News Column

IMPAC MORTGAGE HOLDINGS INC - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 12, 2014

(dollars in thousands, except per share data or as otherwise indicated)

Unless the context otherwise requires, the terms "Company," "we," "us," and "our" refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, Integrated Real Estate Service Corporation (IRES), IMH Assets Corp. (IMH Assets), and Impac Funding Corporation (IFC). Forward-Looking Statements This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "likely," "should," "could," "seem to," "anticipate," "plan," "intend," "project," "assume," or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: our ability to manage effectively our mortgage lending operations and increase mortgage originations; successful development, marketing, sale and financing of new mortgage products, including the non-Qualified Mortgage loan program; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing, the terms of any financing that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions. For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the period ended December 31, 2013, and other reports we file under the Securities Exchange Act of 1934. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.



The Mortgage Industry and Discussion of Relevant Fiscal Periods

The mortgage industry is subject to current events that occur in the financial services industry including changes to regulations and compliance requirements that result in uncertainty surrounding the actions of states, municipalities and new government agencies, including the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA). These events can also include changes in economic indicators, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, and customer perception, as well as others. The factors that affect the industry change rapidly and can be unforeseeable making it difficult to predict and manage an operation in the financial services industry.



Current events can diminish the relevance of "quarter over quarter" and "year-to-date over year-to-date" comparisons of financial information. In such instances, the Company attempts to present financial information in its Management's Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to its financial information.

Market Update The U.S. economy continued its gradual recovery during the first half of 2014. While consumer confidence, buoyed by healthy job growth, began to increase during the second quarter of 2014 from the first quarter, it remained flat compared with December 31, 2013. Labor market conditions, household and business spending continue their modest improvement. Despite stronger economic data in various regions, credit market volatility, emerging market and geopolitical concerns continue to weigh on investor sentiment. Housing markets in the U.S. continue to recover with the strength of recovery varying by market. Housing inventories are at their highest levels in over a year which has helped slow price gains in many regions during the second quarter of 2014. The significant backlog of properties in foreclosure will continue to play a key role in the housing recovery. 26 --------------------------------------------------------------------------------



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In the U.S., both economic data and corporate earnings were mixed, while the Federal Reserve Board announced further reductions in its bond buying stimulus program and updated its guidance on short-term interest rates, putting less weight on the unemployment rate and indicating that it would look at 'a broad range of economic indicators' in deciding when to start raising short-term interest rates. Selected Financial Results for the Three and Six Months Ended June 30, 2014 and 2013 For the Three Months Ended For the Six Months Ended June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Revenues: Gain on sale of loans, net $ 6,534 $ 4,591 $ 20,458$ 11,126$ 37,930 Real estate services fees, net 4,360 3,679 5,155 8,039 9,583 Servicing income, net 1,291 1,569 931 2,859 1,941 (Loss) gain on mortgage servicing rights (1,564 ) (977 ) 2,004 (2,541 ) 3,182 Other 84 1,383 375 1,468 954 Total revenues 10,705 10,245 28,923 20,951 53,590 Expenses: Personnel expense 9,319 9,460 18,891 18,779 36,654 General, administrative and other 4,555 5,372 6,484 9,928 13,206 Total expenses 13,874 14,832 25,375 28,707 49,860 Other income (expense): Net interest (expense) income (96 ) (313 ) (207 ) (409 ) 237 Change in fair value of long-term debt 226 (650 ) (478 ) (424 ) (527 ) Change in fair value of net trust assets 4,711 3,038 (607 ) 7,749 (2,106 ) Loss from discontinued operations, net of tax (834 ) (112 ) (933 ) (946 ) (1,774 ) Total other income (expense) 4,007 1,963 (2,225 ) 5,970 (4,170 ) Net earnings (loss) before income taxes 838 (2,624 ) 1,323 (1,786 ) (440 ) Income tax expense (benefit) 756 342 32 1,098 (1,056 ) Net earnings (loss) $ 82 $ (2,966 )



$ 1,291 $ (2,884 ) $ 616

Diluted earnings (loss) per share $ 0.01 $ (0.33 ) $ 0.14 $ (0.31 ) $ 0.08 Status of Operations Summary Highlights Mortgage lending volumes increased in the second quarter of 2014 to $465.2 million from $353.1 million in the first quarter of 2014 and decreased as compared to $780.1 million in the second quarter of 2013. Mortgage lending revenues and margins increased in the second quarter of 2014 to $6.5 million, or 140 bps, from $4.6 million, or 131 bps in the first quarter of 2014, and decreased as compared to $20.5 million, or 262 bps, in the second quarter of 2013. Mortgage servicing income decreased in the second quarter of 2014 to $1.3 million from $1.6 million in the first quarter of 2014, due to servicing sold in the first quarter, and increased as compared to $1.0 million in the second quarter of 2013. Mortgage servicing rights decreased $19.8 million to $16.2 million at June 30, 2014 as compared to $36.0 million at December 31, 2013. The decrease is due to bulk sale transactions of servicing rights totaling $1.6 billion in unpaid principal balance (UPB), and the sale of AmeriHome, which had servicing rights totaling $702.1 million in UPB. Partially offsetting the decrease was servicing retained loan sales of $807.0 million. At June 30, 2014, the servicing portfolio was $1.6 billion in UPB as compared to $3.1 billion at December 31, 2013.



Real estate services revenue increased to $4.4 million in the second quarter of 2014 as compared to $3.7 million in the first quarter of 2014 as compared to $5.2 million in the second quarter of 2013.

In our long-term mortgage portfolio, based on continued improved performance of the portfolio which was better than expected, we updated certain loss and discount rate assumptions at June 30, 2014 resulting in $4.8 million increase in the estimated fair value of the portfolio in the second quarter of 2014.



Expenses decreased in the second quarter of 2014 to $13.9 million from $14.8 million in the first quarter of 2014, and as compared to $25.4 million in the second quarter of 2013.

