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No breaking on Impac

The inside story of how Impac Mortgage stared down the greatest industry crisis of our time, and lived to tell about it

Bill Ashmore doesn’t want to date himself. But he does. And he really, really does when he recalls a time in the mortgage business when work happened before the advent of the computer.

Back then, when Ashmore started, scanning the room of a mortgage office likely meant a visual presentation that in 2013 appears like a scene from Argo.

And that’s just the aesthetics.

“I have been in the business since the mid-’70s,” says the president of the Irvine, Calif.-based lender Impac Mortgage Holdings.

“If I roll back to 1975, to just before 1980, in the market back then, I’m dealing with photocopy machines. Computers weren’t even used. We were using select IBM typewriters.”

It seems quite fitting, then, that his company did not head the way of economic hostage. That is, unlike many other big guns who were operating in the primary and secondary mortgage markets when the industry went into meltdown in 2007. The economy tanked, taking most of Impac’s competition with it.

But there were bleak moments. Just one snapshot from May 2008 shows the lender reporting a disastrous $2 billion quarterly loss. Yet Impac survived the worst ravages. It stopped originating new loans. It consolidated. And, by all accounts, it has re-emerged in good shape.

So here are some numbers, from then and now: From their 1995 start through the 2007 financial calamity, they originated $90 billion and securitized $60 billion, $8 billion to $10 billion of which remains on the Impac balance sheet to this day, notes Ashmore.

But Impac was not without its critics. It was tarred with the subprime brush, accusations the company strenuously denied. They were Alt-A, they insisted, not quite in the business of prime lending, but not necessarily flirting on the precipices of junk loans either. Indeed, others fell — almost all of their perceived contemporaries. Countrywide, the country’s top subprime lender, collapsed. New Century, the No. 2, disappeared. Ameriquest, too.

Today, the multi-purpose lending firm is undergoing something of a renaissance. Post-crisis, Impac was focused on its existing portfolio. Roll the clock forward three years, and the company is back selling new loans. To that origination platform that restarted in 2010, add correspondent lending, which was pushed out in 2012. Most recently, Impac re-entered warehouse lending through the new division Impac Warehouse Lending, with plans to finance high loan-to-value — up to 150% LTV — Home Affordable Refinance Program products through $3 million to $10 million warehouse lines.

That’s an astonishing turnaround from where it was in the throes of events six years ago, bringing its new loan originations to a crashing halt.

Outsiders looking in marvel: “They carved out a niche for themselves; they had a unique set of products” says former subprime lender and HousingWire President Richard Bitner. “They operated at multiple levels. You could be selling to them and competing with them at the same time.”

Academics, too.

“My guess is they had a capital source that let them consolidate and shift strategy to take advantage of opportunity. Smart move if that’s what they did,” remarks Mark Stapp, Fred E. Taylor professor in real estate at the W.P. Carey School of Business at Arizona State University.

Impac, says Ashmore, was “started as a real estate investment trust after coming out of 1994, where there was a similar type of Fed phenomenon that I think is going on today, and also a change in the regulatory environment.”

That was 1995, when CEO Joe Tomkinson founded the firm alongside Ashmore. “Originally,” he continues, “we were created to invest in mortgages that we would be originating. We did that for many years, until 2007, when things blew up and that whole nonconforming market went away and we had to re-invent ourselves from ’07 to 2010.

“In terms of differentiation, we are similar to other companies, but we also have something that a lot of companies would like to have, which is we’re Fannie Mae, Freddie Mac and Ginnie Mae issuer-approved. So you can deliver to these quasi-governmental agencies. But we also have the ability here to operate in multiple business channels.”

Ashmore reaches further back in time to illustrate why he believes Impac stands alone in the lending space, easily distinguishable from the masses.

“You probably have to go back to the origin of the company,” he says, referencing those years prior to Impac’s emergence and the years of mere typewriters and copy machines. “We still have to underwrite loans. There was a time period where there was some automated underwriting and there is still some automated underwriting that Fannie Mae and Freddie Mac avails you of through their desktop underwriter or loan prospector.

But the efficiencies over the years have dissipated recently.

“If you roll back in time, things are not much different in terms of how business is being conducted today versus what they were in the ’60s and ’70s. However, in the ’70s, wholesale lending sort of started its roots where brokers were originating loans and delivering them to savings and loans and banks.”

