collateral and held-for-investment - Commercial

10,723

7,973

Allowance for loan losses

$
911,218

$
77,684

19

~~Activity for allowance for loan losses for the periods indicated was as follows:~~

Three Months

Nine Months

Ended September 30,

Ended September 30,

2007

2006

2007

2006

Beginning balance

$
214,734

$
57,388

$
77,684

$
67,831

Provision for loan losses

789,445

3,533

979,740

3,638

Charge-offs, net of recoveries

(92,961
)
(5,540
)
(146,206
)
(16,088
)
Allowance for loan losses

$
911,218

$
55,381

$
911,218

$
55,381

Note G—Other Assets

Other assets for the periods indicated consisted of the following:

At September 30,

At December 31,

2007

2006

Deferred charge

$
40,260

$
52,272

Mortgages held-for-investment

509

1,880

Prepaid and other assets

27,099

6,673

Cash margin balances

588

19,112

Premises and equipment, net

7,736

—

Investment in Impac capital trusts

2,471

2,638

Total other assets

$
78,663

$
82,575

~~As of December 31,~~ ~~2006, all premises and equipment were located at IFC, which is included in discontinued operations.~~ The $7.7 million of premises and equipment, net represents the premises and equipment acquired from Pinnacle Financial Corporation, during the second quarter of 2007, and approximately $4.0 million in equipment transferred from IFC to the long-term investment operations, in the third quarter of 2007.

At June 30,

At December 31,

2008

2007

Deferred charge

$
28,684

$
37,412

Other receivables

4,618

—

Premises and equipment

2,947

3,904

Real estate owned outside trust

2,269

4,571

Prepaid expenses

2,423

3,505

Investment in capital trusts

2,271

2,394

Mortgage sevicing rights

1,677

2,083

Other assets

3,795

3,325

$
48,684

$
57,194

Note H—~~Securities Available-for-Sale~~Real Estate Owned (REO)

During the third quarter of 2007, approximately $6.4 million of investment securities available-for-sale were considered to be other than temporarily impaired (“OTTI”) and were charged off (expensed) primarily due to changes in the expected credit losses.
~~Note I—Real Estate Owned (“REO”)~~
~~The following table presents a rollforward of the real estate owned:~~

Nine months

Year ended

ended September 30,

December 31,

2007

2006

Beginning balance

$
137,331

$
46,092

Additions

440,979

181,120

Sales

(170,153
)
(82,553
)
Net realizable value (NRV) adjustment

(47,685
)
(7,328
)
REO, net

$
360,472

$
137,331

Real estate owned, which consists of residential real estate acquired in satisfaction of loans, is carried at the ~~lower of cost or~~ net ~~realizable~~realizeable value ~~which has been reduced for~~less estimated selling and holding costs, offset by expected mortgage insurance proceeds to be received. ~~Adjustments~~Historically, adjustments to the loan carrying value required at the time of foreclosure are charged tooff against the allowance for loan losses. ~~Gains~~Historically, the Company would writedown REO for changes in the value of the real estate due to declining home prices during the holding period and recognize that amount as a provision for REO losses. The gains and losses related to REO are included in the cash flows of the securitized mortgage collateral. Losses or ~~losses~~gains from the ultimate disposition of real estate owned are recorded as ~~(gain) loss~~gain (loss) on sale of other real estate ~~owned.~~ ~~Predominantly all~~owned in the consolidated statements of operations. REO is recorded at its estimated net realizable value at June 30, 2008 and December 31, 2007.
Activity for the Company’s REO consisted of the ~~REO’s held by~~following:

Six Months Ended

Year Ended

June 30, 2008

December 31, 2007

Beginning balance

$
405,434

$
137,331

Foreclosures

388,907

487,314

Liquidations

(170,639
)
(219,211
)
REO

$
623,702

$
405,434

REO inside trusts

$
621,433

$
400,863

REO outside trust (1)

2,269

4,571

REO

$
623,702

$
405,434

(1)          Amount represents REO related to a former on-balance sheet securitization, which was collapsed as the ~~securitized trusts.~~result of the Company exercising its clean-up call option. This REO is included in other assets within continuing operations.

2019

Table of Contents
Note J—I— Securitized Mortgage Borrowings

The following is selected information on securitized mortgage borrowings for the periods ~~indicated:~~indicated (dollars in millions):

Range of Percentages:

Range of Percentages:

Original

Securitized mortgage borrowings

Interest Rate

Interest Rate

Interest Rate

Interest Rate

Issuance

outstanding as of

Margins over

Margins after

Original

Securitized mortgage borrowings

Margins over

Margins after

September 30,

December 31,

Fixed Interest

One-Month

Contractual

Issuance

outstanding as of

Fixed Interest

One-Month

Adjustment

Year of Issuance

Amount

2007

2006

Rates

LIBOR (1)

Call Date (2)

Amount

June 30, 2008

December 31, 2007

Rates

LIBOR (1)

Date (2)

2002

$
3,876.1

$
45.1

$
52.0

5.25 - 12.00

0.27 - 2.75

0.54 - 3.68

$
3,876.1

$
38.9

$
42.1

5.25 - 12.00

0.27 - 2.75

0.54 - 3.68

2003

5,966.1

428.9

906.7

4.34 - 12.75

0.27 - 3.00

0.54 - 4.50

5,966.1

363.5

409.4

4.34 - 12.75

0.27 - 3.00

0.54 - 4.50

2004

17,710.7

3,055.7

5,230.8

3.58 - 5.56

0.25 - 2.50

0.50 - 3.75

17,710.7

2,430.8

2,751.8

3.58 - 5.56

0.25 - 2.50

0.50 - 3.75

2005

13,387.7

6,361.7

8,578.1

—

0.24 - 2.90

0.48 - 4.35

13,387.7

5,380.6

5,961.6

—

0.24 - 2.90

0.48 - 4.35

2006

5,971.4

5,152.8

5,794.7

6.25

0.10 - 2.75

0.20 - 4.13

5,971.4

4,761.7

5,015.7

6.25

0.10 - 2.75

0.20 - 4.125

2007

3,860.5

3,691.1

—

—

0.06 - 2.00

0.12 - 3.00

3,860.5

3,480.2

3,619.9

—

0.06 - 2.00

0.12 - 3.00

Subtotal securitized mortgage borrowings
Subtotal securitized mortgage borrowings

18,735.3

20,562.3

Subtotal securitized mortgage borrowings

16,455.7

17,800.5

Accrued interest payable

18.8

22.8

Accrued interest expense

—

17.1

Unamortized securitization costs
Unamortized securitization costs

(41.9
)
(58.1
)

—

(37.5
)

Fair value adjustment

(4,958.6
)
—

Total securitized mortgage borrowings
Total securitized mortgage borrowings

$
18,712.2

$
20,527.0

Total securitized mortgage borrowings

$
11,497.1

$
17,780.1

(1)          One-month ~~LIBOR~~London Interbank Offered Rate (LIBOR) was ~~5.7200%~~2.46 percent as of ~~September~~ June 30, ~~2007.~~
2008.
(2)          Interest rate margins ~~increase~~are generally adjusted when the unpaid principal balance of the securitized mortgage borrowings is reduced to less than ~~the contractual call amount (10-20%~~10% - 20% of the original issuance ~~amount).~~amount.

~~Securitized mortgage borrowings~~Note J— Repurchase Liabilities (Discontinued Operations)
Reverse Repurchase Facilities
The Company’s reverse repurchase agreements, included in discontinued operations, are ~~issued~~secured by ~~bankruptcy-remote trusts. These securitizations issued are carried at their unpaid principal balances net~~the Company’s loans held-for-sale, restricted cash and certain REOs. The following table presents the outstanding balance of ~~any unamortized discount or premium. Securitized mortgage borrowings are payable solely from~~ the ~~cashflows produced by these entities~~Company’s reverse repurchase facilities as of the dates indicated:

Discontinued Operations

as of June 30,

as of December 31,

2008

2007

Reverse repurchase line (1)

$
220,225

$
318,669

Warehouse line (2)

—

18,021

Total

$
220,225

$
336,690

(1)
This line, which is guaranteed by IMH, is no longer funding loans and was in technical default of several covenants, including warehouse borrowing reduction, delivery of financial statements and financial covenants. As described in Note L, the Company has entered into an agreement to restructure this line.
(2)
This line was paid off in full in May 2008.
Repurchase Reserve
When the Company sells loans through loan sales it is required to make normal and ~~are non-recourse~~customary representations and warranties about the loans to the ~~Company.~~
purchaser. The Company’s whole loan sale agreements generally require it to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. 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. During the ~~third~~second quarter of 2008, the Company sold $7.9 million of loans as compared to $68.1 million in the first quarter of 2008. During the second quarter of 2008, we negotiated the settlement of $4 million in repurchase claims. As of June 30, 2008 and December 31, 2007, the Company ~~exchanged certain net interest margin (“NIM”)~~had a liability for losses on loans sold with representations and ~~subordinated bonds, originally retained~~warranties totaling $12.9 million and $25.7 million, respectively, included in liabilities from six on-balance sheet securitizations the Company completed in 2006 and early 2007, to one lender to satisfy certain reverse repurchase borrowings. At the time of each securitization, the Company borrowed against these retained securities in a reverse repurchase financing arrangement with this lender. In order to satisfy the outstanding reverse repurchase obligation, in the third quarter of 2007, the Company issued securities with a current face value of $137.5 million at a discount of $76.3 million for net proceeds of $61.2 million, along with $8.0 million of various other assets to this lender in full satisfaction of the $69.2 million reverse repurchase borrowing.discontinued operations.

~~The sale~~20

Table of these retained interests for the six affected securitizations qualified these consolidated trusts for reassessment under FIN 46 because the $61.2 million issuance to a third party was considered significant and, an updated analysis showed the Company was no longer the primary beneficiary of these trusts. However, since the Company did not obtain sale accounting for the transfer of loans to the trusts, the Company continues to reflect the trust assets on the Company’s balance sheet.Contents

Note K—~~Reverse Repurchase Agreements (from Continuing and Discontinuing Operations)~~Discontinued Operations

~~The table below includes $148.1 million outstanding for~~During 2007, the ~~continuing~~Company announced plans to exit substantially all of its mortgage, commercial, retail, and warehouse lending operations. Consequently, the amounts related to these operations are presented as ~~well~~discontinued operations in the Company’s consolidated statements of operations and its consolidated statements of cash flows, and the asset groups to be exited are reported as ~~the $775.6 million outstanding as~~assets and liabilities of discontinued operations in its consolidated balance sheets for the periods presented.
The following table presents the discontinued operations’ condensed balance sheets at ~~September~~June 30, ~~2007. As of~~2008 and December 31, ~~2006 the $1.7 billion~~2007:

Discontinued Operations

as of June 30,

as of December 31,

2008

2007

Balance Sheet Items:

Loans held-for-sale

$
165,635

$
279,659

Finance receivables

—

12,458

Total assets

203,320

353,250

Total liabilities

253,334

405,341

Total stockholders’ deficit

$
(50,014
)
$
(52,091
)
Included in ~~outstanding reverse repurchase borrowings were owed~~total liabilities at June 30, 2008 and December 31, 2007 is a lease liability of $9.6 million and $10.9 million, respectively, which is guaranteed by IMH, related to office space that was previously occupied by the discontinued ~~operations. At~~operations and is no longer being used by the Company. Loans held-for-sale includes a $107.8 million and $118.4 million fair value adjustment at June 30, 2008 and December 31, ~~2006~~2008, respectively.
The following tables present discontinued operations condensed statement of operations for the ~~balance outstanding for repurchase obligations represents borrowings by the continuing operations secured by certain retained interests from securitizations.~~three and six month periods ended June 30, 2008 and 2007;

Discontinued Operations

For the Three Months Ended June 30,

2008

2007

Income Statement Items:

Net interest income

$
1,543

$
5,109

Provision for loan losses

—

(1,818
)
Change in fair value of derivative instruments

258

3,870

Other non-interest (expense) income

(8,612
)
(38,159
)
Non-interest expense and income taxes

(4,237
)
(28,024
)
Net loss

$
(11,048
)
$
(59,022
)

Discontinued Operations

For the Six Months Ended June 30,

2008

2007

Income Statement Items:

Net interest income

$
3,213

$
10,622

Provision for loan losses

—

(2,061
)
Change in fair value of derivative instruments

112

567

Other non-interest income (expense)

867

(82,814
)
Non-interest expense and income taxes

(14,552
)
(52,872
)
Net loss

$
(10,360
)
$
(126,558
)

21

At September 30,

At December 31,

2007

2006

Reverse Repurchase Line (1)

$
334,848

$
602,303

Reverse Repurchase Line (2)

—

207,225

Reverse Repurchase Line (3)

90,136

157,214

Reverse Repurchase Line (4)

112,265

87,974

Reverse Repurchase Line (5)

314,182

—

Reverse Repurchase Line (6)

72,332

—

Reverse Repurchase Line (7)

—

298,656

Reverse Repurchase Line (8)

—

363,133

Reverse Repurchase Line (9)

—

163,890

Total Reverse Repurchase Lines Outstanding

$
923,762

$
1,880,395

Included in liabilities of Discontinued Operations

$
775,646

$
1,716,505

Included in liabilities of Continuing Operations

$
148,116

$
163,890

~~(1)~~                               ~~Line 1 is no longer funding loans and was in technical default due to certain income and tangible net worth covenants; however, the Company has not received a letter~~Table of ~~default from the lender.~~
~~(2)~~Contents                               ~~Line 2 expired during 2007 according to the normal provisions of the agreement.~~
~~(3)~~                               Line 3 is no longer funding loans and was in technical default due to certain income and tangible net worth covenants. These loans were sold subsequent to quarter end. The line was satisfied subsequent to quarter end.
~~(4)~~                               Line 4 was in default, and the Company received a notice of default which notified the Company that the lender was seizing the collateral. Under the terms of the agreement, the Company is liable for any loss incurred by the lender on disposal of this collateral. The line was satisfied subsequent to quarter end.
~~(5)~~                               Line 5 is no longer funding loans, and was in technical default due to certain income and tangible net worth covenants. These loans were sold subsequent to quarter end. The line was satisfied subsequent to quarter end.
~~(6)~~                               Line 6 continues to fund conforming loans and has a maximum borrowing capacity of $98 million. Line 6 was in technical default due to certain income and tangible net worth covenants, however, the Company has obtained a waiver. As described in Note N, subsequent events, the available borrowings on Line 6 were reduced to $35.0 million, with a further reduction to $25.0 million by December 31, 2007.
~~(7)~~                               ~~Line 7 expired during 2007 according to the normal provisions of the agreement.~~
~~(8)~~                               ~~Line 8 expired during 2007 according to the normal provisions of the agreement.~~
~~(9)~~                               Line 9 represented borrowing secured by residual and subordinated securities. This borrowing was paid off predominantly through an exchange of certain residuals to satisfy the borrowing balance. See Note J.
The reverse repurchase facilities presented above represent the facilities for the combined company, including continuing and discontinued operations. The Company will only have the ability to fund loans on Line 6 in subsequent periods. For the quarter ended September 30, 2007, the Company obtained required waivers of non-compliance with the financial covenants related to earnings (as defined) for the reverse repurchase agreement Line 6.

Note L—~~Repurchase Reserve~~Subsequent Events

~~Repurchase reserve~~In September 2008, the Company entered into an agreement to restructure its reverse repurchase line with its remaining lender. The balance of this line was $220.2 million at June 30, 2008. The agreement removes all technical defaults from financial covenant noncompliance and any associated margin calls for the ~~retail operations~~term of the agreement. The agreement calls for certain targets including a reduction of the borrowings balance to $100 million in 18 months with an advance rate of no more than 65 percent of the unpaid principal balance and $50 million in 24 months with an advance rate of no more than 55 percent of the unpaid principal balance. By meeting these targets, the agreement term can extend to 30 months. The agreement also calls for monthly principal paydowns of $750,000 for one month and $1.5 million thereafter until the earlier of the Company raising capital or the end of the agreement term. If the Company is successful in raising capital, approximately 10% of the gross proceeds will be required to be paid as an additional principal paydown and the monthly principal paydown is reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be paid to the lender. Accomplishing the restructuring of this reverse repurchase line allows the Company to manage the remaining loans on the line for the ~~periods indicated consisted~~eventual collection, refinance, sale or securitization without the risk of ~~the following:~~receiving margin calls.

At September 30,

At December 31,

2007

2006 (1)

Reserve for early payment defaults

$
3,373

$
—

Reserve for misrepresentations and warranties

709

—

Other

1,370

—

Total repurchase reserve

$
5,452

$
—

~~(1) There was not~~In July 2008, the Company executed a ~~repurchase reserve at December 31, 2006 for continuing~~letter of intent, subject to execution of definitive agreements, to acquire a special servicing platform, whereby the seller will contribute specified balances of loans (mostly distressed) to the platform in order to provide sufficient cash flows to maintain the business during its initial operations.

22

The repurchase liability is included in other liabilities and represents estimated losses for normal representation and warranty terms related to previously sold whole loans. The reserve totaled approximately $5.5 million at September 30, 2007 compared to none at December 31, 2006. In determining the adequacyTable of the reserve for mortgage repurchases, management considers such factors as specific requests for repurchase, known problem loans, underlying collateral values, recent sales activity of similar loans, historical experience, current market conditions and other appropriate information. For the three and nine months ended September 30, 2007, the Company recorded a provision for repurchase losses of $4.6 million as compared to no provision for the same periods in 2006, included in non-interest income.Contents

~~During the quarter ended September 30, 2007, the Company sold $379.8 million in whole loans originated from its retail operations compared to none during the same period in 2006.~~
~~Note M—Income Taxes~~
During the three and nine months ended September 30, 2007, income tax expense was $3.1 million and $12.0 million, respectively, as compared to an expense of $1.7 million and $8.1 million, respectively, during the same periods in 2006. The amount of income tax expense for the quarter ended September 30, 2007 was the result of the recognition of tax expense related to the amortization of the existing deferred charge balance. The deferred charge represents the deferral of the tax effect of the increase in taxable income at the taxable REIT subsidiaries, due to intercompany loan sales. As the gains on loans sold between subsidiaries is eliminated, the related tax effects are recorded as deferred charge, and subsequently recognized over the life of the loans, using the effective yield.
ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Note N—Subsequent Events~~(dollars in thousands, except per share data or as otherwise indicated)
~~Reverse Repurchase and Warehouse Facilities~~
~~In November 2007, the Company amended its lending agreement (line 6 in Note L) providing for a reduced amount of available borrowings effective as of the date of the amendment. The available borrowings on Line 6 were reduced to $35.0 million with a further reduction to $25.0 million by December 31, 2007.~~ The Company relies on this line to provide the available funds necessary to finance the origination of agency loans. The Company has been notified that this lender is expecting to recommend to its credit committee an orderly wind down of this line over the next few months. ~~The Company will either dispose of the retail mortgage operations, or discontinue and wind down the operations by March 31, 2008.~~
~~Loans Held-for-Sale~~
During October 2007, the Company sold $480.8 million of loans that were included in held-for-sale, of which $393.4 million were from the discontinued operations and $87.4 million were from the continuing retail operations.
23

~~ITEM 2:~~~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND~~
~~RESULTS OF OPERATIONS~~

Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), and Impac Commercial Capital Corporation (ICCC).

Forward-Looking Statements

This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,” “should,” “could,” “anticipate,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: the ongoing volatility in the mortgage and mortgage-backed securities industry and our ability to successfully manage through the current market environment; management’s ability to successfully implement future strategies and initiatives; ability to meet liquidity needs from cash flows generated from the long-term mortgage portfolio and master servicing fees; our ability to reduce operating expenses ~~from our discontinued operations;~~and other outstanding liabilities, such as the trust preferred obligations; our ability to ~~sell our remaining mortgages;~~reduce dividend payments on preferred stock; ability to continue to pay dividends on outstanding preferred stock; failure to sell, or achieve expected returns onupon sale of, ~~negotiated loan sales,~~mortgage loans, including non-performing loans, in the secondary market due to market conditions, lack of interest or ineffectual pricing; risks related to the restructuring of the existing reverse repurchase facility, such as completion of definitive agreements, which may be hindered by worsening economic conditions in the mortgage market, and potential difficulties in meeting conditions set forth in the definitive agreement; our ability to meet margin calls to the extent the reverse repurchase line is not restructured; our ability to obtain additional financing and the terms of any financing that we do obtain; our ability to raise additional capital; inability to effectively liquidate properties through auction process or ~~otherwise; unexpected~~otherwise thereby decreasing advisory fees; increase in loan repurchase requests and ability to adequately settle repurchase obligations; risks related to the acquisition of a special servicing platform, which will involve or require, among other things, continuing due diligence, which could reveal matters not now known that affect our decision to seek to complete the acquisition on different terms than those announced or at all, obtaining necessary approvals and consents, including regulatory approvals related to servicing, which consents and approvals may be delayed or unobtainable, difficulties and delays in obtaining regulatory approvals for the proposed transaction, potential difficulties in meeting conditions set forth in the definitive purchase agreement, and the parties’ timely performance of their respective pre-closing covenants and the satisfaction of other conditions, some of which may be beyond the control of the parties or render the acquisition uneconomical; the Company’s ability to successfully integrate the new servicing platform with its existing services; our ability to identify and establish or invest in, and successfully manage and grow, businesses that may be outside of the businesses in which we historically have operated; impairments on our mortgage assets; increases in default rates or losses on mortgage loans underlying our ~~loan repurchase obligations;~~mortgage assets; inability to ~~effectively~~ implement strategies effectively to increase cure rates, reduce delinquencies or mitigate losses on mortgage loans; changes in assumptions regarding estimated loan losses or fair value amounts; increase in default rates on our mortgages; inability to continue funding prime loans; inability to continue existing reverse repurchase facility or obtain other financing on acceptable terms; ability to continue as a going concern as a result of deteriorating market conditions causing further losses on mortgage loans; ability to continue to pay dividend on outstanding preferred stock;changes in yield curve; the ability of our common stock and Series B and C preferred stock to continue trading in an active market; the loss of executive officers and other key management employees; our ability to maintain effective internal control over financial reporting and disclosure controls and procedures; the adoption of changes of new laws that affect our business or the business of people with whom we do business; interest rate fluctuations on our assets that differ from our liabilities; the outcome of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the period ended December 31, ~~2006, and~~2007, the other reports we file under the Securities and Exchange Act of 1934, and the additional risk factors set forth below in this quarterly report. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to publicly release the results of any revisions ~~publicly~~ 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.

23

Table of Contents
The Mortgage Banking Industry and Discussion of Relevant Fiscal Periods

The mortgage banking industry is continually ~~subject~~vulnerable to current events that occur in the financial services industry. ~~Such~~These events include changes in economic indicators, government regulation, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, and customer perception, as well as others. The factors that affect the industry change ~~rapidly.~~rapidly and can be unforeseeable.

~~As a result, current~~Current events, including the adoption of SFAS 159, can diminish the relevance of “quarter over quarter” and “year-to-date over year-to-date” comparisons of financial information. In such instances, the Company ~~intends~~attempts to present financial information in its Management’s Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to its financial information.

Status of Operations, Liquidity and Capital Resources
In 2007 and 2008, management has been seriously challenged by the unprecedented turmoil in the mortgage market, including the following: significant increases in delinquencies and foreclosures; significant increases in credit-related losses; decline in originations; tightening of warehouse credit and the virtual elimination of the market for loan securitizations. As a result, the Company discontinued certain operations, resolved and terminated all but one of our reverse repurchase facilities and settled a portion of our outstanding repurchase claims, while also reducing our operating costs and liabilities. In the first quarter of 2008, the Company also entered into an agreement with a real estate marketing company to generate advisory fees.
One of our goals has been to align the costs of our operations to the cash flows from our long-term mortgage portfolio (residual interests in securitizations), master servicing portfolio and real estate advisory fees. However, we have intentionally maintained certain personnel to allow us to explore future business opportunities should we be able to raise capital. As part of our other goals, we intend to 1) reduce or eliminate dividend payments on the Company’s preferred stock, and 2) modify the Company’s trust preferred securities, which may include reducing the interest rate.
In September 2008, the Company entered into an agreement to restructure its reverse repurchase line with its remaining lender. The balance of this line was $220.2 million at June 30, 2008. The agreement removes all technical defaults from financial covenant noncompliance and any associated margin calls for the term of the agreement. The agreement calls for certain targets including a reduction the borrowings balance to $100 million in 18 months with an advance rate of no more than 65 percent of the unpaid principal balance and $50 million in 24 months with an advance rate of no more than 55 percent of the unpaid principal balance. By meeting these targets, the agreement term can extend to 30 months. The agreement also calls for monthly principal paydowns of $750,000 for one month and $1.5 million thereafter until the earlier of the Company raising capital or the end of the agreement term. If the Company is successful in raising capital, approximately 10% of the gross proceeds will be required to be paid as an additional principal paydown and the monthly principal paydown is reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be paid to the lender. Accomplishing the restructuring of this reverse repurchase line allows the Company to manage the remaining loans on the line for the eventual collection, refinance, sale or securitization without the risk of receiving margin calls.
In order to reduce dividend payments on its preferred stock, the Company is considering exchanging the preferred stock for common stock. In July 2008, our stockholders approved the potential issuance of common shares in excess of 20 percent of our existing common shares. This exchange could offer the current preferred stockholders greater liquidity as common stockholders.
We are currently exploring opportunities to raise capital so that we may accomplish several strategic initiatives, which may include strategic acquisitions, acquiring a special servicing platform and investing in distressed mortgage assets and related securities. Raising additional capital through the sale of securities could significantly dilute the current common stockholders. There can be no assurance that we will be successful in accomplishing our goal to raise the capital needed to implement our strategic initiatives.
We earn advisory fees from a real estate marketing company specializing in the marketing and disposition of foreclosed properties. During the three and six months ended June 30, 2008, we earned $4.7 million and $8.5 million, respectively, from this relationship. The amount of real estate advisory fees we receive from this relationship are based on numerous factors, including real estate market conditions, the level of foreclosure activity, the ability of the marketing company to attract new business, and the Company retaining our CEO and avoiding liquidation. The agreement terminates in 2010 with the Company having an option to extend the agreement for an additional three years.
In July 2008, the Company executed a letter of intent, subject to execution of definitive agreements, to acquire a special servicing platform, whereby the seller will contribute specified balances of loans (mostly distressed) to the platform in order to provide sufficient cash flows to maintain the business during its initial operations. We believe this special servicing platform, combined with our current and anticipated businesses, will create a fully integrated platform that would be utilized to take advantage of opportunities within the distressed mortgage investment market.
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There can be no assurance that we will be successful in accomplishing our objectives outlined above. In the event that we do not raise capital, we may not be able to make any of the acquisitions or implement the initiatives described above. Also, there can be no assurance that the restructuring of the trust preferred securities or the preferred stock will occur. In this event, we intend to reduce operating expenses to a level that is supportable by the revenues from the existing long-term mortgage portfolio (residual interests in securitizations), master servicing portfolio and real estate advisory fees. Nevertheless, if we are not successful in completing the objectives outlined above, we may not be able to meet our contractual obligations for the next year, including repayment of the reverse repurchase line, interest payments on trust preferred securities and preferred stock dividends.
At June 30, 2008, the Company had $24.5 million in stockholders’ equity. After reducing total stockholders’ equity by the $161.8 million in preferred stock liquidation value, our common equity deficit was $(137.3) million or $(1.80) per share.
To understand the financial position of the Company better, we believe it is important to understand the composition of the Company’s stockholders’ equity (deficit) and to which segment of the business it relates. At June 30, 2008, the equity (deficit) within our continuing and discontinued operations was comprised of the following significant assets and liabilities:

Condensed Components of Stockholders’ Equity (Deficit) by Segment

As of June 30, 2008

Continuing

Discontinued

Operations

Operations

Total

Cash

$
25,971

$
159

$
26,130

Residual interests in securitizations (1)

41,796

—

41,796

Mortgage servicing rights (1)

11,737

—

11,737

Advisory fees receivable

4,618

—

4,618

Trust preferred securities ($99,244 par)

(46,266
)
—

(46,266
)
Repurchase liabilities (2)

—

(55,245
)
(55,245
)
Lease liability (3)

—

(9,559
)
(9,559
)
Deferred charge

28,684

—

28,684

Net other assets

7,982

14,631

22,613

Stockholders’ equity (deficit)

$
74,522

$
(50,014
)
$
24,508

(1)          Included in mortgage servicing rights is $10.1 million in master servicing rights, included in securitized mortgage collateral, associated with our consolidated securitizations.
(2)          Balance includes the net amount owed to our lender, which is guaranteed by IMH, and the repurchase reserve.
~~Review of Performance~~(3)          Guaranteed by IMH.

