Q1 2020 Impac Mortgage Holdings Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Impac mortgage holdings first quarter earnings call.

This time, but just wanted to all in listen only mode.

So to speak a presentation there will be a question answer session to ask a question during the session.

It's press Star one on your telephone if you acquire any further systems. Please press star zero.

I like to hand, the call first your speaker today, just a nausea. Please go ahead sir.

Thank you.

Good morning, everyone and thank you for joining Impac mortgage holdings first quarter 2020 earnings conference call. During this call, we will make projections or other forward looking statements.

In regards to but not limited to gap in taxable earnings cash flows interest rate risk in market risk exposure mortgage production in general market conditions we.

I would like to refer you to the business risk factors are most recently filed form 10-K under the Securities Exchange Act 1934. These documents contain and identify important factors that could cause <unk> actual results to differ materially from those contained in our projections or forward looking statements.

This presentation, including outlook and any guidance is effective as of today's date, given we expressly disclaim any duty to update the information here and I.

We'd like to get started by introducing George my understanding chairman and CEO that back more neutral.

Thank you Justin good morning, Thank you for joining impacts first quarter 2020 earnings call. The company's executive team is with me. This morning in California like on our CFO to forget some drill chief risk officer and head of operations.

Moisio Chief administrative officer dollar General counsel.

Tom down to talk to you our chief of staff is joining us from the East coast.

In our 2019 yearend earnings call at March 30.

We identified the potential for supply.

And distribution constraints.

And attendant liquidity risks associated with the adverse impact of cobot 19 to our business into the global financial markets.

Silver reserves emergency rate cut on March 15.

And the resumption of its mortgage backed security securities quantitative easing program.

Green unprecedented volatility in the interest rate and credit markets in which we operate.

You are really affecting our G.S. she had nonqm businesses respectively.

For January February 2020, the company had created substantial momentum across all of our lending channels.

Corresponding growth in volumes and preliminary unaudited GAAP and core earnings of 5 million and $14 million respectively.

The company was poised to regroup record a significant increase in originations from March 2020 with capacity projected at approximately 1.4 billion.

From 190 million in March of two.

2019.

Dislocations in the global financial markets caused by Cobot 19 required the company and make the difficult, but necessary decision to curtail more trubridge nations to only 350 million.

Well below operating capacity and to fully suspend origination activity on March 31.

The company instituted aggressive measures to de lever the company's balance sheet.

The company accomplish these objectives by the end of April on a trade date basis and by the end of May on the settlement that basis.

Satisfied all commitments and that all margin calls from our capital partners more than doubled our liquidity profile as measured by unrestricted cash.

From 2019 year end to the end of May.

My early June resumed lending activities as we have for over 25 years, numerous economic cycles with a singular focus on creating long term value for our stakeholders.

The company's business updates of March Thirtyth.

April 15th and June 4th which are available on our Investor Relations website.

Provide detail as to the actions executed by the company for March 15th to the present.

Purposes of this earnings call, we reiterate the following subset of those activities.

Beginning in March the company made the decision to prioritize and protect liquidity.

We substantially reduced leverage by curtailing originations selling our whole loan and mortgage servicing rights portfolios.

Paying secured debt and restructuring in extending near term unsecured debt.

The company closed out the entirety of its TBN hedge position on March 18 2020.

Current with curtailing and then halting lending activity at the end March.

Hedging with TV, a can create a mismatch between the immediacy of margin calls payable on the TB and extend the timeframe frames required monetize gains embedded in the whole loan pipeline.

The company satisfied all margin calls on time due under our GBA agreements.

Company also satisfied old its obligations under its warehouse lending and repurchase facilities.

And right size, its borrowing capacity electing to reduce capacity from 1.7 billion.

The 600 million and to reduce warehouse counterparties from six to three.

The company believes that its existing borrowing capacity sufficient to fund near term origination activities.

In line with satisfying these obligations the company reduced exposure to warehouse borrowings and corresponding loans held for sale, including non QM loans.

As of December 30, Onest 2019, the company's outstanding warehouse balance was 700 million with corresponding loans held for sale of 758 million of which 275 million were non QM loans.

At the end of May the company's outstanding warehouse balance was 10 million with corresponding loans held for sale of 31 million of which 11 million were non QM loans.

The company also completed the sale of over 4 billion, a new PB of Freddie Mac's mortgage servicing rights in May.

Mission settlement proceeds were used to pay down the company's related borrowing facility in its entirety follow on settlement proceeds of approximately 5 million from the sale are expected to be additive to the company's unrestricted cash balance.

