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

For the quarterly period ended ~~September 30, 2008~~ March 31, 2009

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No xo

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 o ~~Accelerated filer~~ x ~~Non-accelerated filer~~ o ~~Smaller reporting company~~ o	Accelerated filer x

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 ~~76,100,524~~7,618,146 shares of common stock outstanding as of ~~November 12, 2008.~~May 8, 2009.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS	1
	Consolidated Balance Sheets as of ~~September 30, 2008~~March 31, 2009 (unaudited) and December 31, ~~2007~~2008	1
	Consolidated Statements of Operations ~~and Comprehensive Loss~~ for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~(unaudited)	2
	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~(unaudited)	43
	Notes to Unaudited Consolidated Financial Statements	64

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2316
	Forward-Looking Statements	2316
	The Mortgage Banking Industry and Discussion of Relevant Fiscal Periods	2316
	Status of Operations, Liquidity and Capital Resources	2416
	Market Conditions	2619
	Critical Accounting Policies	2821
	Fair Value of Financial Instruments	2922
	Interest Income and ~~Interest~~ Expense	3024
	Selected Financial Results for the Three Months Ended ~~September 30, 2008~~March 31, 2009	3124
	~~Selected Financial Results for the Nine Months Ended September 30, 2008~~	31
	Estimated Taxable Income	3124
	Financial Condition and Results of Operations	3224

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4233

ITEM 4.	CONTROLS AND PROCEDURES	4233

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	4334

ITEM 1A.	RISK FACTORS	4434

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4434

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4434

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	4434

ITEM 5.	OTHER INFORMATION	4534

ITEM 6.	EXHIBITS	4535

	SIGNATURES	4636

	CERTIFICATIONS

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30,			December 31,			March 31,			December 31,
	2008			2007			2009			2008
	(Unaudited)						(Unaudited)
ASSETS
Cash and cash equivalents	$	24,536		$	24,387		$	38,313		$	46,215
Restricted cash							1,247			1,243
Short-term investments							5,041			—
Trust assets
Investment securities available-for-sale	4,856			15,248			1,322			2,068
Securitized mortgage collateral (at fair value at September 30, 2008)	8,264,413			16,532,633
Securitized mortgage collateral							5,505,729			5,894,424
Derivative assets	251			7,497			37			37
Real estate owned (REO) at net realizeable value	663,320			400,863
Real estate owned (REO)							440,916			599,084
Total trust assets	8,932,840			16,956,241			5,948,004			6,495,613

Assets of discontinued operations	158,468			353,250			137,947			141,053
Other assets	49,617			57,194			29,114			31,393
Total assets	$	9,165,461		$	17,391,072		$	6,159,666		$	6,715,517

LIABILITIES
Trust liabilities
Securitized mortgage borrowings (at fair value at September 30, 2008)	$	8,787,013		$	17,780,060
Securitized mortgage borrowings							$	5,691,028		$	6,193,984
Derivative liabilities	103,800			127,757			232,357			273,584
Total trust liabilities	8,890,813			17,907,817			5,923,385			6,467,568

Trust preferred securities (at fair value at September 30, 2008)	35,898			98,398
Trust preferred securities							11,090			15,403
Liabilities of discontinued operations	225,536			405,341			209,865			217,241
Other liabilities	7,704			57,244			6,321			6,053
Total liabilities	9,159,951			18,468,800			6,150,661			6,706,265

Commitments and contingencies

STOCKHOLDERS’ EQUITY
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			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	45			45

Common stock, $0.01 par value; 200,000,000 shares authorized; 76,100,524 and 76,096,392 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively	761			761
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 March 31, 2009 and December 31, 2008.							45			45
Common stock, $0.01 par value; 200,000,000 shares authorized; 7,618,146 shares issued and outstanding as of March 31, 2009 and December 31, 2008							76			76
Additional paid-in capital	1,176,068			1,173,562			1,178,569			1,177,697
Accumulated other comprehensive income	—			1,028
Net accumulated deficit:
Cumulative dividends declared	(815,076		)	(803,912		)	(815,077		)	(815,077		)
Retained deficit	(356,308		)	(1,449,232		)	(354,628		)	(353,509		)
Net accumulated deficit	(1,171,384		)	(2,253,144		)	(1,169,705		)	(1,168,586		)
Total stockholders’ equity (deficit)	5,510			(1,077,728		)
Total stockholders’ equity							9,005			9,252
Total liabilities and stockholders’ equity	$	9,165,461		$	17,391,072		$	6,159,666		$	6,715,517

See accompanying notes to consolidated financial statements.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

~~AND COMPREHENSIVE LOSS~~

(in thousands, except per share data)

(Unaudited)

	For the Three Months						For the Nine Months						For the Three Months
	Ended September 30,						Ended September 30,						Ended March 31,
	2008			2007			2008			2007			2009			2008
INTEREST INCOME:
Total interest income	$	397,445		$	310,006		$	1,077,256		$	931,196

INTEREST EXPENSE:
Total interest expense	394,431			298,003			1,062,637			903,377
INTEREST INCOME													$	712,649		$	271,955

INTEREST EXPENSE													709,007			264,606

Net interest income	3,014			12,003			14,619			27,819			3,642			7,349
Provision for loan losses	—			789,445			—			979,740
Net interest income (expense) after provision for loan losses	3,014			(777,442		)	14,619			(951,921		)

NON-INTEREST INCOME:
Change in fair value of derivative instruments	—			(106,532		)	—			(32,860		)
Change in fair value of net trust assets, excluding REO	7,778			—			145			—			132,930			3,528
Losses from real estate owned	(15,685		)	(45,941		)	(24,771		)	(75,161		)	(128,201		)	(4,256		)
Non-interest income- net trust assets													4,729			(728		)
Change in fair value of trust preferred securities	10,494			—			5,473			—			12			(4,023		)
Real estate advisory fees	7,039			—			15,581			—			—			3,845
Other	1,847			(29,770		)	5,287			(26,021		)	5,508			1,898
Total non-interest income (expense)	11,473			(182,243		)	1,715			(134,042		)
Total non-interest income													10,249			992

NON-INTEREST EXPENSE:
General and administrative	4,951			4,213			13,864			14,173			4,339			3,988
Personnel expense	2,382			2,488			7,531			4,952			6,278			2,330
Total non-interest expense	7,333			6,701			21,395			19,125			10,617			6,318
Net earnings (loss) from continuing operations	7,154			(966,386		)	(5,061		)	(1,105,088		)
Net earnings from continuing operations before income taxes													3,274			2,023
Income tax expense from continuing operations	5,253			3,056			13,980			12,012			1,998			6,526
Net earnings (loss) from continuing operations	1,901			(969,442		)	(19,041		)	(1,117,100		)	1,276			(4,503		)
Net loss from discontinued operations, net of tax	(18,121		)	(221,793		)	(28,481		)	(348,350		)
Net (loss) earnings from discontinued operations, net of tax													(2,395		)	688
Net loss	(16,220		)	(1,191,235		)	(47,522		)	(1,465,450		)	(1,119		)	(3,815		)
Cash dividends on cumulative redeemable preferred stock	(3,722		)	(3,722		)	(11,165		)	(11,165		)	—			(3,722		)
Net loss available to common stockholders	$	(19,942	)	$	(1,194,957	)	$	(58,687	)	$	(1,476,615	)
Net loss attributable to common stockholders													$	(1,119	)	$	(7,537	)

Net loss per common share - basic and diluted:
Earnings (loss) from continuing operations													$	0.17		$	(1.08	)
(Loss) earnings from discontinued operations													(0.32		)	0.09
Net loss per share													$	(0.15	)	$	(0.99	)

See accompanying notes to consolidated financial statements.

Table of Contents

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2008

2007

2008

2007

Net loss

$
(16,220
)
$
(1,191,235
)
$
(47,522
)
$
(1,465,450
)
Net unrealized losses on securities:

Unrealized holding losses arising during year

—

(700
)
—

(673
)
Reclassification of losses included in net earnings

—

(243
)
—

(1,393
)
Net unrealized losses

—

(943
)
—

(2,066
)
Comprehensive loss

$
(16,220
)
$
(1,192,178
)
$
(47,522
)
$
(1,467,516
)

Net loss per common share - Basic:

Loss from continuing operations

$
(0.02
)
$
(12.79
)
$
(0.40
)
$
(14.83
)
Loss from discontinued operations

(0.24
)
(2.91
)
(0.37
)
(4.58
)
Net loss per share

$
(0.26
)
$
(15.70
)
$
(0.77
)
$
(19.41
)

Net loss per common share - Diluted:

Loss from continuing operations

$
(0.02
)
$
(12.79
)
$
(0.40
)
$
(14.83
)
Loss from discontinued operations

(0.24
)
(2.91
)
(0.37
)
(4.58
)
Net loss per share

$
(0.26
)
$
(15.70
)
$
(0.77
)
$
(19.41
)

Dividends declared per common share

$
—

$
—

$
—

$
0.10

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Three Months
	Ended March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations	$	1,276		$	(4,503	)

Losses from real estate owned	128,201			4,256
Amortization and impairment of deferred charge	1,998			6,526
Amortization and impairment of mortgage servicing rights	—			647
Change in fair value of net trust assets, excluding REO	(190,793		)	(29,430		)
Change in fair value of trust preferred securities	(12		)	4,023
Accretion of interest income and expense	197,003			101,224
Stock-based compensation	779			197
Net cash (used in) provided by operating activities of discontinued operations	(2,773		)	88,984
Net change in other assets and liabilities	(12,716		)	(24,034		)
Net cash provided by operating activities	122,963			147,890

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in securitized mortgage collateral	197,532			612,291
Net change in mortgages held-for-investment	390			15
Purchase of premises and equipment	(194		)	—
Purchase of short-term investments	(5,041		)	—
Net principal change on investment securities available-for-sale	1,746			538
Proceeds from the sale of real estate owned	161,332			74,961
Net cash provided by investing activities of discontinued operations	2,657			7,040
Net cash provided by investing activities	358,422			694,845

CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of trust preferred securities	(3,750		)	—
Repayment of securitized mortgage borrowings	(479,081		)	(739,536		)
Preferred stock dividends paid	—			(3,722		)
Net cash used in financing activities of discontinued operations	(6,209		)	(92,942		)
Net cash used in financing activities	(489,040		)	(836,200		)

Net change in cash and cash equivalents	(7,655		)	6,535
Cash and cash equivalents at beginning of period	46,228			26,462
Cash and cash equivalents at end of period - Continuing Operations	38,313			32,901
Cash and cash equivalents at end of period - Discontinued Operations	260			96
Cash and cash equivalents at end of period	$	38,573		$	32,997

NON-CASH TRANSACTIONS (Continuing and Discontinued Operations):
Transfer of loans held-for-sale and held-for-investment to real estate owned	$	3,821		$	—
Transfer of securitized mortgage collateral to real estate owned	118,851			209,801

See accompanying notes to consolidated financial 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,

2008

2007

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss from continuing operations

$
(19,041
)
$
(1,117,100
)

Provision for loan losses

—

979,740

Losses from real estate owned

24,771

75,161

Amortization of deferred charge, net

13,980

12,071

Amortization of debt issuance costs and mortgage servicing rights

1,363

1,174

Amortization of premiums and securitization costs

—

116,609

Change in fair value of derivative instruments

—

136,701

Change in fair value of net trust assets, excluding REO

(113,000
)
—

Change in fair value of trust preferred securities

(5,473
)
—

Accretion of interest income and expense

385,759

—

Write-down of investment securities available-for-sale

—

11,304

Stock-based compensation

901

961

Net change in accrued interest receivable

—

4,658

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

89,973

(2,869,413
)
Net change in other assets and liabilities

(42,135
)
46,396

Net cash provided by (used in) operating activities

337,098

(2,601,738
)

CASH FLOWS FROM INVESTING ACTIVITIES:

Principal reductions on securitized mortgage collateral

1,409,506

4,749,658

Principal reductions on mortgages held-for-investment

59

(2,061
)
Purchase of premises and equipment

357

(1,362
)
Proceeds from investment securities available-for-sale

2,358

2,816

Proceeds from the sale of real estate owned

351,183

161,557

Net cash provided by investing activities of discontinued operations

13,613

395,710

Net cash provided by investing activities

1,777,076

5,306,318

CASH FLOWS FROM FINANCING ACTIVITIES:

Cash disbursements under reverse repurchase agreements

—

(256,459
)
Cash receipts from reverse repurchase agreements

—

92,455

Proceeds from securitized mortgage borrowings

—

3,858,143

Repayment of securitized mortgage borrowings

(1,962,577
)
(5,690,970
)
Common stock dividends paid

—

(30,326
)
Preferred stock dividends paid

(11,165
)
(11,165
)
Proceeds from sale of cumulative redeemable preferred stock

—

608

Net cash used in financing activities of discontinued operations

(142,345
)
(792,630
)
Net cash used in financing activities

(2,116,087
)
(2,830,344
)

Net change in cash and cash equivalents

(1,913
)
(125,764
)
Cash and cash equivalents at beginning of period

26,462

179,677

Cash and cash equivalents at end of period - Continuing Operations

24,536

36,086

Cash and cash equivalents at end of period - Discontinued Operations

13

17,827

Cash and cash equivalents at end of period

$
24,549

$
53,913

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

~~Table of Contents~~

For the Nine Months

Ended September 30,

2008

2007

SUPPLEMENTARY INFORMATION (Continuing and Discontinued Operations):

Interest paid

$
435,861

$
962,116

Taxes paid

—

116

NON-CASH TRANSACTIONS (Continuing and Discontinued Operations):

Accumulated other comprehensive loss

$
—

$
(2,066
)
Transfer of mortgages to real estate owned

3,009

28,445

Transfer of securitized mortgage collateral to real estate owned

628,779

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 net assets from discontinued operations to continuing operations

25,600

4,012

~~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

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 late 2007,~~In the first quarter of 2009, the Company created a new subsidiary, Integrated Real Estate Service Corporation (IRES), which will include mortgage and real estate related fee-based businesses.

The Company’s ~~board of directors elected~~operations include its continuing and discontinued operations. The continuing operations primarily include the long-term mortgage portfolio (residual interests in securitizations reflected as net trust assets and liabilities in the consolidated balance sheets), and to ~~discontinue~~a lesser extent includes the mortgage and real estate related fee-based businesses. The discontinued operations include the former non-conforming mortgage and retail operations conducted by IFC, commercial operations conducted by ICCC, ~~retail mortgage operations conducted by IFC,~~ and warehouse lending operations conducted by ~~IWLG (collectively, the discontinued operations).~~IWLG.

~~The~~During the first quarter of 2009, the Company ~~consists~~revoked its election to be taxed as a REIT, effective January 1, 2009. As a result of revoking this election, the ~~continuing operations, which includes~~Company will be subject to income taxes as a regular corporation. As of December 31, 2008, the ~~long-term mortgage portfolio (residual interests in securitizations) conducted by IMH~~Company had federal and ~~IMH Assets, the master servicing portfolio,~~California net operating loss carryforwards of $406.8 million and ~~real estate advisory fees from the Company’s advisory services agreement with a real estate marketing company.~~$532.2 million, respectively.

The information contained throughout this document is presented on a continuing basis, unless otherwise stated.

Financial Statement Presentation

The accompanying unaudited consolidated financial statements of IMH and its subsidiaries (as defined above) have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (GAAP) 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 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 three-month ~~and nine-month periods~~period ended ~~September 30, 2008~~March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2008.~~2009. These interim period condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the United States Securities and Exchange Commission (SEC).

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 the valuation of trust assets and liabilities, the valuation of repurchase liabilities related to ~~loans~~ sold ~~to investors,~~loans, the valuation of trust preferred securities, ~~the valuation of lease restructuring liabilities~~ and the valuation of loans held-for-sale. Actual results could differ from those estimates.

~~Market Conditions, Status of Operations, Liquidity and Capital Resources~~

Real estate prices have fallen significantly since the peak levels in 2006. During the third quarter of 2008, the credit and housing markets continued to suffer from significant market disruption due to continued deterioration of the real estate and credit markets. The federal government has taken steps to attempt to stabilize the housing and credit markets. At this time, the government’s actions have not affected the Company’s financial position or operations.

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 the Company’s reverse repurchase facilities and settled a portion of its outstanding repurchase claims, while also reducing its operating costs and liabilities in 2007.

During the third quarter of 2008, the Company continued to fund its operations with revenues and cash flows from real estate advisory fees and its residual interests in securitizations and master servicing fees generated from the long-term mortgage portfolio.

~~Table of Contents~~

In the first quarter of 2008, the Company entered into an agreement with a real estate marketing company to generate advisory fees. The real estate marketing company specializes in the marketing of foreclosed properties. During the three and nine months ended September 30, 2008, the Company earned $7.0 million and $15.6 million, respectively, from this relationship. On November 12, 2008, the Company and the real estate marketing company agreed to terminate the advisory services agreement. See Note L for details of the agreement to terminate.

~~In September 2008, the Company entered into an agreement to restructure its reverse repurchase line with its remaining lender. See Note J for details of the restructure.~~

The Company paid its October 2008 trust preferred interest payment as part of its negotiations to restructure or exchange the current trust preferred securities. To date, the Company has been unsuccessful in completing these negotiations.

~~In July 2008, the Company’s stockholders approved the potential issuance of common shares in excess of 20 percent of the existing common shares.~~

There can be no assurance that the Company will be successful in acquiring the special servicer, restructuring the trust preferred securities or exchanging the preferred stock. In any 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.

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 restructured 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 third quarter of 2008, certain markets remained inactive, and some key observable inputs used in valuing certain financial assets and liabilities were unavailable. Under the provisions of FASB Staff Position No. 157-3 “Determining the Fair Value of a Financial Asset When the

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Market for That Asset Is Not Active”, in situations in which there is little, if any, market activity for an asset at measurement date, the fair value measurement objective remains to measure the financial asset at the price that would be received by the holder of the financial asset in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. In the absence of observable market data at September 30, 2008, the Company’s fair value measurements include its own internal assumptions about future cash flows and appropriately risk-adjusted discount rates that it believes market participants would make in orderly market transactions. When and if these markets become active, the Company will use the related observable inputs available at that time. Therefore, at September 30, 2008, all of the items measured at fair value are considered Level 3 fair value measurements.

~~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 since the second half of 2007, the Company significantly added to its allowance for loan losses during the third and fourth quarters of 2007. Principally, because of the 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 trust liabilities represents the net investment interests (residual interests in securitizations) in the consolidated trusts at fair value.

~~The following table summarizes the initial retained earnings charge related to the prospective adoption of SFAS 159 as of January 1, 2008 and the related fair value balances as of January 1, 2008.~~

Ending Balance as of
December 31, 2007

Adoption Net

Fair Value Balance
as of January 1, 2008

(Prior to Adoption)

Gain/(Loss)

(After Adoption) (5)

Impact of electing the 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
)

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~~(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.

~~(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 September 30, 2008 and December 31, 2007, securitized mortgage collateral included $10.4 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 stockholders’ equity was $61.7 million~~

~~Changes in Significant Accounting Policies~~

~~Investment Securities Available-for-Sale~~

The Company elected to continue to account for all of its existing investment securities available-for-sale at fair value. Interest income is recorded based on the effective yield for the period based on the valuation of the previous quarter. Net gains and losses resulting from changes in fair value of investment securities available-for-sale are recorded within change in fair value of net trust assets in the Company’s consolidated statement of operations and comprehensive loss.

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 based on the effective yield for the period based on the previous quarter’s valuation resulting in interest income and interest expense accretion included in interest income and interest expense in the Company’s consolidated statement of operations and comprehensive loss. Net gains (losses) resulting from the changes in fair value of securitized mortgage collateral and borrowings, are included in change in fair value of net trust assets, excluding REO, within non-interest income in the Company’s consolidated statement of operations and comprehensive loss. Electing the fair value option allows the Company 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 transactions within the consolidated statement of operations and comprehensive loss. 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.

~~Trust Preferred Securities~~

The Company elected to account for all of its trust preferred securities at fair value. Interest expense on trust preferred securities is recorded based on the effective yield for the period and included in interest expense in the consolidated statement of operations and comprehensive loss. Gains and losses resulting from the changes in fair value of trust preferred securities are recorded within change in fair value of trust preferred securities in the Company’s consolidated statement of operations and comprehensive loss.

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.

