After wild year, Impac's origination activity picks up in 4Q

For most mortgage companies, 2020 produced record volume and earnings. However, Impac Mortgage Holdings spent much of the year trying to regain its footing after the pandemic halted its operations.

Exactly one year ago the company touted the benefits of shifting its emphasis to originating non-qualified mortgages as a sustainable business model.

Within a matter of weeks, that all went by the wayside.

"We entered 2020 with strong momentum, having repositioned the company over the years to expand our core competency related to alternative products," George Mangiaracina, Impac's chairman and CEO, said during its fourth quarter conference call. "During the first quarter of 2020 prior to destruction caused by COVID-19, we originated $260 million of non-QM loans, and we were on pace to exceed our fourth quarter 2019 non-QM origination volume."

Then, Impac's secondary market investors refused to honor forward commitments to purchase the non-QM production and the bottom dropped out.

The coronavirus disruption resulted in Impac recording an $88.2 million loss in 2020, far worse than the $8 million loss for 2019.

Impac reported a loss of $2.2 million in the fourth quarter, compared with a third quarter profit of $1.6 million and a fourth quarter 2019 loss of $677,000. Using a non-GAAP measure called core earnings, Impac had a fourth quarter profit of $3.3 million, its second consecutive quarter of positive earnings using this measurement, following a third quarter profit of $4.4 million.

The company strictly stuck to conforming and government products when it started originating loans again in June.
Impac didn't return to nonagency jumbo, non-qualified mortgage originations and purchasing loans from mortgage brokers until the fourth quarter.

The direct-to-consumer generated $2.48 billion of the $2.75 billion of volume in 2020. One year prior, retail accounted for $3.51 billion of Impac's total production of $4.55 billion.

The third party origination channels took the biggest hit from the shutdown of operations. In wholesale, Impac did $215 million for the year, just one-quarter of the $816.3 million for 2019.

It stopped purchasing through the correspondent aggregation channel altogether after the first quarter, doing just $54.4 million in 2020, compared with $226.8 million in 2019.

Retail volume accounted for $753.5 million in the fourth quarter, up from $412.3 million in the third quarter but down from $1.23 billion annually.

Impac stepped up its wholesale activity in the fourth quarter, with $56.7 million in volume. That surged from a scant $6.2 million in the third quarter but dropped significantly from $219.1 million year-over-year.

Margin compression affected its fourth quarter earnings, with gain on sale down 73 basis points on a quarter-to-quarter basis. However, that jumped 80 bps than what the company earned on its loans last January and February before the COVID shutdown, Paul Licon, chief financial officer, said.

Those margins likely will get further compressed as the total mortgage market shrinks. "Competition among lenders remains untamed and the resulting pressure to provide consumers with more favorable rates started to drive some margin compression in the GSE space," said Tiffany Entsminger, the chief operating officer. "Increased business promotion spend and adversely impacted margins will likely persist as rates continue to increase."

Impac expects that for the current quarter, there will be an additional 15 to 20 basis points of margin compression for its conforming product, Licon added.

However, Mangiaracina followed up by saying "with that amount of margin compression in the GSE product offset by what we believe would be a shift in production to non-QM and jumbo where the margins are healthier, we're fairly confident that we'll be able to continue to run our platform with a positive rate."

The end of the refinance boom is driving Impac's opportunity as many loan officers that focused on non-QM pivoted to the easy money conforming business. "With rates rising and margins compressing, we're seeing return to these producers to the non-QM sector, which should boost the origination volumes going forward," said Tom Donatacci, Impac's chief of staff-business development.