In a filing today with the Securities and Exchange Commission, Impac Mortgage Holdings Inc. said its third quarter was one to forget: a quarterly loss of $1.2 billion that it said it may not recover from. The result was something you won't see written in quarterly filings very often:
As of September 30, 2007, the Company has negative net worth. While the Company continues to pay its obligations as they become due, the ability of the Company to continue is dependent upon many factors, particularly the Company's ability to realize the value of its investment portfolio. There can be no assurance of the Company's ability to do so.
The former Alt-A-powerhouse-turned-conforming-retail lender said attributed its large quarterly loss to a $628.3 million increase in provision for loan losses, and a $190.9 million loss on the change in fair value and realized losses from derivative instruments. In addition, Impac said it incurred a $27.5 million loss on disposition of the loans, a $22.2 million increase in provision for REO losses and a $9.6 million decrease in realized gains from derivative instruments. There's plenty of verbage in the quarterly filing that essentialy reiterates the company's plan to exit from Alt-A, shutter wholesale, focus on retail conforming, and manage its loan portfolio. And there's also the usual verbage about how delinquencies are increasing within its primarily Alt-A holdings. But speaking of managing its loan portfolio, this little tidbit caught my eye (emphasis added):
Additionally, during the third quarter of 2007, the Company continued alternative REO liquidation methods, in an effort to accelerate the disposition of foreclosed loans, through the use of the auction process which was begun in the second quarter. While this liquidation strategy mitigates certain holding costs and provides potential long term benefits, including disposition of properties prior to further home price depreciation, in certain instances the Company incurred higher severities, through such auction sales than it expected. The Company intends to adjust its strategy to auction only those properties more difficult to sell at retail as a further effort to reduce loss severities. In addition the Company is evaluating a plan to lease such properties until market prices recover.
Impac made a big deal earlier in the year out of its plan to auction off REO in bulk, a strategy it seems to suggest here didn't work well at all -- so the company is going back to using auctions only when it has to. That last sentence is an interesting one: Impac as landlord? Rather than try to sell the REO at a loss right now, Impac is apparently piloting a program where they'll lease their REO properties out until they feel they can actually sell them. I don't think I've seen discussion of this sort of thing being done elsewhere yet, and have to wonder if it will become more common.