Ashmore stepped into the space with Impac 18 years ago, when, he says he learned the nitty-gritty of the entire mortgage process.

“Today, it’s different. There’s much more high specialization required on the part of individuals from a technical standpoint. When you add in the compliance requirements of today and the disclosure requirements and licensing requirements, you’re talking quite a bit different landscape from what it was back 30-40- plus years ago. But the business itself hasn’t changed very much.”

Earlier this year, Orange County, Calif-based financial writer Martin Andelman drew attention to the Impac story with a gushing post on his blog Mandelman Matters.

“Impac is a company once again on its way up and it’s not hard to see why… they did it right by putting the interests of its shareholders above all others, which drove them to do what others seemed to find impossible… making their loan modification efforts both effective and efficient,” he wrote.

“And Impac never asked for… or accepted a nickel of TARP funds or any other taxpayer money. They recognized that what was right for investors and shareholders was also right for the borrowers… and I think, considering what has transpired during this crisis over the last few years, that is something that deserves to be applauded and respected… at the very least. Were it up to me, I’d make sure they were honored with some sort of national award… a statue on Wall Street even seems appropriate.”

Andelman lays the platitudes on fairly thick. But the company’s second-quarter earnings released early last month — showing a significant dip in net earnings from year-ago levels offset by a healthy increase in net earnings from mortgage lending — indicated the re-emergence certainly seems to remain on track.

How are they doing it?

HousingWire got the full scoop on the Impac trajectory during a one-on-one with Ashmore to find out how they are successfully expanding.

Impac does have a retail business, but it operates retail through some net branches — which they call “team branches” — that are strictly on a bottom line basis in terms of how they’re producing loans.

And then there is also the more organic retail branches, a corporate branch. Then there is also the call center, where employees generate proprietary lead-sourced retail loans.

Impac also does wholesale lending nationwide through brokers, with about 500-600 approved brokers.

Then there is also correspondent lending, which started about a year and a half ago, to do business predominantly with credit unions, small banks and small mortgage bankers.

And then most recently, Impac got back into the warehousing business. According to Ashmore, they were a very big warehouse lender from 1995-2007, with upwards of $900 million in outstandings from several hundred clients.

“It will augment our current correspondent business,” Ashmore said

The differentiation is that most other mortgage companies really focus on just one thing. If they’re going be retail, they might be a call center, they may be net branch-oriented or they may be organically branch-oriented.

“We do all three,” Ashmore explains. “There may be a part of a company that does some retail, that does some wholesale, but we basically have a very well-rounded channel origination strategy and we’re licensed in multiple states across the nation to do business in all three of those particular channels. In addition to that, we’ve added our warehouse lending.”

The other part of the strategy, and this is in no way unique, is the fact that Impac is also retaining servicing. The main servicer is under the Impac Mortgage moniker. Subservicing, however goes through a company called Loan Care.

A key part of this strategy hinges on customer loyalty. From consumer direct, from origination, from business-to-business — they stay close to that client on a regular basis.

Impac will try and take advantage of not only originating and servicing that particular borrower, but also being able to come back and offer that particular borrower other products. “So if somebody comes in and we originate a 30-year conventional mortgage, we then have a customer that we can communicate with that might be able to provide us a lead toward doing a reverse mortgage, which we do out of our call center,” Ashmore explains. “Or we can do a 203k rehabilitation loan that we sell to FHA. So we have the ability here that, even though we’ve only originated one loan, we want to try and engage these consumers so that we can offer them other loan products that we have.”

The other thing that Impac will try to do on the retail side, and to a lesser extent on the business-to-business side, is to be Realtor-focused. They did a high percentage of refinances before interest rates went up recently, as did everyone else. But they tried to focus on predominantly concentrated Realtor-type originations. Today, they brag about the high level of real estate network participation. One of them, for example,is the National Association of Hispanic Real Estate Professionals — Impac is a sapphire sponsor. “They’ve been very helpful in building out — not only with the hiring of loan originators, but also introducing us to other real estate brokers that would be in need of financing capabilities,” said Ashmore.

It wasn’t always easy street

November 2010 was a dark, dark month for Impac. A $1.3 million loss from discontinued operations came from a repurchase provision of $1.8 million in loans from Fannie Mae. In its third quarter results, the company announced it decided to stop offering debt-settlement services, which were costing the firm an average of $600,000 a quarter.

