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EX-32.1 - EX-32.1 - IMPAC MORTGAGE HOLDINGS INCimh-20170930ex321cb1f5c.htm
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EX-31.1 - EX-31.1 - IMPAC MORTGAGE HOLDINGS INCimh-20170930ex3117d7fad.htm

 

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

 

For the quarterly period ended September 30, 2017

 

or

 

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

 

For the transition period from               to               .

 

Commission File Number: 1-14100

 

IMPAC MORTGAGE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Maryland

 

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)

 

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 shares of common stock outstanding as of November 3, 2017.

 

 

 


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

ITEM 1. 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

3

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

4

 

Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 (unaudited)

5

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

ITEM 2. 

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

32

 

 

 

 

Forward-Looking Statements

32

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

32

 

Selected Financial Results

33

 

Status of Operations

33

 

Liquidity and Capital Resources

37

 

Critical Accounting Policies

38

 

Financial Condition and Results of Operations

39

 

 

 

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

61

 

 

 

ITEM 4. 

CONTROLS AND PROCEDURES

63

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

ITEM 1. 

LEGAL PROCEEDINGS

64

 

 

 

ITEM 1A. 

RISK FACTORS

64

 

 

 

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

65

 

 

 

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

65

 

 

 

ITEM 4. 

MINE SAFETY DISCLOSURES

65

 

 

 

ITEM 5. 

OTHER INFORMATION

65

 

 

 

ITEM 6. 

EXHIBITS

66

 

 

 

 

SIGNATURES

66

 

 

 

 

CERTIFICATIONS

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,815

 

$

40,096

 

Restricted cash

 

 

6,605

 

 

5,971

 

Mortgage loans held-for-sale

 

 

572,268

 

 

388,422

 

Finance receivables

 

 

60,912

 

 

62,937

 

Mortgage servicing rights

 

 

158,950

 

 

131,537

 

Securitized mortgage trust assets

 

 

3,769,231

 

 

4,033,290

 

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

 

Total assets

 

$

4,815,377

 

$

4,863,734

 

LIABILITIES

 

 

 

 

 

 

 

Warehouse borrowings

 

$

591,583

 

$

420,573

 

MSR financings

 

 

25,133

 

 

 —

 

Term financing, net

 

 

 —

 

 

29,910

 

Convertible notes, net

 

 

24,972

 

 

24,965

 

Long-term debt

 

 

44,561

 

 

47,207

 

Securitized mortgage trust liabilities

 

 

3,751,831

 

 

4,017,603

 

Contingent consideration

 

 

5,816

 

 

31,072

 

Other liabilities

 

 

62,028

 

 

61,364

 

Total liabilities

 

 

4,505,924

 

 

4,632,694

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Additional paid-in capital

 

 

1,233,105

 

 

1,168,125

 

Net accumulated deficit:

 

 

 

 

 

 

 

Cumulative dividends declared

 

 

(822,520)

 

 

(822,520)

 

Retained deficit

 

 

(101,362)

 

 

(114,746)

 

Net accumulated deficit

 

 

(923,882)

 

 

(937,266)

 

Total stockholders’ equity

 

 

309,453

 

 

231,040

 

Total liabilities and stockholders’ equity

 

$

4,815,377

 

$

4,863,734

 

 

See accompanying notes to unaudited consolidated financial statements

3


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(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

 

Revenues:

 

 

    

 

 

    

 

 

    

 

 

    

 

Gain on sale of loans, net

 

$

42,476

 

$

113,158

 

$

116,602

 

$

245,849

 

Real estate services fees, net

 

 

1,355

 

 

2,678

 

 

4,492

 

 

6,773

 

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)

 

Other

 

 

266

 

 

225

 

 

541

 

 

453

 

Total revenues

 

 

42,076

 

 

103,993

 

 

127,051

 

 

220,506

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

 

23,062

 

 

38,467

 

 

69,353

 

 

93,025

 

Business promotion

 

 

10,403

 

 

10,350

 

 

30,744

 

 

30,828

 

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

 

Operating income

 

 

4,516

 

 

22,634

 

 

11,213

 

 

33,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

57,854

 

 

64,932

 

 

180,011

 

 

201,561

 

Interest expense

 

 

(56,308)

 

 

(63,628)

 

 

(176,921)

 

 

(199,525)

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

(1,265)

 

 

 —

 

Change in fair value of long-term debt

 

 

104

 

 

(8,641)

 

 

(2,657)

 

 

(7,286)

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

$

1.28

 

$

0.71

 

$

2.43

 

Diluted

 

 

0.11

 

 

1.18

 

 

0.71

 

 

2.27

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

4


 

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

 

 

5


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(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

 

 

See accompanying notes to unaudited consolidated financial statements

6


 

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 incorporated in August 1995 and has the following wholly-owned subsidiaries: Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets) and Impac Funding Corporation (IFC).