Continuing operations
We currently have three primary sources of cash earnings:
·                  cash flows from the long-term mortgage portfolio;
·                  master servicing fees from the long-term mortgage portfolio; and
·                  real estate advisory fees
Since our consolidated and unconsolidated securitization trusts are non-recourse, we have netted trust assets and liabilities to more simply present the Company’s interest in these trusts, which are considered our residual interests in securitizations. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining overcollateralization levels within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of trust assets (excluding the $10.1 in master servicing rights included in the basis of securitized mortgage collateral) and trust liabilities, was $41.8 million at June 30, 2008.
The Company acts as the master servicer for mortgages included in our CMO and REMIC securitizations. The master servicing fees we earn are generally 0.03 percent per annum on the declining principal balances of these mortgages plus
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interest income on cash held until remitted to investors. Master servicing rights retained in connection with consolidated securitizations are included in securitized mortgage collateral in the Company’s consolidated balance sheet. Master servicing rights retained in connection with unconsolidated securitizations are included in other assets. The carrying amount of master servicing rights was $11.7 million at June 30, 2008, including $10.1 million included in securitized mortgage collateral.
We earn advisory fees and expect to receive significant cash flows from a real estate marketing company specializing in the marketing and disposition of foreclosed properties. During the three and six months ended June 30, 2008, we earned $4.7 million and $8.5 million, respectively, from this relationship. Real estate advisory fees from this relationship are based on numerous factors, including real estate market conditions, the level of foreclosure activity, the ability of this company to attract new business, retention of our CEO and avoiding liquidation. The agreement terminates in 2010 with the Company having an option to extend the agreement for an additional three years.
For the three months ended June 30, 2008 and 2007, we paid $2.0 million and $3.7 million in interest on trust preferred securities and preferred stock dividends, respectively. For the six months ended June 30, 2008 and 2007, we paid $4.0 million and $7.4 million in interest on trust preferred securities and preferred stock dividends, respectively. As of the filing date of this report, the Company is current on all dividend payments.
At June 30, 2008, we had deferred charges of $28.7 million representing the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. Net other assets include $2.9 million in premises and equipment, $2.3 million in investment in capital trusts and $2.4 million in prepaid expenses.
At June 30, 2008, cash within our continuing operations decreased to $26.0 million from $32.9 million at March 31, 2008. The decrease during the quarter is primarily related to cash flows from our residual interests in securitizations have started to decline as a result of increased credit losses and increases in interest rates.
Discontinued operations
The Company’s most significant liabilities at June 30, 2008 relate to its repurchase liabilities and a lease liability within discontinued operations.
The repurchase liabilities consist of a repurchase reserve and the net amount owed to our lenders which is collateralized by loans held-for-sale, restricted cash balances and certain real estate owned and other assets. During the quarter ended June 30, 2008, our $7.5 million warehouse line was fully paid off. The balance of our reverse repurchase line was approximately $220.2 million at June 30, 2008. We are currently distributing all principal and interest received from the collateral securing the reverse repurchase line to the lender. As described above, in September 2008, the Company entered into an agreement to restructure this line.
We were required to make normal and customary representations and warranties about the loans we had previously sold to investors. Our whole loan sale agreements generally required us to repurchase loans if we breached a representation or warranty given to the loan purchaser. In addition, we also could 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. During the quarter, the repurchase liability increased $0.5 million to $12.9 million. Determination of the repurchase liability is an estimate of losses from expected repurchases, and is based, in part, on the recent settlement of claims.
In connection with the discontinuation of our non-conforming mortgage, retail mortgage, warehouse lending and commercial operations, a significant amount of office space that was previously occupied is no longer being used by the Company. At June 30, 2008, the Company had a liability of $9.6 million, representing the present value of the minimum lease payments over the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space.
Market Conditions

The mortgage market faced continued adversity inthrough the ~~third quarter~~filing date of ~~2007~~this document as the continued broad repricing of mortgage credit risk ~~led to a~~continued the severe contraction in market liquidity. Furthermore, the market has continued to try to quantify the ultimate loss rates that are going to be experienced in the underlying assets in asset backed securities.

Conditions in the secondary markets (the markets in which we historically sold or securitized mortgage loans), which dramatically worsened during the third quarter of 2007, continue to be depressed as investor concerns over credit quality and
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a weakening of the United States housing market ~~remain~~have remained high. As a result, the capital markets remain very volatile and illiquid and have effectively been unavailable to the Company. The Company believes the existing conditions in the secondary markets are unprecedented ~~since the Company’s inception~~ and, as such, inherently involve significant risks and uncertainty. These conditions could continue to adversely impact the performance of our ~~long term~~long-term investment portfolio. Until bond spreads and credit performance return to more ~~recent~~historical levels, it will be impossible for the Company to execute securitizations and loan sales. As a result, in ~~the third quarter~~2007, the Company ~~has been~~was forced to ~~further alter~~discontinue its ~~business strategies~~correspondent, retail, wholesale and ~~discontinue the correspondent and wholesale~~commercial mortgage operations ~~and~~as well as the warehouse lending operations, in response to the market conditions. ~~The Company does not intend to reenter the discontinued operations until the economics become more favorable.~~

We believe several converging factors led to the broad repricing, including general concerns over the decline in home prices, the rapid increase in the number of delinquent loans (including Alt-A ~~loans,~~loans), the reduced willingness of investors to acquire commercial paper backed by mortgage collateral, ~~and~~ the resulting contraction in market liquidity and availability of financing lines, the numerous rating agency downgrades of securities, and the increase in supply of securities potentially available for sale.

The downward ~~spiraling~~spiral of negative pricing adjustments on assets had a ~~snowball~~compounding effect as lower prices led to increased lender margin calls for some market participants, which in turn, forced additional selling, causing yet further declines in prices. These events continued to ~~feed off each other through much of the quarter.~~multiply throughout this year.

Normal market trading activity ~~during~~through the second quarter of 2008 was unusually light as uncertainty related to future loss estimates and the lack of liquidity made it difficult for willing buyers and sellers to agree on ~~price.~~prices. This condition was particularly acute with respect to securities backed by ~~2006 and 2007~~ Alt-A loans where market participants ~~are~~were setting price levels based on widely varied opinions about future loan performance and loan loss severity. While the early credit performance for these securities has been clearly far worse than initial expectations, the ultimate level of realized losses will largely be influenced by events that will likely unfold over the next ~~12 to 36 months,~~several years, including the severity of housing price declines and the overall strength of the economy.

The graph below reflects the increase in the yields over the relevant interest rate index that the market was requiring for BBB rated bonds backed by single-family mortgage collateral . The graph depicts the dramatically worsening secondary market.
~~BBB Spreads~~
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The actions taken late in the quarter by the Federal Reserve to reduce the federal funds and discount rates provided some temporary market confidence. We caution that Federal Reserve actions alone are not likely to result in price stability, as the aforementioned market concerns remain largely unresolved. ~~The following has contributed to the current market conditions:~~
•                  ~~mortgage bankers tightened their underwriting standards;~~
•                  ~~the reduction in availability of credit to borrowers reduced demand for homes, decreasing home prices;~~
•                  ~~the reduction in home prices has caused increased delinquencies and defaults on mortgage loans, especially higher combined loan-to-value “CLTV” loans, increasing credit loss severities;~~
•                  ~~the lack of liquidity and lower home prices reduced borrowers’ ability to refinance out of economic hardship, exacerbating home price decline and credit loss severities;~~
•                  ~~adjustable rate mortgage loans resetting higher compounded the depressed market conditions; and~~
•                  the securitization market, which has served as the primary source of term financing for the Company, remains virtually closed as investors, rating agencies and issuers continue to manage through this difficult environment.
~~The~~ deteriorating market for residential real estate loans is ~~also~~ illustrated in the ABX ~~Indices~~2006-1 indices shown below in subprime securitization bonds by initial rating. ~~The~~This earliest ABX index shows market prices for a designated group of subprime securities by credit rating. The index does not include any ~~Impac deals.~~IMH bonds. It is shown here as an illustration of the price volatility in the general mortgage market ~~during~~since the ~~quarter~~beginning of last year and does not reflect actual pricing on ~~Impac~~IMH bonds which are backed by Alt-A loans rather than subprime. There is currently no comparable index for Alt-A mortgage product, but the general direction and magnitude of price movement in the index is reflective of the price movement experienced by the Company.

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Table of Contents

Impact of Recent Market Activity

As a result of the Company’s inability to sell or securitize non-conforming loans, the Company ~~has~~ discontinued funding ~~loans other than conforming~~ loans. Because the Company stopped funding ~~non-conforming~~ loans, the Company discontinued substantially all of its mortgage (including commercial) and warehouse lending ~~operations.~~operations during the second half of 2007.

In addition to the inability of the Company to sell loans, the Company’s investment in securitized non-conforming loans has deteriorated in value primarily from estimated ~~losses and secondarily from a reduction in the fair value of derivatives.~~losses. As a result of continued deterioration in the real estate market ~~during the third quarter,~~through June 30, 2008, the Company ~~significantly added to~~increased its loan loss ~~provisions~~estimates primarily due to increased delinquencies in ~~our long term~~its long-term investment portfolio and increased loss severities related to the sale and liquidation of real estate owned properties. ~~Principally, because of~~The decline in single-family home prices can be seen in the increase in provision for loan losses the Company reported a stockholders’ deficit as of September 30, 2007. This stockholders deficit is created primarily because the Company is required under GAAP to record an allowance for loan losses resulting in achart below.

2628

negative equity investment in certain consolidated trusts. We would like to point out that the trust agreements are non-recourse for which the Company cannot ultimately lose more than its original net investment in each trust. Therefore, the Company is not responsible for the losses in excessTable of its equity investment and subsequently is not required to advance any cash to trusts for credit or derivative loss. The Company plans to adopt SFAS 159 on January 1, 2008. Had the Company adopted SFAS 159 at September 30, 2007, the Company believes that stockholders equity would be positive.
~~Certain of the company’s securitizations are required to be consolidated due to the following factors related to SFAS No. 140,~~ ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125~~: the transfer of the Company’s mortgage loans to these trusts were not accounted for as sales; and the trusts did not meet the characteristics of qualifying special purpose entities. These trusts were considered variable interest entities and were consolidated because the Company was initially considered the primary beneficiary pursuant to FASB Interpretation No. 46, “~~Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.~~”
~~The following table presents the summation of the consolidated trusts with positive and negative net investment positions, as of September 30, 2007 (in thousands):~~

Securitized
Mortgage Collateral

Net Investment

Trusts with positive net investment positions

$
5,353,083

$
143,694

Trusts with negative net investment positions

13,388,437

(561,673
)

$
18,741,520

$
(417,979
)
If the securitizations with negative equity had been accounted for as sales, the Company’s estimate of the fair value of the trusts would be minimal. However, some of these positive and negative net investment positions could continue to provide cash flows to the Company until estimated losses on disposition have been realized. While the Company can not adopt SFAS 159 until January 1, 2008, had the Company adopted SFAS 159 at September 30, 2007 for the financial assets and liabilities of the trusts with negative net investment, the Company believes the effect of adoption could have resulted in a benefit to stockholders’ equity, as presented in the table below (in thousands):
~~Stockholders’~~
~~Equity~~
~~(Deficit)~~
~~As presented September 30, 2007~~
$
~~(493,316~~
)
~~Estimated benefit of adopting SFAS 159 (as described above)~~
~~561,673~~
~~Had the Company adopted SFAS 159 at September 30, 2007~~
$
~~68,357~~
~~The Company intends to adopt SFAS 157 and SFAS 159 as of January 1, 2008, and the effect of adoption will be reflected in the consolidated financial statements for the quarter ended March 31, 2008.~~
27

~~Liquidity~~
During the second quarter the Company accumulated mortgages in the normal course of business, however, starting in July 2007, the secondary mortgage market halted their purchase of investments backed by mortgage loans. As a result the Company was unable to securitize the mortgage loans, which led to significant margin calls, reducing the Company’s cash position. The Company continues to work toward eliminating its margin call exposure on non-conforming mortgages. As of September 30, 2007 the Company had the following reverse repurchase lines outstanding (in thousands):

At September 30,

At October 31,

2007

2007

Reverse Repurchase Line (1)

$
334,848

$
327,859

Reverse Repurchase Line (3)

90,136

—

Reverse Repurchase Line (4)

112,265

112,494

Reverse Repurchase Line (5)

314,182

13,275

Reverse Repurchase Line (6)

72,332

34,600

Total Reverse Repurchase Lines Outstanding

$
923,762

$
488,228

Included in liabilities of Discontinued Operations

$
775,646

$
340,980

Included in liabilities of Continuing Operations

$
148,116

$
147,248

All of the Company’s reverse repurchase lines outstanding at September 30, 2007 were in technical default of certain debt covenants, except Line 6 lender which provided a waiver. Lines 3, 4, and 5 in the table below were satisfied subsequent to September 30, 2007, by either the sale of the loans to third parties or the sale of the loans to the respective lenders. T~~he Company continues to fund conforming loans on Line 6. Also, the available borrowings on Line 6 were reduced to $35.0 million, with a further reduction to $25.0 million by December 31, 2007.~~ The Company has been notified that this lender is expecting to recommend to its credit committee an orderly wind down of this line over the next few months. The Company will either dispose of the retail mortgage operations or discontinue and wind down of the operations.Contents

The Company has taken steps to reduce operating costs, including reducing staff and lease costs, to a level at which the cashflows from the long-term mortgage portfolio and its master servicing portfolio could support the Company’s ongoing operations. The Company continues to re-size the organization to a level more in line with its ongoing operations. Once the Company is able to eliminate the remaining reverse repurchase lines in discontinued operations the Company should be able to meet its liquidity needs from cash flows generated from the long-term mortgage portfolio and its master servicing fees. In an effort to maintain capital, ~~the Company did not declare a cash dividend on our common stock during the~~ ~~third~~ ~~quarter of 2007. Currently, we do not anticipate paying any further dividends on our common stock for the remainder of 2007.~~

~~In light of the continued and widely publicized volatility~~As depicted in the ~~secondary markets, we have discontinued funding~~chart above, average home prices peaked in 2006 at 226.29 and continued their dramatic decline through June 2008. The Standard & Poor’s/Case-Shiller 10-City Composite Home Price Index (the Index) for June 2008 was 180.38 (with the base of ~~loans previously referred to as Alt-A loans~~100.00 for January 2000) and ~~currently do not have any plans to originate these types of loans~~hasn’t been this low since June 2004 when the Index was 179.45. Beginning in the future. At this point, the Company is only funding loans that are eligible to be sold to government sponsored agencies. In addition to the suspension of Alt-A originations, the Company has taken steps to reduce operating expenses significantly which include staff reductions and closure of selected facilities. The Company has discontinued its mortgage origination business, except for its retail operations which originates conforming loans. The Company has also discontinued its warehouse lending operations.
~~In addition, during~~ the third quarter of 2007, the Company ~~transferred certain net interest margin (“NIM”~~believes there is a correlation between the borrowers’ perceived equity in their homes and defaults. The original loan-to-value (defined as loan amount as a percentage of collateral value, “LTV”) and ~~subordinated bonds, originally retained from six on-balance sheet securitizations we completed in 2006 and early 2007,~~original combined loan-to-value (defined as first lien plus total subordinate liens to ~~a lender to satisfy certain reverse repurchase borrowings. At the time~~collateral value, “CLTV”) ratios of ~~each securitization, we borrowed against these retained securities in a reverse repurchase financing arrangement with the lender. In order to satisfy the outstanding reverse repurchase obligation,~~single-family mortgage remaining in the ~~third quarter~~Company’s securitized mortgage collateral as of 2007, we issued securities with a current face value of $137.5 million at a discount of $76.3 million for net proceeds of $61.2 million, along with various other assets to the lender in full satisfaction of the $69.2 million borrowing.
June 30, 2008 was 73 percent and 84 percent, respectively. The sale of these retained interests for the six affected securitizations qualified these consolidated trusts for reassessment under FIN 46 because the $61.2 million sale to a third party was considered significantLTV and an updated analysis showed the Company was no longer the primary beneficiary of these trusts. However, since the Company did not obtain sale accounting under FAS 140 for the transfer of loans to the trusts, the Company continues to reflect the trust assets on the Company’s balance sheet.
~~Allowance for Loan Loss and REO~~
~~The~~ ~~Company’s allowance for loan losses~~CLTV ratios may have increased ~~significantly in the third quarter to reflect higher estimated loan losses. These higher loss estimates stemmed~~ from ~~higher delinquencies, higher ratios of delinquent loans rolling to foreclosure, deterioration in the prevailing real estate market, increasing loss severities, current economic conditions, and the seasoning of the Long-Term Investment Operations investment portfolio.~~
In an effort to mitigate delinquencies, the Company is pursuing a strategy to assist qualified delinquent borrowers by modifying interest rates or delaying the reset of initially adjusting variable interest rate loans. The Company’s recently implemented strategy includes reducing delinquencies by more closely working with the sub-servicers and borrowers. This includes working with management of the sub-servicers to execute a plan to reduce future delinquency rates. Some of the strategies to reduce delinquencies include:
•~~increase loss mitigation efforts (forbearance plans, or loan modifications);~~
•~~an aggressive focus on front end collections;~~
28

•~~preemptive contact with borrowers about to have their mortgages reset to a higher interest rate; and~~
•~~closely monitoring performance against industry metrics.~~
~~These strategies are intended to improve delinquent loan cure rates in an effort to reduce the increase of foreclosed loans moving into REO. However,~~ ~~during the quarter~~ ~~the loan portfolio continued to deteriorate from additional delinquencies and REO. Although these strategies have not been~~origination date as ~~effective as desired, we do believe they will improve performance as they are further implemented.~~
~~Additionally, during the~~ ~~third~~ ~~quarter of 2007, the Company continued alternative REO liquidation methods, in an effort~~ to accelerate the disposition of foreclosed loans, through the use of the auction process which was begun in the second quarter. While this liquidation strategy mitigates certain holding costs and provides potential long term benefits, including disposition of properties prior to further home price depreciation, in certain instances the Company incurred higher severities, through such auction sales than it expected. The Company intends to adjust its strategy to auction only those properties more difficult to sell at retail as a further effort to reduce loss severities. In addition the Company is evaluating a plan to lease such properties until market prices recover.
~~Company Overview~~
Impac Mortgage Holdings, Inc. (the Company or IMH), is a Maryland corporation incorporated in August 1995, and has the following subsidiaries: IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), and Impac Commercial Capital Corporation (ICCC).
~~During the third quarter of 2007, the Company’s board of directors elected to discontinue the mortgage operations (IFC), commercial operations (ICCC), and warehouse lending operations (IWLG).~~
~~Currently, the Company consists of:~~
•~~the Long-Term Investment operations conducted by IMH and IMH Assets; and~~
•~~the Retail Mortgage operations conducted by Impac Home Lending (IHL), a division of IFC.~~
As a result of the ~~market conditions as described above,~~deterioration of the ~~Company discontinued~~real estate market. We believe that home prices that have declined below the ~~following businesses:~~borrower’s original purchase price have a higher risk of default within our portfolio. Based on the Index, home prices have declined 20 percent through June 2008. Further, we believe the home prices in California and Florida, the states with the highest concentration of our mortgages, have declined even further than the Index. As a result, we have dramatically increased our loan loss estimates, which are a primary assumption used in the valuation of securitized mortgage collateral and borrowings.

•~~the Mortgage Operations conducted by IFC and ISAC;~~
•~~the Commercial Operations conducted by ICCC; and~~
•~~the Warehouse Lending Operations conducted by IWLG.~~
~~The following sections of the Management’s Discussion and Analysis~~ ~~of Financial Condition and Results of Operations~~ ~~include the combined results of continuing and discontinuing operations, to improve comparability:~~
•~~Delinquency Data~~
•~~Yield Discussion~~
•~~Production Volumes~~
Critical Accounting Policies

~~We define~~Several of the critical accounting policies ~~as those that are~~ important to the portrayal of our financial condition and results of operations require management to make difficult and ~~require~~complex judgments that rely on estimates ~~and assumptions based on our judgment~~about the effect of matters that are inherently uncertain due to the impact of changing market conditions ~~and~~and/or consumer behavior. We believe our most critical accounting policies relate to the ~~performance of our~~valuation of: (1) assets and liabilities ~~at any given time. In determining which~~that are highly dependent on internal valuation models and assumptions rather than market quotations (see Fair Value of Financial Instruments discussion below); (2) derivatives and other hedging instruments; (3) loans held-for-sale, including estimates of fair value, and related lower of cost or market (LOCOM) valuation reserve; and (4) repurchase reserve (included in liabilities of discontinued operations). Refer to our 2007 Form 10-K for further discussion of our critical accounting policies ~~meet this definition, we considered our~~and judgments.
Management discusses its critical accounting policies and related estimates with ~~respect to~~ the ~~valuation of our assets and liabilities and~~Company’s Audit Committee on a regular basis. We believe the judgments, estimates and assumptions used in ~~determining those valuations. We believe~~ the ~~most~~preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting ~~issues that require~~policies, the ~~most complex~~use of other judgments, estimates and ~~difficult judgments and that are particularly susceptible to significant change to~~assumptions could result in material differences in our ~~financial condition and~~ results of operations ~~include the following:~~or financial condition.

29

•~~allowance for loan losses;~~Table of Contents

•Fair Value of Financial Instruments~~allowance for REO losses;~~

•~~lower~~        The Company adopted SFAS 157 on January 1, 2008. SFAS 157 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. SFAS 157 defines fair value 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). SFAS 157 categorizes fair value measurements 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 identical 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 ~~cost or market (LOCOM) – loans held-for-sale; and~~any input that is significant to the fair value measurement.

•~~repurchase reserve.~~        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 2 in our consolidated financial statements are valued primarily utilizing inputs and assumptions that are observable in the marketplace, and which can be derived from observable market data or corroborated by observable levels at which transactions are executed in the marketplace. Because financial instruments classified as Level 3 are generally based on unobservable inputs, 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, could have a material effect on our results of operations or financial condition.
In conjunction with the adoption of SFAS 157, the Company prospectively adopted SFAS 159 as of January 1, 2008. SFAS 159 provides an option on an instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial adoption, the election is made at the acquisition of a financial asset, financial liability, or a firm commitment and it may not be revoked. Management believes that the adoption of SFAS 159 provides an opportunity to mitigate volatility in reported earnings and provides a better representation of the economics of the trust assets and liabilities.
Under the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments (certain trust assets, trust liabilities and trust preferred securities) held at January 1, 2008. Differences between the December 31, 2007 carrying values and the January 1, 2008 fair values were recognized as an adjustment to retained deficit. The adoption of SFAS 159 resulted in a $1.1 billion decrease to retained deficit on January 1, 2008 from $(1.4) billion at December 31, 2007 to $(308.8) million at January 1, 2008.

~~Allowance for Loan Losses~~Recurring basis

~~We provide an allowance for loan losses for mortgages held as securitized mortgage collateral, finance receivables~~Investment Securities Available-for-Sale. Pursuant to the Company’s adoption of SFAS 159, the Company elected to carry all of its investment securities available-for-sale at fair value. These investment securities are recorded at fair value and ~~mortgages held-for-investment (“loans provided for”). In evaluating the adequacy~~consist primarily of non-investment grade mortgage-backed securities. The fair value of the ~~allowance for loan~~investment securities are measured based upon our expectation of inputs that other market participants would use. Such assumptions include our judgments about the underlying collateral, prepayment speeds, credit losses, ~~management takes many factors into consideration. For instance, a detailed analysis~~and certain other factors. Given the market disruption and lack of ~~historical loan performance~~observable market 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 analyzed by collection status. Our estimateas of the required allowance for these loans is developed by estimating both the rate of default of the loans and the amount of loss in the event of default. 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 method in which to evaluate the allowance for loan losses. Management also recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring inherent loss in our loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, projected loss curves, political factors, market conditions, competitor’s performance, market perception and industry statistics. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as factors change or as more information becomes available.
~~Specific valuation allowances may be established for loans that are deemed impaired, if default by the borrower is deemed probable, and if~~June 30, 2008, the fair value of the ~~loan or the collateral is estimated to be less than the gross carrying value~~investment securities available-for-sale were measured using significant internal expectations of ~~the loan. Actual losses on loans are recorded~~market participants’ assumptions. At June 30, 2008, investment securities available-for-sale were classified as ~~a reduction to the allowance through charge-offs.~~
~~Allowance for REO Losses~~
We provide an allowance for REO losses for mortgages held as real estate owned. In evaluating the adequacy of the allowance for REO losses, management takes many items into consideration. When real estate is acquired in settlement of loans, or other real estate owned, the mortgage is written-down to a percentage of the property’s appraised value or broker’s price opinion or list price less estimated selling costs and including mortgage insurance expected to be received. Subsequent changes in the net realizable value of the real estate owned is reflected as an allowance for REO losses. The allowance for REO losses increased as a result of increased expected loss severities from a reduction in estimated sales prices principally as home prices have deteriorated. In prior periods the Company generally realized small gains from the sale of REOs, as the Company realized an amount greater than the net realizeable value.
~~Lower of Cost or Market—LOCOM – Loans Held-for-Sale~~
~~Mortgage loans held for sale are carried at the lower of amortized cost or fair value. Traditionally, we have estimated~~Level 3 fair value by evaluating a variety of market indicators including recent trades and outstanding commitments. During the third quarter, due to the lack of activity in the secondary mortgage market, we also used the reverse repurchase line basis as an estimate of fair value. To perform the analysis we stratify the mortgage loans in our held-for-sale portfolio into loans with expected trades and those on the reverse repurchase lines. After the valuation method is determined (~~e.g.,~~ trade price or warehouse line basis) we apply fair value estimates to these stratifications to arrive at a valuation allowance which is applied against our carrying amount resulting in a net fair value estimate for mortgage loans held for sale. However, during the third quarter of 2007 the market for unsold loans collapsed resulting in significant write-downs the Company’s remaining unsold loans.measurements.

~~Calculation~~Securitized Mortgage Collateral – Pursuant to the Company’s adoption of ~~Repurchase Reserve~~
~~When we sell~~SFAS 159, the Company elected to carry all of its securitized mortgage collateral at fair value. These assets consist primarily of Alt-A mortgage loans ~~through whole loan sales we~~securitized between 2002 and 2007. Fair value measurements are ~~required to make normal~~based on the Company’s estimated cash flow models, which incorporate assumptions, inputs of other market participants and ~~customary representations and warranties~~quoted prices for the underlying bonds. The Company’s assumptions include our expectations of inputs that other market participants would use. These assumptions include our judgments about the ~~loans~~underlying collateral, prepayment speeds, credit losses, and certain other factors. At June 30, 2008, securitized mortgage collateral was classified as Level 2 or Level 3 measurements depending on the observability of significant inputs 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.model.

30

Table of Contents
~~Investors have requested~~
Securitized Mortgage Borrowings - - Pursuant to the Company’s adoption of SFAS 159, the Company elected 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 completioncarry all of its ~~own investigation regarding~~securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by Alt-A mortgage loans. Fair value measurements include our judgments about the ~~investor claims,~~underlying collateral assumptions such as prepayment speeds, credit losses, and certain other factors and are based upon quoted prices for the individual tranches of bonds, if available. At June 30, 2008, securitized mortgage borrowings were classified as Level 2 or Level 3 measurements depending on the observability of significant inputs to the model.
Trust Preferred Securities - - Pursuant to the Company’s adoption of SFAS 159, the Company ~~repurchases or provides indemnification on certain loans,~~elected to carry all of its trust preferred securities at fair value. These securities were measured based upon using other preferred stock issued by the Company adjusted for differences between the securities. The fair value of the trust preferred securities resulted in adjustments to reduce the par value for the following factors:
·Stated interest rate adjustments to account for the stated yield difference between the trust preferred securities and the preferred stock issued by the Company,
·Liquidity adjustments to reflect the presence of a lack of an actively traded market for these securities.
·Preference adjustments to reflect the rights of the trust preferred securities as ~~appropriate. The Company maintains a liability for expected losses on dispositions of loans expected~~compared to ~~be repurchased or on which indemnification~~the preferred securities.
At June 30, 2008 trust preferred securities were classified as Level 3 measurements.
Derivative Assets and Liabilities.For non-exchange traded contracts, fair value is ~~expected to be provided and regularly evaluates the adequacy of this repurchase liability~~ based on ~~trends~~the amounts that would be required to settle the positions with the related counterparties as of the valuation date.   Valuations of derivative assets and liabilities reflect the value of the instruments including the values associated with counterparty risk. With the issuance of SFAS 157, these values must also take into account the Company’s own credit standing, to the extent applicable, thus included in ~~repurchase~~the valuation of the derivative instrument is the value of the net credit differential between the counterparties to the derivative contract. At June 30, 2008, derivative assets and ~~indemnification requests, actual loss experience, and other relevant factors including economic conditions.~~liabilities were classified as Level 2 measurements.
Non-recurring basis

The Company ~~estimates~~is required to measure certain assets at fair value from time-to-time. These fair value measurements typically result from the ~~repurchase reserve~~application of specific accounting pronouncements under GAAP. The fair value measurements are considered non-recurring fair value measurements under SFAS 157.
Loans Held-for-Sale - Loans held-for-sale for which the fair value option was not elected are carried at lower of cost or market (LOCOM). When available, such measurements are based upon what secondary markets offer for portfolios with similar characteristics, and are considered Level 2 measurements. If market pricing is not available, such measurements are significantly impacted by our expectations of other market participants’ assumptions, and are considered Level 3 measurements. Loans held-for-sale, which are primarily included in assets of discontinued operations, are considered Level 3 measurements at June 30, 2008.
Mortgage Servicing Rights - Mortgage servicing rights (MSR), for which the fair value option was not elected are carried at LOCOM. MSRs are not traded in an active market with observable prices. The Company utilizes internal pricing processes to estimate the fair value of MSRs, which are based on assumptions the Company believes would be used by market participants. MSRs, which are included in other assets, are considered Level 3 measurements at June 30, 2008.
We continue to refine our valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While we believe our valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date.
Interest Income and Expense
Pursuant to the adoption of SFAS 159 on January 1, 2008, interest income and expense on the collateral and borrowings in our securitized trusts is based on effective yields.  The effective yield is the rate used to derive the fair value of the securitized trusts.  Interest income and expense is calculated based on the estimated trailing whole loan sales that still have outstanding early payment warranties and misrepresentation warranties. The calculation of the trailing whole loan sales subject to request is based upon historical analysis of the timing of requests in relation to their sale date. The Company also calculates the rate at which our whole loan sales will develop into early payment default or misrepresentation claims. Based on historical experience, management will determine what percentage of the claims that will incur a loss. The Company applies a historical loss rate, adjusted for current market conditions based on the type of loan (first lien or to a lesser extent second lien) to the loans we expect to incur loss oneffective yields in the ~~future to derive the repurchase reserve. The reserve includes the Company’s estimate of losses in~~trusts multiplied by the fair value of ~~loans~~ the ~~Company expects it will repurchase, plus any premiums that will be refunded to the investor. The loss in fair value is predominately determined based on current market value~~mortgage collateral and borrowings.
31

Table of ~~non-performing loans.~~Contents

Selected Financial Results ~~for the~~ ~~Third~~ ~~quarter of 2007~~for the Three Months Ended June 30, 2008

•Continuing Operations                  ~~The net loss for the third quarter of 2007 was $1.2 billion or $15.66 per diluted share, compared to $127.7 million or $1.68 per diluted share for the third quarter of 2006;~~

•·      ~~Estimated taxable~~Net loss ~~per diluted share was ($0.21)~~of $16.4 million compared to ~~($0.25) for the second quarter~~a net loss of ~~2007 and $0.23 for the third quarter of 2006;~~
•                  ~~No common stock cash dividend was declared for the third or second quarter of 2007 compared to $0.10 for the first quarter of 2007;~~
•                  ~~Total assets were $19.4 billion as of September 30, 2007 compared to $23.6 billion as of December 31, 2006 and $22.5 billion as of September 30, 2006;~~
•                  ~~The retail mortgage operations, which was acquired at the end of May 2007, originated $260.9 million of conforming mortgages compared to $147.4~~$93.5 million for the second quarter of ~~2007, which only includes the month of June as the retail operations were acquired at the end of May; and~~2007.

