UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

⌧

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

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

For the quarterly period ended ~~September~~June 30, ~~2017~~2020

◻

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

~~☐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)		Identification No.)

19500 Jamboree Road, Irvine, California 92612

(Address of principal executive offices)

(949) 475-3600

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	IMH	NYSE American
Preferred Stock Purchase Rights	IMH	NYSE American

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

Indicate by check mark whether the registrant has submitted electronically ~~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 ☒⌧ No ☐◻

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


Large accelerated filer ☐◻		Accelerated filer ☒◻

Non-accelerated filer ☐~~(Do not check if a smaller reporting company)~~⌧		Smaller reporting company ☐⌧
Emerging growth company ☐ ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐◻ No ☒⌧

There were ~~20,949,679~~21,229,857 shares of common stock outstanding as of ~~November 3, 2017.~~August 5, 2020.

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS


		Page
		~~Page~~

PART I. FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

	Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2020 (unaudited) and December 31, ~~2016~~2019	3
	Consolidated Statements of Operations and Comprehensive (Loss) Earnings for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)	4
	Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and 2019 (unaudited)	5
	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)	6 7
	Notes to Unaudited Consolidated Financial Statements	7 8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
		33

	Forward-Looking Statements	32 33
	The Mortgage Industry and Discussion of Relevant Fiscal Periods	32 33
	Selected Financial Results	33 34
	Status of Operations	33 34
	Liquidity and Capital Resources	37 39
	Critical Accounting Policies	38 41
	Financial Condition and Results of Operations	39 42

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61 62

ITEM 4.	CONTROLS AND PROCEDURES	63 62

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	64 63

ITEM 1A.	RISK FACTORS	64 63

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	65 66

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	65 66

ITEM 4.	MINE SAFETY DISCLOSURES	65 66

ITEM 5.	OTHER INFORMATION	65 66

ITEM 6.	EXHIBITS	66
		67
	~~SIGNATURES~~	66

	~~CERTIFICATIONS~~SIGNATURES	67

	CERTIFICATIONS

Table of Contents

PART I. FINANCIAL INFORMATION


ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

~~ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS~~

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30,		December 31,
	2017		2016
		(Unaudited)

					June 30,		December 31,
					2020		2019
ASSETS					(unaudited)
Cash and cash equivalents	$	34,815	$	40,096	$	43,002	$	24,666
Restricted cash		6,605		5,971		5,326		12,466
Mortgage loans held-for-sale		572,268		388,422		29,419		782,143
Finance receivables		60,912		62,937
Mortgage servicing rights		158,950		131,537		279		41,470
Securitized mortgage trust assets		3,769,231		4,033,290		2,229,662		2,634,746
Goodwill		104,938		104,938
Intangible assets, net		22,631		25,778
Deferred tax asset, net		24,420		24,420
Other assets		60,607		46,345		56,936		50,788
Total assets	$	4,815,377	$	4,863,734	$	2,364,624	$	3,546,279
LIABILITIES
Warehouse borrowings	$	591,583	$	420,573	$	1,571	$	701,563
MSR financings		25,133		—
Term financing, net		—		29,910
MSR advance financings						448		—
Convertible notes, net		24,972		24,965		24,839		24,996
Long-term debt		44,561		47,207		41,811		45,434
Securitized mortgage trust liabilities		3,751,831		4,017,603		2,213,863		2,619,210
Contingent consideration		5,816		31,072
Other liabilities		62,028		61,364		67,071		50,839
Total liabilities		4,505,924		4,632,694		2,349,603		3,442,042

Commitments and contingencies (See Note 10)


Commitments and contingencies (See Note 11)

STOCKHOLDERS’ EQUITY
Series A-1 junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued or outstanding		—		—		—		—
Series B 9.375% redeemable preferred stock, $0.01 par value; liquidation value $16,640; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of September 30, 2017 and December 31, 2016		7		7
Series C 9.125% redeemable preferred stock, $0.01 par value; liquidation value $35,127; 5,500,000 shares authorized; 1,405,086 noncumulative shares issued and outstanding as of September 30, 2017 and December 31, 2016		14		14
Common stock, $0.01 par value; 200,000,000 shares authorized; 20,945,165 and 16,019,983 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		209		160
Series B 9.375% redeemable preferred stock, $0.01 par value; liquidation value $33,410; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of June 30, 2020 and December 31, 2019 (See Note 12)						7		7
Series C 9.125% redeemable preferred stock, $0.01 par value; liquidation value $35,127; 5,500,000 shares authorized; 1,405,086 noncumulative shares issued and outstanding as of June 30, 2020 and December 31, 2019 (See Note 12)						14		14
Common stock, $0.01 par value; 200,000,000 shares authorized; 21,229,857 and 21,255,426 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively						212		212
Additional paid-in capital		1,233,105		1,168,125		1,236,749		1,236,237
Accumulated other comprehensive earnings, net of tax						23,899		24,786
Net accumulated deficit:
Cumulative dividends declared		(822,520)		(822,520)		(822,520)		(822,520)
Retained deficit		(101,362)		(114,746)		(423,340)		(334,499)
Net accumulated deficit		(923,882)		(937,266)		(1,245,860)		(1,157,019)
Total stockholders’ equity		309,453		231,040		15,021		104,237
Total liabilities and stockholders’ equity	$	4,815,377	$	4,863,734	$	2,364,624	$	3,546,279

See accompanying notes to unaudited consolidated financial statements

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) EARNINGS

(in thousands, except per share data)

(Unaudited)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									For the Three Months Ended				For the Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019
Revenues:
Gain on sale of loans, net	$	42,476	$	113,158	$	116,602	$	245,849
Gain (loss) on sale of loans, net									$	1,451	$	29,472	$	(26,712)	$	41,686
Servicing fees, net										1,352		3,536		3,859		6,505
Real estate services fees, net		1,355		2,678		4,492		6,773		293		807		687		1,613
Servicing fees, net		8,492		3,789		23,575		8,680
Loss on mortgage servicing rights, net		(10,513)		(15,857)		(18,159)		(41,249)		(8,443)		(9,887)		(26,753)		(15,510)
Other		266		225		541		453		1,289		187		1,352		187
Total revenues		42,076		103,993		127,051		220,506
Total revenues, net										(4,058)		24,115		(47,567)		34,481
Expenses:
Personnel expense		23,062		38,467		69,353		93,025		7,774		14,339		28,439		28,461
General, administrative and other										6,617		5,281		13,590		10,507
Business promotion		10,403		10,350		30,744		30,828		74		2,013		3,203		4,936
General, administrative and other		8,497		7,736		24,845		23,742
Accretion of contingent consideration		396		1,591		1,948		5,244
Change in fair value of contingent consideration		(4,798)		23,215		(11,052)		34,569
Total expenses		37,560		81,359		115,838		187,408		14,465		21,633		45,232		43,904
Operating income		4,516		22,634		11,213		33,098

Operating (loss) earnings										(18,523)		2,482		(92,799)		(9,423)

Other income (expense):
Interest income		57,854		64,932		180,011		201,561		35,832		43,061		71,927		88,316
Interest expense		(56,308)		(63,628)		(176,921)		(199,525)		(35,051)		(40,518)		(68,218)		(83,977)
Loss on extinguishment of debt		—		—		(1,265)		—
Change in fair value of long-term debt		104		(8,641)		(2,657)		(7,286)		(4,208)		388		4,828		654
Change in fair value of net trust assets, including trust REO gains (losses)		(1,745)		1,071		6,578		2,609
Total other income (expense)		(95)		(6,266)		5,746		(2,641)
Earnings before income taxes		4,421		16,368		16,959		30,457
Income tax expense (benefit)		2,104		(130)		3,575		728
Net earnings	$	2,317	$	16,498	$	13,384	$	29,729
Earnings per common share:
Change in fair value of net trust assets, including trust REO losses										(864)		(1,459)		(3,247)		(4,142)
Total other (expense) income, net										(4,291)		1,472		5,290		851
(Loss) earnings before income taxes										(22,814)		3,954		(87,509)		(8,572)
Income tax expense										15		81		51		167
Net (loss) earnings									$	(22,829)	$	3,873	$	(87,560)	$	(8,739)

Other comprehensive (loss) earnings:
Change in fair value of mortgage-backed securities										—		(7)		—		14
Change in fair value of instrument specific credit risk of long-term debt										2,186		267		(887)		363
Total comprehensive (loss) earnings									$	(20,643)	$	4,133	$	(88,447)	$	(8,362)

Net (loss) earnings per common share:
Basic	$	0.11	$	1.28	$	0.71	$	2.43	$	(1.08)	$	0.18	$	(4.12)	$	(0.41)
Diluted		0.11		1.18		0.71		2.27		(1.08)		0.18		(4.12)		(0.41)

~~See accompanying notes to unaudited consolidated financialstatements~~

~~Table of Contents~~

~~IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY~~

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

~~(Unaudited)~~

Preferred



Common



Additional

Cumulative



Total

Shares

Preferred

Shares

Common

Paid-In

Dividends

Retained

Stockholders’

Outstanding

Stock

Outstanding

Stock

Capital

Declared

Deficit

Equity

Balance, December 31, 2016

2,070,678

$
21

16,019,983

$
160

$
1,168,125

$
(822,520)

$
(114,746)

$
231,040

Proceeds and tax benefit from exercise of stock options

—

—

89,537

1

569

—

—

570

Stock based compensation

—

—

—

—

1,972

—

—

1,972

Common stock issuance, net

—

—

4,423,381

44

55,410

—

—

55,454

Trust preferred exchange

—

—

412,264

4

7,029

—

—

7,033

Net earnings

—

—

—

—

—

—

13,384

13,384

Balance, September 30, 2017

2,070,678

$
21

20,945,165

$
209

$
1,233,105

$
(822,520)

$
(101,362)

$
309,453

See accompanying notes to unaudited consolidated financial statements

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

For the Nine Months Ended

September 30,

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:







Net earnings

$
13,384

$
29,729

Loss on sale of mortgage servicing rights

90

10,610

Change in fair value of mortgage servicing rights

20,038

32,048

Loss on extinguishment of debt

1,265

—

Gain on sale of mortgage loans

(106,070)

(212,696)

Change in fair value of mortgage loans held-for-sale

(8,262)

(19,572)

Change in fair value of derivatives lending, net

(2,167)

(14,618)

Provision for repurchases

192

778

Origination of mortgage loans held-for-sale

(5,457,907)

(9,813,665)

Sale and principal reduction on mortgage loans held-for-sale

5,345,665

9,414,794

(Gains) losses from REO

(8,484)

5,971

Change in fair value of net trust assets, excluding REO

1,906

(10,273)

Change in fair value of long-term debt

2,657

7,286

Accretion of interest income and expense

69,075

96,036

Amortization of intangible and other assets

3,576

3,577

Accretion of contingent consideration

1,948

5,244

Change in fair value of contingent consideration

(11,052)

34,569

Amortization of debt issuance costs and discount on note payable

145

398

Stock-based compensation

1,972

1,647

Impairment of deferred charge

591

815

Excess tax benefit from share based compensation

12

—

Net change in restricted cash

(634)

(6,454)

Net change in other assets

(12,733)

(715)

Net change in other liabilities

1,016

19,402

Net cash used in operating activities

(143,777)

(415,089)

CASH FLOWS FROM INVESTING ACTIVITIES:

Net change in securitized mortgage collateral

507,552

461,063

Proceeds from the sale of mortgage servicing rights

805

5,153

Purchase of mortgage servicing rights

(5,618)

—

Finance receivable advances to customers

(714,221)

(672,885)

Repayments of finance receivables

716,246

630,600

Net change in mortgages held-for-investment

2

45

Purchase of premises and equipment

(463)

(147)

Net principal change on investment securities available-for-sale

—

47

Proceeds from the sale of REO

24,159

32,275

Net cash provided by investing activities

528,462

456,151

CASH FLOWS FROM FINANCING ACTIVITIES:

Net proceeds from issuance of common stock

55,454

47,605

Repayment of MSR financing

(25,000)

—

Borrowings under MSR financing

50,133

—

Repayment of warehouse borrowings

(5,063,915)

(8,988,778)

Borrowings under warehouse agreements

5,234,925

9,543,273

Repayment of term financing

(30,000)

—

Payment of acquisition related contingent consideration

(16,152)

(27,996)

Repayment of securitized mortgage borrowings

(595,291)

(588,390)

Principal payments on capital lease

(249)

(393)

Debt issuance costs

(100)

(100)

Tax payments on stock based compensation awards

(341)

—

Proceeds from exercise of stock options

570

210

Net cash used in financing activities

(389,966)

(14,569)

Net change in cash and cash equivalents

(5,281)

26,493

Cash and cash equivalents at beginning of period

40,096

32,409

Cash and cash equivalents at end of period

$
34,815

$
58,902

NON-CASH TRANSACTIONS:

Transfer of securitized mortgage collateral to real estate owned

$
15,367

$
32,719

Mortgage servicing rights retained from loan sales and issuance of mortgage backed securities

42,728

91,809

Common stock issued upon long-term debt exchange

7,033

—

Common stock issued upon conversion of debt

—

20,000

Acquisition of equipment purchased through capital leases

—

551


	Preferred			Common			Additional		Cumulative				Accumulated Other		Total
	Shares	Preferred		Shares	Common		Paid-In		Dividends		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Outstanding	Stock		Capital		Declared		Deficit		Earnings, net of tax		Equity
Balance, January 1, 2020	2,070,678	$	21	21,255,426	$	212	$	1,236,237	$	(822,520)	$	(334,499)	$	24,786	$	104,237

Proceeds from exercise of stock options	—		—	9,500		1		46		—		—		—		47
Stock based compensation	—		—	—		—		238		—		—		—		238
Other comprehensive loss	—		—	—		—		—		—		—		(3,073)		(3,073)
Consolidation of corporate-owned life insurance trusts	—		—	—		—		—		—		(1,281)		—		(1,281)
Net loss	—		—	—		—		—		—		(64,731)		—		(64,731)
Balance, March 31, 2020	2,070,678	$	21	21,264,926	$	213	$	1,236,521	$	(822,520)	$	(400,511)	$	21,713	$	35,437

Retirement of restricted stock	—		—	(35,069)		(1)		(125)		—		—		—		(126)
Stock based compensation	—		—	—		—		111		—		—		—		111
Issuance of warrants in connection with debt financing	—		—	—		—		242		—		—		—		242
Other comprehensive earnings	—		—	—		—		—		—		—		2,186		2,186
Net loss	—		—	—		—		—		—		(22,829)		—		(22,829)
Balance, June 30, 2020	2,070,678	$	21	21,229,857	$	212	$	1,236,749	$	(822,520)	$	(423,340)	$	23,899	$	15,021

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(Unaudited)


	Preferred			Common			Additional		Cumulative				Accumulated Other		Total
	Shares	Preferred		Shares	Common		Paid-In		Dividends		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Outstanding	Stock		Capital		Declared		Deficit		Earnings, net of tax		Equity
Balance, January 1, 2019	2,070,678	$	21	21,117,006	$	211	$	1,235,108	$	(822,520)	$	(326,522)	$	23,877	$	110,175

Proceeds and tax benefit from exercise of stock options	—		—	64,351		1		162		—		—		—		163
Stock based compensation	—		—	—		—		107		—		—		—		107
Other comprehensive earnings	—		—	—		—		—		—		—		117		117
Net loss	—		—	—		—		—		—		(12,612)		—		(12,612)
Balance, March 31, 2019	2,070,678	$	21	21,181,357	$	212	$	1,235,377	$	(822,520)	$	(339,134)	$	23,994	$	97,950

Proceeds from exercise of stock options	—		—	—		—		206		—		—		—		206
Other comprehensive loss	—		—	—		—		—		—		—		260		260
Net loss	—		—	—		—		—		—		3,873		—		3,873
Balance, June 30, 2019	2,070,678	$	21	21,181,357	$	212	$	1,235,583	$	(822,520)	$	(335,261)	$	24,254	$	102,289

See accompanying notes to unaudited consolidated financial statements

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended
	June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(87,560)	$	(8,739)
Loss (gain) on sale of mortgage servicing rights		4,811		(864)
Change in fair value of mortgage servicing rights		21,942		16,374
Gain on sale of mortgage loans		(6,840)		(31,946)
Change in fair value of mortgage loans held-for-sale		23,202		(8,334)
Change in fair value of derivatives lending, net		5,341		(4,566)
Change in provision for repurchases		5,009		3,160
Origination of mortgage loans held-for-sale		(1,518,429)		(1,402,859)
Sale and principal reduction on mortgage loans held-for-sale		2,253,038		1,373,784
(Gain) loss from trust REO		(3,165)		1,099
Change in fair value of net trust assets, excluding trust REO		6,412		3,043
Change in fair value of long-term debt		(4,828)		(654)
Accretion of interest income and expense		32,141		13,768
Amortization of intangible and other assets		—		286
Amortization of debt issuance costs and discount on note payable		4		11
Stock-based compensation		349		313
Accretion of interest expense on corporate debt		81		—
Net change in other assets		9,502		(771)
Net change in other liabilities		(10,715)		(8,737)
Net cash provided by (used in) operating activities		730,295		(55,632)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in securitized mortgage collateral		222,994		295,035
Proceeds from the sale of mortgage servicing rights		16,191		12
Investment in corporate-owned life insurance		(1,258)		—
Purchase of premises and equipment		(535)		(335)
Purchase of mortgage-backed securities		—		(5,347)
Proceeds from the sale of mortgage-backed securities		—		1,021
Proceeds from the sale of trust REO		12,944		10,607
Net cash provided by investing activities		250,336		300,993

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of MSR financing		(15,000)		—
Borrowings under MSR financing		15,448		—
Repayment of warehouse borrowings		(2,153,051)		(1,133,320)
Borrowings under warehouse agreements		1,453,059		1,212,156
Repayment of securitized mortgage borrowings		(271,271)		(321,494)
Net change in liabilities related to corporate owned life insurance		1,461		—
Principal payments on capital lease		—		(81)
Tax payments on stock based compensation awards		(2)		(39)
Retirement of restricted stock		(126)		—
Proceeds from exercise of stock options		47		163
Net cash used in financing activities		(969,435)		(242,615)
Net change in cash, cash equivalents and restricted cash		11,196		2,746
Cash, cash equivalents and restricted cash at beginning of year		37,132		30,189
Cash, cash equivalents and restricted cash at end of period	$	48,328	$	32,935

NON-CASH TRANSACTIONS:
Transfer of securitized mortgage collateral to trust REO	$	7,337	$	13,035
Mortgage servicing rights retained from issuance of mortgage backed securities and loan sales		1,753		1,999
Recognition of corporate-owned life insurance cash surrender value (included in Other assets)		9,476		—
Recognition of corporate-owned life insurance trusts (included in Other liabilities)		10,757		—
Issuance of warrants		242		—
Recognition of operating lease right of use assets (net of $3.8 million of deferred rent)		—		19,694
Recognition of operating lease liabilities		—		23,447

See accompanying notes to unaudited consolidated financial statements

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1.—Summary of Business and Financial Statement Presentation

Business Summary

Impac Mortgage Holdings, Inc. (the Company or IMH) is a ~~Maryland corporation~~financial services company incorporated in ~~August 1995~~Maryland with the following direct and ~~has the following~~indirect wholly-owned subsidiaries: Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets) ~~and~~, Impac Funding Corporation (IFC).

and Copperfield Capital Corporation (CCC), which was created in the second quarter of 2020 to, among other activities, assist with managing mortgage loans held-for-sale, provide origination and servicing solutions focusing on loss mitigation strategies, including loan modifications and restructurings to assist borrowers. The Company’s operations include the mortgage lending operations and real estate services conducted by IRES, IMC and ~~IMC~~CCC and the long-term mortgage portfolio (residual interests in securitizations reflected as net trust assets and liabilities in the consolidated balance sheets) conducted by IMH. IMC’s mortgage lending operations include the activities of its division, CashCall ~~Mortgage (CCM).~~Mortgage.

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 8-03 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2020. 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, ~~2016,~~2019, filed with the United States Securities and Exchange ~~Commission (SEC).~~Commission.

All significant intercompany 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 period presentation.

Management has made a number of material estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with GAAP. Additionally, other items affected by such estimates and assumptions include the valuation of trust assets and trust liabilities, contingencies, the estimated obligation of repurchase liabilities related to sold loans, the valuation of long-term debt, mortgage servicing rights (MSR), mortgage loans held-for-sale (LHFS) and derivative instruments, including interest rate lock commitments (IRLC). Actual results could differ from those estimates and assumptions.

~~Recent~~

Risks and Uncertainties

As the novel coronavirus (COVID-19) pandemic and its effects on the economy escalated in the United States in early March 2020, the financial markets destabilized resulting in economic disruption and substantial market volatility. The widening of nominal spreads resulted in a sudden and severe decline in the mark-to-market values of certain residential mortgage-backed securities (RMBS) assets. The crisis in the RMBS market was closely followed by a substantial widening of spreads on credit assets and a reduction in available liquidity to finance credit assets, including the sizable non-qualified mortgage (NonQM) position within the Company’s LHFS portfolio, causing a severe decline in the mark-to-market values assigned by counterparties.

In order to preserve liquidity, on March 30, 2020, the Company instituted a temporary suspension of all lending activities. The Company satisfied all margin calls received, while also increasing unrestricted cash to $80.2 million at March 31, 2020. Subsequent to March 31, 2020, the Company has continued to prioritize liquidity and de-risking the

Table of Contents

consolidated balance sheet by materially reducing its exposure on the consolidated balance sheet through asset sales and debt repayments.

The reduction in LHFS and locked pipeline, reduction in MSRs and greater retention of uninvested cash to address the volatility in the market, is likely to result in diminished earning capacity for the Company for at least the next few quarters as the Company re-engaged lending activities in June 2020.

Accounting Pronouncements Adopted in 2020

In ~~November 2015,~~August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2015-17, "Income Taxes~~2018-13, “Fair Value Measurement (Topic ~~740): Balance Sheet Classification~~820).” The ASU eliminates disclosures such as the amount of ~~Deferred Taxes." The amendments in ASU 2015-17 eliminate the current requirement~~and reasons for ~~organizations to present deferred tax liabilities~~transfers between Level 1 and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments in this ASU are effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this change prospectively on January 1, 2017 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

~~Table of Contents~~

~~In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects~~Level 2 of the ~~accounting~~fair value hierarchy. The ASU adds new disclosure requirements for ~~share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.~~Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, ~~beginning after December 15, 2016.~~with early adoption permitted for any eliminated or modified disclosures. The Company adopted this ~~change prospectively~~guidance on January 1, ~~2017~~2020, and ~~did not adjust prior periods. The~~the adoption of this ASU ~~did not have a material~~had no significant impact on the Company’s consolidated financial statements.

In August ~~2016,~~2018, the FASB issued ASU ~~No. 2016-15,~~ ~~“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts~~2018-15, “Intangibles-Goodwill and ~~Cash Payments.~~Other- Internal-Use Software (Subtopic 350-40).”This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The ~~update amends~~amendment aligns the ~~guidance~~requirements for capitalizing implementation costs incurred in ~~Accounting Standards Codification 230,~~ ~~Statement of Cash Flows, and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows~~a hosting arrangement that is a service contract with the ~~objective of reducing the existing diversity in practice related~~requirements for capitalizing implementation costs incurred to ~~eight specific cash flow issues. The amendments in this update are~~develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for ~~annual periods~~fiscal years beginning after December 15, ~~2017,~~2019, and interim periods within those fiscal ~~years.~~years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance on January 1, 2020, and the adoption of this ASU had no impact on the Company’s consolidated financial statements.

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for public business entities for fiscal years and interim periods beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 on a prospective basis on January 1, 2020 and the adoption of this ASU had no impact on the Company's consolidated financial statements.

Recent Accounting Pronouncements Not Yet Effective

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-04), which provided certain improvements to ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) and ASU 2016-13. As the Company adopted ASU 2016-01 on January 1, 2018, the improvements in ASU 2019-04 are effective in the first quarter of 2020. Early adoption is permitted. The Company expects to adopt ASU 2016-13 in the first quarter of 2023, as described above, and the improvements in ASU 2019-04 will be adopted concurrently. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In ~~May 2017,~~March 2020, the FASB issued ASU ~~No. 2017-09, “Compensation - Stock Compensation~~2020-04, Reference Rate Reform (Topic ~~718): Scope~~848), which provides optional guidance for a limited period of ~~Modification Accounting.”~~ time to ease the potential burden in accounting for (or recognizing the benefits of) reference rate reform on financial reporting. The ~~update provides guidance about which changes~~amendments in ASU 2020-04 are elective and apply to ~~the terms~~all entities, subject to meeting certain criteria, that have contract, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or ~~conditions~~another reference rate expected to be discontinued because of ~~a share-based payment award require an entity to apply modification accounting~~reference rate reform. The amendments in ~~Topic 718. This~~ ASU is2020-04 are effective for ~~annual reporting periods beginning after~~all entities as of March 12, 2020 through December ~~15, 2017. Early adoption is permitted.~~31, 2022. The Company ~~does not expect~~is currently evaluating the impact the adoption of this ASU ~~2016-09 to~~would have ~~a material impact~~ on ~~its~~our consolidated financial statements.

Table of Contents

Note 2.—Mortgage Loans Held-for-Sale

A summary of the unpaid principal balance (UPB) of mortgage ~~loans held-for-sale~~LHFS by type is presented below:


	September 30,		December 31,
	2017		2016

					June 30,		December 31,
					2020		2019
Government (1)	$	161,479	$	146,305	$	1,889	$	51,019
Conventional (2)		218,744		168,581		19,259		436,040
Other (3)		172,948		62,701
Non-qualified mortgages (NonQM)						11,223		274,834
Fair value adjustment ~~(4)~~(3)		19,097		10,835		(2,952)		20,250
Total mortgage loans held for sale	$	572,268	$	388,422
Total mortgage loans held-for-sale					$	29,419	$	782,143

(1)

~~(1)~~

Includes all government-insured loans including Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA).

(2)

~~(2)~~

Includes loans eligible for sale to Federal National Mortgage Association (Fannie Mae or FNMA) and Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC).

(3)

~~(3)~~

~~Includes non-qualified mortgages (NonQM) and jumbo loans.~~

~~(4)~~

Changes in fair value are included in gain (loss) on sale of loans, net in the accompanying consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

~~Table~~At June 30, 2020 and December 31, 2019, the Company had $3.5 million and $4.5 million, respectively, in UPB of ~~Contents~~

mortgage LHFS that were in nonaccrual status as the loans were 90 days or more delinquent. The carrying value of these nonaccrual loans at June 30, 2020 and December 31, 2019 were $3.0 million and $4.2 million, respectively.

Gain ~~on mortgage loans held-for-sale (LHFS), included in gain~~(loss) on sale of loans, net in the consolidated statements of operations and comprehensive (loss) earnings, is comprised of the following for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Gain on sale of mortgage loans

$
56,230

$
109,059

$
143,752

$
252,084
Premium from servicing retained loan sales

17,855

40,890

42,728

91,809
Unrealized gains from derivative financial instruments

1,711

5,836

2,462

14,294
Realized losses from derivative financial instruments

(2,484)

(3,098)

(7,526)

(18,687)
Mark to market (loss) gain on LHFS

(1,336)

5,300

8,262

19,572
Direct origination expenses, net

(27,734)

(44,902)

(72,884)

(112,445)
(Provision) recovery for repurchases

(1,766)

73

(192)

(778)
Total gain on sale of loans, net

$
42,476

$
113,158

$
116,602

$
245,849


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
(Loss) gain on sale of mortgage loans	$	(21,853)	$	27,822	$	25,639	$	41,430
Premium from servicing retained loan sales		64		416		1,753		1,999
Unrealized gains (losses) from derivative financial instruments		936		5,175		(5,341)		4,566
Losses from derivative financial instruments		(113)		(2,300)		(11,035)		(3,354)
Mark to market gain (loss) on LHFS		22,291		4,864		(23,202)		8,334
Direct origination expenses, net		(260)		(4,974)		(9,517)		(8,129)
Change in provision for repurchases		386		(1,531)		(5,009)		(3,160)
Gain (loss) on sale of loans, net	$	1,451	$	29,472	$	(26,712)	$	41,686

Note 3.—Mortgage Servicing Rights

The Company retains ~~mortgage servicing rights (MSRs)~~MSRs from its sales and securitization of certain mortgage loans or as a result of purchase transactions. MSRs are reported at fair value based on the expected income derived from the net projected cash flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the UPB of the underlying mortgage loans. The servicing fees are collected from the monthly payments made by the mortgagors, or if delinquent, when the underlying real estate is foreclosed upon and liquidated. The Company may receive other remuneration from rights to various mortgagor-contracted fees, such as late charges, collateral reconveyance charges and nonsufficient fund fees, and the Company is generally entitled to retain the interest earned on funds held pending remittance (or float) related to its collection of mortgagor principal, interest, tax and insurance payments.

Table of Contents

The following table summarizes the activity of MSRs for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and year ended December 31, ~~2016:~~2019:


	September 30,		December 31,
	2017		2016
Balance at beginning of period	$	131,537	$	36,425

					June 30,		December 31,
					2020		2019
Balance at beginning of year					$	41,470	$	64,728
Additions from servicing retained loan sales		42,728		128,273		1,753		2,491
Addition from purchases		5,618		—
Reductions from bulk sales (1)		(895)		(8,773)
Reductions from bulk sales						(21,002)		—
Other						—		22
Changes in fair value ~~(2)~~(1)		(20,038)		(24,388)		(21,942)		(25,771)
Fair value of MSRs at end of period	$	158,950	$	131,537	$	279	$	41,470

(1)

~~(1)~~

~~In the first quarter of 2017, the Company sold all but a small portion of its NonQM MSRs.~~

~~(2)~~

Changes in fair value are included within loss on mortgage servicing rights, net in the accompanying consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

~~Table of Contents~~

At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the ~~outstanding principal balance~~UPB of the mortgage servicing portfolio was comprised of the following:


	September 30,		December 31,
	2017		2016

					June 30,		December 31,
					2020		2019
Government insured	$	2,519,574	$	1,359,569	$	146,180	$	105,442
Conventional (1)		13,181,522		10,815,998		—		4,826,407
NonQM		1,969		175,955
Total loans serviced	$	15,703,065	$	12,351,522
Total loans serviced (2)					$	146,180	$	4,931,849

(1)

~~(1)~~

In May 2020, the Company sold all of the conventional mortgage servicing for approximately $20.1 million, receiving $15.0 million in proceeds upon sale, with the remaining due upon transfer of the servicing and transfer of all trailing documents. The Company used the $15.0 million in proceeds from the MSR sale to pay off the MSR financing. (See Note 5.—Debt– MSR Financings)

(2)

~~As of September~~At June 30, ~~2017, the Conventional servicing rights have been~~2020 and December 31, 2019, no collateral was pledged ~~as collateral and subject to acknowledgement agreements~~ as part of the MSR ~~Financings.~~Financing. (See Note 4. 5.— ~~Debt –~~Debt– MSR ~~Financings.)~~

Financings)

The table below illustrates hypothetical changes in fair values of MSRs caused by assumed immediate changes to key assumptions that are used to determine fair value. See Note 6.7.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.


	September 30,		December 31,

					June 30,		December 31,
Mortgage Servicing Rights Sensitivity Analysis	2017		2016		2020		2019
Fair value of MSRs	$	158,950	$	131,537	$	279	$	41,470
Prepayment Speed:
Decrease in fair value from 10% adverse change		(3,841)		(4,956)		*		(1,850)
Decrease in fair value from 20% adverse change		(7,930)		(9,593)		*		(3,631)
Decrease in fair value from 30% adverse change		(12,167)		(13,940)		*		(5,325)
Discount Rate:
Decrease in fair value from 10% adverse change		(5,839)		(4,927)		*		(1,330)
Decrease in fair value from 20% adverse change		(11,277)		(9,511)		*		(2,579)
Decrease in fair value from 30% adverse change		(16,350)		(13,786)		*		(3,753)

*At June 30, 2020, the Company was in the process of selling the remaining GNMA servicing portfolio and the indicative bids support the carrying value.

Sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of changes in assumptions to changes in fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas a change in one factor may result in changes to another. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates. As a result, actual future changes in MSR values may differ significantly from those displayed above.

Table of Contents

Loss on mortgage servicing rights, net is comprised of the following for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									For the Three Months Ended				For the Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019
Change in fair value of mortgage servicing rights	$	(11,177)	$	(8,224)	$	(20,038)	$	(32,048)	$	(3,111)	$	(9,881)	$	(21,942)	$	(16,374)
Loss on sale of mortgage servicing rights		(8)		(7,532)		(90)		(10,610)
Realized and unrealized gains (losses) from hedging instruments		672		(101)		1,969		1,409
(Loss) gain on sale of mortgage servicing rights										(5,332)		(6)		(4,811)		864
Loss on mortgage servicing rights, net	$	(10,513)	$	(15,857)	$	(18,159)	$	(41,249)	$	(8,443)	$	(9,887)	$	(26,753)	$	(15,510)

~~Table of Contents~~

Servicing fees, net is comprised of the following for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017			2016	2017		2016

									For the Three Months Ended				For the Six Months Ended
									June 30,				June 30,
									2020			2019	2020		2019
Contractual servicing fees	$	9,978	$	4,755	$	27,356	$	10,981	$	2,061	$	3,891	$	5,109	$	8,080
Late and ancillary fees		117		41		275		115		26		38		65		92
Subservicing and other costs		(1,603)		(1,007)		(4,056)		(2,416)		(735)		(393)		(1,315)		(1,667)
Servicing fees, net	$	8,492	$	3,789	$	23,575	$	8,680	$	1,352	$	3,536	$	3,859	$	6,505

Loans Eligible for Repurchase from Government National Mortgage Association (GNMA or Ginnie ~~Mae (GNMA)~~Mae)

The Company ~~routinely~~ sells loans in GNMA guaranteed ~~mortgage‑backed~~mortgage-backed securities (MBS) by pooling eligible loans through a pool custodian and assigning rights to the loans to GNMA. When these GNMA loans are initially pooled and securitized, the Company meets the criteria for sale treatment and derecognizes the loans. The terms of the GNMA MBS program allow, but do not require, the Company to repurchase mortgage loans when the borrower has made no payments for three consecutive months. When the Company has the unconditional right, as servicer, to repurchase GNMA pool loans it has previously sold and are more than 90 days past due (whether or not in forbearance), and the repurchase will provide the Company with a more than trivial benefit, the Company then re-recognizes the loans on its consolidated balance sheets in other assets, at their ~~unpaid principal balances,~~UPB, and records a corresponding liability in other liabilities in the consolidated balance sheets. At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, loans eligible for repurchase from GNMA totaled ~~$25.5~~$12.1 million and ~~$9.9~~$1.7 million in UPB, respectively. As part of the Company’s repurchase reserve, the Company records a repurchase provision to provide for estimated losses from the sale or securitization of all mortgage loans, including these loans.

The loans eligible for repurchase from GNMA are in the Company’s servicing portfolio. The Company monitors the delinquency of the servicing portfolio and directs the subservicer to mitigate losses on delinquent loans.

Note 4.—~~Debt~~Leases

The Company has four operating leases for office space and certain office equipment under long-term leases expiring at various dates through 2024. During the three and six months ended June 30, 2020, cash paid for operating leases was $1.3 million and $2.7 million, respectively, while total operating lease expense was $1.0 million and $2.6 million, respectively. Operating lease expense includes short-term leases and sublease income, both of which are immaterial. During the three months ended March 31, 2020, we recognized right of use (ROU) asset impairment of $393 thousand related to the consolidation of one floor of our corporate office, reducing the carrying value of the lease asset to its estimated fair value. The impairment charge is included in general, administrative and other expense in the consolidated statements of operations and comprehensive (loss) earnings. As of June 30, 2020, the Company had no additional operating or finance leases that had not yet commenced.

The following table presents the operating lease balances within the consolidated balance sheets, weighted average remaining lease term, and weighted average discount rates related to the Company’s operating leases as of June 30, 2020:

Table of Contents


		June 30,
Lease Assets and Liabilities	Classification	2020
Assets
Operating lease ROU assets	Other assets	$ 15,012

Liabilities
Operating lease liabilities	Other liabilities	$ 18,403

Weighted average remaining lease term (in years)		4.2
Weighted average discount rate		4.8	%

The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2020:


Year remaining 2020	$	2,486
Year 2021		4,593
Year 2022		4,721
Year 2023		4,867
Year 2024		3,729
Total lease commitments		20,396
Less: imputed interest		(1,993)
Total operating lease liability	$	18,403

Note 5.—Debt

Warehouse Borrowings

The Company, through its subsidiaries, enters into Master Repurchase Agreements with lenders providing warehouse facilities. The warehouse facilities are uncommitted facilities used to fund, and are secured by, residential mortgage loans from the time of funding until the time of settlement when sold to the investor. In accordance with the terms of the Master Repurchase Agreements, the ~~Company is~~Company’s subsidiaries are required to maintain cash balances with the lender as additional collateral for the borrowings, which are included in restricted cash in the accompanying consolidated balance sheets. At June 30, 2020, the Company was not in compliance with certain financial covenants and received the necessary waivers.

Table of Contents

The following table presents certain information on warehouse borrowings and related accrued interest for the periods indicated:


	Maximum		Balance Outstanding At
	Borrowing		September 30,		December 31,
	Capacity		2017		2016		Maturity Date

								Maximum		Balance Outstanding at
								Borrowing		June 30,		December 31,
								Capacity		2020		2019		Maturity Date
Short-term borrowings:
Repurchase agreement 1 (1)	$	150,000	$	121,330	$	106,609	June 15, 2018	$	—	$	—	$	25,953	May 29, 2020
Repurchase agreement 2(2)		35,000		33,995		44,761	May 28, 2018		100,000		1,571		72,971	July 28, 2020
Repurchase agreement 3 (1)		225,000		139,436		125,320	December 22, 2017		—		—		250,722	May 29, 2020
Repurchase agreement 4(3)		250,000		140,184		52,067	February 27, 2018		200,000		—		119,838	August 29, 2020
Repurchase agreement 5		100,000		57,951		56,655	March 31, 2018		300,000		—		72,666	June 22, 2021
Repurchase agreement 6(1)		200,000		98,687		35,161	June 28, 2018		—		—		159,413	June 25, 2020
Total warehouse borrowings	$	960,000	$	591,583	$	420,573		$	600,000	$	1,571	$	701,563

(1)

~~(1)~~

AsIn May 2020, the Company settled all of ~~September 30, 2017~~the loans on repurchase agreements 1, 3 and ~~December 31, 2016, $60.9 million~~6 and ~~$62.9 million, respectively, are associated with finance receivables made to~~closed the ~~Company’s warehouse customers.~~

lines.