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Table of Contents Originations (in millions) For the three months ended June 30, March 31, % June 30, % 2014 2014 Change 2013 Change $ 465.2$ 353.1 32 % $ 780.1 -40 % The decline in volumes and margins as compared to the prior year was primarily due to the sale of our retail branches at the end of 2013, which operated at a monthly loss of approximately $700 thousand. Excluding the production from our retail branches, the decline in our origination volumes was 18% in the second quarter of 2014 as compared to second quarter of 2013. Without this retail production, we had a higher concentration of correspondent and wholesale volume, which generally earn lower margins than retail but also incur lower operational costs. During the second quarter of 2014, lending volumes increased as compared to the first quarter of 2014, predominately due to the ongoing low interest rate environment, resulting in a 38% increase in wholesale and correspondent originations. Despite the higher concentration of correspondent and wholesale originations during the second quarter of 2014, mortgage lending margins improved over the first quarter due to a higher concentration of government loans, which have higher margins. Purchase money transactions as a percentage of overall originations have increased in the second quarter of 2014 to 53%, as compared to 42% in the first quarter of 2014, and 39% in the second quarter of 2013. We believe the increase in purchase money transactions in the last two quarters was primarily a result of our recent focus in sales and operations to provide a better purchase transaction related customer service experience. Originations by Channel: For the three months ended June 30, (in millions) 2014 % 2013 % Wholesale $ 180.6 39 % $ 328.2 42 % Correspondent 271.4 58 % 222.4 29 % Retail 13.2 3 % 229.5 29 % Total originations $ 465.2 100 % $ 780.1 100 % Originations by Channel: For the six months ended June 30, (in millions) 2014 % 2013 % Wholesale $ 280.9 34 % $ 634.7 44 % Correspondent 498.9 61 % 378.9 26 % Retail 38.5 5 % 440.3 30 % Total originations $ 818.3 100 % $ 1,453.9 100 % During the second quarter of 2014, the Company continued its strategy to increase the correspondent and wholesale channel originations. In the second quarter of 2014, although wholesale originations declined, our wholesale and correspondent channels, combined, contributed 97% of total originations as compared to 71% in the second quarter of 2013. Contributing to the large quarter over quarter percentage increase was the reduction in retail originations in 2014 due to the sale of the retail branches in December 2013. 28

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We continue to build our wholesale and correspondent channels. We have added sales staff and streamlined our operations in an effort to provide quality customer service to attract broker and correspondent seller clients and to increase the volume of loans submitted from repeat customers. With our sales, marketing, and operational efforts during the second quarter of 2014, our pipeline has increased in excess of $500 million subsequent to the end of the second quarter, which is expected to result in an increase in originations in the third quarter. Mortgage servicing portfolio (in millions) For the three months ended December 31, % June 30, % June 30, 2014 2013 Change 2013 Change $ 1,571.9$ 3,128.6 -50 % $ 2,110.2 -26 % The mortgage servicing portfolio decreased to $1.6 billion at June 30, 2014, a 50% decrease from March 31, 2014. The decrease is primarily due to bulk sales of servicing rights totaling $1.6 billion in UPB and the sale of AmeriHome, which had servicing rights totaling $702.1 million in UPB. As previously announced, in the first quarter of 2014, we planned to sell up to $1.3 billion in servicing in the first half of 2014. This decision was based on the current market conditions that offered attractive pricing. The sale of servicing in the second quarter of 2014 generated $11.0 million in cash proceeds, with additional proceeds of $1.2 million to be received at the time when the servicing is transferred during the third quarter. Net servicing income in the second quarter of 2014 decreased to $1.3 million as compared to $1.6 million in the first quarter of 2014 due to the aforementioned sale of servicing and the sale of AmeriHome. The following table includes information about our mortgage servicing portfolio: At June 30, % 60+ days At December 31, % 60+ days (in millions) 2014 delinquent (1) 2013 delinquent (1) Fannie Mae $ 795.9 0.14 % $ 1,520.2 0.19 % Freddie Mac 292.3 0.15 % 317.2 0.28 % Ginnie Mae 483.7 0.99 % 1,203.5 1.28 % Total owned servicing portfolio $ 1,571.9 0.31 % $ 3,040.9 0.65 % Acquired Portfolio (2) - 0.00 % 87.7 9.86 % Total servicing portfolio $ 1,571.9 0.31 % $ 3,128.6 1.57 %



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(1) Based on loan count.

(2) Represents servicing portfolio acquired in 2010 acquisition of AmeriHome. AmeriHome was sold during the first quarter of 2014.

Our loan products primarily include conventional loans for Fannie Mae and Freddie Mac and government loans insured by FHA, VA and USDA.

Originations by Loan Type: For the three months ended (in millions) June 30, 2014 % March 31, 2014 % June 30, 2013 % Government (1) 191.7 41 % $ 117.8 33 % $ 212.7 27 % Conventional (2) 254.4 55 % 227.4 65 % 558.4 72 % Other 19.1 4 % 7.9 2 % 9.0 1 % Total originations $ 465.2 100 % $ 353.1 100 % $ 780.1 100 %



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(1) Includes government-insured loans including FHA, VA and USDA. (2) Includes loans eligible for sale to Fannie Mae and Freddie Mac. 29

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Table of Contents For the six months ended (in millions) June 30, 2014 % June 30, 2013 % Government (1) $ 309.5 38 % $ 393.8 27 % Conventional (2) 481.8 59 % 1,044.5 72 % Other 27.0 3 % 15.6 1 % Total originations $ 818.3 100 % $ 1,453.9 100 %



Originations by Purpose:

For the three months ended June 30, (in millions) 2014 % 2013 % Refinance $ 220.2 47 % $ 477.6 61 % Purchase 245.0 53 % 302.5 39 % Total originations $ 465.2 100 % $ 780.1 100 % Originations by Purpose: For the six months ended June 30, (in millions) 2014 % 2013 % Refinance $ 424.4 52 % $ 962.8 66 % Purchase 393.9 48 % 491.1 34 % Total originations $ 818.3 100 % $ 1,453.9 100 % During the first six months of 2014, we have been developing non-Qualified Mortgage (QM) loan programs, being marketed as AltQM, along with qualified mortgages not eligible for delivery to the GSE's, which were introduced to the market in July 2014. We have also been developing relationships with other institutions in an effort to forge a strategic alliance to provide financing sources and exit strategy alternatives for the non-qualified mortgages that we generate. In conjunction with launching these new AltQM products, we are establishing a strategic investor relationship which will provide balance sheet capacity to fund these non- conforming loans. We believe there is an underserved mortgage market for borrowers with good credit who may not meet the new QM guidelines set out by the Consumer Financial Protection Bureau (CFPB). In our opinion, as the demand by consumers for a non-QM product grows and the investor appetite increases, non-QM mortgages will be in more demand. We have established strict lending guidelines, including determining the prospective borrowers ability to repay the mortgage, which we believe will keep delinquencies and foreclosures at acceptable levels. Furthermore, with our excess warehouse borrowing capacity, we are seeking ways to utilize the excess borrowing capacity by making re-warehousing available to our current wholesale brokers and existing correspondent sellers to expand volumes and better serve customers and the borrowers. We presently use a portion of our excess capacity to provide re-warehouse facilities to customers. During the first six months of 2014, we increased our outstanding commitments to customers to $26 million and subsequent to quarter end have increased commitments to $30.0 million. The average outstanding balance of the re-warehouse facilities was approximately $2.3 million in the second quarter of 2014. In the second half of 2014, we anticipate a continued increase in overall originations as well as our operational efficiencies. The Company will work to increase originations through its business to business channels, by expanding our sales forces, and by hiring experienced lending sales personnel for our wholesale and correspondent channels and increasing efficiencies and service to our customers. By leveraging our re-warehousing division, we hope to increase the capture rate of our approved correspondent sellers business as well as expand our active customer base to include new customers seeking warehouse lines. The long-term mortgage portfolio primarily includes the residual interests in securitizations, master servicing rights from the securitizations and long-term debt. 30