•·      ~~The long-term investment operations did not retain any residential or commercial mortgages compared to $795.6~~Net interest income of $4.3 million ~~of primarily Alt-A mortgages and no commercial mortgages~~ for the second quarter of ~~2007 and $3.1 billion~~2008 primarily from our long-term mortgage portfolio as compared to net interest income of ~~primarily Alt-A mortgages and $233.9~~$7.9 million ~~of commercial mortgages~~ for the ~~third~~second quarter of ~~2006.~~2007.
·Master servicing fees of $1.5 million for the second quarter of 2008 as compared to $1.7 million for the second quarter of 2007.
·Real estate advisory fees of $4.7 million for the second quarter of 2008 as compared to zero for the second quarter of 2007.

~~Selected Financial Results for the First Nine Months of 2007~~Discontinued Operations

•·      ~~The net loss for the first nine months of 2007 was $1.5 billion or $19.26 per diluted share, compared to $15.8 million or $0.21 per diluted share for the first nine months of 2006;~~
•                  ~~Estimated taxable income per diluted share was a~~Net loss of ~~($0.22) compared to income of $0.86 for the first nine months of 2006;~~
•                  Cash dividends declared per share were $0.10 compared to $0.75 for the first nine months of 2006; Based on current tax estimates, some portion or all of the 2007 dividends will be a return of capital.
•                  ~~The retail mortgage operations, which was acquired at the end of May 2007, originated $408.3~~$11.0 million ~~of conforming mortgages compared to none for the first nine months of 2006; and~~
31

•                  The long-term investment operations retained for investment $3.0 billion of primarily Alt-A mortgages and $234.9 million of commercial mortgages compared to $579.7 million of primarily Alt-A mortgages and $114.7 million of commercial mortgages for the first nine months of 2006.
~~Third Quarter 2007 vs. Second Quarter 2007 Net Earnings~~

Three Months Ended ,

September 30,

June 30,

Increase

%

2007

2007

(Decrease)

Change

Interest income

$
313,772

$
316,285

$
(2,513
)
(1
)%
Interest expense

302,074

305,076

(3,002
)
(1
)
Net interest income

11,698

11,209

489

4

Provision for loan losses

789,445

161,163

628,282

390

Net interest expense after provision for loan losses

(777,747
)
(149,954
)
(627,793
)
(419
)
Total non-interest income

(194,720
)
59,887

(254,607
)
(425
)
Total non-interest expense

21,635

24,569

(2,934
)
(12
)
Income tax expense

3,056

4,969

(1,913
)
(38
)
Loss from discontinued operations, net

(194,077
)
(32,942
)
(161,135
)
(489
)
Net loss

$
(1,191,235
)
$
(152,547
)
$
(1,038,688
)
(681
)%

Net loss per share - diluted

$
(15.66
)
$
(2.00
)
$
(13.66
)
(683
)%
Dividends declared per common share

$
—

$
—

$
—

—
%
~~The results of operations for the third quarter of 2007 resulted in a net loss of $1.2 billion, or $15.66 per share as~~ compared to a net loss of ~~$152.5~~$59.0 million ~~or $2.00 per share,~~ for the second quarter of 2007.
·Reverse repurchase agreements were $220.2 million compared to $336.7 million at December 31, 2007.
·Loans held-for-sale were $165.6 million, including a fair value adjustment of $106.9 million at June 30, 2008 compared to loans held-for-sale of $189.8 million, including a $107.8 million fair value adjustment at March 31, 2008. The ~~increase~~decline in ~~the net loss was~~loans held-for-sale is primarily due to ~~a $628.3~~prepayments and loan sales.
Selected Financial Results for the Six Months Ended June 30, 2008
Continuing Operations
·Net loss of $20.9 million increase in provision for loan losses, and a $190.9 million loss on the change in fair value and realized losses from derivative instruments. In addition the Company incurred a $27.5 million loss on the disposition of the loans, a $22.2 million increase in provision for REO losses and a $9.6 million decrease in realized gains from derivative instruments, recorded in non-interest income. The loss from discontinued operations increased by $161.1 million, primarily the result of a $88.9 million increase in the LOCOM losses recorded due to the decline in value of the mortgage loans held-for-sale, and a $42.7 million unfavorable change in losses from loan sales which resulted in $48.3 million of losses compared to ~~$3.3~~a net loss of $147.7 million ~~of gains in~~for the ~~second quarter~~first six months of 2007.

·Net interest income of $11.6 million for the first six months of 2008 primarily from our long-term mortgage investment portfolio as compared to net interest income of $15.8 million for the first six months of 2007.
·Master servicing fees of $2.9 million for the first six months of 2008 as compared to $3.2 million for the first six months of 2007.
·Real estate advisory fees of $8.5 million for the first six months of 2008 as compared to zero for the first six months of 2007.
Discontinued Operations
·Net loss of $10.4 million compared to a net loss of $126.6 million for the first six months of 2007.
Estimated Taxable Income

~~Because dividend payments are based on estimated taxable income, dividends may be more or less than~~While the Company has generated significant net ~~earnings. As such,~~operating loss carryforwards in recent periods, we ~~believe that the disclosure of estimated taxable income available~~do not expect to common stockholders, which is a non-generally accepted accounting principle, or “non-GAAP,” financial measurement, is useful information for our investors. Based on current tax estimates, some portion or all of the 2007 dividends may be a return of capital. Additionally, losses recorded for GAAP, generally are reflected as losses ingenerate sufficient taxable income in ~~subsequent periods.~~future periods to be able to realize these tax benefits. Therefore, we have recognized a full valuation allowance against these net operating loss carryforwards in our consolidated balance sheets.

32

The following table presents a reconciliation of net (loss) earnings (GAAP) to estimated taxable income available to common stockholders for the periods indicated (in thousands, except per share amounts):

Three Months Ended (1)

Nine Months Ended

September 30,

June 30,

September 30,

September 30, (1)

2007

2007

2006

2007

Net loss

$
(1,191,235
)
$
(152,547
)
$
(127,690
)
$
(1,465,450
)
Adjustments to net (loss) earnings: (2)

Loan loss provisions (3)

832,453

181,977

3,183

1,053,164

Tax deduction for actual loan losses (3)

(34,348
)
(49,460
)
(5,540
)
(93,394
)
GAAP earnings on REMICs (4)

(13,421
)
(21,070
)
(4,554
)
(49,423
)
Taxable income on REMICs (5)

21,181

28,224

7,392

60,572

Change in fair value of derivatives (6)

135,347

(53,269
)
150,051

136,701

Dividends on preferred stock

(3,722
)
(3,722
)
(3,672
)
(11,165
)
Net loss (earnings) of taxable REIT subsidiaries (7)

220,071

49,551

(4,853
)
328,289

Dividend from taxable REIT subsidiaries (8)

—

—

3,900

—

Elimination of inter-company loan sales transactions (9)

(9,500
)
368

(983
)
(3,661
)
Non deductible capital loss on security available-for-sale (10)

26,709

—

—

26,709

Miscellaneous adjustments

168

1,012

96

1,288

Estimated taxable income (loss) available to common stockholders’ (11)

$
(16,297
)
$
(18,936
)
$
17,330

$
(16,370
)
Estimated taxable income (loss) per diluted common share (11)

$
(0.21
)
$
(0.25
)
$
0.23

$
(0.22
)
Diluted weighted average common shares outstanding

76,084

76,084

76,132

76,084

~~(1)~~         Estimated taxable income includes estimates of book to tax adjustments and can differ from actual taxable income as calculated when we file our annual corporate tax return. Since estimated taxable income is a non-GAAP financial measurement, the reconciliation of estimated taxable income available to common stockholders to net earnings is intended to meet the requirements of Regulation G as promulgated by the SEC for the presentation of non-GAAP financial measurements. To maintain our REIT status, we are required to distribute a minimum of ~~90%~~90 percent of our annual taxable income to our ~~stockholders.~~
~~(2)~~         ~~Certain adjustments are made to net earnings in order to calculate estimated taxable~~stockholders, as well as meet certain asset and income ~~due to differences~~tests set forth in the ~~way revenues and expenses are recognized under the two methods.~~
~~(3)~~         To calculate estimated taxable income, actual loan losses are deducted. For the calculation of net earnings, GAAP requires a deduction for estimated losses inherent in our mortgage portfolios in the form of a provision for loan losses, which are generally not deductible for tax purposes. Therefore, as the estimated losses provided for GAAP are realized, the losses will negatively and may materially impact future taxable income. The loan loss provisions include the allowance for loan loss provision and the REO loan loss provision for the REIT.
~~(4)~~         Includes GAAP amounts related to the REMIC securitizations, which were treated as secured borrowings for GAAP purposes and sales for tax purposes. The REMIC GAAP income excludes the provision for loan losses recorded that may relate to the REMIC collateral included in securitized mortgage collateral. The Company does not have any specific valuation allowances recorded as an offset to the REMIC collateral.
~~(5)~~         ~~Includes amounts that are taxable to~~Internal Revenue Code. If the Company ~~related~~fails to meet these requirements, or elects to terminate its ~~residual interest in the securitizations,~~status as ~~the REMICs are accounted for as sales in its tax filings.~~
~~(6)~~         The mark-to-market change for the valuation of derivatives at IMH is income or expense for GAAP financial reporting but is not included as an addition or deduction for taxable income calculations until realized.
~~(7)~~         ~~Represents net earnings of IFC and ICCC, our taxable~~a REIT, ~~subsidiaries (TRS), which may not necessarily equal taxable income.~~
~~(8)~~         ~~Any dividends paid to IMH by the TRS in excess of their cumulative undistributed taxable income~~we would be ~~recognized as return of capital by IMH~~subject to federal income taxes at the extent of IMH’s capital investment in the TRS. Distributions from the TRS to IMH may not equal the TRS net earnings, however, IMH can only recognize dividend distributions received from the TRS as taxable income to the extent that the TRS distributions are from current or prior period undistributed taxable income. Any distributions by the TRS in excess of IMH’s capital investment in the TRS would be taxed as capital gains.
~~(9)~~         Includes the effects to taxable income associated with the elimination of gains from inter-company loan sales and other intercompany transactions between IFC, ICCC, and IMH, net of tax and the related amortization of the deferred charge.
~~(10)~~   This amount includes a non deductible loss for an other than temporary impairment on certain securities classified as available-for-sale. It is expected that this loss will be realized in a subsequent period.
~~(11)~~   ~~Excludes the deduction for common stock dividends paid and the availability of a deduction attributable to net operating loss carry-forwards. As of December 31, 2006,~~regular corporate rates. While the Company ~~had estimated federal net operating loss carry-forwards of $16.4 million~~has no current plans to terminate its status as a REIT, there can be no assurance that ~~expire in~~future events or transactions would enable the ~~year 2020.~~Company to maintain this status.

~~Third~~ ~~Quarter 2007 vs. Second Quarter 2007~~
Estimated taxable loss decreased $2.6 million to a loss of $16.3 million, or ($0.21) per diluted common share, for the third quarter 2007, compared to a taxable loss of $18.9 million or ($0.25) per diluted common share, for the second quarter 2007. The decrease in estimated taxable loss was mainly attributable to a decrease in actual loan losses which decreased $15.0 million from the second quarter of 2007, as a result of a tax reporting modification to record losses on loans for certain deals when the losses are incurred by the trusts. Offsetting this increase to taxable income was a decrease in the adjusted net interest margin at IMH which decreased $3.5 million from the second quarter of 2007, including the REMIC taxable income. Additionally, losses on the disposition of REO increased by $4.9 million, due to increased severities, primarily the result of declining home prices.
3332

Table of Contents
Financial Condition and Results of Operations
Financial Condition

Condensed Balance Sheet Data
~~(dollars in thousands)~~

September 30,
2007

December 31,
2006

Increase
(Decrease)

%
Change

June 30,

December 31,

Increase

%

Cash and cash equivalents

$
41,186

$
151,714

$
(110,528
)
(73
)%

2008

2007

(Decrease)

Change

Securitized mortgage collateral

18,741,520

20,936,515

(2,194,995
)
(10
)

$
11,055,382

$
16,532,633

$
(5,477,251
)
(33
)%
Investment securities available-for-sale

16,274

31,582

(15,308
)
(48
)
Allowance for loan losses

(911,218
)
(77,684
)
833,534

1,073

Mortgages held-for-sale - retail operations

133,497

—

133,497

100

Assets of discontinued operations

203,320

353,250

(149,930
)
(42
)
Derivative assets

36,153

142,793

(106,640
)
(75
)

109

7,497

(7,388
)
(99
)
Real estate owned (REO), net

360,472

137,331

223,141

162

Assets of discontinued operations

810,574

2,086,216

(1,275,642
)
(61
)
Real estate owned (REO)

621,433

400,863

220,570

55

Other assets

181,918

190,488

(8,570
)
(4
)

83,299

96,829

(13,530
)
(14
)
Total assets

$
19,410,376

$
23,598,955

$
(2,912,937
)
(12
)%

$
11,963,543

$
17,391,072

$
(5,427,529
)
(31
)%

Securitized mortgage borrowings

$
18,712,217

$
20,527,001

$
(1,814,784
)
(9
)%

$
11,497,132

$
17,780,060

$
(6,282,928
)
(35
)%
Reverse repurchase agreements

148,116

163,890

(15,774
)
(10
)
Liabilities of discontinued operations

832,216

1,774,371

(942,155
)
(53
)

253,334

405,341

(152,007
)
(38
)
Other liabilities

211,143

124,163

86,980

70

188,569

283,399

(94,830
)
(33
)
Total liabilities

19,903,692

22,589,425

(2,685,733
)
(12
)

11,939,035

18,468,800

(6,529,765
)
(35
)
Total stockholders’ equity

(493,316
)
1,009,530

(1,502,846
)
(149
)
Total stockholders’ equity (deficit)

24,508

(1,077,728
)
1,102,236

102

Total liabilities and stockholders’ equity

$
19,410,376

$
23,598,955

$
(4,188,579
)
(18
)%

$
11,963,543

$
17,391,072

$
(5,427,529
)
(31
)%

Total assets and liabilities were ~~$19.4~~$12.0 billion and $11.9 billion as of ~~September~~June 30, ~~2007~~2008 as compared to ~~$23.6~~$17.4 billion and $18.5 billion as of December 31, ~~2006, as the long-term investment operations retained $3.0 billion of primarily Alt-A mortgages and $0.2 billion of commercial mortgages offset by $2.1 billion in whole loan sales and $4.4 billion~~2007, respectively. The decreases in total ~~prepayments.~~assets and liabilities were primarily the result of the Company electing to adopt SFAS 159 for a significant portion of the Company’s financial instruments. The adoption of SFAS 159 resulted in the reduction of the carrying basis of certain financial instruments (securitized mortgage collateral and borrowings and trust preferred securities) to fair value at January 1, 2008. Future changes in the fair value of these and other financial instruments will be recognized in earnings. Upon adoption, securitized mortgage collateral and securitized mortgage borrowings were reduced by $0.8 billion and $1.9 billion, respectively. During the first six months, the net change in the fair value of securitized mortgage collateral and securitized mortgage borrowings included in earnings was $(3.2) billion and $3.3 billion, respectively.

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 (including investment securities available-for-sale and excluding the $10.1 million in master servicing rights included within the basis of securitized mortgage collateral) and trust liabilities. Future prepayment estimates for single-family and multi-family loans range from 16 percent and 28 percent for the 2002-2003 vintage years, respectively, and 11 percent and 14 percent for the 2007 vintage year, respectively. The ~~Company’s allowance for loan losses increased to reflect higher estimated losses stemming from higher delinquencies combined with higher estimates of default rates, deterioration~~decline in the ~~prevailing real estate market and economic conditions increasing loss severities on REO liquidations.~~
~~Real estate owned at September 30, 2007 was $360.5 million, or 162 percent, higher than at December 31, 2006 as a result~~fair value of residual interest in securitizations is primarily due to an increase in ~~foreclosures in excess~~interest rates. The following table presents the estimated fair value of ~~real estate liquidated, which~~our residual interests and related assumptions used to derive these values at June 30, 2008:

Fair Value Measurement Assumptions

Residual Interests by Vintage Year

Lifetime Loss Estimate

SF Discount

SF

MF

Total

SF

MF

Rate (1)

2002-2003 (2)

$
12,743

$
9,056

$
21,799

1
%
1
%
30
%
2004

2,787

6,556

9,343

2
%
1
%
40
%
2005

508

650

1,158

6
%
1
%
50
%
2006 (3)

1,112

8,384

9,496

16
%
5
%
50
%
2007

—

—

—

22
%
7
%
50
%
Total

$
17,150

$
24,646

$
41,796

(1)The discount rate for all multi-family residual interests is 20 percent at June 30, 2008.
(2)2002-2003 vintage year includes CMO 2007-A, due to ~~borrowers’ inability to obtain replacement financing~~performance, which uses a 40 percent discount rate and was securitized in ~~conjunction with rising borrowing costs~~2007 from collapsed securitizations which were originally securitized in 2002, 2003 and 2004.
(3)2006 vintage year includes ISAC 2005-2, due to ~~resets, reduced housing demand in~~performance, and the ~~marketplace and lower housing prices.~~fact that it was a REMIC like all other 2006 securitizations.

3433

~~The following table presents selected information about mortgages held as securitized mortgage collateral as~~Table of ~~the dates indicated. Some information is presented as a percentage of the portfolio:~~

Residential
As of

Commercial
As of

September 30,
2007

December 31,
2006

September 30,
2006

September 30,
2007

December 31,
2006

September 30,
2006

Alt-A mortgages

99%

99%

99%

N/A

N/A

N/A

Non-hybrid ARMs

5%

7%

10%

2%

2%

2%

Hybrid ARMs

71%

73%

75%

98%

98%

98%

FRMs

24%

20%

15%

0%

0%

0%

Interest-only

72%

72%

73%

15%

14%

13%

Weighted average coupon

7.10%

6.75%

6.52%

6.26%

6.15%

5.84%

Weighted average margin

3.35%

3.60%

3.73%

2.67%

2.68%

2.69%

Weighted average original LTV

73

74

75

66

66

67

Weighted average original CLTV (1)

84

85

85

66

66

67

Weighted average original credit score

699

697

696

731

730

730

Original prepayment penalty

66%

68%

73%

100%

100%

100%

Prior 3-month constant prepayment rate

21%

39%

40%

10%

6%

8%

Prior 12-month prepayment rate

30%

38%

38%

8%

8%

9%

Lifetime prepayment rate

28%

29%

30%

6%

6%

6%

Weighted average debt service coverage ratio

N/A

N/A

N/A

1.30

1.27

1.29

California

51%

51%

53%

62%

63%

66%

Purchase transactions

54%

58%

59%

49%

51%

51%

Owner occupied

78%

78%

79%

N/A

N/A

N/A

First lien

98%

99%

99%

100%

100%

100%

(1) The CLTV expresses the CLTV of the borrower, and is not indicative of the Company’s exposure, as the Company does not retain a significant amount of second lien loans. This information is based upon information obtained at the time of origination.Contents

The following table presents selected financial data as of the dates ~~indicated (dollars in thousands, except per share data):~~indicated:

As of and Year-to-Date Ended,

September 30,
2007

December 31,
2006

September 30,
2006

Book value per share

$
(8.61
)
$
11.15

$
11.94

Return on average assets

(8.57
)%
(0.31
)%
(0.09
)%
Mortgages owned 60+ days delinquent

$
1,872,283

$
1,229,270

$
1,035,601

60+ day delinquency of mortgages owned

9.40
%
5.64
%
5.01
%

As of and Year-to-Date Ended,

June 30,

December 31,

June 30,

2008

2007

2007

Prior 12-month (CPR) - Single-family

16
%
25
%
35
%
Prior 12-month (CPR) - Multi-family

10
%
9
%
7
%
Total non-performing loans

$
2,542,034

$
2,131,537

$
1,261,818

Total non-performing loans to total loans

15.0
%
11.7
%
6.5
%
Total non-performing assets

$
3,167,904

$
2,543,775

$
1,614,753

Total non-performing assets to total assets

26.5
%
14.6
%
7.2
%

We believe that in order for us to generate ~~net interest spread from the portfolio~~positive cash flows and earnings we must successfully manage the following primary operational and market risks:

·      liquidity risk;

·      credit risk;

·      interest rate risk; and

·      prepayment risk.

Liquidity Risk. Refer to ~~“Liquidity~~“Status of Operations, Liquidity and Capital Resources.”

35

Credit Risk. We manage credit risk by ~~adequately providing for loan losses and~~ actively managing delinquencies and defaults through the ~~sub-servicers. During~~servicers. Starting with the ~~third~~ ~~quarter~~second half of 2007 we ~~did~~have not ~~retain~~retained any additional Alt-A ~~mortgages. The loans originated by the retail~~mortgages in our long-term mortgage ~~operations are generally within typical Fannie Mae and Freddie Mac guidelines.~~portfolio. Our securitized mortgage ~~borrowings consist~~collateral primarily consisting of Alt-A mortgages which are generally within typical Fannie Mae and Freddie Mac guidelines but that have loan characteristics, including higher loan balances, higher loan-to-value ratios or lower documentation requirements (including stated-income loans), that may make them non-conforming under those guidelines.

As of ~~September~~ June 30~~30, 2007,~~, 2008, the original weighted average credit score of ~~mortgages held as residential~~single-family and ~~commercial~~multi-family securitized mortgage collateral was ~~699~~700 and ~~731,~~732, an original weighted average LTV ratio of 73 and 66 percent and an original CLTV of 84 percent and 66 percent, respectively. ~~For additional information regarding~~The LTV and CLTV ratios may have increased from origination date as a result of the ~~long-term mortgage portfolio refer to “Note E—Securitized Mortgage Collateral” in~~deterioration of the ~~accompanying notes to the consolidated financial statements.~~real estate market.

~~Based upon~~Using historical losses, current market conditions and ~~economic factors, we believe that we have adequately provided for~~available market data, the Company has estimated future loan losses, ~~however, if~~which are included in the fair value adjustment to our securitized mortgage collateral. While the credit performance for the loans has been clearly far worse than initial market expectations, the ultimate level of realized losses will largely be influenced by events that will likely unfold over the next several years, including the severity of housing price declines and overall strength of the economy. If market conditions continue to deteriorate in excess of our expectations, the Company may need to ~~record an increase~~recognize additional fair value reductions to our securitized mortgage collateral, which may also affect the ~~allowance for loan losses. The allowance for loan losses increased to $911.2 million as~~value of ~~September~~ ~~30, 2007 as compared to $77.7 million as of December 31, 2006. The increase in~~ the provision reflects higher estimated losses stemming from higher delinquencies combined with higher defaults, increased severities, deterioration in the prevailing real estate market and current economic conditions and the seasoning of long term investment operations investment loan portfolio. Actual loan charge-offs net of recoveries on mortgages in therelated securitized mortgage ~~portfolio increased to $93.0 million for~~ ~~third~~ ~~quarter 2007 as compared to $5.5 million for the~~ ~~third~~ ~~quarter of 2006.~~borrowings.

We monitor our ~~sub-servicers~~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 ~~sub-servicers~~servicers to assess our ~~borrowers~~borrowers’ current ability to pay their mortgages and to make arrangements with selected delinquent borrowers which will result in the best interest of the borrower and the Company, in an effort to minimize the number of mortgages which become seriously delinquent. When resolving delinquent mortgages, ~~sub-servicers~~servicers are required to take timely ~~and aggressive~~ action. The ~~sub-servicer~~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 or by foreclosing and liquidating the property. ~~We perform an ongoing review of mortgages that display weaknesses and believe that we maintain an adequate loan loss allowance on our mortgages.~~ When a borrower fails to make required payments on a mortgage and does not cure the delinquency within 60 days, we generally record a notice of default and commence foreclosure proceedings, or arrange alternative terms of forbearance. If the mortgage is not reinstated within the time permitted by law for reinstatement, the property may then be sold at a foreclosure sale. At foreclosure ~~sales, we~~sale, the trusts consolidated on our balance sheet generally acquire title to the property.