(2)	In July 2020, the line was extended to July 2021, and the maximum borrowing capacity was reduced to $75.0 million.

(3)	In July 2020, the line was extended 30 days pending the renewal process.

~~Table of Contents~~

MSR Financings

~~On August 17, 2017,~~In February 2018, IMC (Borrower)~~, entered into a~~ amended the Line of Credit Promissory Note ~~with a lender providing for a~~(FHLMC and GNMA Financing) originally entered into in August 2017, increasing the maximum borrowing capacity of the revolving line of credit to $50.0 million and extending the term to January 31, 2019. In May 2018, the agreement was amended increasing the maximum borrowing capacity of ~~$30.0~~the revolving line of credit to $60.0 million, ~~(FHLMC Financing). The Borrower is able to borrow~~increasing the borrowing capacity up to ~~55%~~60% of the fair market value of ~~FHLMC~~the pledged mortgage servicing ~~rights. The Line of Credit has a term until May 31, 2018~~rights and ~~will automatically renew for subsequent one year periods unless~~reducing the ~~lender provides the Borrowers 150 days’ notice of its intention not to renew. Interest payments are payable monthly and accrue~~ interest ~~at the~~ rate per annum ~~equal~~ to one-month LIBOR plus ~~4.0% and the balance~~3.0%. As part of the ~~obligation may be prepaid at any time. The~~May 2018 amendment, the obligations under the Line of Credit ~~are~~were secured by FHLMC and GNMA pledged mortgage servicing rights (subject to an acknowledgement agreement) and iswas guaranteed by ~~Integrated Real Estate Services, Corp.~~ ~~At September 30, 2017, $5.0 million was outstanding under the FHLMC Financing.~~

On February 10, 2017, IMC (Borrower), entered into a Loan and Security Agreement (Agreement) with a lender providing for a revolving loan commitment of $40.0 million for a period of two years (FNMA Financing). The Borrower is able to borrow up to 55% of the fair market value of FNMA pledged servicing rights. Upon the two year anniversary of the Agreement, any amounts outstanding will automatically be converted into a term loan due and payable in full on the one year anniversary of the conversion date. Interest payments are payable monthly and accrue interest at the rate per annum equal to one-month LIBOR plus 4.0% and the balance of the obligation may be prepaid at any time. The Borrower initially drew down $35.1 million, and used a portion of the proceeds to pay off the Term Financing (approximately $30.1 million) originally entered into in June 2015 as discussed below. The Borrower also paid the lender an origination fee of $100 thousand, which is deferred and amortized over the life of the FNMA Financing. At September 30, 2017, $20.1 million was outstanding under the FNMA Financing.

~~Term Financing~~

IRES. In June 2015, the Company and its subsidiaries (IRES, IMC and Impac Warehouse Lending, Inc. (IWLI), collectively, the Borrowers) entered into a Loan Agreement with a lender pursuant to which the Creditor provided to the Borrowers a term loan in the aggregate principal amount of $30.0 million (Term Financing) due and payable on December 19, 2016, which could have been extended to December 18, 2017 at the Creditor’s discretion. In June 2016,April 2019, the maturity of the ~~Term Financing~~line was extended until January 31, 2020. In January 2020, the maturity of the line was extended to ~~June 16, 2017 and~~March 31, 2020. In April 2020, the ~~Company paid an additional $100 thousand extension fee, which was deferred and amortized over the life~~maturity of the ~~Term Financing. Interest on~~line was extended to May 31, 2020. In May 2020, the ~~Term Financing~~line was ~~payable monthly and accrued at a rate of one-month LIBOR plus 8.5% per annum. In February 2017,~~repaid with the proceeds from the ~~FNMA Financing were used to pay off the Term Financing.~~

~~Convertible Notes~~

~~In January 2016, pursuant to the terms of the $20.0 million Convertible Promissory Notes issued in April 2013 (the Notes),~~MSR sale. At June 30, 2020, the Company ~~exercised its option to convert~~had no outstanding borrowings under the Notes to common stock. The conversion resulted in the Company issuing an aggregate of 1,839,080 shares of common stock in February 2016, at a conversion price of $10.875 per share. As a result of the transaction, the Company converted $20.0 million of debt into equityFHLMC and ~~paid interest through April 2016. No gain or loss was recorded~~GNMA Financing and had no available capacity for borrowing as a result of the ~~transaction.~~sale of the FHLMC servicing.

MSR Advance Financing

In April 2020, Ginnie Mae announced they revised and expanded their issuer assistance program to provide financing to fund servicer advances through the Pass-Through Assistance Program (PTAP). The PTAP funds advanced by Ginnie Mae bear interest at a fixed rate that will apply to a given months pass-through assistance and will be posted on Ginnie Mae’s website each month. The maturity date is the earlier of the seven months from the month the request and repayment agreement was approved, or July 30, 2021. At June 30, 2020, the Company had $448 thousand in approved PTAP funds outstanding at an interest rate of 5.7%. In July 2020, the outstanding PTAP funds were repaid.

Convertible Notes

In May 2015, the Company issued ~~an additional~~ $25.0 million Convertible Promissory Notes (2015 Convertible Notes). to purchasers, some of which are related parties. The 2015 Convertible Notes were originally due to mature on or before May 9, 2020 and ~~accrue~~accrued interest at a rate of 7.5% per annum, to be paid quarterly. ~~The Company had~~Transaction costs of approximately $50 thousand ~~in transaction costs, which~~ were deferred and amortized over the life of the 2015 Convertible Notes.

Noteholders ~~may~~could convert all or a portion of the outstanding principal amount of the 2015 Convertible Notes into shares of the Company’s common stock (Conversion Shares) at a rate of $21.50 per share, subject to adjustment for stock splits and dividends (Conversion Price). The Company has the right to convert the entire outstanding principal of the 2015 Convertible Notes into Conversion Shares at the Conversion Price if the market price per share of the common stock, as measured by the average volume-weighted closing stock price per share of the common stock on the NYSE AMERICAN (or any other U.S. national securities exchange then serving as the principal such exchange on which the shares of common stock are listed), reaches the level of $30.10 for any twenty (20) trading days in any period of thirty

~~Table of Contents~~

(30) consecutive trading days after the Closing ~~Date.~~Date (as defined in the Convertible Notes). Upon conversion of the 2015 Convertible Notes

Table of Contents

by the Company, the entire amount of accrued and unpaid interest (and all other amounts owing) under the 2015 Convertible Notes are immediately due and payable. Furthermore, if the conversion of the 2015 Convertible Notes by the Company occurs prior to the third anniversary of the Closing Date, then the entire amount of interest under the 2015 Convertible Notes through the third anniversary is immediately due and payable. To the extent the Company pays any cash dividends on its shares of common stock prior to conversion of the 2015 Convertible Notes, upon conversion of the 2015 Convertible Notes, the ~~Noteholders~~noteholders will also receive such dividends on an as-converted basis of the 2015 Convertible Notes less the amount of interest paid by the Company prior to such dividend.

~~Unless an event~~

On April 15, 2020, the Company amended and restated the outstanding 2015 Convertible Notes in the principal amount of ~~default has occurred~~$25 million originally issued in May 2015 pursuant to the terms of the Note Purchase Agreement between the Company and ~~is continuing, each purchaser~~the noteholders of the 2015 Convertible Notes. The 2015 Convertible Notes ~~agrees, for~~have been amended to extend the ~~three years after~~maturity date by six months (until November 9, 2020) and to reduce the ~~Closing Date,~~interest rate on such notes to ~~vote all Conversion Shares for each~~7.0% per annum (Amended Notes). In connection with the issuance of the Amended Notes, the Company issued to the noteholders of the Amended Notes, warrants to purchase up to an aggregate of 212,649 shares of the Company’s ~~nominees for election to the Company’s board of directors and not to nominate any other candidate for election to the board of directors at any time within such three year period.~~

~~Long-term Debt~~

~~Trust Preferred Securities~~

During 2005, the Company formed four wholly‑owned trust subsidiaries (Trusts) for the purpose of issuing an aggregate of $99.2 million of trust preferred securities (Trust Preferred Securities). All proceeds from the sale of the Trust Preferred Securities and the common securities issued by the Trusts were originally invested in $96.3 million of junior subordinated debentures (debentures), which became the sole assets of the Trusts. The Trusts paid dividends on the Trust Preferred Securities at the same rate as paid by the Company on the debentures held by the Trusts.

During 2008 and 2009, the Company purchased and cancelled $36.5 million in outstanding Trust Preferred Securities for $5.5 million. Additionally, during 2009, the Company exchanged an aggregate of $51.3 million in outstanding Trust Preferred Securities for $62.0 million in Junior Subordinated Notes. As a result of these transactions, $8.5 million in Trust Preferred Securities remained outstanding.

~~On May 5, 2017, the Company agreed to exchange 412,264 shares of its~~ common stock ~~for the remaining Trust Preferred Securities which had an aggregate liquidation amount of $8.5 million issued by Impac Capital Trust #4.~~ ~~Accrued and unpaid interest on the Trust Preferred Securities was paid in~~at a cash ~~in the aggregate amount of approximately $14 thousand.~~ ~~The interest rate on the Trust Preferred Securities was a variable rate of three-month LIBOR plus 3.75% per annum. At the time of the exchange, the interest rate was 4.92%.~~

The exchange was based on the carrying value of the trust preferred obligation, which was $5.6 million at March 31, 2017, and an agreed upon stock price that determined a fixed number of shares to be issued in the exchange. However, because the measurement date of the exchange was the date the common stock was issued when the marketexercise price of ~~the common stock was $17.06, the Company recorded a $1.3 million loss~~$2.97 per share. The warrants are exercisable commencing on ~~extinguishment of debt for the difference in stock price from the agreed upon stock price to the stock price~~October 16, 2020 and expire on ~~the issuance date of the common stock.~~April 15, 2025.

September 30,

December 31,

2017

2016

Trust Preferred Securities

$
—

$
8,500

Common securities

—

263

Fair value adjustment

—

(3,197)

Total Trust Preferred Securities

$
—

$
5,566

Long-term Debt

Junior Subordinated Notes

The Company carries its Junior Subordinated Notes at estimated fair value as more fully described in Note 6.7.—Fair Value of Financial ~~Instruments~~.Instruments. The following table shows the remaining principal balance and fair value of ~~junior subordinated notes~~Junior Subordinated Notes issued as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

~~Table of Contents~~


	September 30,		December 31,
	2017		2016

					June 30,		December 31,
					2020		2019
Junior Subordinated Notes (1)	$	62,000	$	62,000	$	62,000	$	62,000
Fair value adjustment		(17,439)		(20,359)		(20,189)		(16,566)
Total Junior Subordinated Notes	$	44,561	$	41,641	$	41,811	$	45,434

(1)

~~(1)~~

Stated maturity of March 2034; requires quarterly ~~distributions initially~~interest payments at a ~~fixed~~variable rate of ~~2.00% per annum through March 2014 with increases of 1.00% per year in 2014 through 2017. Starting in 2018, the interest rates become variable at 3‑month~~3-month LIBOR plus 3.75% per annum.

During the three months ended June 30, 2020, the change in fair value of the long-term debt was the result of a decrease in the 3-month LIBOR forward curve, which reduced the undiscounted cash flows used in this calculation.

Note 5.6.—Securitized Mortgage Trusts

Securitized Mortgage Trust Assets

Securitized mortgage trust assets, which are recorded at their estimated fair value, ~~(FMV),~~ are comprised of the following at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

September 30,

December 31,

2017

2016
Securitized mortgage collateral

$
3,758,140

$
4,021,891
REO

11,091

11,399
Total securitized mortgage trust assets

$
3,769,231

$
4,033,290


	June 30,		December 31,
	2020		2019
Securitized mortgage collateral, at fair value	$	2,225,422	$	2,628,064
REO, at net realizable value (NRV)		4,240		6,682
Total securitized mortgage trust assets	$	2,229,662	$	2,634,746

Table of Contents

Securitized Mortgage Trust Liabilities

Securitized mortgage trust liabilities, which are recorded at their estimated ~~FMV,~~fair value, are comprised of the following at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

September 30,

December 31,

2017

2016
Securitized mortgage borrowings

$
3,751,831

$
4,017,603


	June 30,		December 31,
	2020		2019
Securitized mortgage borrowings	$	2,213,863	$	2,619,210

Changes in fair value of net trust assets, including trust REO ~~losses,~~gains (losses), are comprised of the following for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									For the Three Months Ended				For the Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019
Change in fair value of net trust assets, excluding REO	$	(4,479)	$	2,511	$	(1,906)	$	8,580	$	(2,316)	$	3,113	$	(6,412)	$	(3,043)
Gains (losses) from REO		2,734		(1,440)		8,484		(5,971)		1,452		(4,572)		3,165		(1,099)
Change in fair value of net trust assets, including trust REO gains (losses)	$	(1,745)	$	1,071	$	6,578	$	2,609	$	(864)	$	(1,459)	$	(3,247)	$	(4,142)

Note 6.7.—Fair Value of Financial Instruments

The use of fair value to measure the Company’s financial instruments is fundamental to its consolidated financial statements and is a critical accounting estimate because a substantial portion of its assets and liabilities are recorded at estimated fair value.

~~FASB ASC 825 requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values.~~ The following table presents the estimated fair value of financial instruments included in the consolidated financial statements as of the dates indicated:


	June 30, 2020								December 31, 2019
	Carrying		Estimated Fair Value						Carrying		Estimated Fair Value
	Amount		Level 1		Level 2		Level 3		Amount		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	43,002	$	43,002	$	—	$	—	$	24,666	$	24,666	$	—	$	—
Restricted cash		5,326		5,326		—		—		12,466		12,466		—		—
Mortgage loans held-for-sale		29,419		—		29,419		—		782,143		—		782,143		—
Mortgage servicing rights		279		—		—		279		41,470		—		—		41,470
Derivative assets, lending, net (1)		1,799		—		—		1,799		7,791		—		—		7,791
Securitized mortgage collateral		2,225,422		—		—		2,225,422		2,628,064		—		—		2,628,064

Liabilities
Warehouse borrowings	$	1,571	$	—	$	1,571	$	—	$	701,563	$	—	$	701,563	$	—
MSR advance financing		448		—		—		448		—		—		—		—
Convertible notes		24,839		—		—		24,839		24,996		—		—		24,996
Long-term debt		41,811		—		—		41,811		45,434		—		—		45,434
Securitized mortgage borrowings		2,213,863		—		—		2,213,863		2,619,210		—		—		2,619,210
Derivative liabilities, lending, net (2)		—		—		—		—		651		—		651		—

(1)	Represents IRLCs and are included in other assets in the accompanying consolidated balance sheets.

(2)	Represents Hedging Instruments and are included in other liabilities in the accompanying consolidated balance sheets.

~~Table of Contents~~

September 30, 2017

December 31, 2016

Carrying

Estimated Fair Value

Carrying

Estimated Fair Value

Amount

Level 1

Level 2

Level 3

Amount

Level 1

Level 2

Level 3

Assets
















Cash and cash equivalents

$
34,815

$
34,815

$
—

$
—

$
40,096

$
40,096

$
—

$
—

Restricted cash

6,605

6,605

—

—

5,971

5,971

—

—

Mortgage loans held-for-sale

572,268

—

572,268

—

388,422

—

388,422

—

Finance receivables

60,912

—

60,912

—

62,937

—

62,937

—

Mortgage servicing rights

158,950

—

—

158,950

131,537

—

—

131,537

Derivative assets, lending, net

12,998

—

983

12,015

11,169

—

—

11,169

Securitized mortgage collateral

3,758,140

—

—

3,758,140

4,021,891

—

—

4,021,891

Liabilities

Warehouse borrowings

$
591,583

$
—

$
591,583

$
—

$
420,573

$
—

$
420,573

$
—

MSR financings

25,133

—

—

25,133

—

—

—

—

Term financing

—

—

—

—

29,910

—

—

29,910

Convertible notes

24,972

—

—

24,972

24,965

—

—

24,965

Contingent consideration

5,816

—

—

5,816

31,072

—

—

31,072

Long-term debt

44,561

—

—

44,561

47,207

—

—

47,207

Securitized mortgage borrowings

3,751,831

—

—

3,751,831

4,017,603

—

—

4,017,603

Derivative liabilities, lending, net

—

—

—

—

336

—

336

—

The fair value amounts above have been estimated by management using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates of fair value in both inactive and orderly markets. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Table of Contents

For securitized mortgage collateral and securitized mortgage borrowings, the underlying bonds are collateralized by Alt-A (non-conforming) residential and commercial loans and ~~mortgage-backed securities~~have limited or no market ~~have experienced significant declines in market activity, along with a lack of orderly transactions.~~activity. The Company’s methodology to estimate fair value of these assets and liabilities include the use of internal pricing techniques such as the net present value of future expected cash flows (with observable market participant assumptions, where available) discounted at a rate of return based on the Company’s estimates of market participant requirements. The significant assumptions utilized in these internal pricing techniques, which are based on the characteristics of the underlying collateral, include estimated credit losses, estimated prepayment speeds and appropriate discount rates.

Refer to Recurring Fair Value Measurements below for a description of the valuation methods used to determine the fair value of ~~investment securities available-for-sale,~~mortgage servicing rights, mortgage LHFS, securitized mortgage collateral and borrowings, MSR advance financing, long-term debt and derivative assets and ~~liabilities, long-term debt, mortgage servicing rights and mortgage loans held-for-sale.~~liabilities.

The carrying amount of cash, cash equivalents and restricted cash approximates fair value.

~~Finance receivables carrying amounts approximate fair value due to the short-term nature of the assets~~Warehouse borrowings and ~~do not present unanticipated interest rate or credit concerns.~~

~~Warehouse borrowings~~MSR advance financing carrying amounts approximate fair value due to the short-term nature of the liabilities and do not present unanticipated interest rate or credit concerns.

Convertible notes are recorded at amortized ~~cost. The estimated fair value is determined using a discounted cash flow model using estimated market rates.~~

~~MSR financings carrying amount~~cost, which approximates ~~fair value as the underlying facility bears interest at a rate that is periodically adjusted based on a market index.~~

~~Term financing structured debt had a maturity of less than one year. The term financing was recorded at amortized cost. The carrying amount approximated~~ fair value due to the ~~short-term nature of the liability and did not present unanticipated interest rate or credit concerns.~~short duration to maturity.

~~Table of Contents~~

Fair Value Hierarchy

The application of fair value measurements may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value.

FASB ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

●Level 1—Quoted prices (unadjusted) in active markets for identical instruments or liabilities that an entity has the ability to assess at measurement date.

●Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for an asset or liability, including interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, loss severities, credit risks and default rates; and market-corroborated inputs.

~~Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers is unobservable.~~

●Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers is unobservable.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when estimating fair value.

As a result of the lack of observable market data resulting from inactive markets, the Company has classified its ~~investment securities available-for-sale,~~ mortgage servicing rights, securitized mortgage collateral and borrowings, derivative assets and liabilities ~~(trust and IRLCs)~~(IRLCs), and long-term debt as Level 3 fair value measurements. Level 3 assets and liabilities measured at fair value on a recurring basis were approximately ~~87%~~99% and 99% and ~~92%~~77% and 99%, respectively, of total assets and total liabilities measured at estimated fair value at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016, respectively.~~2019.

Recurring Fair Value Measurements

The Company assesses ~~the~~its financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by ASC Topic 810. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the beginning of the reporting period. There were no material transfers between ~~our~~ Level 1, ~~and~~ Level 2 or Level 3 classified instruments during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

2020.

1617

Table of Contents

The following tables present the Company’s assets and liabilities that are measured at estimated fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, based on the fair value hierarchy:


	Recurring Fair Value Measurements
	September 30, 2017						December 31, 2016
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

													Recurring Fair Value Measurements
													June 30, 2020						December 31, 2019
													Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Mortgage loans held-for-sale	$	—	$	572,268	$	—	$	—	$	388,422	$	—	$	—	$	29,419	$	—	$	—	$	782,143	$	—
Derivative assets, lending, net (1)		—		983		12,015		—		—		11,169		—		—		1,799		—		—		7,791
Mortgage servicing rights		—		—		158,950		—		—		131,537		—		—		279		—		—		41,470
Securitized mortgage collateral		—		—		3,758,140		—		—		4,021,891		—		—		2,225,422		—		—		2,628,064
Total assets at fair value	$	—	$	573,251	$	3,929,105	$	—	$	388,422	$	4,164,597	$	—	$	29,419	$	2,227,500	$	—	$	782,143	$	2,677,325
Liabilities
Securitized mortgage borrowings	$	—	$	—	$	3,751,831	$	—	$	—	$	4,017,603	$	—	$	—	$	2,213,863	$	—	$	—	$	2,619,210
Long-term debt		—		—		44,561		—		—		47,207		—		—		41,811		—		—		45,434
Contingent consideration		—		—		5,816		—		—		31,072
Derivative liabilities, lending, net (2)		—		—		—		—		336		—		—		—		—		—		651		—
Total liabilities at fair value	$	—	$	—	$	3,802,208	$	—	$	336	$	4,095,882	$	—	$	—	$	2,255,674	$	—	$	651	$	2,664,644

(1)

~~(1)~~

At ~~September~~June 30, ~~2017,~~2020, derivative assets, lending, net included ~~$983 thousand of Hedging Instruments and $12.0~~$1.8 million ofin IRLCs and ~~are~~is included in other assets in the accompanying consolidated balance sheets. At December 31, ~~2016,~~2019, derivative assets, lending, net included ~~$11.2~~$7.8 million ofin IRLCs and is included in other assets in the accompanying consolidated balance sheets.

(2)

~~(2)~~

At June 30, 2020 and December 31, ~~2016,~~2019, derivative liabilities, lending, net ~~included $336 thousand in Hedging Instruments and is~~are included in other liabilities in the accompanying consolidated balance sheets.

The following tables present reconciliations for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:


	Level 3 Recurring Fair Value Measurements
	For the Three Months Ended September 30, 2017

	Investment								Interest
	securities		Securitized		Securitized		Mortgage		rate lock		Long-
	available-		mortgage		mortgage		servicing		commitments,		term			Contingent
	for-sale		collateral		borrowings		rights		net		debt			consideration
Fair value, June 30, 2017	$	—	$	3,776,184	$	(3,767,519)	$	152,273	$	9,546	$	(44,536)	$	(14,926)

															Level 3 Recurring Fair Value Measurements
															For the Three Months Ended June 30, 2020

																					Interest
															Securitized		Securitized		Mortgage		rate lock		Long-
															mortgage		mortgage		servicing		commitments,		term
															collateral		borrowings		rights		net		debt
Fair value, March 31, 2020															$	2,248,813	$	(2,238,208)	$	24,328	$	863	$	(39,632)
Total gains (losses) included in earnings:
Interest income (1)		—		9,979		—		—		—		—		—		6,915		—		—		—		—
Interest expense (1)		—		—		(30,810)		—		—		(129)		—		—		(24,005)		—		—		(157)
Change in fair value		—		118,384		(122,863)		(11,177)		2,469		104		4,402		74,961		(77,277)		(3,111)		936		(4,208)
Change in instrument specific credit risk																—		—		—		—		2,186	(2)
Total gains (losses) included in earnings		—		128,363		(153,673)		(11,177)		2,469		(25)		4,402		81,876		(101,282)		(3,111)		936		(2,179)
Transfers in and/or out of Level 3		—		—		—		—		—		—		—		—		—		—		—		—
Purchases, issuances and settlements:
Purchases		—		—		—		—		—		—		—		—		—		—		—		—
Issuances		—		—		—		17,854		—		—		—		—		—		64		—		—
Settlements		—		(146,407)		169,361		—		—		—		4,708		(105,267)		125,627		(21,002)		—		—
Fair value, September 30, 2017	$	—	$	3,758,140	$	(3,751,831)	$	158,950	$	12,015	$	(44,561)	$	(5,816)
Unrealized gains (losses) still held (2)	$	—	$	(580,845)	$	2,734,962	$	158,950	$	12,015	$	(17,439)	$	(5,816)
Fair value, June 30, 2020															$	2,225,422	$	(2,213,863)	$	279	$	1,799	$	(41,811)

(1)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $2.0 million for three months ended ~~September~~June 30, ~~2017.~~2020. The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations and comprehensive (loss) earnings is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)	Amount represents the change in instrument specific credit risk in other comprehensive (loss) earnings in the consolidated statements of operations and comprehensive (loss) earnings and is included in unrealized (losses) gains still held for long-term debt.

Table of Contents


	Level 3 Recurring Fair Value Measurements
	For the Three Months Ended June 30, 2019

							Interest
	Securitized		Securitized		Mortgage		rate lock		Long-
	mortgage		mortgage		servicing		commitments,		term
	collateral		borrowings		rights		net		debt
Fair value, March 31, 2019	$	3,054,720	$	(3,051,736)	$	59,823	$	3,164	$	(44,561)
Total gains (losses) included in earnings:
Interest income (1)		3,950		—		—		—		—
Interest expense (1)		—		(10,198)		—		—		(108)
Change in fair value		40,558		(37,445)		(9,881)		5,285		388
Change in instrument specific credit risk		—		—		—		—		371	(2)
Total gains (losses) included in earnings		44,508		(47,643)		(9,881)		5,285		651
Transfers in and/or out of Level 3		—		—		—	��	—		—
Purchases, issuances and settlements:
Purchases		—		—		—		—		—
Issuances		—		—		416		—		—
Settlements		(178,379)		184,223		(12)		—		—
Fair value, June 30, 2019	$	2,920,849	$	(2,915,156)	$	50,346	$	8,449	$	(43,910)

(1)

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $2.2 million for three months ended June 30, 2019. The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)

~~(2)~~

~~Represents~~Amount represents the ~~amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected~~change in instrument specific credit risk in other comprehensive (loss) earnings in the ~~fair values at September 30, 2017.~~

consolidated statements of operations and comprehensive (loss) earnings.


	Level 3 Recurring Fair Value Measurements
	For the Six Months Ended June 30, 2020

							Interest
	Securitized		Securitized		Mortgage		rate lock		Long-
	mortgage		mortgage		servicing		commitments,		term
	collateral		borrowings		rights		net		debt
Fair value, December 31, 2019	$	2,628,064	$	(2,619,210)	$	41,470	$	7,791	$	(45,434)
Total (losses) gains included in earnings:
Interest income (1)		2,108		—		—		—		—
Interest expense (1)		—		(33,931)		—		—		(318)
Change in fair value		(174,419)		168,007		(21,942)		(5,992)		4,828
Change in instrument specific credit risk		—		—		—		—		(887)	(2)
Total (losses) gains included in earnings		(172,311)		134,076		(21,942)		(5,992)		3,623
Transfers in and/or out of Level 3		—		—		—		—		—
Purchases, issuances and settlements:
Purchases		—		—		—		—		—
Issuances		—		—		1,753		—		—
Settlements		(230,331)		271,271		(21,002)		—		—
Fair value, June 30, 2020	$	2,225,422	$	(2,213,863)	$	279	$	1,799	$	(41,811)
Unrealized (losses) gains still held (3)	$	(374,731)	$	2,620,691	$	279	$	1,799	$	20,189

~~Table of Contents~~

Level 3 Recurring Fair Value Measurements

For the Three Months Ended September 30, 2016

Derivative

Investment

liabilities,

Interest

securities

Securitized

Securitized

net,

Mortgage

rate lock

Long-

available-

mortgage

mortgage

securitized

servicing

commitments,

term

Contingent

for-sale

collateral

borrowings

trusts

rights

net

debt

consideration

Fair value, June 30, 2016

$
21

$
4,290,994

$
(4,288,585)

$
(354)

$
54,747

$
19,303

$
(30,990)

$
(49,986)

Total gains (losses) included in earnings:

Interest income (1)

—

13,336

—

—

—

—

—

—

Interest expense (1)

—

—

(43,956)

—

—

—

(204)

—

Change in fair value

(21)

35,225

(32,644)

(49)

(8,224)

8,017

(8,641)

(24,806)

Total (losses) gains included in earnings

(21)

48,561

(76,600)

(49)

(8,224)

8,017

(8,845)

(24,806)

Transfers in and/or out of Level 3

—

—

—

—

—

—

—

—

Purchases, issuances and settlements:

Purchases

—

—

—

—

—

—

—

—

Issuances

—

—

—

—

40,890

—

—

—

Settlements

—

(184,098)

213,820

379

—

—

—

14,896

Fair value, September 30, 2016

$
—

$
4,155,457

$
(4,151,365)

$
(24)

$
87,413

$
27,320

$
(39,835)

$
(59,896)

Unrealized gains (losses) still held (2)

$
—

$
(967,291)

$
3,129,974

$
9

$
87,413

$
27,320

$
30,928

$
(59,896)

(1)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was ~~$2.6~~$4.4 million for ~~three~~six months ended ~~September~~June 30, ~~2016.~~2020. The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations and comprehensive (loss) earnings is primarily from contractual interest on the securitized mortgage collateral and borrowings.

Table of Contents

(2)	~~(2)~~ Amount represents the change in instrument specific credit risk in other comprehensive (loss) earnings in the consolidated statements of operations and comprehensive (loss) earnings and is included in unrealized (losses) gains still held for long-term debt.

(3)

Represents the amount of unrealized (losses) gains ~~(losses)~~ relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at ~~September~~June 30, ~~2016.~~

2020.


	Level 3 Recurring Fair Value Measurements
	For the Nine Months Ended September 30, 2017

	Investment								Interest
	securities		Securitized		Securitized		Mortgage		rate lock		Long-
	available-		mortgage		mortgage		servicing		commitments,		term		Contingent
	for-sale		collateral		borrowings		rights		net		debt		consideration
Fair value, December 31, 2016	$	—	$	4,021,891	$	(4,017,603)	$	131,537	$	11,169	$	(47,207)	$	(31,072)

															Level 3 Recurring Fair Value Measurements
															For the Six Months Ended June 30, 2019

																					Interest
															Securitized		Securitized		Mortgage		rate lock		Long-
															mortgage		mortgage		servicing		commitments,		term
															collateral		borrowings		rights		net		debt
Fair value, December 31, 2018															$	3,157,071	$	(3,148,215)	$	64,728	$	3,351	$	(44,856)
Total gains (losses) included in earnings:
Interest income (1)		—		39,564		—		—		—		—		—		10,206		—		—		—		—
Interest expense (1)		—		—		(108,010)		—		—		(631)		—		—		(23,751)		—		—		(223)
Change in fair value		—		219,604		(221,510)		(20,038)		846		(2,657)		9,104		61,642		(64,685)		(16,374)		5,098		654
Change in instrument specific credit risk																—		—		—		—		515	(2)
Total gains (losses) included in earnings		—		259,168		(329,520)		(20,038)		846		(3,288)		9,104		71,848		(88,436)		(16,374)		5,098		946
Transfers in and/or out of Level 3		—		—		—		—		—		—		—		—		—		—		—		—
Purchases, issuances and settlements:
Purchases		—		—		—		5,618		—		—		—		—		—		—		—		—
Issuances		—		—		—		42,728		—		—		—		—		—		1,999		—		—
Settlements		—		(522,919)		595,292		(895)		—		5,934		16,152		(308,070)		321,495		(7)		—		—
Fair value, September 30, 2017	$	—	$	3,758,140	$	(3,751,831)	$	158,950	$	12,015	$	(44,561)	$	(5,816)
Fair value, June 30, 2019															$	2,920,849	$	(2,915,156)	$	50,346	$	8,449	$	(43,910)
Unrealized (losses) gains still held (3)															$	(263,682)	$	2,492,202	$	50,346	$	8,449	$	18,090

(1)

~~(1)~~

~~Table of Contents~~

and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

Level 3 Recurring Fair Value Measurements

For the Nine Months Ended September 30, 2016

Derivative

Investment

liabilities,

Interest

securities

Securitized

Securitized

net,

Mortgage

rate lock

Long-

available-

mortgage

mortgage

securitized

servicing

commitments,

term

Contingent

for-sale

collateral

borrowings

trusts

rights

net

debt

consideration

Fair value, December 31, 2015

$
26

$
4,574,919

$
(4,578,657)

$
(1,669)

$
36,425

$
9,184

$
(31,898)

$
(48,079)

Total gains (losses) included in earnings:

Interest income (1)

2

46,540

—

—

—

—

—

—

Interest expense (1)

—

—

(141,927)

—

—

—

(651)

—

Change in fair value

19

27,780

(19,020)

(199)

(32,048)

18,136

(7,286)

(39,813)

Total gains (losses) included in earnings

21

74,320

(160,947)

(199)

(32,048)

18,136

(7,937)

(39,813)

Transfers in and/or out of Level 3

—

—

—

—

—

—

—

—

Purchases, issuances and settlements:

Purchases

—

—

—

—

—

—

—

—

Issuances

—

—

—

—

91,809

—

—

—

Settlements

(47)

(493,782)

588,239

1,844

(8,773)

—

—

27,996

Fair value, September 30, 2016

$
—

$
4,155,457

$
(4,151,365)

$
(24)

$
87,413

$
27,320

$
(39,835)

$
(59,896)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $7.3$4.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019. The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations and comprehensive (loss) earnings is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)	Amount represents the change in instrument specific credit risk in other comprehensive (loss) earnings in the consolidated statements of operations and comprehensive (loss) earnings as required by the adoption of ASU 2016-01 on January 1, 2018.

(3)	Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at June 30, 2019.

The following table presents quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and nonrecurring basis at ~~September~~June 30, ~~2017:~~2020:

Estimated

Valuation

Unobservable

Range of

Weighted

Financial Instrument

Fair Value

Technique

Input

Inputs

Average

Assets and liabilities backed by real estate








Securitized mortgage collateral, and

$
3,758,140

DCF

Prepayment rates

2.1 - 19.0
%
5.6
%
Securitized mortgage borrowings

(3,751,831)

Default rates

0.01 - 4.8
%
1.6
%

Loss severities

14.0 - 99.8
%
46.3
%

Discount rates

3.6 - 25.0
%
4.5
%
Other assets and liabilities

Mortgage servicing rights

$
158,950

DCF

Discount rate

9.0 - 14.0
%
9.6
%

Prepayment rates

8.0 - 84.8
%
10.2
%
Derivative assets - IRLCs, net

12,015

Market pricing

Pull-through rate

15.1 - 99.9
%
82.1
%
Long-term debt

(44,561)

DCF

Discount rate

9.5
%
9.5
%
Contingent consideration

(5,816)

DCF

Discount rate

13.8
%
13.8
%

Margins

1.5 - 2.0
%
1.7
%

Probability of outcomes (1)

25.0 - 50.0
%
33.5
%


	Estimated		Valuation	Unobservable	Range of		Weighted
Financial Instrument	Fair Value		Technique	Input	Inputs		Average
Assets and liabilities backed by real estate
Securitized mortgage collateral, and	$	2,225,422	Discounted Cash Flow	Prepayment rates	4.5 - 33.8	%	10.3	%
Securitized mortgage borrowings		(2,213,863)		Default rates	0.02 - 24.0	%	2.5	%
				Loss severities	0.13 - 98.9	%	63.5	%
				Discount rates	2.8 - 25.0	%	4.2	%
Other assets and liabilities
Mortgage servicing rights	$	279	Market pricing	Indicative bid	100	%	100	%
Derivative assets - IRLCs, net		1,799	Market pricing	Pull-through rates	22.9 - 96.2	%	69.0	%
Long-term debt		(41,811)	Discounted Cash Flow	Discount rate	8.4	%	8.4	%

~~DCF = Discounted Cash Flow~~

~~(1)~~

~~Probability of outcomes is the probability of projected CCM earnings over the earn-out period based upon three scenarios (base, low and high).~~

For assets and liabilities backed by real estate, a significant increase in discount rates, default rates or loss severities would result in a significantly lower estimated fair value. The effect of changes in prepayment speeds would have differing effects depending on the seniority or other characteristics of the instrument. For other assets and liabilities, a significant increase in discount rates would result in a significantly lower estimated fair value. A significant

~~Table of Contents~~

increase or decrease in ~~one-month LIBOR~~pull-through rate assumptions would result in a ~~significantly higher estimated~~significant increase or decrease in the fair value ~~for derivative liabilities, net, securitized trusts.~~of IRLCs. The Company believes that the imprecision of an estimate could be significant.

