Pipeline: Impac Hunting for Lenders

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Scouting for multifamily prospects is at the top of the to-do list for William C. Morris, the new executive vice president of mergers and acquisitions at Impac Mortgage Holdings Inc.

The Newport Beach, Calif., real estate investment trust specializes in alternative-A home loans. Like other mortgage REITs, it has struggled recently with an interest-margin squeeze caused by a flattening yield curve and higher prepayments.

William Ashmore, Impac's president and chief operating officer, said in an interview that it hired Mr. Morris to look at deals because, in the challenging environment, "we as a management team cannot take the time off" from running the portfolio and other strategizing.

Impac has been ramping up its multifamily unit in recent years, especially in small apartment loans. Mr. Ashmore said that even though it would try to steadily expand the unit without a deal, a purchase would accelerate growth. "It's difficult, organically, to grow that business - there's not many successes out there," he said.

Mr. Ashmore said Impac likes multifamily assets because they prepay more slowly than home loans and have low loss rates.

It would like to buy a multifamily lender in the Midwest or the East, he said; one that works with Fannie Mae or Freddie Mac would be nice, but few independent ones remain, he noted.

Impac will also consider buying centralized retail and wholesale residential originators in the same regions, Mr. Ashmore said. It would not want to acquire a specialty lender whose business overlaps much with its own, he said. Targeting "something with a wider spectrum" of products "makes sense."

The REIT, which is not looking to sell itself or any of its units, has gotten a trickle of information about companies, mostly small ones, looking to sell themselves, Mr. Ashmore said. He expects the opportunities to pick up dramatically late this year or early next year.

"This is at a point of the cycle where you're going to see people who were probably making money over the last couple of years that are not making money today, and are looking to be sold," he said.

Impac announced the hiring of Mr. Morris on Monday. He was most recently the chief financial officer for Media Arts Group Inc., which distributed the works of Thomas Kinkade. (The artist has since taken Media Arts private and renamed it Thomas Kinkade Co.) Earlier Mr. Morris ran middle-market M&A for Citigroup Inc.

When Impac reported second-quarter earnings last week, executives said its woes had forced it to shift strategies. For now it will settle for slow portfolio growth, as it sells more of its originations for immediate income, they said.

To produce more loans to hold or sell, Impac has been adding products and heavily recruiting correspondents and salespeople who have strong relationships with potential correspondents.

An "alt-B" product - for lower-credit borrowers - has been only mildly successful for Impac, because of fierce nonprime competition, Mr. Ashmore said. "It seems like a lot of subprime guys cut it to the bone."

Like some other lenders with reservations about option adjustable-rate mortgages, which allow for negative amortization, Impac has still begun offering them. Still it is not pushing these loans aggressively or retaining them, Mr. Ashmore said. "We do not think that is the most attractive program for the borrower. However, it's been driving a substantial amount of originations" industrywide.

Any deal would help Impac get back to stronger balance-sheet growth by increasing its origination power, he said. "We'd really like to get to a position to grow the portfolio more quickly."

Another mortgage REIT, American Home Mortgage Investment Corp. of Melville, N.Y., posted surprisingly strong second-quarter profits, because its acquisitions produced a surge in originations.

Popular Demand

It looks like the Department of Housing and Urban Development's roundtables on efforts to reform Real Estate Settlement Procedures Act enforcement will get an extended engagement.

HUD had planned to hold three invitation-only forums this summer at its Washington headquarters - and three more gatherings outside the city with the Small Business Administration - to collect ideas on what direction to take its revived multiyear reform effort.

However, after requests by consumer and industry groups that were not invited to those meetings, HUD has scheduled another one, to be held Aug. 25 in Washington. Parties not invited to the initial meetings - the forum scheduled for today would have been the final one - because they did not speak up much last round will be joined by a few repeat attendees, to provide a balanced discussion.

Reports from the meetings held so far have made it appear that the various sides would most easily support less radical changes than once envisioned, with exemptions from anti-kickback rules for providers of loan and settlement-service packages still contentious. But HUD Secretary Alphonso Jackson has said the roundtables are not about building consensus, but about creating a dialogue.

Warehouse Woes

AmNet Mortgage Inc. of San Diego, a former REIT that dropped its portfolio to focus exclusively on third-party originations, swung to a second-quarter loss.

On the plus side, its production volume surged 44% from a year earlier, to $3.7 billion.

When it reported its results Monday, AmNet blamed the loss - $1.6 million, or 21 cents a share - on accounting issues related to the hedging of loans being warehoused for sales, not operational difficulties. It posted a $208,000 profit a year earlier.

AmNet must record gains or losses on the hedges' fair values at a quarter's end, but it must wait until selling the associated loans to recognize increases or decreases in their values, executives explained on a conference call.

The accounting treatment provided a benefit in the first quarter, when a March rise in interest rates gave it hedge gains, but not the related losses on the loans. In the second quarter the reverse happened - rates sank in June - and AmNet absorbed the losses on the older loans, the executives said.

"If we look at the company's results over time, the impact of timing differences are generally neutralized," Judy Berry, its CFO, stressed on the call.

Quotable…

"This boom will end when a large number of lenders lose a great deal of money. There is a reason why the three largest banks that make 40% of the nuclear mortgages [option ARMs] are selling 75% of the product despite its inherent high yield. They smell the risk."

- Richard X. Bove, a Punk, Ziegel & Co. analyst, in a report published this week, "This Powder Keg Is Going to Blow"

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