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Our residual interests in securitizations (represented by the difference between total trust assets and total trust liabilities), have recently performed better than expected. Additionally, estimated bond prices continued to improve and corresponding yields have decreased. The decrease in investor yield assumptions on securitized mortgage collateral and securitized mortgage borrowings resulted in an increase in the estimated fair value of these trust assets and liabilities. The cash received from the residual interests was approximately $5.7 million in the second quarter of 2014, a significant increase over our expectations. Based on improved performance and other market data received regarding yield assumptions and discount rates, we lowered future loss assumptions as well as yield and discount rate assumptions in estimating the fair value of the long-term mortgage portfolio. This resulted in an increase in estimated fair value of residual interests of $3.3 million to $14.9 million at June 30, 2014 as compared to $11.6 million at March 31, 2014.



For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of Operations below.

Liquidity and Capital Resources

During the first six months of 2014, we funded our operations primarily from mortgage lending revenues and real estate services fees, net, which include gains on sale of loans, net, and other mortgage related income, portfolio loss mitigation and real estate services fees, net, primarily generated from our long-term mortgage portfolio, and cash flows from our residual interests in securitizations. Additionally, we funded mortgage loan production using warehouse facilities which are repaid once the loan is sold. Furthermore, we utilized the proceeds from the sale of AmeriHome, the sale of mortgage servicing rights and borrowings under the line of credit as additional sources of liquidity. As previously announced, in March 2014 we generated additional liquidity with the sale of AmeriHome for $10.2 million in cash. In conjunction with the transaction, as required by Fannie Mae, we used $3.0 million of the proceeds to reduce our legacy repurchase liability with Fannie Mae. Additionally, during the six months ended June 30, 2014, we sold $1.6 billion in UPB of mortgage servicing generating $16.8 million in cash and a $1.9 million receivable. Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, as well as the broader financial markets and the general economy. Concerns over economic recession, geopolitical issues, unemployment, the availability and cost of financing, the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing. We believe that current cash balances, cash flows from our mortgage lending operations, real estate services fees generated from our long-term mortgage portfolio, and residual interest cash flows from our long-term mortgage portfolio are adequate for our current operating needs. However, we believe the mortgage and real estate services market is volatile, highly competitive and subject to increased regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions, mortgage REITs and other finance companies which have offices in our market area as well as operations throughout the United States. We compete for loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of services we provide to borrowers. Additionally, competition for loss mitigation servicing, loan modification services and other portfolio services has increased due to the difficult mortgage environment, credit tightening and a recovering economy. Our competitors include mega mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and recovery collections business. Efforts to market our ability to provide mortgage and real estate services for others is more difficult than many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a rated primary or special servicer of residential mortgage loans as designated by a rating agency. Additionally, performance of the long-term mortgage portfolio is subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio. While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-term obligations is dependent upon many factors, particularly our ability to successfully operate our mortgage lending segment, real estate services segment and realizing cash flows from the long-term mortgage portfolio. Our future financial performance and success are dependent in large part upon the ability to expand our mortgage lending platform and profitability. 31

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Critical Accounting Policies

We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include those issues included in Management's Discussion and Analysis of Results of Operations in IMH's report on Form 10-K for the year ended December 31, 2013. Such policies have not changed during 2014.



Financial Condition and Results of Operations

Financial Condition



As of June 30, 2014 compared to December 31, 2013

The following table shows the condensed consolidated balance sheets for the following periods: June 30, December 31, Increase % 2014 2013 (Decrease) Change Cash $ 21,091$ 9,969$ 11,122 112 % Restricted cash 1,907 1,467 440 30 Mortgage loans held-for-sale 120,285 129,191 (8,906 ) (7 ) Mortgage servicing rights 16,166 35,981 (19,815 ) (55 ) Securitized mortgage trust assets 5,530,444 5,513,166 17,278 0 Other assets (2) 30,087 28,551 1,536 5 Total assets $ 5,719,980$ 5,718,325$ 1,655 0 % Warehouse borrowings $ 111,227$ 119,634$ (8,407 ) (7 )% Convertible notes 20,000 20,000 - n/a Long-term debt ($71,120 par) 17,555 15,871 1,684 11 Repurchase reserve (1) 6,335 9,478 (3,143 ) (33 ) Securitized mortgage trust liabilities 5,515,578 5,502,585 12,993 0 Other liabilities (2) 23,508 24,886 (1,378 ) (6 ) Total liabilities 5,694,203 5,692,454 1,749 0 Total equity 25,777 25,871 (94 ) (0 ) Total liabilities and stockholders' equity $ 5,719,980$ 5,718,325$ 1,655 0 %



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(1) $4.1 million and $5.5 million of the repurchase reserve was within discontinued operations at June 30, 2014 and December 31, 2013.

(2) Included within other assets and liabilities are the assets and liabilities of discontinued operations.

At June 30, 2014, cash increased to $21.1 million from $10.0 million at December 31, 2013. The primary sources of cash between periods were $16.8 million from the sale of mortgage servicing rights, $13.5 million in fees generated from the mortgage lending operations and real estate services (net of non-cash fair value adjustments), $10.2 million from the sale of AmeriHome, $5.7 million from residual interests in securitizations and $1.0 million in borrowings on the line of credit. Offsetting the sources of cash were continuing operating expenses totaling $26.9 million (net of non-cash depreciation expense), $3.0 million in interest payments on the Convertible Notes and long-term debt and settlements of repurchase requests associated with loans sold by the discontinued non-conforming mortgage operations of approximately $3.5 million. 32

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Mortgage loans held-for-sale decreased $8.9 million to $120.3 million at June 30, 2014 as compared to $129.2 million at December 31, 2013. The decrease was due to $818.3 million in originations offset by $828.4 million in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months.