Impac was shrinking again, despite its best efforts and mired again in trouble, just like in 2007.

“We had a legacy portfolio that, when we surrendered our licenses and backed out of lending in 2007, still had upwards of 5,000 REOs and over 20% delinquency,” said Ashmore. “We had to do what was necessary.” In that 2007 to 2008 timeframe, Impac helped develop REDC, which is now, as the precursor to liquidating all of these REOs.

That $250,000 investment turned out to be almost $16 million, when 18 months later they cashed out of the deal.

Ashmore refers to these investments as “runways” to getting the business back on track. Aggressive deals like this always keep the business around. Back then, there was only one way to get rid of REOs, by giving them to mortgage brokers . There was very little of that going on back then. “Today, you’ve got institutions … and there are a number of these hedge funds that have a lot of money,” Ashmore said. “They’re buying REOs and they’re buying loans that are either sub-performing or nonperforming.”

So what happened in 2010?

Investors were only paying attention to the fact earnings were down 68%, and that Fannie Mae was riding the company’s bottom line hard.

What went little-noticed was Impac announced plans to expand wholesale lending to 26 states. In six months, its warehouse facilities increased lending from $10 million to $48 million in six months.

Boom. Back on track. You can breathe now.

The spirit of innovation keeps the company going. Ashmore claims Impac did the first FICO-based securitization in 1997, “so we’re used to being kind of the first guy out of the gate.” Of course, the current challenge to the market is two fold. The looming Qualified Mortgage rule and potential raises in guarantee fees are top-of-the-list for lender concerns.

Impac expects it will have to bend, but will not break.

The word out there is that Freddie Mac and Fannie Mae would move their guarantee fee up in October. “I’ve heard that’s been put off because the concern is that, with the latest rise in interest rates, it choked off a substantial portion of the originations in a matter of weeks. It’s coming back a little bit, but it really stopped refinance and, to a certain extent, some purchase money transactions in their tracks [recently],” Ashmore said.

There is a very real concern that any large changes will put a big damper on the real estate comeback. The Federal Reserve, for example, will not put a floor under when it expects to stop purchasing mortgage-backed securities for this reason. A raise in g-fees would hurt the overall economy, struggling along to get to more than 1.5% to 2% growth. So Impac is betting that the fee will stay put for the time being.

Some, on the other hand, expect the current 52 to 55 basis points to be pushed to 70.

“They’ve got to hold that off,” Ashmore predicts.

“They want more nonagency securitizations to occur. Well, $4 billion occurred in the first quarter, but after the run up in rates there have been none since then that have occurred in the last 30 days.”

The fact that the market for PLS essentially choked off will not be helped by a more costly GSE market. In fact, to hear Ashmore speak, one could be convinced the FHFA may actually back track on its g-fee hikes. Unlikely, though it does bolster the argument that costs are likely to stay put, especially with the uncertainty surrounding the Qualified Mortgage rule.

And in true Impac fashion, the QM doesn’t really concern Impac executives, either.

“We have put together a program, although right now it’s difficult because the government is flip-flopping on how they want to qualify a mortgage, a Qualified Mortgage, and they just did a flip-flop, with them now thinking over this retention portion of it relative to the loan-to-value and some other components of it.”

Like the g-fees, Ashmore predicts the government will put the brakes on major housing reform in order to avoid a bigger negative impact on the real estate market. The government’s desire to avoid unintended consequences relative to putting QM into place is golden to Ashmore.

QM actually opens up some potential opportunities for somebody like Impac. From 1995-2007, originated $90 billion and securitized $60 billion and still retains $8 or $10 billion on the balance sheet today. Impac started retaining a portion of the loans they originated dating back to as early as 1995-96. Therefore, it does not anticpate a problem with the risk retention proposals of QM.

So while the government is attempting to push more originations outside the agencies and into the public markets, in a securitized format, lenders need to be ready. At any rate, it still stands to be a bumpy ride.

“They’re really not making it any easier for me or anyone else who thinks there’s an opportunity there without giving us some clear guidance and allowing us to figure out how can we make that work in light of pushing out more of these originations out to the public market,” Ashmore said.

And so Impac’s differentiation is that it is has been around for many years. And even though there is the aforementioned hiatus when new business stopped from mid 2007 to the middle part of 2010, Impac appears to be traditionally capable of dealing with both rising g-fees and the QM .