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3.Market Conditions and Status of Operations

During the first quarter of 2009, the Company continues to be significantly and negatively affected by the deteriorating real estate market and the weak economic environment. These factors have led to continued deterioration in the quality of the Company’s long-term mortgage portfolio, as evidenced by the continued increases in delinquencies, foreclosures and credit losses. Existing conditions are unprecedented and inherently involve significant risks and uncertainty to the Company. The current market conditions have led to fewer sources of liquidity available to the Company to operate its business. These conditions continue to adversely affect the performance of the Company’s long-term mortgage portfolio, including significant losses on real estate owned.

During the quarter, the Company has initiated various mortgage and real estate related fee-based businesses, including loan modifications, real estate disposition, monitoring and surveillance services, real estate brokerage and lending services and escrow services, and has begun to generate revenues from these businesses. However, since these businesses are newly formed, there remains uncertainty about their future success.

In January 2009, the Company fully satisfied $25.0 million in outstanding trust preferred securities of Impac Capital Trust #2 for $3.75 million.

In May 2009, the Company exchanged an aggregate of $51.3 million in trust preferred securities of Impac Capital Trusts #1 and #3 for junior subordinated notes with an aggregate principal balance of $62.0 million, with a maturity date in March 2034. Under the terms of the exchange, the interest rates for each note are reduced from 8.01 percent to 2.00 percent through 2013 and increase 1.00 percent per year through 2017. Starting in 2018, the interest rates become variable at 3-month LIBOR plus 375 basis points. In connection with the exchange, the Company paid a fee of $0.5 million.

In March 2009, the Company announced that it will continue to defer interest payments on its remaining $12.0 million in trust preferred securities of Impac Capital Trust #4. At March 31, 2009, interest that has been deferred and unpaid related to these trust preferred securities was $0.4 million. The Company has the right to defer payments of interest for a period of up to 20 consecutive quarterly interest payment periods for Impac Capital Trust #4. During the deferral period, interest on the trust preferred securities will bear additional interest at a rate equal to the coupon rate on the respective security. Unless the Company again elects to defer interest payments, the Company is required to pay all accrued interest together with the additional interest at the next payment date.

In March 2009, the Company announced that it will not be paying dividends for the quarter ended March 31, 2009 on the Company’s 9.375% Series B Cumulative Redeemable Preferred Stock and 9.125% Series C Cumulative Redeemable Preferred Stock. The Company has no present intentions to pay dividends on the Series B and Series C Preferred Stock, however, unpaid dividends on the preferred stock will accumulate. Until such time as all cumulative dividends on the preferred stock are paid, the Company may not pay dividends on, nor redeem, repurchase or make any distribution on, shares of its common stock. At March 31, 2009 cumulative unpaid dividends on preferred stock totaled $7.4 million. If the Company does not pay dividends on its preferred stock for six or more quarterly periods (whether or not consecutive), preferred stockholders will be entitled to elect two additional directors to the Company’s Board of Directors to serve until the Company is current on all dividends.

2. Recent Accounting Pronouncements

~~In October 2008,~~Recently Adopted Accounting Pronouncements

Effective January 1, 2009, the ~~FASB issued FASB Staff Position~~Company adopted EITF No. ~~157-3 “Determining the~~08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 addresses whether issuer’s of liabilities should consider the effect of the third-party credit enhancement when measuring the liability at fair value under FASB Statement No. 157 “Fair Value Measurements” (SFAS 157). EITF 08-5 requires that the issuer of a ~~Financial Asset When~~liability with a third-party credit enhancement that is inseparable from the ~~Market for That Asset Is Not Active” (FSP 157-3).~~liability shall not include the effect of the credit enhancement in the fair value measurement of the liability. The ~~staff position clarifies~~guidance in EITF 08-5 is effective in the first reporting period beginning on or after December 15, 2008, with the effect of initially applying its guidance being included in the change in fair value in the period of adoption. The adoption of EITF 08-5 did not have a significant impact on the Company’s consolidated financial statements.

Effective, January 1, 2009, application of SFAS 157 in inactive markets and provides an illustrative example of how the fair value of a financial asset is determined in an inactive market. FSP 157-3 is effective immediately, including prior periods for which financial statements have not been issued. The issuance of this staff position affects the Company as a significant portion of the Company’s financialto nonfinancial assets and liabilities ~~are measured at fair value using market value approaches based on active markets. Availability of observable market inputs has diminished considerably as~~is required. As a result of the ~~increasing inactivity~~adoption of SFAS 157 for nonfinancial assets and liabilities, the Company has included additional disclosures as of and for the three months ended March 31, 2009 for nonrecurring fair value measurements related to its nonfinancial assets and liabilities.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) issued three statements of position (FSP) related to fair value measurements:

· FSP No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4)

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· FSP No. FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1)

· FAS No. FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2)

FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of market activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the ~~secondary~~volume and level of market activity for ~~mortgage loans, mortgage-backed securities~~the asset or liability and ~~other real estate related assets.~~regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The ~~lack~~Company is in the process of ~~observable market inputs requires that~~determining the ~~Company rely heavily~~impact adopting FSP 157-4 will have on its ~~own internal assumptions~~consolidated financial statements.

FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair Value of ~~the future cash flows and appropriate risk-adjusted discount rates market participants would apply in measuring the~~Financial Instruments”, to require disclosures about fair value of financial ~~assets~~instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and liabilities in orderly market transactions that are not forced liquidations or distressed sales. As discussed in Note B, a significant portion of the Company’s financial assets and liabilities, which were previously classified as Level 2 fair value measurements, were classified as Level 3 fair value measurements at September 30, 2008, as a result of market inactivity and the lack of availability of observable market inputs.

~~In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard~~APB 28-1 is ~~intended to improve financial~~effective for interim reporting ~~by identifying a consistent framework~~periods ending after June 15, 2009, with early adoption permitted for ~~selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 will be effective 60 days~~periods ending after the U.S. Securities and Exchange Commission approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”March 15, 2009. The Company does not expect the adoption of ~~SFAS 162~~FSP FAS 107-1 and APB 28-1 to have a significant ~~impact~~effect on its consolidated financial statements.

FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. For debt securities, the statement requires that an entity assess whether it (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, the Company would be required to recognize other-than-temporary impairment. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a significant effect on its consolidated financial statements.

In April 2008, the FASB voted to eliminate ~~qualifying special purpose entities (QSPEs)~~QSPEs from the guidance in FASB Statement No. 140 “Accounting for Transfers and Servicing of Financial Assets and 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 assets previously sold to ~~a QSPE,~~QSPEs, as well as for future sales. An effective date for any proposed revisions has not been determined by the FASB. As of ~~September 30, 2008,~~March 31, 2009, the current principal balance of QSPEs to which the Company, acting as principal, has transferred assets and received sales treatment were ~~$699.0~~$643.2 million. The Company’s investment in these QSPE’s consists of residual interests accounted for as investment securities available-for-sale in its consolidated balance sheets. The Company is still evaluating the impact of this potential change.

In connection with the aforementioned proposed changes to SFAS 140, the FASB also is proposing three key changes to the consolidation model in FASB Interpretation ~~No. 46(R)~~No 46 (revised December 2003), “Consolidation of Variable Interest ~~Entities (revised December 2003)—an interpretation of ARB No. 51”~~Entities” (FIN ~~46(R))~~46R). First, the FASB has proposed to include former QSPEs in the scope of FIN ~~46(R).~~46R. In addition, the FASB supports amending FIN ~~46(R)~~46R to change the method of analyzing which party to a ~~variable interest entity (VIE)~~VIE should consolidate the VIE to a primarily qualitative determination of control instead of today’s risks and 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 ~~September 30, 2008,~~March 31, 2009, the ~~current principal balance of~~only significant unconsolidated VIEs ~~with which~~are the ~~Company is involved were approximately $699.0 million.~~

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

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 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 SFAS 161 on January 1, 2009, and there should be no impact on the consolidated financial statements as it only addresses disclosures.

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4.3. Legal Proceedings

The Company is party to litigation and claims which are normal in the course of our operations.

In the matter of Sheldon Pittleman v. Impac Mortgage Holdings, Inc. et al filed in the United States district Court, Central district California against IMH and several of its ~~operations. While~~senior officers a Third Amended Complaint was filed. A motion to dismiss was filed by the ~~results~~defendants on December 15, 2008. On March 10, 2009, the court sustained the defendants’ motion to dismiss without leave to amend. The Plaintiffs have filed a Notice of ~~such~~Appeal of the Order Granting the Motion to Dismiss With Prejudice and the Judgment thereon on April 7, 2009.

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2008 for a description of other litigation and claims.

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We believe that we have meritorious defenses to the above claims ~~cannot be predicted with certainty,~~and intend to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on ~~the Company’s~~our financial condition or results of operations.

~~The Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously.~~ Nevertheless, litigation is uncertain and ~~the Company~~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 ~~the Company.~~

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2007 and reports on Form 10-Q for the periods ending March 31, 2008 and June 30, 2008 for a description of other litigation and claims.us.

5.4. Income Taxes and Deferred Charge

During the first quarter of 2009, the Company revoked its election to be taxed as a REIT, effective January 1, 2009. As a result of revoking this election, the Company will be subject to income taxes as a regular corporation.

Prior to January 1, 2009, the Company operated as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT included various restrictions on ownership of IMH’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income.

As of December 31, 2008, the Company had federal and California net operating loss carryforwards of $406.8 million and $532.2 million, respectively. As of December 31, 2008, the Company’s taxable REIT subsidiary had an estimated federal net operating loss tax carryforward of $295.1 million. The federal net operating loss carryforward of the Company’s taxable REIT subsidiary, utilization of which may be limited to the Company’s taxable REIT subsidiary, begins to expire in the year 2027. As of December 31, 2008, the Company and the Company’s taxable REIT subsidiary had net deferred tax assets of approximately $547.9 million and $100.0 million, respectively. The Company recorded a full valuation allowance against the net deferred tax assets as it believes it is more likely than not that the net deferred tax assets will not be recoverable.

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~~expense of ~~$5.3~~$2.0 million and ~~$14.0~~$6.5 million for the three months ended March 31, 2009 and ~~nine months ending September 30,~~ 2008, ~~and $3.1 million and $12.0 million for the three and nine months ending September 30, 2007,~~ respectively. The ~~net provision~~tax expense is 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~~non-recurring 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 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.

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~~This category includes those assets and liabilities that were not included in Level 1 or Level 2.~~value.

The following ~~table presents for each of these hierarchy levels,~~tables present, 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 ~~September 30, 2008.~~March 31, 2009 and December 31, 2008, based on the fair value hierarchy of SFAS 157:

	Recurring Fair Value Measurements						Recurring Fair Value Measurements
	At September 30, 2008						As of March 31, 2009
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Investment securities available-for-sale	$	—	$	—	$	4,856	$	—	$	—	$	1,322
Securitized mortgage collateral ~~(1)~~	—		—		8,253,995		—		—		5,505,729
Total Assets at Fair Value	$	—	$	—	$	8,258,851
Total assets at fair value							$	—	$	—	$	5,507,051

Liabilities
Securitized mortgage borrowings	$	—	$	—	$	8,787,013	$	—	$	—	$	5,691,028
Derivative liabilities, net ~~(2)~~(1)	—		—		103,549		—		—		232,320
Trust preferred securities	—		—		35,898		—		—		11,090
Total Liabilities at Fair Value	$	—	$	—	$	8,926,460
Total liabilities at fair value							$	—	$	—	$	5,934,438

~~(1)~~

Excluded from securitized mortgage collateral above is $10.4 million in master servicing rights related to consolidated securitizations and recorded at the lower of cost or market. Also, securitized mortgage collateral excludes REO, which is separately presented within trust assets in the consolidated balance sheet.

~~(2)~~

~~Derivative liabilities, net includes $251 thousand in derivative assets and $103.8~~

(1) Derivative liabilities, net includes $37 thousand in derivative assets and $232.4 million in derivative liabilities, included within trust assets and trust liabilities, respectively.

During the third quarter of 2008, market inactivity has resulted in a lack of observable market data for purposes of measuring the fair value of financial assets and liabilities. As a result of the severe market inactivity, the Office of the Chief Accountant of the Securities and Exchange Commission (SEC) and the FASB jointly issued a press release to assist financial statement users, preparers, and auditors with application issues surrounding the determination of the fair value of financial assets in markets that are inactive. Subsequent to the issuance of the joint press release, the FASB issued FSP 157-3, which formalizes the guidance jointly issued by the SEC and FASB.

~~As a result~~7

Table of ~~the lack of observable market data resulting from inactive markets, the Company has classified its investment securities available-for-sale, securitized mortgage collateral~~Contents

	Recurring Fair Value Measurements
	As of December 31, 2008
	Level 1		Level 2		Level 3
Assets
Investment securities available-for-sale	$	—	$	—	$	2,068
Securitized mortgage collateral	—		—		5,894,424
Total assets at fair value	$	—	$	—	$	5,896,492

Liabilities
Securitized mortgage borrowings	$	—	$	—	$	6,193,984
Derivative liabilities, net (1)	—		—		273,547
Trust preferred securities	—		—		15,403
Total liabilities at fair value	$	—	$	—	$	6,482,934

(1) Derivative liabilities, net includes $37 thousand in derivative assets and ~~borrowings and net~~$273.6 million in derivative liabilities, ~~as Level 3 fair value measurements at September 30, 2008.~~ included within trust assets and trust liabilities, respectively.

Level 3 assets and liabilities were 100 percent of total assets at fair value and total liabilities at fair ~~value.~~

~~Table of Contents~~value at March 31, 2009 and December 31, 2008, 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 nine~~ months ended ~~September 30,~~March 31, 2009 and 2008:

Level 3 Recurring Fair Value Measurements

Three Months Ended September 30, 2008

Fair Value -
June 30, 2008

Total Gains
(Losses)
Included in
Earnings

Transfers
to
Level 3

Purchases,
issuances and
settlements

Fair Value -
September 30,
2008

Unrealized gains
(losses) still held
(1)

Investment securities available-for-sale

$
8,644

$
(2,626
)
$
—

$
(1,162
)
$
4,856

$
(3,788
)
Securitized mortgage collateral

298,189

(2,256,972
)
10,747,133

(534,355
)
8,253,995

(2,791,327
)
Securitized mortgage borrowings

(316,968
)
2,141,292

(11,180,164
)
568,827

(8,787,013
)
2,710,119

Derivative liabilities, net

—

(10,890
)
(136,471
)
43,812

(103,549
)
32,922

Trust preferred securities

(46,266
)
10,368

—

—

(35,898
)
10,368

Level 3 Recurring Fair Value Measurements

Nine Months Ended September 30, 2008

Fair Value -
January 1, 2008

Total Gains
(Losses)
Included in
Earnings

Transfers
to
Level 3

Purchases,
issuances and
settlements

Fair Value -
September 30,
2008

Unrealized gains
(losses) still held
(1)

Investment securities available-for-sale

$
15,248

$
(8,034
)
$
—

$
(2,358
)
$
4,856

$
(10,392
)
Securitized mortgage collateral

782,574

(5,408,626
)
14,919,649

(2,039,602
)
8,253,995

(7,448,228
)
Securitized mortgage borrowings

(767,704
)
5,125,864

(15,109,073
)
1,963,900

(8,787,013
)
7,089,764

Derivative liabilities, net

—

(94,399
)
(120,260
)
111,110

(103,549
)
16,711

Trust preferred securities

(40,952
)
5,054

—

—

(35,898
)
5,054

	Level 3 Recurring Fair Value Measurements
	For the quarter ended March 31, 2009
	Investment securities available-for- sale			Securitized mortgage collateral			Securitized mortgage borrowings			Derivative liabilities, net			Trust preferred securities
Fair value, December 31, 2008	$	2,068		$	5,894,424		$	(6,193,984	)	$	(273,547	)	$	(15,403	)
Total gains (losses) included in earnings:
Interest income	95			476,709			—			—			—
Interest expense	—			—			(673,807		)	—			—
Change in fair value of net trust assets, excluding REO	905			(549,021		)	697,203			(16,157		)	—
Change in fair value of trust preferred securities	—			—			—			—			12
Total gains (losses) included in earnings	1,000			(72,312		)	23,396			(16,157		)	12
Transfers in and/or out of Level 3	—			—			—			—			—
Purchases, issuances and settlements	(1,746		)	(316,383		)	479,560			57,384			4,301
Fair value, March 31, 2009	$	1,322		$	5,505,729		$	(5,691,028	)	$	(232,320	)	$	(11,090	)

Unrealized (losses) gains still held (1)	$	(897	)	$	(8,100,780	)	$	9,256,884		$	(235,173	)	$	54,380

~~(1)~~

~~Represents the amount of total~~

(1) Represents the amount of unrealized (losses) 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 September 30, 2008.~~

As discussed above, the significant market disruption due to continued deterioration of the real estate and credit markets and the resulting lack of observable market data from these markets during the third quarter of 2008 resulted in securitized mortgage collateral and borrowings and net derivative liabilities being classified as Level 3 ~~fair value measurements~~that are still held at September 30, 2008. During the quarter, $10.7 billion and $11.2 billion in securitized mortgage collateral and borrowings, respectively, was transferred from Level 2 to Level 3 fair value measurements. For the nine months ended September 30, 2008, $14.9 billion and $15.1 billion in securitized mortgage collateral and borrowings, respectively, was transferred from Level 2 to Level 3 fair value measurements. There were no changes, for the three and nine months ended September 30, 2008, in the classification of investment securities available-for-sale or trust preferred securities, which remained Level 3 fair value measurements.March 31, 2009.

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 nine months ended September 30, 2008.

Recurring Fair Value Measurements

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

Three Months Ended September 30, 2008

Investment Securities
Available-for-Sale

Securitized Mortgage
Collateral

Securitized Mortgage
Borrowings

Derivative
Liabilities, Net

Trust Preferred
Securities

Interest income

$
466

$
134,377

$
—

$
—

$
—

Interest expense

—

—

(271,817
)
—

(126
)
Change in fair value of net trust assets, excluding REO

(3,092
)
(2,391,349
)
2,413,109

(10,890
)
—

Change in fair value of trust preferred securities

—

—

—

—

10,494

Total

$
(2,626
)
$
(2,256,972
)
$
2,141,292

$
(10,890
)
$
10,368

138

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	Recurring Fair Value Measurements															Level 3 Recurring Fair Value Measurements
	Level 3 - Total Gains (Losses) Included in Net Loss															For the quarter ended March 31, 2008
	Nine Months Ended September 30, 2008															Investment securities available-for- sale			Securitized mortgage collateral			Securitized mortgage borrowings			Trust preferred securities
	Investment Securities Available-for-Sale			Securitized Mortgage Collateral			Securitized Mortgage Borrowings			Derivative Liabilities, Net			Trust Preferred Securities
Fair value, January 1, 2008																$	15,248		$	782,574		$	(767,704	)	$	(40,952	)
Total gains (losses) included in earnings:
Interest income	$	865		$	231,288		$	—		$	—		$	—		200			(88		)	—			—
Interest expense	—			—			(617,493		)	—			(419		)	—			—			(8,901		)	(154		)
Change in fair value of net trust assets, excluding REO	(8,899		)	(5,639,914		)	5,743,357			(94,399		)	—			(4,290		)	(248,982		)	287,104			—
Change in fair value of trust preferred securities	—			—			—			—			5,473			—			—			—			(4,023		)
Total	$	(8,034	)	$	(5,408,626	)	$	5,125,864		$	(94,399	)	$	5,054
Total gains (losses) included in earnings																(4,090		)	(249,070		)	278,203			(4,177		)
Transfers in and/or out of Level 3 (1)																—			526,469			(562,467		)	—
Purchases, issuances and settlements																(537		)	(93,015		)	53,573			—
Fair value, March 31, 2008																$	10,621		$	966,958		$	(998,395	)	$	(45,129	)

Unrealized (losses) gains still held (2)																$	(2,461	)	$	(386,800	)	$	419,861		$	54,115

(1) Transfers in and/or out of Level 3 are reflected using values as of the beginning of the period.

(2) Represents the amount of unrealized (losses) gains relating to assets and liabilities classified as Level 3 that are still held at March 31, 2008.

~~SFAS~~Based on the lack of observable market data resulting from inactive markets, recurring fair value measurements designated as Level 3 have increased significantly at March 31, 2009 compared to March 31, 2008, resulting from transfers from Level 2 to Level 3 during 2008.

FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (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.