Mortgage servicing rights decreased $19.8 million to $16.2 million at June 30, 2014 as compared to $36.0 million at December 31, 2013. The decrease was due to bulk sales of servicing rights totaling $1.6 billion in UPB, the sale of AmeriHome, which had servicing rights totaling $702.1 million in UPB as well as a mark-to-market reduction in fair value of $3.7 million. Partially offsetting the decrease was servicing retained loan sales of $807.0 million. At June 30, 2014, we serviced $1.6 billion in UPB for others as compared to $3.1 billion at December 31, 2013. Warehouse borrowings decreased $8.4 million to $111.2 million at June 30, 2014 as compared to $119.6 million at December 31, 2013. The decrease was due to a decrease in mortgage loans held-for-sale at June 30, 2014 partially offset by an increase in finance receivables of $4.3 million. During the first six months of 2014, we increased our total borrowing capacity to $315.0 million as compared to $265.0 million at December 31, 2013. Repurchase reserve liability decreased to $6.3 million at June 30, 2014 as compared to $9.5 million at December 31, 2013. During the six months ended June 30, 2014, we paid approximately $3.5 million to settle previous repurchase claims related to our discontinued operations. At June 30, 2014, the repurchase reserve within discontinued operations was $2.2 million as compared to $5.5 million at December 31, 2013. Additionally, we have approximately $4.1 million in repurchase reserves related to the loans sold by the continuing mortgage lending operation since early 2011. We have received a minimal amount of repurchase requests for loans sold by the continuing mortgage lending operation. At June 30, 2014 and December 31, 2013, net trust assets and liabilities were as follows: June 30, December 31, Increase % 2014 2013 (Decrease) Change Total trust assets $ 5,530,444$ 5,513,166$ 17,278 0 % Total trust liabilities 5,515,578 5,502,585 12,993 0 Residual interests in securitizations $ 14,866$ 10,581$ 4,285 40 % Since the consolidated and unconsolidated securitization trusts are nonrecourse to the Company, trust assets and liabilities have been netted to present our interest in these trusts more simply, which are considered the residual interests in securitizations. For unconsolidated securitizations the residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, the residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities, was $14.9 million at June 30, 2014, compared to $10.6 million at December 31, 2013. During the first six months of 2014, the securitized trusts continued to perform better than expected due to reduced losses resulting in increased residual cash flows. In response to the continued trend of higher than expected residual cash flows as a result of the improved performance and reduced losses of the securitized trusts, we decreased future loss assumptions. Additionally, we decreased the investor yield requirements for securitized mortgage borrowings as estimated bond prices have continued to improve and corresponding yields have decreased. The decrease in investor yield requirements also led to a reduction in yield assumptions on securitized mortgage collateral and discount rate assumptions on residual interests. The decrease in future loss assumptions, investor yield assumptions and discount rates resulted in an increase in the estimated fair value of these trust assets and liabilities of $4.3 million. 33 --------------------------------------------------------------------------------



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The changes in total assets and liabilities are primarily attributable to decreases in our trust assets and trust liabilities as summarized below.

June 30, December 31, Increase % 2014 2013 (Decrease) Change Securitized mortgage collateral $ 5,510,741$ 5,494,152$ 16,589 0 % Other trust assets 19,703 19,014 689 4 Total trust assets 5,530,444 5,513,166 17,278 0 Securitized mortgage borrowings $ 5,507,629$ 5,492,371$ 15,258 0 % Other trust liabilities 7,949 10,214 (2,265 ) (22 ) Total trust liabilities 5,515,578 5,502,585 12,993 0 Residual interests in securitizations $ 14,866$ 10,581$ 4,285 40 % We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on information derived from market participants. During the six months ended June 30, 2014, actual and forecasted losses have continued to decrease with a considerable improvement during the second quarter of 2014. During the six months ended June 30, 2014, we decreased the investor yield requirements for certain securitized mortgage collateral and borrowings as estimated bond prices have continued to improve and corresponding yields have decreased. Additionally, during the first six months of 2014, we lowered the discount rate on certain residual interest vintages. The decrease in loss and loss assumptions, decrease in investor yield assumptions on securitized mortgage collateral and securitized mortgage borrowings as well as decreased discount rates resulted in an increase in the value of these trust assets and liabilities resulting in an increase in the value of our residual interests. However, offsetting the increase was principal payments and liquidations of securitized mortgage collateral and securitized mortgage borrowings. The estimated fair value of securitized mortgage collateral increased $16.6 million during the first six months of 2014, primarily due to a decrease in loss and severity assumptions and a decrease in investor yield requirements, partially offset by reductions in principal from borrower payments and transfers of loans to REO for single-family and multi-family collateral. Additionally, other trust assets increased $689 thousand during the first six months of 2014, primarily due to $16.5 million in REO foreclosures and a $9.0 million increase in the net realizable value (NRV) of REO. Partially offsetting the increase were decreases in REO from liquidations of $18.5 million. The estimated fair value of securitized mortgage borrowings increased $15.3 million during the first six months of 2014, primarily due to a decrease in loss and severity assumptions and a decrease in investor yield requirements, partially offset by reductions in principal balances from principal payments during the period for single-family and multi-family collateral. The $2.3 million reduction in other trust liabilities during the first six months of 2014 was primarily due to $2.7 million in derivative cash payments from the securitization trusts, and a $426 thousand increase in derivative fair value resulting from changes in forward LIBOR interest rates. In previous years, we securitized mortgage loans by transferring originated and acquired residential single-family mortgage loans and multi-family commercial loans (the "transferred assets") into non-recourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing function. A trustee and servicer, unrelated to us, was utilized for each securitization. Cash flows from the loans (the loan payments as well as liquidation of foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders (investors). The sub-servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO. To estimate fair value of the assets and liabilities within the securitization trusts each reporting period, management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes referred to as "curves," for defaults, loss severity, interest rates (LIBOR) and prepayments are inputted into the valuation model for each securitization trust. We hire third-party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations. Before inputting this information into the model, management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using other information gathered from the mortgage and real estate market (i.e., third party home price indices, published industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default and foreclosure information for each trust from the respective trustees. 34 --------------------------------------------------------------------------------



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We use the valuation model to generate the expected cash flows to be collected from the trust assets and the expected required bondholder distribution (trust liabilities). To the extent that the trusts are over collateralized, we may receive the excess interest as the holder of the residual interest. The information above provides us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings, derivative assets/liabilities, and the residual interests. To determine the discount rates to apply to these cash flows, we gather information from the bond pricing services and other market participants regarding estimated investor required yields for each bond tranche. Based on that information and the collateral type and vintage, we determine an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We use the blended yield of the bond tranches together with the residual interests to determine an appropriate yield for the securitized mortgage collateral in each securitization (after taking into consideration any derivatives in the securitization). As previously discussed, during the first six months of 2014, we adjusted the acceptable range of expected yields and discount rates for some of our earlier vintage securitizations. Based on improving bond prices and declining yields in the Company's securitization trusts and better than expected residual cash flows as well as conversations with market participants, the Company lowered certain residual discount rates during the first six months of 2014.