Company that into agreements with its convertible promissory note holders originally due may eight 2020 in the original aggregate principal amount 25 million to extend the term by additional six months to November nine 2020.

The company believes that the totality of the above efforts is mitigated exposure.

Mortgage loan forbearance related liquidity constraints basis risk and mark to market shocks related interest in credit risk volatility experienced within these asset classes.

Companies debt to equity leverage ratio and its wholly owned licensed origination subsidiary Impac mortgage Corp.

Has been reduced from four and a half one then less to less than one half to one from the end of December to the end of May.

Additionally, the company's unrestricted cash balance of the same period has increased from 25 million to 58 million.

The company also carries a balance of unencumbered whole loans with the PB of 20 million as of the end of May carried at fair value of 16 million, we expect to monetize unencumbered loans at levels approximating carrying value.

Again with settlement proceeds being additive to our unrestricted cash balance.

The company's June 4th press release expressed the view that market conditions and external factors, while not fully normalized had sufficiently stabilize to the extent that the company had elected to reengage and its lending activities on a go forward basis. The company will focus on segments of the market.

Demonstrated adequate and stable capital markets distribution, initially G.S.C. and government lending.

The company is currently devaluing, the non agency jumbo and Nonqm products and we'll continue to monitor these mark market segments as facts and circumstances evolve.

We prepared to participate in the reemergence of Nonqm lending.

Non QM has been a key differentiator for the company.

And aligns with our historical position as a leader of alternative credit.

The company has reestablished margin of safety with respect to its liquidity profile and this identified a path to profitably originate today's market environment. The company will continue to balance opportunity with rigorous risk management discipline and as it never gets way from forward.

Before turning the call over to pull like in I would like to commend our board of directors in our senior management team.

Our support and tireless efforts over the last three and a half months.

With pride and profound gratitude I would also like to acknowledge the contributions of our dedicated employees, who remain steadfast and accountable to each other through these challenging times to the benefit of our capital partners to the benefit of our local community and to the benefit of our customer the customer the American home.

Uh huh.

Thank you Paul.

On to you to discuss operating results for the first quarter alright. Thanks George.

Q1 was a tale of two quarters heading into March January and February core earnings were $14 million thing in the month of March due to the spread into the krona virus and expect to financial impact and borrowers we saw collapse of the non QM market from the investor side.

Prices for a non QM loans dropped significantly overnight, although we did not have 100% exposure to this product non QM loans still made up a significant portion of our held for sale portfolio.

Within this backdrop that we saw a gain on sale of loans decreased by $54 million from $26 million in Q1 to a loss on sale of loans of $28 million in Q1 2020 core loss for the month of March was 69, and a half million dollars for total quarterly core loss of $56 million in Q1.

GAAP loss for the quarter was $64.7 million. This compares with the GAAP loss of $677000 and core earnings of $1.8 million in Q4.

As George touched on earlier in anticipation of the decrease in proceeds from non Kim on sales and expected increase in margin calls from our warehouse lenders due to the lost and value of non QM collateral the company decided that a strategy to preserve liquidity with the most prudent path to follow although not an easy decision, we decided to pause originate.

And operations at the end of March.

This action allowed us to reduce expenses across the company and assisted in preserving presses capital that otherwise would have been required to fund haircuts on new originations and increased our exposure to further margin calls.

Since that decision was made we have made significant progress and clearing out our total loan portfolio, including our non QM loans, there trades with our investors can have reduced the margin call exposure for our warehouse lenders.

Our loan held for sale balance at the end of Q1 decreased by $238 million to $520 million from a Q4 ending balance of $758 million associated warehouse borrowings decreased by $200 million from $700 million at December two $500 million at the end of Q1.

As we have sold off our loan portfolio, we have been able to replay margin cash from our warehouse lenders.

Unrestricted cash at March 30, Onest was $80.2 million with an unencumbered loan held for sale balance of $2.9 million versus an unrestricted cash balance of $24.7 million with an unencumbered loan held for sale balance of 3.2 million at the end of December also during the quarter, our MSR balance decreased from $41.5 million at Q.

Four to 24.3 million at March 30, Onest, primarily as a result of mark to market write downs from increased speed assumptions.

From artists May we further reduced our loan held for sale portfolio by an additional $489 million to $31 million.

Paid down $491 million in warehouse line borrowings to a month and balance of $10 million extended the maturity of our $25 million convertible note sold our Freddie MSR portfolio, Tom will be speaking about our service and activity later.