Recurring basis

Investment ~~Securities Available-for-Sale.~~securities available-for-sale ~~Pursuant to the Company’s adoption of SFAS 159, the~~— The Company elected to carry all of its investment securities available-for-sale at fair value. ~~These~~The 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, forward interest rates and certain other factors. Given the market disruption and lack of observable market data as of ~~September 30,~~March 31, 2009 and December 31, 2008, the fair value of the investment securities available-for-sale were measured using significant internal expectations of market participants’ assumptions. ~~At September 30, 2008, investment securities available-for-sale were classified as Level 3 fair value measurements.~~

Securitized ~~Mortgage Collateral~~mortgage collateral ~~– Pursuant to the Company’s adoption of SFAS 159, the~~— The Company elected to carry all of its securitized mortgage collateral at fair value. These assets consist primarily of ~~Alt-A~~non-conforming 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~~non-binding quoted prices for the underlying ~~bonds.~~bonds and yield analysis. The Company’s assumptions include its expectations of inputs that other market participants would ~~use.~~use in pricing these assets. These assumptions include judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. ~~At September 30, 2008,~~As of March 31, 2009, securitized mortgage collateral ~~was classified as Level 3 fair value measurements based on the lack of observability of significant inputs to the model. As of September 30, 2008, the~~had an unpaid principal balance ~~and~~of $13.6 billion, compared to an estimated fair value of ~~securitized mortgage collateral was $14.7 billion and $8.3 billion, respectively.~~$5.5 billion. The aggregate unpaid principal balance exceeds the fair value by ~~$6.4~~$8.1 billion at ~~September 30, 2008.~~March 31, 2009. As of ~~September 30, 2008,~~March 31, 2009, the unpaid principal balance ~~and estimated fair value~~ of loans 90 days or more past due was ~~$2.4~~$3.0 billion ~~and $1.3 billion, respectively.~~compared to an estimated fair value of $1.0 billion. The aggregate unpaid principal balances of loans 90 days or more past due exceed the fair value by ~~$1.1~~$2.0 billion at ~~September 30, 2008.~~March 31, 2009.

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Securitized ~~Mortgage Borrowings~~mortgage borrowings ~~- Pursuant to the Company’s adoption of SFAS 159, the~~— 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~~non-conforming mortgage loans. Fair value measurements include the Company’s judgments about the underlying collateral assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors and are based upon non-binding quoted prices for the individual tranches of bonds, if available. ~~At September 30, 2008,~~As of March 31, 2009, securitized mortgage borrowings ~~were classified as Level 3 fair value measurements based on the lack of observability of significant inputs to the model. As of September 30, 2008, the~~had an outstanding principal balance ~~and~~of $15.0 billion compared to an estimated fair value of ~~securitized mortgage borrowings was $15.8 billion and $8.8 billion, respectively.~~$5.7 billion. The aggregate outstanding principal balance exceeds the fair value by ~~$7.0~~$9.3 billion at ~~September 30, 2008.~~March 31, 2009.

Trust ~~Preferred Securities~~preferred securities ~~- Pursuant to the Company’s adoption of SFAS 159, the~~— The Company elected to carry all of its trust preferred securities at fair value. These securities were measured based upon an analysis prepared by the Company, which considered the Company’s own credit risk, ~~included a~~including consideration of recent settlements with trust preferred debt holders, comparison to the terms and market prices of the Company’s preferred stock and ~~the expected~~negotiations of revised terms of ~~restructuring negotiations with a majority of the~~restructured trust preferred ~~debt holders.~~

~~Table~~securities. As of ~~Contents~~

~~At September 30, 2008~~March 31, 2009, trust preferred securities ~~were classified as Level 3 measurements based on the lack of observability of market inputs. As of September 30, 2008, the~~had an unpaid principal balance ~~and~~of $65.5 million compared to an estimated fair value of ~~trust preferred securities was $99.2 million and $35.9 million, respectively.~~$11.1 million. The aggregate unpaid principal balance exceeds the fair value by ~~$63.3~~$54.4 million at ~~September 30, 2008.~~March 31, 2009.

Derivative ~~Assets~~assets and ~~Liabilities.~~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 are based on observable market inputs, if available. To the extent observable market inputs are not available, fair values measurements include the Company’s judgments about the future cash flows, forward interest rates and certain other factors, including counterparty risk. ~~With the issuance of SFAS 157,~~Additionally, 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 September 30, 2008, derivative assets and liabilities were classified as Level 3~~

The following tables present changes in fair value of recurring fair value measurements ~~based on~~for the ~~lack of observability of market inputs.~~three months ended March 31, 2009 and 2008, respectively:

	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Loss
	For the three months ended March 31, 2009
						Change in Fair Value of
	Interest Income (1)		Interest Expense (1)			Net Trust Assets			Trust Preferred Securities		Total

Investment securities available-for-sale	$	95	$	—		$	905		$	—	$	1,000
Securitized mortgage collateral	476,709		—			(549,021		)	—		(72,312		)
Securitized mortgage borrowings	—		(673,807		)	697,203			—		23,396
Derivative instruments	—		—			(16,157		)(2)	—		(16,157		)
Trust preferred securities	—		—			—			12		12
Total	$	476,804	$	(673,807	)	$	132,930	(3)	$	12	$	(64,061	)

On September 15, 2008, Lehman Brothers Holdings Inc. (“LBHI”) filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date, LBHI, through affiliated companies, was an

(1) Amounts represent interest ~~rate swap counterparty to several of the Company’s CMO~~income and REMIC securitizations. As the related securitization trusts are non-recourse to the Company, the Company is not required to replace or otherwise settle any derivative positions affected by counterparty default within the consolidated trusts. At September 30, 2008, the estimated value of these derivatives isinterest expense accretion included in ~~derivative liabilities~~interest income and interest expense, respectively in the consolidated ~~balance sheet.~~statement of operations.

(2) Included in this amount is $41.7 million in changes in the fair value of derivative instruments, offset by $57.9 million in cash payments from the securitization trusts for the three months ended March 31, 2009.

(3) For the three months ended March 31, 2009, change in the fair value of trust assets, excluding REO was $132.9 million. Excluded from the ($190.8) million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $57.9 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Loss
	For the three months ended March 31, 2008
							Change in Fair Value of
	Interest Income (1)			Interest Expense (1)			Net Trust Assets			Trust Preferred Securities			Total

Investment securities available-for-sale	$	200		$	—		$	(4,290	)	$	—		$	(4,090	)
Securitized mortgage collateral	(25,595		)	—			(3,229,500		)	—			(3,255,095		)
Securitized mortgage borrowings	—			(75,675		)	3,419,134			—			3,343,459
Derivative instruments	—			—			(181,816		)(2)	—			(181,816		)
Trust preferred securities	—			(154		)	—			(4,023		)	(4,177		)
Total	$	(25,395	)	$	(75,829	)	$	3,528	(3)	$	(4,023	)	$	(101,719	)

(1) Amounts represent interest income and interest expense accretion included in interest income and interest expense, respectively in the consolidated statement of operations.

Table of Contents

(2) Included in this amount is ($155.9) million in changes in the fair value of derivative instruments and $25.9 million in cash payments from the securitization trusts for the three months ended March 31, 2008.

(3) For the three months ended March 31, 2008, change in the fair value of trust assets, excluding REO was $3.5 million. Excluded from the $29.4 million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $25.9 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

In connection with the fair value accounting for investment securities available-for-sale and securitized mortgage collateral and borrowings, interest income and interest expense is recognized using effective yields, which are based, in part, on estimated fair values for these instruments. As the market’s expectation of future credit losses has increased between periods, market participants have demanded higher yields, which have resulted in significant reductions in the fair values of these instruments. These reductions in fair value have significantly increased the effective yields used for purposes of recognizing interest income and interest expense on these instruments.

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.

Non-recurring basis

The Company is required to measure certain assets and liabilities 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~~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 fair value measurements at ~~September 30,~~March 31, 2009 and December 31, 2008 based on the lack of ~~observability of~~observable market inputs.

~~Mortgage Servicing Rights~~Real estate owned - ~~Mortgage servicing rights (MSRs) for~~REO, which consists of residential real estate acquired in satisfaction of loans, is carried at net realizable value. Upon foreclosure, REO is adjusted to the estimated fair value ~~option~~of the residential real estate less estimated selling and holding costs, offset by expected mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of carrying value or estimated fair value less costs to sell. Fair values of REO are generally based on appraisals or market prices, and considered Level 2 measurements at March 31, 2009 and December 31, 2008.

Lease liability — 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 ~~not elected are carried at LOCOM. MSRs are not traded in an active market with observable prices.~~previously occupied is no longer being used by the Company. The Company ~~utilizes internal pricing processes to estimate~~has subleased a significant amount of this office space. The Company has recorded a liability, included within discontinued operations, representing the fair value of ~~MSRs, which are~~the minimum lease payments over the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space. This liability is based on ~~assumptions~~ the ~~Company believes would be used by market participants, including market~~present value techniques that incorporate the Company’s judgments about estimated sublet revenue and discount ~~rates, float, prepayment speeds and master servicing fees. MSRs, which are included in other assets, are~~rates. Therefore, this liability is considered a Level 3 ~~fair value measurements~~measurement at ~~September 30,~~March 31, 2009 and December 31, 2008.

The following ~~table presents~~tables present the fair values of those financial assets measured at fair value on a non-recurring basis at ~~September 30, 2008.~~March 31, 2009 and December 31, 2008:

				Total Losses
				For the Periods Ended
	Non-recurring Fair Value Measurements			September 30, 2008						Non-recurring Fair Value Measurements					Total Gains (Losses)
	As of September 30, 2008			Three			Nine			As of March 31, 2009					For the Quarter Ended
	Level 1	Level 2	Level 3	Months			Months			Level 1	Level 2	Level 3			March 31, 2009
Loans held-for-sale (1)	—	—	131,193	$	(13,602	)	$	(29,851	)	—	—	$	101,830		$	(72	)
Mortgage servicing rights	—	—	1,256	$	(415	)	$	(1,363	)
REO (2)										—	342,789	—			(85,658		)
Lease liability (3)										—	—	(6,800		)	58

(1) Includes $0.4 million and $101.4 million of loans held-for-sale within continuing and discontinued operations, respectively at March 31, 2009.

~~Includes $1.0 million and $130.2 million of loans held-for-sale within continuing and discontinued operations, respectively at September 30, 2008.~~

1511

Table of Contents

~~The following tables represent changes~~(2) Includes $336.8 million and $6.0 million in ~~fair value~~REO within continuing and discontinued operations, respectively at March 31, 2009. For the quarter ended March 31, 2009, losses of ~~recurring fair value measurements for the three~~$85.7 million related to additional impairment write-downs, included $84.3 million and ~~nine months ended September 30, 2008.~~$1.4 million within continuing and discontinued operations, respectively.

(3) Amounts are included in discontinued operations.

Recurring Fair Value Measurements

Changes in Fair Value Included in Net Loss

Three Months Ended September 30, 2008

Change in Fair Value of

Interest Income

Interest Expense

Net Trust Assets

Trust Preferred
Securities

Total

Investment securities available-for-sale

$
466

$
—

$
(3,092
)
$
—

$
(2,626
)
Securitized mortgage collateral

134,377

—

(2,391,349
)
—

(2,256,972
)
Securitized mortgage borrowings

—

(271,817
)
2,413,109

—

2,141,292

Trust preferred securities

—

(126
)
—

10,494

10,368

Derivative instruments

—

—

(10,890
)
—

(10,890
)
Total

$
134,843

$
(271,943
)
$
7,778

$
10,494

$
(118,828
)

Recurring Fair Value Measurements

Changes in Fair Value Included in Net Loss

Nine Months Ended September 30, 2008

Change in Fair Value of

Interest Income (1)

Interest Expense (1)

Net Trust Assets

Trust Preferred
Securities

Total

Investment securities available-for-sale

$
865

$
—

$
(8,899
)
$
—

$
(8,034
)
Securitized mortgage collateral

231,288

—

(5,639,914
)
—

(5,408,626
)
Securitized mortgage borrowings

—

(617,493
)
5,743,357

—

5,125,864

Trust preferred securities

—

(419
)
—

5,473

5,054

Derivative instruments

—

—

(94,399
)(2)
—

(94,399
)
Total

$
232,153

$
(617,912
)
$
145
(3)
$
5,473

$
(380,141
)

	Non-recurring Fair Value Measurements				Total Losses
	As of December 31, 2008				For the Year Ended
	Level 1	Level 2	Level 3		December 31, 2008
Loans held-for-sale (1)	—	—	$	108,223	$	45,960

~~(1)~~		~~Amounts represent interest income and interest expense accretion included in interest income and interest expense, respectively in the consolidated statement of operations and comprehensive loss.~~

~~(2)~~		Included in this amount is $18.5 million in non-cash changes in the fair value of derivative instruments, which are included in the accompanying statement of cash flows for the nine months ended September 30, (1) Includes $0.4 million and $107.8 million of loans held-for-sale within continuing and discontinued operations, respectively at December 31, 2008.

~~(3)~~		Excluded from the $113 million change in fair value of net trust assets, excluding REO in the accompanying consolidated statement of cash flows is $(112.9) million in cash settlements related to the Company’s net derivative liabilities.

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		Three Months
	Ended September 30,		Ended March 31,
	2008	2007	2009	2008
Risk-free interest rate	1.88%to 2.54%	4.28% to 4.60%	—	1.88% to 2.13%
Expected lives (in years)	3.25 - 3.50	3.00	—	3.25
Expected volatility (1)	87.3% - 91.9%	75.09%	—	87.3% - 89.9%
Expected dividend yield (2)	0.00%	0.00%	—	0.00%
Grant date fair value of share options	$0.50 - 0.78	$0.60	—	$7.14 - 7.76

~~(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 because a dividend on the common stock is currently not probable over the expected life of the options granted during the nine months ended September 30,~~

(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 because a dividend on the common stock was not probable over the expected life of the options granted during the quarters ended March 31, 2009 and 2008.

~~Table of Contents~~There were no stock options granted during the three months ended March 31, 2009.

The following table summarizes activity, pricing and other information for the Company’s stock options for the ~~nine-month period~~three months ended ~~September 30, 2008:~~March 31, 2009:

			Weighted-				Weighted-
			Average				Average
	Number of		Exercise		Number of		Exercise
	Shares		Price ($)		Shares		Price ($)
Options outstanding at January 1, 2008	5,939,914		$	9.75
Options outstanding at January 1, 2009					1,140,186		$	37.18
Options granted	7,970,000		1.27		—		—
Options exercised	—		—		—		—
Options forfeited / cancelled	(2,263,331	)	11.25		(500	)	12.00
Options outstanding at September 30, 2008	11,646,583		$	3.71
Options exercisable at September 30, 2008	3,025,057		$	8.66
Options outstanding at March 31, 2009					1,139,686		$	37.19
Options exercisable at March 31, 2009					295,760		$	86.96

As of ~~September 30, 2008,~~March 31, 2009, there was approximately ~~$4.7~~$3.0 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of ~~1.1~~0.9 years.

Table of Contents

Note 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						For the Three Months
	Ended September 30,						Ended September 30,						Ended March 31,
	2008			2007			2008			2007			2009			2008
Numerator for basic earnings per share:
Net earnings (loss) from continuing operations	$	1,901		$	(969,442	)	$	(19,041	)	$	(1,117,100	)	$	1,276		$	(4,503	)
Net loss from discontinued operations	(18,121		)	(221,793		)	(28,481		)	(348,350		)
Net (loss) earnings from discontinued operations													(2,395		)	688
Less: Cash dividends on cumulative redeemable preferred stock	(3,722		)	(3,722		)	(11,165		)	(11,165		)	—			(3,722		)
Net loss available to common stockholders	$	(19,942	)	$	(1,194,957	)	$	(58,687	)	$	(1,476,615	)
Net loss attributable to common stockholders													$	(1,119	)	$	(7,537	)
Denominator for basic earnings per share:
Basic weighted average number of common shares outstanding during the period	76,098			76,088			76,097			76,083			7,618			7,610
Denominator for diluted earnings per share:
Diluted weighted average number of common shares outstanding during the period	76,098			76,088			76,097			76,083			7,618			7,610
Net effect of dilutive stock options	—			—			—			—			—			—
Diluted weighted average common shares	76,098			76,088			76,097			76,083			7,618			7,610

Loss per common share - Basic:
Loss from continuing operations	$	(0.02	)	$	(12.79	)	$	(0.40	)	$	(14.83	)
Loss from discontinued operations	(0.24		)	(2.91		)	(0.37		)	(4.58		)
Net loss per common share - basic and diluted:
Earnings (loss) from continuing operations													$	0.17		$	(1.08	)
(Loss) earnings from discontinued operations													(0.32		)	0.09
Net loss per share	$	(0.26	)	$	(15.70	)	$	(0.77	)	$	(19.41	)	$	(0.15	)	$	(0.99	)

Loss per common share - Diluted:
Loss from continuing operations	$	(0.02	)	$	(12.79	)	$	(0.40	)	$	(14.83	)
Loss from discontinued operations	(0.24		)	(2.91		)	(0.37		)	(4.58		)
Net loss per share	$	(0.26	)	$	(15.70	)	$	(0.77	)	$	(19.41	)

For the three ~~and nine month periods~~months ended ~~September 30~~,March 31, 2009 and 2008, stock options to purchase ~~11.6~~1.1 million and 1.3 million shares, respectively, were outstanding but not included in the above weighted average calculations because they were anti-dilutive.

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

~~Table of Contents~~

Note E—Segment Reporting

The Company has two reporting segments, the continuing operations and discontinued operations. The following tables present the selected financial data and operating results by reporting segments for the periods indicated:

Continuing

Discontinued

Operations

Operations

Consolidated

Balance Sheet Items as of September 30, 2008:

Securitized mortgage collateral

$
8,264,413

$
—

$
8,264,413

Loans held-for-sale

977

130,217

131,194

Total assets

9,006,993

158,468

9,165,461

Total liabilities

8,934,415

225,536

9,159,951

Total stockholders’ equity (deficit)

$
72,578

$
(67,068
)
$
5,510

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
)

Continuing

Discontinued

Operations

Operations

Consolidated

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

��

Net interest income

$
3,014

$
158

$
3,172

Change in fair value of derivatives, net

—

(92
)
(92
)
Change in fair value of net trust assets

7,778

—

7,778

Other non-interest income (expense)

3,695

(12,908
)
(9,213
)
Non-interest expense and income taxes

(12,586
)
(5,279
)
(17,865
)
Net earnings (loss)

$
1,901

$
(18,121
)
$
(16,220
)

Statement of Operations Items for the nine months ended September 30, 2008:

Net interest income

$
14,619

$
3,372

$
17,991

Change in fair value of derivatives, net

—

20

20

Change in fair value of net trust assets

145

—

145

Other non-interest income (expense)

1,570

(12,041
)
(10,471
)
Non-interest expense and income taxes

(35,375
)
(19,832
)
(55,207
)
Net loss

$
(19,041
)
$
(28,481
)
$
(47,522
)

	Continuing		Discontinued
	Operations		Operations			Consolidated
Balance Sheet Items as of March 31, 2009:
Securitized mortgage collateral	$	5,505,729	$	—		$	5,505,729
Loans held-for-sale	361		101,469			101,830
Total assets	6,021,719		137,947			6,159,666
Total liabilities	5,940,796		209,865			6,150,661
Total stockholders’ equity (deficit)	80,923		(71,918		)	9,005

Balance Sheet Items as of December 31, 2008:
Securitized mortgage collateral	$	5,894,424	$	—		$	5,894,424
Loans held-for-sale	454		107,769			108,223
Total assets	6,574,464		141,053			6,715,517
Total liabilities	6,489,024		217,241			6,706,265
Total stockholders’ equity (deficit)	85,440		(76,188		)	9,252

1813

Table of Contents

Continuing

Discontinued

Operations

Operations

Consolidated

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

Net interest income

$
12,003

$
2,777

$
14,780

Provision for loan losses

(789,445
)
(2,807
)
(792,252
)
Change in fair value of derivatives, net

(106,532
)
(5,979
)
(112,511
)
Other non-interest income (expense)

(75,711
)
(162,138
)
(237,849
)
Non-interest expense and income taxes

(9,757
)
(53,646
)
(63,403
)
Net loss

$
(969,442
)
$
(221,793
)
$
(1,191,235
)

Statement of Operations Items for the nine months ended September 30, 2007:

Net interest income

$
27,819

$
13,399

$
41,218

Provision for loan losses

(979,740
)
(4,868
)
(984,608
)
Change in fair value of derivatives, net

(32,860
)
(5,412
)
(38,272
)
Other non-interest income (expense)

(101,182
)
(244,952
)
(346,134
)
Non-interest expense and income taxes

(31,137
)
(106,517
)
(137,654
)
Net loss

$
(1,117,100
)
$
(348,350
)
$
(1,465,450
)

	Continuing			Discontinued
	Operations			Operations			Consolidated
Statement of Operations Items for the three months ended March 31, 2009:
Net interest income	$	3,642		$	(413	)	$	3,229
Non-interest income- net trust assets	4,729			—			4,729
Other non-interest income (expense)	5,520			(1,921		)	3,599
Non-interest expense and income taxes	(12,615		)	(61		)	(12,676		)
Net earnings (loss)	$	1,276		$	(2,395	)	$	(1,119	)

Statement of Operations Items for the three months ended March 31, 2008:
Net interest income	$	7,349		$	1,671		$	9,020
Non-interest income- net trust assets	(728		)	—			(728		)
Other non-interest income	1,720			9,333			11,053
Non-interest expense and income taxes	(12,844		)	(10,316		)	(23,160		)
Net (loss) earnings	$	(4,503	)	$	688		$	(3,815	)

Note ~~G—Other Assets~~

~~Other assets for the periods indicated consisted of the following:~~

As of September 30,

As of December 31,

2008

2007

Deferred charge

$
23,432

$
37,412

Real estate advisory fees receivable

7,350

—

Premises and equipment

2,719

3,904

Real estate owned outside trust

827

4,571

Prepaid expenses

3,982

3,505

Investment in capital trusts

2,210

2,394

Mortgage sevicing rights

1,256

2,083

Other assets

7,841

3,325

Total other assets

$
49,617

$
57,194

~~Note H—~~F—Real Estate Owned (REO)

Real estate owned (REO), which consists of residential real estate acquired in satisfaction of loans, is carried at ~~the~~ net realizable value, which includes the estimated fair value of the residential real estate less estimated selling and holding costs, offset by expected mortgage insurance proceeds to be ~~received. Historically, adjustments~~received, if any. Adjustments to the loan carrying value required at the time of foreclosure ~~are charged off against the allowance for loan losses. With the adoption of SFAS 159, initial write-downs of REO~~ affect the ~~estimated fair value~~carrying amount of securitized mortgage collateral. Subsequent write-downs in the net realizable value of REO are included in losses from real estate owned in the consolidated statements of ~~operations and comprehensive loss. REO is recorded at its estimated net realizable value at September 30, 2008 and December 31, 2007.~~

~~Table of Contents~~operations.