The following table presents changes in the trust assets and trust liabilities for the six months ended June 30, 2014:

TRUST ASSETS TRUST LIABILITIES Level 3 Recurring Fair Value Level 3 Recurring Fair Value Measurements NRV (1) Measurements Investment securities Securitized Securitized available-for- mortgage Real estate Total trust mortgage Derivative Total trust Net trust sale collateral owned assets borrowings liabilities liabilities assets Recorded book value at 12/31/2013 $ 108 $ 5,494,152 $ 18,906$ 5,513,166$ (5,492,371 )$ (10,214 )$ (5,502,585 )$ 10,581 Total gains/(losses) included in earnings: Interest income 13 20,956 - 20,969 - - - 20,969 Interest expense - - - - (113,127 ) - (113,127 ) (113,127 ) Change in FV of net trust assets, excluding REO 16 317,394 - 317,410 (2) (318,259 ) (426 ) (318,685 )(2) (1,275 ) Gains from REO - not at FV but at NRV - - 9,024 9,024 (2) - - - 9,024 Total gains (losses) included in earnings 29 338,350 9,024 347,403 (431,386 ) (426 ) (431,812 ) (84,409 ) Transfers in and/or out of level 3 - - - - - - - - Purchases, issuances and settlements (46 ) (321,761 ) (8,318 ) (330,125 ) 416,128 2,691 418,819



88,694

Recorded book value at 6/30/2014 $ 91 $ 5,510,741 $ 19,612$ 5,530,444$ (5,507,629 )$ (7,949 )$ (5,515,578 )$ 14,866



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(1) Accounted for at net realizable value.

(2) Represents non-interest income-net trust assets in the consolidated statements of operations for the six months ended June 30, 2014.

Inclusive of gains from REO, total trust assets above reflect a net gain of $326.4 million as a result of an increase in fair value of securitized mortgage collateral of $317.4 million, gains from REO of $9.0 million and increases from other trust assets of $16 thousand. Net losses on trust liabilities were $318.7 million as a result of $318.3 million in losses from the increase in fair value of securitized mortgage borrowings and losses from derivative liabilities of $426 thousand. As a result, non-interest income-net trust assets totaled a gain of $7.7 million for the six months ended June 30, 2014.



The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations):

June 30, December 31, 2014 2013 Net trust assets $ 14,866$ 10,581 Total trust assets 5,530,444 5,513,166



Net trust assets as a percentage of total trust assets 0.27 %

0.19 % 35

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For the six months ended June 30, 2014, the estimated fair value of the net trust assets increased as a percentage of total trust assets. The increase was primarily due to the reduction in loss assumptions as well as the decrease in discount rate assumptions for residual interests as discussed above. Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities. The following tables present the estimated fair value of our residual interests, including investment securities available for sale, by securitization vintage year and other related assumptions used to derive these values at June 30, 2014 and December 31, 2013: Estimated Fair Value of Residual Estimated Fair Value of Residual Interests by Vintage Year at Interests by Vintage Year at December 31, Origination June 30, 2014 2013 Year SF MF Total SF MF Total 2002-2003 (1) $ 8,735$ 2,000$ 10,735 $ 5,761 $ 2,184 $ 7,945 2004 1,886 1,671 3,557 462 2,099 2,561 2005 (2) - 356 356 - 75 75 2006 (2) - 218 218 - - - 2007 (2) - - - - - - Total $ 10,621$ 4,245$ 14,866 $ 6,223 $ 4,358 $ 10,581 Weighted avg. prepayment rate 3.6 % 11.8 % 4.3 % 2.7 % 12.6 % 3.6 % Weighted avg. discount rate 20.9 % 20.0 % 20.6 % 25.4 % 20.2 % 23.2 %



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(1) 2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period.

(2) The estimated fair values of residual interests in vintage years 2005 through 2007 is reflective of higher estimated future losses and investor yield requirements compared to earlier vintage years. We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we use different investor yield (discount rate) assumptions for securitized mortgage collateral and securitized mortgage borrowings and the discount rate used for residual interests based on underlying collateral characteristics, vintage year, assumed risk and market participant assumptions. As previously discussed, based on recent better than expected performance, during the first six months of 2014, residual interest discount rates for the single-family (SF) vintages were lowered to a range of 20% to 35% (20.9% weighted average) from 25% to 40% (25.4% weighted average) and the multi-family (MF) vintages were lowered to 20% from 20% to 35% (20.2% weighted average). The combined SF and MF weighted average discount rate for the quarter ended June 30, 2014 dropped to 20.6% from 23.2% at December 31, 2013. 36 --------------------------------------------------------------------------------



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The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage at June 30, 2014: Estimated Future Losses Investor Yield Requirement (1) (2) SF MF SF MF 2002-2003 8 % * (3) 5 % 9 % 2004 8 % 0 % 5 % 6 % 2005 13 % 2 % 5 % 5 % 2006 23 % 5 % 6 % 5 % 2007 25 % 2 % 5 % 5 %



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(1) Estimated future losses derived by dividing future projected losses by unpaid principal balances at June 30, 2014.

(2) Investor yield requirements represent our estimate of the yield third-party market participants would require to price our trust assets and liabilities given our prepayment, credit loss and forward interest rate assumptions.

(3) Represents less than 1%.

Despite the increase in housing prices from December 2012 through June 2014, housing prices in many parts of the country are still at levels which has significantly reduced or eliminated equity for loans originated after 2003. Future loss estimates are significantly higher for mortgage loans included in securitization vintages after 2004 which reflect severe home price deterioration and defaults experienced with mortgages originated during these periods.