In fact, Impac wants to go further. The biggest hole today is getting mortgages into the hands of self-employed borrowers.

This is Impac’s next big move. The issue isn’t finding a self-employed borrower who has a 720, 730 or 800 FICO score, with a lot of liquid assets, such as bonds, stocks and cash. Those are out there.

But the one thing that falls down under the QM proposed legislation is that it must be a fully documented loan in assets and income. Under the ability-to-repay regulation of QM, lenders must prove an ability for the borrower to make mortgage payments on that loan under currently approved ratios.

And it has to be a sufficient enough downpayment — today it’s about 20%, although that’s up for discussion right now. “I can guarantee you today, that I can find a very high-quality, high FICO, and I can build in a bigger equity cushion. So instead of let’s say a requirement on a fully documented prime jumbo loan today of 20%, I might require 25% to 30% down, depending on if it’s a $400,000, $1 million or $2 million loan…and instead of six months documented liquid reserves, I might document 12 months, 18 months, 24 months or 36 months, depending on the type of loan, the LTV, etc,” Ashmore said.

“And I think that with that borrower it’s a zero-sum game, where they will pay little to no taxes, and that’s one of the reasons why they are self-employed. They are able to make the cash flow that they need, but don’t generate the taxable income,” he adds.

Impac intends to make those loans, and make them all day long. In the end it may be a non-qualified mortgage, but Impac will still look to extend it to the borrower.

The problem is that the GSEs won’t be interested. So Impac needs to be sure to retain the risk appropriately, in case private issuance comes back into focus for non-QM loans.

So Impac needs to create a product that can be rated. Prime jumbos today with the AAA levels that Barclays or Redwood are producing have subordination levels at around 5% to 6%. If Impac did something similar, Ashmore estimates they’d actually retain 10%. Still, plenty would depend on spreads and pricing, but the point is the Redwood deals are consistently oversubscribed. So if Impac could put together such a deal, there is money on the Street to buy into it, especially at higher subordination levels.

The real threat

Today there needs to be a certain plan. There’s going to be a certain amount of opportunity going on. And who dares, wins. Take, for example, very large banks are losing very large portions of mortgage lending market share. Naturally, this leads to an exodus of loan officers and originators.

Where the bank had been a safe haven, where you had a steady stream of borrowers and you had the ability for that particular bank to lend, often they can’t offer less than 40-plus days in processing. They’re struggling and offering tighter and tighter mortgage products. Originators are leaving.That’s an opportunity for Impac to pick up high quality mortgage staff.

And pick them up is exactly what they’re doing.

“I just OK’d the hiring of a branch manager stationed out of Gilbert, which I think is a suburb of Scottsdale or Phoenix, and the reason why he’s been making a move is because the branch that’s he’s from that was doing $10 million-plus a month … his average balance is $250,000. He wants to make the move over because basically the company he is at cannot meet the net-worth requirements to stay in business, to do business as a lender, so they’re actually shutting down as of the end of the month,” said Ashmore.

These are the types of opportunities Impac is not letting pass by. The safe havens are ending, people are ready and willing to move into other areas, with other firms. With so much talent coming up for grabs, Impac believes it can capitalize if careful. The real threat facing Impac is expanding too fast.

“Some of the movement we’re going to make is going to be opportunistic,” Ashmore said. “But opportunistic with the due diligence that we can bring somebody on and we can create a very low-cost branch structure and get that branch up to $15 million-plus a month in pretty short order.”

So what happens if they move too fast? The one thing to avoid is the one thing Ashmore says no one wants to talk about: the commoditization of the mortgage business. The company needs to take care that it does not just generate business with Realtors, brokers and correspondents in a way that is 100% based on price. Impac must maintain what it started and build a business that lasts beyond price swings.

The majority of business Impac needs to guard — whether it features real estate brokers, mortgage brokers or correspondents — is at the relationship-level. Ashmore gets this.

“It’s less about what the price is. You have to be competitive. But it’s more about these other things that you can bring to them,” he said.

What Impac is staking its future on is building that level of trust. For example there may be cases where warehouse customers do not fulfill all of Impac’s requirements. “If we can trust him 100% ,I will fund that loan before I receive that final condition and expedite that purchase, and there’s not going to be any other warehouse lender that does that.”

And if something goes wrong, one thing is for certain: Impac might have to bend, but it will never break. That much should pretty much be understood at this point.

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