Activity for the Company’s REO consisted of the following:

Nine Months Ended

Year Ended

September 30, 2008

December 31, 2007

Beginning balance

$
405,434

$
137,331

Foreclosures

592,771

487,314

Liquidations

(334,058
)
(219,211
)
REO

$
664,147

$
405,434

REO inside trusts

$
663,320

$
400,863

REO outside trusts (1)

827

4,571

REO

$
664,147

$
405,434

	At March 31, 2009			At December 31, 2008
REO	$	548,978		$	635,285
Impairment (1)	(107,114		)	(35,533		)
Ending balance	$	441,864		$	599,752

REO inside trusts	$	440,916		$	599,084
REO outside trusts (2)	948			668
Total	$	441,864		$	599,752

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

(2) Amount represents REO related to former on-balance sheet securitizations, which were collapsed as the result of the Company exercising its clean-up call options. This REO is included in other assets in the accompanying consolidated balance sheets.

Note I— ~~Securitized Mortgage~~ ~~Borrowings~~

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

Range of Percentages:

Interest Rate

Interest Rate

Original

Securitized mortgage borrowings

Margins over

Margins after

Issuance

outstanding as of

Fixed Interest

One-Month

Adjustment

Year of Issuance

Amount

September 30, 2008 (1)

December 31, 2007

Rates

LIBOR (2)

Date (3)

2002

$
3,876.1

$
37.7

$
42.1

5.25 - 12.00

0.27 - 2.75

0.54 - 3.68

2003

5,966.1

335.6

409.4

4.34 - 12.75

0.27 - 3.00

0.54 - 4.50

2004

17,710.7

2,325.8

2,751.8

3.58 - 5.56

0.25 - 2.50

0.50 - 3.75

2005

13,387.7

5,154.9

5,961.6

—

0.24 - 2.90

0.48 - 4.35

2006

5,971.4

4,652.3

5,015.7

6.25

0.10 - 2.75

0.20 - 4.125

2007

3,860.5

3,394.2

3,619.9

—

0.06 - 2.00

0.12 - 3.00

Subtotal securitized mortgage borrowings

15,900.5

17,800.5

Accrued interest expense

—

17.1

Unamortized securitization costs

—

(37.5
)

Fair value adjustment

(7,113.5
)
—

Total securitized mortgage borrowings

$
8,787.0

$
17,780.1

~~(1)~~	~~Outstanding balances include $61.2 million in losses allocated to bond holders. These bondholder losses will not be realized until the related trusts terminate.~~
~~(2)~~	~~One-month London Interbank Offered Rate (LIBOR) was 3.93 percent as of September 30, 2008.~~
~~(3)~~	~~Interest rate margins are generally adjusted when the unpaid principal balance of the securitized mortgage borrowings is reduced to less than 10% - 20% of the original issuance amount.~~

~~Note J—~~G— Reverse Repurchase ~~Liabilities~~Financing (Discontinued Operations)

~~Reverse Repurchase Facilities~~

The Company’s reverse repurchase ~~agreements,~~financing, included in discontinued operations, ~~are~~is secured by the Company’s loans held-for-sale with an unpaid principal balance of $203.3, restricted cash of $20.8 million and certain REOs. The following table presents the outstanding balance of the Company’s ~~reverse repurchase facilities~~Restructured Financing as of the dates indicated:

Discontinued Operations

as of September 30,

as of December 31,

2008

2007

Reverse repurchase line (1)

$
194,345

$
318,669

Warehouse line (2)

—

18,021

Total

$
194,345

$
336,690

	Discontinued Operations
	as of March 31,		as of December 31,
	2009		2008

Reverse repurchase line (1)	$	182,468	$	188,677

(1) This line, which is guaranteed by IMH, is no longer funding loans and was restructured in 2008 as ~~of December 31, 2007, was in technical default of several covenants, including warehouse borrowing reduction, delivery of financial statements and financial covenants. As~~ described ~~below, the Company has restructured this line.~~below.

~~(2)~~ ~~This line was paid off in full in May 2008.~~

2014

Table of Contents

In September 2008, the Company entered into an agreement to restructure its reverse repurchase line (Restructured Financing) with its remaining lender. The balance of this ~~line~~Restructured Financing was ~~$194.3~~$182.5 million at ~~September 30, 2008.~~March 31, 2009 and collateralized by loans held-for-sale within discontinued operations. The agreement ~~removes~~removed 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~~by March 2010 with an advance rate of no more than 65 percent of the outstanding principal balance and $50 million ~~in 24 months~~by September 2010 with an advance rate of no more than 55 percent of the outstanding principal balance. By meeting these targets, the agreement term can extend to ~~30 months.~~March 2011. At March 31, 2009, the advance rate was 80 percent. 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%~~10 percent of the gross proceeds will be required to be paid as an additional principal paydown and the monthly principal paydown would then be 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. To the extent the cash collected from the collateral is not adequate to pay the interest expense due on the borrowings, interest expense would be paid to the lender from the ~~margin~~Company’s restricted cash account included in assets of discontinued operations or the Company’s cash balances. Accomplishing the restructuring of this reverse repurchase line allows the Company to timely manage the remaining loans on the line for the eventual collection, refinance, sale or securitization without the risk of receiving margin calls.

~~Repurchase Reserve~~

~~When~~ Upon an event of default, the Company ~~sells loans through loan sales it~~ is ~~required to make normal and customary representations and warranties about~~responsible for any shortfall if the value of the loans securing the financing is insufficient to repay the ~~purchaser. The Company’s whole loan sale agreements generally require it to repurchase loans if~~outstanding balance. During the first quarter of 2009, 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 quarter of 2008, the Company sold $19.6 million of loans as compared to $7.9paid an additional $4.5 million in principal paydowns as required under the second quarter of 2008. As of September 30, 2008 and December 31, 2007, the Company had a liability for losses on loans sold with representations and warranties totaling $13.5 million and $25.7 million, respectively, included in liabilities from discontinued operations. During the quarter, the repurchase liability increased $0.6 million to $13.5 million.restructured terms.

Note ~~K—Discontinued Operations~~H—Subsequent Events

~~During 2007,~~In April 2009, the Company’s officers and directors gave notice of the surrender of an aggregate of 581,000 options and the Board accepted and approved the cancellation of those listed options. In connection with the cancellation of these options, the Company ~~announced plans to exit substantially all~~will record non-cash compensation expense of ~~its mortgage, commercial, retail, and warehouse lending operations. Consequently,~~approximately $1.7 million during the amounts related to these operations are presented as 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 assets and liabilities of discontinued operations in its consolidated balance sheets for the periods presented.second quarter.

~~The following table presents~~In May 2009, the ~~discontinued operations’ condensed~~Company exchanged an aggregate of $51.3 million in trust preferred securities of Impac Capital Trusts #1 and #3 for junior subordinated notes with an aggregate principal balance ~~sheets~~of $62.0 million, with a maturity date in March 2034. Under the terms of the exchange, the interest rates for each note are reduced from 8.01 percent to 2.00 percent through 2013 and increase 1.00 percent per year through 2017. Starting in 2018, the interest rates become variable at ~~September 30, 2008 and December 31, 2007:~~

Discontinued Operations

as of September 30,

as of December 31,

2008

2007

Balance Sheet Items:

Loans held-for-sale

$
130,217

$
279,659

Finance receivables

—

12,458

Total assets

158,468

353,250

Total liabilities

225,536

405,341

Total stockholders’ deficit

(67,068
)
(52,091
)

~~Included in total liabilities at September 30, 2008 and December 31, 2007 is~~3-month LIBOR plus 375 basis points. In connection with the exchange, the Company paid a ~~lease liability~~fee of $3.5 million and $10.9 million, respectively, which is guaranteed by IMH, related to office space that was previously occupied by the discontinued operations and is no longer being used by the Company. The Company has subleased some of this office space. Loans held-for-sale includes a $98.5 million and $118.4 million fair value adjustment at September 30, 2008 and December 31, 2007, respectively.$0.5 million.

~~As part of the settlement of intercompany debt, certain net assets, totaling $25.6 million, were transferred from discontinued operations to continuing operations.~~

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Table of Contents

~~The following tables present discontinued operations condensed statement of operations for the three and nine month periods ended September 30, 2008 and 2007;~~ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Discontinued Operations

For the Three Months Ended September 30,

2008

2007

Income Statement Items:

Net interest income

$
158

$
2,777

Provision for loan losses

—

(2,807
)
Change in fair value of derivative instruments

(92
)
(5,979
)
Other non-interest (expense) income

(12,908
)
(162,138
)
Non-interest expense and income taxes

(5,279
)
(53,646
)
Net loss

$
(18,121
)
$
(221,793
)

Discontinued Operations

For the Nine Months Ended September 30,

2008

2007

Income Statement Items:

Net interest income

$
3,372

$
13,399

Provision for loan losses

—

(4,868
)
Change in fair value of derivative instruments

20

(5,412
)
Other non-interest (expense) income

(12,041
)
(244,952
)
Non-interest expense and income taxes

(19,832
)
(106,517
)
Net loss

$
(28,481
)
$
(348,350
)

~~Note L—Subsequent Events~~

On November 12, 2008, the Company and the real estate marketing company agreed to terminate the advisory services agreement. The Company will receive approximately $37 million, inclusive of the $7.4 million receivable included in other assets in the consolidated balance sheet at September 30, 2008.

~~Table of Contents~~

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, IMH Assets Corp. (IMH Assets), Integrated Real Estate Services Corporation (IRES), 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~~10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,” “should,” “could,” “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~~industry; our ability to successfully manage through the current market environment; ~~management’s ability to successfully implement future strategies and initiatives;~~our ability to meet liquidity needs from current cash ~~flows;~~flows or generate new sources of revenue; management’s ability to successfully initiate mortgage-related fee-based business strategies; the ability to make interest and dividend payments; our ability to reduce ~~operating expenses and other outstanding liabilities, such as the trust preferred obligations; our ability to reduce~~or eliminate dividend and interest payments on preferred stock and trust preferred securities; ~~ability to continue to pay dividends on outstanding preferred stock; failure to sell, or achieve expected returns upon sale of,~~increases in default rates and mortgage ~~loans, including non-performing loans, in the secondary market due to market conditions, lack of interest or ineffectual pricing;~~related losses; potential difficulties in satisfying conditions ~~set forth~~(payment and covenants) in the ~~restructured repurchase facility;~~Restructured Financing; our ability to obtain additional financing and the terms of any financing that we do obtain; inability to effectively liquidate ~~properties;~~properties to mitigate losses; increase in loan repurchase requests and ability to adequately settle repurchase obligations; ~~risks related to the acquisition~~decreases in value of ~~a special servicing platform, which will involve or require, among other things, continuing due diligence, which could reveal matters not now known~~our residual interests that ~~affect~~differ from 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; impairments on our mortgage assets; increases in default rates or losses on mortgage loans underlying our mortgage assets; inability to 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;assumptions; 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;~~ 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, ~~2007,~~2008, 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 and those filed for the previous 2008 quarterly periods.~~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 that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

The Mortgage Banking Industry and Discussion of Relevant Fiscal Periods

The mortgage banking industry is continually vulnerable to current events that occur in the financial services industry. 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 and can be unforeseeable.

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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 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~~Long-term 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 2007.portfolio

During the ~~third~~first quarter of ~~2008,~~2009, the Company ~~continued~~continues to ~~fund its operations with revenues~~be significantly and ~~cash flows from~~negatively affected by the deteriorating real estate ~~advisory fees~~market and ~~its residual interests in securitizations and master servicing fees generated from~~ the ~~long-term mortgage portfolio. Continued~~weak economic environment. These factors have led to continued deterioration in the ~~housing and credit markets may have a significant impact on these revenues and cash flows.~~

In the first quarter of 2008, we entered into an agreement with a real estate marketing company to generate advisory fees. The real estate marketing company specializes in the marketing of foreclosed properties. During the three and nine months ended September 30, 2008, we earned $7.0 million and $15.6 million, respectively, from this relationship. On November 12, 2008, the Company and the real estate marketing company agreed to terminate the advisory services agreement. The Company will receive approximately $37 million, inclusivequality of the ~~$7.4 million receivable included in other assets in~~ ~~the consolidated balance sheet at September 30, 2008.~~

~~The~~ Company’s ~~intent is to align the costs of its operations to the cash flows from our~~ long-term mortgage portfolio, ~~(residual interests~~as evidenced by the continued increases in ~~securitizations), master servicing~~delinquencies, foreclosures and credit losses. Existing conditions are unprecedented and inherently involve significant risks and uncertainty to the Company. The current market conditions have led to fewer sources of liquidity available to the Company to operate its business. These conditions continue to adversely affect the performance of the Company’s long-term mortgage portfolio, including significant losses on real estate owned.

New businesses

During the quarter, the Company has initiated various mortgage and real estate ~~advisory fees.~~related fee-based businesses, including loan modifications, real estate disposition, monitoring and surveillance services, real estate brokerage and lending services and escrow services, and has begun to generate revenues from these businesses. However, ~~we have intentionally maintained certain personnel to allow us to explore~~since these businesses are newly formed, there remains uncertainty about their future ~~business opportunities. We are investigating opportunities to restructure the trust preferred securities and/or reduce or eliminate dividend payments on the Company’s preferred stock.~~success.

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.

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 $194.3 million at September 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 outstanding principal balance and $50 million in 24 months with an advance rate of no more than 55 percent of the outstanding 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 October 2008, then $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 would then be 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. To the extent the cash collected from the collateral is not adequate to pay the interest expense due on the borrowings, interest expense would be paid to the lender from the margin cash account or the Company’s cash balances. 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.

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Liquidity and capital resources

During the first quarter of 2009, the Company continued to fund its operations primarily from the cash flows from its long-term mortgage portfolio, and to a lesser extent includes the mortgage and real estate related fee-based businesses.

In January 2009, the Company fully satisfied $25.0 million in outstanding trust preferred securities of Impac Capital Trust #2 for $3.75 million

In May 2009, the Company exchanged an aggregate of $51.3 million in trust preferred securities of Impac Capital Trusts #1 and #3 for junior subordinated notes with an aggregate principal balance of $62.0 million, with a maturity date in March 2034. Under the terms of the exchange, the interest rates for each note are reduced from 8.01 percent to 2.00 percent through 2013 and increase 1.00 percent per year through 2017. Starting in 2018, the interest rates become variable at 3-month LIBOR plus 375 basis points. The difference in principal balance between the original $51.3 million in trust preferred securities and the $62.0 million in junior subordinated notes reflects the aforementioned reduction in interest rates. In connection with the exchange, the Company paid a fee of $0.5 million.

The primary use of liquidity within discontinued operations continues to be the Company’s restructured reverse repurchase financing (Restructured Financing). As of March 31, 2009, the balance of the Restructured Financing was $182.5 million secured by loans held for sale with an unpaid principal balance of $203.3 million, restricted cash of $20.8 million and certain real estate owned. Principal and interest received on the underlying collateral is remitted to the lender monthly. During the first quarter of 2009, the Company paid an additional $4.5 million in principal paydowns as required under the restructured terms.

In order to reduce ~~dividend payments on~~ its ~~preferred stock,~~obligations under its Series B and Series C Cumulative Redeemable Preferred Stock, the Company is considering ~~exchanging~~repurchasing the preferred stock ~~for common stock. In July 2008, our stockholders approved~~in accordance with its terms, which may include the ~~potential issuance~~payment of ~~common shares in excess~~accumulated dividends of ~~20 percent of our existing common shares. This exchange could offer the current preferred stockholders greater liquidity as common stockholders and could reduce dividend obligations for the Company.~~

The Company paid its October 2008 trust preferred interest payment as part of its negotiations to restructure or exchange the current trust preferred securities for new securities with a lower interest rate or reductions in principal. To date, the Company has been unsuccessful in completing these negotiations.

Although we do not believe that we need additional capital to fund the operations of the special servicer, we are exploring opportunities to raise capital. There can be no assurance that we will be successful in raising additional capital.

We can not provide assurance that we will be successful in accomplishing our objectives outlined above, including a reduction of interest rates for the trust preferred securities or the exchange of preferred stock for common stock or reducing the dividend. In the event we are not successful, 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, real estate advisory fees and any new businesses.$7.4 million.

If we are not successful in ~~completing the objectives outlined above,~~(i) realizing cash flows from our residual interests in securitizations, (ii) realizing cash flows from new mortgage and real estate related fee-based businesses and (iii) restructuring trust preferred securities, we may not be able to satisfy our contractual obligations for ~~the next year,~~2010 and subsequent years, including repayment of the ~~restructured reverse repurchase line,~~Restructured Financing, interest payments on trust preferred securities and preferred stock dividends.

~~At September 30, 2008, the Company had $5.5 million in stockholders’ equity.~~ To better 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 ~~September 30, 2008,~~March 31, 2009, 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 September 30, 2008

Continuing

Discontinued

Operations

Operations

Total

Cash

$
24,536

$
13

$
24,549

Residual interests in securitizations (1)

31,609

—

31,609

Mortgage servicing rights (1)

11,674

—

11,674

Advisory fees receivable

7,350

—

7,350

Trust preferred securities ($99,244 par)

(35,898
)
—

(35,898
)
Repurchase liabilities (2)

—

(56,378
)
(56,378
)
Lease liability (3)

(5,479
)
(3,525
)
(9,004
)
Deferred charge

23,432

—

23,432

Net other assets (liabilities)

15,354

(7,178
)
8,176

Stockholders’ equity (deficit)

$
72,578

$
(67,068
)
$
5,510

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	Condensed Components of Stockholders’ Equity (Deficit) by Segment
	As of March 31, 2009
	Continuing			Discontinued
	Operations			Operations			Total
Cash	$	38,313		$	260		$	38,573
Short-term investments	5,041			—			5,041
Residual interests in securitizations	24,619			—			24,619
Trust preferred securities ($65,470 par)	(11,090		)	—			(11,090		)
Repurchase liabilities (1)	—			(65,982		)	(65,982		)
Lease liability (2)	—			(6,800		)	(6,800		)
Deferred charge	13,144			—			13,144
Net other assets	10,896			604			11,500
Stockholders’ equity (deficit)	$	80,923		$	(71,918	)	$	9,005

~~(1)~~

~~Included in mortgage servicing rights is $10.4 million in master servicing rights associated with our consolidated securitizations, which is included in securitized mortgage collateral.~~

~~(2)~~

~~Balance includes the net amount owed to our lender, which is guaranteed by IMH, and the repurchase reserve.~~

~~(3)~~

(1) Balance includes the net amount owed to our lender, which are guaranteed by IMH, and the repurchase reserve.