Table of Contents

The following tables present the changes in recurring fair value measurements included in net (loss) earnings for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:


	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Earnings
	For the Three Months Ended September 30, 2017
					Change in Fair Value of
	Interest		Interest		Net Trust		Long-term		Other Revenue		Gain on sale
	Income (1)		Expense (1)		Assets		Debt		and Expense		of loans, net		Total
Investment securities available-for-sale	$	—	$	—	$	—	$	—	$	—	$	—	$	—

															Recurring Fair Value Measurements
															Changes in Fair Value Included in Net (Loss) Earnings
															For the Three Months Ended June 30, 2020
																			Change in Fair Value of
															Interest		Interest		Net Trust		Long-term		Other Revenue		Gain (Loss) on Sale
															Income (1)		Expense (1)		Assets		Debt		and Expense		of Loans, net		Total
Securitized mortgage collateral		9,979		—		118,384		—		—		—		128,363	$	6,915	$	—	$	74,961	$	—	$	—	$	—	$	81,876
Securitized mortgage borrowings		—		(30,810)		(122,863)		—		—		—		(153,673)		—		(24,005)		(77,277)		—		—		—		(101,282)
Derivative liabilities, net, securitized trusts		—		—		—		—		—		—		—
Long-term debt		—		(129)		—		104		—		—		(25)		—		(157)		—		(4,208)		—		—		(4,365)
Mortgage servicing rights (2)		—		—		—		—		(11,177)		—		(11,177)		—		—		—		—		(3,111)		—		(3,111)
Contingent consideration (3)		—		—		—		—		4,402		—		4,402
Mortgage loans held-for-sale		—		—		—		—		—		(1,336)		(1,336)		—		—		—		—		—		22,291		22,291
Derivative assets — IRLCs		—		—		—		—		—		2,469		2,469		—		—		—		—		—		936		936
Derivative liabilities — Hedging Instruments		—		—		—		—		(214)		(758)		(972)		—		—		—		—		—		—		—
Total	$	9,979	$	(30,939)	$	(4,479)	$	104	$	(6,989)	$	375	$	(31,949)	$	6,915	$	(24,162)	$	(2,316)	$	(4,208)	$	(3,111)	$	23,227	$	(3,655)

(1)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)

~~(2)~~

Included in loss on ~~mortgage servicing rights,~~MSRs, net in the consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

~~(3)~~

~~Includes $396 thousand of accretion of the contingent consideration liability.~~


	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Earnings
	For the Three Months Ended September 30, 2016
					Change in Fair Value of
	Interest		Interest		Net Trust			Long-term		Other		Gain on sale
	Income (1)		Expense (1)		Assets			Debt		Revenue		of loans, net		Total
Investment securities available-for-sale	$	—	$	—	$	(21)		$	—	$	—	$	—	$	(21)

																Recurring Fair Value Measurements
																Changes in Fair Value Included in Net (Loss) Earnings
																For the Three Months Ended June 30, 2019
																				Change in Fair Value of
																Interest		Interest		Net Trust		Long-term		Other Revenue		Gain (Loss) on Sale
																Income (1)		Expense (1)		Assets		Debt		and Expense		of Loans, net		Total
Securitized mortgage collateral		13,336		—		35,225			—		—		—		48,561	$	3,950	$	—	$	40,558	$	—	$	—	$	—	$	44,508
Securitized mortgage borrowings		—		(43,956)		(32,644)			—		—		—		(76,600)		—		(10,198)		(37,445)		—		—		—		(47,643)
Derivative liabilities, net, securitized trusts		—		—		(49)	(2)		—		—		—		(49)
Long-term debt		—		(204)		—			(8,641)		—		—		(8,845)		—		(108)		—		388		—		—		280
Mortgage servicing rights (3)		—		—		—			—		(8,224)		—		(8,224)
Contingent consideration (4)		—		—		—			—		(24,806)		—		(24,806)
Mortgage servicing rights (2)																	—		—		—		—		(9,881)		—		(9,881)
Mortgage loans held-for-sale		—		—		—			—		—		5,300		5,300		—		—		—		—		—		4,864		4,864
Derivative assets — IRLCs		—		—		—			—		—		8,017		8,017		—		—		—		—		—		5,285		5,285
Derivative liabilities — Hedging Instruments		—		—		—			—		(96)		(2,181)		(2,277)		—		—		—		—		—		(110)		(110)
Total	$	13,336	$	(44,160)	$	2,511		$	(8,641)	$	(33,126)	$	11,136	$	(58,944)	$	3,950	$	(10,306)	$	3,113	$	388	$	(9,881)	$	10,039	$	(2,697)

(1)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)

~~(2)~~

Included in this amount is $280 thousand in change in the fair value of derivative instruments, offset by $329 thousand in cash payments from the securitization trusts for the three months ended September 30, 2016.

~~(3)~~

Included in loss on ~~mortgage servicing rights,~~MSRs, net in the consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

~~(4)~~

~~Includes $1.6 million of accretion of the contingent consideration liability.~~

2021

Table of Contents

The following tables present the changes in recurring fair value measurements included in net (loss) earnings for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:


	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Earnings
	For the Nine Months Ended September 30, 2017
					Change in Fair Value of
	Interest		Interest		Net Trust			Long-term		Other Revenue		Gain on sale
	Income (1)		Expense (1)		Assets			Debt		and Expense		of loans, net		Total
Investment securities available-for-sale	$	—	$	—	$	—		$	—	$	—	$	—	$	—

																Recurring Fair Value Measurements
																Changes in Fair Value Included in Net (Loss) Earnings
																For the Six Months Ended June 30, 2020
																				Change in Fair Value of
																Interest		Interest		Net Trust			Long-term		Other Income		Gain (Loss) on Sale
																Income (1)		Expense (1)		Assets			Debt		and Expense		of Loans, net		Total
Securitized mortgage collateral		39,564		—		219,604			—		—		—		259,168	$	2,108	$	—	$	(174,419)		$	—	$	—	$	—	$	(172,311)
Securitized mortgage borrowings		—		(108,010)		(221,510)			—		—		—		(329,520)		—		(33,931)		168,007			—		—		—		134,076
Derivative liabilities, net, securitized trusts		—		—		—			—		—		—		—
Long-term debt		—		(631)		—			(2,657)		—		—		(3,288)		—		(318)		—			4,828		—		—		4,510
Mortgage servicing rights (2)		—		—		—			—		(20,038)		—		(20,038)		—		—		—			—		(21,942)		—		(21,942)
Contingent consideration (3)		—		—		—			—		9,104		—		9,104
Mortgage loans held-for-sale		—		—		—			—		—		8,262		8,262		—		—		—			—		—		(23,202)		(23,202)
Derivative assets — IRLCs		—		—		—			—		—		846		846		—		—		—			—		—		(5,992)		(5,992)
Derivative liabilities — Hedging Instruments		—		—		—			—		(296)		1,616		1,320		—		—		—			—		—		651		651
Total	$	39,564	$	(108,641)	$	(1,906)	(4)	$	(2,657)	$	(11,230)	$	10,724	$	(74,146)	$	2,108	$	(34,249)	$	(6,412)	(3)	$	4,828	$	(21,942)	$	(28,543)	$	(84,210)

(1)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)

~~(2)~~

Included in loss on ~~mortgage servicing rights,~~MSRs, net in the consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

(3)

~~(3)~~

~~Includes $1.9 million of accretion of the contingent consideration liability.~~

~~(4)~~

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, change in the fair value of net trust assets, excluding REO was ~~$1.9~~$6.4 million.


	Recurring Fair Value Measurements
	Changes in Fair Value Included in Net Earnings
	For the Nine Months Ended September 30, 2016
					Change in Fair Value of
	Interest		Interest		Net Trust			Long-term		Other		Gain on sale
	Income (1)		Expense (1)		Assets			Debt		Revenue		of loans, net		Total
Investment securities available-for-sale	$	2	$	—	$	19		$	—	$	—	$	—	$	21

																Recurring Fair Value Measurements
																Changes in Fair Value Included in Net (Loss) Earnings
																For the Six Months Ended June 30, 2019
																				Change in Fair Value of
																Interest		Interest		Net Trust			Long-term		Other Income		Gain (Loss) on Sale
																Income (1)		Expense (1)		Assets			Debt		and Expense		of Loans, net		Total
Securitized mortgage collateral		46,540		—		27,780			—		—		—		74,320	$	10,206	$	—	$	61,642		$	—	$	—	$	—	$	71,848
Securitized mortgage borrowings		—		(141,927)		(19,020)			—		—		—		(160,947)		—		(23,751)		(64,685)			—		—		—		(88,436)
Derivative liabilities, net, securitized trusts		—		—		(199)	(2)		—		—		—		(199)
Long-term debt		—		(651)		—			(7,286)		—		—		(7,937)		—		(223)		—			654		—		—		431
Mortgage servicing rights (3)		—		—		—			—		(32,048)		—		(32,048)
Contingent consideration (4)		—		—		—			—		(39,813)		—		(39,813)
Mortgage servicing rights (2)																	—		—		—			—		(16,374)		—		(16,374)
Mortgage loans held-for-sale		—		—		—			—		—		19,572		19,572		—		—		—			—		—		8,334		8,334
Derivative assets — IRLCs		—		—		—			—		—		18,136		18,136		—		—		—			—		—		5,098		5,098
Derivative liabilities — Hedging Instruments		—		—		—			—		324		(3,842)		(3,518)		—		—		—			—		—		(532)		(532)
Total	$	46,542	$	(142,578)	$	8,580	(5)	$	(7,286)	$	(71,537)	$	33,866	$	(132,413)	$	10,206	$	(23,974)	$	(3,043)	(3)	$	654	$	(16,374)	$	12,900	$	(19,631)

(1)

~~(1)~~

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)

~~(2)~~

~~Included in this amount is $1.5 million in change in the fair value of derivative instruments, offset by $1.~~7 ~~million in cash payments from the securitization trusts for the nine months ended September 30, 2016.~~

~~(3)~~

Included in loss on ~~mortgage servicing rights,~~MSRs, net in the consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

(3)

~~(4)~~

~~Includes $5.2 million of accretion of the contingent consideration liability.~~

~~(5)~~

For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, change in the fair value of net trust assets, excluding REO was ~~$8.6~~$3.0 million. Excluded from the $10.3 million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $1.7 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

~~Table of Contents~~

The following is a description of the measurement techniques for items recorded at estimated fair value on a recurring basis.

~~Investment securities available-for-sale~~—Investment securities available-for-sale are carried at fair value. The investment securities consist primarily of non-investment grade mortgage-backed securities. The fair value of the investment securities is 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, future credit losses, forward interest rates and certain other factors. Given the lack of observable market data as of September 30, 2017 and December 31, 2016 relating to these securities, the estimated fair value of the investment securities available-for-sale was measured using significant internal expectations of market participants’ assumptions. Investment securities available-for-sale is considered a Level 3 measurement at September 30, 2016.

Mortgage servicing rights—The Company elected to carry its ~~mortgage servicing rights~~MSRs arising from its mortgage loan origination ~~operation~~operations at estimated fair value. The fair value of ~~mortgage servicing rights~~MSRs is based upon ~~market prices for similar instruments~~an indicative bid at June 30, 2020 and a discounted cash flow ~~model.~~model at December 31, 2019. The valuation model incorporates assumptions that market participants would use in estimating the fair value of servicing. These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. ~~Mortgage servicing rights~~MSRs are considered a Level 3 measurement at ~~September~~June 30, ~~2017.~~2020.

Mortgage loans held-for-sale—The Company elected to carry its mortgage ~~loans held-for-sale~~LHFS originated or acquired at estimated fair value. Fair value is based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. Given the meaningful level of secondary market activity for mortgage loans, active pricing is available for similar assets and accordingly, the Company classifies its mortgage ~~loans held-for-sale~~LHFS as a Level 2 measurement at ~~September~~June 30, ~~2017.~~2020.

Table of Contents

Securitized mortgage collateral—The Company elected to carry its securitized mortgage collateral at fair value. These assets consist primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value measurements are based on the Company’s internal models used to compute the net present value of future expected cash flows with observable market participant assumptions, where available. The Company’s assumptions include its expectations of inputs that other market participants would use in pricing these assets. These assumptions include judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of ~~September~~June 30, ~~2017,~~2020, securitized mortgage collateral had UPB of ~~$4.3~~$2.6 billion, compared to an estimated fair value on the Company’s balance sheet of ~~$3.8~~$2.2 billion. The aggregate UPB ~~exceeds~~exceeded the fair value by ~~$0.5~~$0.4 billion at ~~September~~June 30, ~~2017.~~2020. As of ~~September~~June 30, ~~2017,~~2020, the UPB of loans 90 days or more past due was ~~$0.6~~$0.4 billion compared to an estimated fair value of ~~$0.2~~$0.1 billion. The aggregate UPB of loans 90 days or more past due ~~exceed~~exceeded the fair value by ~~$0.4~~$0.3 billion at ~~September~~June 30, ~~2017.~~2020. Securitized mortgage collateral is considered a Level 3 measurement at ~~September~~June 30, ~~2017.~~2020.

Securitized mortgage borrowings—The Company elected to carry its securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by non-conforming mortgage loans. Fair value measurements include the Company’s judgments about the underlying collateral and assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of ~~September~~June 30, ~~2017,~~2020, securitized mortgage borrowings had an outstanding principal balance of ~~$4.3~~$2.6 billion, net of $2.2 billion in bond losses, compared to an estimated fair value of ~~$3.8~~$2.2 billion. The aggregate outstanding principal balance ~~exceeds~~exceeded the fair value by ~~$0.5~~$0.4 billion at ~~September~~June 30, ~~2017.~~2020. Securitized mortgage borrowings are considered a Level 3 measurement at ~~September~~June 30, ~~2017.~~2020.

~~Contingent consideration—~~Contingent consideration is applicable to the acquisition of CCM and is estimated and recorded at fair value at the acquisition date as part of purchase price consideration. Additionally, each reporting period, the Company estimates the change in fair value of the contingent consideration and any change in fair value is recognized in the Company’s consolidated statements of operations if it is determined to not be a measurement period adjustment. The estimate of the fair value of contingent consideration requires significant judgment and assumptions to

~~Table of Contents~~

be made about future operating results, discount rates and probabilities of various projected operating result scenarios. During the three months ended September 30, 2017, the change in fair value of contingent consideration was related to a decrease in projected volumes and earnings of CCM. Future revisions to these assumptions could materially change the estimated fair value of contingent consideration and materially affect the Company’s financial results. Contingent consideration is considered a Level 3 measurement at September 30, 2017.

Long-term debt—The Company elected to carry ~~all of~~ its remaining long-term debt (consisting of ~~trust preferred securities and~~ junior subordinated notes) at fair value. These securities are measured based upon an analysis prepared by management, which considered the Company’s own credit risk, including previous settlements with trust preferred debt holders and discounted cash flow analysis. As of ~~September~~June 30, ~~2017,~~2020, long-term debt had UPB of $62.0 million compared to an estimated fair value of ~~$44.6~~$41.8 million. The aggregate UPB ~~exceeds~~exceeded the fair value by ~~$17.4~~$20.2 million at ~~September~~June 30, ~~2017.~~2020. The long-term debt is considered a Level 3 measurement at ~~September~~June 30, ~~2017.~~2020.

Derivative assets and liabilities, ~~Securitized trusts~~—For non-exchange traded contracts, fair value was 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 were based on observable market inputs, if available. To the extent observable market inputs were not available, fair values measurements include the Company’s judgments about future cash flows, forward interest rates and certain other factors, including counterparty risk. Additionally, these values also took into account the Company’s own credit standing, to the extent applicable; thus, the valuation of the derivative instrument included the estimated value of the net credit differential between the counterparties to the derivative contract. As of September 30, 2017, there were no derivative assets or liabilities in the securitized trusts. These derivatives were included in the consolidated securitization trusts, which are nonrecourse to the Company, and thus the economic risk from these derivatives was limited to the Company’s residual interests in the securitization trusts. Derivative assets and liabilities, securitized trusts were considered a Level 3 measurement in 2016.

~~Derivative assets and liabilities, Lending~~lending—The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as free standing derivatives. The derivatives include IRLCs with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked in that interest rate. These commitments are determined to be derivative instruments in accordance with GAAP. The derivatives also include hedging instruments (typically TBA MBS) used to hedge the fair value changes associated with changes in interest rates relating to its mortgage lending ~~originations as well as mortgage servicing rights.~~originations. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date of the loan sale. The estimated fair value of IRLCs are based on underlying loan types with similar characteristics using the TBA MBS market, which is actively quoted and ~~easily~~ validated through external sources. The data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program and expected sale date of the loan, adjusted for current market conditions. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs, the base value is then adjusted for the anticipated Pull-through Rate. The anticipated Pull-through Rate is an unobservable input based on historical experience, which results in classification of IRLCs as a Level 3 measurement at ~~September~~June 30, ~~2017.~~2020.

The fair value of the Hedging Instruments is based on the actively quoted TBA MBS market using observable inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date. Therefore, the Hedging Instruments are classified as a Level 2 measurement at ~~September~~June 30, ~~2017.~~

2020.

Table of Contents

The following table includes information for the derivative assets and liabilities related to lending for the periods presented:


					Total Gains (Losses) (1)				Total Gains (Losses) (1)
	Notional Amount				For the Three Months Ended				For the Nine Months Ended
	September 30,		December 31,		September 30,				September 30,
	2017		2016		2017		2016		2017		2016

																	Total Gains (Losses)				Total Losses
													Notional Amount				For the Three Months Ended				For the Six Months Ended
													June 30,		December 31,		June 30,				June 30,
													2020		2019		2020		2019		2020		2019
Derivative – IRLC's(1)	$	650,282	$	558,538	$	2,469	$	8,017	$	846	$	18,136	$	103,148	$	419,035	$	936	$	5,285	$	(5,992)	$	5,098
Derivative – TBA MBS(2)		544,932		492,157		(2,570)		(5,379)		(3,941)		(21,120)		—		485,459		(113)		(2,410)		(10,384)		(3,886)
Derivative – Forward delivery loan commitment (3)														—		232,530		—		—		—		—

(1)

~~(1)~~

Amounts included in gain (loss) on sale of loans, net within the accompanying consolidated statements of ~~operations.~~

operations and comprehensive (loss) earnings.

(2)	Amounts included in gain (loss) on sale of loans, net and loss on mortgage servicing rights, net within the accompanying consolidated statements of operations and comprehensive (loss) earnings.

(3)	As of December 31, 2019, $232.5 million in mortgage loans had been allocated to forward delivery loan commitments and recorded at fair value within LHFS in the accompanying consolidated balance sheets.

Nonrecurring Fair Value Measurements

The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.

The following tables present financial and non-financial assets ~~and liabilities~~ measured using nonrecurring fair value measurements at ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively:


	Nonrecurring Fair Value Measurements						Total Gains (Losses) (1)		Total Gains (Losses) (1)
	September 30, 2017						For the Three Months Ended		For the Nine Months Ended
	Level 1		Level 2		Level 3		September 30, 2017		September 30, 2017

											Nonrecurring Fair Value Measurements						Total Gains (Losses) (1)		Total Gains (1)
											June 30, 2020						For the Three Months Ended		For the Six Months Ended
											Level 1		Level 2		Level 3		June 30, 2020		June 30, 2020
REO (2)	$	—	$	2,870	$	—	$	2,734	$	8,484	$	—	$	4,392	$	—	$	1,452	$	3,165
Deferred charge (3)		—		—		8,094		(71)		(591)
ROU asset impairment												—		—		15,012		—		(393)

(1)

~~(1)~~

Total ~~losses~~gains (losses) reflect ~~losses~~gains from all nonrecurring measurements during the period.

(2)

~~(2)~~

~~Balance~~At June 30, 2020, $4.2 million of REO was within securitized mortgage trust assets. The balance represents REO at ~~September~~June 30, ~~2017~~2020, which ~~has~~have been impaired subsequent to foreclosure. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Company recorded ~~$2.7~~$1.5 million and ~~$8.5~~$3.2 million, respectively, in gains, which ~~represents~~represent recovery of the ~~net realizable value (NRV)~~NRV attributable to an improvement in state specific loss severities on properties held during the period which resulted in an increase to NRV.

~~(3)~~

For the three and nine months ended September 30, 2017, the Company recorded $71 thousand and $591 thousand, respectively, in income tax expense resulting from impairment write-downs of deferred charge based on changes in estimated cash flows and lives of the related mortgages retained in the securitized mortgage collateral.


	Nonrecurring Fair Value Measurements						Total Gains (Losses) (1)		Total Gains (Losses) (1)
	September 30, 2016						For the Three Months Ended		For the Nine Months Ended
	Level 1		Level 2		Level 3		September 30, 2016		September 30, 2016

											Nonrecurring Fair Value Measurements						Total Losses (1)		Total Losses (1)
											June 30, 2019						For the Three Months Ended		For the Six Months Ended
											Level 1		Level 2		Level 3		June 30, 2019		June 30, 2019
REO (2)	$	—	$	1,664	$	—	$	(1,440)	$	(5,971)	$	—	$	11,214	$	—	$	(4,572)	$	(1,099)
Deferred charge (3)		—		—		9,148		(200)		(815)

(1)

~~(1)~~

Total losses reflect losses from all nonrecurring measurements during the period.

(2)

~~(2)~~

At June 30, 2019, $10.9 million of REO was within securitized mortgage trust assets. Balance represents REO at ~~September~~June 30, ~~2016~~2019, which ~~has~~have been impaired subsequent to foreclosure. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, the Company recorded ~~$1.4~~$4.6 million and ~~$6.0~~$1.1 million, respectively, losses related to changes in ~~losses which~~NRV of properties. Losses represent ~~additional~~ impairment ~~write-downs~~of the NRV attributable to an increase in state specific loss severities on properties held during the period which resulted in a decrease to NRV.

~~(3)~~

For the three and nine months ended September 30, 2016, the Company recorded $200 thousand and $815 thousand, respectively, in income tax expense resulting from impairment write-downs of deferred charge based on changes in estimated cash flows and lives of the related mortgages retained in the securitized mortgage collateral.

Real estate owned—REO consists of residential real estate (within securitized mortgage trust assets) acquired in satisfaction of loans. Upon foreclosure, REO is adjusted to the estimated fair value of the residential real estate less estimated selling and holding costs, offset by

~~Table of Contents~~

expected contractual mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of carrying value or estimated fair value less costs to sell. REO balance representing REOs which have been impaired subsequent to foreclosure are subject to nonrecurring fair value measurement

Table of Contents

and are included in the nonrecurring fair value measurements tables. Fair values of REO are generally based on observable market inputs, and are considered Level 2 measurements at ~~September~~June 30, ~~2017.~~2020.

~~Deferred charge—~~ ~~Deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years.~~

ROU asset impairment—The Company ~~evaluates the deferred charge~~performs reviews of its ROU assets for impairment ~~quarterly using internal estimates~~when evidence exists that the carrying value of ~~estimated cash flows~~an asset may not be recoverable. During the first quarter of 2020, the Company recorded a $393 thousand ROU asset impairment charge related to the consolidation of one floor of our corporate office. The impairment charge is included in general, administrative and ~~lives of the related mortgages retained~~other expense in the ~~securitized mortgage collateral. If the deferred charge is determined to be impaired, it is recognized as a component~~consolidated statements of ~~income tax expense. Deferred charge is~~operations and comprehensive (loss) earnings. ROU asset was considered a Level 3 fair value measurement at ~~September~~June 30, ~~2017.~~2020.

Note 7.8.—Income Taxes

The Company calculates its quarterly tax provision pursuant to the guidelines in ASC 740 Income ~~Taxes.~~Taxes. ASC 740 requires companies to estimate the annual effective tax rate for current year ordinary income. In calculating the effective tax rate, permanent differences between financial reporting and taxable income are factored into the calculation, ~~but~~and temporary differences are not. The estimated annual effective tax rate represents the ~~best~~Company’s estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision.

The Company adopted ASU 2019-12 on a prospective basis on January 1, 2020. The most significant impact to the Company included the removal of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income). The changes also add a requirement for an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

The Company recorded income tax expense of ~~$2.1 million~~$15 thousand and ~~$3.6 million~~$51 thousand for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively,~~2020, respectively. Tax expense for the three and six months ended June 30, 2020 is primarily the result of state income taxes from states where the ~~recognition of a deferred tax liability created by the amortization of an indefinite-life intangible asset (goodwill) and amortization of the deferred charge.~~Company does not have net operating loss carryforwards or state minimum taxes. The deferred tax liability for indefinite-life intangibles cannot be included in the calculation of valuation allowance as these liabilities cannot be considered when determining the realizability of the net deferred tax assets.

~~For the three and nine months ended September 30, 2016, the~~ Company recorded income tax ~~benefit~~expense of ~~$130~~$81 thousand and $167 thousand for the three and six months ended June 30, 2019, respectively. Tax expense ~~of $728 thousand, respectively,~~for the three and six months ended June 30, 2019 is primarily the result of ~~a return to provision adjustment for the 2015 tax return booked in the third quarter, amortization of the deferred charge, federal alternative minimum tax (AMT), and~~ state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, ~~including AMT. The deferred charge represents the deferral of income tax expense on inter-company profits that resulted~~offset by a benefit resulting from the ~~sale~~intraperiod allocation rules that are applied when there is a pre-tax loss from continuing operations and pre-tax income from other comprehensive income.

At June 30, 2020, the Company had accumulated other comprehensive (loss) earnings of ~~mortgages from taxable subsidiaries to IMH prior to 2008. The deferred charge amortization and/or impairment,~~$23.9 million, which ~~does not result in any~~was net of tax ~~liability to be paid, is calculated based on the change in the estimated fair value~~ of the underlying securitized mortgage collateral during the period. 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.$11.3 million.

As of December 31, ~~2016,~~2019, the Company had estimated federal net operating loss (NOL) carryforwards of approximately ~~$581.8~~$566.6 million. Federal ~~net operating loss~~NOL carryforwards begin to expire in 2027. As of December 31, ~~2016,~~2019, the Company had estimated California ~~net operating loss (NOL)~~NOL carryforwards of approximately ~~$487.0~~$385.2 million, of which ~~$86.9 million~~begin to expire in ~~2017.~~2028. The Company may not be able to realize the maximum benefit due to the nature and tax ~~entity~~entities that ~~holds~~hold the NOL.

Table of Contents

Note 8.9.—Reconciliation of (Loss) Earnings Per Common Share

Basic net (loss) earnings per common share is computed by dividing net ~~earnings~~loss available to common stockholders (numerator) by the weighted average number of vested common shares outstanding during the period (denominator). Diluted net (loss) earnings per common share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the if-converted

~~Table of Contents~~

method. Dilutive potential common shares include shares issuable upon conversion of Convertible Notes, warrants, dilutive effect of outstanding stock options, ~~and~~restricted stock awards (RSA), restricted stock units (RSU), deferred stock units ~~(DSUs).~~(DSU) and cumulative redeemable preferred stock outstanding for the periods indicated, when dilutive.

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Numerator for basic earnings per share:








Net earnings

$
2,317

$
16,498

$
13,384

$
29,729

Numerator for diluted earnings per share:

Net earnings

$
2,317

$
16,498

$
13,384

$
29,729
Interest expense attributable to convertible notes (1)

—

457

1,158

1,997
Net earnings plus interest expense attributable to convertible notes

$
2,317

$
16,955

$
14,542

$
31,726

Denominator for basic earnings per share (2):

Basic weighted average common shares outstanding during the period

20,916

12,920

18,928

12,241

Denominator for diluted earnings per share (2):

Basic weighted average common shares outstanding during the period

20,916

12,920

18,928

12,241
Net effect of dilutive convertible notes (1)

—

1,163

1,163

1,426
Net effect of dilutive stock options and DSU’s

279

320

290

306
Diluted weighted average common shares

21,195

14,403

20,381

13,973
Net earnings per common share:

Basic

$
0.11

$
1.28

$
0.71

$
2.43
Diluted

$
0.11

$
1.18

$
0.71

$
2.27


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Numerator for basic (loss) earnings per share:
Net (loss) earnings	$	(22,829)	$	3,873	$	(87,560)	$	(8,739)

Numerator for diluted loss per share:
Net (loss) earnings	$	(22,829)	$	3,873	$	(87,560)	$	(8,739)
Interest expense attributable to convertible notes (1)		—		—		—		—
Net (loss) earnings plus interest expense attributable to convertible notes	$	(22,829)	$	3,873	$	(87,560)	$	(8,739)

Denominator for basic (loss) earnings per share (2):
Basic weighted average common shares outstanding during the period		21,230		21,181		21,229		21,170

Denominator for diluted (loss) earnings per share (2):
Basic weighted average common shares outstanding during the period		21,230		21,181		21,229		21,170
Net effect of dilutive convertible notes and warrants (1)		—		—		—		—
Net effect of dilutive stock options, DSU’s, RSA's and RSU's (1)		—		8		—		—
Diluted weighted average common shares		21,230		21,189		21,229		21,170
Net (loss) earnings per common share:
Basic	$	(1.08)	$	0.18	$	(4.12)	$	(0.41)
Diluted	$	(1.08)	$	0.18	$	(4.12)	$	(0.41)

(1)

~~(1)~~

Adjustments to diluted (loss) earnings per share for the ~~convertible notes for the~~ three and six months ended ~~September~~June 30, ~~2017~~2020 and six months ended June 30, 2019 were excluded from the calculation, as they ~~are~~were anti-dilutive.

(2)

~~(2)~~

Number of shares presented in thousands.

At June 30, 2020, there were 1.0 million shares of stock options, RSA’s, RSU’s and DSU’s outstanding in the aggregate. For ~~September~~the three and six months ended June 30, ~~2017,~~2020 and 2019, there were 1.2 million ~~anti-dilutive stock options outstanding. There~~shares attributable to the 2015 Convertible Notes that were ~~842 thousand anti-dilutive stock options outstanding~~anti-dilutive. Additionally, for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016.~~2020, there were 213 thousand warrants that were anti-dilutive.

In addition to the potential dilutive effects of stock options, restricted stock, restricted stock units, deferred stock units and convertible notes listed above, see Note 12.—Equity and Share Based Payments, Redeemable Preferred Stock, for a description of cumulative undeclared dividends in arrears which would also become dilutive in the event the Company is not successful in its appeal of the original court ruling.

Table of Contents

Note 9.10.—Segment Reporting

The Company has three primary reporting segments which include mortgage lending, real estate services and long-term mortgage portfolio. Unallocated corporate and other administrative costs, including the costs associated with being a public company, are presented in Corporate and other.



Statement of Operations Items for the	Mortgage		Real Estate		Long-term		Corporate				Mortgage		Real Estate		Long-term		Corporate
Three Months Ended September 30, 2017:	Lending		Services		Portfolio		and other		Consolidated
Three Months Ended June 30, 2020:											Lending		Services		Portfolio		and other		Consolidated
Gain on sale of loans, net	$	42,476	$	—	$	—	$	—	$	42,476	$	1,451	$	—	$	—	$	—	$	1,451
Real estate services fees, net		—		1,355		—		—		1,355
Servicing fees, net		8,492		—		—		—		8,492		1,352		—		—		—		1,352
Loss on mortgage servicing rights, net		(10,513)		—		—		—		(10,513)		(8,443)		—		—		—		(8,443)
Real estate services fees, net												—		293		—		—		293
Other revenue		—		—		81		185		266		—		—		30		1,259		1,289
Accretion of contingent consideration		(396)		—		—		—		(396)
Change in fair value of contingent consideration		4,798		—		—		—		4,798
Loss on extinguishment of debt		—		—		—		—		—
Other operating expense		(36,663)		(797)		(67)		(4,435)		(41,962)		(8,364)		(356)		(179)		(5,566)		(14,465)
Other income (expense)		1,107		—		(722)		(480)		(95)		287		—		(3,983)		(595)		(4,291)
Net earnings (loss) before income tax expense	$	9,301	$	558	$	(708)	$	(4,730)		4,421
Net loss before income tax expense											$	(13,717)	$	(63)	$	(4,132)	$	(4,902)		(22,814)
Income tax expense										2,104										15
Net earnings									$	2,317
Net loss																			$	(22,829)



Statement of Operations Items for the	Mortgage		Real Estate		Long-term		Corporate				Mortgage		Real Estate		Long-term		Corporate
Three Months Ended September 30, 2016:	Lending		Services		Portfolio		and other		Consolidated
Three Months Ended June 30, 2019:											Lending		Services		Portfolio		and other		Consolidated
Gain on sale of loans, net	$	113,158	$	—	$	—	$	—	$	113,158	$	29,472	$	—	$	—	$	—	$	29,472
Real estate services fees, net		—		2,678		—		—		2,678
Servicing fees, net		3,789		—		—		—		3,789		3,536		—		—		—		3,536
Loss on mortgage servicing rights, net		(15,857)		—		—		—		(15,857)		(9,887)		—		—		—		(9,887)
Real estate services fees, net												—		807		—		—		807
Other revenue		18		—		71		136		225		36		—		131		20		187
Accretion of contingent consideration		(1,591)		—		—		—		(1,591)
Change in fair value of contingent consideration		(23,215)		—		—		—		(23,215)
Other operating expense		(53,884)		(2,005)		(102)		(562)		(56,553)		(17,456)		(345)		(110)		(3,722)		(21,633)
Other income (expense)		1,092		—		(6,075)		(1,283)		(6,266)		1,905		—		19		(452)		1,472
Net earnings (loss) before income tax expense	$	23,510	$	673	$	(6,106)	$	(1,709)	$	16,368	$	7,606	$	462	$	40	$	(4,154)	$	3,954
Income tax benefit										(130)
Income tax expense																				81
Net earnings									$	16,498									$	3,873


Statement of Operations Items for the	Mortgage		Real Estate		Long-term		Corporate
Six Months Ended June 30, 2020:	Lending		Services		Portfolio		and other		Consolidated
Loss on sale of loans, net	$	(26,712)	$	—	$	—	$	—	$	(26,712)
Servicing fees, net		3,859		—		—		—		3,859
Loss on mortgage servicing rights, net		(26,753)		—		—		—		(26,753)
Real estate services fees, net		—		687		—		—		687
Other revenue		—		—		72		1,280		1,352
Other operating expense		(33,307)		(717)		(350)		(10,858)		(45,232)
Other income (expense)		2,387		—		3,957		(1,054)		5,290
Net (loss) earnings before income tax expense	$	(80,526)	$	(30)	$	3,679	$	(10,632)		(87,509)
Income tax expense										51
Net loss									$	(87,560)

Table of Contents



Statement of Operations Items for the	Mortgage		Real Estate		Long-term			Corporate			Mortgage		Real Estate		Long-term		Corporate
Nine Months Ended September 30, 2017:	Lending		Services		Portfolio		and other		Consolidated
Six Months Ended June 30, 2019:											Lending		Services		Portfolio		and other		Consolidated
Gain on sale of loans, net	$	116,602	$	—	$	—	$	—	$	116,602	$	41,686	$	—	$	—	$	—	$	41,686
Real estate services fees, net		—		4,492		—		—		4,492
Servicing fees, net		23,575		—		—		—		23,575		6,505		—		—		—		6,505
Loss on mortgage servicing rights, net		(18,159)		—		—		—		(18,159)		(15,510)		—		—		—		(15,510)
Real estate services fees, net												—		1,613		—		—		1,613
Other revenue		19		—		209		313		541		36		—		98		53		187
Accretion of contingent consideration		(1,948)		—		—		—		(1,948)
Change in fair value of contingent consideration		11,052		—		—		—		11,052
Loss on extinguishment of debt		—		—		(1,265)		—		(1,265)
Other operating expense		(109,979)		(2,534)		(253)		(12,176)		(124,942)		(34,956)		(732)		(250)		(7,966)		(43,904)
Other income (expense)		2,096		—		6,673		(1,758)		7,011		3,320		—		(1,560)		(909)		851
Net earnings (loss) before income tax expense	$	23,258	$	1,958	$	5,364	$	(13,621)		16,959	$	1,081	$	881	$	(1,712)	$	(8,822)	$	(8,572)
Income tax expense										3,575										167
Net earnings									$	13,384
Net loss																			$	(8,739)

Statement of Operations Items for the

Mortgage

Real Estate

Long-term

Corporate


Nine Months Ended September 30, 2016:

Lending

Services

Portfolio

and other

Consolidated

Gain on sale of loans, net

$
245,849

$
—

$
—

$
—

$
245,849

Real estate services fees, net

—

6,773

—

—

6,773

Servicing fees, net

8,680

—

—

—

8,680

Loss on mortgage servicing rights, net

(41,249)

—

—

—

(41,249)

Other revenue

70

—

183

200

453

Accretion of contingent consideration

(5,244)

—

—

—

(5,244)

Change in fair value of contingent consideration

(34,569)

—

—

—

(34,569)

Other operating expense

(138,269)

(5,228)

(347)

(3,751)

(147,595)

Other income (expense)

2,148

—

(418)

(4,371)

(2,641)

Net earnings (loss) before income tax expense

$
37,416

$
1,545

$
(582)

$
(7,922)

$
30,457

Income tax expense

728

Net earnings

$
29,729

Long-term

Mortgage

Real Estate

Mortgage

Corporate

Balance Sheet Items as of:

Lending

Services

Portfolio

and other

Consolidated

Total Assets at September 30, 2017 (1)

$
1,008,628

$
555

$
3,777,326

$
28,868

$
4,815,377

Total Assets at December 31, 2016 (1)

$
762,924

$
5,451

$
4,042,273

$
53,086

$
4,863,734


	Mortgage		Real Estate		Long-term		Corporate
Balance Sheet Items as of:	Lending		Services		Portfolio		and other		Consolidated
Total Assets at June 30, 2020 (1)	$	100,640	$	508	$	2,229,677	$	33,799	$	2,364,624
Total Assets at December 31, 2019 (1)	$	888,847	$	6	$	2,634,812	$	22,614	$	3,546,279

(1)

~~(1)~~

All segment asset balances exclude intercompany balances.

Note ~~10.~~11.—Commitments and Contingencies

Legal Proceedings

The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In any case, there may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant

~~Table of Contents~~

judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.

Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

The legal matter updates summarized below are ongoing and may have an effect on the Company’s business and future financial condition and results of operations:

On December 7, 2011, a purported class action was filed in the Circuit Court of Baltimore City entitled Timm, v. Impac Mortgage Holdings, Inc, et al. alleging on behalf of holders of the Company’s 9.375% Series B Cumulative Redeemable Preferred Stock (Preferred B) and 9.125% Series C Cumulative Redeemable Preferred Stock (Preferred

Table of Contents

C) who did not tender their stock in connection with the Company’s 2009 completion of its Offer to Purchase and Consent Solicitation that the Company failed to achieve the required consent of the Preferred B and C holders, the consents to amend the Preferred stock were not effective because they were given on unissued stock (after redemption), the Company tied the tender offer with a consent requirement that constituted an improper “vote buying” scheme, and that the tender offer was a breach of a fiduciary duty. The action seeks the payment of two quarterly dividends for the Preferred B and C holders, the unwinding of the consents and reinstatement of the cumulative dividend on the Preferred B and C stock, and the election of two directors by the Preferred B and C holders. The action also seeks punitive damages and legal expenses. On July 16, 2018, the Court entered a Judgement Order whereby it (1) declared and entered judgment in favor of all defendants on all claims related to the Preferred C holders and all claims against all individual defendants thereby affirming the validity of the 2009 amendments to the Series B Articles Supplementary; (2) declared its interpretation of the voting provision language in the Preferred B Articles Supplementary to mean that consent of two-thirds of the Preferred B stockholders was required to approve the 2009 amendments to the Preferred B Articles Supplementary, which consent was not obtained, thus rendering the amendments invalid and leaving the 2004 Preferred B Articles Supplementary in effect; (3) ordered the Company to hold a special election within sixty days for the Preferred B stockholders to elect two directors to the Board of Directors pursuant to the 2004 Preferred B Articles Supplementary (which Directors will remain on the Company’s Board of Directors until such time as all accumulated dividends on the Preferred B have been paid or set aside for payment); and, (4) declared that the Company is required to pay three quarters of dividends on the Preferred B stock under the 2004 Articles Supplementary (approximately, $1.2 million, but did not order the Company to make any payment at this time). The Court declined to certify any class pending the outcome of appeals and certified its Judgment Order for immediate appeal. On October 2, 2019, the appellate court held oral argument for all appeals in the matter. On February 5, 2020, the Court of Special Appeal requested that the parties provide a supplemental memorandum explaining the appealability of the original circuit court opinion which the Company responded to on February 21, 2020. On April 1, 2020, the Court of Special Appeal issued an opinion affirming the judgment in favor of plaintiffs on the Series B voting rights arguing that the voting rights provision was not ambiguous. In response, the Company filed a petition for a writ of certiorari to the Maryland Court of Appeal appealing the Court of Special Appeals opinion. The petition was submitted by the Company on May 20, 2020, the plaintiffs responded on June 4, 2020, and the Company submitted a reply brief on June 15, 2020. The Maryland Court of Appeals granted the writ of certiorari on July 13, 2020.

On April 30, 2012, a purported class action was filed entitled Marentes v. Impac Mortgage Holdings, Inc., alleging that certain loan modification activities of the Company constitute an unfair business practice, false advertising and marketing, and that the fees charged are improper. The complaint seeks unspecified damages, restitution, injunctive relief, attorney’s fees and prejudgment interest. ~~Phase one~~On August 22, 2012, the plaintiffs filed an amended complaint adding Impac Funding Corporation as a defendant and on October 2, 2012, the plaintiffs dismissed Impac Mortgage Holdings, Inc., without prejudice. On January 11, 2019, the trial court determined that the plaintiffs were unable to prove their case and ordered that judgment be entered in favor of the ~~trial~~defendant. On April 19, 2019, the plaintiffs filed their Notice of Appeal and the plaintiffs filed their opening brief on October 31, 2019. The Company filed its response on February 19, 2020. The plaintiffs filed their appellate reply on May 26, 2020. The Court has set August 17, 2020 for ~~this matter has been continued, with the parties scheduled to return to court on November 29, 2017, for a status conference.~~ oral arguments.

The Company is a party to other litigation and claims which are normal in the course of ~~our~~the Company’s operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations. The Company believes that it has meritorious defenses to the claims and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits 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’s financial position and results of operations.

Please refer to IMH’s report on Form 10-K for the year ended December 31, ~~2016 and subsequent quarterly reports~~2019 for a full description of litigation and claims.

Repurchase Reserve

When the Company sells mortgage loans, it makes customary representations and warranties to the purchasers about various characteristics of each loan such as the origination and underwriting guidelines, including but not limited to

Table of Contents

the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. The Company’s whole loan sale agreements generally require it to repurchase loans if the Company breached a representation or warranty given to the loan ~~purchaser.~~purchaser as well as refunds of premiums to investors for early payoffs on loans sold.

The following table summarizes the repurchase reserve activity, within other liabilities on the consolidated balance sheets, related to previously sold loans for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and year ended December 31, ~~2016:~~2019:

September 30,

December 31,

2017

2016
Beginning balance

$
5,408

$
5,236
Provision for repurchases

192

379
Settlements

(620)

(207)
Total repurchase reserve

$
4,980

$
5,408


	June 30,		December 31,
	2020		2019
Beginning balance	$	8,969	$	7,657
Provision for repurchases (1)		5,009		5,487
Settlements		(3,936)		(4,175)
Total repurchase reserve	$	10,042	$	8,969

(1)

The provision for repurchases is included in gain (loss) on sale of loans, net in the accompanying consolidated statements of operations and comprehensive (loss) earnings.

~~Table~~Corporate-owned Life Insurance Trusts

During the first quarter of ~~Contents~~

~~Short-Term Loan Commitments~~

2020, there was a triggering event that caused the Company to reevaluate the consolidation of certain corporate-owned life insurance trusts. As a result, the Company has consolidated life insurance trusts for three former executive officers. The ~~Company uses~~corporate-owned life insurance contracts are recorded at cash surrender value, which is provided by a ~~portion of its warehouse borrowing capacity to provide secured short-term revolving financing to small~~third party and ~~medium-size mortgage originators to finance mortgage loans from~~held within trusts. At June 30, 2020, the ~~closing~~cash surrender value of the ~~mortgage loans until sold to investors (Finance Receivables). As of September~~policies was $10.7 million and were recorded within other assets on the consolidated balance sheets. At June 30, ~~2017,~~2020, the ~~warehouse lending operations had warehouse lines to non-affiliated customers totaling $159.0 million, of which there~~liability associated with the corporate-owned life insurance trusts was an outstanding balance of $60.9 million in finance receivables compared to $62.9 million as of December 31, 2016. The finance receivables are generally secured by residential mortgage loans as well as personal guarantees.$12.2 million.


	At June 30, 2020
Corporate-owned life insurance trusts:	Trust #1		Trust #2		Trust #3		Total
Corporate-owned life insurance cash surrender value	$	4,958	$	3,796	$	1,980	$	10,734
Corporate-owned life insurance liability		5,641		4,425		2,152		12,218
Corporate-owned life insurance shortfall (1)	$	(683)	$	(629)	$	(172)	$	(1,484)

(1)

$1.3 million of the total shortfall was recorded as a change in retained deficit at the time of the consolidation of the trusts. The additional shortfall was recorded in the accompanying consolidated statements of operations and comprehensive (loss) earnings.

Commitments to Extend Credit

The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. These loan commitments are treated as derivatives and are carried at fair value. See Note 6.7. — Fair ~~value~~Value of Financial Instruments for more information.

Note ~~11.~~12.—Equity and Share Based Payments

~~Equity~~Redeemable Preferred Stock

~~On April 18, 2017,~~At June 30, 2020, the Company had outstanding $68.5 million liquidation preference of Series B and Series C Preferred Stock, inclusive of cumulative undeclared dividends in arrears. The holders of each series of Preferred Stock, which are non-voting and redeemable at the option of the Company, retain the right to a $25.00 per share liquidation preference in the event of a liquidation of the Company and ~~certain purchasers entered into a securities purchase agreement, pursuant~~the right to ~~which~~receive dividends on the Preferred Stock if any such dividends are declared.

Table of Contents

As discussed within Note 11.—Commitments and Contingencies, all rights of the Preferred B holders under the 2004 Articles were deemed reinstated. Subject to an appeal, the Company ~~sold $56.0~~has cumulative undeclared dividends in arrears of approximately $16.8 million, ~~worth~~or approximately $25.20 per outstanding share of ~~shares of its common stock in a registered direct offering (Offering) at a price of $12.66~~Preferred B, increasing the liquidation value to approximately $50.20 per share. InAdditionally, every quarter the ~~Offering, the Company issued an aggregate of 4,423,381 shares of common stock.~~

cumulative undeclared dividends in arrears will increase by $0.5859 per share, or approximately $390 thousand. The net proceeds to the Company from the Offering were approximately $55.5 million after deducting the financial advisory fee and estimated aggregate offering expenses payable by the Company. The Company used a portionliquidation preference, inclusive of the ~~proceeds from~~cumulative undeclared dividends in arrears, is only payable upon voluntary or involuntary liquidation, dissolution or winding up of the ~~Offering for general corporate purposes, including general administrative expenses and working capital and capital expenditures, development costs, and repayment of debt.~~Company’s affairs.

As further described in Note 4. – Debt, Convertible Notes, in January 2016, the Company elected to exercise its option to convert the Notes to common stock. The conversion resulted in the Company issuing an aggregate of 1,839,080 shares of common stock at a conversion price of $10.875 per share.

Share Based Payments

The following table summarizes activity, pricing and other information for the Company’s stock options for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2020:


		Weighted-
		Average
	Number of	Exercise
	Shares	Price
Options outstanding at beginning of year	1,391,327	$	13.37

					Weighted-
					Average
				Number of	Exercise
				Shares	Price
Options outstanding at the beginning of the year				914,470	$	8.10
Options granted	358,450		13.72	30,000		5.34
Options exercised	(89,537)		6.36	(9,500)		4.84
Options forfeited/cancelled	(26,355)		16.95	(269,897)		7.85
Options outstanding at end of period	1,633,885		13.77
Options exercisable at end of period	947,479	$	12.24
Options outstanding at the end of the period				665,073		8.12
Options exercisable at the end of the period				413,246	$	10.14

As of ~~September~~June 30, ~~2017,~~2020, there was approximately ~~$4.1 million~~$386 thousand of total unrecognized compensation cost related to stock option compensation arrangements granted under the plan, net of estimated forfeitures. That cost is expected to be recognized over the remaining weighted average period of ~~2.1~~1.5 years.

~~There were 358,450~~

The following table summarizes activity, pricing and ~~342,000 options granted during~~other information for the ~~nine~~Company’s RSU’s for the six months ended ~~September~~June 30, ~~2017 and 2016, respectively. For the nine months ended September~~2020:


		Weighted-
		Average
	Number of	Grant Date
	Shares	Fair Value
RSU’s outstanding at beginning of the year	75,000	$	3.75
RSU’s granted	242,961		5.34
RSU’s issued	—		—
RSU’s forfeited/cancelled	(26,026)		4.32
RSU’s outstanding at end of the period	291,935	$	5.02

As of June 30, ~~2017 and 2016, the aggregate grant-date fair value of stock options granted~~2020, there was approximately ~~$2.2 million and $2.7 million, respectively.~~

$758 thousand of total unrecognized compensation cost related to the RSU compensation arrangements granted under the plan. That cost is expected to be recognized over the remaining weighted average period of 2.5 years.

3031

Table of Contents

The following table summarizes activity, pricing and other information for the Company’s DSU’s ~~also referred to as deferred stock units as the issuance of the stock is deferred until termination of service,~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2020:

Weighted-

Average

Number of

Grant Date

Shares

Fair Value
DSU’s outstanding at beginning of year

85,750

$
9.83
DSU’s granted

15,000

13.72
DSU’s exercised

—

—
DSU’s forfeited/cancelled

—

—
DSU’s outstanding at end of period

100,750

$
10.41


		Weighted-
		Average
	Number of	Grant Date
	Shares	Fair Value
DSU’s outstanding at the beginning of the year	54,500	$	6.61
DSU’s granted	15,000		5.34
DSU’s issued	—		—
DSU’s forfeited/cancelled	(15,000)		5.34
DSU’s outstanding at the end of the period	54,500	$	6.61

As of ~~September~~June 30, ~~2017,~~2020, there was approximately ~~$252~~$276 thousand of total unrecognized compensation cost related to the DSU compensation arrangements granted under the plan. That cost is expected to be recognized over athe remaining weighted average period of ~~2.7~~2.4 years.

The following table summarizes activity, pricing and other information for the Company’s RSA’s for the six months ended June 30, 2020:


		Weighted-
		Average
	Number of	Grant Date
	Shares	Fair Value
RSA’s outstanding at beginning of the year	35,069	$	3.57
RSA’s granted	—		—
RSA’s issued	—		—
RSA’s forfeited/cancelled	(35,069)		3.57
RSA’s outstanding at end of the period	—	$	—

As of June 30, 2020, there were no outstanding RSA’s as the shares forfeited prior to the minimum vesting requirement.

Note ~~12.~~13.—Subsequent Events

As previously reported on Form 8-K, on July 7, 2020, the Company received notification from the Freddie Mac that the Company’s eligibility to sell whole loans to Freddie Mac was suspended, without cause. As noted in Freddie Mac’s Seller/Servicer Guide, Freddie Mac may elect, in its sole discretion, to suspend a Seller from eligibility, without cause, thereby restricting the Seller from obtaining new purchase commitments during the suspension period.

Subsequent events have been evaluated through the date of this filing.

3132

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 direct and indirect wholly-owned subsidiaries, Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), Copperfield Capital Corporation and Impac Funding Corporation (IFC).

Forward-Looking Statements

This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,” “projected,” “should,” “could,” “seem to,” “anticipate,” “plan,” “intend,” “project,” “assume,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: ~~failure~~ongoing impact on the U.S. economy and financial markets due to ~~increase origination volume~~the outbreak of the novel coronavirus, and ~~ability~~any adverse impact or disruption to ~~successfully leverage our marketing platform to expand volumes of our other loan products;~~the Company’s operations; unemployment rates; successful development, marketing, sale and financing of new ~~mortgage~~and existing financial products, ~~including expansion of non-Qualified Mortgage originations and government loan programs;~~ability to successfully re-engage in lending activities; inability to successfully reduce prepayment on our mortgage ~~loans,~~loans; ability to successfully diversify our loan products; decrease in our mortgage servicing portfolio or its market value; ability to increase our market share and geographic footprint in the various residential mortgage businesses; ability to manage and sell MSRs as needed; ability to successfully sell loans to third-party investors; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing ~~capacity;~~capacity and satisfy financial covenants; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our ~~technology;~~technology including cyber risk and data security risk; ability to successfully create cost and product efficiencies through new technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing, through lending and repurchase facilities, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the period ended December 31, ~~2016,~~2019, and other subsequent reports we file under the Securities Exchange Act of 1934. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such ~~statements.~~statements except as required by law.

The Mortgage Industry and Discussion of Relevant Fiscal Periods

The mortgage industry is subject to current events that occur in the financial services industry including changes to regulations and compliance requirements that result in uncertainty surrounding the actions of states, municipalities and ~~new~~ government agencies, including the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA). These events can also include changes in economic indicators, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, environmental conditions, such as hurricanes and floods, and customer perception, as well as others. The factors that affect the industry change rapidly and can be unforeseeable making it difficult to predict and manage an operation in the financial services industry.

3233

Table of Contents

Current events can diminish the relevance of “quarter over quarter” and “year-to-date over year-to-date” comparisons of financial information. In such instances, we attempt to present financial information in Management’s Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to our financial information.

Selected Financial Results


	For the Three Months Ended						For the Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
	2017		2017		2016		2017		2016

											For the Three Months Ended						For the Six Months Ended
											June 30,		March 31,		June 30,		June 30,		June 30,
(in thousands, except per share data)											2020		2020		2019		2020		2019
Revenues:
Gain on sale of loans, net	$	42,476	$	36,806	$	113,158	$	116,602	$	245,849
Real estate services fees, net		1,355		1,504		2,678		4,492		6,773
Gain (loss) on sale of loans, net											$	1,451	$	(28,162)	$	29,472	$	(26,712)	$	41,686
Servicing fees, net		8,492		7,764		3,789		23,575		8,680		1,352		2,507		3,536		3,859		6,505
Loss on mortgage servicing rights, net		(10,513)		(6,669)		(15,857)		(18,159)		(41,249)		(8,443)		(18,310)		(9,887)		(26,753)		(15,510)
Real estate services fees, net												293		393		807		687		1,613
Other		266		228		225		541		453		1,289		63		187		1,352		187
Total revenues		42,076		39,633		103,993		127,051		220,506		(4,058)		(43,509)		24,115		(47,567)		34,481
Expenses:
Personnel expense		23,062		21,373		38,467		69,353		93,025		7,774		20,664		14,339		28,439		28,461
Business promotion		10,403		10,110		10,350		30,744		30,828		74		3,128		2,013		3,203		4,936
General, administrative and other		8,497		8,324		7,736		24,845		23,742		6,617		6,975		5,281		13,590		10,507
Accretion of contingent consideration		396		707		1,591		1,948		5,244
Change in fair value of contingent consideration		(4,798)		(6,793)		23,215		(11,052)		34,569
Total expenses		37,560		33,721		81,359		115,838		187,408		14,465		30,767		21,633		45,232		43,904
Operating income:		4,516		5,912		22,634		11,213		33,098
Other income (expense):
Operating (loss) income:												(18,523)		(74,276)		2,482		(92,799)		(9,423)
Other (expense) income:
Net interest income		1,546		1,098		1,304		3,090		2,036		781		2,928		2,543		3,709		4,339
Loss on extinguishment of debt		—		(1,265)		—		(1,265)		—
Change in fair value of long-term debt		104		(265)		(8,641)		(2,657)		(7,286)		(4,208)		9,036		388		4,828		654
Change in fair value of net trust assets		(1,745)		2,005		1,071		6,578		2,609		(864)		(2,383)		(1,459)		(3,247)		(4,142)
Total other income (expense)		(95)		1,573		(6,266)		5,746		(2,641)
Net earnings before income taxes		4,421		7,485		16,368		16,959		30,457
Total other (expense) income												(4,291)		9,581		1,472		5,290		851
(Loss) earnings before income taxes												(22,814)		(64,695)		3,954		(87,509)		(8,572)
Income tax expense		2,104		1,045		(130)		3,575		728		15		36		81		51		167
Net earnings	$	2,317	$	6,440	$	16,498	$	13,384	$	29,729

Net (loss ) earnings											$	(22,829)	$	(64,731)	$	3,873	$	(87,560)	$	(8,739)
Other comprehensive (loss) earnings:
Change in fair value of mortgage-backed securities												—		—		(7)		—		14
Change in fair value of instrument specific credit risk												2,186		(3,073)		267		(887)		363
Total comprehensive (loss) earnings											$	(20,643)	$	(67,804)	$	4,133	$	(88,447)	$	(8,362)

Diluted weighted average common shares		21,195		21,258		14,403		20,381		13,973		21,230		21,228		21,189		21,229		21,170
Diluted earnings per share	$	0.11	$	0.32	$	1.18	$	0.71	$	2.27
Diluted loss per share											$	(1.08)	$	(3.05)	$	0.18	$	(4.12)	$	(0.41)

Status of Operations

Summary ~~Highlights~~

The second quarter of 2020 was a quarter defined by our temporary suspension of lending activities due to the uncertainty caused by the global pandemic (pandemic) and various initiatives promulgated by the Federal government in response to the pandemic. As a result, during the second quarter of 2020, we undertook a number of efforts to substantially reduce leverage on our consolidated balance sheet through asset sales and debt repayments. Between April 1, 2020 and May 31, 2020, we sold approximately $469.0 million in mortgage loans, repaid approximately $490.0 million of associated warehouse borrowings, extended the maturity of the $25.0 million in Convertible Promissory Notes (originally due May 8, 2020) an additional six months to November 9, 2020, completed the sale of $4.1 billion in unpaid principal balance (UPB) of Freddie Mac mortgage servicing rights (MSRs) and repaid the associated $15.0 million outstanding on the MSR borrowing facility in its entirety. In addition, during the six months ended June 30, 2020, and through the date of this filing, we have satisfied all obligations under our warehouse lending and repurchase facilities and chose to right-size our borrowing capacity, by reducing maximum borrowing capacity during the second quarter from $1.7 billion to $600.0

Table of Contents

million and reducing warehouse counterparties from six to three over the same period. By June 30, 2020, we had substantially de-levered the balance sheet while increasing our unrestricted cash balance from $24.7 million at December 31, 2019, to approximately $43.0 million at June 30, 2020, while also having a balance of unencumbered whole loans with a UPB of approximately $30.0 million. We believe our temporary suspension of lending activities during the second quarter of 2020 was prudent and allowed us to successfully deleverage the consolidated balance sheet and reduce our risk profile, while prioritizing the preservation of liquidity and long-term value for our capital partners and stakeholders.

While we intend to maintain a defensive posture due to the significant risks still present in the marketplace, we announced on June 4, 2020, that we have re-engaged lending activities, initially expected to be GSE, Federal Housing Administration (FHA) and Veterans Affairs (VA) lending. We are currently evaluating the Non-Agency jumbo and non-qualified mortgage (NonQM) products and will continue to monitor these market segments as facts and circumstances evolve particularly relating to the reemergence of NonQM.

As previously reported on Form 8-K, on July 7, 2020, we received notification from the Federal Home Loan Mortgage Corporation (Freddie Mac) that our eligibility to sell whole loans to Freddie Mac was suspended, without cause. As noted in Freddie Mac’s Seller/Servicer Guide, Freddie Mac may elect, in its sole discretion, to suspend a Seller from eligibility, without cause, thereby restricting the Seller from obtaining new purchase commitments during the suspension period.

Key Metrics – Second quarter 2020

●

~~Mortgage lending volumes increased in the third quarter of 2017 to $2.1 billion from $1.8 billion in the second quarter of 2017, but decreased~~At June 30, 2020, unrestricted cash was $43.0 million as compared to ~~$4.2 billion in~~$24.7 million at December 31, 2019.

●

For the ~~third quarter of 2016.~~

~~Mortgage servicing portfolio increased to $15.7 billion at September 30, 2017 from $14.7 billion at~~three months ended June 30, ~~2017 and $9.5~~2020, total originations were $2.1 million as compared to $1.5 billion ~~at September 30, 2016.~~

~~Servicing fees, net increased to $8.5 million~~ for the three months ended ~~September 30, 2017 from $7.8~~March 31, 2020 and $821.4 million for the three months ended June 30, ~~2017~~2019.

●

Mortgage servicing portfolio decreased to $0.1 billion at June 30, 2020 as compared to $4.7 billion at March 31, 2020 and ~~$3.8~~$6.0 billion at June 30, 2019.

●

Mortgage servicing right asset decreased to $0.3 million at June 30, 2020 as compared to $24.3 million at March 31, 2020 and $50.4 million at June 30, 2019.

●

Net losses of $22.8 million for the three months ended ~~September~~June 30, ~~2016.~~

2020 as compared to net losses of $64.7 million for the three months ended March 31, 2020 and net earnings of $3.9 million for the three months ended June 30, 2019.

●

Gain on sale of loans, net was $1.5 million for the three months ended June 30, 2020 as compared to a loss on sale of loans of $28.2 million for the three months ended March 31, 2020 and gain on sale of loans of $29.5 million for the three months ended June 30, 2019.

~~NonQM mortgage origination volumes increased in~~●

Servicing fees, net decreased to $1.4 million for the ~~third quarter of 2017~~three months ended June 30, 2020 from $2.5 million for the three months ended March 31, 2020 and from $3.5 million for the three months ended June 30, 2019.

●

Operating expenses (personnel, business promotion and general, administrative and other) for the three months ended March 31, 2020 decreased to ~~$239.4~~$14.5 million from ~~$232.5~~$30.8 million infor the ~~second quarter of 2017~~three months ended March 31, 2020 and ~~$68.9~~$21.6 million infor the ~~third quarter of 2016.~~

three months ended June 30, 2019.

For the ~~third~~second quarter of ~~2017,~~2020, we reported net ~~earnings~~loss of ~~$2.3~~$22.8 million, or ~~$0.11~~$1.08 per diluted common share, as compared to net earnings of ~~$16.5~~$3.9 million, or ~~$1.18~~$0.18 per diluted common share, for the ~~third~~second quarter of ~~2016.~~2019. For the ~~third~~second quarter of ~~2017, o~~2020, core ~~perating income, excluding the changes~~loss before tax (as defined below in ~~contingent consideration (adjusted operating (loss) income (loss)~~Non-GAAP Financial Measures) was ~~$114 thousand,~~$10.4 million, or ~~$0.01~~$0.49 per diluted common share, as compared to ~~$47.4~~core earnings before tax of $11.9 million, or ~~$3.29~~$0.56 per diluted common share, for the ~~third~~second quarter of ~~2016.~~ 2019.

~~The decrease~~For the six months ended June 30, 2020, we reported net loss of $87.6 million, or $4.12 per diluted common share, as compared to net loss of $8.7 million, or $0.41 per diluted common share, for the six months ended June 30, 2019. For the six months ended June 30, 2020, core loss before tax (as defined below in ~~net~~Non-GAAP Financial Measures) was $66.4 million, or $3.13 per diluted common share, as compared to core earnings ~~and adjusted operating income (loss)~~before tax of $6.1 million, or $0.29 per diluted common share, for the six months ended June 30, 2019.

3335

Table of Contents

~~was primarily due~~

The second quarter of 2020 results were significantly impacted by the effects of the pandemic, which ultimately led to the aforementioned temporary suspension of our lending activities during the quarter. While we undertook a ~~decline~~number of efforts to substantially reduce leverage and improve liquidity during the quarter, we did not re-engage lending activities until June 2020, which resulted in ~~gain~~a significant loss during the second quarter. For the quarter ended June 30, 2020, the significant components of our net loss were loss on sale of ~~loans revenues~~MSRs as a result of fees associated with the sale, change in fair value of MSRs due to prepayments, an increase in the ~~third~~fair value of our long-term debt due to an increase in forward LIBOR and operating expenses. During the second quarter of ~~2017~~2020, operating expenses (personnel, business promotion and general, administrative and other) decreased to $14.5 million from $30.8 million and $21.6 million for the quarters ended March 31, 2020 and June 30, 2019, respectively, as ~~compared to third quarter~~a result of ~~2016. The decline~~our temporary suspension of lending activities.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in ~~gain on sale of loans revenues was due to a decrease in origination volume magnified also by the decline in gain on sale margins. Origination volume declined 51%~~accordance with generally accepted accounting principles in the ~~third quarter of 2017~~United States (GAAP), we use the following non-GAAP financial measures: core (loss) earnings before tax and core (loss) earnings per share before tax. Core (loss) earnings and core (loss) earnings per share are financial measurements calculated by adjusting GAAP earnings before tax to exclude certain non-cash items, such as compared to the same period in the prior year (discussed further below). Gain on sale margins decreased by 64 basis point (bps) to 204 bps in the third quarter of 2017, as compared to 268 bps in the third quarter of 2016 reflecting the margin compression resulting from the historically low interest rate environment in the third quarter of 2016, in which the Company was able to generate significantly larger volume with wide gain on sale margins.

~~Net earnings include~~ fair value adjustments ~~for changes in the contingent consideration, long-term debt~~ and ~~net trust assets. The contingent consideration is related to the CashCall Mortgage (CCM) acquisition transaction, while the other fair value adjustments are related to our~~mark-to-market of mortgage servicing rights (MSRs), and legacy ~~portfolio. These~~non-recurring expenses. The fair value adjustments are non-cash items ~~and are not related to current operating results. Although we are required to record change in fair value and accretion of the contingent consideration,~~which management believes ~~operating income excluding contingent consideration changes and the related accretion is more useful to discuss~~should be excluded when discussing our ongoing and future operations.

~~Adjusted operating income~~We use core (loss) ~~is not considered an accounting principle generally accepted in the United States~~earnings as we believe that it more accurately reflects our current business operations of ~~America (GAAP) financial measurement; see the discussion~~mortgage originations and ~~reconciliation on non-GAAP financial measures below.~~

~~We calculate adjusted operating income (loss) and adjusted operating income per share as performance measures, which are considered non-GAAP financial measures, to~~ further ~~aid~~aids our investors in understanding and analyzing our core operating results and comparing them among periods. ~~Adjusted operating income (loss) and adjusted operating income (loss) per share exclude certain items that we do not consider part of our core operating results.~~ These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for net (loss) earnings before income taxes, net (loss) earnings or diluted (loss) earnings per share (EPS) prepared in accordance with GAAP. The ~~table~~tables below ~~shows operating income excluding these items:~~

For the Three Months Ended

For the Nine Months Ended


September 30,

June 30,

September 30,

September 30,

September 30,

2017

2017

2016

2017

2016
Net earnings:

$
2,317

$
6,440

$
16,498

$
13,384

$
29,729
Total other (income) expense

95

(1,573)

6,266

(5,746)

2,641
Income tax expense

2,104

1,045

(130)

3,575

728
Operating income:

$
4,516

$
5,912

$
22,634

$
11,213

$
33,098
Accretion of contingent consideration

396

707

1,591

1,948

5,244
Change in fair value of contingent consideration

(4,798)

(6,793)

23,215

(11,052)

34,569
Adjusted operating income (loss)

$
114

$
(174)

$
47,440

$
2,109

$
72,911

Diluted weighted average common shares

21,195

21,258

14,403

20,381

13,973
Diluted adjusted operating income (loss) per share

$
0.01

$
(0.01)

$
3.29

$
0.10

$
5.22

Diluted earnings per share

$
0.11

$
0.32

$
1.18

$
0.71

$
2.27
Adjustments:

Total other (expense) income (1)

—

(0.09)

0.40

(0.35)

0.05
Income tax expense

0.10

0.05

(0.01)

0.18

0.05
Accretion of contingent consideration

0.02

0.03

0.11

0.10

0.38
Change in fair value of contingent consideration

(0.22)

(0.32)

1.61

(0.54)

2.47
Diluted adjusted operating income (loss) per share

$
0.01

$
(0.01)

$
3.29

$
0.10

$
5.22

~~(1)~~

Except for when anti-dilutive, convertible debt interest expense, net of tax, is included for calculating diluted earnings per share (EPS) and is excluded for purposes of reconciling GAAP diluted EPS to non-GAAP diluted adjusted operating income (loss) per share.

provide a reconciliation of net (loss) earnings before tax and diluted (loss) earnings per share to non-GAAP core (loss) earnings before tax and per share non-GAAP core (loss) earnings before tax:

3436

Table of Contents


	For the Three Months Ended						For the Six Months Ended
	June 30,		March 31,		June 30,		June 30,		June 30,
(in thousands, except per share data)	2020		2020		2019		2020		2019
Net (loss) earnings before tax:	$	(22,814)	$	(64,695)	$	3,954	$	(87,509)	$	(8,572)

Change in fair value of mortgage servicing rights		7,200		15,294		6,920		22,494		10,590
Change in fair value of long-term debt		4,208		(9,036)		(388)		(4,828)		(654)
Change in fair value of net trust assets, including trust REO gains		864		2,383		1,459		3,247		4,142
Legal settlements and professional fees, for legacy matters		—		—		—		—		50
Legacy corporate-owned life insurance		176		—		—		176		—
Severance		—		—		—		—		539
Core (loss) earnings before tax	$	(10,366)	$	(56,054)	$	11,945	$	(66,420)	$	6,095

Diluted weighted average common shares		21,230		21,228		21,189		21,229		21,170
Diluted core (loss) earnings per common share before tax	$	(0.49)	$	(2.64)	$	0.56	$	(3.13)	$	0.29

Diluted loss per common share	$	(1.08)	$	(3.05)	$	0.18	$	(4.12)	$	(0.41)
Adjustments:
Income tax expense (benefit)		—		—		—		—		0.01
Change in fair value of mortgage servicing rights		0.34		0.72		0.33		1.06		0.50
Change in fair value of long-term debt		0.20		(0.42)		(0.02)		(0.23)		(0.03)
Change in fair value of net trust assets, including trust REO gains		0.04		0.11		0.07		0.15		0.19
Legal settlements and professional fees, for legacy matters		—		—		—		—		—
Legacy corporate-owned life insurance		0.01		—		—		0.01		—
Severance		—		—		—		—		0.03
Diluted core (loss) earnings per common share before tax	$	(0.49)	$	(2.64)	$	0.56	$	(3.13)	$	0.29

Originations by Channel:


	For the Three Months Ended
	September 30,		June 30,		%		September 30,		%

											For the Three Months Ended
											June 30,		March 31,		%		June 30,		%
(in millions)	2017		2017		Change		2016		Change		2020		2020		Change		2019		Change
Retail	$	1,426.2	$	1,186.8	20	%	$	3,273.7	(56)	%	$	1.9	$	1,310.0	(100)	%	$	566.5	(100)	%
Wholesale												—		152.1	(100)			202.0	(100)
Correspondent		376.4		305.8	23			583.2	(35)			0.2		54.2	(100)			52.9	(100)
Wholesale		281.7		301.0	(6)			360.1	(22)
Total originations	$	2,084.3	$	1,793.6	16		$	4,217.0	(51)		$	2.1	$	1,516.3	(100)	%	$	821.4	(100)	%

During the ~~third~~second quarter of ~~2017,~~2020, total originations ~~increased 16% to~~were $2.1 ~~billion~~million as compared to ~~$1.8~~$1.5 billion in the first quarter of 2020 and $821.4 million in the second quarter of ~~2017 and decreased 51% as compared to $4.2 billion~~2019. The decrease in ~~the third quarter of 2016. This increase from the second quarter of 2017~~originations was the result of ~~a slight decline in mortgage interest rates~~ ~~during the third quarter~~our temporary suspension of ~~2017.~~ ~~The decrease in originations from the third quarter of 2016 was a result of higher interest rates during the third quarter of 2017 as compared~~lending activities due to the ~~historically low interest rate environment~~uncertainty caused by the ~~previous year, causing a sharp drop in refinance volume.~~pandemic.

Our loan products primarily include conventional loans eligible for sale to Fannie Mae and Freddie Mac, NonQM mortgages and loans eligible for government insurance (government loans) by the Federal Housing Administration (FHA), Veterans Affairs (VA), and United States Department of Agriculture (USDA) ~~and also NonQM mortgages.~~.

Table of Contents

Originations by Loan Type:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

									For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in millions)	2017		2016		2017		2016		2020		2019		% Change		2020		2019		% Change
Conventional	$	1,345.2	$	3,707.1	$	3,391.8	$	8,322.9		1.9		456.4	(100)		$	1,223.1	$	662.1	85	%
NonQM									$	0.2	$	315.1	(100)	%		261.8		658.4	(60)
Government (1)		499.7		439.2		1,409.9		1,281.7		—		49.9	(100)			33.5		82.4	(59)
NonQM		239.4		68.9		656.2		203.3
Other		—		1.8		—		5.7
Total originations	$	2,084.3	$	4,217.0	$	5,457.9	$	9,813.6	$	2.1	$	821.4	(100)	%	$	1,518.4	$	1,402.9	8	%

(1)

~~(1)~~

Includes all government-insured loans including FHA, VA and USDA.

We entered 2020 building on the strong momentum gained over the past year repositioning the Company and focusing on our core NonQM lending business. During the ~~third~~first quarter of ~~2017,~~2020, prior to the ~~origination volume of~~disruption caused by the pandemic, we originated $261.6 million in NonQM loans ~~increased~~and were on pace to ~~$239.4 million, as compared~~exceed our fourth quarter 2019 NonQM originations. As financial markets became dislocated in March 2020, spreads widened substantially on credit assets due to ~~$232.5 million~~potential pandemic related payment delinquencies and forbearances, causing a severe decline in the ~~second quarter of 2017~~values assigned by investors and ~~$68.9 million~~counterparties for NonQM assets. As a result, we ceased originating NonQM loans in the ~~third quarter~~beginning of ~~2016. In~~April 2020 as the ~~third quarter of 2017, NonQM origination volumes by channel were $61.8 million from~~decline in value increased the ~~retail channel~~cost and ~~$177.6 million from~~liquidity to finance the ~~wholesale and correspondent channels. In~~product, reduced the ~~second quarter of 2017, retail NonQM originations were $82.9 million while wholesale and correspondent originations were $149.6 million. The~~ability to finance additional NonQM loans ~~originated in 2016 and through the third quarter of 2017 have all been sold on a servicing released basis.~~with lenders as well as diminished stable capital markets distribution exits.

Despite our current pause originating NonQM loans, we still believe there is an underserved mortgage market for borrowers with good credit who may not meet the qualified mortgage (QM) guidelines set out by the Consumer Financial Protection ~~Bureau (CFPB). During 2014, we began originating~~Bureau. We believe the quality, consistency and performance of our loans has been demonstrated through the issuance of four securitizations since 2018. All four securitizations were 100% backed by Impac NonQM ~~loans. We have established strict lending guidelines, including determining~~collateral with the ~~prospective borrowers’ ability to repay the mortgage, which we believe will keep delinquencies and foreclosures at acceptable levels.~~senior tranches receiving AAA ratings. We continue to ~~refine our guidelines to expand our reach to~~monitor and evaluate the ~~underserved~~reemergence of the NonQM market ~~of credit worthy borrowers who can fully document and substantiate an ability to repay mortgage loans, but are unable to obtain financing through traditional programs (QM loans),~~including capital markets distribution exits for ~~example self-employed borrowers. Through~~ the ~~third~~product.

Originations by Purpose:


	For the Three Months Ended June 30,								For the Six Months Ended June 30,
(in millions)	2020		%		2019		%		2020		%		2019		%
Refinance	$	1.6	76	%	$	625.5	76	%	$	1,403.0	92	%	$	1,035.7	74	%
Purchase		0.5	24			195.9	24			115.4	8			367.2	26
Total originations	$	2.1	100	%	$	821.4	100	%	$	1,518.4	100	%	$	1,402.9	100	%

During the first quarter of ~~2017, our NonQM origination volume was $656.2 million with an average Fair Isaac Company credit score (FICO) of 726 and a weighted average loan to value ratio (LTV) of 64%.~~

~~Table of Contents~~

In 2016, we relaunched our NonQM loan program as “The Intelligent NonQM Mortgage,” to better communicate our NonQM loan value proposition to consumers, brokers, sellers and investors. In conjunction with this product, we have established investor relationships that provide us with an exit strategy for these nonconforming loans.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,
(in millions)

2017

%

2016

%


2017

%

2016

%

Refinance

$
1,589.8

76
%
$
3,756.8

89
%

$
4,183.9

77
%
$
8,554.0

87
%
Purchase

494.5

24

460.2

11

1,274.0

23

1,259.6

13

Total originations

$
2,084.3

100

$
4,217.0

100

$
5,457.9

100

$
9,813.6

100

~~During the third quarter of 2017,~~2020, refinance volume decreased ~~approximately 58%~~ to ~~$2.2 billion~~$1.6 million as compared to ~~$4.2~~$1.4 billion ~~in the third quarter of 2016~~ ~~as a result of rising interest rates~~ ~~at the end of 2016 and continuing~~ in the first quarter of ~~2017. Despite the 51% decrease in origination volumes during the third quarter of 2017, purchase money transactions increased 7% to $494.5 million as compared to $460.2~~2020 and $625.5 million in the ~~third~~second quarter of ~~2016.~~ 2019. The decrease in originations was the result of our temporary suspension of lending activities due to the uncertainty caused by the pandemic.