34

Table of Contents
We ~~believe~~use the Mortgage Bankers Association (MBA) method ~~is most consistent with the SEC proposal of defining~~to define delinquency as a contractually required payment being 30 days or more past due, compared to the Office of Thrift Supervision (OTS) method, which lags the MBA method by 30 days. It is our view that the MBA methodology provides a more accurate reading on delinquency. The OTS methodology lags the MBA approach in reporting delinquencies by an additional 30 days.due. We measure delinquencies from the date of the last payment due date in which a payment was ~~received, compared to the OTS method which starts counting the days on the date the payment was not made.~~received. Delinquencies ~~under the OTS method including~~for loans 60 days late or greater, foreclosures and delinquent bankruptcies were ~~$1,466.8~~$2,969.1 million or ~~7.4~~17.5 percent ~~compared to $1,872.3 million or 9.5 percent for the MBA method.~~as of June 30, 2008.
36

The following table summarizes non-performing loans that we own, including securitized mortgage collateral, ~~mortgages~~loans held for long-term investment and ~~mortgages~~loans held-for-sale for continuing and discontinued operations combined, that were 60 or more days delinquent (utilizing the MBA method) for the periods ~~indicated (in thousands):~~indicated:

At September 30,
2007

%

At December 31,
2006

%

At June 30,

At December 31,

2008

%

2007

%

Loans held-for-sale (1)

60 - 89 days delinquent

$
33,882

2%

$
11,107

1%

$
11,483

0.5
%
$
45,121

2
%
90 or more days delinquent

31,418

2%

34,598

3%

59,038

2
%
51,294

2
%
Foreclosures ~~(2)~~

10,730

1%

13,267

1%

10,195

0.5
%
23,936

1
%
Delinquent bankruptcies

—

—

—

—

Total 60+ days delinquent loans held-for-sale

76,030

4%

58,972

5%

Total delinquent loans held-for-sale

80,716

3
%
120,351

5
%

Long-term mortgage portfolio

Securitized mortgage collateral

60 - 89 days delinquent

$
404,264

22%

$
373,238

30%

$
415,549

14
%
$
490,946

18
%
90 or more days delinquent

378,915

20%

275,089

22%

706,692

24
%
773,816

29
%
Foreclosures (2)

850,964

45%

403,489

33%

1,555,217

52
%
1,093,385

41
%
Delinquent bankruptcies

162,110

9%

118,482

10%

Total 60+ days delinquent long term mortgage portfolio

1,796,253

96%

1,170,298

95%

Total 60 or more days delinquent

$
1,872,283

100%

$
1,229,270

100%

Delinquent bankruptcies (3)

210,892

7
%
189,106

7
%
Total delinquent long-term mortgage portfolio

2,888,350

97
%
2,547,253

95
%
Total delinquent loans

$
2,969,066

100
%
$
2,667,604

100
%
Total loans

$
16,926,026

$
18,252,197

(1) ~~Delinquencies included in loans held-for-sale are primarily related to loans repurchased from buyers of whole loans from the Company in accordance with the normal representations and warranties.~~   Loans held-for-sale are substantially included asin discontinued operations onin the consolidated ~~statements of operations.~~balance sheets.
(2)   Represents properties in the process of foreclosure.
(3)   Represents bankruptcies that are 30 days or more delinquent.
The following table summarizes securitized mortgage collateral, loans held-for-investment, loans held-for-sale and real estate owned, that were non-performing for continuing and discontinued operations combined for the periods indicated:

At June 30,

At December 31,

2008

%

2007

%

90 or more days delinquent, foreclosures and delinquent bankruptcies

$
2,542,034

80
%
$
2,131,537

84
%
Real estate owned

625,870

20
%
412,238

16
%
Total non-performing assets

$
3,167,904

100
%
$
2,543,775

100
%

Non-performing assets consist of mortgages that are 90 days or more delinquent, including loans in foreclosure and delinquent bankruptcies. It is our policy to place a mortgage on non-accrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral ~~whereby~~when the scheduled payment is received from the ~~servicer whether or not the borrower makes the payment.~~servicer. As of ~~September~~ June 30, ~~2007,~~2008, non-performing assets as a percentage of ~~total~~the outstanding principal balance of securitized mortgage assets ~~were 9.27~~was 26.5 percent compared to ~~4.26~~14.6 percent as of ~~year-end 2006.~~December 31, 2007.
The following table summarizes securitized mortgage collateral, mortgages held for long-term investment, mortgages held-for-sale and real estate owned, that were non-performing for continuing and discontinued operations combined for the periods indicated (in thousands):

At September 30,
2007

%

At December 31,
2006

%

90 or more days delinquent, foreclosures and delinquent bankruptcies

$
1,434,137

80%

$
844,925

84%

Other real estate owned

366,061

20%

161,538

16%

Total non-performing assets

$
1,800,198

100%

$
1,006,463

100%

Real estate owned, 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~~Historically, adjustments to the loan carrying value required at the time of foreclosure ~~are~~were charged against the allowance for loan losses. ~~Losses or gains from~~With the adoption of FAS 159, the Company no
35

Table of Contents
longer maintains an allowance for loan losses and adjustments to the carrying value of REO at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in the Company’s estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition ~~of real estate owned~~ are recorded as ~~(gain) loss on sale of other~~gains or losses from real estate owned in the consolidated statement of operations. Subsequent adjustments to the carrying value after foreclosure are recorded as adjustments to the valuation allowance against the REO balance. At September 30, 2007, the allowance against REO was $56.3 million, as compared to $8.5 million at December 31, 2006. Real estate owned at ~~September~~June 30, ~~2007~~2008 was ~~$366.1~~$213.6 million, or ~~128~~51.8 percent higher than at December 31, ~~2006~~2007 as a result of an increase in foreclosures ~~due to~~from higher delinquencies and deterioration in the prevailing real estate market and, in part, due to borrowers’ inability to obtain replacement financing in conjunction with rising borrowing costs due to resets, reduced housing demand in the marketplace and lower housing prices.

37

We ~~have~~ realized a ~~loss~~gain on ~~disposition~~sale of real estate owned in the amount ~~of $7.6~~$1.8 million and ~~$7.8~~$5.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2007,~~2008, respectively, as compared to a ~~gain~~loss of ~~$302 thousand and $1.3~~$1.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2006, respectively. The increase in losses~~2007. Additionally, for the three and six months ended June 30, 2008, the Company recorded an unrealized loss on the ~~disposition of REO is reflective~~net realizable value of the ~~pace at~~REO in the amount of $6.6 million and $14.3 million, respectively, which ~~home prices have deteriorated.~~
~~The following tables and discussion present~~reflects the decline in value of the REO ~~and REO allowance for~~from the ~~continuing operations.~~foreclosure date.

The following table presents ~~a rollforward~~the balances and related activity of the real estate owned ~~(in thousands):~~for continuing operations:

Nine months
ended September 30,
2007

Year ended
December 31,
2006

Beginning balance

$
137,331

$
46,092

Additions

440,979

181,120

Sales

(170,153
)
(82,553
)
Net realizable value (NRV) adjustment

(47,685
)
(7,328
)
REO, net

$
360,472

$
137,331

Six Months Ended

Year Ended

June 30, 2008

December 31, 2007

Beginning balance

$
405,434

$
137,331

Foreclosures

388,907

487,314

Liquidations

(170,639
)
(219,211
)
REO

$
623,702

$
405,434

REO inside trusts

$
621,433

$
400,863

REO outside trust (1)

2,269

4,571

REO

$
623,702

$
405,434

~~The CLTV~~In calculating the cash flows to assess the fair value of the ~~loans converted to REO was 96 percent as of September 30, 2007, based on information we had at~~securitized mortgage collateral the ~~point of origination of~~Company estimates the ~~loan.~~ ~~Predominantly all of the REO’s held by the securitized trusts.~~
~~The Company maintains an allowance for~~lifetime losses embedded in our loan ~~losses.~~portfolio. In evaluating the adequacy of the ~~allowance for loan~~lifetime 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 the required ~~allowance~~lifetime losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss in the event of default. The rate of default is assigned to the loans based on their attributes (~~e.g.~~e.g., original loan-to-value, borrower credit score, documentation type, 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 ~~allowance for~~lifetime loan losses.

~~Activity for allowance for loan losses for the periods indicated was as follows:~~

At September 30,
2007

At December 31,
2006

Securitized mortgage collateral and held-for-investment - Residential

$
900,495

$
69,711

Securitized mortgage collateral and held-for-investment - Commercial

10,723

7,973

Allowance for loan losses

$
911,218

$
77,684

~~The allowance for loan losses for the periods indicated consisted of the following:~~

Three Months
Ended September 30,

Nine Months
Ended September 30,

2007

2006

2007

2006

Beginning balance

$
214,734

$
57,388

$
77,684

$
67,831

Provision for loan losses

789,445

3,533

979,740

3,638

Charge-offs, net of recoveries

(92,961
)
(5,540
)
(146,206
)
(16,088
)
Allowance for loan losses

$
911,218

$
55,381

$
911,218

$
55,381

38

Management ~~also~~ recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring ~~inherent loss~~losses in our 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, projected loss curves, political factors, market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The Company provides loan losses in accordance with its policies that include an analysis of the loan portfolio to determine estimated loan losses in the next 12 to 18 months. The determination of the level of the allowance for loan losses and, correspondingly, the provisionassessment for loan losses, is based on delinquency trends and prior loan 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 ~~impacting~~affecting credit quality and inherent losses. While our delinquency rates have increased, we believe, based on current market conditions, our total allowance for loan losses is adequate to absorb losses inherent in our mortgage portfolio as of September 30, 2007.
Interest Rate Risk. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”
Prepayment ~~Risk.~~ Risk. The Company uses prepayment penalties as a method of partially mitigating prepayment ~~risk.~~risk for those borrowers that have the ability to refinance. Mortgage industry evidence suggests that ~~the prior years increase~~changes in home appreciation rates and lower payment option mortgage products over the last three years had been a significant factor affecting borrowers refinancing decisions. As mortgage rates increase and housing prices decline, borrowers will find it more difficult to refinance to obtain cheaper financing. If borrowers are unable to pay their mortgage payments at the adjusted rate, delinquencies may increase. The three-month average combined constant prepayment rate ~~(“CPR”)~~(CPR) of single-family and multi-family loans held as securitized mortgage collateral decreased to 2011 percent at ~~September~~ June 30, ~~2007~~2008 from 3617 percent as of December 31, 2006. This reduction in prepayment rates has resulted in an increase in the amortization period for premiums paid to acquire loans, which has increased interest income, as described under “Estimated Taxable Income.”2007.
36

Table of Contents

As of ~~September~~June 30, ~~2007,~~2008, the twelve-month combined CPR of ~~mortgages~~single-family and multi-family loans held as securitized mortgage collateral was 2915 percent as compared to a 3824 percent twelve-month average CPR as of December 31, ~~2006.~~2007. Prepayment penalties are charged to borrowers for mortgages that are paid early and recorded as interest income. Income from prepayment penalties helps offset amortization of loan premiums and securitization costs. Due to the prepayment of mortgages during the first nine months of 2007 prepayment penalties were received from borrowers and were recorded as interest income and increased the yield on average mortgage assets by 9 basis points as compared to 21 basis points for the same period in 2006.

39

Results of Operations
For the Three and Six Months Ended ~~September~~ June 30, ~~2007~~2008 compared to the Three and Six Months Ended June 30, 2007~~September~~ ~~30, 2006~~

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

For the Three Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Interest income

$
407,855

$
316,443

$
91,412

29
%
Interest expense

403,599

308,569

95,030

31

Net interest income (expense)

4,256

7,874

(3,618
)
(46
)
Provision for loan losses

—

161,163

(161,163
)
n/a

Net interest income (expense) after provision for loan losses

4,256

(153,289
)
157,545

103

Total non-interest income

(10,748
)
70,804

(81,552
)
(115
)
Total non-interest expense

7,745

6,071

1,674

28

Income tax expense (benefit)

2,202

4,969

(2,767
)
(56
)
Net (loss) earnings from continuing operations

(16,439
)
(93,525
)
77,086

82

Loss from discontinued operations, net

(11,048
)
(59,022
)
47,974

81

Net loss

$
(27,487
)
$
(152,547
)
$
125,060

82
%

Net loss per share - diluted

$
(0.41
)
$
(2.05
)
$
1.64

80
%
Dividends declared per common share

$
—

$
—

$
—

n/a
%

Three Months Ended September 30,

2007

2006

Increase
(Decrease)

%
Change

Interest income

$
313,772

$
261,054

$
52,718

20
%
Interest expense

302,074

292,480

9,594

3

Net interest income (expense)

11,698

(31,426
)
43,124

137

Provision for loan losses

789,445

3,533

785,912

22,245

Net interest expense after provision for loan losses

(777,747
)
(34,959
)
742,788

2,125

Total non-interest income

(194,720
)
(80,988
)
113,732

140

Total non-interest expense

21,635

6,780

14,855

219

Income tax expense

3,056

1,700

1,356

80

Net (loss) earnings from continuing operations

(997,158
)
(124,427
)
872,731

701

Loss from discontinued operations, net

(194,077
)
(3,264
)
(190,813
)
(5,846
)
Net (loss) earnings

$
(1,191,235
)
$
(127,691
)
$
1,063,544

833
%

Net (loss) earnings per share - diluted

$
(15.66
)
$
(1.68
)
$
(13.98
)
(833
)%
Dividends declared per common share

$
—

$
0.25

$
(0.25
)
(100
)%
~~For the Nine Months Ended September 30, 2007 compared to the Nine Months Ended September 30, 2006~~

For the Six Months Ended June 30,

Nine Months Ended September 30,

Increase

%

2007

2006

Increase
(Decrease)

%
Change

2008

2007

(Decrease)

Change

Interest income

$
936,364

$
849,283

$
87,081

10
%

$
679,811

$
621,191

$
58,620

9
%
Interest expense

909,060

896,023

13,037

1

668,206

605,374

62,832

10

Net interest income (expense)

27,304

(46,740
)
74,044

158

11,605

15,817

(4,212
)
(27
)
Provision for loan losses

979,740

3,638

976,102

26,831

—

190,295

(190,295
)
n/a

Net interest expense after provision for loan losses

(952,436
)
(50,378
)
902,058

1,791

Net interest income (expense) after provision for loan losses

11,605

(174,478
)
186,083

107

Total non-interest income

(144,035
)
91,312

(235,347
)
(258
)

(9,757
)
48,201

(57,958
)
(120
)
Total non-interest expense

54,161

17,708

36,453

206

14,062

12,424

1,638

13

Income tax expense

12,012

8,070

3,942

49

Income tax expense (benefit)

8,728

8,956

(228
)
(3
)
Net (loss) earnings from continuing operations

(1,162,644
)
15,156

1,177,800

7,771

(20,942
)
(147,657
)
126,715

86

Loss from discontinued operations, net

(302,806
)
(30,923
)
(271,883
)
(879
)

(10,360
)
(126,558
)
116,198

92

Net (loss) earnings

$
(1,465,450
)
$
(15,767
)
$
1,449,683

9,194
%
Net loss

$
(31,302
)
$
(274,215
)
$
242,913

89
%

Net (loss) earnings per share - diluted

$
(19.26
)
$
(0.21
)
$
(19.05
)
(9,199
)%
Net loss per share - diluted

$
(0.51
)
$
(3.70
)
$
3.19

86
%
Dividends declared per common share

$
0.10

$
0.75

$
(0.65
)
(87
)%

$
—

$
0.10

$
(0.10
)
n/a
%

Net Interest Income ~~(Expense)~~

We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, ~~mortgages held-for-investment, mortgages~~loans held-for-sale and investment securities available-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 on mortgage assets, which include securitized mortgage borrowings, reverse repurchase agreements and borrowings secured by investment securities available-for-sale. ~~Net~~With the adoption of SFAS 159, net interest income ~~also includes~~during the quarter represents the effective yield of the net trust assets. During 2007, net interest income included (1) amortization of acquisition costs on mortgages
37

Table of Contents
acquired from the mortgage operations, (2) accretion of loan discounts, which primarily
40

~~represents~~ represented the amount allocated to mortgage servicing rights when they are sold to third parties and mortgages are transferred to the long-term investment operations from the mortgage operations and retained for long-term investment, (3) amortization of securitized mortgage securitization expenses and, to a lesser extent, (4) amortization of securitized mortgage bond discounts.

The following table summarizes average balance, interest and weighted average yield on mortgage assets and borrowings on mortgage assets, included within continuing and discontinued operations, for the periods ~~indicated for combined continued and discontinued operations (dollars in thousands):~~indicated:

For the Three Months Ended June 30,

Three Months Ended September 30,

2008

2007

2007

2006

Average

(8)

Average

(8)

Average
Balance

Interest

(8)
Yield

Average
Balance

Interest

(8)
Yield

Balance

Interest

Yield

Balance

Interest

Yield

MORTGAGE ASSETS

Subordinated securities collateralized by mortgages

$
14,443

$
1,459

40.41
%
$
31,503

$
1,509

19.16
%

$
10,333

$
687

26.59
%
$
29,094

$
1,711

23.52
%
Securitized mortgage collateral (1)

19,662,219

307,433

6.25
%
19,581,945

257,995

5.27
%

11,344,758

406,988

14.35
%
21,184,780

319,051

6.02
%
Mortgages held-for-investment and held-for-sale

1,222,466

23,229

7.60
%
2,073,935

33,405

6.44
%
Loans held-for-investment and held-for-sale (2)

183,459

3,193

6.96
%
866,517

10,967

5.06
%
Finance receivables

38,819

1,584

16.32
%
263,106

5,230

7.95
%

—

—

0.00
%
163,456

2,965

7.26
%
Total mortgage assets\ interest income

$
20,937,947

$
333,705

6.38
%
$
21,950,489

$
298,139

5.43
%

$
11,538,550

$
410,868

14.24
%
$
22,243,847

$
334,694

6.02
%

BORROWINGS

Securitized mortgage borrowings

$
19,458,646

$
295,325

6.07
%
$
19,190,482

$
289,925

6.04
%

$
11,645,457

$
401,432

13.79
%
$
20,772,443

$
304,551

5.86
%
Reverse repurchase agreements

1,225,321

21,959

7.17
%
2,098,722

32,552

6.20
%

231,489

1,797

3.11
%
1,134,264

17,236

6.08
%
Total borrowings on mortgage assets\ interest expense

$
20,683,967

$
317,284

6.14
%
$
21,289,204

$
322,477

6.06
%

$
11,876,946

$
403,229

13.58
%
$
21,906,707

$
321,787

5.88
%

Net Interest Spread (2)

0.24
%

(0.63
)%
Net Interest Margin (3)

0.31
%

(0.44
)%

Net interest income on mortgage assets

$
16,421

0.31
%

$
(24,338
)
(0.44
)%
Less: Accretion of loan discounts (4)

(12,539
)
(0.23
)%

(14,837
)
(0.27
)%
Adjusted by net cash receipts on derivatives (5)

28,921

0.55
%

60,630

1.10
%
Adjusted Net Interest Margin (6)

$
32,803

0.63
%

$
21,455

0.39
%

Effect of amortization of loan premiums and securitization costs (7)

$
32,212

(0.62
)%

$
54,594

(0.99
)%
Net Interest Spread (3)

$
7,639

0.66
%

$
12,907

0.14
%
Net Interest Margin (4)

0.26
%

0.23
%

For the Six Months Ended June 30,

2008

2007

Average

(8)

Average

(8)

Balance

Interest

Yield

Balance

Interest

Yield

MORTGAGE ASSETS

Subordinated securities collateralized by mortgages

$
12,738

$
1,420

22.30
%
$
29,949

$
3,308

22.09
%
Securitized mortgage collateral (1)

13,383,352

676,886

10.12
%
20,930,093

622,653

5.95
%
Loans held-for-investment and held-for-sale (2)

198,135

7,448

7.52
%
1,411,734

41,312

5.85
%
Finance receivables

—

—

0.00
%
217,859

8,192

7.52
%
Total mortgage assets\ interest income

$
13,594,225

$
685,754

10.09
%
$
22,589,635

$
675,465

5.98
%

BORROWINGS

Securitized mortgage borrowings

$
13,686,955

$
663,248

9.69
%
$
20,479,422

$
597,928

5.84
%
Reverse repurchase agreements

258,649

5,159

3.99
%
1,684,967

50,973

6.05
%
Total borrowings on mortgage assets\ interest expense

$
13,945,604

$
668,407

9.59
%
$
22,164,389

$
648,901

5.86
%

Net Interest Spread (3)

$
17,347

0.50
%

$
26,564

0.12
%
Net Interest Margin (4)

0.39
%

0.24
%

4138

Table of Contents

Nine Months Ended September 30,

2007

2006

Average
Balance

Interest

(8)
Yield

Average
Balance

Interest

(8)
Yield

MORTGAGE ASSETS

Subordinated securities collateralized by mortgages

$
24,723

$
4,767

25.71
%
$
29,722

$
2,686

12.05
%
Securitized mortgage collateral (1)

20,502,803

930,086

6.05
%
21,667,571

838,452

5.16
%
Mortgages held-for-investment and held-for-sale

1,347,949

64,541

6.38
%
1,782,364

86,603

6.48
%
Finance receivables

277,410

9,776

4.70
%
284,295

15,037

7.05
%
Total mortgage assets\ interest income

$
22,152,885

$
1,009,170

6.07
%
$
23,763,952

$
942,778

5.29
%

BORROWINGS

Securitized mortgage borrowings

$
20,135,424

$
893,253

5.91
%
$
21,233,648

$
888,144

5.58
%
Reverse repurchase agreements

1,654,003

72,932

5.88
%
1,870,276

81,881

5.84
%
Total borrowings on mortgage assets\ interest expense

$
21,789,427

$
966,185

5.91
%
$
23,103,924

$
970,025

5.60
%

Net Interest Spread (2)

0.16
%

(0.31
)%
Net Interest Margin (3)

0.26
%

(0.15
)%

Net Interest (expense) Income on Mortgage Assets

$
42,985

0.26
%

$
(27,247
)
(0.15
)%
Less: Accretion of loan discounts (4)

(41,247
)
(0.25
)%

(48,910
)
(0.27
)%
Adjusted by net cash receipts on derivatives (5)

105,019

0.63
%

156,633

0.88
%
Adjusted Net Interest Margin (6)

$
106,757

0.64
%

$
80,476

0.45
%

Effect of amortization of loan premiums and securitization costs (7)

$
117,242

(0.71
)%

$
181,071

(1.02
)%

(1)   Interest on securitized mortgage collateral in 2007 includes amortization of acquisition cost on mortgages acquired from the mortgage operations and accretion of loan discounts. During 2008, the Company started applying the effective yield used to derive the fair value of the securitized mortgage collateral.
(2)The held-for-sale balance excludes the lower of cost or market (LOCOM) writedown on the loans.
(3)   Net interest spread on mortgage assets is calculated by subtracting the weighted average yield on total borrowings on mortgage assets from the weighted average yield on total mortgage assets.
~~(3)~~(4)   Net interest margin on mortgage assets is calculated by subtracting interest expense on total borrowings on mortgage assets from interest income on total mortgage assets and then dividing by total average mortgage assets and annualizing the quarterly margin.
~~(4)Yield represents~~
Net interest income ~~from~~spread for the ~~accretion~~second quarter of ~~loan discounts, included~~2008 decreased $5.3 million (41 percent) as compared to the second quarter of 2007. The decrease in ~~(1) above, divided by total average mortgage assets.~~
~~(5)Yield represents net cash receipts on derivatives divided by total average mortgage assets.~~
~~(6)Adjusted~~ net interest ~~margin~~income was primarily due to declines in outstanding balances offset by an increase in net interest spread. During the quarter, the yield on mortgage assets ~~is calculated~~changed by ~~subtracting interest expense~~8.22 percent to 14.24 percent from 6.02 percent for the comparable 2007 period. The yield on total borrowings ~~on mortgage assets, accretion of loan discounts and net cash receipts on derivatives from interest income on total mortgage assets divided~~changed by total average mortgage assets. Net cash receipts on derivatives are a component of realized gain on derivative instruments on the consolidated statements of operations. Adjusted net interest margin on mortgage assets is a non-GAAP financial measurement; however, the reconciliation provided in this table is intended7.70 percent to ~~meet the requirements of Regulation G as promulgated by the SEC~~13.58 percent for the ~~presentation~~quarter from 5.88 percent for the comparable period. The increase in the securitized mortgage collateral and borrowing yields is primarily a result of ~~non-GAAP financial measurements. We believe that~~ the ~~presentation~~adoption of ~~adjusted net interest margin on mortgage assets is a useful operating performance measure for our investors as it more closely reflects~~SFAS 159 and the ~~economics of net interest margins on mortgage assets by providing information to evaluate net interest income attributable to net investments.~~
~~(7)The amortization of loan premiums and securitization costs are components~~related recognition of interest income and ~~interest~~ expense ~~respectively. Yield represents the cost of amortization of net loan premiums and securitization costs divided by total average mortgage assets.~~
~~(8)~~ ~~The yields represent annualized yields~~ based on ~~the results~~effective yields for ~~the quarter and year-to-date.~~
~~(9)~~ ~~The yields presented above represents the yields of continuing and discontinued operations.~~
42

~~For~~ the three months ended ~~September~~June 30, ~~2007~~2008, based on fair value, as compared to using effective interest rates using the historical basis in the loans in the prior period. As the market’s expectation of future credit losses has increased, the market has demanded higher yields, as investors require a higher yield on these financial assets and liabilities.
Net interest income spread for the first six months of 2008 decreased $9.2 million (35 percent) as compared to the ~~three~~first six months ~~ended~~ ~~September~~ ~~30, 2006~~
~~Increases~~of 2007. The decrease in net interest income ~~were~~was primarily due to declines in outstanding balances offset by an ~~improvement~~increase in net interest ~~margins~~spread. During the first six months, the yield on mortgage assets aschanged by 4.11 percent to 10.09 percent from 5.98 percent for the comparable 2007 period. The yield on total borrowings changed by 3.73 percent to 9.59 percent for the first six months from 5.86 percent for the comparable period. The increase in the securitized mortgage collateral and borrowing yields is primarily a result of the ~~following:~~
·~~the Company’s loans have adjusted upward due to resets~~adoption of SFAS 159 and the ~~layering~~related recognition of ~~additional mortgage loans at higher rates,~~
·~~the Company increased the amortization period in which loan premiums paid for loans that are retained are amortized to~~ interest income and ~~the period securitization costs are amortized to interest~~ expense ~~due to lower prepayment rates; and~~
·~~the yield~~based on ~~borrowing costs have remained flat from September 2006 through September 2007.~~
~~Net interest income~~effective yields for the ~~third quarter of 2007 increased $43.1 million (137 percent)~~six months ended June 30, 2008, based on fair value, as compared to ~~2006. The increase was primarily due to net~~using effective interest ~~margins on mortgage assets increasing by 75~~rates using the historical basis ~~points to 0.31 percent for the third quarter of 2007 as compared to (0.44 percent) for 2006.~~ The increase in adjusted net interest margins on mortgage assets was primarily due to a positive variance of 95 basis points in yield on mortgage assets, as coupons have adjusted, and a decrease of 37 basis points in amortization of premiums and securitization costs, partially offset by an unfavorable variance of 8 basis points in borrowing costs and a 55 basis point decrease from realized gains on derivative assets.
~~As a result of the illiquidity~~ in the ~~mortgage market and borrowers’ inability to obtain cheaper financing we are seeing a corresponding decline~~loans in ~~mortgage prepayment speeds which we started to observe in our portfolio during 2007. Additionally, as home prices have declined in most areas, therefore increasing~~ the ~~effective loan to value ratios, borrowers’ even those with higher~~prior period. As the market’s expectation of future credit scores are facing limited loan refinancing options. Our securitized mortgage collateral reflects reduced prepayments with the three-month CPR rate declining to 20 percent as of September 30, 2007 from 36 percent as of December 31, 2006.
Amortization of loan premiums and securitization expenses decreased by 37 basis points to 0.62 percent of average mortgage assets during the third quarter of 2007 as compared to 0.99 percent of average mortgage assets during the same period in 2006. The decrease in amortization of premiums and securitization expenses was the result of a decrease in actual prepayments, and a decrease in expected prepayments, whichlosses has increased, the ~~number of months in which the Company amortizes the premiums, therefore increasing interest income.~~market has demanded higher yields, as investors require a higher yield on these financial assets and liabilities.