(2)Guaranteed by IMH.

Continuing operations

We currently have ~~three primary~~the following sources of cash earnings:

· cash flows from the long-term mortgage portfolio (residual interests in securitizations);

· master servicing fees from the long-term mortgage portfolio; and

· to a lesser extent, revenues from mortgage and real estate ~~advisory fees~~related fee-based businesses

Since our consolidated and unconsolidated securitization trusts are non-recourse, we have netted trust assets and liabilities to present the Company’s interest in these trusts more simply, which are considered our residual interests in securitizations. For unconsolidated securitizations our residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, our residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and net derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after

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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 $10.4 million in master servicing rights which are included in the basis of securitized mortgage collateral)~~ and trust liabilities, was ~~$31.6~~$24.6 million at ~~September 30,~~March 31, 2009, compared to $28.0 million at December 31, 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 interest income on cash held until remitted to investors. ~~Master servicing rights retained in connection with consolidated securitizations are~~

During the first quarter of 2008, the Company’s sources of cash flow earnings also included ~~in securitized mortgage collateral~~real estate advisory fees. The real estate advisory agreement was terminated in the ~~Company’s consolidated balance sheet. Master servicing rights retained~~fourth quarter of 2008 and we received a fee of $27.0 million for agreeing to terminate this relationship. During the quarter ended March 31, 2008, we earned $3.8 million in connection with unconsolidated securitizations are included in other assets. The carrying amount of master servicing rights was $11.7 million at September 30, 2008, including $10.4 million included in securitized mortgage collateral.real estate advisory fees.

For the three months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ we paid ~~$2.0 million~~zero and $3.7 million, respectively in preferred stock dividends. For the three months ended March 31, 2009 and 2008, we paid $0.3 million and $2.0 million, respectively in interest on trust preferred securities and preferred stock dividends, respectively. For the nine months ended September 30, 2008 and 2007, we paid $6.0 million and $11.2 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 and interest payments.securities.

At ~~September 30, 2008,~~March 31, 2009, we had deferred charges of ~~$23.4~~$13.1 million, ~~representing~~which is amortized as a component of income tax expense in the consolidated statements of operations over the estimated life of the mortgages retained in the securitized mortgage collateral. The deferred charges represent 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. This balance is recorded as required by ~~GAAP~~accounting principles generally accepted in the United States of America (GAAP) and does not have any realizable cash value.

Net other assets include ~~$2.7~~$2.6 million in premises and equipment, ~~$2.2~~$1.6 million in investment in capital trusts, $1.2 million in restricted cash and ~~$4.0~~$2.2 million in prepaid expenses.

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At ~~September 30, 2008,~~March 31, 2009, cash within our continuing operations decreased to ~~$24.5~~$38.3 million from ~~$26.0~~$46.2 million at ~~June 30,~~December 31, 2008. However, during the three months ended March 31, 2009, the Company invested $5.0 million in highly liquid short-term investments.

Discontinued operations

The Company’s most significant liabilities at ~~September 30, 2008~~March 31, 2009 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~~lender for the Restructured Financing, which is collateralized by loans held-for-sale, restricted cash balances and certain real estate ~~owned and other assets.~~owned. The balance of ~~our reverse repurchase line~~the Restructured Financing was approximately ~~$194.3~~$182.5 million at ~~September 30, 2008.~~March 31, 2009. We are currently distributing all principal and interest received from the collateral securing the ~~reverse repurchase line~~Restructured Financing to the lender. ~~As described above, in September 2008,~~Additionally, the ~~Company restructured this line.~~Restructured Financing calls for monthly principal paydowns of $1.5 million.

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~~The repurchase ~~liability increased $0.6 million to $13.5 million. Determination of the repurchase liability~~reserve is an estimate of losses from expected repurchases, and is based, in part, on the recent settlement of claims. At March 31, 2009, the repurchase reserve was $13.6 million.

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. The Company has subleased ~~some~~a significant amount of this office space. At ~~September 30, 2008,~~March 31, 2009, the Company had a liability of ~~$5.5 million and $3.5~~$6.8 million included within ~~continuing operations and~~ discontinued operations, ~~respectively,~~ 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 has faced continued adversity ~~through the filing date of this document~~ as the ~~continued~~ broad repricing of mortgage credit risk continued to cause the severe contraction in market liquidity. Market conditions were particularly acute with respect to securities backed by non-conforming (including Alt-A loans, which were the Company’s primary single-family loan product) where market participants were setting price levels based on widely varied opinions about investor yield requirements, future loan performance and loan loss severity. 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~~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 and ~~into~~throughout 2008, continue to be depressed asinto 2009 with investor concerns over credit quality and a ~~weakening of the~~deteriorating United States economy and housing ~~market have remained high.~~market. 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 and, as such, inherently involve significant risks and uncertainty. These conditions could continue to adversely impact the performance of our long-term investment portfolio.

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Until bond spreads and credit performance return to more historical levels, it will be impossible for the Company to execute securitizations and loan sales. As a result, in 2007, the Company was forced to discontinue its correspondent, retail, wholesale and commercial mortgage operations as well as the warehouse lending operations, in response to the market conditions.

We believe ~~several converging factors led to~~there is currently no index for Alt-A mortgage product, but the ~~broad repricing, including~~ general ~~concerns over the decline in home prices, the rapid increase in the number~~direction and magnitude of delinquent loans (including Alt-A loans), the reduced willingness of investors to acquire commercial paper backed by mortgage collateral, 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 spiral of negative pricing adjustments on assets had a 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 multiply throughout this year.

Normal market trading activity through the third quarter of 2008 continued to be 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 prices. This condition was particularly acute with respect to securities backed by Alt-A loans where market participants 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 several years, including the severity of housing price declines and the overall strength of the economy.

~~The deteriorating market for subprime residential real estate loans is illustrated~~movement in the ABX 2007-1index is reflective of the disruption in the market and general price movement experienced by the Company’s securities. The index, which does not include any IMH bonds, is being used for illustrative purposes only because it is a non-conforming single-family mortgage index that has traded consistently in recent years. The ABX 2007-1 Index ~~shown below by initial rating. This index shows~~illustrates market prices for designated groups of subprime securities by credit rating. The ~~chart~~index is shown here as an illustration of the price volatility in the general non-conforming mortgage market since the beginning of ~~last year~~2007 and does not reflect actual pricing on IMH bonds, which are backed by Alt-A loans rather than subprime loans. This index, which does not include any IMH bonds, is being used for illustrative purposes only because it is a single-family mortgage index that has traded consistently in recent years. 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 general price movement experienced by the Company. As shown below, the ABX 2007-1 Index displays dramatic declines in the value of such securities.

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~~Impact~~Effects of Recent Market Activity

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

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~~In addition~~operations. Market conditions deteriorated in 2008 and continue to ~~the inability of the Company to sell loans,~~be depressed in 2009. As a result, the Company’s investment in securitized non-conforming loans (residual interests) has ~~deteriorated~~declined in value primarily from increased estimated ~~losses. As a result of continued deterioration~~losses and significant disruption in the ~~real estate~~ market, ~~through September 30, 2008, the Company~~evidenced by increased its loan loss estimates primarily due to increased delinquencies in its long-term investment portfolio and increased loss severities related to the sale and liquidation of real estate owned properties.investor yield requirements. The decline in single-family home prices can be seen in the chart below.

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As depicted in the chart above, average home prices peaked in June 2006 at 226.29 and continued their dramatic decline through ~~August 2008.~~February 2009. The Standard & ~~Poor’s/~~Poor’s Case-Shiller 10-City Composite Home Price Index (the Index) for ~~August 2008~~February 2009 was ~~176.60~~154.70 (with the base of 100.00 for January 2000) and hasn’t been this low since ~~June 2004~~August 2003 when the Index was ~~179.45.~~153.61. Beginning in the third quarter of 2007, the Company 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 original combined loan-to-value (defined as first lien plus total subordinate liens to collateral value, “CLTV”) ratios of single-family ~~mortgage~~mortgages remaining in the Company’s securitized mortgage collateral as of ~~September 30, 2008~~March 31, 2009 was 73 percent and 8483 percent, respectively. The current LTV and CLTV ratios ~~may have~~likely increased from origination date as a result of the deterioration ofin the real estate market. We believe that home prices that have declined below the borrower’s original purchase price have a higher risk of default within our portfolio. Based on the Index, home prices have declined 2232 percent through ~~August 2008.~~February 2009 from the 2006 peak. 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~~We have ~~dramatically increased~~considered the deterioration in home prices in our ~~loan~~ loss estimates, which are a primary assumption used in the valuation of securitized mortgage collateral and borrowings.

Critical Accounting Policies

Several of the critical accounting policies important to the portrayal of our financial condition and results of operations require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the ~~impact~~affect of changing market conditions and/or consumer behavior. We believe our most critical accounting policies relate to the valuation of: (1) assets and liabilities 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) real estate owned and 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~~report on Form 10-K for the year ended December 31, 2008 for further discussion of our critical accounting policies and judgments.

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Management discusses its critical accounting policies and related estimates with the Company’s Audit Committee on a regular basis. We believe the judgments, estimates and assumptions used in the 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 policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

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Fair Value of Financial Instruments

~~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 any input that is significant to the fair value measurement.

The use of fair value to measure our financial instruments is fundamental to our financial statements and is a critical accounting estimate because a substantial portion of our assets and liabilities are recorded at estimated fair value. Financial instruments classified as Level 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, and the process to determine fair value is generally more subjective and involves a high degree of management judgment and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of different assumptions, as well as changes in market conditions, could have a material effect on our results of operations or financial condition.

~~In conjunction with~~As a result of the ~~adoption~~lack of ~~SFAS 157,~~observable market data resulting from inactive markets, 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~~has classified all its investment securities available-for-sale, securitized mortgage collateral 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~~borrowings, net derivative liabilities and trust preferred ~~securities) held~~securities as Level 3 fair value measurements at ~~January 1, 2008. Differences between the~~March 31, 2009 and December 31, ~~2007 carrying values~~2008. Level 3 assets and ~~the January 1, 2008~~liabilities were 100 percent of total assets and liabilities at 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~~value at March 31, 2009 and December 31, ~~2007 to $(308.8) million at January 1,~~ 2008.

Recurring basis

Investment ~~Securities Available-for-Sale.~~securities available-for-sale— ~~Pursuant to the Company’s adoption of SFAS 159, the~~The Company elected to carry all of its investment securities available-for-sale at fair value. ~~These~~The 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 our expectation of inputs that other market participants would use. Such assumptions include our 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 ~~September 30, 2008,~~March 31, 2009, the fair value of the investment securities available-for-sale were measured using significant internal expectations of market participants’ assumptions. ~~At September 30, 2008, investment securities available-for-sale were classified as Level 3 fair value measurements.~~

Securitized ~~Mortgage Collateral~~mortgage collateral— ~~– Pursuant to the Company’s adoption of SFAS 159, the~~The Company elected to carry all of its securitized mortgage collateral at fair value. These assets consist primarily of ~~Alt-A~~non-conforming single-family residential and multi-family 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~~non-binding quoted prices for the underlying ~~bonds.~~bonds and yield analysis. The Company’s assumptions include our expectations of inputs that other market participants would ~~use.~~use in pricing these assets. These assumptions include our judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. ~~At September 30, 2008, securitized mortgage collateral was classified as Level 3 fair value measurements based on the lack of observability of significant inputs to the model.~~

Securitized ~~Mortgage Borrowings~~mortgage borrowings— ~~- Pursuant to the Company’s adoption of SFAS 159, the~~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~~non-conforming mortgage loans. Fair value measurements include our judgments

~~Table of Contents~~

about the underlying collateral assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors and are based upon non-binding quoted prices for the individual tranches of bonds, if available. ~~At September 30, 2008, securitized mortgage borrowings were classified as Level 3 fair value measurements based on the lack of observability of significant inputs to the model.~~

Trust ~~Preferred Securities~~preferred securities— ~~- Pursuant to the Company’s adoption of SFAS 159, the~~ TheCompany elected to carry all of its trust preferred securities at fair value. These securities were measured based upon an analysis prepared by the Company, which ~~included a~~considered the Company’s own credit risk, including consideration of recent settlements with trust preferred debt holders, comparison to the terms and market prices of the Company’s preferred stock and ~~the expected~~negotiations of revised terms of ~~restructuring negotiations with a majority of the~~restructured trust preferred ~~debt holders. At September 30, 2008 trust preferred securities were classified as Level 3 fair value measurements based on the lack~~securities.

Table of ~~observability of market inputs.~~Contents

Derivative ~~Assets~~assets and ~~Liabilities.~~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 are based on observable market inputs, if available. To the extent observable market inputs are not available, fair values measurements include the Company’s judgments about the future cash flows, forward interest rates and certain other factors, including counterparty risk. ~~With the issuance of SFAS 157, these~~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 September 30, 2008,~~

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

To mitigate exposure to the effect of changing interest rates on cash flows on securitized mortgage borrowings and reverse repurchase borrowings, the Company purchased derivative ~~assets~~instruments primarily in the form of interest rate swap agreements (swaps) and, ~~liabilities were classified as Level 3 fair value measurements based on~~to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). Due to the ~~lack~~closure of ~~observability~~the mortgage operations, the Company has not entered into a new derivative instrument since the third quarter of ~~market inputs.~~2007.

On September 15, 2008, Lehman Brothers Holdings Inc. ~~(“LBHI”)~~(LBHI) filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date, LBHI, through affiliated companies, was an interest rate swap counterparty to several of the Company’s CMO and REMIC securitizations. At March 31, 2009, the estimated value of derivative liabilities to LBHI, through its affiliated companies was $92.3 million and is included in derivative liabilities in the consolidated balance sheet. As the related securitization trusts are non-recourse to the Company, the Company is not required to replace or otherwise settle any derivative positions affected by counterparty default within the consolidated trusts. ~~At September 30, 2008, the estimated value of these derivatives is included in derivative liabilities in the consolidated balance sheet.~~

Non-recurring basis

The Company is required to measure certain assets and liabilities at fair ~~value from time-to-time.~~value. 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~~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~~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 fair value measurements at ~~September 30,~~March 31, 2009 and December 31, 2008 based on the lack of ~~observability of~~observable market inputs.

~~Mortgage Servicing Rights~~Real estate owned - ~~Mortgage servicing rights (MSR), for~~REO, which consists of residential real estate acquired in satisfaction of loans, is carried at net realizable value. Upon foreclosure, REO is adjusted to the estimated fair value ~~option~~of the residential real estate less estimated selling and holding costs, offset by expected mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of carrying value or estimated fair value less costs to sell. Fair values of REO are generally based on appraisals or market prices, and considered Level 2 measurements at March 31, 2009 and December 31, 2008.

Lease liability – 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 ~~not elected are carried at LOCOM. MSRs are not traded in an active market with observable prices.~~previously occupied is no longer being used by the Company. The Company ~~utilizes internal pricing processes to estimate~~has subleased a significant amount of this office space. The Company has recorded a liability, included within discontinued operations, representing the fair value of ~~MSRs, which are~~the minimum lease payments over the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space. This liability is based on ~~assumptions~~ the ~~Company believes would be used by market participants. MSRs, which are included in other assets, are~~present value techniques that incorporate the Company’s judgments about estimated sublet revenue and discount rates. Therefore, this liability is considered a Level 3 ~~measurements~~measurement at ~~September 30,~~March 31, 2009 and December 31, 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 Interest 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 assets and liabilities in the securitized trusts. Interest income and interest expense is calculated based on the estimated effective yields in the trusts multiplied by the fair value of the mortgage collateral and borrowings.

3023

Table of Contents

Interest Income and Expense
Interest income on securitized mortgage collateral and interest expense on securitized mortgage borrowings are recorded using the effective yield for the period based on the previous quarter’s estimated fair value.
Selected Financial Results for the Three Months Ended September 30, 2008March 31, 2009

Continuing Operations

· Net earnings of ~~$1.9~~$1.3 million for the ~~third~~first quarter of ~~2008~~2009, compared to a net loss of ~~$969.4~~$4.5 million for the ~~third~~first quarter of ~~2007.~~2008.

· Net interest income of ~~$3.0~~$3.6 million for the ~~third~~first quarter of ~~2008~~2009, primarily from our long-term mortgage portfolio, as compared to net interest income of ~~$12.0~~$7.3 million for the ~~third~~first quarter of ~~2007.~~2008.

· ~~Master servicing fees~~Non-interest income - net trust assets of ~~$1.4~~$4.7 million for the ~~third~~first quarter of ~~2008 as~~2009, compared to ~~$1.7~~($0.7) million for the ~~third~~first quarter of ~~2007.~~

·~~Real estate advisory fees of $7.0 million for the third quarter of~~ 2008 ~~as compared to zero for the third quarter of 2007.~~

Discontinued Operations

· Net loss of ~~$18.1~~$2.4 million for the ~~third~~first quarter of ~~2008~~2009, compared to a net ~~loss~~earnings of ~~$221.8~~$0.7 million for the ~~third~~first quarter of ~~2007.~~2008.

· ~~Reverse repurchase agreements were $194.3~~Restructured Financing was $182.5 million at ~~September 30, 2008~~March 31, 2009, compared to ~~$336.7~~$188.7 million at December 31, ~~2007.~~2008.

· Loans held-for-sale were ~~$130.2~~$101.5 million, including a fair value adjustment of ~~$98.5~~$102.7 million at ~~September 30, 2008~~March 31, 2009, compared to loans held-for-sale of ~~$165.6~~$107.8 million, including a ~~$106.9~~$109.1 million fair value adjustment at ~~June 30,~~December 31, 2008. ~~The decline in loans held-for-sale is primarily related to increased foreclosures, loan sales and additional fair value adjustments.~~

Selected Financial Results for the Nine Months Ended September 30, 2008

~~Continuing Operations~~

·~~Net loss of $19.0 million for the first nine months of 2008 compared to a net loss of $1.1 billion for the first nine months of 2007.~~

·Net interest income of $14.6 million for the first nine months of 2008 primarily from our long-term mortgage investment portfolio as compared to net interest income of $27.8 million for the first nine months of 2007.

·~~Master servicing fees of $4.4 million for the first nine months of 2008 as compared to $4.9 million for the first nine months of 2007.~~

·~~Real estate advisory fees of $15.6 million for the first nine months of 2008 as compared to zero for the first nine months of 2007.~~

~~Discontinued Operations~~

·~~Net loss of $28.5 million for the first nine months of 2008 compared to a net loss of $348.4 million for the first nine months of 2007.~~

Estimated Taxable Income

While the Company has generated significant net operating loss carryforwards in recent periods, we do not expect to generate sufficient taxable income in 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.

To maintain our REIT status, we are required to distribute a minimum of 90 percent of our annual taxable income to our stockholders, as well as meet certain asset and income tests set forth in the Internal Revenue Code. If the Company fails to meet these requirements, or elects to terminate its status as a REIT, we would be subject to federal income taxes at the regular corporate rates. While the Company has no current plans to terminate its status as a REIT, there can be no assurance that future events or transactions would enable the Company to maintain this status.