The Company’s operations include the mortgage lending operations and real estate services conducted by IRES and IMC 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 CashCall Mortgage (CCM).

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 months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, filed with the United States Securities and Exchange Commission (SEC).

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, mortgage loans held-for-sale and derivative instruments, including interest rate lock commitments (IRLC). Actual results could differ from those estimates and assumptions.

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." The amendments in ASU 2015-17 eliminate the current requirement for organizations to present deferred tax liabilities 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.

7


 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of the accounting 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. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.  The Company adopted this change prospectively on January 1, 2017 and did not adjust prior periods.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update amends the guidance 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 with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.”  The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual reporting periods beginning after December 15, 2017.   Early adoption is permitted. The Company does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements.

 

 

Note 2.—Mortgage Loans Held-for-Sale

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2017

 

2016

 

Government (1)

    

$

161,479

    

$

146,305

 

Conventional (2)

 

 

218,744

 

 

168,581

 

Other (3)

 

 

172,948

 

 

62,701

 

Fair value adjustment (4)

 

 

19,097

 

 

10,835

 

Total mortgage loans held for sale

 

$

572,268

 

$

388,422

 


(1)

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

(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)

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

(4)

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

 

8


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Note 3.—Mortgage Servicing Rights

The Company retains mortgage servicing rights (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 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 loans. The servicing fees are collected from the monthly payments made by the mortgagors or 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.

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

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2017

 

2016

Balance at beginning of period

    

$

131,537

    

$

36,425

Additions from servicing retained loan sales

 

 

42,728

 

 

128,273

Addition from purchases

 

 

5,618

 

 

 —

Reductions from bulk sales (1)

 

 

(895)

 

 

(8,773)

Changes in fair value (2)

 

 

(20,038)

 

 

(24,388)

Fair value of MSRs at end of period

 

$

158,950

 

$

131,537


(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.

 

9


 

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2017

 

2016

 

Government insured

    

$

2,519,574

    

$

1,359,569

 

Conventional (1)

 

 

13,181,522

 

 

10,815,998

 

NonQM

 

 

1,969

 

 

175,955

 

Total loans serviced

 

$

15,703,065

 

$

12,351,522

 


(1)

As of September 30, 2017, the Conventional servicing rights have been pledged as collateral and subject to acknowledgement agreements as part of the MSR Financings. (See Note 4. — Debt – MSR 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.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

Mortgage Servicing Rights Sensitivity Analysis

 

2017

 

2016

Fair value of MSRs

    

$

158,950

 

$

131,537

Prepayment Speed:

 

 

 

 

 

 

Decrease in fair value from 10% adverse change

 

 

(3,841)

 

 

(4,956)

Decrease in fair value from 20% adverse change

 

 

(7,930)

 

 

(9,593)

Decrease in fair value from 30% adverse change

 

 

(12,167)

 

 

(13,940)

Discount Rate:

 

 

 

 

 

 

Decrease in fair value from 10% adverse change

 

 

(5,839)

 

 

(4,927)

Decrease in fair value from 20% adverse change

 

 

(11,277)

 

 

(9,511)

Decrease in fair value from 30% adverse change

 

 

(16,350)

 

 

(13,786)

 

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.

Loss on mortgage servicing rights is comprised of the following for the three and nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

Change in fair value of mortgage servicing rights

 

$

(11,177)

 

$

(8,224)

 

$

(20,038)

 

$

(32,048)

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 on mortgage servicing rights, net

 

$

(10,513)

 

$

(15,857)

 

$

(18,159)

 

$

(41,249)

10


 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

    

2016

    

2017

    

2016

Contractual servicing fees

 

$

9,978

 

$

4,755

 

$

27,356

 

$

10,981

Late and ancillary fees

 

 

117

 

 

41

 

 

275

 

 

115

Subservicing and other costs

 

 

(1,603)

 

 

(1,007)

 

 

(4,056)

 

 

(2,416)

Servicing fees, net

 

$

8,492

 

$

3,789

 

$

23,575

 

$

8,680

Loans Eligible for Repurchase from Ginnie Mae (GNMA)

The Company routinely sells loans in GNMA guaranteed 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, the Company then re-recognizes the loans on its consolidated balance sheets in other assets, at their unpaid principal balances, and records a corresponding liability in other liabilities in the consolidated balance sheets.  At September 30, 2017 and December 31, 2016, loans eligible for repurchase from GNMA totaled $25.5 million and $9.9 million in UPB, respectively.

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

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 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.

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

 

Short-term borrowings:

    

 

    

    

 

    

    

 

    

 

    

 

Repurchase agreement 1 

 

$

150,000

 

$

121,330

 

$

106,609

 

June 15, 2018

 

Repurchase agreement 2

 

 

35,000

 

 

33,995

 

 

44,761

 

May 28, 2018