Mortgage ~~servicing portfolio~~Servicing Portfolio:



	September 30,		June 30,		%		September 30,		%
(in millions)	2017		2017		Change		2016		Change

											June 30,		December 31,		%
(Unpaid principal balance (UPB), in millions)											2020		2019		Change
Mortgage servicing portfolio	$	15,703.1	$	14,667.9	7	%	$	9,450.7	66	%	$	146.2	$	4,931.8	(97.0)	%

The mortgage servicing portfolio ~~increased~~decreased to ~~$15.7 billion at September 30, 2017 as compared to $14.7~~$0.1 billion at June 30, ~~2017 and $9.5~~2020 as compared to $4.9 billion at ~~September~~December 31, 2019 and $6.0 billion at June 30, ~~2016.~~2019. The ~~increase~~decrease in the mortgage servicing portfolio was primarily due to ~~a shift~~the sale of $4.1 billion in ~~our strategy in 2016~~UPB of Freddie Mac MSRs. Throughout 2019 and into the second quarter of 2020, we continued to selectively retain ~~our~~ mortgage servicing as well as initiating a retention program to recapture portfolio runoff during the low interest rate environment. During 2017, we have continued with our strategy of growing the mortgage servicing portfolio. During the nine months ended September 30, 2017, the mortgage servicing portfolio increased due to servicing retainedincreasing whole loan sales ~~of $4.7 billion in~~ ~~unpaid principal balance (UPB) as well as~~on a ~~purchase of approximately $570.0 million in UPB of mortgage~~ servicing ~~rights (MSR). As a result,~~ ~~the UPB of our mortgage servicing portfolio increased 66%~~released basis to ~~$15.7 billion as of September 30, 2017 from September 30, 2016.~~ investors. The servicing portfolio generated net servicing fees of ~~$8.5~~$1.4 million in the ~~third~~second quarter of ~~2017,~~2020, a ~~124% increase~~62% decrease over the net servicing fees of ~~$3.8~~$3.5 million ~~in the third quarter of 2016.~~ Delinquencies within the servicing portfolio have increased slightly but remain low at 0.49% for 60+ days delinquent as of September 30, 2017 as compared to 0.25% as of December 31, 2016. With the acquisition of MSRs in the second quarter of ~~2017, we added~~ ~~Specialized Loan Servicing LLC~~2019, as a ~~subservicer~~result of the aforementioned servicing sale as well as a portfolio runoff caused by the decrease in ~~addition to our current subservicer LoanCare, LLC.~~mortgage interest rates which began in 2019. The sale of MSRs during the second quarter of 2020, will further reduce net servicing fees going forward.

Table of Contents

The following table includes information about our mortgage servicing portfolio:


	At September 30,		% 60+ days		At December 31,		% 60+ days

									At June 30,		% 60+ days		At December 31,		% 60+ days
(in millions)	2017		delinquent (1)		2016		delinquent (1)		2020		delinquent (1)		2019		delinquent (1)
Fannie Mae	$	7,501.2	0.21	%	$	6,204.2	0.12	%
Freddie Mac		5,680.3	0.15			4,611.8	0.08		$	—	0.00	%	$	4,826.2	0.47	%
Ginnie Mae		2,519.6	1.88			1,359.5	1.25			146.2	13.22			105.4	2.41
Other		2.0	16.67			176.0	0.00
Fannie Mae										—	0.00			0.2	0.00
Total servicing portfolio	$	15,703.1	0.49		$	12,351.5	0.25		$	146.2	13.22	%	$	4,931.8	0.51	%

(1)

~~(1)~~

Based on loan count.

During the nine months ended September 30, 2017, our warehouse borrowing capacity increased from $925.0 million to $960.0 million. In addition to funding our mortgage loan originations, we also used a portion of our warehouse borrowing capacity to provide re‑warehouse facilities to our customers, correspondent sellers and other small mortgage banking companies represented as finance receivables on the consolidated balance sheets. The outstanding balance of finance receivables decreased to $60.9 million at September 30, 2017 as compared to $62.9 million at

~~Table of Contents~~

~~December 31, 2016. The warehouse lending division funding volumes increased to $279.7 million during the third quarter of 2017 as compared $251.0 million for~~For the second quarter of 2017 but decreased compared to $286.9 million for the third quarter of 2016. As of September 30, 2017, the warehouse lending operations had extended warehouse line commitments to non-affiliated customers totaling $159.0 million as compared to $175.5 million at December 31, 2016. By leveraging our re‑warehousing division, our strategy is to increase the capture rate of our approved correspondent sellers business as well as expand our active customer base to include new customers seeking warehouse lines.

~~For the third quarter of 2017,~~2020, real estate services fees were ~~$1.4 million~~$293 thousand as compared to ~~$1.5 million~~$393 thousand in the first quarter of 2020 and $807 thousand in the second quarter of ~~2017 and $2.7 million in the third quarter of 2016. Since most~~2019. Most of our real estate services business is generated from our long-term mortgage portfolio, and as the ~~long‑term~~long-term mortgage portfolio continues to decline, we expect real estate services and the related revenues to decline.

In our long-term mortgage portfolio, the residual interests generated cash flows of ~~$2.7 million in the third quarter of 2017 as compared to $3.1 million~~$489 thousand in the second quarter of ~~2017 and $1.6 million~~2020 as compared to $354 thousand in the ~~third~~first quarter of ~~2016.~~2020 and $274 thousand in the second quarter of 2019. The estimated fair value of the net residual interests ~~decreased $2.5 million~~increased $684 thousand in the ~~third~~second quarter of ~~2017~~2020 to ~~$17.4~~$15.8 million at ~~September~~June 30, ~~2017,~~2020, due to an increase in fair value of certain multifamily trusts as a result of ~~residual cash flows received~~excess spread due to the current interest rate environment partially offset by an ~~improvement~~increase in ~~performance from~~loss assumptions for certain trusts.

For additional information regarding the long-term mortgage portfolio, refer to Financial Condition and Results of Operations below.

Liquidity and Capital Resources

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we funded our operations primarily from mortgage lending revenues and, to a lesser extent, real estate services fees and cash flows from our residual interests in securitizations. Mortgage lending revenues include ~~gains~~gain (loss) on sale of loans, net, servicing fees, net, proceeds from the sale of mortgage servicing rights and other mortgage related income, and real estate services fees including portfolio loss mitigation fees primarily generated from our long-term mortgage portfolio. During the three and nine months ended September 30, 2017, we raised capital by issuing common stock as well as obtained MSR financing facilities, as further described below. Additionally, weincome. We funded mortgage loan originations using warehouse facilities, which are repaid once the loan is sold. We may continue to manage our capital through the financing or sale of mortgage servicing rights. We may also seek to raise capital by issuing debt or ~~equity, including offering shares through~~equity.

In mid-February we began instituting measures to increase liquidity as the ~~“At-the-Market” offering (ATM) program~~risk of the rapidly spreading pandemic continued to outpace expectations. We satisfied all margin calls due under our To Be Announced (TBA) hedging agreements, and warehouse lending and repurchase facilities. In March 2020, we ~~iniated~~made the determination that our interest rate hedges were no longer effective in ~~2015.~~hedging asset market values as a result of the market dislocation, which caused an inability to monetize the value of our locked and funded loan portfolio. As a result, on March 18, 2020, we closed out the entirety of our TBA hedge position. In late March 2020, we instituted a temporary suspension of all lending activities believing it prudent to de-risk, protect liquidity and prepare for the potential of a prolonged global recession. During March 2020, we began to sell assets, repay debt, and generate additional cash liquidity. As of March 31, 2020, our unrestricted cash was $80.2 million. Between April 1, 2020 and May 31, 2020, we sold approximately $469.0 million in mortgage loans, repaid approximately $490.0 million of associated warehouse borrowings, completed the sale of $4.1 billion in UPB of Freddie Mac MSRs and repaid the associated $15.0 million outstanding on the MSR borrowing facility in its entirety. We have right sized our warehouse borrowing capacity by electing to reduce the maximum borrowing capacity from $1.7 billion to $600.0 million and electing to reduce the warehouse counterparties from six to three.

~~On August 17, 2017,~~In February 2018, IMC (Borrower), ~~issued a~~amended the Line of Credit Promissory Note ~~with a lender providing for a~~(FHLMC and GNMA Financing, or MSR financing) originally entered into in August 2017, increasing the maximum borrowing capacity of the revolving line of credit to $50.0 million and extending the term to January 31, 2019. In May 2018, the agreement was amended increasing the maximum borrowing capacity of ~~$30.0~~the revolving line of credit to $60.0 million, ~~(FHLMC Financing). The Borrower is able to borrow~~increasing the borrowing capacity up to ~~55%~~60% of the fair market value of ~~FHLMC pledged mortgage servicing rights. The Line of Credit has a term until May 31, 2018 and will automatically renew for subsequent one year periods unless~~ the lender provides the Borrower 150 days’ notice of its intention not to renew. Interest payments are payable monthly and accrue interest at the rate per annum equal to LIBOR plus 4.0% and the balance of the obligation may be prepaid at any time. The obligations under the FHLMC Financing are secured by FHLMC pledged mortgage servicing rights and reducing the interest rate per annum to one-month LIBOR plus 3.0%. As part of the May 2018 amendment, the obligations under the Line of Credit are secured by FHLMC and GNMA pledged mortgage servicing rights (subject to an acknowledge agreement) and is guaranteed by Integrated Real Estate Services, Corp. ~~is a guarantor.~~ ~~At September 30, 2017, $5.0 million was outstanding under~~In April 2019, the ~~FHLMC Financing.~~

On May 5, 2017, we entered into an exchange agreement pursuant to which we agreed to issue 412,264 shares of our common stock in exchange for trust preferred securities with an aggregate liquidation amount of $8.5 million issued by Impac Capital Trust #4. ~~Accrued and unpaid interest on the trust preferred securities was paid in cash in the aggregate amount of approximately $14 thousand.~~ ~~The exchange was based on the carrying value~~maturity of the ~~trust preferred obligation which~~line was ~~$5.6 million at~~extended until January 31, 2020. In January 2020, the maturity of the line was extended to March 31, 2017 and an agreed upon stock price of $13.68 that determined a fixed number of shares to be issued in the exchange resulting in a discount to par of 34%. However, because the market value of the common stock was $17.06 on the issuance date (measurement date),2020. At March 31, 2020, we recorded a $1.3 million loss on extinguishment of debt during the three and nine months ended September 30, 2017. The appreciation in stock price from the agreement date to the issuance date of the common stock resulted in a loss on extinguishment of debt. The annual interest savings will amount to approximately $400 thousand.

On April 18, 2017, we received $56.0 million from the issuance of common stock in a registered direct offering (Offering) at a price of $12.66 per share. In the Offering, we issued an aggregate of 4,423,381 shares of common stock. borrowed

3739

Table of Contents

~~Net~~$15.0 million under the FHLMC and GNMA Financing and had no additional available capacity for borrowing. In April 2020, the maturity of the line was extended to May 31, 2020. In May 2020, the line was repaid with the proceeds from the ~~Offering~~MSR sale.

In April 2020, Ginnie Mae announced they revised and expanded their issuer assistance program to provide financing to fund servicer advances through the Pass-Through Assistance Program (PTAP). The PTAP funds advanced by Ginnie Mae bear interest at a fixed rate that will apply to a given months pass-through assistance and will be posted on Ginnie Mae’s website each month. The maturity date is the earlier of the seven months from the month the request and repayment agreement was approved, or July 30, 2021. At June 30, 2020, we had $448 thousand in approved PTAP funds outstanding at an interest rate of 5.7%. In July 2020, the outstanding PTAP funds were repaid.

In May 2015, we issued $25.0 million Convertible Promissory Notes (Convertible Notes). The Convertible Notes originally matured on or before May 9, 2020 and accrued interest at a rate of 7.5% per annum, paid quarterly. On April 15, 2020, we amended and restated the Convertible Notes to extend the maturity date by six months (until November 9, 2020) and to reduce the interest rate on such notes to 7.0% per annum (Amended Notes). In connection with the issuance of the Amended Notes, we issued to the holders of the Amended Notes, warrants to purchase up to an aggregate of 212,649 shares of our common stock at a cash exercise price of $2.97 per share. The warrants are exercisable commencing on October 16, 2020 and expire on April 15, 2025. We are currently evaluating various options as to the appropriate settlement or extension of the Convertible Notes.

In May 2020, we completed the sale of $4.1 billion in UPB of Freddie Mac MSRs for approximately ~~$55.5~~$20.1 million, ~~after deducting~~receiving $15.0 million in proceeds upon sale, with the ~~financial advisory fee~~remaining due upon transfer of the servicing and ~~estimated aggregate offering expenses. We intend to use~~transfer of all trailing documents. The Company used the ~~net~~$15.0 million in proceeds from the Offering for general corporate purposes, including general administrative expenses and working capital and capital expenditures, development costs, strategic investments or possible acquisitions, or repayment of debt.

In February 2017, we entered into a Loan and Security Agreement (Agreement) with a lender providing for a revolving loan commitment of up to $40.0 million for a period of two years (FNMA Financing) to finance MSRs. We are able to borrow up to 55% of the fair market value of FNMA pledged servicing rights. Upon the two year anniversary of the Agreement, any amounts outstanding will automatically be converted into a term loan due and payable in full on the one year anniversary of the conversion date. Interest payments are payable monthly and accrue interest at the rate per annum equal to one-month LIBOR plus 4.0%. The balance of the obligation may be prepaid at any time. With the initial draw of $35.1 million, a portion of the proceeds were usedMSR sale to pay off the ~~Term Financing (approximately $30.1 million) originally entered into in June 2015. At September 30, 2017, the outstanding balance of the FNMA Financing was $20.1 million.~~ MSR financing.

During the nine months ended September 30, 2017, we paid approximately $16.2 million in contingent consideration payments related to the CCM acquisition for the fourth quarter of 2016, the first and second quarters of 2017 earn-out period. Additionally, the contingent consideration payment for the third quarter of 2017 is approximately $4.7 million and is due in November 2017. These contingent consideration payments are based on the performance of the CCM division and over time the earn-out percentage declines. The fourth quarter 2016 earn-out percentage was 55% of the CCM division earnings, as defined. Beginning in 2017, the earn-out percentage decreased to 45% and terminates at the end of 2017.

Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, as well as the pandemic and the broader financial markets and the general economy. Concerns over economic recession, geopolitical issues, unemployment, the availability and cost of financing, the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing or raise capital on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective ~~financing.~~financing and profitable and stable capital market distribution exits.

We originate loans eligible for sale to Fannie Mae, Freddie Mac, (together, the GSEs), government insured or guaranteed loans, such as FHA, VA and USDA loans, and loans eligible for Ginnie Mae securities issuance (collectively, the Agencies), in addition to other investors and counterparties (collectively, the Counterparties). It is important for us to sell or securitize the loans we originate and, when doing so, maintain the option to also sell the related MSRs associated with these loans. Prepayment speeds on loans generated through our retail direct channel have been a concern for some investors dating back to 2016 which has resulted and could further result in adverse pricing or delays in our ability to sell or securitize loans and related MSRs on a timely and profitable basis. During the fourth quarter of 2017, Fannie Mae sufficiently limited the manner and volume for our deliveries of eligible loans such that we elected to cease deliveries to them and we expanded our whole loan investor base for these loans. In 2019, with the creation of the uniform mortgage-backed securities (UMBS) market, which was intended to improve liquidity and align prepayment speeds across Fannie Mae and Freddie Mac securities, Freddie Mac raised concerns about the high prepayment speeds of our loans generated through our retail direct channel. During 2019 and through the first half of 2020, we further expanded our investor base and completed servicing released loan sales to non-GSE whole loan investors and expect to continue to utilize these alternative exit strategies for Fannie Mae and Freddie Mac eligible loans. In July 2020, we received notification from Freddie Mac that our eligibility to sell whole loans to Freddie Mac was suspended, without cause. While we believe that the overall volume delivered under purchase commitments to the GSE’s was immaterial for 2019 and the first half of 2020, we are committed to operating actively and in good standing with our broad range of capital markets counterparties. We continue to take steps to manage our prepayment speeds to be more consistent with our industry peers and to reestablish the full confidence and delivery mechanisms to our investor base. We seek to satisfy the requirements as outlined by Freddie Mac to achieve reinstatement, while we continue to satisfy our obligations on a timely basis to our other counterparties, as we have done without exception. Despite being in a suspended status with Freddie Mac, we remain in good standing as an approved originator and/or seller/servicer with our GSE’s, Agencies and Counterparties for agency, non-agency, and government insured or guaranteed loan programs.

Table of Contents

We believe that current cash balances, cash flows from our mortgage lending operations, the sale of mortgage servicing rights, real estate services fees generated from our long-term mortgage portfolio, availability on our warehouse lines of credit and residual interest cash flows from our long-term mortgage portfolio are adequate for our current operating ~~needs.~~needs based on the current operating environment. We believe the mortgage and real estate services market is volatile, highly competitive and subject to increased regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions and other finance companies which operate in our market area as well as throughout the United States. We compete for loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of services we provide to borrowers, brokers and sellers. Additionally, performance of the long-term mortgage portfolio is subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio.

While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-term obligations is dependent upon many factors, particularly our ability to successfully operate our mortgage lending ~~segment,~~and real estate services segment, manage and ~~realizing~~monetize our MSRs, and realize cash flows from the long-term mortgage portfolio. Our future financial performance and profitability are dependent in large part upon the ability to expand our mortgage lending platform successfully.

Critical Accounting Policies

We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those

~~Table of Contents~~

valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include those issues included in Management’s Discussion and Analysis of Results of Operations in IMH’s report on Form 10-K for the year ended December 31, ~~2016. Such policies have not changed during 2017.~~2019.

Table of Contents

Financial Condition and Results of Operations

Financial Condition

As of ~~September~~June 30, ~~2017~~2020 compared to December 31, ~~2016~~2019

The following table shows the condensed consolidated balance sheets for the following periods:


	September 30,		December 31,		Increase		%
	2017		2016		(Decrease)		Change

(in thousands, except per share data)									June 30,		December 31,		$		%
									2020		2019		Change		Change
ASSETS
Cash	$	34,815	$	40,096	$	(5,281)	(13)	%	$	43,002	$	24,666	$	18,336	74	%
Restricted cash		6,605		5,971		634	11			5,326		12,466		(7,140)	(57)
Mortgage loans held-for-sale		572,268		388,422		183,846	47			29,419		782,143		(752,724)	(96)
Finance receivables		60,912		62,937		(2,025)	(3)
Mortgage servicing rights		158,950		131,537		27,413	21			279		41,470		(41,191)	(99)
Securitized mortgage trust assets		3,769,231		4,033,290		(264,059)	(7)			2,229,662		2,634,746		(405,084)	(15)
Goodwill		104,938		104,938		—	—
Intangibles, net		22,631		25,778		(3,147)	(12)
Deferred tax asset, net		24,420		24,420		—	—
Other assets		60,607		46,345		14,262	31			56,936		50,788		6,148	12
Total assets	$	4,815,377	$	4,863,734	$	(48,357)	(1)	%	$	2,364,624	$	3,546,279	$	(1,181,655)	(33)	%
LIABILITIES & EQUITY
Warehouse borrowings	$	591,583	$	420,573	$	171,010	41	%	$	1,571	$	701,563	$	(699,992)	(100)	%
MSR financings		25,133		—		25,133	n/a			448		—		448	n/a
Convertible notes		24,972		24,965		7	0			24,839		24,996		(157)	(1)
Contingent consideration		5,816		31,072		(25,256)	(81)
Long-term debt (Par value; $62,000 and $70,500)		44,561		47,207		(2,646)	(6)
Long-term debt (Par value; $62,000)										41,811		45,434		(3,623)	(8)
Securitized mortgage trust liabilities		3,751,831		4,017,603		(265,772)	(7)			2,213,863		2,619,210		(405,347)	(15)
Repurchase reserve		4,980		5,408		(428)	(8)			10,042		8,969		1,073	12
Term financing, net		—		29,910		(29,910)	(100)
Other liabilities		57,048		55,956		1,092	2			57,029		41,870		15,159	36
Total liabilities		4,505,924		4,632,694		(126,770)	(3)			2,349,603		3,442,042		(1,092,439)	(32)
Total equity		309,453		231,040		78,413	34			15,021		104,237		(89,216)	(86)
Total liabilities and stockholders’ equity	$	4,815,377	$	4,863,734	$	(48,357)	(1)	%	$	2,364,624	$	3,546,279	$	(1,181,655)	(33)	%


Book value per share	$	14.77		14.42		0.35	2	%	$	0.71	$	4.90	$	(4.19)	(85)	%
Tangible Book value per share									$	0.71	$	4.90	$	(4.19)	(85)	%

At ~~September~~June 30, ~~2017,~~2020, cash ~~decreased $5.3~~increased $18.3 million to $43.0 million from ~~$40.1~~$24.7 million at December 31, ~~2016.~~2019. Cash balances ~~decreased~~increased primarily due to repayment of the $30.0 million term financing, $16.2 million earn-out payments to CashCall Inc. based upon CCM earnings for the fourth quarter of 2016 and the first and second quarters of 2017, $5.6 million purchase of mortgage servicing rights and a ~~$10.8 million increase~~decrease in warehouse haircuts (difference between loan balance funded and amount advanced by warehouse lender) ~~associated with~~. Offsetting the increase in ~~mortgage loans held-for-sale (LHFS). Partially offsetting the decrease in~~ cash was ~~$55.5 million~~the payment of operating expenses as well as an increase in ~~proceeds from common stock offering, $25.1 million in net borrowings under the MSR financing facility and $11.0 million in residual cash flows.~~unencumbered loans funded with our cash.

LHFS ~~increased $183.8~~decreased $752.7 million to ~~$572.3~~$29.4 million at ~~September~~June 30, ~~2017~~2020 as compared to ~~$388.4~~$782.1 million at December 31, ~~2016.~~2019. The ~~increase was due~~decrease primarily relates to ~~$5.5 billion in originations~~our temporary suspension of lending activities during the ~~first nine~~second quarter of 2020. During the six months ended June 30, 2020, we had originations of ~~2017 partially~~

~~Table of Contents~~

$1.5 billion offset by ~~$5.3~~$2.2 billion in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months.

~~Finance receivables~~MSRs decreased ~~$2.0~~$41.2 million to ~~$60.9~~$0.3 million at ~~September~~June 30, ~~2017~~2020 as compared to ~~$62.9~~$41.5 million at December 31, ~~2016.~~2019. The decrease was ~~primarily~~ due to ~~$714.2~~$4.1 billion in UPB of MSR sales during the second quarter of 2020 as well as mark-to-market decreases in fair value of $21.9 million ~~in fundings~~partially offset by ~~$716.2~~additions of $1.8 million ~~in settlements during the nine months ended September 30, 2017.~~

~~MSRs increased $27.4 million to $159.0 million at September 30, 2017 as compared to $131.5 million at December 31, 2016. The increase was due to~~from servicing retained loan sales of ~~$4.7 billion in UPB as well as a purchase of approximately $570.0~~$196.2 million in ~~UPB of MSRs. Partially offsetting the increase was a bulk sale of NonQM MSRs totaling approximately $155.9 million in UPB~~UPB. At June 30, 2020 and ~~a mark-to-market reduction in fair value of $20.0 million. At September 30, 2017,~~December 31, 2019, we serviced ~~$15.7~~$146.2 million and $4.9 billion, respectively, in UPB for ~~others~~others.

Warehouse borrowings decreased $700.0 million to $1.6 million at June 30, 2020 as compared to ~~$12.4 billion at December 31, 2016.~~

~~Warehouse borrowings increased $171.0 million to $591.6 million at September 30, 2017 as compared to $420.6~~$701.6 million at December 31, ~~2016.~~2019. The ~~increase~~decrease was due to ~~an increase~~a $752.7 million decrease in LHFS at ~~September~~June 30, ~~2017.~~ 2020. During the second quarter of 2020, we have right-sized our warehouse lending capacity reducing it by $1.1 billion to $600 million and reducing warehouse counterparties from six to three.

Table of Contents

We ~~increased our total borrowing capacity to $960.0 million from $925.0 million at December 31, 2016.~~

~~In August and February 2017, we entered into separate Agreements with two lenders providing for~~have an MSR financing ~~facilities~~facility of ~~up to $30.0 million and $40.0~~$60.0 million. ~~The $30.0 million facility allows us to~~ ~~borrow up to 55% of the fair market value of FHLMC pledged mortgage servicing rights. The $40.0 million~~ This facility allows us to borrow up to ~~55%~~60% of the fair market value of ~~FNMA~~Freddie Mac and Ginnie Mae (subject to an acknowledgment agreement) pledged mortgage servicing rights. At ~~September~~June 30, ~~2017,~~2020, we had no outstanding borrowings against the ~~balance outstanding on~~facility and had no available capacity for borrowing as a result of the sale of the FHLMC servicing in the second quarter of 2020. In April 2020, Ginnie Mae announced they revised and ~~FNMA facilites was $5.0 million and $20.1 million, respectively.~~expanded their issuer assistance program to provide financing to fund servicer advances through the PTAP. At June 30, 2020, the Company had $448 thousand in approved PTAP funds outstanding. The outstanding PTAP assistance funds were repaid in July 2020.

~~Long-term debt decreased $2.6~~Repurchase reserve increased $1.0 million to ~~$44.6~~$10.0 million at ~~September~~June 30, ~~2017~~2020 as compared to ~~$47.2~~$9.0 million at December 31, ~~2016.~~2019. The ~~decrease~~increase was due to ~~the exchange agreement entered into in May 2017,~~ ~~whereby we issued 412,264 shares of common stock in exchange for trust preferred securities with~~ a ~~fair value of $5.6 million. Partially offsetting the decrease in long-term debt was a~~ ~~mark-to-market~~$5.0 million increase in ~~fair value~~change in provision for repurchases as a result of ~~$2.7 million.~~an increase in expected early payoffs and future losses, partially offset by $3.9 million in settlements primarily related to repurchased loans as well as refunds of premiums to investors for early payoffs on loans sold.

Book value per share ~~increased~~decreased 85%, or $4.19, to ~~$14.77~~$0.71 at ~~September~~June 30, ~~2017~~2020 as compared to ~~$14.42~~$4.90 at December 31, ~~2016.~~2019. Book value per common share ~~increased 10%~~decreased 170% to ~~$12.30~~($1.73) as of ~~September~~June 30, ~~2017,~~2020, as compared to ~~$11.19~~$2.47 as of December 31, ~~2016~~2019 (inclusive of the remaining $51.8 million of liquidation preference on our preferred stock). In the event we are not successful in appealing the Preferred B litigation, inclusive of the Preferred B stock cumulative undeclared dividends in arrears of $16.8 million, book value per common share was ($2.52) at June 30, 2020.

The changes in total assets and liabilities, at fair market value, are primarily attributable to decreases in our trust assets and trust liabilities as summarized below.


	September 30,		December 31,		Increase		%
	2017		2016		(Decrease)		Change

									June 30,		December 31,		$		%
									2020		2019		Change		Change
Securitized mortgage collateral	$	3,758,140	$	4,021,891	$	(263,751)	(7)	%	$	2,225,422	$	2,628,064	$	(402,642)	(15)	%
Other trust assets		11,091		11,399		(308)	(3)
Real estate owned (REO)										4,240		6,682		(2,442)	(37)
Total trust assets(1)		3,769,231		4,033,290		(264,059)	(7)			2,229,662		2,634,746		(405,084)	(15)


Securitized mortgage borrowings	$	3,751,831	$	4,017,603	$	(265,772)	(7)	%	$	2,213,863	$	2,619,210	$	(405,347)	(15)	%
Total trust liabilities(1)		3,751,831		4,017,603		(265,772)	(7)			2,213,863		2,619,210		(405,347)	(15)
Residual interests in securitizations	$	17,400	$	15,687	$	1,713	11	%	$	15,799	$	15,536	$	263	2	%

(1)	At June 30, 2020, the UPB of trust assets and trust liabilities was approximately $2.7 billion and $2.6 billion, respectively. At December 31, 2019, the UPB of trust assets and trust liabilities was approximately $3.0 billion and $2.9 billion, respectively.

Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, trust assets and liabilities have been netted to present our interest in these trusts more simply, which are considered the residual interests in securitizations. For unconsolidated securitizations the residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, the residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities, was ~~$17.4~~$15.8 million at ~~September~~June 30, ~~2017~~2020 as compared to ~~$15.7~~$15.5 million at December 31, ~~2016.~~

~~Table of Contents~~

2019.

We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on information derived from market participants. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, actual losses were ~~relatively flat and were inline with~~slightly elevated as compared to forecasted losses for the majority of trusts, including those with residual value. Principal payments and liquidations of securitized mortgage collateral and securitized mortgage borrowings also contributed to the reduction in trust assets and liabilities. The increase in residual fair value at ~~September~~June 30, ~~2017~~2020 was the result of an increase in fair value of certain multifamily trusts as a ~~decrease~~result of excess spread due to the current interest rate environment partially offset by an increase in loss assumptions ~~as well as recoveries on~~for certain ~~multifamily trusts with residual value.~~trusts.

●

The estimated fair value of securitized mortgage collateral decreased ~~$263.8~~$402.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, primarily due to reductions in principal from borrower payments and transfers of loans to ~~Real Estate Owned (REO)~~REO for single-family and multi-family collateral. Additionally, other trust assets decreased ~~$0.3~~$2.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, primarily due to a decrease in REO from liquidations of ~~$24.2~~$12.9 million. Partially

Table of Contents

offsetting the decrease was an increase of ~~$15.4~~$7.3 million in REO from foreclosures and ~~an $8.5~~a $3.2 million increase in the net realizable value (NRV) of REO.

●

The estimated fair value of securitized mortgage borrowings decreased ~~$265.8~~$405.3 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, primarily due to reductions in principal balances from principal payments during the period for single-family and multi-family collateral ~~as well as a decrease~~partially offset by an increase in loss assumptions.

Prior to 2008, we securitized mortgage loans by transferring originated and acquired residential single-family mortgage loans and multi-family commercial loans (the “transferred assets”) into nonrecourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing function. A trustee and sub-servicer, unrelated to us, were utilized for each securitization. Cash flows from the loans (the loan payments as well as liquidation of foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders (investors). The sub-servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO.

To estimate fair value of the assets and liabilities within the securitization trusts each reporting period, management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes referred to as “curves,” for defaults, loss severity, interest rates (LIBOR) and prepayments are inputted into the valuation model for each securitization trust. We hire third-party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations. Before inputting this information into the model, management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using other information gathered from the mortgage and real estate market (~~i.e.~~, third party home price indices, published industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default and foreclosure information for each trust from the respective trustees.

We use the valuation model to generate the expected cash flows to be collected from the trust assets and the expected required bondholder distribution (trust liabilities). To the extent that the trusts are over collateralized, we may receive the excess interest as the holder of the residual interest. The information above provides us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings ~~derivative assets/liabilities,~~ and the residual interests.

To determine the discount rates to apply to these cash flows, we gather information from the bond pricing services and other market participants regarding estimated investor required yields for each bond tranche. Based on that information and the collateral type and vintage, we determine an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We use the blended yield of the bond tranches together with the residual interests to determine an appropriate yield for the securitized mortgage collateral in each ~~securitization (after taking into consideration any derivatives in the securitization).~~securitization.

~~Table of Contents~~

The following table presents changes in the trust assets and trust liabilities for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2020:


							TRUST LIABILITIES
	Level 3 Recurring Fair
	Value Measurement						Level 3 Recurring Fair
			NRV (1)				Value Measurement
	Securitized		Real				Securitized		Net
	mortgage		estate		Total trust		mortgage		trust
	collateral		owned		assets		borrowings		assets
Recorded book value at December 31, 2016	$	4,021,891	$	11,399	$	4,033,290	$	(4,017,603)	$	15,687

											TRUST ASSETS						TRUST LIABILITIES
											Level 3 Recurring Fair
											Value Measurement						Level 3 Recurring Fair
													NRV (1)				Value Measurement
											Securitized		Real				Securitized		Net
											mortgage		estate		Total trust		mortgage		trust
											collateral		owned		assets		borrowings		assets
Recorded fair value at December 31, 2019											$	2,628,064	$	6,682	$	2,634,746	$	(2,619,210)	$	15,536
Total gains/(losses) included in earnings:
Interest income		39,564		—		39,564		—		39,564		2,108		—		2,108		—		2,108
Interest expense		—		—		—		(108,010)		(108,010)		—		—		—		(33,931)		(33,931)
Change in FV of net trust assets, excluding REO ~~(2)~~(1)		219,604		—		219,604		(221,510)		(1,906)		(174,419)		—		(174,419)		168,007		(6,412)
Gains from REO – not at FV but at NRV (2)		—		8,484		8,484		—		8,484		—		3,165		3,165		—		3,165
Total gains (losses) included in earnings		259,168		8,484		267,652		(329,520)		(61,868)		(172,311)		3,165		(169,146)		134,076		(35,070)
Transfers in and/or out of level 3		—		—		—		—		—		—		—		—		—		—
Purchases, issuances and settlements		(522,919)		(8,792)		(531,711)		595,292		63,581		(230,331)		(5,607)		(235,938)		271,271		35,333
Recorded book value at September 30, 2017	$	3,758,140	$	11,091	$	3,769,231	$	(3,751,831)	$	17,400
Recorded fair value at June 30, 2020											$	2,225,422	$	4,240	$	2,229,662	$	(2,213,863)	$	15,799

(1)

~~(1)~~

~~Accounted for at net realizable value.~~

~~(2)~~

Represents change in fair value of net trust assets, including trust REO ~~(losses)~~ gains in the consolidated statements of operations and comprehensive (loss) earnings for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

2020.

(2)	Accounted for at net realizable value.

Inclusive of gains from REO, total trust assets above reflect a net ~~gain~~loss of ~~$228.1~~$171.3 million ~~for the nine months ended September 30, 2017~~ as a result of ~~an increase~~a decrease in fair value from securitized mortgage collateral of ~~$219.6~~$174.4 million ~~and~~offset by gains from REO of ~~$8.5~~$3.2 million. Net ~~losses~~gains on trust liabilities were ~~$221.5~~$168.0 million ~~from~~as a result of the ~~increase~~decrease in fair value of securitized mortgage borrowings. As a result, ~~non-interest~~other income—change in fair value of net trust assets, ~~totaled an increase of $6.6~~including trust REO gains (losses) decreased by $3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020.

Table of Contents

The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations):


	September 30,			December 31,
	2017			2016

							June 30,			December 31,
							2020			2019
Net trust assets	$	17,400		$	15,687		$	15,799		$	15,536
Total trust assets		3,769,231			4,033,290			2,229,662			2,634,746
Net trust assets as a percentage of total trust assets		0.46	%		0.39	%		0.71	%		0.59	%

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the estimated fair value of the net trust assets increased as a percentage of total trust ~~assets. The increase was primarily~~assets due to an increase in ~~projected future cash flows due to~~prepayments and prepayment assumptions and a decrease in forward LIBOR offset by an increase in losses and loss ~~assumptions in the 2006 multi-family vintage.~~assumptions.

Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities.

~~Table of Contents~~

The following tables present the estimated fair value of our residual interests, ~~including investment securities available for sale,~~ by securitization vintage year, and other related assumptions used to derive these values at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:


	Estimated Fair Value of Residual									Estimated Fair Value of Residual
	Interests by Vintage Year at									Interests by Vintage Year at
	September 30, 2017									December 31, 2016

																			Estimated Fair Value of Residual									Estimated Fair Value of Residual
																			Interests by Vintage Year at									Interests by Vintage Year at
																			June 30, 2020									December 31, 2019
Origination Year	SF			MF			Total			SF			MF			Total			SF			MF			Total			SF			MF			Total
2002-2003 (1)	$	8,412		$	699		$	9,111		$	8,402		$	921		$	9,323		$	7,430		$	470		$	7,900		$	8,075		$	604		$	8,679
2004		1,267			579			1,846			1,267			653			1,920			3,337			870			4,207			3,386			709			4,095
2005		23			42			65			—			—			—			16			42			58			—			88			88
2006		—			6,378			6,378			—			4,444			4,444			—			3,634			3,634			—			2,674			2,674
Total	$	9,702		$	7,698		$	17,400		$	9,669		$	6,018		$	15,687		$	10,783		$	5,016		$	15,799		$	11,461		$	4,075		$	15,536
Weighted avg. prepayment rate		6.8	%		9.2	%		7.0	%		6.3	%		10.1	%		6.6	%		11.2	%		18.3	%		11.6	%		10.5	%		11.4	%		10.6	%
Weighted avg. discount rate		16.3	%		18.6	%		17.3	%		16.3	%		17.9	%		16.9	%		18.1	%		17.8	%		18.0	%		18.0	%		17.2	%		17.8	%

(1)

~~(1)~~

2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period.

We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we use different investor yield (discount rate) assumptions for securitized mortgage collateral and securitized mortgage borrowings and the discount rate used for residual interests based on underlying collateral characteristics, vintage year, assumed risk and market participant assumptions. ~~The increase in the estimated fair value~~

Table of ~~the 2006 multi-family residual interests was due to a reduction in future loss assumptions and recoveries within certain trusts.~~Contents

The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage at ~~September~~June 30, ~~2017:~~2020:


	Estimated Future				Investor Yield
	Losses (1)				Requirement (2)
	SF		MF		SF		MF

									Estimated Future				Investor Yield
									Losses (1)				Requirement (2)
									SF		MF		SF		MF
2002-2003	5	%	*	(3)	6	%	7	%	10	%	*	(3)	7	%	10	%
2004	9		*	(3)	5		5		8		*	(3)	7		6
2005	11		*	%	5		4		16		2		6		5
2006	12		1		6		4		15		*	(3)	6		7
2007	9		*	(3)	7		3		16		*	(3)	6		3

(1)

~~(1)~~

Estimated future losses derived by dividing future projected losses by UPB at ~~September~~June 30, ~~2017.~~

2020.

(2)

~~(2)~~

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

(3)

~~(3)~~

Represents less than 1%.

