Impac Mortgage Holdings, Inc. Common Stock

Good day, and thank you for standing by. Welcome to the Impact Mortgage Holdings Incorporated Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Joe Joffrion, General Counsel. Please go ahead, sir.

Good morning, everyone, and thank you for joining Impact Mortgage Holdings' year-end 2021 earnings conference call. During this call, we will make projections and other forward-looking statements in regards to, but not limited to, gap in taxable earnings, cash flows, interest rate and market risk exposure, mortgage production, and general market conditions. I would like to refer you to the business risk factors in our most recently filed Form 10-K and Form 10-Qs filed in the Securities and Exchange Act of 1934. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This presentation, including any outlook and guidance, is effective as of the date given, and we expressly disclaim any duty to update the information herein. I would like to get started by introducing George Mangiaracena, Chairman and CEO of Impact Mortgage Holdings. George?

Thank you, Joe. Tiffany Essinger, our COO, John Glockner, our treasurer, Toby Wakori, our CIO, will join me for prepared remarks, and Justin Mozio, our CIO, will be available for the question and answer segment of today's call. For the fourth quarter of 2021, the company reported gap net income of $3.6 million, or 15 cents, per diluted common share, and a core loss of approximately... $5 million or 23 cents per diluted common share. The year ended December 31st, 2021. The company reported a gap net loss of 3.9 million or 22 cents per diluted common share and a core loss of approximately 12.4 million or 5.8 cents per diluted common share. The delta between gap and core results is primarily attributable to the increase in the fair value of our residual portfolio, which John Glockman will discuss in his prepared remarks later in this call. As we've outlined in prior earnings calls, the company broadly classifies its origination activities, irrespective of channel, as either rate or credit. Our rate business is centered around our GSE product, while our credit business is focused on our non-QM product. In the fourth quarter of 2021, with respect to our rate business, The company was not immune from the reduced origination volumes and margin compression typically experienced by the industry at the later stages of refinance waves that were driven by low rates and accommodative monetary policy. This is reflected in our GSC origination volumes in the fourth quarter. We anticipate that market conditions will continue to be challenging for the foreseeable future in our rates business and have adjusted our capacity models, marketing spend, and headcount accordingly. With respect to our credit business, the fourth quarter of 2021 further evidenced the resilience of our non-QM franchise. Non-QM originations totaled close to 400 million in the fourth quarter of 2021, double that of the third quarter, and positioned the company for an annualized run rate of approximately 1.5 billion. In the full year 2021, the company posted close to 700 million in non-QM, two and a half times out of 2020. Further context, the company originated less than 15 million in non-QM in the four quarters post-COVID, the second quarter of 2020 through the first quarter of 2021. The non-QM segment of the mortgage market experienced significant market pressure beginning in the fourth quarter of 2021, with conditions further deteriorating into the first quarter of 2022. Expectations related to rising short-term interest rates, as expressed in the two- and three-year swap rates, have resulted in concerns over extension risk and more extensive structured financing terms. In addition to a disciplined approach to hedging activities, non-QM note rates were required to be recalibrated with the consumer from a low of a 4% range prevalent in 2021 to a target in the mid-5s to 6%. levels not coincidentally present in the market prior to the COVID-induced emergency monetary policy measures of March 2020. The average note rate of the company's current locked pipeline reflects this arduous climb up the rate ladder. The company continues to believe that the addressable market for non-QM will expand once markets normalize. The first quarter of 2020 introduced increased market volatility and heightened market awareness of non-transitory inflation and credit and liquidity risk brought on by geopolitical events. Some of us were cutting our teeth in the business back in October of 1998 at the advent of the Russian debt crisis, which triggered a flight-to-safety rally in U.S. Treasuries and a concurrent sell-off in credit-based assets. Especially finance companies at that time experienced losses and liquidity calls on their Treasury short-hedge positions and also faced warehouse margin calls and market value declines in their subprime and all-day mortgage loan portfolios. Layered risks are difficult to effectively hedge in times of acute market dislocation. The company has deployed a wide range of capital markets hedge strategies and delivery mechanisms over the last several years with increased utilization over the last six months on futures on treasury swaps, forward sale agreements, and best-effort deliveries in lieu of aggregating non-QM for bulk sale. We will continue to remain disciplined in our origination and capital markets activities and remain undeterred in our belief that the addressable market for non-QM will expand to our benefit once markets normalize with respect to volume and margin. Turning now to our longstanding preferred delitigation. As we disclosed in our 8 filing on July 19th, the Maryland Court of Appeals issued an order which affirmed the lower court's ruling, specifically that the proposed 2009 amendment to the preferred B articles did not receive the required votes and that therefore the original preferred B articles remained in place. I will now turn the call over to our general counsel, Joe Jafion, for a more detailed update on this matter.