Long-Term Mortgage Portfolio Credit Quality

We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days delinquent or greater, foreclosures and delinquent bankruptcies were $1.6 billion or 21.7% of the long-term mortgage portfolio as of June 30, 2014. The following table summarizes the gross UPB of loans in our mortgage portfolio, included in securitized mortgage collateral, for continuing that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated: Total Total June 30, Collateral December 31, Collateral 2014 % 2013 % Securitized mortgage collateral 60 - 89 days delinquent $ 149,830 2.1 % $ 180,002 2.4 % 90 or more days delinquent 515,998 7.2 % 580,318 7.6 % Foreclosures (1) 569,073 7.9 % 605,201 7.9 % Delinquent bankruptcies (2) 326,616 4.5 % 340,102 4.5 % Total 60+ days delinquent long-term mortgage portfolio 1,561,517 21.7 % 1,705,623 22.4 % Total 60 or more days delinquent $ 1,561,517 21.7 % $ 1,705,623 22.4 % Total collateral $ 7,184,666 100 % $ 7,610,999 100 %



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(1) Represents properties in the process of foreclosure. (2) Represents bankruptcies that are 30 days or more delinquent. 37

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The following table summarizes the gross securitized mortgage collateral and REO (at NRV), that were non-performing for continuing operations as of the dates indicated (excludes 60-89 days delinquent): Total Total June 30, Collateral December 31, Collateral 2014 % 2013 % 90 or more days delinquent, foreclosures and delinquent bankruptcies $ 1,411,687 19.6 % $ 1,525,621 20.0 % Real estate owned 19,627 0.3 % 18,921 0.3 % Total non-performing assets $ 1,431,314 19.9 % $ 1,544,542 20.3 % Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including loans in foreclosure and delinquent bankruptcies) plus REO. It is the Company's policy to place a mortgage on nonaccrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages. As of June 30, 2014, non-performing assets (unpaid principal balance of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total collateral was 19.9%. At December 31, 2013, non-performing assets to total collateral was 20.3%. Non-performing assets decreased by approximately $113.2 million at June 30, 2014 as compared to December 31, 2013. At June 30, 2014, the estimated fair value of non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) was $501.2 million or 8.8% of total assets. At December 31, 2013, the estimated fair value of non-performing assets was $536.8 million or 9.4% of total assets. REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in the consolidated statements of operations. REO, for continuing and discontinued operations, at June 30, 2014 increased $706 thousand or 4% to $19.6 million from $18.9 million at December 31, 2013, as a result of an increase of the net realizable value of the REO. For the three and six months ended June 30, 2014, we recorded an increase in net realizable value of the REO in the amount of $2.9 million and $9.0 million, respectively, compared to an increase of $2.3 million and $5.6 million for the comparable 2013 period. Increases in net realizable value reflect increases in value of the REO subsequent to foreclosure date, but prior to the date of sale.



The following table presents the balances of REO for continuing operations:

June 30, December 31, 2014 2013 REO $ 21,590$ 23,601 Impairment (1) (1,963 ) (4,680 ) Ending balance $ 19,627$ 18,921 REO inside trusts $ 19,612$ 18,906 REO outside trusts 15 15 Total $ 19,627$ 18,921



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(1) Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.

In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the loans based on their attributes (e.g., original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the future loan losses. 38

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Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower's ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor's performance, market perception, historical losses, and industry statistics. The assessment for losses is based on delinquency trends and prior loss experience and management's judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent losses. Results of Operations For the Three and Six Months Ended June 30, 2014 compared to the Three and Six Months Ended June 30, 2013 For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Revenues $ 10,705$ 28,923$ (18,218 ) (63 )% Expenses (13,874 ) (25,375 ) 11,501 45 Net interest (expense) income (96 ) (207 ) 111 54 Change in fair value of long-term debt 226 (478 ) 704 147 Change in fair value of net trust assets, including trust REO gains (losses) 4,711 (607 ) 5,318 876 Income tax expense from continuing operations (756 ) (32 ) (724 ) (2,263 ) Net earnings from continuing operations 916 2,224 (1,308 ) (59 ) Loss from discontinued operations, net (834 ) (933 ) 99 11 Net earnings 82 1,291 (1,209 ) (94 ) Net earnings attributable to noncontrolling interest (1) - (73 )



73 100 Net earnings attributable to IMH $ 82$ 1,218$ (1,136 ) (93 )

Earnings per share available to common stockholders - basic $ 0.01$ 0.14 $



(0.13 ) (93 )%

Earnings per share available to common stockholders - diluted $ 0.01$ 0.14$ (0.13 ) (93 )%

-------------------------------------------------------------------------------- (1) For the three months ended June 30, 2013, net earnings attributable to noncontrolling interest represents the portion of the earnings of AmeriHome that we did not wholly-own. For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Revenues $ 20,951$ 53,590$ (32,639 ) (61 )% Expenses (28,707 ) (49,860 ) 21,153 42 Net interest (expense) income (409 ) 237 (646 ) (273 ) Change in fair value of long-term debt (424 ) (527 ) 103 20 Change in fair value of net trust assets, including trust REO gains (losses) 7,749 (2,106 ) 9,855 468 Income tax (expense) benefit from continuing operations (1,098 ) 1,056 (2,154 ) (204 ) Net (loss) earnings from continuing operations (1,938 ) 2,390 (4,328 ) (181 ) Loss from discontinued operations, net (946 ) (1,774 ) 828 47 Net (loss) earnings (2,884 ) 616 (3,500 ) (568 ) Net earnings attributable to noncontrolling interest (1) - (136 ) 136 100 Net (loss) earnings attributable to IMH $ (2,884 )$ 480 $



(3,364 ) (701 )%

(Loss) earnings per share available to common stockholders - basic $ (0.31 )$ 0.06$ (0.37 ) (612 )%

(Loss) earnings per share available to common stockholders - diluted $ (0.31 )$ 0.08$ (0.39 ) (474 )%

-------------------------------------------------------------------------------- (1) For the six months ended June 30, 2013, net earnings attributable to noncontrolling interest represents the portion of the earnings of AmeriHome that we did not wholly-own. 39

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Table of Contents Revenues For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change



Gain on sale of loans, net $ 6,534$ 20,458$ (13,924 )