A substantial portion of our long-term mortgage investment portfolio consists of mortgages with prepayment penalty features that are primarily designed to help minimize the rate of early mortgage prepayments. However, if borrowers do prepay, a prepayment penalty is charged which helps partially offset additional amortization of loan premiums and securitization costs related to the prepaid mortgages. During the third quarter of 2007, prepayment penalties received from borrowers were recorded as interest income and decreased 14 basis points to 6 basis points of mortgage assets as compared to 20 basis points of mortgage assets in the third quarter of 2006.
Adjusted net interest margins on mortgage assets, which is a non-GAAP financial measurement as indicated in the yield table above, increased by 24 basis points as compared to an increase of 75 basis points on net interest margin on mortgage assets in the prior year. Adjusted net interest margin on mortgage assets did not increase as much as net interest margin on mortgage assets primarily due to a 55 basis point decrease in realized gains from derivative instruments.
Adjusted net interest margins were also affected during the third quarter of 2007 by our interest rate risk management policies which include the employment of balance guarantees that limit our derivatives to no more than 100% coverage of the principal amount outstanding on certain securitized mortgage borrowings at any given time. Our interest rate risk management policies are formulated with the intent to offset the potential adverse effects of changing interest rates primarily associated with cash flows on adjustable rate securitized mortgage borrowings. By design, our current interest rate risk management program typically provides 20% to 25% coverage of the outstanding principal balance of our six month LIBOR ARMs and 80% to no more than 98% coverage of the outstanding principal balance of intermediate, or hybrid, ARMs at the point in time that we securitize the mortgages. During the third quarter, as a result of declining interest rates and rising derivative liabilities, the Company closed substantially all open hedge positions that were not included in the bankruptcy remote securitized mortgage collateral trusts, which included all hedge positions on its loans held-for-sale.
43

~~For the three months ended~~ ~~September~~ ~~30, 2007 compared to the three months ended~~ ~~September~~ ~~30, 2006~~
~~Increases in net interest income were primarily due to an improvement in net interest margins on mortgage assets as a result of the following:~~
·~~the Company’s loans have adjusted upward due to resets and the layering of additional mortgage loans at higher rates,~~
·the Company increased the amortization period in which loan premiums paid for loans that are retained are amortized to interest income, and the period securitization costs are amortized to interest expense, due to lower prepayment rates; and
·~~the yield on borrowing costs have remained flat from September 2006 through September 2007.~~
Net interest income for the third quarter of 2007 increased $43.1 million (137 percent) as compared to 2006. The increase was primarily due to net interest margins on mortgage assets increasing by 75 basis points to 0.31 percent for the third quarter of 2007 as compared to (0.44 percent) for 2006. The increase in adjusted net interest margins on mortgage assets was primarily due to a positive variance of 95 basis points in yield on mortgage assets, as coupons have adjusted, and a decrease of 37 basis points in amortization of premiums and securitization costs, partially offset by an unfavorable variance of 8 basis points in borrowing costs and a 55 basis point decrease from realized gains on derivative assets.
As a result of the illiquidity in the mortgage market and borrowers’ inability to obtain cheaper financing we are seeing a corresponding decline in mortgage prepayment speeds which we started to observe in our portfolio during 2007. Additionally, as home prices have declined in most areas, therefore increasing the effective loan to value ratios, borrowers’ even those with higher credit scores are facing limited loan refinancing options. Our securitized mortgage collateral reflects reduced prepayments with the three-month CPR rate declining to 20 percent as of September 30, 2007 from 36 percent as of December 31, 2006.
Amortization of loan premiums and securitization expenses decreased by 37 basis points to 0.62 percent of average mortgage assets during the third quarter of 2007 as compared to 0.99 percent of average mortgage assets during the same period in 2006. The decrease in amortization of premiums and securitization expenses was the result of a decrease in actual prepayments, and a decrease in expected prepayments, which has increased the number of months in which the Company amortizes the premiums, therefore increasing interest income.
A substantial portion of our long-term mortgage investment portfolio consists of mortgages with prepayment penalty features that are primarily designed to help minimize the rate of early mortgage prepayments. However, if borrowers do prepay, a prepayment penalty is charged which helps partially offset additional amortization of loan premiums and securitization costs related to the prepaid mortgages. During the third quarter of 2007, prepayment penalties received from borrowers were recorded as interest income and decreased 14 basis points to 6 basis points of mortgage assets as compared to 20 basis points of mortgage assets in the third quarter of 2006.
Adjusted net interest margins on mortgage assets, which is a non-GAAP financial measurement as indicated in the yield table above, increased by 24 basis points as compared to an increase of 75 basis points on net interest margin on mortgage assets in the prior year. Adjusted net interest margin on mortgage assets did not increase as much as net interest margin on mortgage assets primarily due to a 55 basis point decrease in realized gains from derivative instruments.
Adjusted net interest margins were also affected during the third quarter of 2007 by our interest rate risk management policies which include the employment of balance guarantees that limit our derivatives to no more than 100% coverage of the principal amount outstanding on certain securitized mortgage borrowings at any given time. Our interest rate risk management policies are formulated with the intent to offset the potential adverse effects of changing interest rates primarily associated with cash flows on adjustable rate securitized mortgage borrowings. By design, our current interest rate risk management program typically provides 20% to 25% coverage of the outstanding principal balance of our six month LIBOR ARMs and 80% to no more than 98% coverage of the outstanding principal balance of intermediate, or hybrid, ARMs at the point in time that we securitize the mortgages. During the third quarter, as a result of declining interest rates and rising derivative liabilities, the Company closed substantially all open hedge positions that were not included in the bankruptcy remote securitized borrowings collateral trusts, which included all hedge positions on its loans held-for-sale.
44

~~For the nine months ended~~ ~~September~~ ~~30, 2007 compared to the nine months ended~~ ~~September~~ ~~30, 2006~~
~~Increases in net interest income were primarily due to an improvement in net interest margins on mortgage assets as a result of the following:~~
·~~the Company’s loans have adjusted upward due to resets and the layering of additional mortgage loans at higher rates,~~
·the Company increased the amortization period in which loan premiums paid for loans that are retained are amortized to interest income, and the period securitization costs are amortized to interest expense, due to lower prepayment rates; and
·the yield on borrowing costs have increased less during the third quarter 2007 as compared to the third quarter 2006, as our mortgages have re-priced upward faster than the increase in borrowing costs on the underlying borrowings as well as the addition of new collateral with higher coupons.
Net interest income for the first nine months of 2007 increased $74.0 million (158 percent) as compared to 2006. The increase was primarily due to net interest margins on mortgage assets increasing by 41 basis points to 0.26 percent for the first nine months of 2007 as compared to (0.15 percent) for the same period in 2006. The increase in adjusted net interest margins on mortgage assets was primarily due to a positive variance of 78 basis points in yield on mortgage assets, as coupons have adjusted, and a decrease of 31 basis points in amortization of premiums and securitization costs, partially offset by an unfavorable variance of 31 basis points in borrowing costs and an 25 basis point decrease from realized gains on derivative assets.
As a result of the illiquidity in the mortgage market and borrowers’ inability to obtain cheaper financing we are seeing a corresponding decline in mortgage prepayment speeds which we started to observe in our portfolio during 2007. Additionally, as home prices have declined in most areas, therefore increasing the effective loan to value ratios, borrowers’ with higher credit scores are facing limited loan refinancing options. Our securitized mortgage collateral reflects reduced prepayments with the three-month CPR rate declining to 20 percent as of September 30, 2007 from 36 percent as of December 31, 2006.
Amortization of loan premiums and securitization expenses decreased by 31 basis points to 0.71 percent of average mortgage assets during the first nine months of 2007 as compared to 1.02 percent of average mortgage assets during the same period in 2006. The decrease in amortization of premiums and securitization expenses was the result of a decrease in actual prepayments, and a decrease in expected prepayment speeds, which has increased the number of months in which the Company amortizes the premiums, therefore increasing interest income.
A substantial portion of our long-term mortgage investment portfolio consists of mortgages with prepayment penalty features that are primarily designed to help minimize the rate of early mortgage prepayments. However, if borrowers do prepay, a prepayment penalty is charged which helps partially offset additional amortization of loan premiums and securitization costs related to the prepaid mortgages. During the first nine months of 2007, prepayment penalties received from borrowers were recorded as interest income and decreased 12 basis points to 9 basis points of mortgage assets as compared to 21 basis points of mortgage assets during the same period of 2006.
Adjusted net interest margins on mortgage assets, which is a non-GAAP financial measurement as indicated in the yield table above, increased by 19 basis points as compared to an increase of 41 basis points on net interest margin on mortgage assets in the prior year. Adjusted net interest margin on mortgage assets did not increase as much as net interest margin on mortgage assets primarily due to a 25 basis point decrease in realized gains from derivative instruments. Realized gains from derivative instruments partially offset the decline in net interest margins on mortgage assets associated with increases in borrowing costs.
Adjusted net interest margins were also affected during the second half of 2007 by our interest rate risk management policies which include the employment of balance guarantees that limit our derivatives to no more than 100% coverage of the principal amount outstanding on certain securitized mortgage borrowings at any given time. Our interest rate risk management policies are formulated with the intent to offset the potential adverse effects of changing interest rates primarily associated with cash flows on adjustable rate securitized mortgage borrowings. By design, our current interest rate risk management program typically provides 20% to 25% coverage of the outstanding principal balance of our six month LIBOR ARMs and 80% to no more than 98% coverage of the outstanding principal balance of intermediate, or hybrid, ARMs at the point in time that we securitize the mortgages. During the third quarter, as a result of declining interest rates and rising derivative liabilities, the Company closed substantially all open hedge positions that were not included in the bankruptcy remote securitized borrowings collateral trusts, which included all hedge positions on its loans held-for-sale.
45

~~For further information on our interest rate risk management policies refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”~~
~~Provision for Loan Losses~~
The Company provides for loan losses in accordance with its policies that include an analysis of the loan portfolio to determine estimated loan losses expected in the next 12 to 18 months. The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses, is based on delinquency trends and prior loan 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 impacting credit quality and inherent losses. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created.
The allowance for loan losses was $911.2 million at September 30, 2007, and was comprised of specific reserves of $4.0 million and a loan portfolio reserve of $907.2 million. Exclusive of specific reserves, the Company maintained an allowance for securitized mortgage collateral and mortgage loans held-for-investment for loan losses of 485 basis points at September 30, 2007 compared to 34 basis points at December 31, 2006. The Company believes the total allowance for loan losses is adequate to absorb losses inherent in the loan portfolio at September 30, 2007, barring deterioration in future trends in excess of our expectations.
~~For further information on delinquencies in our long-term investment portfolio and non-performing assets refer to “Financial Condition and Results of Operations—Credit Risk.”~~
Non-Interest Income
~~For the Three Months Ended September 30, 2007 compared to the Three Months Ended September 30, 2006:~~

Changes in Non-Interest Income
~~(dollars in thousands)~~

Three Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

Change in fair value of derivative instruments

$
(137,553
)
$
(150,051
)
$
12,498

8
%
Realized gain from derivative instruments

28,815

60,595

(31,780
)
(52
)
Provision for repurchases

(4,553
)
—

(4,553
)
(100
)
(Loss) gain on sale of other real estate owned

(5,571
)
485

(6,056
)
(1249
)
Amortization of mortgage servicing rights

(188
)
(380
)
192

51

Other (expense) income

(1,056
)
8,383

(9,439
)
(113
)
Lower of cost or market writedown

(6,657
)
—

(6,657
)
(100
)
Loss on sale of loans

(27,586
)
(20
)
(27,566
)
(137,830
)
Provision for REO losses

(40,371
)
—

(40,371
)
(100
)
Total non-interest income

$
(194,720
)
$
(80,988
)
$
(113,732
)
(140
)%

For the Three Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Change in fair value of derivative instruments

—

91,670

(91,670
)
n/a
%
Change in fair value of net trust assets, excluding REO

(11,161
)
—

(11,161
)
n/a

Change in fair value of trust preferred securities

(997
)
—

(997
)
n/a

Losses from real estate owned

(4,830
)
(19,328
)
14,498

75

Real estate advisory fees

4,696

—

4,696

n/a

Other

1,544

(1,538
)
3,082

200

Total non-interest income

$
(10,748
)
$
70,804

$
(81,552
)
(115
)%

Change in Fair Value of Derivative ~~Instruments.~~ Instruments. The change in the fair value of derivative instruments decreased by $91.7 million during the second quarter of 2008 as compared to the second quarter of 2007, as the Company no longer recognizes the derivative fair value adjustments as a separate component of non-interest income. As a result of the adoption of SFAS 159 the Company now recognizes changes in the fair value of derivative instruments as a component of the change in fair value of net trust assets. The change in fair value of derivative instruments ~~increased income by $12.5~~was a gain of $98.3 million (8 percent) during the third quarter of 2007 as compared to the third quarter of 2006. The amount of market valuation adjustment is primarily the result of changes in the expectation of future interest rates and partially offset by actual cash receipts on derivative instruments. We primarily enter into derivative contracts to offset a portion of the changes in cash flows associated with securitized mortgage borrowings. We record a market valuation adjustment for these derivatives, as a current period expense or income. ~~Changes in fair value of derivatives at IMH are included in GAAP net earnings and excluded for purposes of calculating estimated taxable income~~.
~~Realized Gain from Derivative Instruments~~. Realized gains from derivatives decreased by $31.8 million (52 percent) during the third quarter of 2007 as compared to the third quarter of 2006, or 55 basis points of total average mortgage assets during the second quarter of 2007 as compared to 110 basis points of total average mortgage assets during the second quarter of 2006. The decrease in realized gains is primarily due to a decrease in the notional balance of the trusts. Realized gains2008.

46

Change in Fair Value of Net Trust Assets. The Company recognized a $11.2 million loss from ~~derivatives are recorded as current period expense or revenue on our consolidated financial statements and are included in~~ the ~~calculation of taxable income.~~ Realized gains exclude the mark to market gains or losses that are realized for tax purposes at the taxable REIT subsidiaries when the loans held-for-sale are deposited into the securitization trust, and the related derivatives are deposited into a swap trust. These gains are not realized for GAAP purposes, as the deposit of the derivatives into the swap trust are considered an inter-company transfer, as the REIT consolidates the swap trust. For GAAP purpose, these gains and losses are included in change in fair value of net trust assets, which is comprised of a loss in the increase of fair value of securitized mortgage borrowings of $88.9 million, gain in the fair value of derivatives instruments of $98.3 million and losses on the reduction in fair value of securitized mortgage collateral and investment securities available-for-sale of $19.0 million, and $1.5 million, respectively. The overall reduction in fair value of the securitized mortgage collateral and securitized mortgage borrowings is the result of a decrease in the fair value of derivative ~~instruments.~~instruments, a decrease in London Interbank Offered Rate (LIBOR) reflected in the forward yield curve and a decrease in the market prices of our mortgage-backed securities.
39

Table of Contents

~~Loss on Sale~~Change in the Fair Value of ~~Loans.~~Trust Preferred Securities. ~~The Company recorded a loss on~~During the ~~sale of loans of $27.6 million during the third~~second quarter of ~~2007 as a result of a $24.4 million loss on the sale of all the remaining financial interest in one of the Company’s securitizations that~~2008 the Company ~~sold to~~recognized a ~~lender in settlement of all obligations owed on that security.~~
~~Provision for REO loss.~~ ~~During the third quarter of 2007, the Company recorded a provision for REO losses~~loss in the amount of ~~$40.4~~$1.0 million as a result of ~~changes~~increase in the ~~net realizable~~fair value of the real estate owned subsequent to the foreclosure date, due to increases in loss severities on recent REO liquidations as a result of an increase in homes for sale in the marketplace, a reduction in demand due to declining prices (as home buyers postpone home purchases, thereby exacerbating home price declines), and a reduced ability for borrowers to obtain financing.
~~Changes in Non-Interest Income~~
~~(dollars in thousands)~~

Nine Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

Change in fair value of derivative instruments

$
(138,334
)
$
(91,155
)
$
(47,179
)
(52
)%
Realized gain from derivative instruments

103,840

156,582

(52,742
)
(34
)
Provision for repurchases

(4,553
)
—

(4,553
)
(100
)
(Loss) gain on sale of other real estate owned

(6,716
)
1,740

(8,456
)
(486
)
Amortization of mortgage servicing rights

(603
)
(1,112
)
509

46

Lower of cost or market writedown

(7,396
)
—

(7,396
)
(100
)
Other (expense) income

4,367

26,664

(22,297
)
(84
)
Loss on sale of loans

(26,195
)
(1,407
)
(24,788
)
(1762
)
Provision for REO losses

(68,445
)
—

(68,445
)
(100
)
Total non-interest income

$
(144,035
)
$
91,312

$
(235,347
)
(258
)%
trust preferred securities.
~~Realized Gain from Derivative Instruments~~. Realized gains from derivatives decreased by $52.7 million (34 percent) during the first nine months of 2007 as compared to the same period in 2006, or 63 basis points of total average mortgage assets during the first nine months of 2007 as compared to 88 basis points of total average mortgage assets during the same period in 2006. The decrease in realized gains is primarily due to a decrease in the notional balance of the trusts. Realized gains from derivatives are recorded as current period expense or revenue on our consolidated financial statements and are included in the calculation of taxable income.

For the Six Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Change in fair value of derivative instruments

—

73,672

(73,672
)
n/a
%
Change in fair value of net trust assets, excluding REO

(7,633
)
—

(7,633
)
n/a

Change in fair value of trust preferred securities

(5,020
)
—

(5,020
)
n/a

Losses from real estate owned

(9,086
)
(29,220
)
20,134

69

Real estate advisory fees

8,540

—

8,540

n/a

Other

3,442

3,749

(307
)
(8
)
Total non-interest income

$
(9,757
)
$
48,201

$
(57,958
)
(120
)%

Change in Fair Value of Derivative ~~Instruments.~~ Instruments. The change in the fair value of derivative instruments decreased by $73.7 million during the first six months of 2008 as compared to the first six months of 2007, as the Company no longer recognizes the derivative fair value adjustments as a separate component of non-interest income. As a result of the adoption of SFAS 159 the Company now recognizes changes in the fair value of derivative instruments as a component of the change in fair value of net trust assets. The change in fair value of derivative instruments ~~decreased by $47.2~~was a loss of $83.5 million ~~(52 percent)~~ during the ~~third quarter~~first six months of ~~2007 as compared to~~2008.
Change in Fair Value of Net Trust Assets. The Company recognized a $7.6 million loss from the ~~third quarter~~change in fair value of ~~2006. The amount~~net trust assets, which is comprised of ~~market valuation adjustment is primarily~~gains on the ~~result~~reduction of ~~actual cash receipts on derivative instruments, and changes in the expectation~~fair value of ~~future interest rates. We primarily enter into derivative contracts to offset a portion of the changes in cash flows associated with~~ securitized mortgage borrowings asof $3.3 billion, loss on the Federal Open Market Committee has reduced the federal funds rate by 50 basis points in September 2007. We record a market valuation adjustment for these derivatives as current period expense or income. ~~Changes~~reduction in fair value of derivatives ~~at IMH are included~~instruments of $83.5 million and losses on the reduction in ~~GAAP net earnings~~fair value of securitized mortgage collateral and ~~excluded for purposes~~investment securities available-for-sale of ~~calculating estimated taxable income~~$3.2 billion and $5.8 million, respectively. The overall reduction in fair value of the securitized mortgage collateral and securitized mortgage borrowings is the result of a decrease in the fair value of derivative instruments, a decrease in London Interbank Offered Rate (LIBOR) reflected in the forward yield curve and a decrease in the market prices of our mortgage-backed securities..

~~Loss on Sale~~Change in the Fair Value of ~~Loans.~~Trust Preferred Securities. The Company recorded a loss on the sale of loans of $26.2 million during the nine months ended September 30, 2007 as a result of a $24.4 million loss on the sale of all of the remaining financial interest in one of the Company’s securitizations that the Company sold to a lender in settlement of all obligations owed on that security.
47

~~Provision for REO loss.~~ During the first ~~nine~~six months of ~~2007,~~2008 the Company ~~recorded~~recognized a ~~provision for REO losses~~loss in the amount of ~~$68.4~~$5.0 million as a result of ~~changes~~increase in the ~~net realizable~~fair value of the real estate owned subsequent to the foreclosure date, due to increases in severities on REO liquidations as a result of an increase in homes for sale in the marketplace, a reduction in demand due to declining prices (as home buyers postpone home purchases, thereby exacerbating home price declines), and a reduced ability for borrowers to obtain financing.trust preferred securities.

Non-Interest Expense

Changes in Non-Interest Expense
~~(dollars in thousands)~~

Three Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

General and administrative and other expense

$
8,154

$
1,868

$
6,286

337
%
Occupancy expense

4,814

413

4,401

1,066

Personnel expense

6,127

2,234

3,893

174

Data processing expense

1,425

1,478

(53
)
(4
)
Professional services

622

285

337

118

Equipment expense

493

502

(9
)
(2
)
Total operating expense

$
21,635

$
6,780

$
14,855

219
%

For the Three Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

General and administrative

$
4,925

$
4,451

$
474

11
%
Personnel expense

2,820

1,620

1,200

74

Total operating expense

$
7,745

$
6,071

$
1,674

28
%

Total non-interest expenses remained increased ~~$14.9 million (219 percent)~~ on a quarter-over-quarter basis as ~~general and administrative expenses have~~personnel expense increased ~~$6.3~~$1.2 million ~~(337 percent) and occupancy expenses have increased $4.4 million (1,066~~(74 percent) during the ~~third~~second quarter of ~~2007~~2008 as compared to same period in ~~2006. The increase is primarily the result of the costs from the Company’s retail mortgage operations that was acquired in the third quarter of~~ 2007, as a ~~result there~~greater amount of the Company’s personnel costs are ~~not comparable expense amounts~~being utilized within the continuing operations versus discontinued operations. The $474 thousand increase in ~~the prior year. Occupancy expense increased $4.4 million from the prior year, as the Company recorded a $2.3 million restructuring charge for certain leases that were ceased~~general and administrative costs is primarily attributable to ~~be used~~an increase in ~~its retail operations. Additionally, the retail mortgage operations included $1.7 million~~professional expenses.
40

Table of ~~lease charges with no comparable costs in the prior year.~~Contents

Changes in Non-Interest Expense
~~(dollars in thousands)~~

Nine Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

General and administrative and other expense

$
25,293

$
5,831

$
19,462

334
%
Personnel expense

14,089

4,151

9,938

239

Occupancy expense

6,986

1,263

5,723

453

Data processing expense

4,181

3,434

747

22

Professional services

2,212

1,464

748

51

Equipment expense

1,400

1,565

(165
)
(11
)
Total operating expense

$
54,161

$
17,708

$
36,453

206
%

For the Six Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

General and administrative

$
8,912

$
9,960

$
(1,048
)
(11
)%
Personnel expense

5,150

2,464

2,686

109

Total operating expense

$
14,062

$
12,424

$
1,638

13
%

Total non-interest expenses increased ~~$36.5~~as personnel expense increased $2.7 million ~~(206~~(109 percent) during the first ~~nine~~six months of ~~2007 as general and administrative expenses have increased $19.5 million (324 percent) and personnel expenses have increased $9.9 million (239 percent) during the third quarter of 2007~~2008 as compared to same period in ~~2006. The increase is primarily the result of the costs from the Company’s retail mortgage operations that was acquired in the third quarter of 2007;~~2007, as a result there are not comparable expense amounts in the prior year. Occupancy expense increased $5.7 million from the prior year, as the Company recorded a $2.3 million restructuring charge for certain leases that were ceased to be used in its retail operations. Additionally, the retail mortgage operations included $2.3 million of lease charges with no comparable costs in the prior year.
48

~~Mortgage Acquisitions and Originations by Continuing and Discontinuing Operations Channel~~
~~The following table summarizes the principal balance of mortgage acquisitions and originations for the periods indicated (in thousands):~~

Three Months Ended September 30,

2007

2006

Principal

Principal

By Production Channel:

Balance

%

Balance

%

Correspondent acquisitions:

Flow

$
24,581

4

$
1,104,017

33

Bulk

69,615

11

1,191,686

35

Total correspondent acquisitions

94,197

15

2,295,703

68

Retail originations (1)

260,917

42

—

—

Wholesale originations

221,602

36

846,803

25

Total mortgage operations acquisitions

576,716

94

3,142,506

93

Commercial Mortgage Operations

39,085

6

233,894

7

Total acquisitions and originations

$
615,801

100

$
3,376,400

100

~~(1)Originations are from continuing retail operations conducted by IHL.~~
~~Acquisitions and originations decreased to $615.8 million for the third quarter of 2007 as compared to $3.4 billion for the same period in 2006. The cessation~~greater amount of the Company’s ~~ability~~personnel costs are being utilized within the continuing operations versus discontinued operations. The $1.0 million decrease in general and administrative costs is primarily attributable to ~~sell loans resulted~~a decrease in ~~the discontinuation of the Flow, Bulk, Wholesale~~data processing, communications costs, and ~~Commercial production channels are the primary reason for the decline~~occupancy expense offset by an increase in ~~production.~~

Nine Months Ended September 30,

2007

2006

Principal

Principal

By Production Channel:

Balance

%

Balance

%

Correspondent acquisitions:

Flow

$
473,603

11

$
3,766,955

46

Bulk

1,300,690

29

1,661,781

20

Total correspondent acquisitions

1,774,293

40

5,428,736

66

Retail originations (1)

408,271

10

—

—

Wholesale originations

1,920,900

43

2,014,900

25

Total mortgage operations acquisitions

4,103,464

92

7,443,636

91

Commercial Mortgage Operations

394,962

8

713,829

9

Total acquisitions and originations

$
4,498,426

100

$
8,157,465

100

~~(1)Originations are from continuing retail operations conducted by IHL.~~professional expenses.

Acquisitions and originations decreased to $4.5 billion for the first nine months of 2007 as compared to $8.2 billion for the same period in 2006. The cessation of the Company’s ability to sell loans resulted in the discontinuation of the Flow, Bulk, Wholesale and Commercial production channels are the primary reason for the decline in production.
49

Results of Operations by Business Segment

~~Long-Term Investment~~Continuing Operations

Condensed Statements of Operations Data
~~(dollars in thousands)~~

Three Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

Net interest income (expense)

$
3,040

$
(44,131
)
$
47,171

107
%
Provision for loan losses

789,445

3,533

785,912

22,245

Net interest expense after provision for loan losses

(786,405
)
(47,664
)
(738,741
)
(1550
)

Realized gain from derivative instruments

28,815

60,595

(31,780
)
(52
)
Change in fair value of derivative instruments

(135,347
)
(150,051
)
14,704

10

Other non-interest income

(76,159
)
6,803

(82,962
)
(1,219
)
Total non-interest income

(182,691
)
(82,653
)
(100,038
)
(121
)

Non-interest expense

7,262

6,780

482

7

Net loss

$
(976,358
)
$
(137,097
)
$
(839,261
)
(612
)%

For the Three Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
4,256

$
7,874

$
(3,618
)
(46
)%
Provision for loan losses

—

161,163

(161,163
)
n/a

Net interest income (expense) after provision for loan losses

4,256

(153,289
)
157,545

103

Change in fair value of net trust assets, excluding REO

(11,161
)
—

(11,161
)
n/a

Change in fair value of derivative instruments

—

91,670

(91,670
)
n/a

Real estate advisory fees

4,696

—

4,696

n/a

Other non-interest income (expense)

(4,283
)
(20,866
)
16,583

79

Total non-interest (expense) income

(10,748
)
70,804

(81,552
)
(115
)

Non-interest expense and income taxes

9,947

11,040

(1,093
)
(10
)
Net (loss) earnings from continuing operations

$
(16,439
)
$
(93,525
)
$
77,086

82
%

Net loss for the quarter ended ~~September~~June 30, ~~2007 increased $839.3 million (612 percent) to a loss of $976.4~~2008 decreased $77.1 million as compared to the ~~third~~second quarter of ~~2006.~~2007. The ~~quarter-over-quarter decrease~~primary reason for the reduction in net ~~earnings was primarily due to~~loss is the ~~increase in the~~adoption of SFAS 159 for securitized mortgage collateral, borrowings and trust preferred securities. The Company no longer records a provision for loan losses ~~which increased $785.9~~($161.2 million for the ~~third~~second quarter of ~~2007 as compared to~~2007) and separately the third quarter of 2006, due to increased delinquencies. In addition, the Company has observed an increase in loss severities on its REO liquidations, which is used to estimate the severities on our REO inventory.
Net interest income increased $47.2 million (107 percent) quarter over quarter, primarily as a result of a decrease in projected prepayment speeds which reduced the amortization of loan premiums, which increased interest income. The decreased amortization was affected by the reduced prepayment rates, which resulted from the sharp decline in available mortgage products for non-conforming borrowers and declining housing prices reducing the equity in the borrowers’ properties. Additionally, the Company’s adjusted coupon rates have increased in excess of the increase in borrowing costs, compared to the prior year.
Realized gain (loss) from derivatives decreased to $28.8 million for the third quarter of 2007 compared to $60.6 million for the third quarter of 2006, as a result of a decrease in the size of the mortgage portfolio, and the decrease in the size of the underlying notional balance of the derivatives.
~~The~~ change in fair value onof derivative instruments ~~decreased $14.7~~($91.7 million gain for the ~~third~~second quarter of ~~2007 as compared to the third quarter of 2006. The market valuation adjustment~~2007), which is ~~primarily the result of changes~~now included in the ~~expectation~~change in fair value of ~~future interest rates.~~
~~Additionally, other non-interest income decreased $83.0~~net trust assets, which consisted of a $98.3 million ~~primarily~~gain on derivatives offset by a $109.5 million decrease in the fair value of the remaining net trust assets, due to the ~~provision for REO losses increasing $40.4~~decline in forward LIBOR rates. The fair value of trust preferred securities increased $1.0 million ~~for~~during the ~~third~~second quarter of 2007, as compared to no provision for REO losses for the third quarter of 2006, as a result of the decline in home prices. Also contributing to the decrease in other non-interest income was a loss of $24.4 million on the sale of a financed interest in one of the Company’s securitizations that the Company sold to a repo lender in settlement of all obligations owed on that security.2008.

5041

~~Condensed Statements~~Table of ~~Operations Data~~
~~(dollars in thousands)~~

Nine Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

Net interest income (expense)

$
383

$
(91,593
)
$
91,976

100
%
Provision for loan losses

979,740

3,638

976,102

26,831

Net interest expense after provision for loan losses

(979,357
)
(95,231
)
(884,126
)
(928
)

Realized gain from derivative instruments

103,840

156,582

(52,742
)
(34
)
Change in fair value of derivative instruments

(136,701
)
(95,185
)
(41,516
)
(44
)
Other non-interest income

(102,767
)
21,332

(124,099
)
(582
)
Total non-interest income

(135,628
)
82,729

(218,357
)
(264
)

Non-interest expense

19,702

17,708

1,994

11

Net loss

$
(1,134,687
)
$
(30,210
)
$
(1,104,477
)
(3,656
)%
Net loss for the nine months ended September 30, 2007 increased $1.1 billion (3,656 percent) to a loss of $1.1 billion, as compared to the same period in 2006. The decrease in net earnings was primarily due to the increase in the provision for loan losses which increased $976.1 million, due to increased severities on REO liquidations, coupled with increased mortgage delinquency dollars. Net interest income increased $92.0 million (100 percent), primarily as a result of a decrease in projected prepayment speeds which reduced the amortization of loan premiums, which increased interest income. Additionally, the Company’s adjusted coupon rates have increased in excess of the increase in borrowing costs, compared to the prior year.
Realized gain (loss) from derivatives which decreased to $103.8 million compared to $156.6 million for the first nine months of 2006, as a result of a decrease in the size of the mortgage portfolio, and the size of the underlying notional balance of the derivatives.
~~The change in fair value on derivative instruments decreased $41.5 million due to changes in the expectation of future interest rates.~~
Additionally, other non-interest income decreased $124.1 million primarily due to the provision for REO losses increasing to $68.4. million, as compared to no provision for REO losses for the first nine months of 2006. Also contributing to the decrease in other non-interest income was a loss of $24.4 million on the sale of a financed interest in one of the Company’s securitizations that the Company sold to a repo lender in settlement of all obligations owed on that security.
51

~~Retail Operations~~Contents

Condensed Statements of Operations Data
~~(dollars in thousands)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2007

Net interest income (expense)

$
(116
)
$
(312
)
Provision for loan losses

—

—

Net interest income (expense) after provison for loan losses

$
(116
)
$
(312
)

Gain on sale of loans

143

2,804

Lower of cost or market writedown

(6,657
)
(4,553
)
Provision for repurchases

(4,553
)
(7,396
)
Other income

(1,971
)
(1,409
)
Non-interest expense and income taxes

14,373

34,459

Net loss

$
(27,527
)
$
(45,325
)
~~On May 31, 2007, the Company acquired production facilities from Pinnacle Financial Corporation (PFC), later renamed Impac Home Loans (IHL) located primarily on the east coast of the United States.~~ ~~Therefore, there is no corresponding three or nine month 2006 comparison.~~
The retail operations generates income by selling mortgages to permanent investors, and, to a lesser extent, earns revenue from fees associated with mortgage servicing rights, and interest income earned on mortgages held-for-sale.