~~Table of Contents~~

Financial Condition and Results of Operations

Financial Condition

Condensed Balance Sheet Data

	September 30,		December 31,			Increase			%		March 31,		December 31,		Increase			%
	2008		2007			(Decrease)			Change		2009		2008		(Decrease)			Change
Investment securities available-for-sale											$	1,322	$	2,068	$	(746	)	(36	)%
Securitized mortgage collateral	$	8,264,413	$	16,532,633		$	(8,268,220	)	(50	)%	5,505,729		5,894,424		(388,695		)	(7	)
Assets of discontinued operations	158,468		353,250			(194,782		)	(55	)
Derivative assets	251		7,497			(7,246		)	(97	)	37		37		—			—
Real estate owned (REO)	663,320		400,863			262,457			65		440,916		599,084		(158,168		)	(26	)
Total trust assets											5,948,004		6,495,613		(547,609		)	(8	)

Assets of discontinued operations											137,947		141,053		(3,106		)	(2	)
Other assets	79,009		96,829			(17,820		)	(18	)	73,715		78,851		(5,136		)	(7	)
Total assets	$	9,165,461	$	17,391,072		$	(8,225,611	)	(47	)%	$	6,159,666	$	6,715,517	$	(555,851	)	(8	)%

Securitized mortgage borrowings	$	8,787,013	$	17,780,060		$	(8,993,047	)	(51	)%	$	5,691,028	$	6,193,984	$	(502,956	)	(8	)%
Derivative liabilities											232,357		273,584		(41,227		)	(15	)
Total trust liabilities											5,923,385		6,467,568		(544,183		)	(8	)

Liabilities of discontinued operations	225,536		405,341			(179,805		)	(44	)	209,865		217,241		(7,376		)	(3	)
Other liabilities	147,402		283,399			(135,997		)	(48	)	17,411		21,456		(4,045		)	(19	)
Total liabilities	9,159,951		18,468,800			(9,308,849		)	(50	)	6,150,661		6,706,265		(555,604		)	(8	)
Total stockholders’ equity (deficit)	5,510		(1,077,728		)	1,083,238			101
Total stockholders’ equity											9,005		9,252		(247		)	(3	)
Total liabilities and stockholders’ equity	$	9,165,461	$	17,391,072		$	(8,225,611	)	(47	)%	$	6,159,666	$	6,715,517	$	(555,851	)	(8	)%

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Total assets and liabilities were ~~$9.2~~$6.2 billion ~~and $9.2 billion as of September 30, 2008, respectively,~~at March 31, 2009 as compared to ~~$17.4~~$6.7 billion ~~and $18.5 billion as of~~at December 31, ~~2007, respectively.~~2008. The ~~decreases~~decrease in total assets and liabilities ~~were~~are primarily attributable to continued decreases in fair values related to the Company’s trust assets and liabilities as summarized below:

· Securitized mortgage collateral decreased $388.7 million to $5.5 billion at March 31, 2009. The decrease in securitized mortgage collateral was 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~~decline 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~~$72.3 million and ~~other financial instruments are recognized~~reductions in ~~earnings. Upon adoption, securitized~~principal balances (resulting from transfers to REO and principal paydowns) of $316.4 million.

· REO within the Company’s securitization trusts decreased $158.2 million during the quarter to $440.9 million at March 31, 2009. Increases in REO from foreclosures totaled $118.6 million. Offsetting the increase in REO from foreclosures were $192.5 million in liquidations and $84.3 million in additional lower of cost or market write-downs subsequent to foreclosure.

· Securitized mortgage ~~collateral and~~borrowings decreased $503.0 million to $5.7 billion at March 31, 2009. The decrease in securitized mortgage borrowings ~~were reduced by $0.8 billion and $1.9 billion, respectively. During~~was the ~~first nine months, the net change~~result of a decrease in ~~the~~ fair value of ~~securitized mortgage collateral~~$23.4 million and ~~securitized mortgage borrowings included~~reductions in ~~earnings was $(5.6) billion and $5.7 billion, respectively.~~outstanding balances (resulting from principal paydowns) of $479.1 million.

· Derivative liabilities, net decreased $41.2 million during the quarter to $232.3 million at March 31, 2009. The decrease is the result of a $16.2 million negative change in fair value, offset by cash payments from the securitization trusts of $57.4 million.

Since our consolidated and unconsolidated securitization trusts are non-recourse to the Company, our economic risk is limited to our residual interests in these securitization trusts. Therefore, we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets ~~(including investment securities available-for-sale and excluding the $10.4 million in master servicing rights included within the basis of securitized mortgage collateral)~~ and trust liabilities. Forecasted voluntary and involuntary prepayment estimates for single-family and multi-family loans for the next 12 months range from 12 percent and 28 percent for the 2002-2003 vintage years, respectively, and 7 percent and 15 percent for the 2007 vintage year, respectively. The decline inFor unconsolidated securitizations, our residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, our residual interests ~~in securitizations is primarily due to increases in credit losses, delinquencies~~are represented by the fair value of securitized mortgage collateral and ~~overall reductions in~~net realizable value of real estate ~~prices.~~owned, offset by the fair value of securitized mortgage borrowings and net derivative liabilities. The following ~~table presents~~tables present the estimated fair value of our residual interests by securitization vintage year and other related assumptions used to derive these values at ~~September 30, 2008:~~March 31, 2009:

Fair Value Measurement Assumptions

Residual Interests by Vintage Year

Lifetime Loss Estimate

SF Discount

SF

MF

Total

SF

MF

Rate (1)

2002-2003 (2)

$
11,288

$
6,441

$
17,729

2
%
1
%
30
%
2004

2,240

4,652

6,892

3
%
1
%
40
%
2005

106

457

563

8
%
1
%
50
%
2006 (3)

398

5,572

5,970

21
%
6
%
50
%
2007

—

455

455

27
%
7
%
50
%
Total

$
14,032

$
17,577

$
31,609

			Estimated Fair Value of Residual Interests by Vintage Year
			SF		MF		Total
	2002-2003 (1)		9,177		4,410		13,587
		2004	3,962		4,426		8,388
		2005 (2)	312		600		912
		2006 (2)	55		1,481		1,536
		2007 (2)	—		196		196
		Total	13,506		11,113		24,619

Weighted avg. prepayment rate			14	%	19	%	14	%
Weighted avg. discount rate (3)			49	%	48	%	49	%

(1)		~~The discount rate for all multi-family residual interests is 30 percent at September 30, 2008.~~
~~(2)~~		2002-2003 vintage year includes CMO 2007-A, ~~due~~since the majority of the mortgages collateralized in this securitization were originated during this period.
(2)		The estimated fair values of residual interests in vintage years 2005 through 2007 is reflective of higher estimated future losses and investor yield requirements compared to ~~performance, which uses a 40 percent discount rate and was securitized in 2007 from collapsed securitizations which were originally securitized in 2002, 2003 and 2004.~~earlier vintage years.
(3)		~~2006 vintage year includes ISAC 2005-2, due to performance,~~Discount rates were 30 percent on SF and ~~the fact that it was a REMIC like all other 2006 securitizations.~~MF prepayment penalties.

32The fair value of trust assets is essentially the fair value of trust liabilities plus the fair value of the residual interests. The credit loss, prepayment and forward interest rate assumptions used in the fair value process were the same for trust assets, liabilities and residual interests, as the collateral assumptions determine collateral cash flows which are used to pay the bonds and residual interests. The only difference in assumptions was between the investor yield requirements on trust assets and liabilities (trust liabilities were slightly less on those securitization trusts with residual interests) and the discount rates used for residual interests. The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage:

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		Estimated Future Losses (1)				Investor Yield Requirement (2)
		SF		MF		SF		MF
2002-2003		5	%	2	%	17	%	27	%
	2004	7	%	2	%	33	%	25	%
	2005	17	%	8	%	49	%	28	%
	2006	29	%	16	%	39	%	25	%
	2007	29	%	15	%	35	%	31	%

(1) Estimated future losses derived by dividing future projected losses by current unpaid principal balances.

(2) Investor yield requirements represent the Company’s estimate of the yield third-party market participants would require to price our trust assets and liabilities given our prepayment, credit loss and forward interest rate assumptions.

The following table presents selected financial data as of the dates indicated:

	As of and Year-to-Date Ended,									As of and Year-to-Date Ended,
	September 30,			December 31,			September 30,			March 31,			December 31,			March 31,
	2008			2007			2007			2009			2008			2008
Prior 12-month (CPR) - Single-family	14		%	25		%	30		%
Prior 12-month (CPR) - Multi-family	11		%	9		%	8		%
Prior 12-month constant prepayment rate (CPR) - Residential										11		%	11		%	20		%
Prior 12-month constant prepayment rate (CPR) - Commercial										11		%	10		%	10		%
Total non-performing loans	$	2,687,680		$	2,131,537		$	1,434,137		$	3,278,977		$	3,040,291		$	2,359,590
Total non-performing loans to total loans	16.5		%	11.7		%	7.2		%	21.8		%	19.4		%	13.3		%
Total non-performing assets (1)	$	3,355,838		$	2,543,775		$	1,800,198		$	3,727,684		$	3,646,742		$	2,870,087
Total non-performing assets to total assets (2)	36.6		%	14.6		%	9.3		%	25.4		%	25.8		%	13.9		%

~~(1)~~

(1) Non-performing assets include the unpaid principal balance of non-performing loans (loans that are 90 days or more delinquent, including loans in foreclosure and delinquent bankruptcies) and REO

(2)Non-performing ~~assets include non-performing loans and REO~~

~~(2)~~

For 2008, with the adoption of SFAS 159, securitized mortgage collateral is recorded at fair value and as a result of current market conditions has significantly decreased. The decrease in the fair value of securitized mortgage collateral resulted in significant decreases in total assets at September 30, 2008 compared to prior periods. This decrease in total assets, along with the increases in non-performing assets has resulted in higher total non-performing assets to total assets is presented as the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO as a percentage of total assets.

We believe that in order for us to generate ~~positive~~ cash flows ~~and earnings~~from the long-term mortgage portfolio, 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 “Status of Operations, Liquidity and Capital Resources.”

Credit ~~Risk.~~risk. We manage credit risk by actively managing delinquencies and defaults through our servicers. Starting with the second half of 2007 we have not retained any ~~additional Alt-A~~ mortgages in our long-term mortgage portfolio. Our securitized mortgage collateral primarily ~~consisting~~consists of Alt-A mortgages which are generally within typical Fannie Mae and Freddie Mac guidelines but ~~that~~ have loan characteristics, ~~including~~which may include 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 30, 2008, the~~March 31, 2009, single-family and multi-family securitized mortgage collateral had an original weighted average credit score of ~~single-family and multi-family securitized mortgage collateral was~~ 701 and ~~732,~~731, an original weighted average LTV ratio of 73 and 66 percent and an original CLTV of 8483 percent and 66 percent, respectively. The current LTV and CLTV ratios may have increased from origination date as a result of the deterioration of the real estate market.

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Using historical losses, current portfolio statistics and market conditions and available market data, the Company has estimated future loan losses, 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 the Company’s initial ~~market~~ expectations when the loans were originated, 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 recognize additional fair value reductions to our securitized mortgage collateral, which may also affect the value of the related securitized mortgage borrowings.

We monitor our servicers to attempt to ensure that they perform loss mitigation, foreclosure and collection functions according to their servicing practices and each securitization trust’s pooling and servicing agreement. We have met with the management of our servicers to assess our borrowers’ current ability to pay their mortgages and to make arrangements with selected delinquent borrowers which will result in the best interest of the trust, borrower and the Company, in an effort to minimize the number of mortgages which become seriously delinquent. When resolving delinquent mortgages, servicers are required to take timely action. The servicer is required to determine payment collection under various circumstances, which will result in the maximum financial benefit. This is accomplished by either working with the borrower to bring the mortgage current or by foreclosing and liquidating the property. 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

~~Table of Contents~~

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 a foreclosure sale, the trusts consolidated on our balance sheet generally acquire title to the property.

We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 days or more past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days late or greater, foreclosures and delinquent bankruptcies were ~~$3,140.7 million~~$3.7 billion or ~~19.3~~24.8 percent as of ~~September 30, 2008.~~March 31, 2009.

The following table summarizes the unpaid principal balances of non-performing loans ~~that we own, including~~in our mortgage portfolio, included in securitized mortgage collateral, loans ~~held for long-term investment~~held-for-investment and 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:

	As of September 30,				As of December 31,				At March 31,				At December 31,
	2008		%		2007		%		2009		%		2008		%
Loans held-for-sale (1)
Loans held for sale (1)
60 - 89 days delinquent	$	13,117	0	%	$	45,121	2	%	$	9,517	0.1	%	$	13,694	0.1	%
90 or more days delinquent	46,467		1	%	51,294		2	%	66,271		0.4		63,541		0.4
Foreclosures (2)	62,581		2	%	23,936		1	%	73,609		0.5		65,661		0.4
Total delinquent loans held-for-sale	122,165		4	%	120,351		5	%
Total 60+ days delinquent loans held-for-sale									149,397		1.0		142,896		0.9

Securitized mortgage collateral
60 - 89 days delinquent	$	439,909	14	%	$	490,946	18	%	$	435,054	2.9	%	$	494,960	3.2	%
90 or more days delinquent	833,472		27	%	773,816		29	%	1,459,021		9.7		1,096,366		7.0
Foreclosures (2)	1,527,771		49	%	1,093,385		41	%	1,440,503		9.6		1,614,472		10.3
Delinquent bankruptcies (3)	217,389		7	%	189,106		7	%	239,573		1.6		200,251		1.3
Total delinquent long-term mortgage portfolio	3,018,541		96	%	2,547,253		95	%
Total delinquent loans	$	3,140,706	100	%	$	2,667,604	100	%
Total loans	$	16,270,192			$	18,252,197
Total 60+ days delinquent long-term mortgage portfolio									3,574,151		23.8		3,406,049		21.7
Total 60 or more days delinquent									$	3,723,548	24.8		$	3,548,945	22.7
Total mortgages owned									$	15,018,922			$	15,666,243

~~(1)~~

~~Loans held-for-sale are substantially included in discontinued operations in the consolidated balance sheets.~~

~~(2)~~

~~Represents properties in the process of foreclosure.~~

~~(3)~~

(1) Loans held-for-sale are substantially included in discontinued operations in the consolidated 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:~~indicated (excludes 60-89 days delinquent):

As of September 30,

As of December 31,

2008

%

2007

%

90 or more days delinquent, foreclosures and delinquent bankruptcies

$
2,687,680

80
%
$
2,131,537

84
%
Real estate owned

668,158

20
%
412,238

16
%
Total non-performing assets

$
3,355,838

100
%
$
2,543,775

100
%

Table of Contents

	At March 31,				At December 31,
	2009		%		2008		%
90 or more days delinquent, foreclosures and delinquent bankruptcies	$	3,278,977	88	%	$	3,040,291	83	%
Real estate owned	448,707		12	%	606,451		17	%
Total non-performing assets	$	3,727,684	100	%	$	3,646,742	100	%

Non-performing assets consist of ~~mortgages~~non-performing loans (mortgages that are 90 days or more delinquent, including loans in foreclosure and delinquent ~~bankruptcies.~~bankruptcies) plus REO. 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 when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. As of ~~September 30, 2008~~,March 31, 2009, non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total assets was ~~36.6 percent compared to 14.6 percent as of~~25 percent. At December 31, ~~2007. At September 30,~~ 2008, with the adoption of SFAS 159, securitized mortgage collateral is recorded at fair value and as a result of current market conditions has significantly decreased. The decrease in the fair value of securitized mortgage collateral resulted in significant decreases in total assets at September 30, 2008 compared to prior periods. This decrease in total assets, along with the increases in non-performing assets has resulted in higher total non-performing assets to total ~~assets.~~

~~Table of Contents~~assets was 26 percent.

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. Historically, adjustments to the loan carrying value required at the time of foreclosure were charged against the allowance for loan losses. With the adoption of SFAS 159, the Company no longer maintains an allowance for loan losses and adjustmentsAdjustments 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 are recorded as gains or losses from real estate owned in the consolidated ~~statement~~statements of ~~operations and comprehensive loss.~~operations. Real estate owned, for continuing and discontinued operations, at ~~September 30, 2008 increased $255.9~~March 31, 2009 decreased $157.7 million or ~~62.1~~26 percent from December 31, ~~2007~~2008 as a result of anincreased liquidations during the period. Foreclosures continue to increase ~~in foreclosures~~resulting 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.~~financing.

We realized a loss on sale of real estate owned in the amount ~~$10.1 million and $4.8~~$43.9 million for the ~~three and nine months ended September 30, 2008, respectively,~~first quarter of 2009 as compared to a ~~loss~~gain of ~~$5.6 million and $6.7~~$3.5 million for the ~~three and nine months ended September 30, 2007, respectively.~~first quarter of 2008. Additionally, ~~for~~during the ~~three and nine months ended September 30, 2008,~~first quarter of 2009, the Company recorded ~~an unrealized loss on~~writedowns of the net realizable value of the REO in the amount of ~~$5.6~~$84.3 million ~~and $19.9~~as compared to $7.7 million ~~respectively,~~for the first quarter of 2008, which reflects the decline in value of the REO from the foreclosure date.

The following table presents the balances ~~and related activity~~ of ~~the real estate owned~~REO for continuing operations:

	At March 31, 2009			At December 31, 2008
REO	$	548,978		$	635,285
Impairment (1)	(107,114		)	(35,533		)
Ending balance	$	441,864		$	599,752

REO inside trusts	$	440,916		$	599,084
REO outside trusts (2)	948			668
Total	$	441,864		$	599,752

(1) Impairment represents the cumulative writedowns of net realizable value subsequent to foreclosure.

In calculating the cash flows to assess the fair value of the securitized mortgage collateral, the Company estimates the ~~lifetime~~future losses embedded in our loan portfolio. In evaluating the adequacy of ~~the lifetime~~these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of ~~the required 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, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the ~~lifetime~~future loan losses.

Table of Contents

Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in ~~our~~the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, ~~projected loss curves,~~ political factors, market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The assessment 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 affecting credit quality and inherent losses.

Interest Rate Risk. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”

Prepayment Risk. The Company uses prepayment penalties as a method of partially mitigating prepayment risk for those borrowers that have the ability to refinance. ~~Mortgage~~Historically, mortgage industry evidence suggests that 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. AsHowever, the recent economic downturn, lack of available credit and decline in property values has limited borrowers’ ability to refinance. Additionally, as mortgage rates increase and housing prices decline, borrowers will find it more difficult to

~~Table of Contents~~

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 voluntary prepayment rate of single-family and multi-family loans held as securitized mortgage collateral ~~decreased~~increased to 1012 percent at ~~September 30, 2008~~March 31, 2009 from 1710 percent as of December 31, ~~2007.~~2008.

As of September 30, 2008, the twelve-month combined CPR of single-family and multi-family loans held as securitized mortgage collateral was 13 percent as compared to a 24 percent twelve-month average CPR as of December 31, 2007. Prepayment penalties are charged to borrowers for mortgages that are paid early and recorded as interest income.

Results of Operations

For the Three ~~and Nine~~ Months Ended ~~September 30, 2008~~March 31, 2009 compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2007~~March 31, 2008

Condensed Statements of Operations Data

For the Three Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Interest income

$
397,445

$
310,006

$
87,439

28
%
Interest expense

394,431

298,003

96,428

32

Net interest income

3,014

12,003

(8,989
)
(75
)
Provision for loan losses

—

789,445

(789,445
)
n/a

Net interest income (expense) after provision for loan losses

3,014

(777,442
)
780,456

100

Total non-interest income (expense)

11,473

(182,243
)
193,716

106

Total non-interest expense

7,333

6,701

632

9

Income tax expense

5,253

3,056

2,197

72

Net earnings (loss) from continuing operations

1,901

(969,442
)
971,343

100

Loss from discontinued operations, net

(18,121
)
(221,793
)
203,672

92

Net loss

$
(16,220
)
$
(1,191,235
)
$
1,175,015

99
%

Net loss per share - diluted

$
(0.26
)
$
(15.70
)
$
15.44

98
%
Dividends declared per common share

$
—

$
—

$
—

n/a
%

For the Nine Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Interest income

$
1,077,256

$
931,196

$
146,060

16
%
Interest expense

1,062,637

903,377

159,260

18

Net interest income

14,619

27,819

(13,200
)
(47
)
Provision for loan losses

—

979,740

(979,740
)
n/a

Net interest income (expense) after provision for loan losses

14,619

(951,921
)
966,540

102

Total non-interest income (expense)

1,715

(134,042
)
135,757

101

Total non-interest expense

21,395

19,125

2,270

12

Income tax expense

13,980

12,012

1,968

16

Net loss from continuing operations

(19,041
)
(1,117,100
)
1,098,059

98

Loss from discontinued operations, net

(28,481
)
(348,350
)
319,869

92

Net loss

$
(47,522
)
$
(1,465,450
)
$
1,417,928

97
%

Net loss per share - diluted

$
(0.77
)
$
(19.41
)
$
18.64

96
%
Dividends declared per common share

$
—

$
0.10

$
(0.10
)
n/a
%

	For the Three Months Ended March 31,
							Increase			%
	2009			2008			(Decrease)			Change
Interest income	$	712,649		$	271,955		$	440,694		162	%
Interest expense	709,007			264,606			444,401			168
Net interest income	3,642			7,349			(3,707		)	(50	)
Total non-interest income	10,249			992			9,257			933
Total non-interest expense	10,617			6,318			4,299			68
Income tax expense	1,998			6,526			(4,528		)	(69	)
Net earnings (loss) from continuing operations	1,276			(4,503		)	5,779			128
Net (loss) earnings from discontinued operations, net	(2,395		)	688			(3,083		)	(448	)
Net loss	$	(1,119	)	$	(3,815	)	$	2,696		71	%

Net loss per common share - basic and diluted:	$	(0.15	)	$	(0.99	)	$	0.84		85	%

Net Interest Income

We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, 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 and reverse repurchase ~~agreements~~agreements. Interest income and ~~borrowings secured by investment~~

~~Table of Contents~~

~~securities available-for-sale. With the adoption of SFAS 159, net~~ interest ~~income~~expense during the ~~quarter~~period represents the effective yield, based on the fair value of the trust assets and liabilities. During 2007, net interest income included (1) amortization of acquisition costs on mortgages acquired from the mortgage operations, (2) accretion of loan discounts, which primarily 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 securitization costs and, to a lesser extent, (4) amortization of 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:~~indicated. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. These cash receipts and payments are included as a component of the change in fair value of net trust assets.