Repaid $50 million, an outstanding MSR facility borrowings, resulting in a decline of our leverage ratio at the holding company level, excluding our consolidated legacy Trust from 16 to one in March to 41 at the end of May.

As of May 30, Onest, our unrestricted cash balance was $58 million with an unencumbered loan held for sale balance of 19 and half million.

In addition, the you PB over servicing portfolio has decreased to $150 million Ginnie Mae only loans from a servicing UPB of $4.7 billion as of March 31st which consisted of both Jenny and frankly loans, primarily as a result of selling or Freddie MSR portfolio.

We have also undertaking a thorough review of expenses at the company and have taken steps to rightsize our cost structure.

As we come out of these trying times and move forward from this crisis, we feel that we have that liquidity and resources available to restart our lending operations and the responsible and disciplined manner.

I'll now pass the call over to Tom to Touchy to discuss the company's recent initiatives regarding its mortgage servicing.

Thanks, Paul.

We're pleased to announce the successful sale.

Of 4.1 billion you PB Freddie Mac MSR is which closed on May 30 is 2020.

The sale consisted of approximately 15000 loans with a weighted average note rate of 3.86%.

80%, California concentration she's in 39 months, the net servicing fee of 25 basis points.

The sale was executed via market auction, which resulted in a winning bid at 51 basis points slightly above a to multiple or approximately $20.1 million from a large regional bank.

The sale date payment of $15 million has been received in the portfolio will transfer on July Onest 2020, the remaining holdbacks funds will be received over the coming months.

The transaction was executed during a time of significant market volatility, where we saw MSR prices and liquidity in a decline. So the results were satisfactory and at the upper end of our expectations.

Our recent industry market survey of seven of the most active conventional MSR co issue buyers had an average new origination, California MSR bid of a 1.63 multiple versus the higher auction results.

In terms of the sale also included limited reps and warrants, resulting in limited tail risk exposure to impacts on the sale as well.

As George mentioned earlier.

Permit the decision to prioritize and protect liquidity.

This MSR sale was initiated by impact manage risk and improve liquidity during the market dislocation caused by totaled 19.

The proceeds of the sale were used and we'll continue to be used to increase our cash position and pay down our financing line on the MSR, which has been brought to zero balance.

None of the proceeds were used to required satisfied debt to any GST or any other entities.

In addition to the remaining purchase price funds and $5 million expected to be received on this transaction becoming much.

We have also established a team to accelerate the receipt of approximately $1.8 million due from past MSR transactions.

This document delivery and confirmation project is currently underway and we expect most if not all of that balance to be collected in 2020 as well I will now I'll turn over to Tiffany Entzminger, who will provide insight into our current operational capacity.

Thanks, Tom.

Consumer demand for refinancing and the corresponding margins for GST eligible and government loan products are higher than they have been in years.

Impact as well suited to originate and fund over $1 billion heading into March prior to the market events that causes the pullback from lending activity as a preventative measure.

Well the non insulin market is still rebounding there is substantial liquidity in the GST eligible FHLB and VA lending market for responsibly serve consumer.

It is here that we remain focused.

Initially targeting 250 million and funded volume by the end of Q3 2020 in the retail channel alone provide the baseline of profitability for the origination platform.

In addition, we're updating the product offerings and our wholesale channel.

To provide GST eligible and government offering to the TPL community.

Management team thought to create a liquidity of margin liquidity margin of safety through aggressive de risking efforts and we remain committed to maintaining a run rate that will support that margin going forward.

Originated loans with strong credit quality maximizing operational efficiencies optimizing geographic diversity in the portfolio and continuing to be sensitive and alert to changing consumer needs around forbearance and covered related hardship will be top of mind during the next quarter.

Justin Moisio will now discuss near term production mix and product okay.

Thank you Tiffany.

Our targeted 250 month million monthly run rate third quarter will be originated through our call Center, we're focused on segments of the market.

Does that and responsible and our approach to serving the market.

Currently with GSE eligible originated loans, having some of the widest margin since 2008, we've been able to remain competitive in pricing la optimizing execution.

With pent up demand from borrowers we may have taken a pause in March and April we've been able to keep our business promotion expensive bare minimum as we continue to work through the tremendous backlog of high quality leads we've received while origination efforts.

Were suspended.

And package of storage history around alternative credit pioneer in both the <unk> space. We continue to have a strong appetite around <unk> and continued to pay attention to the changing forebears landscape or will behavior and appropriate risk based pricing for these products.

Gac's FHA in VA have published guidance on for Barents management and practices for impacted borrowers identifying solutions and the alternative credit market to ensure servicers warehouse lenders and investors have consistent expectations will be a significant milestone prior to relaunch in the product in a meaningful way.