Despite the increase in housing prices through September 30, 2017, housing prices in many parts of the country are still at levels which have significantly reduced or eliminated equity for loans originated after 2003. Future loss estimates are significantly higher for mortgage loans included in securitization vintages after 2005 which reflect severe home price deterioration and defaults experienced with mortgages originated during these periods.

~~Table of Contents~~

Long-Term Mortgage Portfolio Credit Quality

We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days delinquent or greater, foreclosures and delinquent bankruptcies were ~~$834.0~~$634.2 million, or ~~18.7%~~23.6% of the long-term mortgage portfolio, ~~as of September~~at June 30, ~~2017~~2020 as compared to ~~$1.0 billion~~$511.3 million or ~~20.0% as of~~17.3% at December 31, ~~2016.~~2019.

The following table summarizes the gross UPB of loans in our mortgage portfolio, included in securitized mortgage collateral and REO, that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated:


	September 30,		Total		December 31,		Total

									June 30,		Total		December 31,		Total
Securitized mortgage collateral	2017		Collateral		2016		Collateral		2020		Collateral		2019		Collateral
60 - 89 days delinquent	$	102,044	2.3	%	$	140,567	2.8	%	$	205,782	7.6	%	$	88,553	3.0	%
90 or more days delinquent		349,684	7.8			417,947	8.2			227,945	8.5			191,781	6.5
Foreclosures (1)		176,757	4.0			224,633	4.4			139,060	5.2			155,082	5.2
Delinquent bankruptcies (2)		205,500	4.6			232,249	4.6			61,453	2.3			75,880	2.6
Total 60 or more days delinquent	$	833,985	18.7		$	1,015,396	20.0		$	634,240	23.6	%	$	511,296	17.3	%
Total collateral	$	4,454,670	100.0		$	5,078,500	100.0		$	2,694,198	100.0	%	$	2,964,654	100.0	%

(1)

~~(1)~~

Represents properties in the process of foreclosure.

(2)

~~(2)~~

Represents bankruptcies that are 30 days or more delinquent.

At June 30, 2020, mortgage loans 60 or more days delinquent (whether or not subject to forbearance) increased 24% as compared to December 31, 2019. Delinquency and forbearance is taken into account as part of our credit loss assumptions when determining the estimated fair value of our residual interests. At June 30, 2020, residential loss assumptions for certain trusts increased as compared to March 31, 2020 and December 31, 2019. To the extent delinquencies and loans in forbearance increase in deals with residual fair value, the estimated fair value of our residual interests may decrease due to a reduction or delay in the timing of estimated cash flows.

Table of Contents

The following table summarizes the gross securitized mortgage collateral and REO at NRV, that were non-performing as of the dates indicated (excludes 60-89 days delinquent):


			Total				Total
	September 30,		Collateral		December 31,		Collateral
	2017		%		2016		%

											Total				Total
									June 30,		Collateral		December 31,		Collateral
									2020		%		2019		%
90 or more days delinquent, foreclosures and delinquent bankruptcies	$	731,941	16.4	%	$	874,829	17.2	%	$	428,458	16.0	%	$	422,743	14.3	%
Real estate owned		11,091	0.2			11,399	0.2
Real estate owned inside and outside trusts										4,392	0.2			6,834	0.2
Total non-performing assets	$	743,032	16.6		$	886,228	17.4		$	432,850	16.2	%	$	429,577	14.5	%

Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including loans in foreclosure and delinquent bankruptcies) plus REO. It is our policy to place a mortgage on nonaccrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages. As of ~~September~~June 30, ~~2017,~~2020, non-performing assets (UPB of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total collateral was ~~16.6%~~16.1%. At December 31, ~~2016,~~2019, non-performing assets to total collateral was ~~17.4%~~14.5%. Non-performing assets decreased by approximately ~~$143.2~~$3.3 million at ~~September~~June 30, ~~2017~~2020 as compared to December 31, ~~2016.~~2019. At ~~September~~June 30, ~~2017,~~2020, the estimated fair value of non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) was ~~$245.8~~$93.2 million or ~~5.1%~~3.9% of total assets. At December 31, ~~2016,~~2019, the estimated fair value of non-performing assets was ~~$263.6~~$158.4 million or ~~5.4%~~4.5% of total assets.

REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as change in fair value of net trust assets including trust REO gains (losses) in the consolidated statements of ~~operations.~~

~~Table of Contents~~

operations and comprehensive (loss) earnings.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we recorded an increase of $1.5 million and $3.2 million in net realizable value of REO, ~~in the amount of $2.7 million and $8.5 million,~~ respectively, compared to a decrease of ~~$1.4~~$4.6 million and ~~$6.0~~$1.1 million for the comparable ~~2016 period.~~2019 periods. Increases and ~~write-downs~~decrease of the net realizable value reflect ~~increases or declines~~the change in value of the REO subsequent to foreclosure date, but prior to the date of sale.

The following table presents the balances of REO:


	September 30,		December 31,
	2017		2016

					June 30,		December 31,
					2020		2019
REO	$	17,009	$	25,802	$	15,436	$	21,195
Impairment (1)		(5,918)		(14,403)		(11,196)		(14,361)
Ending balance					$	4,240	$	6,834
REO inside trusts					$	4,240	$	6,682
REO outside trusts						152		152
Total	$	11,091	$	11,399	$	4,392	$	6,834

(1)

~~(1)~~

Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.

In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data

Table of Contents

is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the loans based on their attributes (~~e.g.~~(e.g., original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the future loan losses.

Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The assessment for losses is based on delinquency trends and prior loss experience and management’s judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent losses.

Results of Operations

For the Three Months Ended ~~September~~June 30, ~~2017~~2020 compared to the Three Months Ended ~~September~~June 30, ~~2016~~2019

For the Three Months Ended September 30,




Increase

%

2017

2016

(Decrease)

Change

Revenues

$
42,076

$
103,993

$
(61,917)

(60)
%
Expenses (1)

(37,560)

(81,359)

43,799

54

Net interest income

1,546

1,304

242

19

Loss on extinguishment of debt

—

—

—

n/a

Change in fair value of long-term debt

104

(8,641)

8,745

(101)

Change in fair value of net trust assets, including trust REO gains (losses)

(1,745)

1,071

(2,816)

(263)

Income tax (expense) benefit

(2,104)

130

(2,234)

1718

Net earnings

$
2,317

$
16,498

$
(14,181)

(86)

Earnings per share available to common stockholders—basic

$
0.11

$
1.28

$
(1.17)

(91)
%
Earnings per share available to common stockholders—diluted

$
0.11

$
1.18

$
(1.07)

(91)
%

~~(1)~~

~~Includes changes in contingent consideration liability resulting in income of $4.8 million and an expense of $23.2 million for the three months ended September 30, 2017 and 2016, respectively.~~


	For the Three Months Ended June 30,
					$		%
	2020		2019		Change		Change
Revenues	$	(4,058)	$	24,115	$	(28,173)	(117)	%
Expenses		(14,465)		(21,633)		7,168	33
Net interest income		781		2,543		(1,762)	(69)
Change in fair value of long-term debt		(4,208)		388		(4,596)	(1185)
Change in fair value of net trust assets, including trust REO gains (losses)		(864)		(1,459)		595	41
Income tax expense		(15)		(81)		66	81
Net (loss) earnings	$	(22,829)	$	3,873	$	(26,702)	(689)	%
(Loss) earnings per share available to common stockholders—basic	$	(1.08)	$	0.18	$	(1.26)	(688)	%
Loss per share available to common stockholders—diluted	$	(1.08)	$	0.18	$	(1.26)	(688)	%

For the Six Months Ended June 30, 2020 compared to the Six Months Ended June 30, 2019


	For the Six Months Ended June 30,
					$		%
	2020		2019		Change		Change
Revenues	$	(47,567)	$	34,481	$	(82,048)	(238)	%
Expenses		(45,232)		(43,904)		1,328	3
Net interest income		3,709		4,339		(630)	(15)
Change in fair value of long-term debt		4,828		654		4,174	638
Change in fair value of net trust assets, including trust REO losses		(3,247)		(4,142)		895	22
Income tax expense		(51)		(167)		(116)	(69)
Net loss	$	(87,560)	$	(8,739)	$	(76,397)	(874)	%
Loss per share available to common stockholders—basic	$	(4.12)	$	(0.41)	$	(3.71)	(899)	%
Loss per share available to common stockholders—diluted	$	(4.12)	$	(0.41)	$	(3.71)	(899)	%

4548

Table of Contents

For the ~~Nine~~Three Months Ended ~~September~~June 30, ~~2017~~2020 compared to the ~~Nine~~Three Months Ended ~~September~~June 30, ~~2016~~2019

Revenues

For the Nine Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Revenues

$
127,051

$
220,506

$
(93,455)

(42)
%
Expenses (1)

(115,838)

(187,408)

71,570

38

Net interest income (expense)

3,090

2,036

1,054

52

Loss on extinguishment of debt

(1,265)

—

(1,265)

n/a

Change in fair value of long-term debt

(2,657)

(7,286)

4,629

(64)

Change in fair value of net trust assets, including trust REO gains (losses)

6,578

2,609

3,969

152

Income tax expense

(3,575)

(728)

(2,847)

(391)

Net earnings

$
13,384

$
29,729

$
(16,345)

(55)

Earnings per share available to common stockholders—basic

$
0.71

$
2.43

$
(1.72)

(71)
%
Earnings per share available to common stockholders—diluted

$
0.71

$
2.27

$
(1.56)

(69)
%

~~(1)~~

~~Includes changes in contingent consideration liability resulting in income of $11.1 million and an expense of $34.6 million for the nine months ended September 30, 2017 and 2016, respectively.~~


	For the Three Months Ended June 30,
					$		%
	2020		2019		Change		Change
Gain on sale of loans, net	$	1,451	$	29,472	$	(28,021)	(95)	%
Servicing fees, net		1,352		3,536		(2,184)	(62)
Loss on mortgage servicing rights, net		(8,443)		(9,887)		1,444	15
Real estate services fees, net		293		807		(514)	(64)
Other revenues		1,289		187		1,102	589
Total revenues	$	(4,058)	$	24,115	$	(28,173)	(117)	%

~~Revenues~~

For the Three Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Gain on sale of loans, net

$
42,476

$
113,158

$
(70,682)

(62)
%
Real estate services fees, net

1,355

2,678

(1,323)

(49)

Servicing fees, net

8,492

3,789

4,703

124

Loss on mortgage servicing rights, net

(10,513)

(15,857)

5,344

34

Other revenues

266

225

41

18

Total revenues

$
42,076

$
103,993

$
(61,917)

(60)
%

Gain on sale of loans, net. For the three months ended ~~September~~June 30, ~~2017,~~2020, gain on sale of loans, net ~~were $42.5~~was $1.5 million compared to ~~$113.2~~$29.5 million in the comparable ~~2016~~2019 period. The ~~$70.7~~$28.0 million decrease for the three months ended June 30, 2020 is primarily due to a ~~$52.8~~$49.7 million decrease in ~~premiums from the~~gain on sale of ~~mortgage~~ loans, a ~~$23.0 million decrease in premiums from servicing retained loan sales, a $6.6 million decrease in mark-to-market gains on LHFS, a $3.5~~$2.1 million decrease in realized and unrealized net gains on derivative financial instruments and a ~~$1.8~~$352 thousand decrease of premiums from servicing retained loan sales. Partially offsetting these decreases in gain on sale of loans was a $17.4 million increase in ~~provision for repurchases, partially offset by~~mark-to-market gains on LHFS, a ~~$17.2~~$4.7 million decrease in direct loan origination ~~expenses.~~expenses and a $1.9 million decrease in provision for repurchases for the three months ended June 30, 2020.

The ~~overall decrease~~significant reduction in gain on sale of loans, net was ~~primarily~~the result of our temporary pause in lending during the second quarter of 2020 as we believed it was prudent to de-risk our consolidated balance sheet and protect liquidity due to the significant reduction in value assigned by investors and counterparties for our NonQM position. On June 4, 2020, we announced our re-engagement in lending activities. As a ~~51% decrease~~result of the temporary suspension in ~~volume as well as a decrease in gain on sale margins. For~~lending, for the three months ended ~~September~~June 30, ~~2017,~~2020, we originated and sold $2.1 ~~billion~~million and ~~$2.1 billion~~$489.1 million of loans, respectively, as compared to ~~$4.2 billion~~$821.4 million and ~~$4.1 billion~~$861.2 million of loans originated and sold, respectively, during the same period in 2016. Margins decreased to approximately 204 bps for the three months ended September 30, 2017 as compared to 268 bps for the same period in 2016 due to margin compression across all three channels as a result of the increase in interest rates as compared to the third quarter of 2016 as well as an increase in competition for volume.2019.

~~Real estate services~~

Servicing fees, net. For the three months ended ~~September~~June 30, ~~2017, real estate services~~2020, servicing fees, net were $1.4 million compared to ~~$2.7~~$3.5 million in the comparable ~~2016~~2019 period. The ~~$1.3~~decrease in servicing fees, net was due to the sale of $4.1 billion in UPB of Freddie Mac MSRs as well as the significant decrease in mortgage interest rates as compared to the second quarter of 2019. The substantial decrease in mortgage interest rates caused a significant increase in runoff of our mortgage servicing portfolio which combined with the servicing sale decreased the servicing portfolio average balance 73% to $1.6 billion for the three months ended June 30, 2020 as compared to an average balance of $6.1 billion for the three months ended June 30, 2019. During the three months ended June 30, 2020, we had $11.3 million in servicing retained loan sales.

Loss on mortgage servicing rights, net


	For the Three Months Ended June 30,
					$		%
	2020		2019		Change		Change
Loss on sale of mortgage servicing rights	$	(5,332)	$	(6)	$	(5,326)	88,767	%
Changes in fair value:
Due to changes in valuation market rates, inputs or assumptions		(1,868)		(6,914)		5,046	73
Other changes in fair value:
Scheduled principal prepayments		(104)		(719)		615	86
Voluntary prepayments		(1,139)		(2,248)		1,109	49
Total changes in fair value	$	(3,111)	$	(9,881)	$	6,770	69

Loss on mortgage servicing rights, net	$	(8,443)	$	(9,887)	$	1,444	15	%

Table of Contents

For the three months ended June 30, 2020, loss on MSRs, net was $8.4 million compared to a loss of $9.9 million in the comparable 2019 period. As previously discussed, in May 2020, we sold $4.1 billion in UPB of Freddie Mac MSRs and recorded a $5.3 million loss on the sale of MSRs primarily as a result of fees associated with the sale. Additionally, for the three months ended June 30, 2020, we recorded a $3.1 million loss from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market rates, inputs and assumptions as well as voluntary and scheduled prepayments. As a result of the aforementioned decrease in interest rates during 2019 and through the second quarter of 2020, $3.0 million of the $3.1 million change in fair value of MSRs was due to prepayments, with $1.9 million primarily due to an increase in prepayment speed assumptions and $1.1 million due to voluntary prepayments.

Real estate services fees, net. For the three months ended June 30, 2020, real estate services fees, net were $293 thousand as compared to $807 thousand in the comparable 2019 period. The $514 thousand decrease was primarily the result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage ~~portfolio as compared to 2016.~~portfolio.

~~Servicing fees, net.~~

Other revenues. For the three months ended ~~September~~June 30, ~~2017, servicing fees, net was $8.5~~2020, other revenues were $1.3 million as compared to ~~$3.8 million~~$187 thousand in the comparable ~~2016~~2019 period. The $1.1 million increase ~~in servicing fees, net~~ was the result of ~~the servicing portfolio increasing 81% to an average balance of $15.4 billion for the three months ended September 30, 2017~~

~~Table of Contents~~

~~as compared to an average balance of $8.5 billion for the three months ended September 30, 2016. The~~a $1.3 million increase in the ~~average balance of~~cash surrender value associated with the ~~servicing portfolio is~~corporate-owned life insurance trusts as a result of ~~our efforts during~~ the ~~past year to retain servicing with fewer bulk sales~~payment of ~~MSRs. We had $1.9 billion in servicing retained loan sales during the three months ended September 30, 2017 with no bulk sales of MSRs.~~premiums.

~~Loss on mortgage servicing rights, net.~~

For the ~~three months ended September~~Six Months Ended June 30, ~~2017, loss on MSRs, net was $10.5 million~~2020 compared to ~~$15.9 million in~~ the ~~comparable 2016 period. For the three months ended September~~Six Months Ended June 30, 2017, we recorded an $11.2 million loss from a change in fair value of MSRs primarily the result of mark-to-market changes related to amortization as well as an increase in prepayment speeds. During the quarter, we had an $8 thousand loss on sale of mortgage servicing rights related to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods. Partially offsetting the loss was $672 thousand in realized and unrealized gains from hedging instruments related to MSRs.2019


	For the Nine Months Ended September 30,
					Increase		%
	2017		2016		(Decrease)		Change
Gain on sale of loans, net	$	116,602	$	245,849	$	(129,247)	(53)	%
Real estate services fees, net		4,492		6,773		(2,281)	(34)

									For the Six Months Ended June 30,
													$		%
									2020		2019		Change		Change
(Loss) gain on sale of loans, net									$	(26,712)	$	41,686	$	(68,398)	(164)	%
Servicing fees, net		23,575		8,680		14,895	172			3,859		6,505		(2,646)	(41)
Loss on mortgage servicing rights, net		(18,159)		(41,249)		23,090	56			(26,753)		(15,510)		(11,243)	(72)
Real estate services fees, net										687		1,613		(926)	(57)
Other revenues		541		453		88	19			1,352		187		1,165	623
Total revenues	$	127,051	$	220,506	$	(93,455)	(42)		$	(47,567)	$	34,481	$	(82,048)	(238)	%

~~Gain~~(Loss) gain on sale of loans, net. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, (loss) gain on sale of loans, net ~~were $116.6~~was a loss of ($26.7) million compared to ~~$245.8~~a gain of $41.7 million in the comparable ~~2016~~2019 period. The ~~$129.2~~$68.4 million decrease for the six months ended June 30, 2020, is primarily due to ~~a $108.3 million~~the aforementioned temporary pause in lending during the second quarter of 2020. The decrease in ~~premiums from the~~(loss) gain on sale of ~~mortgage~~ loans, net was most notably due to a ~~$49.1~~$31.5 million ~~decrease in premiums from servicing retained loan sales and an $11.3 million decrease~~increase in mark-to-market ~~gains~~losses on LHFS, ~~partially offset by~~ a ~~$39.6~~$17.6 million ~~decrease in direct loan origination expenses, $149 thousand decrease~~increase in realized and unrealized net losses on derivative financial instruments, ~~and~~ a ~~$586 thousand~~$15.8 million decrease in ~~provision for repurchases.~~

~~The overall decrease in~~(loss) gain on sale of loans ~~net~~and a $1.8 million increase in provision for repurchases.

As previously discussed, for the six months ended June 30, 2020, the predominance of our loss was ~~primarily~~ due to ~~a 44% decrease in volumes as well~~the substantial remarking of our NonQM loan portfolio held-for-sale as a ~~decrease~~result of spreads widening substantially on credit assets due to potential pandemic related payment delinquencies and forbearances, causing a severe decline in ~~gain~~the values assigned by counterparties for NonQM assets, which resulted in a significant loss on sale ~~margins.~~of loans, net. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020, we originated and sold ~~$5.5~~$1.5 billion and ~~$5.3~~$2.2 billion of loans, respectively, as compared to ~~$9.8~~$1.4 billion and ~~$9.3~~$1.3 billion of loans originated and sold, respectively, during the same period in ~~2016. Margins decreased to approximately 214 bps for~~2019.

Servicing fees, net. For the ~~nine~~six months ended ~~September~~June 30, ~~2017 as~~2020, servicing fees, net were $3.9 million compared to ~~251 bps for~~$6.5 million in the ~~same period~~comparable 2019 period. The decrease in ~~2016 due to margin compression across all three channels as a~~servicing fees, net was the result of the ~~increase~~significant decrease in mortgage interest rates as compared to the first ~~nine~~six months of ~~2016~~2019 as well as the sale of $4.1 billion in UPB of Freddie Mac MSRs in the second quarter of 2020. The substantial decrease in mortgage interest rates caused a significant increase in runoff of our mortgage servicing portfolio which combined with the servicing sale decreased the servicing portfolio average balance 48% to $3.2 billion for the six months ended June 30, 2020 as compared to an average balance of $6.2 billion for the comparable period in 2019. During the six months ended June 30, 2020, we had $196.2 million in servicing retained loan sales. As previously discussed, in May 2020, we completed the sale of $4.1 billion in UPB of Freddie Mac MSRs and as a result, we expect servicing fees, net to decline in future periods.

Table of Contents

Loss on mortgage servicing rights, net


	For the Six Months Ended June 30,
					$		%
	2020		2019		Change		Change
(Loss) gain on sale of mortgage servicing rights	$	(4,811)	$	864	$	(5,675)	657	%
Changes in fair value:
Due to changes in valuation market rates, inputs or assumptions		(17,683)		(11,454)		(6,229)	54
Other changes in fair value:
Scheduled principal prepayments		(497)		(1,503)		1,006	67
Voluntary prepayments		(3,762)		(3,417)		(345)	(10)
Total changes in fair value	$	(21,942)	$	(16,374)	$	(5,568)	34

Loss on mortgage servicing rights, net	$	(26,753)	$	(15,510)	$	(11,243)	72	%

For the six months ended June 30, 2020, loss on MSRs, net was $26.8 million compared to a loss of $15.5 million in the comparable 2019 period. For the six months ended June 30, 2020, we recorded a $21.9 million loss from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market rates, inputs and assumptions as well as voluntary and scheduled prepayments. As a result of the aforementioned decrease in interest rates during 2019 and through the second quarter of 2020, $21.4 million of the $21.9 million change in fair value of MSRs was due to prepayments, with $17.7 million primarily due to an increase in ~~competition for volume.~~prepayment speed assumptions and $3.8 million due to voluntary prepayments.

Real estate services fees, net. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, real estate services fees, net were ~~$4.5 million~~$687 thousand as compared to ~~$6.8~~$1.6 million in the comparable ~~2016~~2019 period. The ~~$2.3 million~~$926 thousand decrease was primarily the result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage ~~portfolio~~portfolio.

Other revenues. For the six months ended June 30, 2020, other revenues were $1.4 million as compared to ~~2016.~~

~~Servicing fees, net.~~ ~~For the nine months ended September 30, 2017, servicing fees, net was $23.6 million compared to $8.7 million~~$187 thousand in the comparable ~~2016~~2019 period. The $1.2 million increase ~~in servicing fees, net~~ was the result of the servicing portfolio increasing 122% to an average balance of $14.1 billion for the nine months ended September 30, 2017 as compared to an average balance of $6.4 billion for the nine months ended September 30, 2016. Thea $1.3 million increase in the ~~average balance of~~cash surrender value associated with the ~~servicing portfolio is~~corporate-owned life insurance trusts as a result of ~~our efforts during~~ the ~~past year to retain servicing with fewer bulk sales~~payment of MSRs. We had $4.7 billion in servicing retained loan sales during the nine months ended September 30, 2017. Partially offsetting the increase was a bulk sale of NonQM MSRs totaling approximately $155.9 million in UPB.premiums.

~~Table of Contents~~

~~Loss on mortgage servicing rights, net.~~For the ~~nine months ended September~~Three Months Ended June 30, ~~2017, loss on MSRs, net was $18.2 million~~2020 compared to ~~$41.2 million in~~ the ~~comparable 2016 period. For the nine months ended September~~Three Months Ended June 30, 2017, we recorded a $20.0 million loss from a change in fair value of MSRs primarily the result of mark-to-market changes related to amortization as well as an increase in prepayment speeds. During the nine months ended September 30, 2017, we had a $90 thousand loss on sale of mortgage servicing rights related to refunds of premiums to investors for loan payoffs partially offset by recoveries of previously written off holdbacks associated with sales of servicing rights in previous periods. Partially offsetting the loss was a $2.0 million increase in realized and unrealized gains from hedging instruments related to MSRs.2019

Expenses


	For the Three Months Ended September 30,
				��	Increase		%
	2017		2016		(Decrease)		Change

									For the Three Months Ended June 30,
													$		%
									2020		2019		Change		Change
Personnel expense	$	23,062	$	38,467	$	(15,405)	(40)	%	$	7,774	$	14,339	$	(6,565)	(46)	%
Business promotion		10,403		10,350		53	1			74		2,013		(1,939)	(96)
General, administrative and other		8,497		7,736		761	10			6,617		5,281		1,336	25
Accretion of contingent consideration		396		1,591		(1,195)	(75)
Change in fair value of contingent consideration		(4,798)		23,215		(28,013)	(121)
Total expenses	$	37,560	$	81,359	$	(43,799)	(54)	%	$	14,465	$	21,633	$	(7,168)	(33)	%

Total expenses ~~were $37.6~~decreased by $7.2 million, or 33%, to $14.5 million for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$81.4~~$21.6 million for the comparable period ~~of 2016.~~in 2019. Personnel expense decreased ~~$15.4~~$6.6 million to ~~$23.1~~$7.8 million for the three months ended ~~September~~June 30, 2017. The decrease is primarily related to a reduction in commission expense due to a decrease in loan originations as well as staff reductions made in the first quarter of 2017. As a result of the staff reductions in the first quarter of 2017, average headcount decreased 24% for the third quarter of 20172020 as compared to the same period in ~~2016.~~

~~Business promotion was flat at $10.4 million~~2019. The decrease is primarily related to the aforementioned temporary pause in lending during the three months ended June 30, 2020. In mid-March, we undertook a series of actions to help ensure the safety and productivity of our employees and help prevent the spread of COVID-19 among our workforce. Substantially all of our employees have been working remotely since March 16, 2020. As a result of the temporary pause in lending, we furloughed a significant amount of our workforce, which resulted in average headcount decreasing 50% for the three months ended ~~September~~June 30, 2017 and 2016. Our centralized call center purchases leads and promotes its business through radio and television advertisements. During the third quarter of 2017, business promotion was relatively flat2020 as compared to ~~2016~~the same period in 2019. We greatly value the health and well-being of our employees and their families and consistent with ~~continued efforts~~our furlough policy, have covered

Table of Contents

and continue to ~~increase NonQM~~cover employees’ costs of health and ~~purchase money production with~~medical benefits during the ~~reduction~~furlough period to provide tangible support during this time of hardship.

Business promotion decreased $1.9 million to $74 thousand for the three months ended June 30, 2020 as compared to $2.0 million for the same period in ~~refinance activity~~the prior year. Business promotion decreased as a result of the ~~increase~~aforementioned temporary pause in ~~interest rates~~lending during the three months ended June 30, 2020. As we reengage in lending activities, we expect business promotion will remain low as compared to prior periods as a result of the ~~third quarter of 2016~~. current interest rate environment. We will continue to source leads through digital campaigns, which allow for a more cost effective approach, increasing the ability to be more price and product competitive to more specific target geographies.

General, administrative and other expenses increased to ~~$8.5~~$6.6 million for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$7.7~~$5.3 million for the same period in ~~2016.~~2019. The increase was ~~primarily~~ related to a ~~$1.8~~$1.4 million increase in premiums associated with the corporate-owned life insurance trusts liability as compared to the second quarter of 2019. Additionally, legal and professional fees ~~associated with defending litigation, as discussed in Item 3 of the 2016 10-K and in Item 1 of Part II within this 10-Q. Partially offsetting the increase was an~~increased $534 thousand ~~decrease in other general and admistrative expenses, a $294 thousand decrease in data processing and a $187 thousand decrease in premises and equipment expense.~~

As part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in December 2017, which increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period. In the third quarter of 2017, accretion increased the contingent consideration liability by $396 thousand as compared to $1.6 million during the third quarter of 2016. The decrease in accretion is due to the reduction of forecasted pre-tax earnings of CCM as a result of ~~updated assumptions as well as~~exploring alternative exit strategies for our NonQM position during the three months ended June 30, 2020. Offsetting the increase in expense was a reduction in all other general, administrative and other expenses as a result of the ~~estimated earn-out percentage as~~temporary pause in lending during the three months ended June 30, 2020.

For the Six Months Ended June 30, 2020 compared to ~~2016. The accretion will continue to be a charge against earnings in future quarters until~~ the ~~end of the earn-out period in December 2017.~~

Six Months Ended June 30, 2019

~~Table of Contents~~

origination volume over the remaining earn-out period which ends in December 2017. The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM. ~~The decrease in the contingent consideration liability resulted in an increase in earnings of $4.8 million in the third quarter of 2017.~~


	For the Nine Months Ended September 30,
					Increase		%
	2017		2016		(Decrease)		Change

									For the Six Months Ended June 30,
													$		%
									2020		2019		Change		Change
Personnel expense	$	69,353	$	93,025	$	(23,672)	(25)	%	$	28,439	$	28,461	$	(22)	(0)	%
Business promotion		30,744		30,828		(84)	(0)			3,203		4,936		(1,733)	(35)
General, administrative and other		24,845		23,742		1,103	5			13,590		10,507		3,083	29
Accretion of contingent consideration		1,948		5,244		(3,296)	(63)
Change in fair value of contingent consideration		(11,052)		34,569		(45,621)	(132)
Total expenses	$	115,838	$	187,408	$	(71,570)	(38)		$	45,232	$	43,904	$	1,328	3	%

Total expenses ~~were $115.8~~increased by $1.3 million, or 3%, to $45.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$187.4~~$44.0 million for the comparable period ~~of 2016.~~in 2019. Personnel expense ~~decreased $23.7 million to $69.4~~was flat at $28.4 million for the ~~nine~~six months ended ~~September~~June 30, 2017. The decrease is primarily related to a reduction in commission expense due to a decrease in loan originations as well as staff reductions made in the first quarter of 2017. With the decline in origination volumes in the first quarter of 2017 we made staff reductions, of which the full impact of the reductions were not reflected until the second quarter. As a result, average headcount decreased 13% for the nine months ended September 30, 20172020 as compared to the same period in ~~2016.~~

~~Business promotion was $30.7 million for~~2019. Despite the ~~nine~~temporary pause in lending during the three months ended ~~September~~June 30, 2017, compared to $30.8 million for the comparable period of 2016. Our centralized call center purchases leads and promotes its business through radio and television advertisements. During the first nine months of 2017, business promotion2020, personnel expense was flat due to ~~efforts~~an increase in originations and related employee commission expense during the first quarter of 2020 as compared to ~~increase NonQM and purchase money production with~~ the ~~reduction~~comparable period in ~~refinance activity~~2019, partially offset by the aforementioned furlough during the second quarter of 2020.

Business promotion decreased $1.7 million to $3.2 million for the six months ended June 30, 2020 as compared to $4.9 million for the same period in the prior year. Business promotion decreased as a result of the ~~increase~~aforementioned temporary pause in ~~interest rates~~lending during the three months ended June 30, 2020. As we reengage in lending activities, we expect business promotion expense to decrease as compared to prior periods as a result of the ~~first nine months of 2016~~. current interest rate environment. We will continue to source leads through digital campaigns, which allow for a more cost effective approach, increasing the ability to be more price and product competitive to more specific target geographies.

General, administrative and other expenses increased to ~~$24.8~~$13.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$23.7~~$10.5 million for the same period in ~~2016.~~2019. The increase was ~~primarily~~partially related to a ~~$2.3~~$1.4 million increase in premiums associated with the corporate-owned life insurance trusts liability as compared to the same period in 2019. The increase in general, administrative and other expenses was also due to a $623 thousand increase in occupancy expense primarily due to right of use (ROU) asset impairment as well as additional leased space as compared to the first quarter of 2019. In August 2019, we entered into an agreement to lease additional office space in our corporate office to accommodate the staffing increase during the third quarter of 2019. During the first quarter of 2020, as a result of the pandemic and subsequent reduction in lending activities, we consolidated one floor of our corporate office and recognized ROU asset impairment of $393 thousand for the additional space leased in August 2019, in addition to a $198 thousand increase in occupancy expense as compared to the first quarter of 2019. Additionally, legal and professional fees associated with defending litigation, as discussed in Item 3 of the 2016 10-K and in Item 1 of Part II within this 10-Q and a $155 thousand increase in occupancy expense. Partially offsetting the increase was a $707 thousand decrease in other general and administrative expenses, a $462 thousand decrease in premises and equipment and a $215 thousand decrease in data processing expense.

As part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in December 2017, which increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period. In the first nine months of 2017, accretion increased ~~the contingent consideration liability by $1.9~~$1.0 million ~~as compared to $5.2 million during the first nine months of 2016. The decrease in accretion is due to the reduction of forecasted pre-tax earnings of CCM~~ as a result of ~~updated assumptions as well as~~exploring alternative exit strategies for our NonQM loan portfolio held-for-sale during the six months ended June 30, 2020. Offsetting these increases in expenses outlined above was a reduction in ~~the estimated earn-out percentage as compared to 2016. The accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period in December 2017.~~

We recorded an $11.1 million change in fair value associated with a reduction in the contingent consideration liability for the nine months ended September 30, 2017 related to updated assumptions including current market conditions. The change in fair value of contingent consideration was primarily related to expected margin compression as well as a reduction in volume over the remaining earn-out period which ends in December 2017. The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM. ~~The decrease in the contingent consideration liability resulted in an increase in earnings of $11.1 million for the nine months ended September 30, 2017.~~

all other general,

4952

Table of Contents

administrative and other expenses as a result of the temporary pause in lending during the three months ended June 30, 2020.

Net Interest Income ~~(Expense)~~

We earn net interest income primarily from mortgage assets, which include securitized mortgage collateral and loans held-for-sale, ~~and finance receivables,~~ or collectively, “mortgage assets,” and, to a lesser extent, interest income earned on cash and cash equivalents. Interest expense is primarily interest paid on borrowings secured by mortgage assets, which include securitized mortgage borrowings and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes, MSR ~~Financing~~financing and ~~Term Financing.~~corporate owned life insurance trusts. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities.

The following tables summarize average balance, interest and weighted average yield on interest-earning assets and interest-bearing liabilities, for the periods indicated. 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,
	2017						2016
	Average						Average
	Balance		Interest		Yield		Balance		Interest		Yield

													For the Three Months Ended June 30,
													2020						2019
													Average						Average
													Balance		Interest		Yield		Balance		Interest		Yield
ASSETS
Securitized mortgage collateral	$	3,767,162	$	51,606	5.48	%	$	4,223,226	$	59,616	5.65	%	$	2,237,117	$	33,933	6.07	%	$	2,987,784	$	36,630	4.90	%
Mortgage loans held-for-sale		452,390		5,465	4.83			494,918		4,606	3.72			165,865		1,875	4.52			439,445		6,259	5.70
Finance receivables		50,034		745	5.96			53,868		700	5.20
Other		33,733		38	0.45			15,401		10	0.26			66,603		24	0.14			30,827		172	2.23
Total interest-earning assets	$	4,303,319	$	57,854	5.38		$	4,787,413	$	64,932	5.43		$	2,469,585	$	35,832	5.80	%	$	3,458,056	$	43,061	4.98	%
LIABILITIES
Securitized mortgage borrowings	$	3,759,675	$	49,629	5.28		$	4,219,975	$	57,043	5.41	%	$	2,226,036	$	31,896	5.73		$	2,983,446	$	34,435	4.62	%
Warehouse borrowings (1)		490,118		4,948	4.04			537,084		4,222	3.14
Warehouse borrowings														144,035		1,517	4.21			390,223		4,506	4.62
MSR financing facilities		13,014		192	5.90			—		—	—			9,772		93	3.81			—		—	—
Long-term debt		44,548		1,059	9.51			35,412		1,078	12.18			40,722		948	9.31			44,236		1,106	10.00
Convertible notes		24,970		471	7.55			24,963		469	7.52			24,998		524	8.38			24,988		471	7.54
Term financing		—		—	—			29,813		806	10.81
Other		390		9	9.23			755		10	5.30			10,773		73	2.71			—		—	—
Total interest-bearing liabilities	$	4,332,715	$	56,308	5.20		$	4,848,002	$	63,628	5.25		$	2,456,336	$	35,051	5.71	%	$	3,442,893	$	40,518	4.71	%
Net Interest Spread (2)			$	1,546	0.18	%			$	1,304	0.18	%
Net Interest Margin (3)					0.14	%					0.11	%
Net interest spread (1)															$	781	0.09	%			$	2,543	0.27	%
Net interest margin (2)																	0.13	%					0.29	%

(1)

~~(1)~~

~~Warehouse borrowings include the borrowings from mortgage loans held-for-sale and finance receivables.~~

~~(2)~~

Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(2)

~~(3)~~

Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

Net interest spread ~~increased $242 thousand~~income decreased $1.8 million for the three months ended ~~September~~June 30, ~~2017~~2020 primarily attributable to ~~an increase~~a decrease in the net interest spread between loans held-for-sale and ~~finance receivables and~~ their related warehouse borrowings, ~~and a decrease in interest expense related to the payoff of the Term Financing. Partially offsetting the increase in net spread was~~ a decrease in the net interest spread on the securitized mortgage collateral and securitized mortgage borrowings, ~~as well as~~ an increase in interest expense ~~as a result of~~on the corporate owned life insurance trusts (within other liabilities), an increase in interest expense on MSR financing ~~facility.~~and convertible notes. Partially offsetting the decrease in net interest spread income was a decrease in interest expense on the long-term debt. As a result, the net interest margin ~~increased~~decreased to ~~0.14%~~0.13% for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~0.11%~~0.29% for the three months ended ~~September~~June 30, ~~2016.~~2019.

During the ~~quarter~~three months ended ~~September~~June 30, ~~2017,~~2020, the yield on interest-earning assets ~~decreased~~increased to ~~5.38%~~5.80% from ~~5.43%~~4.98% in the comparable ~~2016~~2019 period. The yield on interest-bearing liabilities ~~decreased~~increased to ~~5.20%~~5.71% for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~5.25%~~4.71% for the comparable ~~2016~~2019 period. In connection with the fair value accounting for securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense isare recognized using effective yields based on estimated fair values for these instruments. The ~~decrease~~increase in yield for securitized

~~Table of Contents~~

mortgage collateral and securitized mortgage borrowings is primarily related to ~~increased~~a decrease in prices ~~on mortgage-backed bonds~~ which resulted in ~~a decrease~~an increase in yield as compared to the previous period.