For the Six Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
11,605

$
15,817

$
(4,212
)
(27
)%
Provision for loan losses

—

190,295

(190,295
)
n/a

Net interest income (expense) after provision for loan losses

11,605

(174,478
)
186,083

107

Change in fair value of net trust assets, excluding REO

(7,633
)
—

(7,633
)
n/a

Change in fair value of derivative instruments

—

73,672

(73,672
)
n/a

Real estate advisory fees

8,540

—

8,540

n/a

Other non-interest income (expense)

(10,664
)
(25,471
)
14,807

58

Total non-interest (expense) income

(9,757
)
48,201

(57,958
)
(120
)

Non-interest expense and income taxes

22,790

21,380

1,410

7

Net (loss) earnings from continuing operations

$
(20,942
)
$
(147,657
)
$
126,715

86
%

Net loss for the ~~retail operations was a loss of $27.5~~six months ended June 30, 2008 decreased $126.7 million ~~primarily due~~as compared to the ~~following:~~
·~~$4.6 million~~first six months of 2007. The primary reason for the reduction in net loss is the result of the adoption of SFAS 159 for securitized mortgage collateral, borrowings and trust preferred securities. The Company no longer records a provision for ~~repurchases;~~
·                  ~~$6.7~~loan losses ($190.3 million for the first six months of 2007) and separately the change in fair value of derivative instruments ($73.7 million gain for the first six months of 2007), which is now included in the change in fair value of net trust assets, which consisted of a $83.5 million loss on ~~lower of cost or market writedown on loans held-for-sale; and~~
·~~non-interest expense and income taxes of $14.4 million.~~
~~The Company recorded loans held-for-sale at the lower of cost or market resulting in~~derivatives offset by a ~~$6.7~~$75.9 million write-down of loans held-for-sale as current market conditions, such as the widening of credit and bond spreads and a lack of demand for mortgage product forced the loans to drop in value. The $6.7 million writedown was primarily due to a decreaseincrease in the fair value of the remaining net trust assets, due to the decline in ~~the marketplace for loans, as investors require a higher yield, which reduced the~~forward LIBOR rates. The fair value of ~~our loans held-for-sale. The retail operations are reflected as a stand-alone entity for segment financial reporting purposes; however, on~~trust preferred securities increased $5.0 million during the ~~consolidated financial statements inter-company loan sales and related gains are eliminated.~~
~~Non-interest expense and income taxes were $14.4 million which was primarily the result~~first six months of occupancy expense of $4.0 million, which includes a $2.3 million lease abandonment charge and general and administrative expenses of $4.7 million for the third quarter of 2007. Additionally, the retail operations recorded a $1.2 million impairment on property plant and equipment in which the book value exceeded the fair value.2008.
52

Discontinued Operations
Condensed Statements of Operations Data
~~(dollars in thousands)~~

Three Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

Net interest income (expense)

$
3,082

$
6,915

$
(3,833
)
(55
)%
Provision for loan losses

2,807

(350
)
3,157

902

Net interest income (expense) after provison for loan losses

$
275

$
7,265

$
(6,990
)
(96
)

Gain on sale of loans

(39,287
)
4,926

(44,213
)
(898
)
Lower of cost or market writedown

(99,067
)
—

(99,067
)
(100
)
Provision for repurchases

(11,165
)
15,876

(27,041
)
(170
)
Other income

(6,120
)
(5,290
)
(830
)
(16
)
Non-interest expense and income taxes

38,713

26,041

12,672

49

Net loss

$
(194,077
)
$
(3,264
)
$
(190,813
)
(5,846
)%
During the third quarter of 2007, the Company announced plans to exit its mortgage origination (excluding retail mortgage operations), commercial origination, and warehouse lending operations. These businesses are presented as discontinued operations in the Company’s consolidated financial statements.

For the Three Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
1,543

$
5,109

$
(3,566
)
(70
)%
Provision for loan losses

—

(1,818
)
1,818

n/a

Net interest income after provison for loan losses

$
1,543

$
3,291

$
(5,384
)
(164
)

Loss on sale of loans

(8,246
)
(6,525
)
(1,721
)
(26
)
Provision for repurchases

(1,823
)
(18,889
)
17,066

90

Other income (loss)

1,715

(8,875
)
10,590

119

Personnel expense

(3,680
)
(22,021
)
18,341

83

Non-interest expense and income taxes

(557
)
(6,003
)
5,446

91

Net loss

$
(11,048
)
$
(59,022
)
$
47,974

81
%

Net ~~earnings~~loss for the discontinued operations decreased ~~$194.1~~$48.0 million ~~(5,846 percent)~~ primarily due to the following changes:

·                  decrease of ~~$44.2~~$17.1 million in ~~gains from the sale of loans;~~provision for repurchases.

·                  ~~increase~~decrease in other income (loss) of ~~$27.0 million in provision for repurchases; and~~$10.6 million.

·                  ~~increase~~decrease in ~~charges to~~personnel expense of ~~$99.1 million for the change in valuation of loans held-for-sale (LOCOM).~~$18.3 million.

42

~~Gains from the sale~~Table of loans decreased $44.2 million primarily as a result of the Company’s exchange of the Company’s ISAC SD 06-1, in settlement of borrowing obligations. The Company recorded a loss of $24.4 million which represented the difference between the GAAP basis of the loans and the borrowings outstanding on the repo line at the date the interests in the securitization were exchanged for payoff of the debt. Additionally the pricing obtained on loans sold to third parties was significantly reduced, when compared to the prior years execution prices, as the market value of performing and non-performing loans decreased due to the saturation of loans for sale in the market place and the ~~deterioration in the prevailing real estate market and economic conditions~~.Contents

Provision for repurchases ~~increased $27.0~~decreased $17.1 million ~~(170 percent)~~ during the ~~third~~second quarter of ~~2007~~2008 as compared to ~~the third quarter of 2006.~~2007. The ~~increase~~decrease in the provision for repurchases was primarily due to anthe settlement of $117 repurchase obligations.
Other income (loss) increased $10.6 million during the second quarter of 2008 as compared to 2007. The increase ~~in severities~~was mainly attributable to the Company recording a goodwill impairment charge of ~~actual losses, which resulted from a decrease in~~$12.4 million during the ~~perceived credit quality~~second quarter of 2007 related to the ~~loans subject to repurchase.~~acquisition of certain production facilities.

The Company recorded loans held-for-sale at the lower of cost or market resulting in a $99.1 million increase in the write-down of loans held-for-sale as current market conditions, such as the widening of credit and bond spreads and a lack of demand for mortgage product forced the loans to decline in value. The $99.1 million write-down was primarily attributable to a decrease in personnel expense during the ~~weighted average market price for loans. The Company accumulated $1.6 billion~~quarter was a result of ~~loans as~~more costs being allocated to continuing operations due to the discontinuation of ~~June 30, 2007 in~~ the ~~normal course of business, however with the deterioration in the credit markets the Company was unable to securitize or sell these loans as planned, which resulted in significant margin calls. The~~ mortgage commercial, and warehouse lending operations are reflected as discontinued operations for financial reporting purposes; however, on the financial statements inter-company loan sales, related gains, finance receivables and borrowings are eliminated.operations.

During the three months ended September 30, 2007, the mortgage operations recorded a restructuring charge of $4.2 million, for the fair value of lease costs that were ceased to be utilized at September 30, 2007, included in non-interest expense above. Additionally, the mortgage operations recorded an $11.6 million impairment on property plant and equipment in which the book value exceeded the fair value.
53

~~Condensed Statements of Operations Data~~
~~(dollars in thousands)~~

Nine Months Ended September 30,

Increase

%

2007

2006

(Decrease)

Change

Net interest income (expense)

$
13,915

$
18,958

$
(5,043
)
(27
)%
Provision for loan losses

4,867

(350
)
5,217

1,491

Net interest income (expense) after provison for loan losses

$
9,048

$
19,308

$
(10,260
)
(53
)

Gain on sale of loans

(47,401
)
37,057

(84,458
)
(228
)
Provision for repurchases

(41,883
)
(7,233
)
(34,650
)
(479
)
Lower of cost or market writedown

(133,203
)
(15,283
)
(117,920
)
(772
)
Other income

(4,963
)
(1,396
)
(3,567
)
(256
)
Non-interest expense and income taxes

84,404

63,376

21,028

33

Net loss

$
(302,806
)
$
(30,923
)
$
(271,883
)
(879
)%
During the third quarter of 2007, the Company announced plans to exit its mortgage, commercial, and warehouse lending operations. These businesses were presented as discontinued operations in the Company’s financial statements.

For the Six Months Ended June 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
3,213

$
10,622

$
(7,409
)
(70
)%
Provision for loan losses

—

(2,061
)
2,061

n/a

Net interest income after provison for loan losses

$
3,213

$
8,561

$
(9,470
)
(111
)

Loss on sale of loans

(8,711
)
(40,327
)
31,616

78

Provision for repurchases

8,435

(30,718
)
39,153

127

Other income (loss)

1,255

(11,202
)
12,457

111

Personnel expense

(8,973
)
(39,563
)
30,590

77

Non-interest expense and income taxes

(5,579
)
(13,309
)
7,730

58

Net loss

$
(10,360
)
$
(126,558
)
$
116,198

92
%

Net ~~earnings~~loss for the discontinued operations decreased ~~$271.9~~$116.2 million ~~(879 percent)~~ primarily due to the following changes:

·                  decrease of ~~$84.5~~$31.6 million in ~~gains from the~~loss on sale of ~~loans;~~loans.

·                  ~~increase~~decrease of ~~$34.7~~$39.2 million in provision for ~~repurchases; and~~repurchases.

·                  ~~increase~~decrease in ~~charges to expense~~other income (loss) of ~~$117.9 million for the change in valuation of loans held-for-sale.~~$12.5 million.

~~Gains from the~~·decrease in personnel expense of $30.6 million.
Loss on sale of loans decreased ~~$84.5~~$31.6 million ~~primarily as~~to an $8.7 million loss in the first six months of 2008. The decrease was due to a ~~result~~significant reduction in the balance of loans held-for-sale between periods resulting from collections, prepayments, loan sales, securitizations and reduced LOCOM adjustments. For the ~~Company’s exchange~~six months ended June 30, 2008, gain on sale of ~~the Company’s ISAC SD 06-1, in settlement of borrowing obligations. The Company recorded~~loans $7.5 million, compared to a loss of ~~$24.4~~$5.5 million ~~which represented the difference between the GAAP basis of the loans and the borrowings outstanding on the repo line at the date the interests~~ in the ~~securitization were exchanged for payoff~~comparable period of 2007. For the ~~debt. Additionally the pricing obtained on loans sold to third parties was significantly reduced, when~~six months ended June 30, 2008, we recorded $16.2 million in additional LOCOM adjustments, compared to $34.9 million for the ~~prior years execution prices, as the market value~~comparable period of ~~performing and non-performing loans decreased due to the saturation of loans for sale in the market place and the~~ ~~deterioration in the prevailing real estate market and economic conditions~~.2007.

Provision for repurchases ~~increased $34.7~~decreased $39.2 million ~~(479 percent)~~ during the ~~third quarter~~first six months of ~~2007~~2008 as compared to ~~the third quarter of 2006.~~2007. The ~~increase~~decrease in the provision for repurchases was primarily due to ~~an increase~~the settlement of $117 million in ~~severities of actual losses, which resulted from a decrease in the perceived credit quality of the loans subject to repurchase.~~repurchase obligations.

~~The Company recorded loans held-for-sale at the lower of cost or market resulting in a $117.9~~Other income (loss) increased $12.5 million increase in the write-down of loans held-for-sale as current market conditions, such as the widening of credit and bond spreads and a lack of demand for mortgage product forced the loans to decline in value. The $117.9 million write-down was primarily attributable to a decrease in the weighted average market price loans. The Company accumulated $1.6 billion of loans as of June 30, 2007 in the normal course of business, however with the deterioration in the credit markets the Company was unable to securitize or sell these loans as planned, which resulted in significant margin calls. The mortgage, commercial, and warehouse lending operations are reflected as discontinued operations for financial reporting purposes; however, on the financial statements inter-company loan sales, related gains, finance receivables and borrowings are eliminated.
54

~~Liquidity and Capital Resources~~
It has been our policy to have adequate liquidity to cover normal cyclical swings in funding availability and mortgage demand and to allow us to meet abnormal and unexpected funding requirements. However, based on the unprecedented volatility in the marketplace since the beginning of the third quarter it has become difficult to anticipate future conditions, and meet these objectives of available liquidity. The Company accumulated $1.6 billion of loans as of June 30, 2007 in the normal course of business, however with the deterioration in the credit markets the Company was unable to securitize or sell these loans ~~as planned~~, which resulted in significant margin calls. As of September 30, 2007, the Company’s largest liquidity usage was the margin calls required on its remaining reverse repurchase lines of credit. The Company does not anticipate any further significant margin calls on the loans held-for-sale. However, since we still have certain facilities outstanding, there can be no assurances the Company may not receive future margin calls nor can we make any assurances that we would satisfy these margin calls. The Company’s usage of liquidity in order of significance consisted of the following:
·                  ~~meeting margin call requirements on loans held-for-sale,~~
·                  ~~settling obligations related to the Company’s repurchase obligations, and~~
·                  ~~normal payroll, lease obligations and other operating expenditures.~~
We plan to meet liquidity requirements through effectively managing our assets and maximizing recovery on our investments with the goal of avoiding unplanned sales of assets or emergency borrowing of funds. Toward this goal, our asset/liability committee, or “ALCO,” is responsible for monitoring our liquidity position and funding needs.
ALCO participants include senior executives of the Company. ALCO meets on a weekly basis to review current and projected sources and uses of funds. ALCO monitors the composition of the balance sheet for changes in the liquidity of our assets. Our primary liquidity consists of cash and cash equivalents; short-term securities available for sale, and maturing mortgages, or “liquid assets.”
We believe that current cash balances, short-term investments, current financing facilities, excess cash flows generated from our long-term mortgage portfolio, and master servicing fees will provide for projected funding needs. However, the secondary market is rapidly evolving and the performance of the long-term mortgage portfolio is subject to the deteriorating real estate market and current credit crisis, and the potential impact on the Company is unknown. Additionally, as the Company liquidates REOs the resulting losses will reduce the cash receipts from the securitized mortgage collateral. Also the ability of the Company to reduce its lease obligations will effect the future cash flows.
~~Our operating businesses primarily use available funds as follows:~~
·                 ~~origination of mortgages by the retail mortgage operations;~~
·                  ~~pay interest on remaining reverse warehouse facilities;~~
·                 ~~distribute preferred stock dividends, and trust preferred interest;~~
·                 ~~pay lease obligations, payroll obligations, operating expenses and~~
·                 ~~repurchase loans.~~
Our ability to meet liquidity requirements and the financing needs of our remaining customers is subject to maintaining the remaining reverse repurchase facility. The Company was in technical default of the reverse repurchase lines, however, subsequent to September 30, 2007 the Company satisfied a large portion of the $923.8 million outstanding at September 30, 2007. The Company continues to use one facility to fund new retail loan originations, until the retail operations are discontinued. The retail facility has an outstanding balance of $72.3 million at September 30, 2007; however the available borrowings on this line were reduced to $35.0 million, with a further reduction to $25.0 million by December 31, 2007 and the Company has been notified that this lender is expecting to recommend to its credit committee an orderly wind down of this line over the next few months. The Company will either dispose of the retail mortgage operations or discontinue and wind down the operations.
55

Although the Company does not anticipate being able to obtain any financing over the next twelve months, any decision to provide available financing to us in the future will depend upon a number of factors, including:
·                 ~~our compliance with the terms of our existing credit arrangements, including any financial covenants;~~
·                 ~~the ability to obtain waivers upon any non compliance;~~
·                 ~~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.~~
~~Distribute common and preferred stock dividends~~. We are required to distribute a minimum of 90% of our taxable income to our stockholders in order to maintain our REIT status, exclusive of the application of any tax loss carry forwards that may be used to offset current period taxable income. Because we pay dividends based on taxable income, dividends may be more or less than net earnings. We did not declare a cash dividend for the second or third quarter of 2007 and paid cash dividends of $0.10 per outstanding common share forduring the first ~~quarter~~six months of 2007. Based on current tax estimates, all of the 2007 dividends will be a return of capital. In addition, we paid cash dividends of $3.7 million on preferred stock during the third quarter of 2007.
~~During the third quarter of 2007, our operating businesses were primarily funded as follows:~~
·          ~~reverse repurchase agreements;~~
·          ~~excess cash flows from our long-term mortgage portfolio master servicing fees; and~~
·          ~~sale of mortgages.~~
~~Reverse repurchase agreements.~~ In the past we used reverse repurchase agreements to fund substantially all financing for the origination of mortgages. We currently finance the acquisition of conforming mortgages generated by the retail operations, primarily through borrowings on one remaining reverse repurchase facility which had a maximum borrowing capacity of $98.0 million and $72.3 million outstanding at September 30, 2007, which will expire during 2008.
~~Excess cash flows from our long-term mortgage portfolio~~. We receive excess cash flows on mortgages held as securitized mortgage collateral after distributions are made to investors on securitized mortgage borrowings to the extent cash or other collateral required to maintain credit ratings on the securitized mortgage borrowings is fulfilled and can be used to provide funding for some of the long-term investment operations’ activities. Excess cash flows represent the difference between principal and interest payments on the underlying mortgages, adjusted 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;~~
·                  ~~pro rata early principal prepayments paid on securitized mortgage borrowings;~~
·                  ~~OC 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;~~
·                  ~~basis risk shortfall;~~
·                  ~~bond writedowns reinstated; and~~
·                  ~~residual cashflow.~~
56

~~Inflation/Deflation~~
The consolidated financial statements and corresponding notes to the consolidated financial statements have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Inflation affects our operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand for mortgages and a borrower’s ability to qualify for mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interest rates and housing price appreciation, borrowers may prepay their mortgages, which in turn may adversely affect our yield and subsequently the value of our portfolio of mortgage assets. Additionally, the depreciation in home prices has increased the loss severities experienced by the Company.
~~Off Balance Sheet Arrangements~~
When we sell loans through whole-loan sales, we are required to make normal and customary representations and warranties to the loan purchasers, including guarantees against early payment defaults typically 90 days, and fraudulent misrepresentations by the borrowers. 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. Because the loans are no longer on our balance sheet, the recourse component is considered a guarantee. During the third quarter of 2007, we sold $920.1 million of loans with recourse compared to $1.2 billion in the third quarter of 2006. We maintained a $36.9 million reserve related to these guarantees as of September 30, 2007 compared with a reserve of $27.8 million as of June 30, 2007. During the third quarter of 2007 we paid $2.0 million to repurchase loans previously sold to third parties2008 as compared to ~~$13.3~~2007. The increase was mainly attributable to the Company recording a goodwill impairment charge of $12.4 million during the second quarter of ~~2007.~~2007 related to the acquisition of certain production facilities.

The decrease in personnel expense during the quarter was a result of more costs being allocated to continuing operations due to the discontinuation of the mortgage operations.
43

Table of Contents
ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
~~General Overview~~
~~We manage credit, prepayment~~For quantitative and ~~liquidity~~qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our annual report on Form 10-K for the normal course of business. Since a significant portion of our revenues and earnings are derived from net interest income, we strive to manage our interest-earning assets and interest-bearing liabilities to generate what we believe to be an appropriate contribution from net interest income. When interest rates fluctuate, profitability can be adversely affected by changes in the fair market value of our assets and liabilities and by the interest spread earned on interest-earning assets and interest-bearing liabilities. We derive income from the differential spread between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Any change in interest rates affects income received and income paid from assets and liabilities in varying and typically in unequal amounts. Changing interest rates may compress or widen our interest rate margins and affect overall earnings.
57

Interest rate risk management is the responsibility of the Asset Liability Committee (ALCO), which is comprised of the senior management and reports results of interest rate risk analysis to the IMH board of directors on at least a quarterly basis. ALCO establishes policies that monitor and coordinate sources, uses and pricing of funds. ALCO also attempts to reduce the volatility in net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. However, as a result of the credit crisis, the Company is no longer in a position to actively hedge its interest rate risk in the future. In addition, various modeling techniques are used to value interest sensitive mortgage-backed securities. The value of investment securities available-for-sale is determined using a discounted cash flow model using prepayment rate, discount rate and credit loss assumptions.year ended December 31, 2007. Our investment securities portfolio is available-for-sale, which requires us to perform market valuations of the securities in order to properly record the portfolio. We continually monitor interest rates of our investment securities portfolio as compared to prevalent interest rates in the market. We do not currently maintain a securities trading portfolio and are not exposedexposures to market ~~risk as it relates to speculative trading activities.~~
~~Changes in Interest Rates~~
Interest rate risk management policies intended to limit our exposure to changes in interest rates primarily associated with cash flows on our adjustable rate securitized mortgage borrowings. Our primary objective is to limit our exposure to the variability in future cash flows attributable to the variability of one-month LIBOR, which is the underlying index of our adjustable rate securitized mortgage borrowings. We also monitor on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. Our interest rate risk management policies are formulated with the intent to offset potential adverse effects of changing interest rates on cash flows on adjustable rate securitized mortgage borrowings. However, we are currently limited on what we can do to offset future changes in interest rates. ~~The Company maintains derivatives on the securitized mortgage borrowings to offset approximately 80-90% of the potentially adverse risk.~~have not changed materially since December 31, 2007.

In the past we primarily acquired for long-term investment ARMs and hybrid ARMs and, to a lesser extent, FRMs. ARMs are generally subject to periodic and lifetime interest rate caps. This means that the interest rate of each ARM is limited to upwards or downwards movements on its periodic interest rate adjustment date, generally nine months, or over the life of the mortgage. Periodic caps limit the maximum interest rate change, which can occur on any interest rate change date to generally a maximum of 1% per semiannual adjustment. Also, each ARM has a maximum lifetime interest rate cap. Generally, borrowings are not subject to the same periodic or lifetime interest rate limitations. During a period of rapidly increasing or decreasing interest rates, financing costs could increase or decrease at a faster rate than the periodic interest rate adjustments on mortgages would allow, which could affect net interest income. In addition, if market rates were to exceed the maximum interest rate limits of our ARMs, borrowing costs could increase while interest rates on ARMs would remain constant. In the past we also acquired hybrid ARMs that had initial fixed interest rate periods generally ranging from two to seven years which subsequently convert to ARMs. During a rapidly increasing or decreasing interest rate environment financing costs would increase or decrease more rapidly than would interest rates on mortgages, which would remain fixed until their next interest rate adjustment date. In order to provide protection against potential resulting basis risk shortfall on the related liabilities, in the past we purchased derivatives.
The use of derivatives to manage risk associated with changes in interest rates was an integral part of our strategy. The amount of cash payments or cash receipts on derivatives is determined by (1) the notional amount of the derivative and (2) current interest rate levels in relation to the various strikes or coupons of derivatives during a particular time period. As of September 30, 2007 and December 31, 2006, we had notional balances of interest rate swaps, caps, and floors of $15.4 billion and $19.5 billion, respectively, with net fair values of $(4.3) million and $132.5 million, respectively, pertaining to our current and pending securitizations. By using derivatives, we attempted to minimize the effect of both upward and downward interest rate changes on our long-term mortgage portfolio. Our goal was to moderate significant changes to base case net interest income, including net cash flows from derivatives, as interest rates change. We primarily acquired swaps, and to a lesser extent caps, to essentially convert our adjustable rate securitized mortgage borrowings into fixed rate borrowings. For instance, we receive one-month LIBOR on swaps, which offsets interest expense on adjustable rate securitized mortgage borrowings, and we pay a fixed interest rate.
The interest rate risk profile of our balance sheet is more sensitive to changes in interest rates related to our liabilities. We used derivatives extensively in order to manage the interest rate, or price risk, inherent in our assets, liabilities and loan commitments. Our main objective in managing interest rate risk was to moderate the effect of changes in interest rates on our earnings over time. Our interest rate risk management strategies may result in significant earnings volatility in the short term. The success of our interest rate risk management strategy is largely dependent on our ability to predict the earnings sensitivity of our long-term investment operations in various interest rate environments. There are many market factors that affect the performance of our interest rate risk management activities including interest rate volatility, prepayment behavior, the shape of the yield curve and the spread between mortgage interest rates and treasury or swap rates. The success of this strategy affects our net earnings. This effect, which can be either positive or negative, can be material.
58

We measure the sensitivity of our net interest income to changes in interest rates affecting interest sensitive assets and liabilities using various simulations. These simulations take into consideration changes that may occur in investment and financing strategies, the forward yield curve, interest rate risk management strategies, mortgage prepayment speeds. As part of various interest rate simulations, we calculate the effect of potential changes in interest rates on our interest-earning assets and interest-bearing liabilities and their affect on overall earnings. The simulations assume instantaneous and parallel shifts in interest rates and to what degree those shifts affect net interest income.
The following table estimates the financial effect to base case, including net cash flow from derivatives, from various instantaneous and parallel shifts in interest rates based on both our consolidated structure and un-consolidated structure, which refers to the notional amount of derivatives that are not recorded on our balance sheet as of August 31, 2007 (dollar amounts in millions):

Changes in base case as of August 31, 2007 (1)

Instantaneous and Parallel Change in Interest Rates (2)

Excluding net cash
flow on derivatives

Net cash flow
on derivatives

Including net cash
flow on derivatives

$

(%)

$

$

(%)

Up 300 basis points, or 3% (3)

(177
)
(1,389
)
139

(38
)
(70
)
Up 200 basis points, or 2%

(100
)
(783
)
92

(8
)
(14
)
Up 100 basis points, or 1%

(46
)
(362
)
46

—

—

Down 100 basis points or 1%

40

313

(47
)
(7
)
(13
)
Down 200 basis points or 2%

78

613

(94
)
(16
)
(29
)
Down 300 basis points or 3%

118

923

(141
)
(23
)
(43
)
~~(1)~~                         The dollar and percentage changes represent base case for the next twelve months versus the change in base case using various instantaneous and parallel interest rate change simulations, excluding the effect of amortization of loan discounts to base case.
~~(2)~~                         ~~Instantaneous and parallel interest rate changes over and under the projected forward yield curve.~~
~~(3)~~                         ~~This simulation was added to our analysis as it is relevant in light of the interest rate environment as of August 31, 2007 and the projected forward yield curve for 2007 and 2008.~~
In the previous table, the up 100 basis point scenario as of August 31, 2007 represents our projection of the net change from base case net interest income, which is derived from assumptions as previously discussed, if market interest rates were to immediately rise by 100 basis points. This means that we increase interest rates at all data points along our projected forward yield curve by 100 basis points and recalculate our projection of net interest income over the next 12 months. In addition, based on changes in interest rates, or changes in our forward yield curve, our model adjusts mortgage prepayment rates and recalculates amortization of acquisition and securitization costs and net cash receipts or payments on derivatives as part of the calculation of net interest income. Thus, if a 100 basis point interest rate increase occurred, the projected volatility to net interest income is positively impacted through our use of derivatives.
We estimate net interest income along with net cash flows from derivatives for the next twelve months using balance sheet data and the notional amount of derivatives as of August 31, 2007 and 12-month projections of the following primary drivers affecting net interest income:
·                   ~~future interest rates using forward yield curves, which are considered market consensus estimates of future interest rates;~~
·                   ~~mortgage prepayment rate assumptions; and~~
·                   ~~forward swap rates.~~
We refer to the 12-month projection of net interest income along with the 12-month projection of net cash flows from derivatives as the “base case.” For financial reporting purposes, net cash flows from derivatives are included in realized gain (loss) from derivative instruments on the consolidated financial statements. However, for purposes of interest rate risk analysis we include net cash flows from derivatives in our base case simulations as we acquire derivatives to offset the effect that changes in interest rates have on variable borrowing costs, such as securitized mortgage and warehouse borrowings. We believe that including net cash flows from derivatives in our interest rate risk analysis presents a more useful simulation of the effect of changing interest rates on net cash flows generated by our long-term mortgage portfolio.
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Once the base case has been established, we “shock” the base case with instantaneous and parallel shifts in interest rates in 100 basis point increments upward and downward. Calculations are made for each of the defined instantaneous and parallel shifts in interest rates over or under the forward yield curve used to determine the base case and include any associated changes in projected mortgage prepayment rates caused by changes in interest rates. The results of each 100 basis point change in interest rates are then compared against the base case to determine the estimated dollar and percentage change to base case. The simulations consider the affect of interest rate changes on interest sensitive assets and liabilities as well as derivatives. The simulations also consider the impact that instantaneous and parallel shift in interest rates have on prepayment rates and the resulting affect of accelerating or decelerating amortization of premium and securitization costs.
Using information as presented above, and other analysis, the Company reviews its interest rate risk profile. Based on this review, in the past the Company made certain decisions on how to mitigate its interest rate risk.
ITEM 4:          CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

~~We are committed to maintaining~~The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules ~~13-a-15(e)~~13a-15(e) or ~~15d – 15 (e)~~15d-15(e)) designed to ensure that information required to be disclosed in ~~our periodic~~ reports filed or submitted under the Securities Exchange Act of 1934, as amended, ~~or the Exchange Act,~~ is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and ~~forms,~~forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that ~~such~~ information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to ~~our~~the Company’s management, including ~~our Chief Executive Officer (CEO) (who is currently performing the functions of both the~~its principal executive and principal financial ~~officer),~~officers, or persons performing similar functions, as appropriate to allow ~~for~~ timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures based on the application of management’s judgment.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our CEO ~~(who is currently performing the functions of both the principal executive~~ and ~~financial officer),~~CFO, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on ~~this~~that evaluation, ~~our principal~~the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures, were not effective at a reasonable assurance level, due to the identification of a material weakness, as discussed in the 2007 Form 10-K.
Material Weakness
In connection with its assessment of the Company’s internal control over financial reporting as of December 31, 2007, management identified a material weakness related to our effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to close its books and records effectively at each reporting date, obtain the necessary information from operational departments to complete the work necessary to file its financial reports timely and failure to timely identify and remediate accounting errors.
Management’s Remediation Plan
The Company’s management has continued to remediate the material weakness identified in Management’s Report on Internal Control over Financial Reporting as of December 31, 2007 by taking the following actions:
·                  effective February 2008, we appointed Todd Taylor as Interim Chief Financial Officer, and
·                  we hired additional resources for the accounting and finance departments on a contract basis to help perform certain accounting functions, until management can employ a more permanent solution.
We believe that our disclosure controls and procedures, ~~were effective~~including our control over financial reporting, have improved since year-end due to the scrutiny of such matters by our management and Audit Committee and the changes described above. However, due in part to continued lack of permanent staff in Accounting/Finance and in part to the effort needed to accurately document the change in accounting for fair value measurements, the Company continued to be late in closing its books and records effectively at ~~a reasonable assurance level at September~~the required reporting date. Therefore, the Company believes the material weakness related to our effectiveness of internal control over financial reporting is not fully remediated as of June 30, ~~2007.~~2008.

