Mortgage REITs Suffer in Tough Times

A pair of mortgage real estate investment trusts reported losses for the fourth quarter, continuing the trend of a number of firms which have adopted this structure, especially those who specialize in nonprime originations.

The companies are Impac Mortgage Holdings Inc., Irvine, Calif., and HomeBanc Corp., Atlanta. HomeBanc recently let go of its chairman and chief executive Patrick S. Flood and replaced him with Kevin Race as president and chief executive and James Witherow as chairman.

HomeBanc reported a GAAP net loss of $10.7 million ($0.18 per share) for the fourth quarter, compared with GAAP net earnings of $348,000 ($0.01 per share) for the same period a year earlier.

Mr. Race said the company had a GAAP net operating loss of $6.3 million for the period, but the company had to record a net tax expense instead of a net tax benefit for the quarter. "The fourth-quarter tax expense is the result of an increase in the valuation allowance previously established to reduce the net deferred tax asset at Dec. 31, 2006 to an amount we currently believe is likely to be realized.

For the year, HomeBanc had a GAAP net loss of just under $11 million ($0.20 per share), an improvement over the GAAP net loss of $11.6 million ($0.21 per share) in 2005.

Meanwhile, the company has begun to implement its 2007 strategic plan. Previously, it had said it would be reducing its Georgia and Florida operations and instead look to move into new markets. It will open a store in April in Nashville, and two more in undisclosed locations later this year.

Mr. Race noted it closed five of its 10 Georgia production offices and two of its nine Florida production offices, adding he believed it would generate $3.8 million of savings in 2007. The company is also working on how to implement its intentions to give up its real estate investment trust status. Mr. Flood had said HomeBanc was looking to de-REIT back in November of 2006.

HomeBanc said it sold its mortgage-backed securities portfolio during the first quarter of 2007, generating $70 million in net proceeds. The sale reduced its investment portfolio from $5.9 billion at year-end 2006 to $4.6 billion currently, and it now consists almost entirely of mortgage loans.

Impac Mortgage Holdings chairman and chief executive Joseph Tomkinson noted the company tightened its underwriting guidelines 17 times in 2006.

Still, it reported a net loss of $66.3 million ($1.06 per share) for 2006, compared with net income of $270.3 million ($3.35 per share) the previous year. However, because it is a real estate investment trust, Impac has $79.5 million ($1.05 per share) of estimated taxable income available to common stockholders compared to actual taxable income of $142.9 million ($1.87 per share).

The company blames the GAAP loss on a compression of net interest margins because borrowing repriced more quickly than adjustable-mortgage assets.

Impac also reported a $257.9 million decrease in the fair value of derivatives, which was partially offset by a $181.1 million increase in cash receipts. Net earnings decreased by $29.5 million because of a charge related to loan repurchases in the second and fourth quarters of 2006.

Total origination volume for the year was $11.6 billion of residential loans and $983.4 million of commercial and multifamily loans. In 2005, it did $22.3 billion and $798.5 million, respectively.

As for the current environment, Mr. Tomkinson said that with current conditions, "We expect some growth in our balance sheet with potential improvement to our adjusted net interest margins. Our strategy is to continue to invest in longer duration loans including commercial mortgages, while selling the option ARM product for cash gains.

"Offsetting these positive prospects has been the increase of nonperforming loans, real estate-owned and actual loan losses which remain within our expectations, but are expected to continue to reduce REIT taxable income.

"Further, estimated taxable earnings and profits from the mortgage operations during the first half of 2007 are expected to be impacted as we liquidate nonperforming loans at the taxable subsidiary." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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