Table of Contents


	For the Nine Months Ended September 30,
	2017						2016
	Average						Average
	Balance		Interest		Yield		Balance		Interest		Yield

													For the Six Months Ended June 30,
													2020						2019
													Average						Average
													Balance		Interest		Yield		Balance		Interest		Yield
ASSETS
Securitized mortgage collateral	$	3,864,888	$	165,260	5.70	%	$	4,346,482	$	188,707	5.79	%	$	2,367,433	$	61,646	5.21	%	$	3,044,213	$	76,652	5.04	%
Mortgage loans held-for-sale		363,713		12,923	4.74			397,565		11,325	3.80			439,712		10,196	4.64			394,232		11,377	5.77
Finance receivables		38,118		1,695	5.93			37,302		1,502	5.37
Other		37,063		133	0.48			21,028		27	0.17			51,658		85	0.33			30,265		287	1.90
Total interest-earning assets	$	4,303,782	$	180,011	5.58		$	4,802,377	$	201,561	5.60		$	2,858,803	$	71,927	5.03	%	$	3,468,710	$	88,316	5.09	%
LIABILITIES
Securitized mortgage borrowings	$	3,857,405	$	159,115	5.50	%	$	4,346,741	$	181,362	5.56	%	$	2,357,094	$	57,282	4.86	%	$	3,038,369	$	72,487	4.77	%
Warehouse borrowings (1)		392,108		11,896	4.05			425,882		10,701	3.35
Warehouse borrowings														406,486		7,761	3.82			342,220		8,303	4.85
MSR financing facilities		16,579		674	5.42			—		—	—			6,040		118	3.91			—		—	—
Long-term debt		46,587		3,393	9.71			33,716		3,088	12.21			42,293		1,989	9.41			44,442		2,237	10.07
Convertible notes		24,968		1,413	7.55			24,961		2,050	10.95			24,997		995	7.96			24,987		943	7.55
Term financing		4,490		408	12.12			29,792		2,300	10.29
Other		474		22	6.19			543		24	5.89			5,447		73	2.68			32		7	43.75
Total interest-bearing liabilities	$	4,342,611	$	176,921	5.43		$	4,861,635	$	199,525	5.47		$	2,842,357	$	68,218	4.80	%	$	3,450,050	$	83,977	4.87	%
Net Interest Spread (2)			$	3,090	0.15	%			$	2,036	0.13	%
Net Interest Margin (3)					0.10	%					0.06	%
Net interest spread (1)															$	3,709	0.23	%			$	4,339	0.22	%
Net interest margin (2)																	0.26	%					0.25	%

(1)

~~(1)~~

~~Warehouse borrowings include the borrowings from mortgage loans held-for-sale and finance receivables.~~

~~(2)~~

Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(2)

~~(3)~~

Net interest margin is calculated by dividing net interest spread by total average interest-earning ~~assets~~.

assets.

Net interest spread ~~increased $1.1 million~~income decreased $630 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 primarily attributable to ~~an increase~~a decrease in the net interest spread between loans held-for-sale and ~~finance receivables and~~ their related warehouse borrowings, ~~a decrease~~an increase in interest expense ~~from~~on the ~~conversion of the Convertible Notes in January 2016 and a decrease~~corporate owned life insurance trusts (within other liabilities), an increase in interest expense ~~related to the payoff of the Term Financing.~~on MSR financing and convertible notes. Offsetting the ~~increase~~decrease in net interest spread income was ~~a decrease~~an increase in the net interest spread on the securitized mortgage collateral and securitized mortgage ~~borrowings, an increase~~borrowing and a decrease in ~~the~~ interest expense on the long-term ~~debt as well as an increase~~debt. Despite the decrease in net interest ~~expense as a result of the MSR financing facilities. As a result,~~spread income, the net interest margin increased to ~~0.10%~~0.26% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~0.06%~~0.25% for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the yield on interest-earning assets decreased to ~~5.58%~~5.03% from ~~5.60%~~5.09% in the comparable ~~2016~~2019 period. The yield on interest-bearing liabilities decreased to ~~5.43%~~4.80% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~5.47%~~4.87% for the comparable ~~2016~~2019 period. In connection with the fair value accounting for securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense isare recognized using effective yields based on estimated fair values for these instruments. The ~~decrease~~increase in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to ~~increased~~a decrease in prices ~~on mortgage-backed bonds~~ which resulted in ~~a decrease~~an increase in yield as compared to the previous period.

~~Loss on extinguishment of debt.~~

We recorded a $1.3 million loss on extinguishment of debt during the nine months ended September 30, 2017. In May 2017, we exchanged 412,264 shares of common stock for the remaining trust preferred securities which had an aggregate liquidation amount of $8.5 million. The value of the shares on the issuance date exceeded the carrying value of debt by $1.3 million.

~~Table of Contents~~

Change in the fair value of long-term debt.

Long-term debt (consisting of ~~trust preferred securities and~~ junior subordinated notes) is measured based upon an internal analysis, which considers our own credit risk and discounted cash flow analyses. Improvements in our financial results and financial condition in the future could result in additional increases in the estimated fair value of the long-term debt, while deterioration in financial results and financial condition could result in a decrease in the estimated fair value of the long-term debt.

~~Change~~

During the three months ended June 30, 2020, the fair value of the long-term debt increased $2.2 million to $41.8 million from $39.6 million at March 31, 2020. The increase in estimated fair value was the result of a $4.2 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve as compared to the first quarter of 2020, as well as a $157 thousand increase due to accretion partially offset by a reduction of $2.2 million change in the instrument specific credit risk. During the six months ended June 30, 2020, the fair value of long-term debt ~~resulted in income~~decreased by

Table of ~~$104 thousand and an expense of $2.7~~Contents

$3.6 million ~~for the three and nine months ended September 30, 2017, compared~~ to ~~an expense of $8.6~~$41.8 million ~~and $7.3~~from $45.4 million ~~for the three and nine months ended September 30, 2016.~~at December 31, 2019. The decrease in ~~the~~ estimated fair value ~~of long-term debt in the third quarter of 2017~~ was the result of a ~~slight~~$4.8 million change in the market specific credit risk as a result of a decrease in the forward LIBOR ~~curve. For~~curve as compared to the ~~nine~~fourth quarter of 2019 partially offset by an $887 thousand change in the instrument specific credit risk and a $318 thousand increase due to accretion.

During the three months ended ~~September~~June 30, ~~2017,~~2019, the fair value of the long-term debt decreased $651 thousand. The decrease in estimated fair value was the result of ~~long-term debt increased primarily due to~~ a ~~decrease~~$388 thousand change in the ~~discount rate attributable to an improvement in our~~market specific credit risk ~~profile, financial condition~~during the quarter as well as a $267 thousand change in the instrument specific credit risk partially offset by an increase due to accretion. During the six months ended June 30, 2019, the fair value of the long-term debt decreased $946 thousand. The decrease in ~~LIBOR~~estimated fair value was the result of a $654 thousand change in the market specific credit risk during ~~2017.~~ the quarter as well as a $363 thousand change in the instrument specific credit risk partially offset by an increase due to accretion.

Change in fair value of net trust assets, including trust REO ~~(losses) gains~~losses


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									For the Three Months Ended				For the Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019
Change in fair value of net trust assets, excluding REO	$	(4,479)	$	2,511	$	(1,906)	$	8,580	$	(2,316)	$	3,113	$	(6,412)	$	(3,043)
Gains (losses) from REO		2,734		(1,440)		8,484		(5,971)		1,452		(4,572)		3,165		(1,099)
Change in fair value of net trust assets, including trust REO (losses) gains	$	(1,745)	$	1,071	$	6,578	$	2,609
Change in fair value of net trust assets, including trust REO gains (losses)									$	(864)	$	(1,459)	$	(3,247)	$	(4,142)

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of ~~$1.7~~$0.9 million for the three months ended ~~September~~June 30, ~~2017.~~2020. The change in fair value of net trust assets, excluding REO was due to ~~$4.5~~$2.3 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of increases in loss assumptions on certain trusts during the period partially offset by a decrease in forward LIBOR. Additionally, the NRV of REO increased $1.5 million during the period attributed to lower expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $1.5 million for the three months ended June 30, 2019. The change in fair value of net trust assets, excluding REO was due to $3.1 million in gains from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of a decrease in forward LIBOR during the quarter partially offset by an increase in loss assumptions for certain trusts. Additionally, the NRV of REO decreased $4.6 million during the period attributed to higher expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $3.2 million for the six months ended June 30, 2020. The change in fair value of net trust assets, excluding REO was due to $6.4 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral as a result of increases in loss assumptions on certain trusts during the period partially offset by a decrease in forward LIBOR. Additionally, the NRV of REO increased $3.2 million during the period attributed to lower expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $4.1 million for the six months ended June 30, 2019. The change in fair value of net trust assets, excluding REO was due to $3.0 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral primarily associated with ~~an increase in LIBOR,~~increased loss assumptions partially offset by ~~updated assumptions on certain later vintage trusts with improved performance.~~the recent decrease in forward LIBOR. Additionally, the NRV of REO ~~increased $2.7~~decreased $1.1 million during the period attributed to ~~lower~~higher expected loss severities on properties within certain states held in the long-term mortgage portfolio during the period.

~~The change in fair value related to our net trust assets (residual interests in securitizations) was a gain~~

Table of $6.6 million for the nine months ended September 30, 2017. The change in fair value of net trust assets, excluding REO was due to $1.9 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral primarily associated with an increase in LIBOR, partially offset by updated assumptions on certain later vintage trusts with improved performance. Additionally, the NRV of REO increased $8.5 million during the period as a result of lower expected loss severities on properties held in the long-term mortgage portfolio.Contents

Income Taxes

We recorded income tax expense of ~~$2.1 million~~$15 thousand and ~~$3.6 million~~$51 thousand for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively. Tax expense for the three and six months ended June 30, 2020 is primarily the result of ~~the recognition~~state income taxes from states where we do not have net operating loss carryforwards or state minimum taxes. We recorded income tax expense of ~~a deferred tax liability created by the amortization of an indefinite-life intangible asset (goodwill)~~$81 thousand and ~~amortization of the deferred charge. The deferred tax liability~~$167 thousand for ~~indefinite-life intangibles cannot be included in the calculation of valuation allowance as these liabilities cannot be considered when determining the realizability of the net deferred tax assets.~~

~~For~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, we recorded income tax benefit of $130 thousand~~2019, respectively. Tax expense for the three and ~~an expense of $728 thousand, respectively,~~six months ended June 30, 2019 is primarily the result of ~~a return to provision adjustment for the 2015 tax return booked in the third quarter, amortization of the deferred charge, federal alternative minimum tax (AMT), and~~ state income taxes from states where we do not have net operating loss carryforwards or state minimum taxes, ~~including AMT The deferred charge represents the deferral of income tax expense on inter-company profits that resulted~~offset by a benefit resulting from the ~~sale of mortgages~~intraperiod allocation rules that are applied when there is a pre-tax loss from taxable subsidiaries to IMH prior to 2008. The deferred charge amortization and/or impairment, which does not result in any tax liability to be paid is calculated based on the change in fair value of the underlying securitized mortgage collateral during the period. The deferred charge is included incontinuing operations and pre-tax income from 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.~~comprehensive income.

~~Table of Contents~~

As of December 31, ~~2016,~~2019, we had estimated federal net operating loss (NOL) carryforwards of approximately ~~$581.8~~$566.6 million. Federal ~~net operating loss~~NOL carryforwards begin to expire in 2027. As of ~~September 30, 2017, the estimated Federal NOL carryforward expiration schedule is as follows (in millions):~~

Tax Year Established

Amount

Expiration Date
12/31/2007

$
228.8

12/31/2027
12/31/2008

3.6

12/31/2028
12/31/2009

101.6

12/31/2029
12/31/2010

89.7

12/31/2030
12/31/2011

44.1

12/31/2031
12/31/2012

—

12/31/2032
12/31/2013

28.5

12/31/2033
12/31/2014

—

12/31/2034
12/31/2015

30.5

12/31/2035
12/31/2016

55.0

12/31/2036
Total Federal NOLs

$
581.8

~~As of~~ December 31, ~~2016,~~2019, we had estimated California ~~net operating loss (NOL)~~NOL carryforwards of approximately ~~$487.0~~$385.2 million, of which ~~$86.9 million~~begin to expire in ~~2017.~~2028. We may not be able to realize the maximum benefit due to the nature and tax ~~entity~~entities that ~~holds~~hold the ~~NOL~~NOLs.

Results of Operations by Business Segment

We have three primary operating segments: Mortgage Lending, Long-Term Mortgage Portfolio and Real Estate ~~Services and Long-Term Mortgage Portfolio.~~Services. Unallocated corporate and other administrative costs, including the cost associated with being a public company, are presented in Corporate. Segment operating results are as follows:

Mortgage Lending


	For the Three Months Ended September 30,
					Increase		%
	2017		2016		(Decrease)		Change

									For the Three Months Ended June 30,
													$		%
									2020		2019		Change		Change
Gain on sale of loans, net	$	42,476	$	113,158	$	(70,682)	(62)	%	$	1,451	$	29,472	$	(28,021)	(95)	%
Servicing fees, net		8,492		3,789		4,703	124			1,352		3,536		(2,184)	(62)
Loss on mortgage servicing rights, net		(10,513)		(15,857)		5,344	34			(8,443)		(9,887)		1,444	15
Other		—		18		(18)	(100)
Total revenues		40,455		101,108		(60,653)	(60)			(5,640)		23,121		(28,761)	(124)

Other income		1,106		1,092		14	1			287		1,941		(1,654)	(85)

Personnel expense		(21,268)		(37,996)		16,728	44			(6,154)		(12,777)		6,623	52
Business promotion		(10,376)		(10,310)		(66)	(1)			(74)		(2,013)		1,939	96
General, administrative and other		(5,018)		(5,578)		560	10			(2,136)		(2,666)		530	20
Accretion of contingent consideration		(396)		(1,591)		1,195	75
Change in fair value of contingent consideration		4,798		(23,215)		28,013	121
Earnings before income taxes	$	9,301	$	23,510	$	(14,209)	(60)	%
(Loss) earnings before income taxes									$	(13,717)	$	7,606	$	(21,323)	(280)	%

For the three months ended ~~September~~June 30, ~~2017,~~2020, gain on sale of loans, net ~~were $42.5~~was $1.5 million compared to ~~$113.2~~$29.5 million in the comparable ~~2016~~2019 period. The ~~$70.7~~$28.0 million decrease for the three months ended June 30, 2020 is primarily due to a ~~$52.8~~$49.7 million decrease in ~~premiums from the~~gain on sale of ~~mortgage~~ loans, a ~~$23.0 million decrease in premiums from servicing retained loan sales, a $6.6 million decrease in mark-to-markt gains on LHFS, a $3.5~~$2.1 million decrease in realized and unrealized net gains on derivative financial instruments and a $352 thousand decrease of premiums from servicing retained loan sales. Partially offsetting these decreases in gain on sale of loans was a $17.4 million increase in mark-to-market gains on LHFS, a $4.7 million decrease in direct loan origination expenses and a $1.9 million decrease in provision for repurchases for the three months ended June 30, 2020.

The significant reduction in gain on sale of loans, net was the result of our temporary pause in lending during the second quarter as we believed it was prudent to de-risk our consolidated balance sheet and protect liquidity due to the significant reduction in value assigned by investors and counterparties for our NonQM position. On June 4, 2020, we announced our re-engagement in lending activities. As a result of the temporary suspension in lending, for the three months ended June 30, 2020, we originated and sold $2.1 million and $489.1 million of loans, respectively, as compared to $821.4 million and $861.2 million of loans originated and sold, respectively, during the same period in 2019.

5356

Table of Contents

For the three months ended June 30, 2020, servicing fees, net were $1.4 million compared to $3.5 million in the comparable 2019 period. The decrease in servicing fees, net was due to the sale of $4.1 billion in UPB of Freddie Mac MSRs as well as the significant decrease in mortgage interest rates as compared to the first quarter of 2019. The substantial decrease in mortgage interest rates caused a significant increase in runoff of our mortgage servicing portfolio which combined with the servicing sale decreased the servicing portfolio average balance 73% to $1.6 billion for the three months ended June 30, 2020 as compared to an average balance of $6.1 billion for the three months ended June 30, 2019. During the three months ended June 30, 2020, we had $11.3 million in servicing retained loan sales.

For the three months ended June 30, 2020, loss on MSRs, net was $8.4 million compared to a loss of $9.9 million in the comparable 2019 period. As previously discussed, in May 2020, we sold $4.1 billion in UPB of Freddie Mac MSRs and recorded a $5.3 million loss on sale of MSRs primarily as a result of fees associated with the sale. Additionally, for the three months ended June 30, 2020, we recorded a $3.1 million loss from a change in fair value of MSRs primarily due to changes in fair value associated with changes in market rates, inputs and assumptions as well as voluntary and scheduled prepayments. As a result of the aforementioned decrease in interest rates during 2019 and through the second quarter of 2020, $3.0 million of the $3.1 million change in fair value of MSRs was due to prepayments, with $1.9 million primarily due to an increase in prepayment speed assumptions and $1.1 million due to voluntary prepayments.

For the three months ended June 30, 2020, other income decreased to $287 thousand as compared to $1.9 million in the comparable 2019 period. The $1.7 million decrease in other income was primarily due to a $1.4 million decrease net interest spread between loans held-for-sale and their related warehouse borrowing during the second quarter of 2020 as a result of our temporary pause in lending for most of the quarter. The decrease in other income was also attributable to a $93 thousand increase in interest expense related to an increase in the utilization of the MSR financing facilities during the second quarter of 2020, a $77 thousand decrease in interest income on mortgage-backed securities purchased and sold during 2019 and a $52 thousand decrease on invested cash balances.

Personnel expense decreased $6.6 million to $6.2 million for the three months ended June 30, 2020 as compared to the same period in 2019. The decrease is primarily related to the aforementioned temporary pause in lending during the three months ended June 30, 2020. As a result of the temporary pause in lending, we furloughed a significant amount of our workforce, which resulted in average headcount in the mortgage lending segment decreasing by 58% for the three months ended June 30, 2020 as compared to the same period in 2019. As part of the furlough, we covered the employees’ costs of health and medical benefits to provide tangible support to our furloughed employees during the unprecedented hardship.

Business promotion decreased $1.9 million to $74 thousand for the three months ended June 30, 2020 as compared to $2.0 million for the same period in the prior year. Business promotion decreased as a result of the aforementioned temporary pause in lending during the three months ended June 30, 2020. As we reengage in lending activities, we expect business promotion expense to decrease as compared to prior periods as a result of the current interest rate environment. We will continue to source leads through digital campaigns, which allow for a more cost effective approach, increasing the ability to be more price and product competitive to more specific target geographies.

General, administrative and other expenses decreased to $2.1 million for the three months ended June 30, 2020, compared to $2.7 million for the same period in 2019. The decrease was related to a reduction in most general, administrative and other expenses as a result of the temporary pause in lending during the three months ended June 30, 2020. Partially offsetting the decrease was a $196 thousand increase in legal and professional fees as a result of exploring alternative exit strategies for our NonQM position during the three months ended June 30, 2020.

Table of Contents


	For the Six Months Ended June 30,
					$		%
	2020		2019		Change		Change
(Loss) gain on sale of loans, net	$	(26,712)	$	41,686	$	(68,398)	(164)	%
Servicing fees, net		3,859		6,505		(2,646)	(41)
Loss on mortgage servicing rights, net		(26,753)		(15,510)		(11,243)	(72)
Total revenues		(49,606)		32,681		(82,287)	(252)

Other income		2,387		3,355		(968)	(29)

Personnel expense		(24,134)		(24,836)		702	3
Business promotion		(3,197)		(4,909)		1,712	35
General, administrative and other		(5,976)		(5,210)		(766)	(15)
(Loss) earnings before income taxes	$	(80,526)	$	1,081	$	(81,607)	(7,549)	%

For the six months ended June 30, 2020, (loss) gain on sale of loans, net was a loss of ($26.7) million compared to a gain of $41.7 million in the comparable 2019 period. The $68.4 million decrease for the six months ended June 30, 2020, is primarily due to the aforementioned temporary pause in lending during the second quarter of 2020. The decrease in (loss) gain on sale of loans, net was most notably due to a $31.5 million increase in mark-to-market losses on LHFS, a $17.6 million increase in realized and unrealized net losses on derivative financial instruments, a $15.8 million decrease in (loss) gain on sale of loans and a $1.8 million increase in provision for ~~repurchases, partially offset~~repurchases.

As previously discussed, for the six months ended June 30, 2020, the predominance of our loss was due to the substantial remarking of our NonQM loan portfolio held-for sale as a result of spreads widening substantially on credit assets due to potential pandemic related payment delinquencies and forbearances, causing a severe decline in the values assigned by counterparties for NonQM assets, which resulted in a ~~$17.2 million decrease in direct loan origination expenses.~~

~~The overall decrease in gain~~significant loss on sale of loans, ~~net was primarily due to a 51% decrease in volume as well as a decrease in gain on sale margins.~~net. For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, we originated and sold ~~$2.1~~$1.5 billion and ~~$2.1~~$2.2 billion of loans, respectively, as compared to ~~$4.2~~$1.4 billion and ~~$4.1~~$1.3 billion of loans originated and sold, respectively, during the same period in 2016. Margins decreased to approximately 204 bps for the three months ended September 30, 2017 as compared to 268 bps for the same period in 2016 due to margin compression across all three channels as a result of the increase in interest rates as compared to the third quarter of 2016 as well as an increase in competition for volume.2019.

For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, servicing fees, net ~~was $8.5~~were $3.9 million compared to ~~$3.8~~$6.5 million in the comparable ~~2016~~2019 period. The ~~increase~~decrease in servicing fees, net was the result of the significant decrease in mortgage interest rates as compared to the first six months of 2019 as well as the sale of $4.1 billion in UPB of Freddie Mac MSRs. The substantial decrease in mortgage interest rates caused a significant increase in runoff of our mortgage servicing portfolio ~~increasing 81% to an~~which combined with the servicing sale decreased the servicing portfolio average balance ~~of $15.4~~48% to $3.2 billion for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to an average balance of ~~$8.5~~$6.2 billion for the ~~three~~comparable period in 2019. During the six months ended ~~September~~June 30, ~~2016. The increase in the average balance of the servicing portfolio is a result of our efforts during the past year to retain servicing with fewer bulk sales of MSRs. We~~2020, we had ~~$1.9 billion~~$196.2 million in servicing retained loan ~~sales during~~sales. As previously discussed, in May 2020, we completed the ~~three months ended September 30, 2017 with no bulk sales~~sale of ~~MSRs.~~$4.1 billion in UPB of Freddie Mac MSRs and as a result, we expect servicing fees, net to decline in future periods.

For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, loss on MSRs, net was ~~$10.5~~$26.8 million compared to ~~$15.9~~a loss of $15.5 million in the comparable ~~2016~~2019 period. As previously discussed, in May 2020, we sold $4.1 billion in UPB of Freddie Mac MSRs and recorded a $5.3 million loss on sale of MSRs primarily as a result of fees associated with the sale. For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, we recorded ~~an $11.2~~a $21.9 million loss from a change in fair value of MSRs primarily ~~the~~due to changes in fair value associated with changes in market rates, inputs and assumptions as well as voluntary and scheduled prepayments. As a result of ~~mark-to-market changes related~~the aforementioned decrease in interest rates during 2019 and through the second quarter of 2020, $21.4 million of the $21.9 million change in fair value of MSRs was due to ~~amortization as well as~~prepayments, with $17.7 million primarily due to an increase in prepayment ~~speeds. During the quarter, we had an $8 thousand loss on sale of mortgage servicing rights related~~speed assumptions and $3.8 million due to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods. Partially offsetting the loss was $672 thousand in realized and unrealized gains from hedging instruments related to MSRs.voluntary prepayments.

For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, other income ~~was flat at $1.1~~decreased to $2.4 million as compared to $3.4 million in the comparable ~~2016~~2019 period. The ~~$14 thousand increase~~$1.0 million decrease in other income was primarily due to a ~~$178~~$639 thousand ~~increase in~~decrease net interest spread between loans held-for-sale ~~finance receivables~~ and their related warehouse borrowing ~~expense~~during the six months ended June 30, 2020 as ~~well as~~compared to the comparable period in 2019. The decrease in other income was also attributable to a ~~$28 thousand increase in interest income on invested cash balances partially offset by a $192~~$118 thousand increase in interest expense related to an increase in the utilization of the MSR financing ~~facility entered into~~facilities during the

Table of Contents

quarter, a $91 thousand decrease in ~~February 2017.~~interest income on mortgage-backed securities purchased and sold during 2019 and a $89 thousand decrease on invested cash balances.

Personnel expense decreased to $24.1 million for the six months ended June 30, 2020 as compared to $24.8 million for the same period in 2019. Despite the temporary pause in lending during the three months ended June 30, 2020, personnel expense only decreased by $702 thousand due to an increase in originations and related employee commission expense during the first quarter of 2020 as compared to 2019, partially offset by the aforementioned furlough during the second quarter of 2020.

Business promotion decreased $1.7 million to $3.2 million for the six months ended June 30, 2020 as compared to $4.9 million for the same period in the prior year. Business promotion decreased as a result of the aforementioned temporary pause in lending during the three months ended June 30, 2020. As we reengage in lending activities, we expect business promotion expense to decrease as compared to prior periods as a result of the current interest rate environment. We will continue to source leads through digital campaigns, which allow for a more cost effective approach, increasing the ability to be more price and product competitive to more specific target geographies.

General, administrative and other expenses increased to $6.0 million for the six months ended June 30, 2020, compared to $5.2 million for the same period in 2019. The increase was ~~$21.3 million~~partially related to a $513 thousand increase in occupancy expense primarily due to ROU asset impairment as well as additional leased space as compared to the first quarter of 2019. In August 2019, we entered into an agreement to lease additional office space in our corporate office to accommodate the staffing increase during the third quarter of 2019. During the first quarter of 2020, as a result of the pandemic and subsequent reduction in lending activities, we consolidated one floor of our corporate office and recognized ROU asset impairment of $393 thousand for the additional space leased in August 2019, in addition to a $198 thousand increase in occupancy expense as compared to the first six months of 2019. The increase was also due to a $314 thousand increase in legal and professional fees as a result of exploring alternative exit strategies for our NonQM position during the three months ended June 30, 2020. Partially offsetting the increases in expenses outlined above was a reduction in all other general, administrative and other expenses as a result of the temporary pause in lending during the three months ended June 30, 2020.

Long-Term Mortgage Portfolio


	For the Three Months Ended June 30,
					$		%
	2020		2019		Change		Change
Other revenue	$	30	$	131	$	(101)	77	%

Personnel expense		(35)		(30)		(5)	(17)
General, administrative and other		(144)		(79)		(65)	(82)
Total expenses		(179)		(109)		(70)	(64)

Net interest income		1,089		1,089		—	-
Change in fair value of long-term debt		(4,208)		388		(4,596)	(1,185)
Change in fair value of net trust assets, including trust REO gains (losses)		(864)		(1,459)		595	41
Total other (expense) income		(3,983)		18		(4,001)	(22,228)
(Loss) earnings before income taxes	$	(4,132)	$	40	$	(4,172)	(10,430)	%

For the three months ended June 30, 2020 and 2019, net interest income totaled $1.1 million. Net interest income was flat for the three months ended ~~September~~June 30, ~~2017, compared to $38.0 million for the comparable period of 2016. The decrease is~~2020 primarily ~~related~~attributable to a ~~reduction~~$158 thousand decrease in ~~commission~~net interest spread on the long-term mortgage portfolio offset by a $158 thousand decrease in interest expense ~~due to~~on the long-term debt associated with a decrease in loan originations as well as staff reductions made in the first quarter of 2017. As a result of the staff reductions in the first quarter of 2017, average headcount of the mortgage lending operations decreased 27% for the third quarter of 2017three-month LIBOR as compared to the same period in ~~2016.~~ 2019.

~~Business promotion~~During the three months ended June 30, 2020, the fair value of the long-term debt increased $2.2 million to $41.8 million from $39.6 million at March 31, 2020. The increase in estimated fair value was ~~flat at $10.4~~the result of a $4.2 million change in the market specific credit risk as a result of an increase in the forward LIBOR curve as compared to the first quarter of 2020, as well as a $157 thousand increase due to accretion partially offset by a reduction of $2.2 million change in the instrument specific credit risk.

Table of Contents

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $0.9 million for the three months ended ~~September~~June 30, 2017 and 2016. Our centralized call center purchases leads and promotes its business through radio and television advertisements. During the third quarter of 2017, business promotion was relatively flat as compared to 2016 with continued efforts to increase NonQM and purchase money production with the reduction in refinance activity as a result of the increase in interest rates as compared to the third quarter of 2016.

General, administrative and other expenses decreased to $5.0 million for the three months ended September 30, 2017, compared to $5.6 million for the same period in 2016. The decrease was primarily related to a $561 thousand decrease in other general and administrative expenses and a $156 thousand decrease in data processing expense, partially offset by a $157 thousand increase in occupancy expense.

~~Table of Contents~~

updated assumptions as well as a reduction in the estimated earn-out percentage as compared to 2016. The accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period in December 2017.

We recorded a $4.8 million change in fair value associated with a reduction in the contingent consideration liability for the third quarter of 2017 related to updated assumptions including current market conditions.2020. The change in fair value of ~~contingent consideration~~net trust assets, excluding REO was ~~primarily related~~due to ~~expected margin compression as well as a reduction~~$2.3 million in ~~origination volume over the remaining earn-out period which ends~~losses from changes in ~~December 2017. The~~ fair value of ~~contingent consideration may change from quarter to quarter based upon actual experience~~securitized mortgage borrowings and ~~updated~~securitized mortgage collateral as a result of increases in loss assumptions ~~used to forecast pre-tax earnings for CCM.~~ ~~The decrease in~~on certain trusts during the ~~contingent consideration liability resulted in an increase in earnings of $4.8 million in the third quarter of 2017.~~

For the Nine Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Gain on sale of loans, net

$
116,602

$
245,849

$
(129,247)

(53)
%
Servicing fees, net

23,575

8,680

14,895

172

Loss on mortgage servicing rights, net

(18,159)

(41,249)

23,090

56

Other

19

70

(51)

(73)

Total revenues

122,037

213,350

(91,313)

(43)

Other income

2,096

2,148

(52)

(2)

Personnel expense

(64,226)

(92,334)

28,108

30

Business promotion

(30,668)

(30,721)

53

0

General, administrative and other

(15,085)

(15,214)

129

1

Accretion of contingent consideration

(1,948)

(5,244)

3,296

63

Change in fair value of contingent consideration

11,052

(34,569)

45,621

132

Earnings before income taxes

$
23,258

$
37,416

$
(14,158)

(38)

For the nine months ended September 30, 2017, gain on sale of loans, net were $116.6 million compared to $245.8 million in the comparable 2016 period. The $129.2 million decrease is primarily due to a $108.3 million decrease in premiums from the sale of mortgage loans, a $49.1 million decrease in premiums from servicing retained loan sales and an $11.3 million decrease in mark-to-market gains on LHFS,period partially offset by a ~~$39.6 million~~ decrease in ~~direct loan origination expenses, $149 thousand decrease~~forward LIBOR. Additionally, the NRV of REO increased $1.5 million during the period attributed to lower expected loss severities on properties within certain states held in ~~realized and unrealized net losses on derivative financial instruments and a $586 thousand decrease in provision for repurchases.~~the long-term mortgage portfolio during the period.

~~The overall decrease in gain on sale of loans, net was primarily due to a 44% decrease in volumes as well as a decrease in gain on sale margins.~~


	For the Six Months Ended June 30,
					$		%
	2020		2019		Change		Change
Other revenue	$	72	$	98	$	(26)	(27)	%

Personnel expense		(69)		(67)		(2)	(3)
General, administrative and other		(281)		(183)		(98)	(54)
Total expenses		(350)		(250)		(100)	(40)

Net interest income		2,376		1,928		448	23
Change in fair value of long-term debt		4,828		654		4,174	638
Change in fair value of net trust assets, including trust REO gains (losses)		(3,247)		(4,142)		895	22
Total other income (expense)		3,957		(1,560)		5,517	354
Earnings (loss) before income taxes	$	3,679	$	(1,712)	$	5,391	315	%

For the ~~nine~~six months ended ~~September~~June 30, ~~2017 we originated and sold $5.5 billion and $5.3 billion of loans, respectively,~~2020, net interest income totaled $2.4 million as compared to ~~$9.8 billion and $9.3 billion of loans originated and sold, respectively, during the same period in 2016. Margins decreased to approximately 214 bps~~$1.9 million for the ~~nine~~comparable 2019 period. Net interest income increased $448 thousand for the six months ended ~~September~~June 30, 2017 as compared to 251 bps for the same period in 2016 due to margin compression across all three channels as a result of the increase in interest rates as compared to the first nine months of 2016 as well as an increase in competition for volume.

For the nine months ended September 30, 2017, servicing fees, net was $23.6 million compared to $8.7 million in the comparable 2016 period. The increase in servicing fees, net was the result of the servicing portfolio increasing 122% to an average balance of $14.1 billion for the nine months ended September 30, 2017 as compared to an average balance of $6.4 billion for the nine months ended September 30, 2016. The increase in the average balance of the servicing portfolio is a result of our efforts during the past year to retain servicing with fewer bulk sales of MSRs. We had $4.7 billion in servicing retained loan sales during the nine months ended September 30, 2017. Partially offsetting the increase was a bulk sale of NonQM MSRs totaling approximately $155.9 million in UPB.

~~Table of Contents~~

For the nine months ended September 30, 2017, loss on MSRs, net was $18.2 million compared to $41.2 million in the comparable 2016 period. For the nine months ended September 30, 2017, we recorded a $20.0 million loss from a change in fair value of MSRs2020 primarily the result of mark-to-market changes related to amortization as well as an increase in prepayment speeds. During the nine months ended September 30, 2017, we had a $90 thousand loss on sale of mortgage servicing rights related to refunds of premiums to investors for loan payoffs partially offset by recoveries of previously written off holdbacks associated with sales of servicing rights in previous periods. Partially offsetting the loss was a $2.0 million increase in realized and unrealized gains from hedging instruments related to MSRs.

~~For the nine months ended September 30, 2017, other income was flat at $2.1 million compared to the comparable 2016 period. The $52 thousand decrease in other income was due~~attributable to a ~~$674 thousand increase in interest expense related to the MSR financing facility entered into in February 2017, partially offset by a $596~~$199 thousand increase in net interest spread ~~between loans held-for-sale, finance receivables and their related warehouse borrowing expense~~on the long-term mortgage portfolio as well as a ~~$28~~$248 thousand ~~increase~~decrease in interest ~~income~~expense on ~~invested cash balances.~~

~~Personnel expense was $64.2 million for~~ the ~~nine months ended September 30, 2017, compared to $92.3 million for the comparable period of 2016. The decrease is primarily related to a reduction in commission expense due to a~~long-term debt associated with an decrease in loan originations as well as staff reductions made in the first quarter of 2017. With the decline in origination volumes in the first quarter of 2017 we made staff reductions, of which the full impact of the reductions were not reflected until the second quarter. As a result, average headcount decreased 16% for the nine months ended September 30, 2017three-month LIBOR as compared to the same period in ~~2016.~~2019.

~~Business promotion was flat at $30.7 million for~~During the ~~nine~~six months ended ~~September~~June 30, ~~2017 and~~2020, the ~~comparable period~~fair value of ~~2016. Our centralized call center purchases leads and promotes its business through radio and television advertisements. During~~long-term debt decreased by $3.6 million to $41.8 million from $45.4 million at December 31, 2019. The decrease in estimated fair value was the ~~first nine months~~result of ~~2017, business promotion was flat due to efforts to increase NonQM and purchase money production with~~a $4.8 million change in the ~~reduction in refinance activity~~market specific credit risk as a result of a decrease in the ~~increase in interest rates~~forward LIBOR curve as compared to the ~~first nine months~~fourth quarter of ~~2016~~.

General, administrative and other expenses decreased to $15.1 million for the nine months ended September 30, 2017, compared to $15.2 million for the same period in 2016. The decrease was primarily related to a $693 thousand decrease in other general and administrative expenses and an $81 thousand decrease in legal and professional fees,2019 partially offset by an $887 thousand change in the instrument specific credit risk and a ~~$645~~$318 thousand increase ~~in occupancy expense.~~

As part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in December 2017, which increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period. In the first nine months of 2017, accretion increased the contingent consideration liability by $1.9 million as compared to $5.2 million during the first nine months of 2016. The decrease in accretion is due to the reduction of forecasted pre-tax earnings of CCM as a result of updated assumptions as well as a reduction in the estimated earn-out percentage as compared to 2016. The accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period in December 2017.accretion.

~~We recorded an $11.1 million~~The change in fair value ~~associated with~~related to our net trust assets (residual interests in securitizations) was a ~~reduction in the contingent consideration liability~~loss of $3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 related to updated assumptions including current market conditions.~~2020. The change in fair value of ~~contingent consideration~~net trust assets, excluding REO was ~~primarily related~~due to ~~expected margin compression as well as a reduction~~$6.4 million in ~~origination volume over the remaining earn-out period which ends~~losses from changes in ~~December 2017. The~~ fair value of ~~contingent consideration may change from quarter to quarter based upon actual experience~~securitized mortgage borrowings and ~~updated~~securitized mortgage collateral as a result of increases in loss assumptions ~~used to forecast pre-tax earnings for CCM.~~ ~~The~~on certain trusts during the period partially offset by a decrease in forward LIBOR. Additionally, the ~~contingent consideration liability resulted~~NRV of REO increased $3.2 million during the period attributed to lower expected loss severities on properties within certain states held in ~~an increase in earnings of $11.1 million for~~ the ~~nine months ended September 30, 2017.~~long-term mortgage portfolio during the period.