For the Three Months Ended September 30,

2008

2007

Average

Average

Balance

Interest

Yield

Balance

Interest

Yield

MORTGAGE ASSETS

Subordinated securities collateralized by mortgages

$
8,322

$
560

26.92
%
$
14,443

$
1,459

40.41
%
Securitized mortgage collateral (1)

9,659,897

396,695

16.43
%
19,662,219

307,433

6.25
%
Loans held-for-investment and held-for-sale (2)

152,115

2,043

5.37
%
1,222,466

23,229

7.60
%
Finance receivables

—

—

0.00
%
38,819

1,584

16.32
%
Total mortgage assets\ interest income

$
9,820,334

$
399,298

16.26
%
$
20,937,947

$
333,705

6.38
%

BORROWINGS

Securitized mortgage borrowings

$
10,142,072

$
392,271

15.47
%
$
19,458,646

$
295,325

6.07
%
Reverse repurchase agreements

208,949

2,039

3.90
%
1,225,321

21,959

7.17
%
Total borrowings on mortgage assets\ interest expense

$
10,351,021

$
394,310

15.24
%
$
20,683,967

$
317,284

6.14
%

Net Interest Spread (3)

$
4,988

1.03
%

$
16,421

0.24
%
Net Interest Margin (4)

0.20
%

0.31
%

For the Nine Months Ended September 30,

2008

2007

Average

Average

Balance

Interest

Yield

Balance

Interest

Yield

MORTGAGE ASSETS

Subordinated securities collateralized by mortgages

$
11,250

$
1,980

23.47
%
$
24,723

$
4,767

25.71
%
Securitized mortgage collateral (1)

11,666,313

1,073,580

12.27
%
20,502,803

930,086

6.05
%
Loans held-for-investment and held-for-sale (2)

182,683

9,492

6.93
%
1,347,949

64,541

6.38
%
Finance receivables

—

—

0.00
%
277,410

9,776

4.70
%
Total mortgage assets\ interest income

$
11,860,246

$
1,085,052

12.20
%
$
22,152,885

$
1,009,170

6.07
%

BORROWINGS

Securitized mortgage borrowings

$
11,988,676

$
1,055,519

11.74
%
$
20,135,424

$
893,253

5.91
%
Reverse repurchase agreements

241,961

7,197

3.97
%
1,654,003

72,932

5.88
%
Total borrowings on mortgage assets\ interest expense

$
12,230,637

$
1,062,716

11.59
%
$
21,789,427

$
966,185

5.91
%

Net Interest Spread (3)

$
22,336

0.61
%

$
42,985

0.16
%
Net Interest Margin (4)

0.25
%

0.26
%

~~(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.

3729

Table of Contents

~~(2)~~

~~The held-for-sale balance excludes the lower of cost or market (LOCOM) writedown on the loans.~~

~~(3)~~

	For the Three Months Ended March 31,
	2009						2008
	Average						Average
	Balance		Interest		Yield		Balance		Interest		Yield
MORTGAGE ASSETS
Investment securities, available-for-sale	$	1,421	$	130	36.59	%	$	15,144	$	733	19.36	%
Securitized mortgage collateral	5,700,077		712,080		49.97		13,672,728		269,897		7.90
Loans held-for-investment and held-for-sale (1)	106,029		1,129		4.26		212,811		4,256		8.00
Total mortgage assets\ interest income	$	5,807,527	$	713,339	49.13	%	$	13,900,683	$	274,886	7.91	%

BORROWINGS
Securitized mortgage borrowings	$	5,942,506	$	708,465	47.69	%	$	13,835,280	$	261,816	7.57	%
Reverse repurchase agreements	184,907		1,715		3.71		285,808		3,362		4.71
Total borrowings on mortgage assets\ interest expense	$	6,127,413	$	710,180	46.36	%	$	14,121,088	$	265,178	7.51	%

Net Interest Spread (2)			$	3,159	2.77	%			$	9,708	0.40	%
Net Interest Margin (3)					0.22	%					0.28	%

(1) The held-for-sale balance excludes the lower of cost or market (LOCOM) write-down on the loans.

(2)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) 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.

~~(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.

Net interest income spread for the ~~third quarter of 2008~~three months ended March 31, 2009 decreased ~~$11.4~~$6.5 million to ~~$5.0~~$3.2 million ~~as compared to~~from $9.7 million for the ~~third quarter of 2007.~~three months ended March 31, 2008. The decrease in net interest ~~income~~spread was primarily ~~due~~attributable to overall declines in ~~outstanding~~averages balances ~~and~~between periods, offset by an increase in the ~~effective yield recognized based on~~net interest spread from 0.40 percent for the ~~fair values of~~quarter ended March 31, 2008 to 2.77 percent for the ~~related securitized collateral and borrowings.~~ three months ended March 31, 2009.

During the first quarter of 2009, the yield on mortgage assets increased to ~~16.26~~49.13 percent from ~~6.38~~7.91 percent ~~for~~in the comparable ~~2007~~2008 period. The yield on total borrowings increased to ~~15.24~~46.36 percent for the first quarter of 2009 from ~~6.14~~7.51 percent for comparable 2008 period. In connection with the ~~comparable period. The increase in the~~fair value accounting for investment securities available-for-sale and securitized mortgage collateral and borrowings, ~~yields is primarily a result of the adoption of SFAS 159 and the related recognition of~~ interest income and interest expense is recognized using effective yields, which are based, in part, on estimated fair values for ~~the three months ended September 30, 2008, based on fair value, as compared to using effective interest rates using the historical basis in the loans in the prior period.~~these instruments. As the market’s expectation of future credit losses has increased ~~the~~between periods, market ~~has~~participants have demanded higher yields, ~~as investors require a higher yield on these financial assets and liabilities.~~

~~Net interest income spread for the first nine months of 2008 decreased $20.6 million to $22.3 million as compared to the first nine months of 2007. The decrease~~which have resulted in ~~net interest income was primarily due to declines~~significant reductions in ~~outstanding balances and the effective yield recognized based on~~ the fair values of these instruments. These reductions in fair value have significantly increased the ~~related securitized collateral and borrowings. During the first nine months, the yield on mortgage assets increased to 12.20 percent from 6.07 percent~~effective yields used for the comparable 2007 period. The yield on total borrowings increased to 11.59 percent for the first nine months from 5.91 percent for the comparable period. The increase in the securitized mortgage collateral and borrowing yields is primarily a resultpurposes of ~~the adoption of SFAS 159 and the related recognition of~~recognizing interest income and interest expense using effective yields for the nine months ended September 30, 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.~~instruments.

Non-Interest Income

For the Three Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Change in fair value of derivative instruments

—

(106,532
)
106,532

n/a
%
Change in fair value of net trust assets, excluding REO

7,778

—

7,778

n/a

Change in fair value of trust preferred securities

10,494

—

10,494

n/a

Losses from real estate owned

(15,685
)
(45,941
)
30,256

66

Real estate advisory fees

7,039

—

7,039

n/a

Other

1,847

(29,770
)
31,617

106

Total non-interest income

$
11,473

$
(182,243
)
$
193,716

106
%

Changes in Non-Interest Income

	For the Three Months Ended March 31,
							Increase			%
	2009			2008			(Decrease)			Change
Change in fair value of net trust assets, excluding REO	132,930			3,528			129,402			3,668	%
Losses from real estate owned	(128,201		)	(4,256		)	(123,945		)	(2,912	)
Non-interest income - net trust assets	4,729			(728		)	5,457			750
Change in fair value of trust preferred securities	12			(4,023		)	4,035			100
Real estate advisory fees	—			3,845			(3,845		)	(100	)
Other	5,508			1,898			3,610			190
Total non-interest income	$	10,249		$	992		$	9,257		933	%

Table of Contents

~~Change in Fair Value of Derivative Instruments~~Non-interest income – net trust assets. ~~. The change in the fair value of derivative instruments increased by $106.5 million during the third quarter of 2008 as compared~~Since our consolidated and unconsolidated securitization trusts are non-recourse to the ~~third quarter~~Company, our economic risk is limited to our residual interests in these securitization trusts. To better understand the economics on our residual interests in securitizations, it is necessary to consider the net effect 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. .. All estimated future losses are included in the estimate of the fair value of securitized mortgage collateral. Losses on REO are reported separately in the consolidated statement of operations. Since REO is a nonfinancial asset, REO is the only component of trust assets and liabilities that is not recorded at fair value. Therefore, REO values at the time of sale or losses from further write-downs are recorded separately in the Company’s consolidated statement of operations. The ~~change~~net effect of changes in value related to our investment in all trust assets and liabilities is shown as non-interest income — net trust assets. Non-interest income related to our net trust assets (residual interests in securitizations) was $4.7 million for the three months ended March 31, 2009, compared to a loss of $0.7 million in the comparable 2008 period. The individual components of the non-interest income from net trust assets was comprised of:

Change in fair value of ~~derivative instruments was a loss of $10.9 million during~~net trust assets, excluding REO. For the ~~third~~ quarter ~~of 2008.~~

~~Change in Fair Value of Net Trust Assets.~~ ~~The~~ended March 31, 2009, the Company recognized a ~~$7.8~~$132.9 million gain from the change in fair value of net trust assets, ~~which is~~excluding REO. This gain was comprised of ~~a gain~~gains resulting from the ~~decrease~~increase in fair value of investment securities-for-sale and a reduction in the fair value of securitized mortgage borrowings of ~~$2.4 billion, loss~~$0.9 million and $697.2 million, respectively. Offsetting these gains were reductions in the ~~fair value of derivatives instruments of $10.9 million and losses on the reduction in~~ fair value of securitized mortgage collateral and ~~investment securities available-for-sale~~derivative instruments of ~~$2.4 billion,~~$549.0 million and ~~$3.1~~$16.2 million, respectively. ~~The overall reduction~~

For the quarter ended March 31, 2008, the Company recognized a $3.5 million gain from the change in fair value of net trust assets. This gain was comprised of gains resulting from the reduction in the fair value of securitized mortgage borrowings of $3.4 billion. Offsetting these gains were reductions in the fair value of investment securities, available-for-sale, securitized mortgage collateral and derivative instruments of $4.3 million, $3.2 billion and $181.8 million, respectively.

The overall reductions in fair value of the securitized mortgage collateral, securitized mortgage borrowings isand derivative instruments for the ~~result of increased credit losses related to increasing delinquencies, foreclosures~~three months ended March 31, 2009 and ~~higher loss severities resulting from home price declines. The decline in net derivative liabilities is~~2008 are the result of decreases in London Interbank Offered Rate (LIBOR) reflected in the forward yield ~~curve.~~curve, as well as decreases in the market prices of our mortgage-backed securities.

Losses from real estate owned. Losses from real estate owned were $128.2 million for the three months ended March 31, 2009. This loss was comprised of a $43.9 million loss on sale of real estate owned, coupled with $84.3 million in additional lower of cost or market adjustments during the period. During the first quarter of 2009, loss severities resulting from liquidations in areas where we have high concentration of foreclosed properties (such as California and Florida) have increased significantly over previous periods as a result of continued deterioration in the U.S. economy and real estate markets. These continued declines in housing prices have resulted in liquidations of foreclosed assets at prices below expected levels as wells as additional impairment write-downs of REO since foreclosure.

Losses from real estate owned were $4.3 million for the three months ended March 31, 2008, comprised of $3.5 million in gains from the sale of real estate owned, offset by $7.7 million in additional lower of cost or market adjustments.

Change in the ~~Fair Value~~fair value of trust preferred securities.Change in the fair value of trust preferred securities was a gain of $12 thousand for the three months ended March 31, 2009, compared to a loss of $4.0 million for the three months ended March 31, 2008. Trust ~~Preferred Securities.~~ preferred securities are measured based upon an analysis prepared by the Company, which considers the Company’s own credit risk, including consideration of recent settlements with trust preferred debt holders, comparison to the terms and market prices of the Company’s preferred stock and negotiations of revised terms of restructured trust preferred securities. For the three months ended March 31, 2009, the fair value of trust preferred securities remained essentially unchanged. During the ~~third~~ quarter, ofthe Company fully satisfied $25 million in outstanding trust preferred securities for $3.75 million. For the three months ended March 31, 2008, the ~~Company recognized~~change in fair value of trust preferred securities was a ~~gain in the amount~~loss of ~~$10.5~~$4.0 million as a result of ~~a decrease~~the change in ~~the fair value of the~~ trust preferred ~~securities.~~securities to $45.1 million at March 31, 2008, compared to $40.9 million at January 1, 2008.

3831

Table of Contents

For the Nine Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Change in fair value of derivative instruments

—

(32,860
)
32,860

n/a
%
Change in fair value of net trust assets, excluding REO

145

—

145

n/a

Change in fair value of trust preferred securities

5,473

—

5,473

n/a

Losses from real estate owned

(24,771
)
(75,161
)
50,390

67

Real estate advisory fees

15,581

—

15,581

n/a

Other

5,287

(26,021
)
31,308

120

Total non-interest income

$
1,715

$
(134,042
)
$
135,757

101
%

~~Change in Fair Value of Derivative Instruments~~. The change in the fair value of derivative instruments increased by $32.9 million during the first nine months of 2008 as compared to the first nine 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 was a loss of $94.4 million during the first nine months of 2008.

~~Change in Fair Value of Net Trust Assets.~~ The Company recognized a $145 thousand gain from the change in fair value of net trust assets, which is comprised of a gain on the reduction of the fair value of securitized mortgage borrowings of $5.7 billion, loss on the reduction in fair value of derivatives instruments of $94.4 million and losses on the reduction in fair value of securitized mortgage collateral and investment securities available-for-sale of $5.6 billion and $8.9 million, respectively. The overall reduction in fair value of the investment securities available-for-sale, securitized mortgage collateral and securitized mortgage borrowings is the result of increased credit losses related to increasing delinquencies, foreclosures and higher loss severities resulting from home price declines. The decline in net derivative liabilities is the result of decreases in London Interbank Offered Rate (LIBOR) reflected in the forward yield curve.

~~Change in the Fair Value of Trust Preferred Securities.~~ ~~During the first nine months of 2008 the Company recognized a gain in the amount of $5.5 million as a result of a decrease in the fair value of the trust preferred securities.~~

Non-Interest Expense

Changes in Non-Interest Expense

	For the Three Months Ended September 30,									For the Three Months Ended March 31,
					Increase			%						Increase		%
	2008		2007		(Decrease)			Change		2009		2008		(Decrease)		Change
General and administrative	$	4,951	$	4,213	$	738		18	%	$	4,339	$	3,988	$	351	9	%
Personnel expense	2,382		2,488		(106		)	(4	)	6,278		2,330		3,948		169
Total operating expense	$	7,333	$	6,701	$	632		9	%	$	10,617	$	6,318	$	4,299	68	%

Total non-interest ~~expenses increased on a quarter-over-quarter basis as general and administrative costs increased $738 thousand (18 percent) during~~expense was $10.6 million for the ~~third quarter of 2008 as~~three months ended March 31, 2009, compared to ~~same~~$6.3 million for the comparable period of 2008. The $4.3 million increase in ~~2007, which~~non-interest expense was primarily attributable to ana $3.9 million increase in ~~professional expenses. Personnel expense decreased $106 thousand on a quarter-over-quarter basis.~~

~~Changes in Non-Interest Expense~~

For the Nine Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

General and administrative

$
13,864

$
14,173

$
(309
)
(2
)%
Personnel expense

7,531

4,952

2,579

52

Total operating expense

$
21,395

$
19,125

$
2,270

12
%

~~Table of Contents~~

~~Total non-interest~~personnel expenses ~~increased as personnel expense increased $2.6 million (52 percent) during~~over the ~~first nine months of 2008 as compared to same period in 2007,~~prior quarter, as a greater amount of the Company’s personnel ~~costs are being~~were utilized within the continuing operations versus discontinued operations. The ~~$309 thousand decrease~~Company has intentionally maintained certain personnel for new mortgage and real estate related fee-based businesses. However, personnel costs of both continuing and discontinued operations decreased by $1.0 million to $6.6 million for the three months ended March 31, 2009, compared to $7.6 million in ~~general and administrative costs is primarily attributable to~~the comparable period of 2008, as a ~~decrease~~result of overall reductions in ~~data processing, communications costs, and occupancy expense offset by an increase in professional expenses.~~workforce between periods.

Results of Operations by Business Segment

Continuing Operations

Condensed Statements of Operations Data

For the Three Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
3,014

$
12,003

$
(8,989
)
(75
)%
Provision for loan losses

—

789,445

(789,445
)
n/a

Net interest income (expense) after provision for loan losses

3,014

(777,442
)
780,456

100

Change in fair value of derivative instruments

—

(106,532
)
106,532

n/a

Change in fair value of net trust assets, excluding REO

7,778

—

7,778

n/a

Losses from real estate owned

(15,685
)
(45,941
)
30,256

66

Real estate advisory fees

7,039

—

7,039

n/a

Other non-interest income (expense)

12,341

(29,770
)
42,111

141

Total non-interest income (expense)

11,473

(182,243
)
193,716

106

Non-interest expense and income taxes

12,586

9,757

2,829

29

Net earnings (loss) from continuing operations

$
1,901

$
(969,442
)
$
971,343

100
%

	For the Three Months Ended March 31,
							Increase			%
	2009			2008			(Decrease)			Change
Net interest income	$	3,642		$	7,349		$	(3,707	)	(50	)%

Change in fair value of net trust assets, excluding REO	132,930			3,528			129,402			3,668
Losses from real estate owned	(128,201		)	(4,256		)	(123,945		)	(2,912	)
Non-interest income- net trust assets	4,729			(728		)	5,457			750
Change in fair value of trust preferred securities	12			(4,023		)	4,035			100
Other non-interest expense	5,508			5,743			(235		)	(4	)
Total non-interest income	10,249			992			9,257			933

Non-interest expense and income taxes	12,615			12,844			(229		)	(2	)
Net earnings (loss) from continuing operations	$	1,276		$	(4,503	)	$	5,779		128	%

Net earnings for the quarter ended ~~September 30, 2008~~March 31, 2009 increased ~~$971.3~~$5.8 million ~~as compared~~ to ~~the third quarter~~net earnings of ~~2007. The primary reason for the reduction in~~$1.3 million from a net loss ~~is the adoption~~ of ~~SFAS 159 for securitized mortgage collateral, borrowings and trust preferred securities. The Company no longer records a provision for loan losses ($789.4~~$4.5 million for the ~~third quarter~~comparable period of ~~2007) under SFAS 159 as the losses are included~~2008. This increase is primarily attributable to a $9.3 million increase in ~~the estimate of fair value for the securitized mortgage collateral. The change~~total non-interest income offset by a $3.7 million decrease in ~~fair value of derivative instruments ($106.5 million loss for the third quarter of 2007), is now included in the change in fair value of~~net interest income. Non-interest income from net trust assets ~~which consisted~~increased $5.5 million to a $4.7 million gain in the first quarter of 2009, compared to a ~~$10.9~~loss of $0.7 million ~~loss on derivatives~~ for the ~~third quarter of~~comparable period in 2008. The ~~fair value of~~increase is due to the downward shift in Libor rates between periods, which has resulted in increases in future expected net cash flows on net trust ~~preferred securities decreased $10.5 million during the third quarter of 2008 and is included in other non-interest income.~~assets between periods.

~~Condensed Statements of Operations Data~~

For the Nine Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
14,619

$
27,819

$
(13,200
)
(47
)%
Provision for loan losses

—

979,740

(979,740
)
n/a

Net interest income (expense) after provision for loan losses

14,619

(951,921
)
966,540

102

Change in fair value of derivative instruments

—

(32,860
)
32,860

n/a

Change in fair value of net trust assets, excluding REO

145

—

145

n/a

Losses from real estate owned

(24,771
)
(75,161
)
50,390

67

Real estate advisory fees

15,581

—

15,581

n/a

Other non-interest income (expense)

10,760

(26,021
)
36,781

141

Total non-interest income (expense)

1,715

(134,042
)
135,757

101

Non-interest expense and income taxes

35,375

31,137

4,238

14

Net loss from continuing operations

$
(19,041
)
$
(1,117,100
)
$
1,098,059

98
%

4032

Table of Contents

Net loss for the nine months ended September 30, 2008 decreased $1.1 billion as compared to the nine months ended September 30, 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 loan losses ($979.7 million for the first nine months of 2007) under SFAS 159 as the losses are included in the estimate of fair value for the securitized mortgage collateral. The change in fair value of derivative instruments ($32.9 million loss for the first nine months of 2007), is now included in the change in fair value of net trust assets, which consisted of a $94.4 million loss on derivatives for the first nine months of 2008 The fair value of trust preferred securities decreased $5.5 million during the first nine months of 2008 and is included in other non-interest income.

