Newport Beach-based Impac Mortgage Holdings Inc. has placed its bet on homebuyers.
The real estate investment trust buys more mortgages for home buys than refinancings, largely shielding the company from the pullback in refinances last year.
The company also favors adjustable rate mortgages, which lately account for the vast majority of loans made in Southern California.
Impac posted revenue growth of 302% in the three-year period ended June 30, increasing from $165 million in 2001 to $662 million in the past 12 months.
That stellar growth has placed Impac at No. 5 on this year’s Business Journal list of fastest-growing companies, up from No. 15 a year earlier.
The REIT’s profit also has ballooned. As of June, the company’s 12-month net income was $261 million, up from $22 million three years earlier.
Impac buys mortgages from originators such as Irvine-based Greenlight Financial Services Inc. and Newport Beach-based Express Lending.
The company packages loans in pools and sells them as bonds to Wall Street investors. Impac also sells mortgages to investment bankers who package them for sale as investments.
As a REIT, Impac pays out most of its profits to shareholders as dividends.
To be sure, Impac’s growth has mirrored the robust housing market. While home sales have slowed here in the past few months, sales continue at a brisk clip nationally.
Many economists expect housing sales to slow as mortgage rates rise. Mortgage rates are expected to increase as the economy improves and the Federal Reserve Bank continues its policy of monetary tightening.
In any case, Wall Street has taken a shine to Impac’s growth. It’s been trading at 25 lately, up 66% compared to a year earlier. The company’s market value was $1.7 billion at recent check.
By buying and selling loans, Impac functions as a big middleman in the mortgage business.
Most of the company’s profits come from the difference between the interest it earns on mortgages in its portfolio and the money it pays to bondholders.
Impac is like a smaller version of Fannie Mae and Freddie Mac,big mortgage buyers backed by the federal government.
Impac buys loans that Fannie Mae and Freddie Mac pass on, not because of bad credit scores but because of some other issue, be it the size of a loan relative to a home’s value or a self-employed person who doesn’t have a bunch of paycheck stubs to show a bank. The loans are known as “alt-A.”
The company also provides loans to some people whose mortgage payments total more than 30% of their income, which is an industry standard.
It’s a tricky business, to be sure. The company invests primarily in adjustable rate mortgages. The bonds it sells to investors also are adjustable.
Impac’s office on Dove Street is like a giant trading floor with a big flow of money coming in and going out and constantly adjusting to market rates. Impac also hedges its risk with limits on some loan fluctuations.
In an interview in January, Tania Jernigan, Impac’s vice president of investor relations, said the company typically invests 3% of its money in each loan pool it sells. So for every $100 million in loans held by an Impac trust, $97 million belongs to bondholders.
The risk for Impac is if rates shoot up abruptly. If that happens, Impac could face the prospect of paying more for loans than it earns.
But once rates plateau at a higher rate, Impac becomes more profitable, sources said. The reason: The 3% Impac invests in its loans would earn a higher return. The other 97% should keep the same spread between what Impac pays bondholders and what it earns.
Rising rates also threaten Impac if they cut into home sales, since about 60% of its loans are from home buys.
Still, many of Impac’s loans carry a prepayment penalty.
That means Impac can rely on the loans it already handles to keep generating income, though growth would slow.
Another risk: fraud, which has been spawned by the rapid growth in the mortgage industry, according to industry sources.
In one case, the FBI last month broke up a ring of 35 members of the mortgage industry who had combined to obtain 380 fraudulent home loans exceeding $70 million, reported the Los Angeles Times in a story on fraud.
The story cited one Ohio congressman who said 10% to 15% of all home loan applications involve some fraud or misrepresentation.
Impac has had its own run-in with fraud, according to the company. In fact, the mortgage company in September filed suit against Credit Suisse First Boston LLC for $3 million, alleging the investment bank facilitated fraud.
In the suit, filed last month in Orange County Superior Court, Impac accuses the investment bank of buying loans from Florida’s General Mortgage Corp., which falsely claimed to own them.
The lawsuit charges that Credit Suisse continued buying loans from General Mortgage even after Impac alerted Credit Suisse to the alleged fraud.
Still, the lawsuit doesn’t amount to much for a company that made $261 million in profit for the year ended in June.