5660

Table of Contents

Real Estate Services


	For the Three Months Ended September 30,
					Increase		%
	2017		2016		(Decrease)		Change

									For the Three Months Ended June 30,
													$		%
									2020		2019		Change		Change
Real estate services fees, net	$	1,355	$	2,678	$	(1,323)	(49)	%	$	293	$	807	$	(514)	(64)	%
Personnel expense		(638)		(1,863)		1,225	66			(287)		(280)		(7)	(3)
General, administrative and other		(159)		(142)		(17)	(12)			(69)		(65)		(4)	(6)
Earnings before income taxes	$	558	$	673	$	(115)	(17)	%
(Loss) earnings before income taxes									$	(63)	$	462	$	(525)	(114)	%

For the three months ended ~~September~~June 30, ~~2017,~~2020, real estate services fees, net were ~~$1.4 million~~$293 thousand compared to ~~$2.7 million~~$807 thousand in the comparable ~~2016~~2019 period. The ~~$1.3 million~~$514 thousand decrease in real estate services fees, net was the result of a ~~$1.0 million decrease in loss mitigation fees, a $302~~$376 thousand decrease in real estate ~~and recovery~~service fees and a ~~$22~~$132 thousand decrease in loss mitigation fees. The decrease in real estate ~~services. The $1.3 million decrease~~service fees, loss mitigation and real estate and recovery fees was ~~primarily the~~a result of athe continued decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to ~~2016.~~2019.


	For the Six Months Ended June 30,
					$		%
	2020		2019		Change		Change
Real estate services fees, net	$	687	$	1,613	$	(926)	(57)	%
Personnel expense		(575)		(601)		26	4
General, administrative and other		(142)		(131)		(11)	(8)
(Loss) earnings before income taxes	$	(30)	$	881	$	(911)	(103)	%

For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, real estate services fees, net were $687 thousand compared to $1.6 million in the ~~$1.2 million reduction~~comparable 2019 period. The $926 thousand decrease in ~~personnel expense~~real estate services fees, net was ~~due to~~primarily the result of a ~~reduction~~$627 thousand decrease in ~~personnel~~real estate service fees, a $220 thousand decrease in loss mitigation fees and ~~personnel related costs as~~a $79 thousand decrease in real estate and recovery fees. The decrease in real estate service fees, loss mitigation and real estate and recovery fees was a result of athe continued decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to ~~2016.~~2019.

For the Nine Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Real estate services fees, net

$
4,492

$
6,773

$
(2,281)

(34)
%
Personnel expense

(2,046)

(4,721)

2,675

57

General, administrative and other

(488)

(507)

19

4

Earnings before income taxes

$
1,958

$
1,545

$
413

27
%

For the nine months ended September 30, 2017, real estate services fees, net were $4.5 million compared to $6.8 million in the comparable 2016 period. The $2.3 million decrease in real estate services fees, net was the result of a $1.2 million decrease in real estate and recovery fees and a $1.1 million decrease in loss mitigation fees partially offset by a $75 thousand increase in real estate services. The $2.3 million decrease was primarily the result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to 2016.Corporate

For the nine months ended September 30, 2017, the $2.7 million reduction in personnel expense was due to a reduction in personnel and personnel related costs as a result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to 2016.

~~Table of Contents~~

~~Long-Term Mortgage Portfolio~~

For the Three Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Other revenue

$
81

$
71

$
10

14
%

Personnel expense

(3)

(3)

—

0
%
General, administrative and other

(64)

(99)

35

35

Total expenses

(67)

(102)

35

34

Net interest income

919

1,495

(576)

(39)

Change in fair value of long-term debt

104

(8,641)

8,745

101

Change in fair value of net trust assets, including trust REO gains (losses)

(1,745)

1,071

(2,816)

(263)

Total other income (expense)

(722)

(6,075)

5,353

88

Loss before income taxes

$
(708)

$
(6,106)

$
5,398

88
%

For the three months ended September 30, 2017, net interest income totaled $919 thousand as compared to $1.5 million for the comparable 2016 period. Net interest income decreased $576 thousand for the three months ended September 30, 2017 primarily attributable to a $596 thousand decrease in net interest spread on the long-term mortgage portfolio as compared to the previous period partially offset by a $19 thousand decrease in interest expense on the long-term debt. The reduction in interest expense on the long-term debt was due to the aformentioned ~~exchange of trust preferred securities~~ ~~in May 2017, partially offset by an increase in three-month LIBOR as compared to the prior year.~~

Change in the fair value of long-term debt resulted in income of $104 thousand for the three months ended September 30, 2017, compared to an $8.6 million loss for the comparable 2016 period. The decrease in the estimated fair value of long-term debt in the third quarter of 2017 was the result of a slight decrease in the forward LIBOR curve.

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $1.7 million for the three months ended September 30, 2017. The change in fair value of net trust assets, excluding REO was due to $4.5 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral primarily associated with an increase in LIBOR, partially offset by updated assumptions on certain later vintage trusts with improved performance. Additionally, the NRV of REO increased $2.7 million during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period.

~~Table of Contents~~

For the Nine Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Other revenue

$
209

$
183

$
26

14
%

Personnel expense

(11)

(14)

3

21
%
General, administrative and other

(242)

(333)

91

27

Total expenses

(253)

(347)

94

27

Net interest income

2,752

4,259

(1,507)

(35)

Loss on extinguishment of debt

(1,265)

—

(1,265)

n/a

Change in fair value of long-term debt

(2,657)

(7,286)

4,629

64

Change in fair value of net trust assets, including trust REO gains (losses)

6,578

2,609

3,969

152

Total other income

5,408

(418)

5,826

1394

Earnings (loss) before income taxes

$
5,364

$
(582)

$
5,946

1022
%

For the nine months ended September 30, 2017, net interest income totaled $2.8 million as compared to $4.3 million for the comparable 2016 period. Net interest income decreased $1.5 million for the nine months ended September 30, 2017 primarily attributable to a $1.2 million decrease in net interest spread on the long-term mortgage portfolio as well as a $305 thousand increase in interest expense on the long-term debt due to an increase in three-month LIBOR as compared to the prior year.

~~During the second quarter of 2017, we exchanged 412,264 shares of common stock for trust preferred securities with an aggregate liquidation amount of $8.5 million.~~ ~~Accrued and unpaid interest on the trust preferred securities was paid in cash in the aggregate amount of approximately $14 thousand.~~ ~~We recorded a $1.3 million loss on extinguishment of debt due to stock price appreciation after the agreed upon settlement and before the issuance date of the common stock.~~

Change in the fair value of long-term debt resulted in an expense of $2.7 million for the nine months ended September 30, 2017, compared to a $7.3 million expense for the comparable 2016. The increase in the estimated fair value of long-term debt in 2017 was primarily the result of a decrease in the discount rate attributable to an improvement in our credit risk profile, financial condition as well as an increase in three-month LIBOR during 2017.

The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $6.6 million for the nine months ended September 30, 2017. The change in fair value of net trust assets, excluding REO was due to $1.9 million in losses from changes in fair value of securitized mortgage borrowings and securitized mortgage collateral primarily associated with updated loss assumptions and recoveries on a certain later vintage multifamily trust with improved performance. Additionally, the NRV of REO increased $8.5 million during the period as a result of lower expected loss severities on properties held in the long-term mortgage portfolio.

~~Table of Contents~~

~~Corporate~~

The corporate segment includes all compensation applicable to the corporate services groups, public company costs as well as debt expense related to the Convertible Notes ~~Term Financing~~ and capital leases. This corporate services group supports all operating segments. A portion of the corporate services costs is allocated to the operating segments. The costs associated with being a public company as well as the interest expense related to the Convertible Notes and capital leases are not allocated to our other segments and remain in this segment.


	For the Three Months Ended September 30,
					Increase		%
	2017		2016		(Decrease)		Change

									For the Three Months Ended June 30,
													$		%
									2020		2019		Change		Change
Interest expense	$	(480)	$	(1,283)		803	63	%	$	(595)	$	(452)	$	(143)	(32)	%
Other expenses		(4,250)		(426)		(3,824)	(898)			(4,307)		(3,702)		(605)	(16)
Net loss before income taxes	$	(4,730)	$	(1,709)	$	(3,021)	(177)	%	$	(4,902)	$	(4,154)	$	(748)	(18)	%

For the three months ended ~~September~~June 30, ~~2017,~~2020, interest expense ~~decreased~~increased to ~~$480~~$595 thousand as compared to ~~$1.3 million for~~$452 thousand in the comparable ~~2016~~2019 period. The ~~$803~~$143 thousand ~~decrease~~increase in interest expense was primarily ~~due an $803~~a $73 thousand ~~reduction~~increase in interest expense associated with the premium financing associated with the corporate-owned life insurance

Table of Contents

trusts liability as well as a $52 thousand increase in interest expense associated with accretion related to ~~the payoff of the Term Financing~~convertible note extension entered into in ~~February 2017.~~ May 2020.

For the three months ended ~~September~~June 30, ~~2017,~~2020, other expenses increased to $4.3 million as compared to ~~$426 thousand~~$3.7 million for the comparable ~~2016~~2019 period. During the three months ended June 30, 2020, the primary increase in other expense was a $1.4 million increase in premiums associated with the corporate-owned life insurance trusts liability. Additionally, legal and professional fees increased $275 thousand as a result of exploring alternative exit strategies for our NonQM position during the three months ended June 30, 2020. Offsetting the increase in other expenses was a $1.3 million increase in the cash surrender value associated with the corporate-owned life insurance trusts as a result of the payment of premiums.


	For the Six Months Ended June 30,
					$		%
	2020		2019		Change		Change
Interest expense	$	(1,054)	$	(909)	$	(145)	(16)	%
Other expenses		(9,578)		(7,913)		(1,665)	(21)
Net loss before income taxes	$	(10,632)	$	(8,822)	$	(1,810)	(21)	%

For the six months ended June 30, 2020, interest expense increased to $1.1 million as compared to $909 thousand in the comparable 2019 period. The $145 thousand increase in interest expense was primarily ~~due~~a $73 thousand increase in interest expense associated with the premium financing associated with the corporate-owned life insurance trusts liability as well as a $52 thousand increase in interest expense associated with accretion related to ~~a reduction~~convertible note extension entered into in ~~allocated corporate~~May 2020.

For the six months ended June 30, 2020, other expenses increased to $9.6 million as compared to $7.9 million for the comparable 2019 period. During the six months ended June 30, 2020, the primary increase in other ~~segments. The corporate expenses also increased due to~~expense was a ~~$1.9~~$1.4 million increase in premiums associated with the corporate-owned life insurance trusts liability, a $1.0 million increase in benefit claims and a $621 thousand increase in legal and professional fees ~~associated with defending litigation,~~ as ~~discussed in Item 3~~a result of exploring alternative exit strategies for our NonQM position during the ~~2016 10-K and in Item 1 of Part II within this 10-Q, a $306 thousand~~three months ended June 30, 2020. Offsetting the increase in ~~personnel costs primarily associated with our increased investment in technology as well as a $211 thousand increase in healthcare costs.~~

For the Nine Months Ended September 30,






Increase

%

2017

2016

(Decrease)

Change

Interest expense

$
(1,758)

$
(4,371)

2,613

60
%
Other expenses

(11,863)

(3,551)

(8,312)

(234)

Net loss before income taxes

$
(13,621)

$
(7,922)

$
(5,699)

(72)
%

For the nine months ended September 30, 2017, interest expense decreased to $1.8 million as compared to $4.4 million for the comparable 2016 period. The $2.6 million decrease in interest expense was primarily due a $637 thousand reduction in interest expense related to the conversion of the original $20.0 million in Convertible Notes to common stock in January 2016 as well as a $1.9 million decrease in interest expense related to the payoff the Term Financing in February 2017.

~~For the nine months ended September 30, 2017,~~ other expenses ~~increased to $11.9 million as compared to $3.6 million for the comparable 2016 period. The increase~~ was ~~primarily due to an increase in corporate expenses of $4.0 million during the nine months ended September 30, 2017 as compared to the same period in 2016 and~~ a ~~reduction in allocated corporate expenses in other segments. The increase in corporate expenses is due to a $1.4~~$1.3 million increase in ~~personnel costs primarily~~the cash surrender value associated with ~~our increased investment in technology, a $786 thousand increase in healthcare costs as well~~the corporate-owned life insurance trusts as a ~~$2.4 million increase in legal and professional fees associated with defending litigation, as discussed in Item 3~~result of the ~~2016 10-K and in Item 1~~payment of ~~Part II within this 10-Q. Partially offsetting the increase was a $684 thousand decrease in data processing and equipment expense.~~premiums.

~~Table of Contents~~

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of operational and market risks. Refer to the complete discussion of operational and market risks included in Part II, Item 7 of our report on Form 10-K for the year ended December 31, 2016. There has been no material change to the types of market and operational risks faced by us.

~~Interest Rate Risk~~

Our interest rate risk arises from the financial instruments and positions we hold. This includes mortgage loans held for sale, MSRs and derivative financial instruments. These risks are regularly monitored by executive management that identify and manage the sensitivity of earnings or capital to changing interest rates to achieve our overall financial objectives.

Our principal market exposure is to interest rate risk, specifically changes in long-term Treasury rates and mortgage interest rates due to their impact on mortgage-related assets and commitments. We are also exposed to changes in short-term interest rates, such as LIBOR, on certain variable rate borrowings including our term financing, MSR financing and mortgage warehouse borrowings. We anticipate that such interest rates will remain our primary benchmark for market risk for the foreseeable future.

Our business is subject to variability in results of operations in both the mortgage origination and mortgage servicing activities due to fluctuations in interest rates. In a declining interest rate environment, we would expect our mortgage production activities’ results of operations to be positively impacted by higher loan origination volumes and gain on sale margins. Furthermore, with declining rates, we would expect the market value of our MSRs to decline due to higher actual and projected loan prepayments related to our loan servicing portfolio. Conversely, in a rising interest rate environment, we would expect a negative impact on the results of operations of our mortgage production activities but a positive impact on the market values of our MSRs. The interaction between the results of operations of our mortgage activities is a core component of our overall interest rate risk strategy.

We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds, discount rates, costs of servicing and default rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. We use a forward yield curve, which we believe better presents fair value of MSRs because the forward yield curve is the market’s expectation of future interest rates based on its expectation of inflation and other economic conditions.

Interest rate lock commitments (IRLCs) represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and our interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As such, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment through the earlier of (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range between 15 and 60 days; and our holding period of the mortgage loan from funding to sale is typically within 20 days.

We manage the interest rate risk associated with our outstanding IRLCs and mortgage loans held for sale by entering into derivative loan instruments such as forward loan sales commitments or To-Be-Announced mortgage backed securities (TBA Forward Commitments). We expect these derivatives will experience changes in fair value opposite to changes in fair value of the derivative IRLCs and mortgage loans held-for-sale, thereby reducing earnings volatility. We take into account various factors and strategies in determining the portion of the mortgage pipeline (derivative loan commitments) and mortgage loans held for sale we want to economically hedge. Our expectation of how

~~Table of Contents~~

~~many of our IRLCs will ultimately close is a key factor in determining the notional amount of derivatives used in hedging the position.~~

Mortgage loans held-for-sale are financed by our warehouse lines of credit which generally carry variable rates. Mortgage loans held for sale are carried on our balance sheet on average for only 7 to 25 days after closing and prior to being sold. As a ~~result, we believe that any negative impact related~~smaller reporting company, the Company is not required to ~~our variable rate warehouse borrowings resulting from a shift in market interest rates would not be material to our consolidated financial statements.~~provide the information required by this Item.

~~Sensitivity Analysis~~

We have exposure to economic losses due to interest rate risk arising from changes in the level or volatility of market interest rates. We assess this risk based on changes in interest rates using a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.

Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.

We used September 30, 2017 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitivity and assume instantaneous, parallel shifts in interest rate yield curves. Management uses sensitivity analysis, such as those summarized below, based on a hypothetical 25 basis point increase or decrease in interest rates, to monitor the risks associated with changes in interest rates. We believe the use of a 50 basis point shift up and down (100 basis point range) is appropriate given the relatively short time period that the mortgage loans pipeline is held on our balance sheet and exposed to interest rate risk (during the processing, underwriting and closing stages of the mortgage loans which can last up to approximately 60 days). We also actively manage our risk management strategy for our mortgage loans pipeline (through the use of economic hedges such as forward loan sale commitments and mandatory delivery commitments) and generally adjust our hedging position daily. In analyzing the interest rate risks associated with our MSRs, management also uses multiple sensitivity analyses (hypothetical 25 and 50 basis point increases and decreases) to review the interest rate risk associated with our MSRs.

At a given point in time, the overall sensitivity of our mortgage loans pipeline is impacted by several factors beyond just the size of the pipeline. The composition of the pipeline, based on the percentage of IRLC’s compared to mortgage loans held for sale, the age and status of the IRLC’s, the interest rate movement since the IRLC’s were entered into, the channels from which the IRLC’s originate, and other factors all impact the sensitivity.

These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.

The following table summarizes the estimated changes in the fair value of our mortgage pipeline, MSRs and related derivatives that are sensitive to interest rates as of September 30, 2017 given hypothetical instantaneous parallel shifts in the yield curve:

Changes in Fair Value

Down

Down

Up

Up

50 bps

25 bps

25 bps

50 bps

Total mortgage pipeline (1)

(609)

(91)

(346)

(1,081)

Mortgage servicing rights (2)

(14,350)

(6,366)

5,061

8,888

~~(1)~~

Represents unallocated mortgage loans held for sale, IRLCs and hedging instruments that are considered “at risk” for purposes of illustrating interest rate sensitivity. IRLCs and hedging instruments are considered to be unallocated when we have not committed the underlying mortgage loans for sale.

~~(2)~~

~~Includes hedging instruments used to hedge fair value changes associated with changes in interest rates relating to mortgage servicing rights~~.

~~Table of Contents~~

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 at a reasonable assurance level to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our ~~CEO~~chief executive officer and ~~CFO,~~chief financial officer, 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 ~~September~~of June 30, ~~2017,~~2020, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

Table of Contents

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~~June 30, ~~2017,~~2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Legal Proceedings

Information with respect to this item may be found in Note 11 – Commitments and Contingencies of the “Notes to Unaudited Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

ITEM 1A: RISK FACTORS

The ~~Company is~~pandemic has impaired may continue to impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in forbearances and/or delinquencies, which could negatively impact our business.

Borrowers that have been negatively impacted by the pandemic may not remit payments of principal and interest relating to their mortgage loans on a ~~defendant in~~timely basis, or at all. This could be due to an inability to make such payments, an unwillingness to make such payments, or a ~~party~~temporary or permanent waiver of the requirement to ~~a number~~make such payments, including under the terms of ~~legal actions~~any applicable forbearance, modification, or ~~proceedings that arise~~maturity extension agreement or program. On March 27, 2020, the CARES Act was enacted to provide financial assistance to individuals and businesses affected by the pandemic. The CARES Act provides certain measures to support individuals in maintaining solvency through monetary relief, including in the ~~ordinary course~~form of ~~business. In some~~loan forgiveness/forbearance. The CARES Act, among other things, provides any homeowner with a federally-backed mortgage who is experiencing financial hardship the option of ~~these actions~~up to six months of forbearance on their mortgage payments, with a potential to extend that forbearance for another six months. During the forbearance period, no additional fees, penalties or interest can accrue on the homeowner’s account. The CARES Act also established a temporary moratorium on foreclosures. Transactions we enter into to finance loans with warehouse counterparties and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to ~~each pending matter~~sell whole loans to third parties, may be ~~if any.~~

~~In accordance with applicable accounting guidance,~~negatively impacted by the ~~Company establishes an accrued liability for litigation when those matters present loss contingencies~~pandemic related payment forbearances, waiver, or other payment deferral program, including but not limited to, reducing proceeds from these transactions, require us to repurchase impacted loans and reduce proceeds or incur losses on loans sold that are ~~both probable~~within forbearance or other deferred payment programs. To the extent borrower forbearance affects our ability to finance and ~~estimable. In any case, there~~sell loans to third parties, it may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.

~~The legal matter updates summarized below are ongoing and may have an effect on the Company’s business and future financial condition and results of operations:~~

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

Loss or suspension of our approvals, or limitations placed on our delivery volume, or the potential limitation or wind-down of, the role Fannie Mae, Freddie Mac and Ginnie Mae play in the residential mortgage-backed security (MBS) market have had, and could continue to have, an adverse effect on our business, operations and financial condition.

Table of Contents

the performance of loans sold to them. These limitations and reforms could negatively impact our financial condition, net earnings and growth.

We have historically serviced loans on behalf of Fannie Mae and Freddie Mac, as well as loans that have been delivered into securitization programs sponsored by Ginnie Mae and other Counterparties in connection with the issuance of agency guaranteed mortgage-backed securities and other non-agency securitizations. These entities establish the base service fee to compensate us for servicing loans as well as the assessment of fines and penalties that may be imposed upon us for failing to meet servicing standards.

The extent and timing of any regulatory reform regarding the GSEs, Agencies, Counterparties and the home mortgage market, as well as any effect on Impac’s business operations and financial results, are uncertain. It is important for us to sell or securitize the loans we originate and, when doing so, maintain the option to also sell the related MSR's associated with these loans. Prepayment speeds on loans generated through our retail direct channel have been a concern for some investors dating back to 2016, which has resulted and could further result in adverse pricing or delays in our ability to sell or securitize loans and related MSRs on a timely and profitable basis. During the fourth quarter of 2017, Fannie Mae sufficiently limited the manner and volume for our deliveries of eligible loans such that we elected to cease deliveries to them and we expanded our whole loan investor base for these loans. In 2019, with the creation of the uniform mortgage-backed securities (UMBS) market, which was intended to improve liquidity and align prepayment speeds across Fannie Mae and Freddie Mac securities, Freddie Mac raised concerns about the high prepayment speeds of our loans generated through our retail direct channel. During 2019 and through the first half of 2020, we further expanded our investor base and completed servicing released loan sales to non-GSE whole loan investors and expect to continue to utilize these alternative exit strategies for Fannie Mae and Freddie Mac eligible loans. In July 2020, we received notification from Freddie Mac that our eligibility to sell whole loans to Freddie Mac was suspended, without cause. While we believe that the overall volume delivered under purchase commitments to the GSE’s was not material to our overall operations for 2019 and the first half of 2020, we are committed to operating actively and in good standing with our broad range of capital markets counterparties. We continue to take steps to manage our prepayment speeds to be more consistent with our industry comparables and to reestablish the full confidence and delivery mechanisms to our investor base. Despite being in a suspended status with Freddie Mac, we remain in good standing as an approved originator and/or seller/servicer with our GSE’s, Agencies and Counterparties for agency, non-agency, and government insured or guaranteed loan programs.

Substantive changes to risk-based and collateral eligibility requirements by any of the GSE’s, Agencies or Counterparties may affect our ability to originate, deliver or securitize loans. These changes may also be implemented by a GSE, Agency or Counterparty without advance notice. If the GSEs, Agencies or Counterparties cease to exist, wind down, or otherwise significantly change their business operations or if we lose our approved seller/servicer or approved counterparty status with the GSEs, Agencies or Counterparties, or if one of these parties materially limits the amount of loans we can sell to them, or we are otherwise unable to sell loans to them there could be a material adverse effect on our mortgage lending operations, financial condition, results of operations, and cash flows.

The continued spread of COVID-19 could negatively impact the availability of key personnel necessary to conduct our business.

The effects of the pandemic could adversely impact our financial condition and results of operations due to interrupted service and availability of personnel, including our executive officers and other employees that are part of our management team and an inability to recruit, attract and retain skilled personnel. To the extent our management or personnel are impacted in significant numbers by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work, our business and operating results may be negatively impacted. Moreover, the negative impacts of the pandemic necessitated a significant reduction in our workforce and additional reductions in our workforce may become necessary if economic conditions do not improve, which could negatively impact our business and results of operations. Additionally, the pandemic could negatively impact our ability to ensure operational continuity in the event our business continuity plan is not effective or ineffectively implemented or deployed during a disruption.

Table of Contents

The ~~Company believes~~continued impact of the pandemic could negatively impact the availability of key third party service providers necessary to conduct our business and the ability of counterparties to meet contractual obligations to us.

Our financial results and results of operations could be negatively impacted by the inability of third-party vendors to provide services we rely on to conduct our business and operate effectively, including vendors that ~~it has meritorious defenses~~provide IT services, mortgage origination support services, corporate support services, government services or other operational support services. Further, an inability of our counterparties to make or satisfy the ~~claims~~conditions or representations and ~~intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not~~warranties in agreements they have entered into with us could also have a material adverse effect on ~~its~~our financial condition, or results of ~~operations. Nevertheless, litigation~~operations and cash flows.

Our use of financial leverage exposes us to increased risks, including breaches and additional potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements.

Significant and widespread decreases in the fair values of our assets have caused and could continue to cause us to breach financial covenants under our borrowing facilities related to profitability, net worth and leverage. Such covenants, if breached, can result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements. During the first and second quarters of 2020, we breached such financial covenants in certain borrowing agreements with our financing counterparties and were able to obtain waivers. We continue to engage in discussions with our financing counterparties in regards to such financial covenants; however, we cannot be certain whether we will be able to remain in compliance with these financial covenants, or whether our financing counterparties will negotiate terms or amendments in respect of these financial covenants, the timing of any such negotiations or amendments or the terms thereof. Even if we continue to obtain temporary or permanent amendments or waivers from financing counterparties to amend and or waive financial covenants, there is ~~uncertain~~no certainty that we will be able to remain in compliance with such amended covenants and or receive waivers in the ~~Company~~event we breach a covenant. If any of our counterparties elected not to renew our borrowing facility, we may not ~~prevail in the lawsuits and can express no opinion as~~be able to ~~their ultimate resolution. An adverse judgment in any of these matters~~find a replacement counterparty, which could have a material adverse effect on our financial condition.

The use of alternative exit strategies subjects us to risk associated with the ~~Company’s~~potential limitation or elimination of delivery options to counterparties which has had and could continue to have a material adverse effect on our financial ~~position~~condition, results of operations and cash flows.

It is important for us to sell or securitize the loans we originate. Prepayment speeds on loans generated through our retail direct channel have been a concern for some investors dating back to 2016, which has resulted and could further result in adverse pricing or delays in our ability to sell or securitize loans and related MSRs on a timely and profitable basis. The use of alternative exit strategies has resulted in and could further result in adverse pricing, delays in our ability to sell timely as a result of due diligence, investor overlays, and increased staffing. In addition, reliance on these investors subjects us to changes in risk, collateral, and counterparty eligibility requirements which may affect our ability to deliver and securitize loans. If we are unable to meet all required eligibility criteria, which may be amended and/or implemented without notice, it could impact the volume, products, pricing, and servicing options for originated loans which could have a material adverse impact on overall operations, profitability and cash flows. Additionally, there can be no assurance that investors will continue to purchase our collateral at favorable terms, or at all.

Our NonQM product offerings may expose us to a higher risk of delinquencies, regulatory risks, foreclosures, counterparty risk and losses adversely affecting our earnings and financial condition.

We originate and acquire various types of residential mortgage products, which include NonQM and non-conforming loan products. Unlike Qualified Mortgages, NonQM loans do not benefit from a presumption that the borrower has the ability to repay the loan. In the event that these NonQM mortgages begin to experience a significant rate of default, we could be subject to statutory claims for violations of the ability to repay standard. Any such claims could materially and adversely affect our ability to underwrite these loans, our business, and results of ~~operations.~~

~~Please refer to IMH’s report on Form 10-K for the year ended December 31, 2016 and subsequent quarterly reports for a description of litigation and claims.~~

~~ITEM 1A: RISK FACTORS~~

~~A decline in the unpaid principal balance of the servicing portfolio and the related estimated fair value of the MSRs could adversely affect our net earnings,~~operations or financial ~~condition, future servicing fees and our ability to borrow on the Company’s MSR financing facilities.~~

condition.

6465

Table of Contents

~~The servicing portfolio~~While we undertake initiatives to mitigate any exposure and use our commercially reasonable efforts to ensure that we have made a reasonable determination that the ~~value~~borrowers will have the ability to repay a loan, this type of product has increased risk and exposure to litigation and claims of borrowers. If, however, we were to make a loan which does not satisfy the regulatory standards for ascertaining the borrower’s ability to repay the loan, the consequences could include giving the borrower a defense to repayment of the ~~related MSRs~~loan, which may prevent us from collecting interest and principal on that loan.

NonQM loans are ~~sensitive to changes in prevailing interest rates:~~

~~a decrease in interest rates may increase prepayment speeds which may lead to (i) increased amortization expense; (ii) decrease in servicing fees; and (iii) decrease in the value of our MSRs;~~

an increase in interest rates, together with an increase in monthly payments when an adjustable mortgage loan’s interest rate adjusts upward from an initial fixed rate or a low introductory rate, may cause increased delinquency, default and foreclosure. Increased mortgage defaults and foreclosures may adversely affect our business as they increase our expenses and reduce the number ofmortgages that generally did not qualify for purchase by government-sponsored entities such as Fannie Mae and Freddie Mac. Credit risks associated with all these mortgages ~~we service;~~

~~Our servicing portfolio is subject to “run off”, meaning that mortgage loans serviced by us~~ may be ~~prepaid prior~~greater than those associated with conforming mortgages. Mortgages made to ~~maturity~~these borrowers may entail a higher risk of delinquency and higher losses than mortgages made to borrowers who utilize conventional mortgage sources. Delinquency, foreclosures and losses generally increase during economic slowdowns or ~~repaid through standard amortization~~recessions. The actual risk of ~~principal. As~~delinquencies, foreclosures and losses on mortgages made to these borrowers may be higher to the extent the economy enters a ~~result,~~recession. The combination of different underwriting criteria and higher rates of interest can adversely affect our ~~ability~~business and financial condition from higher prepayment rates and higher delinquency rates and /or credit losses. Additionally, during periods of market dislocation, similar to ~~maintain~~what occurred during the ~~size~~first and second quarters of 2020, liquidity for NonQM and non-conforming loan products suffer more acute pressure which creates a substantial widening of credit spreads on these assets, causing a severe decline in the values assigned by investors and counterparties for NonQM and non-conforming assets. These periods of market dislocation have adversely affected the values assigned to our ~~servicing portfolio depends~~NonQM and non-conforming assets. Further periods of economic dislocation caused by the pandemic or other factors may adversely affect the liquidity for our products and may have a material adverse effect on our ~~ability to retain the right to service the existing residential mortgages or to originate additional mortgages. Significant “run off” could result in decreasing the estimated value~~business, financial condition and results of ~~the MSRs, which could have an adverse impact our net earnings.~~operations.

Our MSR financing facilities generally allow us to borrow up 55% of the estimated fair value of MSRs. A decline in value of the MSRs could limit our ability to borrow on these facilities. Limitations on borrowings on these financing facilities imposed by the amount of eligible collateral pledged could affect the borrowing capacity of the facility, which could have an adverse impact on our financial condition.

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

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

None.

ITEM 5: OTHER INFORMATION

None.

6566

Table of Contents

ITEM 6: EXHIBITS


(a)		Exhibits:
10.1		~~2010 Omnibus~~Impac Mortgage Holdings, Inc. 2020 Equity Incentive Plan ~~as amended~~(incorporated by reference to Appendix A to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on April 28, 2020).
10.2		Form of Stock Option Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit ~~10.1~~10.2 of the ~~Company’s~~Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~July 27, 2017)~~June 25, 2020).
~~10.2~~10.3 10.4		~~Line~~Form of ~~Credit Promissory Note with Merchants Bank of Indiana, dated August 17, 2017~~Restricted Stock Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit ~~10.1~~10.3 of the ~~Company’s~~Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~August 22, 2017)~~June 25, 2020).
~~10.3~~		~~Security~~Form of Restricted Stock Unit Agreement ~~executed by Impac Mortgage Corp. in favor of Merchants Bank of Indiana, dated August 17, 2017~~under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit ~~10.1~~10.4 of the ~~Company’s~~Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~August 22, 2017)~~June 25, 2020).
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.
101		The following materials from Impac Mortgage Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2020, formatted in XBRL (Extensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss), (3) the Condensed Consolidated Statements of Cash Flows, and (4) Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text.

* 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.

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~~PAUL LICON
~~Todd R. Taylor~~Paul Licon
Chief Financial Officer and Chief Accounting Officer
(~~authorized officer of registrant~~Principal Financial Officer and ~~principal financial officer)~~Principal Accounting Officer)

~~November 9, 2017~~August 7, 2020

6667


	Preferred			Common			Additional		Cumulative				Total
	Shares	Preferred		Shares	Common		Paid-In		Dividends		Retained		Stockholders’
	Outstanding	Stock		Outstanding	Stock		Capital		Declared		Deficit		Equity
Balance, December 31, 2016	2,070,678	$	21	16,019,983	$	160	$	1,168,125	$	(822,520)	$	(114,746)	$	231,040

Proceeds and tax benefit from exercise of stock options	—		—	89,537		1		569		—		—		570
Stock based compensation	—		—	—		—		1,972		—		—		1,972
Common stock issuance, net	—		—	4,423,381		44		55,410		—		—		55,454
Trust preferred exchange	—		—	412,264		4		7,029		—		—		7,033
Net earnings	—		—	—		—		—		—		13,384		13,384
Balance, September 30, 2017	2,070,678	$	21	20,945,165	$	209	$	1,233,105	$	(822,520)	$	(101,362)	$	309,453


	September 30, 2017								December 31, 2016
	Carrying		Estimated Fair Value						Carrying		Estimated Fair Value
	Amount		Level 1		Level 2		Level 3		Amount		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	34,815	$	34,815	$	—	$	—	$	40,096	$	40,096	$	—	$	—
Restricted cash		6,605		6,605		—		—		5,971		5,971		—		—
Mortgage loans held-for-sale		572,268		—		572,268		—		388,422		—		388,422		—
Finance receivables		60,912		—		60,912		—		62,937		—		62,937		—
Mortgage servicing rights		158,950		—		—		158,950		131,537		—		—		131,537
Derivative assets, lending, net		12,998		—		983		12,015		11,169		—		—		11,169
Securitized mortgage collateral		3,758,140		—		—		3,758,140		4,021,891		—		—		4,021,891

Liabilities
Warehouse borrowings	$	591,583	$	—	$	591,583	$	—	$	420,573	$	—	$	420,573	$	—
MSR financings		25,133		—		—		25,133		—		—		—		—
Term financing		—		—		—		—		29,910		—		—		29,910
Convertible notes		24,972		—		—		24,972		24,965		—		—		24,965
Contingent consideration		5,816		—		—		5,816		31,072		—		—		31,072
Long-term debt		44,561		—		—		44,561		47,207		—		—		47,207
Securitized mortgage borrowings		3,751,831		—		—		3,751,831		4,017,603		—		—		4,017,603
Derivative liabilities, lending, net		—		—		—		—		336		—		336		—


	Level 3 Recurring Fair Value Measurements
	For the Three Months Ended September 30, 2016
							Derivative
	Investment						liabilities,				Interest
	securities		Securitized		Securitized		net,		Mortgage		rate lock		Long-
	available-		mortgage		mortgage		securitized		servicing		commitments,		term		Contingent
	for-sale		collateral		borrowings		trusts		rights		net		debt		consideration
Fair value, June 30, 2016	$	21	$	4,290,994	$	(4,288,585)	$	(354)	$	54,747	$	19,303	$	(30,990)	$	(49,986)
Total gains (losses) included in earnings:
Interest income (1)		—		13,336		—		—		—		—		—		—
Interest expense (1)		—		—		(43,956)		—		—		—		(204)		—
Change in fair value		(21)		35,225		(32,644)		(49)		(8,224)		8,017		(8,641)		(24,806)
Total (losses) gains included in earnings		(21)		48,561		(76,600)		(49)		(8,224)		8,017		(8,845)		(24,806)
Transfers in and/or out of Level 3		—		—		—		—		—		—		—		—
Purchases, issuances and settlements:
Purchases		—		—		—		—		—		—		—		—
Issuances		—		—		—		—		40,890		—		—		—
Settlements		—		(184,098)		213,820		379		—		—		—		14,896
Fair value, September 30, 2016	$	—	$	4,155,457	$	(4,151,365)	$	(24)	$	87,413	$	27,320	$	(39,835)	$	(59,896)
Unrealized gains (losses) still held (2)	$	—	$	(967,291)	$	3,129,974	$	9	$	87,413	$	27,320	$	30,928	$	(59,896)


	Estimated		Valuation	Unobservable	Range of		Weighted
Financial Instrument	Fair Value		Technique	Input	Inputs		Average
Assets and liabilities backed by real estate
Securitized mortgage collateral, and	$	3,758,140	DCF	Prepayment rates	2.1 - 19.0	%	5.6	%
Securitized mortgage borrowings		(3,751,831)		Default rates	0.01 - 4.8	%	1.6	%
				Loss severities	14.0 - 99.8	%	46.3	%
				Discount rates	3.6 - 25.0	%	4.5	%
Other assets and liabilities
Mortgage servicing rights	$	158,950	DCF	Discount rate	9.0 - 14.0	%	9.6	%
				Prepayment rates	8.0 - 84.8	%	10.2	%
Derivative assets - IRLCs, net		12,015	Market pricing	Pull-through rate	15.1 - 99.9	%	82.1	%
Long-term debt		(44,561)	DCF	Discount rate	9.5	%	9.5	%
Contingent consideration		(5,816)	DCF	Discount rate	13.8	%	13.8	%
				Margins	1.5 - 2.0	%	1.7	%
				Probability of outcomes (1)	25.0 - 50.0	%	33.5	%


Tax Year Established	Amount		Expiration Date
12/31/2007	$	228.8	12/31/2027
12/31/2008		3.6	12/31/2028
12/31/2009		101.6	12/31/2029
12/31/2010		89.7	12/31/2030
12/31/2011		44.1	12/31/2031
12/31/2012		—	12/31/2032
12/31/2013		28.5	12/31/2033
12/31/2014		—	12/31/2034
12/31/2015		30.5	12/31/2035
12/31/2016		55.0	12/31/2036
Total Federal NOLs	$	581.8


	Changes in Fair Value
	Down	Down	Up	Up
	50 bps	25 bps	25 bps	50 bps
Total mortgage pipeline (1)	(609)	(91)	(346)	(1,081)
Mortgage servicing rights (2)	(14,350)	(6,366)	5,061	8,888