Changes in Internal Control Over Financial Reporting

~~During~~There has been no change in the ~~quarter ended September 30, 2007, the changes to~~Company’s internal control over financial reporting ~~have been significant as we have been downsizing and restructuring~~during the Company over the last few months, to reflect the deterioration in market conditions. Given the current market environment, we have made significant changes to the staff levels, our business model, as well as certain controlsCompany’s quarter ended June 30, 2008, that ~~are no longer considered applicable. The changes that~~has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, ~~are as follows:~~except the following:

·                                          We ~~continue to reduce our workforce, consolidate~~have implemented controls associated with the adoption of SFAS 157 and ~~eliminate operations~~SFAS 159 and ~~outsource certain functions. Accordingly, responsibility for administration, management and review of many of our assets has transitioned among our remaining personnel.~~fair value accounting.

·                  In conjunction with further reductions in personnel, we have transitioned some of our accounting and business support applications to manual processes supported by a system of manual internal controls and spreadsheets. Management has supervised these transitions and has implemented procedures we believe provide effective disclosure and internal controls over financial reporting. We are assessing the efficacy of these procedures and will continue to do so in subsequent periods.
As the market for our industry has continued to deteriorate over the last few months, we have been reducing staff levels. In addition, with the discontinuance of certain operations, we have been evaluating the need to maintain an internal control environment consistent with previous periods. This evaluation has led to the reduction and / or change in certain controls that are not deemed to be applicable to the current business process and reporting. We are also in the process of evaluating the need for information technology systems that we have used in the past to conduct business and report results. With the reduced number of the internal controls, with less staff to perform the steps to maintain the controls, we have identified deficiencies in our internal control environment. In addition, with less staff to maintain the information technology systems,
6044

~~our risks associated with maintaining an adequate control information technology environment has increased. As a result, it is very likely that in connection with the annual assessment~~Table of our internal control over financial reporting we will identify significant deficiencies. Although we are uncertain at this time as we have not completed our assessment, any significant deficiencies may, in the aggregate or individually, rise to the level to be deemed material weaknesses, which would result in a determination of ineffective internal control over financial reporting and disclosure controls.Contents

PART II. OTHER INFORMATION

ITEM 1:LEGAL PROCEEDINGS

~~On August 17, 2007, a purported class action matter was filed~~The Company is party to litigation and claims which are normal in the ~~United States District Court, Central District~~course of ~~California, against IMH~~our operations. While the results of such litigation and ~~several~~claims cannot be predicted with certainty, the Company believes the final outcome of ~~its senior officers entitled Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al. The action alleges against all defendants violations~~such matters will not have a material adverse effect on our financial condition or results of Section 10(b) and 10b-5 of the Securities exchange Act of 1934 (the “Exchange Act”) and against the individual defendants violations of Section 20(a) of the Exchange Act. Plaintiffs contend that the defendants caused the Company’s stock to trade at artificially inflated prices through false and misleading statements and intentional or reckless disregard of basic accounting principles. The complaint seeks compensatory damages for all damages sustained as a result of the defendants’ actions, including reasonable costs and expenses and other relief as the court may deem proper. On October 3, 2007, a similar case was filed in the same Court entitled Richard Abrams v. Impac Mortgage Holdings, Inc., et al. This action makes allegations similar to those in the Pittleman action and also seeks similar recovery.operations.

On ~~October 11,~~November 9, 2007, ~~a shareholder derivative action was~~and separately on August 25, 2008, two matters were filed against IFC in Orange County in the Superior Court of California, ~~Orange County against the Company~~as Case No. 07CC11612 and ~~certain of its officers and directors. The complaint alleges~~Case No. 00110553, respectively, by Citimortgage, Inc., alleging claims for a breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, a violation of California Civil Code Sections 1709 and 1710 for deceit and for contribution and indemnification. The action seeks to recover for the company the damages suffered by the Company as a result of the individuals breach of fiduciary duty, abuse of control, gross mismanagement and waste of corporate assets. It also seeks to impose a constructive trust on the proceeds of any individuals trading activity, disgorgement of profits benefits of other compensation of the individual defendants, costs and disbursements in the action including reasonable attorney’s fees, expert fees, accountant’s fees, expenses and such other relief as the court may deem proper.
On October 4, 2007, a purported class action matter was filed in the United States District Court, Central District of California against Impac Funding Corporation and Impac Mortgage Holdings, Inc. entitled Vincent Marshell v. Impac Funding Corporation, et al. The action alleges violations of Truth in Lending Act, Violation of California Business and Professional Code Section 17200, et seq, breach of contract and ~~an additional claim under Business~~damages based upon representations and ~~Professional Code Section 17200. The complaint alleges that the defendants failed to disclose pertinent information~~warranties made in conjunction with whole loan sales. These actions seek combined damages in excess of $4.2 million.
On June 28, 2008, a ~~clear conspicuous manner as called for~~matter was filed against IFC in the ~~Truth~~Circuit Court of the Eighteenth Judicial District, Dupage County in ~~Lending Act,~~Illinois, as case no. 2008L000721, by TR Mid America Plaza Corp., seeking damages for breach of contract (a lease agreement) in excess of $0.6 million plus such amount as determined through the date of judgment and ~~that they misled the plaintiff. The action seeks to recover actual damages, compensatory damages, consequential damages, punitive damages, rescission, reasonable~~payment of attorneys fees and ~~costs, statutory damages, a disgorgement of all profits obtained as a result of the unfair competition, equitable relief including restitution and such other relief as is just and proper.~~
On December 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and several of its senior officers entitled Sharon Page v. Impac Mortgage Holdings, Inc., et al. The action is a complaint for violations of the Employee Retirement Income Security Act in relation to the Company’s 401(k) plan. The complaint alleges breach of fiduciary duties, breach of duty to avoid conflicts of interest, allegations of co-fiduciary liability and knowing participation in a breach of fiduciary duty by IMH. Plaintiffs contend that the defendants breached their fiduciary duties in violation of ERISA by failing to prudently and loyally manage the plan’s investment in IMH stock by continuing to offer IMH stock as an investment option and to make contributions in stock, provide complete and accurate information to participants, and monitor appointed plan fiduciaries and provide them with accurate information. The complaint seeks monetary payment to the plan for the losses in an amount to be proven, injunctive and other appropriate equitable relief, a constructive trust on amounts by which any defendant was unjustly enriched, an appointment of one or more independent fiduciaries, actual damages, reasonable attorney fees and expenses, taxable costs, interests on these amounts and other legal or equitable relief as may be just and proper.
Please refer to IMH’s report on Form 10-K for the year ended December 31, 2006 and reports on Form 10-Q for the periods ending March 31, 2007 and June 30, 2007 for a description of other litigation and claims.costs.

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

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2007 for a description of other litigation and claims.
ITEM 1A:RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, ~~2006 and our quarterly reports on Form 10-Q for the period ended March 31,~~ 2007 ~~and June 30, 2007, include~~includes a detailed discussion of ~~additional~~our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form ~~10-K, in addition to the March 31, 2007 and June 30, 2007 Form 10-Qs.~~10-K.
61

WeThe advisory service fees we earn pursuant to the advisory services agreement may be reduced upon the occurrence of certain conditions or the agreement may be terminated, which would have ~~negative shareholders’ equity, which could adversely affect our financial condition and otherwise adversely impact our business and growth prospects.~~a material adverse effect on us.

AsPursuant to the advisory services agreement with a real estate marketing company we earn advisory fees. For the three and six months ended June 30, 2008, we earned $4.7 million and $8.5 million, respectively in advisory fees, which, along with cash flows and master servicing fees from our long-term mortgage portfolio, is one of ~~September 30, 2007, we had~~our primary sources of earnings. Although the Company is eligible to receive a shareholders’ deficit of $(493.3) million, which means our total liabilities exceed our total assets. The existence of a shareholders’ deficit may effect our ability to continue to pay scheduled distributions on our preferred stock, limit our ability to obtain future debt or equity financing, and cause regulatory issues as it could effect our state mortgage licenses. If we are unable to obtain financingtermination fee in the ~~future, it could have~~case of the sale, transfer or merger of the marketing company or upon IMH entering into bankruptcy proceedings, IMH’s advisory fees may be reduced and the agreement subsequently terminated if certain conditions are not satisfied. If our CEO is no longer in a ~~negative effect on~~senior management capacity with the Company or any affiliates nor a director, then the advisory fee percentage is substantially reduced and the marketing company may terminate the agreement. Furthermore, if the Company fails to provide the agreed upon services, then the agreement may be terminated with no further obligations or payments to the Company. The reduction of the advisory fees or termination of the agreement would substantially decrease our ~~operations and our liquidity.~~
Our ability to generate cash flows from operations and to make scheduled distributions on our outstanding preferred stock will depend on our future financial performance and particularly our ability to realize the value of our investment portfolio. Our future performance will be affected by a range of economic, competitive, legislative, operating and other business factors, many of which we cannot control, such as general economic and financial conditions in our industry or the economy at large. A significant reduction in operating cash flows resulting from further deterioration in the mortgage industry, changes in economic conditions, or other events could increase the need for additional or alternative sources of liquidityincome stream and could have a material adverse effect on our operations, financial condition and business prospects.
The occurrence of recent adverse developments in the mortgage finance and credit markets has affected our business and our stock price.
Beginning in the second quarter of 2007 and continuing through 2008, the mortgage industry and the residential housing market have been adversely affected as home prices declined and delinquencies increased. The mortgage market is currently
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experiencing unprecedented disruptions, which have had, and continue to have, an adverse impact on the Company’s earnings and financial condition. These disruptions are further evidenced by the recent event surrounding the takeover of Fannie Mae and Freddie Mac by the Federal government. These conditions may not stabilize or they may worsen for the foreseeable future. Our ability to meet our long-term liquidity requirements is subject to several factors, such as decreasing our dividend and trust preferred payment obligations and possibly raising additional capital. Recent adverse changes in the mortgage finance and credit markets have eliminated or reduced the availability, or increased the cost, of significant sources of funding for us. We may not be able to access sources of funding or, if available to us, we may not be able to negotiate favorable terms. Any decision by our lenders and/or investors to make additional funds available to us in the future will depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements, our financial performance, industry and market trends in our various businesses, the lenders’ and/or investors’ own resources and policies concerning loans and investments, and the relative attractiveness of alternative investment or lending opportunities. If we cannot raise cash by selling debt or equity securities, we may be forced to cut additional resources, sell more of our assets at unfavorable prices or discontinue various business activities to preserve cash. Furthermore, the price of our common stock declined significantly as a result of these events and the impact on our results of operations.
If we fail to successfully implement our strategic initiatives, our business, financial condition and results of operations could be materially and ~~prospects and~~adversely affected.
In light of the continuing turmoil in the mortgage market, our ability to ~~satisfy~~continue our operations is dependent upon our ability to successfully implement our strategic initiatives and acquire new operations that contribute sufficient additional cash flow to enable us to meet our current and future expenses. Our future financial performance and success are dependent in large part upon our ability to implement our contemplated strategies successfully. We have restructured our existing reverse repurchase line and we are exploring to reduce or eliminate the dividend payments on our outstanding preferred stock and seeking to modify our trust preferred securities to reduce payment obligations. Our ability to implement any restructuring is dependent upon agreement of various third parties and security holders. We expect that these efforts and negotiations will be complex, and there can be no assurances that any negotiations or other efforts will be successful. To the extent that they are not, we would be unlikely to be able to continue our operations as planned thereby requiring us to reduce our operating costs and expenses so that our income can cover those costs.
We are also considering strategic acquisitions, such as acquiring a real estate marketing company, a special servicing platform and investing in distressed mortgage assets and related securities. Our ability to acquire new businesses is significantly constrained by our limited liquidity and our likely inability to obtain debt financing or to issue equity securities as a result of our current financial condition, as well as other uncertainties and risks. There can be no assurances that we will be able to acquire new business operations. We may not be able to implement our strategic initiatives successfully or achieve the anticipated benefits of their implementation. If we are unable to do so, we may be unable to satisfy our ~~obligations,~~future operating costs and liabilities, including repayment of the restructured finance facility, interest payments on the trust preferred securities and payment of preferred stock dividends. Even if we are able to implement some or all of our strategic initiatives successfully, our operating results may not improve to the extent we anticipate, or at all.
If we are unable to raise additional capital or generate sufficient liquidity we may be unable to implement our strategic initiatives or conduct our operations.
We are considering raising capital in order to accomplish some of our strategic initiatives. If we are unable to access any capital on reasonable terms, we will not be ~~forced~~able to ~~adopt an alternative strategy~~accomplish our goals. Furthermore, we will then be dependent on our existing revenues from the long-term mortgage and master servicing portfolios and from real estate advisory fees. Our ability to conduct our operations will depend on our ability to effectively reduce operating costs to a level that ~~may include actions such as, selling assets, restructuring or refinancing indebtedness or seeking equity capital.~~is supportable by our revenues. We cannot assure you that any of these ~~alternative~~alternatives will be available to us, or if available, that we will be able to negotiate favorable terms.
Acquisitions of other businesses could result in operating difficulties.
As part of our strategic initiatives, we may seek to acquire a real estate marketing company and we may acquire a special servicing platform. If we continue to pursue these and any other business opportunities, the process of negotiating the acquisition and integrating an acquired business may result in operating difficulties and expenditures and may require significant management attention. Moreover, we may never realize the anticipated benefits of any new business or acquisition. We may not have, and may not be able to acquire or retain, personnel with experience in any new business we may establish or acquire. In addition, future acquisitions could result in contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could harm our results of operations, financial condition and business prospects.
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We may not pay dividends to our common or preferred stockholders.
REIT provisions of the Internal Revenue Code generally require that we annually distribute to our stockholders at least 90 percent of all of our taxable income, exclusive of the application of any tax loss carry forwards that may be used to offset current period taxable income. These provisions restrict our ability to retain earnings and thereby generate capital from our operating activities. In addition, for any year that we do not generate taxable income, we are not required to declare and pay dividends to maintain our REIT status. We have not declared a common stock dividend since March 31, 2007.
The Series B Preferred Stock and Series C Preferred Stock currently receive quarterly dividends of $0.58594 and $0.57031 per share, respectively. Even if we choose not to pay dividends on our preferred stock, dividends will accrue whether or not current payment of dividends is prohibited, whether or not we have earnings, whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are declared. The Company may decide not to pay dividends on preferred stock for any quarter or for a period of time in order to maintain its cash, operate its business or implement strategic initiatives. Although the Company may choose not to pay dividends, the continued payment and accrual of these dividends may prevent the Company from implementing new strategies in the current market environment, thereby, hindering our growth prospects. Plus, accumulating dividends with respect to our preferred stock will negatively affect the ability of our common stockholders to receive any distribution or other value upon liquidation. The continued accrual and payment of the preferred stock dividends may have a material adverse effect on our liquidity, financial condition and operations.
We may not make payments on our trust preferred debt obligations in the foreseeable future
We currently have over $90 million in obligations related to junior subordinated debentures related to the outstanding trust preferred securities. We are required to make quarterly payments on these debt obligations. In order to preserve cash, the Company may decide not to make payments on these obligations. If the Company defers quarterly payments, it may do so for a limited period of time and it may not pay dividends on its capital stock during such period. If the Company continues to fail to pay the trust preferred obligations, then it will be in default and the entire amount may be immediately due and payable and it could be ~~effected on satisfactory terms, if at all, or~~in cross-default with other existing finance facilities. Although the Company is exploring to modify the trust preferred obligations in order to decrease its payment obligations in some manner, we can not assure you that ~~they would yield sufficient funds for continuing operations.~~it will be successful.

The New York Stock Exchange (“NYSE”) has notified us that we are not in compliance with its continued listing criteria. If we are delisted by ~~The~~the NYSE, the price and liquidity of our common stock and preferred stock will be negatively affected.

Our common stock and Series B Preferred Stock and Series C Preferred Stock are currently listed on the New York Stock Exchange (the “NYSE”). We must satisfy certain minimum listing maintenance requirements to maintain such listing, including maintaining a minimum bid price of $1.00 per share for the common stock. On ~~November 28 2007,~~July 8, 2008, we received a second notice from NYSE Regulation Inc. ~~stating~~(“NYSE Regulation”) that ~~we are~~the Company was not in compliance with the ~~NYSE’s~~NYSE continued listing standard related to maintaining a consecutive thirty day average closing stock price of over $1.00 per common share. ~~Under~~ NYSE ~~rules, we have six months to bring our~~Regulation noted that effective May 28, 2008 the Company had cured its previous non-compliance with the same NYSE continued listing standard. However, NYSE Regulation notified us that the Company’s common stock again fell below the $1.00 average share price requirement.   After reviewing materials submitted by the Company specifying details as to its strategic plans to address the current share price deficiency, NYSE Regulation agreed to provide us an approximately four month cure period. NYSE Regulation will formally reevaluate our continued listing with the NYSE’s Listings and ~~average price back above $1.00, during which time our common stock~~Compliance Committee at the end of this approximately four month cure period, and ~~preferred stock~~it will also continue to ~~be listed~~closely monitor the Company during this timeframe both with regards to share price levels and ~~traded~~progress on its planned initiatives. Furthermore, on April 1, 2008 we received notification from the NYSE that the failure to timely file annual and interim reports with the Securities and Exchange Commission may subject us to ~~ongoing reassessment by NYSE Regulation. If the share price and average price are not above $1.00 at the expiration of the six-month period, then the NYSE will commence~~ suspension and delisting procedures. In addition, even if such minimum price is achieved and maintained, there can be no assurance that we will be able to continue to meet the NYSE’s other qualitative or quantitative listing standards for continued listing. The NYSE has informed us that it will continue to monitor share price levels and that it reserves the right to take more immediate listing action in the event that the stock trades at levels that are viewed as “abnormally low” on a sustained basis or based on other qualitative factors.

We cannot assure you that the NYSE will maintain our listing in the future. In the event that our common stock and preferred stock is delisted by the NYSE, or if it becomes apparent to us that we will be unable to meet the NYSE’s continued listing criteria in the foreseeable future, we may seek to have our stock listed or quoted on another national securities exchange or quotation system. If our securities are delisted from the NYSE, then they may trade on the Over-the-Counter-Bulletin Board, which is viewed by most investors as a less desirable and less liquid market place. However, we cannot assure you that, if our common stock is listed or quoted on such other exchange or system, the market for our common stock
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will be as liquid as it has been on the NYSE. As a result, if we are delisted by the NYSE or transfer our listing to another exchange or quotation system, the market price for our common stock may become more volatile than it has been historically. Delisting from the NYSE could make trading our common stock and preferred stock more difficult for our investors, leading to declines in share price. Delisting of our common stock would also make it more difficult and expensive for us to raise additional capital.

We have restructured our reverse repurchase line which requires monthly payments and other payment obligations, will reduce our operating income, and contains other provisions that will restrict our business operations.
Our ability to finance our operations, grow our business and implement our strategic initiatives is dependent upon the availability of credit on commercially acceptable terms, including the use of warehouse lines of credit and repurchase agreements. On September 11, 2008, we executed a new warehouse line agreement with UBS Real Estate Securities Inc. (“UBS”). The agreement removes all technical defaults from financial covenant noncompliance and any associated margin calls for the term of the agreement. The agreement calls for certain targets including a reduction of the borrowings balance to $100 million in 18 months with an advance rate of no more than 65 percent of the unpaid principal balance and $50 million in 24 months with an advance rate of no more than 55 percent of the unpaid principal balance. By meeting these targets, the agreement term can extend to 30 months. The agreement also calls for monthly principal paydowns of $750,000 for one month and $1.5 million thereafter until the earlier of the Company raising capital or the end of the agreement term. If the Company is successful in raising capital, approximately 10% of the gross proceeds will be required to be paid as an additional principal paydown and the monthly principal paydown is reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be paid to the lender. We may not have the funds available to make the required paydowns, which could result in defaults and we may not have adequate assets to use as collateral. In the event we do not have sufficient liquidity to meet the payment requirements, UBS can accelerate our indebtedness, increase interest rates and terminate our ability to borrow additional funds. Such a situation would likely result in a rapid deterioration of our financial condition.
We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to implement our strategic initiatives and operate our business as planned.
We have historically been dependent on warehouse lines, repurchase agreements, credit facilities, securitizations and other structured financings. Our ability to use these financing sources depends on various conditions in the markets, which are beyond our control, including lack of liquidity and greater credit spreads. We cannot assure you that these markets will provide an efficient source of long-term financing. Any new financing could subject us to recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution, funds available for operations as well as for future business opportunities. If we ~~fail~~are not able to ~~maintain effective systems of internal control over financial reporting and disclosure controls and procedures,~~borrow additional funds in the future on our new warehouse facility or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under this facility, we may not be able to ~~accurately report our financial results or prevent fraud, which could cause current and potential shareholders~~continue 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. Any failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results, or cause us to fail to meet our reporting obligations. In the past, we have reported, and may discover in the future, material weaknesses in our internal control over financial reporting.
During 2007, as the market for our industry has continued to deteriorate over the last few months, we have been reducing staff levels. In addition, with the discontinuance of certain operations, we have been evaluating the need to maintain an internal control environment consistent with previous periods. This evaluation has led to the reduction and / or change in certain controls that are not deemed to be applicable to the current business process and reporting. We are also in the process of evaluating the need for information technology systems that we have used in the past to conduct business and
62

report results. Even with the reduced number of internal controls, we have experienced some deficiencies in our internal control environment. In addition, with less staff to maintain the information technology systems, our risks associated with maintaining an adequate control information technology environment has increased. As a result, it is very likely that in connection with the annual assessment of our internal control over financial reporting, we will identify significant deficiencies. Although we are uncertain at this time as we have not completed our assessment, any significant deficiencies may, in the aggregate or individually, rise to the level to be deemed material weaknesses, which would result in a determination of ineffective internal control over financial reporting and disclosure controls.
We cannot be certain that our efforts to improve or change 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. If we are unable to adequately maintain our internal control over financial reporting, our external auditors will not be able to issue an unqualified opinion and will issue an adverse opinion on the effectiveness of 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. Such events could harm our business ~~affect our ability to raise capital and adversely affect the trading price of our securities.~~
~~Deteriorating mortgage market conditions have had and may continue to have a material adverse impact on our earnings and financial condition.~~
~~Beginning in the second quarter of 2007, the mortgage industry and the residential housing market were adversely affected~~ as home prices declined and delinquencies increased, particularly in the sub-prime mortgage industry. The difficulty that arose as a result of this has spread across various mortgage sectors, including the market in which we operate. These markets are currently experiencing unprecedented disruptions, which have had and continue to have an adverse impact on the Company’s earnings and financial condition. For the three months ended September 30, 2007, the Company had a net loss of $1.2 billion and estimated taxable loss of $16.3 million.
During the third quarter, the secondary and securitization mortgage markets significantly reduced its purchasing of loans, to almost none, making it extremely difficult to sell non-conforming mortgage loans and securities to investors, which led to significant margin calls, reducing the Company’s cash position. In addition, because housing prices have declined and lenders tightened underwriting guidelines, making it more difficult to refinance, defaults and credit losses increased; which further exacerbated home price depreciation and credit losses. As a result, nonconforming mortgage loans have not performed up to historical expectations and the fair value of non-conforming mortgage loans has deteriorated. For the three months ended September 30, 2007, the Company’s REO’s was $369.5 million and the long-term mortgage portfolio included 8.97% of mortgages that were 60 days or more delinquent. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future.
As a result of the Company’s inability to sell or securitize non-conforming loans, the Company has discontinued funding loans other than conforming agency loans. The Company has discontinued substantially all of its mortgage operations, commercial operations and warehouse lending operations and will either dispose of the remaining retail mortgage operations or discontinue and wind down the operations.   As a further result of the deteriorating market conditions, the Company experienced frequent margin calls, was in default on several repurchase facilities, and either terminated or allowed facilities to lapse leaving the Company with one available reverse repurchase facility. The Company can not make any assurances that it will not receive future margin calls, that it will be able to satisfy those margin calls, or that it will be able to obtain any future waivers of non-compliance on those facilities. If overall market conditions continue to deteriorate and result in additional substantial declines in the value of the assets which we use to collateralize our secured borrowing arrangements, sufficient capital may not be available to support the continued ownership of our investments, requiring certain assets to be sold at a loss. The further deterioration of the mortgage market have had and may continue to have a material adverse impact on our earnings and financial condition.
63

~~Recent increased delinquencies and losses with respect to residential mortgage loans, particularly in the sub-prime sector, may cause us to recognize additional losses,~~planned, which would ~~further adversely affect our operating results, liquidity, financial condition, business prospects and ability to continue as a going concern.~~
The residential mortgage market has continued to encounter difficulties which have adversely affected our performance. In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase, particularly in the sub-prime sector. In addition, in recent months residential property values in many states have declined or remained stable, after extended periods during which those values appreciated. A sustained decline or a lack of increase in those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, especially with respect to any residential mortgage loans where the aggregate loan amounts (including any subordinate loans) are close to or greater than the related property values. Another factor that may have contributed to, and may in the future result in, higher delinquency rates is the increase in monthly payments on adjustable rate mortgage loans. Any increase in prevailing market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans. Moreover, with respect to option ARM mortgage loans with a negative amortization feature which reach their negative amortization cap, borrowers may experience a substantial increase in their monthly payment even without an increase in prevailing market interest rates. Compounding this issue, the current lack of appreciation in residential property values, increased interest rates, and the adoption of tighter underwriting standards throughout the sub-prime mortgage loan industry may adversely affect the ability of borrowers to refinance these loans and avoid default, particularly borrowers facing a reset of the monthly payment to a higher amount. To the extent that delinquencies or losses continue to increase for these or other reasons, the value of our mortgage securities and the remaining mortgage loans held in our portfolio will be further reduced, which will adversely affect our operating results, liquidity, cash flow, financial condition, business prospects and ability to continue as a going concern.
~~Failure to enter into new employment agreements and retain 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, including our chief executive officer, president and chief operating officer. 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. Each of our chief executive officer, our president and chief operating officer have an employment agreement that expires on December 31, 2007.  We can not make any assurances that we will successfully negotiate new employment agreements with these executive officers or that any of them will remain with the Company. The loss of our chief executive officer, president, chief operating officer or other senior executive officers and key management could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Our chief financial officer recently resigned from the Company effective November 30, 2007. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel.  Furthermore, in light of our present financial condition, no assurance can be given that we will retain these and other executive officers and key management personnel. To the extent that one or more of our top executives or other key management personnel are no longer employed by us, our operations and business prospects may be adversely affected.    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, liquidity and results of operations.

