Monday, September 10, 2007

Alt-A Mortgages Trip Up Impac Mortgage Holdings

On August 14, Impac Mortgage Holdings, Inc. (IMH-$1.51), one of the largest "Alt-A" residential mortgages lenders (loans that are typically between prime and subprime in terms of quality), reported a second quarter 2007 net loss of $(152.5) million, or $2.05 per common share, as compared to net earnings of $26.4 million, or $0.30 per diluted common share for previous year. The net loss was primarily the result of a $163.0 million increase in the provision for loan losses as a result of deteriorating market conditions and higher delinquencies.

Pools of
Alt-A mortgage backed securities (MBS) are packaged and marketed as being more appealing to traditional MBS yield seekers because they are perceived to offer temporary protection from prepayment risk (in a falling interest rate environment). However, this prepayment risk can be counterbalanced by a higher credit risk—as is being borne out in the volatile credit markets of 2007.

Unfortunately, management’s concept of embracing innovative mortgage lending by “questioning the basic assumptions of making mortgage loans,” turned out to be no more than another credit scheme designed to promote revenue growth by minimizing borrowers’ varying credit-risk profiles and loosening loan-to-value requirements.

On August 22, the loan originator took steps to substantially reduce its operating expenses, including staff reductions and closure of selected mortgage origination facilities. Given pink slips were approximately 350 employees of its nationwide workforce.

Commenting on the restructuring, Chairman, CEO, and co-founder Joseph R. Tomkinson said, “We are deeply saddened by the displacement of these employees, many of whom have been loyal to the Company for more than a decade. During this very difficult time, the Company is hosting a variety of seminars, career days, daily lab environments and a job fair to assist our employees in their job searches.”

As few CEOs are ever fired “for cause,” we thought it might be of interest to review the termination provisions of Messer. Tomkinson’s own employment agreement. As of December 31, 2006, if Tomkinson were to be ‘let go without cause,’ he is entitled to a severance package of about $1.92 million, which includes $1.5 million in a lump-sum cash severance, $106,560 in owed cash bonus, and the continuation of health benefits, stock options and non-vested stock vesting for an additional thirty months after separation from the Company.

Somehow, we find it difficult to believe that the 350 ‘loyal employees’ shown the door were given similar severance benefits.

Oh—a check of Impac’s online job center showed this originator of non-conforming residential mortgages was running an ad seeking a defaulted loan operations specialist.

Editor David J. Phillips does not hold a financial interest in Impac Mortgage Holdings. The 10Q Detective has a Full Disclosure Policy.

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