(68 )% Real estate services fees, net 4,360 5,155 (795 ) (15 ) Servicing income, net 1,291 931 360 39 (Loss) gain on mortgage servicing rights (1,564 ) 2,004 (3,568 ) (178 ) Other revenues 84 375 (291 ) (78 ) Total revenues $ 10,705$ 28,923$ (18,218 ) (63 )% Gain on sale of loans, net. For the three months ended June 30, 2014, gain on sale of loans, net were $6.5 million compared to $20.5 million in the comparable 2013 period. The $13.9 million decrease is primarily related to a $15.1 million decrease in realized and unrealized losses on derivative financial instruments, a $2.6 million decrease in premiums received from the sale of mortgage loans, a $2.5 million increase in net direct loan origination expenses and a $1.9 million decrease in premiums from servicing retained loan sales, partially offset by a $7.8 million increase in mark-to-market gains. The overall decrease in gain on sale of loans, net was due to a reduction in mortgage loan origination and sale volumes as well as tighter lending spreads and gain on sale margins associated with $465.2 million and $449.5 million of loans originated and sold, respectively, during the three months ended June 30, 2014, as compared to $780.1 million and $704.7 million of loans originated and sold, respectively, during the same period in 2013. (Loss) gain on mortgage servicing rights. For the three months ended June 30, 2014, (loss) gain on mortgage servicing rights was an expense of $1.6 million compared to revenue of $2.0 million in the comparable 2013 period. For the three months ended June 30, 2014, (loss) gain on mortgage servicing rights was primarily the result of a ($2.8) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $1.8 million for the same period in 2013. Partially offsetting the change in fair value was a $1.2 million gain on the sale of mortgage servicing rights during the three months ended June 30, 2014, as compared to $155 thousand during the same period in 2013. Real estate services fees, net. For the three months ended June 30, 2014, real estate services fees, net were $4.4 million compared to $5.2 million in the comparable 2013 period. The $795 thousand decrease was primarily the result of a decrease in transactions related to the decline in loans and the balance of the long-term mortgage portfolio. Servicing gain and loss, net. For the three months ended June 30, 2014, servicing gain and loss, net was an expense of $1.6 million compared to revenue of $2.0 million in the comparable 2013 period. For the three months ended June 30, 2014, the mark-to-market mortgage servicing rights expense was primarily the result of an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period. Other revenues. For the three months ended June 30, 2014, other revenue was $84 thousand compared to $375 thousand for the comparable 2013 period. The decrease in other revenue was due to a $300 thousand reduction in investment income. For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Gain on sale of loans, net $ 11,126$ 37,930$ (26,804 ) (71 )% Real estate services fees, net 8,039 9,583 (1,544 ) (16 ) Servicing income, net 2,859 1,941 918 47 (Loss) gain on mortgage servicing rights (2,541 ) 3,182 (5,723 ) (180 ) Other revenues 1,468 954 514 54 Total revenues $ 20,951$ 53,590$ (32,639 ) (61 )% Gain on sale of loans, net. For the six months ended June 30, 2014, gain on sale of loans, net were $11.1 million compared to $37.9 million in the comparable 2013 period. The $26.8 million decrease is primarily related to a $18.7 million decrease in realized and unrealized losses on derivative financial instruments, an $11.0 million decrease in premiums received from the sale of mortgage loans, a $3.0 million decrease in premiums from servicing retained loan sales and a $3.0 million increase in net direct loan origination expenses, partially offset by a $8.5 million increase in mark-to-market gains. The overall decrease in gain on sale of loans, net was due to a reduction in mortgage loan origination and sale volumes as well as tighter lending spreads and gain on sale margins associated with $818.3 million and $828.4 million of loans originated and sold, respectively, during the six months ended June 30, 2014, as compared to $1.5 billion and $1.3 billion of loans originated and sold, respectively, during the same period in 2013. 40 --------------------------------------------------------------------------------

Table of Contents Servicing income, net. For the six months ended June 30, 2014, servicing income, net was $2.9 million compared to $1.9 million in the comparable 2013 period. The increase in servicing income, net was the result of the servicing portfolio increasing 55% to an average balance of $2.7 billion for the six months ended June 30, 2014 as compared to an average balance of $1.7 billion for the six months ended June 30, 2013. During 2014, we sold $1.6 billion in UPB of servicing rights and sold AmeriHome, which had servicing rights of $702.1 million in UPB. Additionally, during the second quarter of 2014, we retained servicing rights on $807.0 million in loans sales. Real estate services fees, net. For the six months ended June 30, 2014, real estate services fees, net were $8.0 million compared to $9.6 million in the comparable 2013 period. The $1.6 million decrease was primarily the result of a decrease in transactions related to the decline in loans and the balance of the long-term mortgage portfolio. (Loss) gain on mortgage servicing rights. For the six months ended June 30, 2014, (loss) gain on mortgage servicing rights was an expense of $2.5 million compared to revenue of $3.2 million in the comparable 2013 period. For the six months ended June 30, 2014, (loss) gain on mortgage servicing rights was primarily the result of a ($3.7) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $3.1 million for the same period in 2013. Partially offsetting the change in fair value was a $1.2 million gain on the sale of mortgage servicing rights during the six months ended June 30, 2014, as compared to $116 thousand during the same period in 2013. Other revenues. For the six months ended June 30, 2014, other revenue was $1.5 million compared to $954 thousand for the comparable 2013 period. The increase in other revenue was due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain, partially offset by a $600 thousand reduction in investment income. Expenses For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Personnel expense $ 9,319$ 18,891$ (9,572 ) (51 )% General, administrative and other 4,555 6,484 (1,929 ) (30 ) Total expenses $ 13,874$ 25,375$ (11,501 ) (45 )% Total expenses were $13.9 million for the three months ended June 30, 2014, compared to $25.4 million for the comparable period of 2013. Personnel expense decreased $9.6 million to $9.3 million for the three months ended June 30, 2014. The decrease is primarily due to a reduction in personnel related costs due to a decrease in employees and a decrease in commission expense due to a reduction in loan origination volumes and a shift to correspondent and wholesale lending resulting in lower commission expense. In the fourth quarter of 2013, we sold our retail branch offices and consolidated our lending fulfillment centers reducing staffing to a level appropriate for our lending volumes. At June 30, 2014 the average number of employees declined to 290 during the three months ended June 30, 2014 as compared to 650 for the three months ended June 30, 2013. General, administrative and other expenses decreased to $4.6 million for the three months ended June 30, 2014, compared to $6.5 million for the same period in 2013. The decrease was primarily related to a $1.2 million decline in marketing and other expenses and a $407 thousand reduction in occupancy expense attributable to reduced lending volumes as well as the closure of the retail branches in the fourth quarter of 2013. For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Personnel expense $ 18,779$ 36,654$ (17,875 ) (49 )% General, administrative and other 9,928 13,206 (3,278 ) (25 ) Total expenses $ 28,707$ 49,860$ (21,153 ) (42 )% Total expenses were $28.7 million for the six months ended June 30, 2014, compared to $49.9 million for the comparable period of 2013. Personnel expense decreased $17.9 million to $18.8 million for the six months ended June 30, 2014. The decrease is primarily due to a reduction in personnel related costs due to a decrease in employees and a decrease in commission expense due to a reduction in loan origination volumes and a shift to correspondent and wholesale lending resulting in lower commission expense. In the fourth quarter of 2013, we sold our retail branch offices and consolidated our lending fulfillment centers reducing staffing to a level appropriate for our lending volumes. At June 30, 2014 the average number of employees declined to 295 during the six months ended June 30, 2014 as compared to 631 for the six months ended June 30, 2013. 41