ITEM 2:UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
ITEM 3:DEFAULTS UPON SENIOR SECURITIES

None.

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

~~None.~~None
64
ITEM 5:          OTHER INFORMATION
Restructured of Reverse Repurchase Line
On September 11, 2008, the Company entered into an agreement with UBS Real Estate Securities Inc. to restructure its reverse repurchase line with its remaining lender. The balance of this line was $220.2 million at June 30, 2008. The agreement removes all technical defaults from financial covenant noncompliance and any associated margin calls for the term of the agreement. The agreement calls for certain targets including a reduction of the borrowings balance to $100 million in 18 months with an advance rate of no more than 65 percent of the unpaid principal balance and $50 million in 24 months with an advance rate of no more than 55 percent of the unpaid principal balance. By meeting these targets, the agreement term can extend to 30 months. The agreement also calls for monthly principal paydowns of $750,000 for one month and $1.5 million thereafter until the earlier of the Company raising capital or the end of the agreement term. If the Company is successful in raising capital, approximately 10% of the gross proceeds will be required to be paid as an additional principal paydown and the monthly principal paydown is reduced to $750,000. The interest rate is LIBOR plus 325 basis points, and all cash collected from the securing mortgage loans is required to be paid to the lender.
48

Table of Contents
Accomplishing the restructuring of this reverse repurchase line allows the Company to manage the remaining loans on the line for the eventual collection, refinance, sale or securitization without the risk of receiving margin calls.
Annual Meeting of Stockholders
On July 10, 2008, we held our annual meeting of stockholders. Of 76,104,656 shares eligible to vote, 69,745,926, or 91.6 percent, votes were returned, formulating a quorum. At the annual stockholders meeting, the following matters were submitted to stockholders for vote Proposal I - Election of Directors; Proposal II - Ratification of the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2008; Proposal III – Amendments to the 2001 Stock Option, Deferred Stock, and Restricted Stock Plan; and Proposal IV – Potential Issuance of in excess of 20 percent of our outstanding shares of common stock in connection with a possible exchange of the Company’s Series B Preferred Stock and Series C Preferred Stock.
~~ITEM 5:~~~~OTHER INFORMATION~~Proposal I—Election of Directors

~~Resignation~~The results of ~~Chief Financial Officer~~voting on these proposals are as follows:
Director

For

Withheld

Elected

Joseph R. Tomkinson

66,355,675

3,390,247

Yes

William S. Ashmore

66,436,234

3,309,688

Yes

James Walsh

66,450,743

3,295,179

Yes

Frank P. Filipps

66,212,473

3,533,449

Yes

Stephan R. Peers

66,305,502

3,440,420

Yes

Leigh J. Abrams

66,324,583

3,421,339

Yes

All directors are elected at our annual stockholders meeting.

OnProposal II – Ratification of the appointment of Ernst & Young LLP as our independent auditors for the year ending December ~~18, 2007, Impac Mortgage Holdings, Inc.~~31, 2008.
Proposal II was approved with 68,372,826 shares voted for, 1,039,055 voted against and ~~Gretchen D. Verdugo agreed~~334,039 abstained from voting, thereby, ratifying the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2008.
Proposal III – Amendments to ~~terminate Ms. Verdugo’s Employment Agreement, originally entered into on May 1, 2006,~~the 2001 Stock Option, Deferred Stock, and ~~Ms. Verdugo resigned as~~Restricted Stock Plan
Proposal III was approved with 30,884,180 shares voted for, 13,826,301 voted against and 738,942 abstained from voting, thereby ratifying the amendment to the 2001 Stock Option, Deferred Stock, and Restricted Stock Plan.
Proposal IV – Potential Issuance of in excess of 20 percent of our outstanding shares of common stock in connection with a possible exchange of the Company’s ~~Executive Vice President~~Series B Preferred Stock and Chief Financial Officer effective November 30, 2007. The Company and Ms. Verdugo also entered into a Consulting Agreement, effective December 3, 2007. Pursuant to the Consulting Agreement, the Company will pay Ms. Verdugo an aggregate of $200,000 for the initial six months, provide reimbursement for business expenses and provide health care benefits, life insurance and short and long term disability until May 31, 2008.
Series C Preferred Stock
~~Amendment to Bylaws~~

~~Pursuant to American Stock Exchange Rule 778~~Proposal IV was approved with 39,499,182 shares voted for, 2,573,181 voted against and ~~Section 135~~318,320 abstained from voting, thereby approving the potential issuance of in excess of 20 percent of our outstanding shares of common stock in connection with a possible exchange of the ~~Amex Company Guide, all securities listed on the Amex on~~Company’s Series B Preferred Stock and after January 1, 2008 must be eligible for Direct Registration System, or DRS.   A DRS permits an investor’s ownership of listed companies’ equity securities to be recorded and maintained on the books of the issuers or their transfer agents without the physical issuance of a stock certificate. The new rule does not require companies to participate in the DRS; however, all AMEX listed equity securities must be eligible to participate in the DRS by January 1, 2008. To be eligible to participate in the DRS, companies must, among other things, make sure that their governing documents allow their equity securities to be held in book-entry form. As was the case with many companies, the Bylaws for Impac Mortgage Holdings, Inc. (specifically, Article VII) did not allow registrant’s stock to be held in book-entry form. Article VII of IMH’s Bylaws required the physical issuance of stock certificates to its shareholders.Series C Preferred Stock.

~~Accordingly, on December 14, 2007, IMH’s Board~~49

Table of Directors approved amendments to IMH’s Bylaws to allow for either physical issuance of registrant’s shares in certificated form or their issuance in book entry form (uncertificated), depending on the individual decision of each shareholder. The Bylaw amendments render the Common Stock DRS eligible and thereby in compliance with the AMEX Company Guide.Contents
ITEM 6:EXHIBITS

(a)   Exhibits:

~~3.2~~
~~Amendment No. 4 to Bylaws of Impac Mortgage Holdings, Inc.~~
~~10.1~~
~~Consulting Agreement between Impac Mortgage Holdings, Inc. and Gretchen Verdugo dated December 18, 2007~~
31.1

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.
32.1*31.2

Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*         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.

65

SIGNATURES

Pursuant to the requirements 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.

IMPAC MORTGAGE HOLDINGS, INC.
~~IMPAC MORTGAGE HOLDINGS, INC.~~
/s/ ~~Joseph~~Todd R. ~~Tomkinson~~
Taylor

by: ~~Joseph~~Todd R. ~~Tomkinson~~
Taylor
Interim Chief ~~Executive~~Financial Officer
~~(authorized~~(authorized officer of registrant and principal ~~executive and~~ financial officer)

Date: ~~December 20, 2007~~September 15, 2008

6650

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
INTEREST INCOME:
Mortgage assets	$	313,307		$	259,359		$	932,580		$	843,845
Other	465			1,695			3,784			5,438
Total interest income	313,772			261,054			936,364			849,283

INTEREST EXPENSE:
Securitized mortgage borrowings	294,570			289,837			889,851			888,056
Reverse repurchase agreements	5,274			344			12,488			981
Other borrowings	2,230			2,299			6,721			6,986
Total interest expense	302,074			292,480			909,060			896,023

Net interest income (expense)	11,698			(31,426		)	27,304			(46,740		)
Provision for loan losses	789,445			3,533			979,740			3,638
Net interest expense after provision for loan losses	(777,747		)	(34,959		)	(952,436		)	(50,378		)

NON-INTEREST INCOME:
Change in fair value of derivative instruments	(137,553		)	(150,051		)	(138,334		)	(91,155		)
Realized gain from derivative instruments	28,815			60,595			103,840			156,582
Provision for repurchases	(4,553		)	—			(4,553		)	—
(Loss) gain on sale of other real estate owned	(5,571		)	485			(6,716		)	1,740
Amortization of mortgage servicing rights	(188		)	(380		)	(603		)	(1,112		)
Lower of cost or market writedown	(6,657		)	—			(7,396		)	—
Loss on sale of loans	(27,586		)	(20		)	(26,195		)	(1,407		)
Provision for REO losses	(40,371		)	—			(68,445		)	—
Other (expense) income	(1,056		)	8,383			4,367			26,664
Total non-interest income (expense)	(194,720		)	(80,988		)	(144,035		)	91,312

NON-INTEREST EXPENSE:
General and administrative and other expense	8,154			1,868			25,293			5,831
Occupancy expense	4,814			413			6,986			1,263
Personnel expense	6,127			2,234			14,089			4,151
Data processing expense	1,425			1,478			4,181			3,434
Professional services	622			285			2,212			1,464
Equipment expense	493			502			1,400			1,565
Total non-interest expense	21,635			6,780			54,161			17,708
Net (loss) earnings from continuing operations	(994,102		)	(122,727		)	(1,150,632		)	23,226
Income tax expense from continuing operations	3,056			1,700			12,012			8,070
Net (loss) earnings from continuing operations	(997,158		)	(124,427		)	(1,162,644		)	15,156
Loss from discontinued operations, net of tax	(194,077		)	(3,264		)	(302,806		)	(30,923		)
Net (loss) earnings	(1,191,235		)	(127,691		)	(1,465,450		)	(15,767		)
Cash dividends on cumulative redeemable preferred stock	(3,722		)	(3,672		)	(11,165		)	(11,016		)
Net loss available to common stockholders	$	(1,194,957	)	$	(131,363	)	$	(1,476,615	)	$	(26,783	)

	For the Nine Months
	Ended September 30,
	2007			2006
				restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings of continuing operations	$	(1,162,644	)	$	15,156
Continuing operations adjustments to reconcile net earnings to net cash used in operating activities:
Provision for loan losses	979,740			3,638
Provision for REO losses	68,445			—
Amortization of deferred charge, net	12,071			15,872
Amortization of premiums, securitization costs and debt issuance costs	117,180			181,769
Loss (gain) on sale of other real estate owned	6,716			(1,740		)
Loss on sale of loans	26,195			1,407
Provision for repurchases	4,553			—
Loss on lower of cost or market writedown	7,396			—
Change in fair value of derivative instruments	138,334			91,155
Purchase of mortgages held-for-sale	(686,271		)	—
Sale and principal reductions on mortgages held-for-sale	546,223			—
Stock-based compensation	1,960			1,628
Goodwill impairment	12,360			—
Impairment of long lived assets	1,200			—
Write-down of securities available-for-sale	11,304
Net change in other assets and liabilities	(13,994		)	(11,869		)
Net cash provided by operating activities of continuing operations	70,768			297,016

Net loss in discontinued operations	(302,806		)	(30,923		)
Discontinued operations adjustments to reconcile net earnings to net cash used in operating activities:
Provision for repurchases	41,883			7,233
Loss on lower of cost or market writedown	133,203			15,284
Provision for loan losses	4,867			(349		)
Purchase of mortgages held-for-sale	(4,162,759		)	(8,301,684		)
Sale and principal reductions on mortgages held-for-sale	1,549,318			6,397,450
Loss (gain) on sale of loans	47,401			(37,019		)
Depreciation and amortization	3,167			4,392
Impairment of long lived assets	11,614			—
Net change in other assets and liabilities	(16,887		)	935
Net cash used in operating activities of discontinued operations	(2,690,999		)	(1,944,681		)
Net cash used in by operating activities	(2,620,231		)	(1,647,665		)

	Discontinued Operations
	as of September 30,
	2007
				Mortgage							Total
	Warehouse			Operations (2)		Commercial		Inter-			Discontinued
Balance Sheet Items:	Lending			(IFC)		Operations		Company (1)			Operations
Securitized mortgage collateral and mortgages held-for-investment	$	—		$	—	$	—	$	—		$	—
Mortgages held-for-sale	—			592,376		129,295		—			721,671
Finance receivables	994,768			—		—		(959,818		)	34,950
Allowance for loan losses	(7,759		)	—		—		—			(7,759		)
Total assets	1,179,849			804,543		129,680		(1,303,498		)	810,574
Reverse repurchase agreements	923,733			714,182		130,581		(992,850		)	775,646

	Discontinued Operations
	as of December 31,
	2006
				Mortgage								Total
	Warehouse			Operations (2)			Commercial		Inter-			Discontinued
Balance Sheet Items:	Lending			(IFC)			Operations		Company (1)			Operations
Securitized mortgage collateral and mortgages held-for-investment	$	—		$	114,315		$	—	$	—		$	114,315
Mortgages held-for-sale	—			1,382,626			179,293		—			1,561,919
Finance receivables	1,847,097			—			—		(1,540,816		)	306,281
Allowance for loan losses	(10,598		)	(3,493		)	—		—			(14,091		)
Total assets	1,966,317			1,629,180			181,406		(1,690,687		)	2,086,216
Reverse repurchase agreements	1,716,512			1,356,524			176,800		(1,533,331		)	1,716,505

	Discontinued Operations
	for the nine months ended September 30,
	2007
			Mortgage									Total
	Warehouse		Operations (2)			Commercial			Inter-			Discontinued
Income Statement Items:	Lending		(IFC)			Operations			Company (1)			Operations
Net interest income (expense)	$	18,203	$	(7,622	)	$	(2,424	)	$	5,758		$	13,915
Provision (benefit) for loan losses	4,979		(112		)	—			—			4,867
Realized gain from derivative instruments	—		910			270			—			1,180
Change in fair value of derivative instruments	—		(3,479		)	(1,479		)	—			(4,958		)
Other non-interest (expense) income	1,481		(194,106		)	(6,376		)	(24,671		)	(223,672		)
Non-interest expense and income taxes	8,508		67,267			8,629			—			84,404
Net earnings (loss)	$	6,197	$	(271,452	)	$	(18,638	)	$	(18,913	)	$	(302,806	)

	Discontinued Operations
	for the three months ended September 30,
	2007
				Mortgage								Total
	Warehouse			Operations (2)			Commercial			Inter-		Discontinued
Income Statement Items:	Lending			(IFC)			Operations			Company (1)		Operations
Net interest income (expense)	$	6,025		$	(1,691	)	$	(2,041	)	$	789	$	3,082
Provision for loan losses	2,637			170			—			—		2,807
Realized gain from derivative instruments	—			54			52			—		106
Change in fair value of derivative instruments	—			(1,098		)	(2,780		)	—		(3,878		)
Other non-interest (expense) income	267			(146,028		)	(6,106		)	—		(151,867		)
Non-interest expense and income taxes	3,966			31,768			2,979			—		38,713
Net (loss) earnings	$	(311	)	$	(180,701	)	$	(13,854	)	$	789	$	(194,077	)

	Ending Balance as of						Fair Value Balance
	December 31,2007			Adoption Net			as of January 1, 2008
	(Prior to Adoption)			Gain/(Loss)			(After Adoption) (5)
Impact of electingthe fair value option under SFAS 159:
Investment securities available-for-sale	$	15,248		$	1,028	(1)	$	15,248
Securitized mortgage collateral (2)	16,532,633			(821,311		)	15,711,322
Securitized mortgage borrowings (3)	(17,780,060		)	1,903,283			(15,876,777		)
Trust preferred securities	(98,398		)	57,446			(40,952		)
Cumulative-effect adjustment (pre-tax)				1,140,446
Tax impact (4)				—
Cumulative-effect adjustment to reduce retained deficit				$	1,140,446

Total retained deficit as of December 31, 2007				(1,449,232		)
Cumulative-effect adjustment to reduce retained deficit				$	1,140,446
Total retained deficit as of January 1, 2008 (6)				$	(308,786	)

(2)		Components of securitized mortgage collateral at December 31, 2007 include the allowance for loan loss of $1.2 billion, accrued interest of $99.7 million and premiums of $183.1 million, which were part of its fair value for the adoption of SFAS 159. At June 30, 2008 and December 31, 2007, securitized mortgage collateral included $10.1 million and $9.1 million, respectively in master servicing rights, recorded at the lower of cost or market, related to consolidated securitizations and recorded at the lower of cost or market.
(3)		Components of securitized mortgage borrowings at December 31, 2007 include accrued interest of $17.1 million and securitization costs of $37.5 million, which were part of its fair value for the adoption of SFAS 159.
(4)		There was no tax effect of the adoption of SFAS 159 as the Company qualifies as a REIT for federal income tax purposes and its tax liabilities are only related to it deferred charges associated with previous inter-company loan sales.
(5)		The securitized mortgage collateral and securitized mortgage borrowings include the mortgage insurance and bond insurance proceeds to be received from third parties.
(6)		As of January 1, 2008, after adoption of SFAS 159, total stockholder’s equity was $61.7 million

	At September 30,			At December 31,
	2007			2006
Mortgages held-for-sale - residential	$	714,359		$	1,381,264
Mortgages held-for-sale - commercial	128,869			177,619
Net premiums on mortgages held-for-sale - residential	2,438			18,024
Net premiums on mortgages held-for-sale - commercial	79			857
Change in fair value of residential mortgages held-for-sale	(126,849		)	(18,717		)
Net deferred costs	2,775			2,872
Total mortgages held-for-sale	$	721,671		$	1,561,919

	Recurring Fair Value Measurements
	At June 30, 2008
	Level 1		Level 2		Level 3		Total
Assets
Investment securities available-for-sale	$	—	$	—	$	8,644	$	8,644
Securitized mortgage collateral (1)	—		10,747,133		298,189		11,045,322
Total Assets at Fair Value	$	—	$	10,747,133	$	306,833	$	11,053,966

Liabilities
Securitized mortgage borrowings	$	—	$	11,180,164	$	316,968	$	11,497,132
Derivative liabilities, net (2)	—		136,471		—		136,471
Trust preferred securities	—		—		46,266		46,266
Total Liabilities at Fair Value	$	—	$	11,316,635	$	363,234	$	11,679,869

(1)		Excluded from securitized mortgage collateral above is $10.1 million in master servicing rights related to consolidated securitizations and recorded at the lower of cost or market.
(2)		Derivative liabilities, net includes $109 thousand in derivative assets and $136.6 million in derivative liabilities, included within trust assets and trust liabilities, respectively.

	Level 3 Recurring Fair Value Measurements
	Three Months Ended June 30, 2008
	Fair Value -March 31, 2008			Total Gains (Losses) Included in Earnings			Transfers in and/or out of Level 3			Purchases, issuances and settlements			Fair Value - June 30, 2008			Unrealized gains (losses) still held (1)
Investment securities available-for-sale	$	10,621		$	(1,318	)	$	—		$	(659	)	$	8,644		$	(1,977	)
Securitized mortgage collateral	966,958			12,581			(645,986		)	(35,364		)	298,189			(22,783		)
Securitized mortgage borrowings	(998,395		)	(12,388		)	661,157			32,658			(316,968		)	20,270
Trust preferred securities	(45,129		)	(1,137		)	—			—			(46,266		)	(1,137		)

	Level 3 Recurring Fair Value Measurements
	Six Months Ended June 30, 2008
	Fair Value - January 1, 2008			Total Gains (Losses) Included in Earnings			Transfers in and/or out of Level 3			Purchases, issuances and settlements			Fair Value - June 30, 2008			Unrealized gains (losses) still held (1)
Investment securities available-for-sale	$	15,248		$	(5,408	)	$	—		$	(1,196	)	$	8,644		$	(5,006	)
Securitized mortgage collateral	782,574			(236,490		)	(119,516		)	(128,379		)	298,189			(189,290		)
Securitized mortgage borrowings	(767,704		)	265,815			98,688			86,233			(316,968		)	183,216
Trust preferred securities	(40,952		)	(5,314		)	—			—			(46,266		)	(5,020		)

	Recurring Fair Value Measurements
	Level 3 - Total Gains (Losses) Included in Net Loss
	Three Months Ended June 30, 2008
	Investment Securities Available-for-Sale			Securitized Mortgage Collateral		Securitized Mortgage Borrowings			Trust Preferred Securities
Interest income	$	199		$	10,306	$	—		$	—
Interest expense	—			—		(6,275		)	(140		)
Change in fair value of net trust assets, excluding REO	(1,517		)	2,275		(6,113		)	—
Change in fair value of trust preferred securities	—			—		—			(997		)
Total	$	(1,318	)	$	12,581	$	(12,388	)	$	(1,137	)

·		Stated interest rate adjustments to account for the stated yield difference between the trust preferred securities and the preferred stock issued by the Company,

·		Liquidity adjustments to reflect the presence of a lack of an actively traded market for these securities.

·		Preference adjustments to reflect the rights of the trust preferred securities as compared to the preferred securities.

									Total Gains (Losses)
	Non-recurring Fair Value Measurements								For the Periods Ended
	As of June 30, 2008								June 30, 2008
	Level 1		Level 2		Level 3		Total		Three Months			Six Months
Loans held-for-sale (1)	$	—	$	—	$	167,420	$	167,420	$	(7,885	)	$	(16,249	)
Mortgage servicing rights	$	—	$	—	$	1,677	$	1,677	$	(301	)	$	(948	)

	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Loss
	Three Months Ended June 30, 2008
						Change in Fair Value of
	Interest Income		Interest Expense			Net Trust Assets			Trust Preferred Securities			Total
Investment securities available-for-sale	$	687	$	—		$	(1,517	)	$	—		$	(830	)
Securitized mortgage collateral	406,988		—			(19,062		)	—			387,926
Securitized mortgage borrowings	—		(401,431		)	(88,886		)	—			(490,317		)
Trust preferred securities	—		(2,168		)	—			(997		)	(3,165		)
Derivative instruments	—		—			98,304			—			98,304
Total	$	407,675	$	(403,599	)	$	(11,161	)	$	(997	)	$	(8,082	)

(1)		The $75.9 million total change in fair value of these financial instruments is included as change in fair value of trust assets, excluding REO and derivatives, in the accompanying statement of cash flows for the six months ended June 30, 2008.
(2)		Included in this amount is $(12.1) million in non-cash changes in the fair value of derivative instruments, which are included in the accompanying statement of cash flows for the six months ended June 30, 2008, and $(71.4) million in cash settlements paid.
(3)		The totals include $(370.1) million and $344.9 million of accretion of interest income and expense, respectively.

	Nine Months		Six Months
	Ended September 30,		Ended June 30,
	2007	2006	2008	2007
Risk-free interest rate	4.28% to 4.60%	3.90% to 4.26%	1.88% to 2.13%	—
Expected lives (in years)	3	3	3.25	—
Expected volatility (1)	75.09%	34.75%	87.3% - 89.9%	—
Expected dividend yield (2)	0.00%	11.00%	0.00%	—
Grant date fair value of share options	$0.60	$1.41	$ 0.71 - 0.78	—

			Weighted-				Weighted-
			Average				Average
	Number of		Exercise		Number of		Exercise
	Shares		Price ($)		Shares		Price ($)
Options outstanding at January 1, 2007	7,048,755		$	12.91
Options outstanding at January 1, 2008					5,939,914		$	9.75
Options granted	2,158,500		2.56		7,810,000		1.28
Options exercised	—		—		—		—
Options forfeited / cancelled	(1,887,173	)	12.75		(1,131,164	)	4.69
Options outstanding at end of period	7,320,082		$	9.90
Options exercisable at end of period	3,468,038		$	13.60
Options outstanding at June 30, 2008					12,618,750		$	4.91
Options exercisable at June 30, 2008					2,661,559		$	12.94

	Securitized Mortgage Collateral		Net Investment
Trusts with positive net investment positions	$	5,353,083	$	143,694
Trusts with negative net investment positions	13,388,437		(561,673		)
	$	18,741,520	$	(417,979	)

	Reporting Segments as of the Nine Months
	Ended September 30, 2007
	Long-Term
	Investment			Retail			Discontinued			Inter-
Balance Sheet Items:	Operations			Operations			Operations			Company (1)			Consolidated
Securitized mortgage collateral and mortgages held-for-investment	$	18,866,749		$	—		$	—		$	(124,721	)	$	18,742,029
Mortgages held-for-sale	2,201			131,296			721,671			—			855,168
Finance receivables	—			185			34,950			(6		)	35,129
Allowance for loan losses	(911,218		)	—			(7,759		)	—			(918,977		)
Total assets	18,516,644			167,886			810,574			(84,728		)	19,410,376
Total stockholders’ equity	(351,016		)	(39,614		)	299,664			(402,350		)	(493,316		)

	Reporting Segments as of the year
	Ended December 30, 2006
	Long-Term
	Investment			Discontinued			Inter-
Balance Sheet Items:	Operations			Operations			Company (1)			Consolidated
Securitized mortgage collateral and mortgages held-for-investment	$	21,072,413		$	114,315		$	(134,018	)	$	21,052,710
Mortgages held-for-sale	—			1,561,919			—			1,561,919
Finance receivables	—			306,281			13			306,294
Allowance for loan losses	(77,684		)	(14,091		)	—			(91,775		)
Total assets	21,516,202			2,086,216			(3,463		)	23,598,955
Total stockholders’ equity	829,494			319,792			(139,756		)	1,009,530

	Reporting Segments as of and for the Nine Months
	Ended September 30, 2007
	Long-Term
	Investment			Retail			Discontinued			Inter-
Income Statement Items:	Operations			Operations			Operations			Company (1)		Consolidated
Net interest income (expense)	$	383		$	(312	)	$	13,915		$	27,233	$	41,219
Provision for loan losses	979,740			—			4,867			—		984,607
Realized gain from derivative instruments	103,840			—			1,180			—		105,020
Change in fair value of derivative instruments	(136,701		)	(1,633		)	(4,958		)	—		(143,292		)
Other non-interest (expense) income	(102,767		)	(8,921		)	(223,672		)	2,147		(333,213		)
Non-interest expense and income taxes	19,702			34,459			84,404			12,012		150,577
Net (loss) earnings	$	(1,134,687	)	$	(45,325	)	$	(302,806	)	$	17,368	$	(1,465,450	)

	Continuing			Discontinued
	Operations			Operations			Consolidated
Balance Sheet Items as of June 30, 2008:
Securitized mortgage collateral	$	11,055,382		$	—		$	11,055,382
Loans held-for-sale	1,785			165,635			167,420
Total assets	11,760,223			203,320			11,963,543
Total liabilities	11,685,701			253,334			11,939,035
Total stockholders’ equity (deficit)	$	74,522		$	(50,014	)	$	24,508

Balance Sheet Items as of December 31, 2007:
Securitized mortgage collateral	$	16,532,633		$	—		$	16,532,633
Loans held-for-sale	1,684			279,659			281,343
Finance receivables	336			12,458			12,794
Total assets	17,037,822			353,250			17,391,072
Total liabilities	18,063,459			405,341			18,468,800
Total stockholders’ deficit	$	(1,025,637	)	$	(52,091	)	$	(1,077,728	)

	Reporting Segments as of and for the Nine Months
	Ended September 30, 2006
	Long-Term
	Investment			Discontinued			Inter-
Income Statement Items:	Operations			Operations			Company (1)		Consolidated
Net interest (expense) income	$	(91,593	)	$	18,958		$	44,853	$	(27,782	)
Provision for loan losses	3,638			(350		)	—		3,288
Realized gain from derivative instruments	156,582			51			—		156,633
Change in fair value of derivative instruments	(95,185		)	(1,447		)	4,030		(92,602		)
Other non-interest income	21,332			14,541			4,553		40,426
Non-interest expense and income taxes	17,708			63,376			8,070		89,154
Net (loss) earnings	$	(30,210	)	$	(30,923	)	$	45,366	$	(15,767	)

	Reporting Segments as of and for the Three Months
	Ended September 30, 2007
	Long-Term
	Investment			Retail			Discontinued			Inter-
Income Statement Items:	Operations			Operations			Operations			Company (1)		Consolidated
Net interest income (expense)	$	3,040		$	(116	)	$	3,082		$	8,774	$	14,780
Provision for loan losses	789,445			—			2,807			—		792,252
Realized gain from derivative instruments	28,815			—			106			—		28,921
Change in fair value of derivative instruments	(135,347		)	(2,206		)	(3,878		)	—		(141,431		)
Other non-interest (expense) income	(76,159		)	(10,832		)	(151,867		)	1,009		(237,849		)
Non-interest expense and income taxes	7,262			14,373			38,713			3,056		63,404
Net (loss) earnings	$	(976,358	)	$	(27,527	)	$	(194,077	)	$	6,727	$	(1,191,235	)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2007			2006			2007			2006
Beginning balance	$	214,734		$	57,388		$	77,684		$	67,831
Provision for loan losses	789,445			3,533			979,740			3,638
Charge-offs, net of recoveries	(92,961		)	(5,540		)	(146,206		)	(16,088		)
Allowance for loan losses	$	911,218		$	55,381		$	911,218		$	55,381

	At June 30,			At December 31,
	2008			2007
Deferred charge	$	28,684		$	37,412
Other receivables	4,618			—
Premises and equipment	2,947			3,904
Real estate owned outside trust	2,269			4,571
Prepaid expenses	2,423			3,505
Investment in capital trusts	2,271			2,394
Mortgage sevicing rights	1,677			2,083
Other assets	3,795			3,325
	$		48,684	$		57,194

	Nine months			Year ended
	ended September 30,			December 31,
	2007			2006
Beginning balance	$	137,331		$	46,092
Additions	440,979			181,120
Sales	(170,153		)	(82,553		)
Net realizable value (NRV) adjustment	(47,685		)	(7,328		)
REO, net	$	360,472		$	137,331