Impac regains profitability in 3Q, but faces hurdles over shutdown

For the first time in four quarters, Impac Mortgage Holdings reported a net profit even as it still deals with headwinds from halting all origination activities for nearly three months because of the pandemic.

"The results evidence the resiliency of our business model, as the company achieved positive GAAP and core earnings for the first time since the third quarter of 2019," said George Mangiaracina, chairman and CEO in a press release.

"The aggressive deleverage of the company's balance sheet in the second quarter of this year, in response to market dislocations attendant with the COVID-19 pandemic, protected liquidity and permitted the company to successfully recreate positive cash flow and to organically grow book value,” he said.

Impac had net earnings of $1.6 million, compared with a second quarter loss of $22.8 million and net earnings of $1.4 million in the third quarter of 2019.

The company's business is still being affected by the halt in originations at the end of March. As it resumed lending activities, the competition for talent caused by the extraordinary volume in third quarter has been "a binding constraint not only for us…but also industry-wide," Impac's earnings release noted.

The slight year-over-year growth in profitability came from reduced operating expenses because of the second quarter suspension of originating activities to $16.1 million from $25.6 million.

Net gain on sale for the third quarter declined significantly compared with the prior year as a result of a decrease in mortgage loans originated and sold. For the three months ended Sept. 30, Impac originated and sold into the secondary market $418.5 million and $303.1 million respectively, versus $1.6 billion and $1 billion during the same period in 2019. Second quarter volume was extremely small because of the shutdown, just $2.1 million as it only resumed taking applications in June.

Still, the company had a much higher gain on sales margin for the third quarter, approximately 460 basis points compared with 190 bps for the third quarter of 2019.

All of the third quarter volume consisted of conforming and government loans. The disruption in the secondary markets forced the company out of the non-qualified mortgage business it had been developing in the prior quarters.

But in the current quarter, Impac has resumed non-QM loan production.

The market dislocation also forced Impac to severely reduce its mortgage servicing rights portfolio, to just $824,000 as of Sept. 30, compared with $4.9 billion at Dec. 31, 2019 and $6.2 billion at Sept. 30, 2019.

It sold a total of $4.2 billion of Freddie Mac and Ginnie Mae MSRs in the second and third quarters. Impac recorded a $128,000 loss for the third quarter regarding the sale of $136.7 million of Ginnie Mae MSRs. It also took an $18,000 fair value loss on the MSR portfolio in the quarter because of the low interest rate environment.