Impact remains committed to surfing borrowers across all markets and continues to participate in dialogue in discovery in this area with the goal participating in non QM originations and the same thoughtful and risk focus ways as it has in the past.

On Monday, the CFPB issued a proposal to revive.

Revise the qualified mortgage rule, which has the potential to significantly impact the non through a market <unk> will provide additional detail around the proposed CFPB royalty payment. Thank you Justin company remained focused on the future and the impact of proposed regulations that legislation on the organization as it moves forward.

And the non Kim space. The CFPB issued proposed rules to address the expiration of the coupon patch that gave agency load the presumption of the ability to repay and qualified mortgage compliance.

<unk> proposed rule extends the coupon patched originally set to expire in January until the effective date of opposed amendments to the <unk> rules.

The amendments of the ATR funeral would eliminate the 43% that's an income and proscriptive underwriting requirements in favor of a price based approach.

The theory being that the higher priced alone the less the borrower habitability to repay an alternative theory being that lenders concerned about a borrowers ability to repay will price that loan for the credit risk and as a result of higher priced could be considered proxy for lenders perception of the borrowers ability to repay.

The <unk> is also considering alternative DTI thresholds or hybrids between the DTI price based approaches.

The proposed amendments have been supported by the MBA and the National Association of Realtors, among others as a way of avoiding disruption to the overall mortgage market. However show. The proposed amendments brought in what is considered a qualified mortgage considerably that could serve to constrained inoculum market as a whole.

Another significant development was the failure, California Assembly Bill 20, 501 last week.

The proposed reforms under this though would have been sweeping.

As an attempt at providing kovar 19 relief the bill would've prohibited foreclosures during the year. After the bill became active and would have afforded forbearance periods of up to 12 months without borrowers occurring interest or other fees.

The bill would have imposed penalties on lenders and servicers for violating it's provisions I would also a expose the industry to new consumer litigation.

Despite the attempt to providing consumer protections the potential negative impact on lending in this day could've been considerable.

It remains unclear if the bill will be reintroduced but the industry feels that the California legislature came to the right conclusion.

I will now turn the call back over to Georgia for closing comments.

That concludes our financial results and prepared remarks will now open the call for questions.

And <unk>, if you'd like to ask a question.

I need to furnish star one on your telephone once again that star want to ask a question.

<unk> composite kunai roster.

Actually Victor I received a couple of calls.

Sorry, a couple of emails right before this with some questions. So let me just walk through those now with our team.

The first question we received based on your current mix of production what volume levels with the company need to reach to return to profitability. So Paul I think you want to touch on that one yeah. Thanks Justin.

As we move forward with restarting our production, we anticipate ramping up our volume $250 million a month of high quality conventional product predominantly from our consumer direct channel.

This is other level that we expect to achieve consistent profitability.

Looking down the road, we are reviving our third party origination are <unk> business. We have maintained key leadership within the building for this business channel and would expect within one to two quarters that it will once again contribute high quality GSD FHA NVA loans.

Or <unk> business is also foundational for a non QM business.

Which is potentially through six months away.

Predicated on a reform on I'm, sorry on a uniform standardization around forbearance.

Okay.

The other question, we received was the company as well as the industry is mentioned a lot regarding forbearance. So how exactly is the company handling alone for barracks, so probably Tiffany if you want to take that one sir.

For a conventional in government loan currently being service Derossett servicer, where it hearing T. The guidance provided by any means freddiemac, which allows borrowers experiencing literally did hard-set to opt into an forbearance period with the opportunity to an extended needed.

For a non human population, we're actively engaged with our special servicer to ensure that we're hearing to industry best practices for this asset.

Above all are going to support our borrowers during this difficult time, all available option promoting continued homeownership and path to reinstatement for borrowers here experiencing hardship.

Unlike GSE in government market. There is no uniform approach governing the nonhuman borrower contact.

Chip documentation and available program offering as it relates to forbearance, which is having an adverse impact on the liquidity market. We're actively engaged through discussions with investors warehouse lenders and reading agencies to promote standardized approach around for Baron.

And is mentioned and our previous press release impact created Copperfield Capital Corp.

<unk> existing expertise within our company to address these issues and provide support T alternative credit clients navigating these same issues around barbarian.

Okay. Thank you.

At this time of the company.

Received any additional questions. So we will conclude our first quarter earnings call. Thank you everyone for joining us and we'll be back with you in early August for a second quarter earnings call. Thank you.

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