Discontinued Operations

Condensed Statements of Operations Data

For the Three Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
158

$
2,777

$
(2,619
)
(94
)%
Provision for loan losses

—

(2,807
)
2,807

n/a

Net interest income (expense) after provison for loan losses

$
158

$
(30
)
$
188

(627
)

Loss on sale of loans

(12,279
)
(144,868
)
132,589

92

Provision for repurchases

(1,060
)
(15,718
)
14,658

93

Other income (loss)

339

(7,530
)
7,869

105

Personnel expense

(3,979
)
(17,072
)
13,093

77

Non-interest expense and income taxes

(1,300
)
(36,575
)
35,275

96

Net loss

$
(18,121
)
$
(221,793
)
$
203,672

92
%

	For the Three Months Ended March 31,
							Increase			%
	2009			2008			(Decrease)			Change
Net interest (expense) income	$	(413	)	$	1,671		$	(2,084	)	(125	)%

Gain (loss) on sale of loans	42			(465		)	507			109
(Provision) recovery for repurchases	(756		)	10,258			(11,014		)	(107	)
Other loss	(1,207		)	(460		)	(747		)	(162	)
Personnel expense	(347		)	(5,293		)	4,946			93
Non-interest expense and income taxes	286			(5,023		)	5,309			106
Net loss (earnings)	$	(2,395	)	$	688		$	(3,083	)	(448	)%

Net loss for the discontinued operations ~~decreased $203.7~~was $2.4 million for the three months ended March 31, 2009, compared to net earnings of $0.7 million for the comparable period in 2008. The change is primarily due to the ~~following changes:~~following:

· decrease of ~~$132.6~~$2.1 million in ~~loss on sale of loans.~~net interest income

· ~~decrease~~increase of ~~$14.7~~$11.0 million in provision for repurchases

· decrease in personnel expense of ~~$35.3~~$4.9 million ~~in non-interest expense and income taxes.~~

· decrease in ~~personnel~~non-interest expense and income taxes of ~~$13.1~~$5.3 million.

Loss on sale of loans decreased $132.6 million to a $12.3 million loss in the third quarter of 2008. For the three months ended September 30, 2008, gain on sale of loans was $1.3 million, offset by a $13.6 million charge in additional LOCOM adjustments as a result of continued deterioration of loans held-for-sale. This is compared to a loss on whole loan sales of $39.1 million and additional LOCOM adjustments of $105.7 million for the comparable period of 2007.

Provision for repurchases ~~decreased~~increased to ~~$1.1~~an expense of $0.8 million for the ~~third quarter of 2008 as~~three months ended March 31, 2009, compared to ~~$15.7~~a recovery of $10.3 million in ~~2007.~~the comparable period of 2008. The ~~reduction~~$11.0 million decrease is the result of ~~fewer whole loan sales and a reduction~~the settlement of $113 million in repurchase obligations during the ~~amount~~first quarter of ~~repurchase requests.~~2008.

The $4.9 million decrease in personnel expense during the ~~quarter~~three months ended March 31, 2009 over the comparable period was a result of more costs being allocated to continuing operations due to the discontinuation of the mortgage operations.

~~Non-interest expense decreased $35.3 million during the third quarter~~ However, personnel costs of ~~2008 due to certain non-recurring charges in the prior year. In the third quarter 2007, the Company recorded a~~ ~~restructuring charge of $6.5 million related to lease costs associated with facilities that were no longer used~~both continuing and ~~a $12.8 million impairment on property plant and equipment in which the book value exceeded fair value at September 30, 2007.~~

~~Table of Contents~~

For the Nine Months Ended September 30,

Increase

%

2008

2007

(Decrease)

Change

Net interest income

$
3,372

$
13,399

$
(10,027
)
(75
)%
Provision for loan losses

—

(4,868
)
4,868

n/a

Net interest income after provison for loan losses

$
3,372

$
8,531

$
(5,159
)
(60
)

Loss on sale of loans

(20,990
)
(185,196
)
164,206

89

Provision for repurchases

7,375

(46,436
)
53,811

116

Other income (loss)

1,594

(18,733
)
20,327

109

Personnel expense

(12,953
)
(56,635
)
43,682

77

Non-interest expense and income taxes

(6,879
)
(49,881
)
43,002

86

Net loss

$
(28,481
)
$
(348,350
)
$
319,869

92
%

~~Net loss for the~~ discontinued operations decreased ~~$319.9~~by $1.0 million ~~primarily due~~ to $6.6 million for the ~~following changes:~~three months ended March 31, 2009, compared to $7.6 million in the comparable period of 2008, as a result of overall reductions in workforce between periods.

·~~decrease~~As a result of ~~$164.2 million in loss on sale~~the discontinuation of ~~loans.~~

·~~decrease of $53.8 million in provision for repurchases.~~

·~~decrease in personnel expense of $43.7 million.~~

·~~decrease of $43.0 million in~~certain operations, non-interest expense and income ~~taxes.~~taxes decreased $5.3 million between periods primarily due to a reductions of $3.0 million in occupancy expense, $1.1 million in legal and professional expense and $1.4 million in general and administrative expenses.

Loss on sale of loans decreased $164.2 million to a $21.0 million loss in the first nine months of 2008. For the nine months ended September 30, 2008, gain on sale of loans was $8.9 million, offset by a $29.9 million charge in additional LOCOM adjustments as a result of continued deterioration of loans held-for-sale. This is compared to a loss on whole loan sales of $44.6 million and additional LOCOM adjustments of $140.6 million for the comparable period of 2007.

Provision for repurchases decreased to $7.4 million for the first nine months of 2008 as compared to a loss of $46.4 million in 2007. The reduction is the result of settlements of $122.3 million in repurchase obligations during the first half of 2008, combined with fewer whole loan sales and a reduction in the amount of repurchase requests during the nine months ended September 30, 2008.

~~Non-interest expense decreased $43.0 million during the first nine months of 2008 due to certain non-recurring charges in the prior year. In the third quarter 2007, the Company recorded a~~ restructuring charge of $6.5 million related to lease costs associated with facilities that were no longer used and a $12.8 million impairment on property plant and equipment in which the book value exceeded fair value at September 30, 2007.

~~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.~~

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and 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 year ended December 31, ~~2007.~~2008. Our exposures to market risks have not changed materially since December 31, ~~2007.~~2008.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and

~~Table of Contents~~

procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Table of Contents

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as 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 as Chief Financial Officer in November 2008, 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, 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, the Company believes the material weakness related to our effectiveness of internal control over financial reporting is not fully remediated as of September 30, 2008.level.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended ~~September 30, 2008,~~March 31, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company is party to litigation and claims which are normal in the course of our operations. ~~While~~

In the ~~results~~matter of ~~such~~Sheldon Pittleman v. Impac Mortgage Holdings, Inc. et al filed in the United States district Court, Central district California against IMH and several of its senior officers a Third Amended Complaint was filed. A motion to dismiss was filed by the defendants on December 15, 2008. On March 10, 2009, the court sustained the defendants’ motion to dismiss without leave to amend. The Plaintiffs have filed a Notice of Appeal of the Order Granting the Motion to Dismiss With Prejudice and the Judgment thereon on April 7, 2009.

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2008 for a description of other litigation and claims.

~~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.

~~Table of Contents~~

ITEM 1A: RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, ~~2007 and our quarterly reports on Form 10-Q for the period ended March 31,~~ 2008 ~~and June 30, 2008, 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, 2008 and June 30, 2008 Form 10-Qs.~~10-K.

~~Our ability to utilize our net operating losses and certain other tax attributes may be limited.~~

As of December 31, 2007, we had net operating losses (NOLs) of approximately $159.7 million for federal income tax purposes and approximately $463.9 million for state income tax purposes. Utilization of the NOLs and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code, and similar state provisions due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards and other deferred tax assets that can be utilized to offset future taxable income and income tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. To the extent that we consummate an exchange offer of our preferred stock, we believe that the exchange of the preferred stock for common stock may result in an ownership change as defined under Section 382 of the Internal Revenue Code, which would be expected to create annual limitations on the Company’s ability to utilize NOL and tax credit carryovers. Such limitations would result in approximately $223.1 million of tax benefits related to NOL and tax credit carryforwards that will expire unused. Any limitation on our NOL carryforwards that could be used to offset post-ownership change taxable income would adversely affect our liquidity and cash flow in the event we become profitable. However, even if no ownership change occurs, we may not generate sufficient taxable income in future periods to be able to realize the tax benefits of our NOL carryforwards.

~~Issuances of additional share of Common Stock may adversely affect its market price and significantly dilute stockholders.~~

In order to support our business objectives, we may raise capital through the sale of equity. We may also issue additional shares of common stock if we consummate an exchange offer of our Series B Preferred Stock and Series C Preferred Stock. The issuance or sale, or the proposed sale, of substantial amounts of our common stock in the public market could materially adversely effect the market price of our common stock or other outstanding securities. We do not know the actual or perceived effect of these issuances, the timing of any offerings or issuances of securities, the potential dilution of the book value or earnings per share of our securities then outstanding and the effect on the market price of our securities then outstanding.

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

ITEM 5:OTHER INFORMATION

~~Annual Meeting~~Impac Capital Trust #2

In January 2009, Impac Mortgage Holdings, Inc. (the “Company”) fully satisfied $25 million in outstanding trust preferred securities for $3.75 million. In connection with the settlement, the Company terminated the Junior Subordinated Indenture dated April 22, 2005 with Wilmington Trust Company on February 18, 2009 and the Amended and Restated Trust Agreement dated April 22, 2005 on February 19, 2009.

The above information included in this Item 5 is provided in accordance with Item 1.02 of ~~Stockholders~~Form 8-K.

Amendment No. 4 to 2001 Stock Plan

On ~~July 10, 2008, we held our annual meeting~~April 28, 2009, the Board of ~~stockholders. Of 76,104,656 shares eligible~~Directors approved an amendment 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 theCompany’s 2001 Stock Option, Deferred Stock and Restricted Stock ~~Plan;~~Plan requiring, in accordance with California securities regulations and ~~Proposal IV – Potential Issuance~~to the extent applicable, the delivery to participants of ~~in excess of 20 percent of our outstanding~~annual financial statements and a 30% limit on total reserved shares ~~of common stock in connection with a possible exchange of the Company’s Series B Preferred Stock and Series C Preferred Stock.~~unless stockholder approval is obtained.

44The above information included in this Item 5 is provided in accordance with Item 5.02 of Form 8-K.

Table of Contents

~~Proposal I—Election~~Option Cancellations

On April 28 2009, the Company’s officers and directors gave notice of ~~Directors~~the surrender of an aggregate of 581,000 options and the Board accepted and approved the cancellation of those listed options. Joseph R. Tomkinson and William S. Ashmore each surrendered for cancellation 225,000 options, Todd R. Taylor surrendered for cancellation 37,500 options, and Ronald M. Morrison surrendered for cancellation 42,500 options.

The ~~results~~above information included in this Item 5 is provided in accordance with Item 5.02 of ~~voting on these proposals are as follows:~~Form 8-K.

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

Exchange of Trust Preferred Securities for Notes

~~All directors~~On May 8, 2009, Impac Mortgage Holdings, Inc. (the “Company”) entered into an Exchange Agreement with Taberna Preferred Funding I, Ltd. and Taberna Preferred Funding II, Ltd. whereby the Company agreed to issue new notes (the “New Notes”) in the aggregate principal balance of $62.0 million (as further described below) in exchange for (i) preferred securities in the original aggregate principal amount of $26,250,000 issued by Impac Capital Trust #3 issued pursuant to that certain Amended and Restated Trust Agreement dated as of May 20, 2005 and (ii) the preferred securities in the original aggregate principal amount of $25 million issued by Impac Capital Trust #1 issued pursuant to that certain Second Amended and Restated Trust Agreement dated as of September 26, 2005.

Simultaneously with the execution of the Exchange Agreement, the Company and The Bank of New York Mellon Trust Company, National Association, as trustee entered into (i) a Junior Subordinated Indenture pursuant to which the Company issued a Junior Subordinated Note due 2034 in the original principal amount of $30,244,000 and (ii) a Junior Subordinated Indenture pursuant to which the Company issued a Junior Subordinated Note due 2034 in the original principal amount of $31,756,000.

As a result of the exchange of the preferred securities for the New Notes, the preferred securities and related junior subordinated notes due 2035 in the aggregate principal balances of $25.8 million and $27.1 million issued pursuant to Indentures dated September 16, 2005 and May 20, 2005 will be cancelled and the applicable Trust Agreements and Indentures will be terminated.

The New Notes are ~~elected~~payable quarterly in arrears and bear interest at ~~our annual stockholders meeting.~~a fixed rate equal to 2% per for the first five years (i.e., until 2014), and then 3%, 4%, 5% and 6% per annum for each subsequent year thereafter. Starting in 2018, the interest rate will be equal to LIBOR plus 3.75% per annum. Interest is cumulative and will accrue from the date of original issuance. The Notes mature on March 30, 2034. The Company may at its option redeem at par the Notes, in whole or in part, beginning on March 30, 2010, but they may be redeemed earlier following the occurrence of a “Special Event” (as defined in the Indenture) at a price equal to 107.5% of the principal amount together with accrued interest.

Either the trustee or the holders of at least 25% of the aggregate principal amount of the outstanding Notes may declare the principal amount of, and all accrued interest on, all the Notes to be due and payable immediately if an Event of Default occurs. An Event of Default generally includes a default in payment of any interest for 30 days, default under either Indenture (i.e., a cross-default), a default in payment upon maturity, a default in performance, or breach of any covenant or representation, bankruptcy or insolvency of the Company or liquidation or dissolution of the Trust.

The above information included in this Item 5 is provided in accordance with Items 1.01, 1.02 and Item 2.03 of Form 8-K.

~~Proposal II – Ratification of the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2008.~~ITEM 6:EXHIBITS

Proposal II was approved with 68,372,826 shares voted for, 1,039,055 voted against and 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 the 2001 Stock Option, Deferred Stock, and Restricted Stock Plan~~(a)

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 Series B Preferred Stock and Series C Preferred Stock

Proposal IV was approved with 39,499,182 shares voted for, 2,573,181 voted against and 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 Company’s Series B Preferred Stock and Series C Preferred Stock.

ITEM 5: OTHER INFORMATION

~~Termination of Advisory Services Agreement~~

In the first quarter of 2008, we entered into an agreement with a real estate marketing company to generate advisory fees. The real estate marketing company specializes in the marketing of foreclosed properties. On November 12, 2008, the Company and the real estate marketing company agreed to terminate the advisory services agreement. The Company will receive approximately $37 million, inclusive of the $7.4 million receivable included in other assets in the consolidated balance sheet at September 30, 2008.

ITEM 6: EXHIBITS

~~(a)~~ Exhibits:

10.1		~~Amended~~Amendment No. 3 to 2001 Stock Option, Deferred Stock and Restated Master Purchase Agreement between UBS Real Estate Securities, Inc., Impac Funding Corporation, Impac Mortgage Holdings, Inc. and Impac Warehouse Lending Group, Inc. dated as of September 11, 2008.Restricted Stock Plan
~~10.1(a)~~10.2		~~Waiver Agreement with UBS Real Estate Securities, Inc., dated September 11, 2008.~~
~~10.1(b)~~		~~Fee Letter with UBS Real Estate Securities, Inc., dated September 11, 2008.~~Amendment No. 4 to 2001 Stock Option, Deferred Stock and Restricted Stock Plan
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.
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.

4535

Table of Contents

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.

/s/ Todd R. Taylor
~~by:~~ Todd R. Taylor
Chief Financial Officer
(authorized officer of registrant and principal financial officer)

~~Date: November 12, 2008~~

46May 11, 2009

	Ending Balance as of December 31, 2007			Adoption Net			Fair Value Balance as of January 1, 2008
	(Prior to Adoption)			Gain/(Loss)			(After Adoption) (5)
Impact of electing the 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	)

	Level 3 Recurring Fair Value Measurements
	Three Months Ended September 30, 2008
	Fair Value - June 30, 2008			Total Gains (Losses) Included in Earnings			Transfers to Level 3			Purchases, issuances and settlements			Fair Value - September 30, 2008			Unrealized gains (losses) still held (1)
Investment securities available-for-sale	$	8,644		$	(2,626	)	$	—		$	(1,162	)	$	4,856		$	(3,788	)
Securitized mortgage collateral	298,189			(2,256,972		)	10,747,133			(534,355		)	8,253,995			(2,791,327		)
Securitized mortgage borrowings	(316,968		)	2,141,292			(11,180,164		)	568,827			(8,787,013		)	2,710,119
Derivative liabilities, net	—			(10,890		)	(136,471		)	43,812			(103,549		)	32,922
Trust preferred securities	(46,266		)	10,368			—			—			(35,898		)	10,368

	Level 3 Recurring Fair Value Measurements
	Nine Months Ended September 30, 2008
	Fair Value - January 1, 2008			Total Gains (Losses) Included in Earnings			Transfers to Level 3			Purchases, issuances and settlements			Fair Value - September 30, 2008			Unrealized gains (losses) still held (1)
Investment securities available-for-sale	$	15,248		$	(8,034	)	$	—		$	(2,358	)	$	4,856		$	(10,392	)
Securitized mortgage collateral	782,574			(5,408,626		)	14,919,649			(2,039,602		)	8,253,995			(7,448,228		)
Securitized mortgage borrowings	(767,704		)	5,125,864			(15,109,073		)	1,963,900			(8,787,013		)	7,089,764
Derivative liabilities, net	—			(94,399		)	(120,260		)	111,110			(103,549		)	16,711
Trust preferred securities	(40,952		)	5,054			—			—			(35,898		)	5,054

	Nine Months Ended			Year Ended
	September 30, 2008			December 31, 2007
Beginning balance	$	405,434		$	137,331
Foreclosures	592,771			487,314
Liquidations	(334,058		)	(219,211		)
REO	$	664,147		$	405,434

REO inside trusts	$	663,320		$	400,863
REO outside trusts (1)	827			4,571
REO	$	664,147		$	405,434

									Range of Percentages:
										Interest Rate	Interest Rate
	Original		Securitized mortgage borrowings							Margins over	Margins after
	Issuance		outstanding as of						Fixed Interest	One-Month	Adjustment
Year of Issuance	Amount		September 30, 2008 (1)			December 31, 2007			Rates	LIBOR (2)	Date (3)
2002	$	3,876.1	$	37.7		$	42.1		5.25 - 12.00	0.27 - 2.75	0.54 - 3.68
2003	5,966.1		335.6			409.4			4.34 - 12.75	0.27 - 3.00	0.54 - 4.50
2004	17,710.7		2,325.8			2,751.8			3.58 - 5.56	0.25 - 2.50	0.50 - 3.75
2005	13,387.7		5,154.9			5,961.6			—	0.24 - 2.90	0.48 - 4.35
2006	5,971.4		4,652.3			5,015.7			6.25	0.10 - 2.75	0.20 - 4.125
2007	3,860.5		3,394.2			3,619.9			—	0.06 - 2.00	0.12 - 3.00
Subtotal securitized mortgage borrowings			15,900.5			17,800.5
Accrued interest expense			—			17.1
Unamortized securitization costs			—			(37.5		)
Fair value adjustment			(7,113.5		)	—
Total securitized mortgage borrowings			$	8,787.0		$	17,780.1

							Fair Value Measurement Assumptions
	Residual Interests by Vintage Year						Lifetime Loss Estimate				SF Discount
	SF		MF		Total		SF		MF		Rate (1)
2002-2003 (2)	$	11,288	$	6,441	$	17,729	2	%	1	%	30	%
2004	2,240		4,652		6,892		3	%	1	%	40	%
2005	106		457		563		8	%	1	%	50	%
2006 (3)	398		5,572		5,970		21	%	6	%	50	%
2007	—		455		455		27	%	7	%	50	%
Total	$	14,032	$	17,577	$	31,609

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