Wounded Survivors Wearily Report In

The most seriously injured mREITs belated reported in today, capped off by Thornburg Mortgage's (TMA) announcement that it had finally closed its Hail Mary debt deal.

Impac Mortgage (IMH) still can't file its 10-K (not that Impac was a timely filer in the good days, but I digress...), but it has settled most of its repurchase obligations and made significant strides in bolstering liquidity.

Luminent Mortgage (LUM), which was all but left for dead last summer, is reinventing itself as a publicly-traded partnership that performs advisory services for distressed assets. I expect Deerfield Capital Corporation (DFR) to consider such a transaction in the near future. The move is similar to what KKR Financial (KFN) did back in May and may be part of a larger trend to move away from the fairly restrictive REIT requirements that limit hedging strategies and starve companies of liquidity.

Another quarter has come and gone and these companies are still alive, even if some are still on life support. Finally, the tide may be turning in their favor.

Alt-A Investors Mount a Comeback

Maybe it was just the rate cuts, maybe it was talk of a bailout for insurers, but money has been flowing into the Alt-A investors over the past two weeks.

Redwood Trust (RWT), which closed at $33.41 on January 22, has risen 34.5% since to close at $44.94 today. Likewise, Impac Mortgage (IMH), which I had admittedly left for dead, has climbed from $0.75/share to $1.71/share in the same time frame - a stunning 128% gain. Even Luminent Mortgage (LUM) has rallied 57%, moving up from $0.56/share to $0.88/share. Both stocks have a chance of regaining compliance with the NYSE listing requirements if the trend continues.

Of the three, I am of course the most interested in RWT. Although it's still well off its mid-60s highs, RWT has weathered this storm much better than most companies. Even so, it's not yet clear sailing for Redwood. Earlier this week, S&P put several classes of its Acacia CDOs on creditwatch negative.

Fully Impacted

As I scan through Impac Mortgage's (IMH) recently filed third-quarter 10-Q, it is apparent that management is absolutely shell-shocked. Although there was no mention of bankruptcy, the company is hanging on by a thread. The third-quarter GAAP loss was a stunning $1.2 billon, or $15.66/share. I felt the following risk factor summed things up quite succinctly:

As of September 30, 2007, we had a shareholders’ deficit of $(493.3) million, which means our total liabilities exceed our total assets. The existence of a shareholders’ deficit may effect our ability to continue to pay scheduled distributions on our preferred stock, limit our ability to obtain future debt or equity financing, and cause regulatory issues as it could effect our state mortgage licenses. If we are unable to obtain financing in the future, it could have a negative effect on our operations and our liquidity.

Our ability to generate cash flows from operations and to make scheduled distributions on our outstanding preferred stock will depend on our future financial performance and particularly our ability to realize the value of our investment portfolio. Our future performance will be affected by a range of economic, competitive, legislative, operating and other business factors, many of which we cannot control, such as general economic and financial conditions in our industry or the economy at large. A significant reduction in operating cash flows resulting from further deterioration in the mortgage industry, changes in economic conditions, or other events could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations and prospects and our ability to satisfy our obligations. If we are unable to satisfy our obligations, we will be forced to adopt an alternative strategy that may include actions such as, selling assets, restructuring or refinancing indebtedness or seeking equity capital. We cannot assure you that any of these alternative strategies could be effected on satisfactory terms, if at all, or that they would yield sufficient funds for continuing operations.

Impac now finds itself in much the same situation as NovaStar, hoping its remaining repurchase lenders will not issue a notice of default while the Company waits to see if its securitizations perform well enough to continue distributing cash receipts. Impac's future lies mainly in the hands of rating agencies, for future downgrades will cause the securitizations to fail overcollateralization tests and prevent Impac from receiving cash distributions. Additionally, Impac is running out of unencumbered collateral with which to satisfy margin calls. The next few weeks will be critical to see if what's left of Impac survives.

NYSE Warns Impac on Share Price Deficiency

As we warned you over a month ago, Impac Mortgage (IMH) was finally notified of its share price deficiency for listing on the NYSE. Impac conveniently waited until the last day possible to disclose this information, doing so after the bell on Tuesday.

The situation is not as dire as NovaStar's (NFI), for example, as Impac still meets other quantitative guidelines for listing and will receive a six-month window to cure the share price deficiency, which it could do with a simple reverse split.

Nonetheless, the NYSE cautioned Impac that "[it] has informed that Company that it will continue to monitor share price levels and that it reserves the right to take more immediate listing action in the event that the stock trades at levels that are viewed as 'abnormally low' on a sustained basis or based on other qualitative factors."

Impac Intent on Survival

Residential originator and investor Impac Mortgage Holdings (IMH) provided a market update via press release early this morning, principally to inform the market of its inability to file its 10-Q. (But you already knew that.)

As has been the case for other mREITs this quarter, under GAAP, Impac is going to have to record a negative equity investment charge related to losses in certain trusts. The losses embedded int those trusts, which are consolidated for GAAP purposes, exceed Impac's economic net investment and thus will not be realized cash losses. However, the negative equity charge will likely cause Impac to to have a consolidated stockholders' deficit and consequently a negative GAAP book value. It will be interesting to see how Impac's lenders treat this material development.

Nonetheless, Impac believes that "its current cash flows along with its reduction in operating expenses...should provide sufficient liquidity to execute its current business plan." Time will tell for Impac, whose stock continues to trade well below $1/share.

Is Impac Insolvent?

Silence is not golden for Impac Mortgage (IMH).

After the bell on Tuesday, Impac belatedly revealed that it received a September default notice from Bear Stearns related to unmet margin calls on an active repurchase agreement. Subsequently, Bear Stearns notified Impac that it had elected to terminate the facility and demanded immediate payment of the entire amount of approximately $286 million and seized the collateral.

Impac also disclosed that it had defaulted on two other repurchase agreements sometime after the end of the third quarter. Those facilities were subsequently terminated.

Finally, Impac was in default on a fourth repurchase agreement and a warehouse facility at September 30. The Company requested a waiver of default from each these lenders, but had not received the waivers as of November 13, 2007.

The one-time Alt-A giant admitted that the Company’s board of directors had elected to discontinue the mortgage operations, commercial operations and warehouse lending operations -- and incur a pre-tax restructuring charge of approximately $17 million.

Obviously, Impac was not going to file its 10-Q on time, but the SEC is the least of IMH's concerns. Impac closed at just $0.94/share, but with the very real threat of bankruptcy looming overhead, shares may head south quickly after the open tomorrow.

Is Impac's Listing In Trouble?

A double-digit percentage drop in shares of Impac Mortgage Holdings (IMH) has put the one-time Alt-A giant at risk of being delisted from the NYSE. Shares of Impac dipped below the NYSE's $1.00/share minimum bid price for the second straight day, although Impac still has twenty-eight more days for share prices to recover before they are technically out of compliance with NYSE Listing Standard 802.01C. However, the depressed share price does limit the ability of institutional investors to remain in Impac shares, so I would look for IMH to do a reverse split in the near future - a first in the Company's 12-year public history.

As a side note, the situation at Impac is different from that at Bimini. Impac is only at risk of being out of compliance with the $1/share minimum bid price rule, but has sufficient capitalization otherwise. Bimini has been below the $25 million market capitalization threshold for thirteen days now.