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General, administrative and other expenses decreased to $9.9 million for the six months ended June 30, 2014, compared to $13.2 million for the same period in 2013. The decrease was primarily related to a $2.0 million decline in marketing and other expenses and a $911 thousand reduction in legal and professional fees attributable to reduced lending volumes as well as the closure of the retail branches in the fourth quarter of 2013. The reduction in legal and professional fees is primarily due to a non-operational $700 thousand legal settlement expense recorded during the first quarter of 2013. Net Interest (Expense) Income We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, loans held-for-sale and investment securities available-for-sale, or collectively, "mortgage assets," and, to a lesser extent, interest income earned on cash and cash equivalents. Interest expense is primarily interest paid on borrowings secured by mortgage assets, which include securitized mortgage borrowings and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes, notes payable and line of credit. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities. The following tables summarize average balance, interest and weighted average yield on interest-earning assets and interest-bearing liabilities, included within continuing operations, for the periods indicated. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. These cash receipts and payments are included as a component of the change in fair value of net trust assets. For the Three Months Ended June 30, 2014 2013 Average Average Balance Interest Yield Balance Interest Yield ASSETS Securitized mortgage collateral $ 5,485,629$ 67,784 4.94 % $ 5,732,048$ 76,256 5.32 % Mortgage loans held-for-sale 110,643 1,141 4.12 % 145,063 1,252 3.45 % Other 13,507 37 1.10 % 16,687 18 0.43 % Total interest-earning assets $ 5,609,779$ 68,962 4.92 % $ 5,893,798$ 77,526 5.26 % LIABILITIES Securitized mortgage borrowings $ 5,484,344$ 66,623 4.86 % $ 5,725,605$ 74,963 5.24 % Warehouse borrowings 106,993 953 3.56 % 138,181 1,397 4.04 % Long-term debt 17,395 1,074 24.70 % 13,867 986 28.44 % Convertible Notes 20,000 387 7.74 % 13,846 265 7.66 % Note payable - - 0.00 % 711 104 58.51 % Other 2,841 21 2.96 % 1,293 18 5.57 % Total interest-bearing liabilities $ 5,631,573$ 69,058 4.91 % $ 5,893,503$ 77,733 5.28 % Net Interest Spread (1) $ (96 ) 0.02 % $ (207 ) -0.02 % Net Interest Margin (2) -0.01 % -0.01 %



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(1) Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(2) Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

Net interest spread increased $111 thousand for the quarter ended June 30, 2014 primarily attributable to an increase in the net interest spread between loans held-for-sale and warehouse borrowings and a decrease in interest expense on notes payable. The increase was partially offset by a decrease in net interest spread on the long-term mortgage portfolio due to increases in pricing and the corresponding reduction in investor yield requirements between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio, an increase in interest expense associated with the long-term debt and an increase in interest expense associated with the issuance of the Convertible Notes during the second quarter of 2013. As a result, net interest margin remained flat at -0.01% for the quarters ended June 30, 2014 and 2013. 42 --------------------------------------------------------------------------------



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During the quarter ended June 30, 2014, the yield on interest-earning assets decreased to 4.92% from 5.26% in the comparable 2013 period. The yield on interest-bearing liabilities decreased to 4.91% for the quarter ended June 30, 2014 from 5.28% for the comparable 2013 period. In connection with the fair value accounting for investment securities available-for-sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield. Bond prices received from pricing services and other market participants have increased over the past few quarters as investor's demand for mortgage-backed securities has increased. This has resulted in an increase in fair value for both securitized mortgage collateral and securitized mortgage borrowings. These increases in fair value have decreased the effective yields used for purposes of recognizing interest income and interest expense on these instruments. For the Six Months Ended June 30, 2014 2013 Average Average Balance Interest Yield Balance Interest Yield ASSETS Securitized mortgage collateral $ 5,488,470$ 138,867 5.06 % $ 5,750,660$ 164,533 5.72 % Mortgage loans held-for-sale 97,912 2,064 4.22 % 121,501 2,083 3.43 % Other 11,994 51 0.85 % 13,962 40 0.57 % Total interest-earning

assets $ 5,598,376$ 140,982 5.04 % $ 5,886,123$ 166,656 5.66 % LIABILITIES Securitized mortgage borrowings $ 5,487,020$ 136,670 4.98 % $ 5,742,889$ 161,482 5.62 % Warehouse borrowings 93,644 1,699 3.63 % 115,956 2,390 4.12 % Long-term debt 16,887 2,185 25.88 % 13,489 1,940 28.76 % Convertible notes 20,000 774 7.74 % 6,961 273 7.84 % Note payable - - 0.00 % 1,766 303 34.31 % Other 3,338 63 3.77 % 899 31 6.90 % Total interest-bearing liabilities $ 5,620,889$ 141,391 5.03 % $ 5,881,960$ 166,419 5.66 % Net Interest Spread (1) $ (409 ) 0.01 % $ 237 0.00 % Net Interest Margin (2) -0.01 % 0.01 %



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(1) Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(2) Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

Net interest spread decreased $646 thousand for the six months ended June 30, 2014 primarily attributable to a decrease in net interest spread on the long-term mortgage portfolio due to increases in pricing and the corresponding reduction in investor yield requirements between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio, an increase in interest expense associated with the long-term debt and an increase in interest expense associated with the issuance of the Convertible Notes during the second quarter of 2013. The decrease was partially offset by a decrease in interest expense on the note payable as well as an increase in the net interest spread between loans held-for-sale and warehouse borrowings. As a result, net interest margin decreased from 0.01% for the six months ended June 30, 2013 to -0.01% for the six months ended June 30, 2014. During the six months ended June 30, 2014, the yield on interest-earning assets decreased to 5.04% from 5.66% in the comparable 2013 period. The yield on interest-bearing liabilities decreased to 5.03% for the six months ended June 30, 2014 from 5.66% for the comparable 2013 period. In connection with the fair value accounting for investment securities available-for-sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield. Bond 43 --------------------------------------------------------------------------------



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prices received from pricing services and other market participants have increased over the past few quarters as investor's demand for mortgage-backed securities has increased. This has resulted in an increase in fair value for both securitized mortgage collateral and securitized mortgage borrowings. These increases in fair value have decreased the effective yields used for purposes of recognizing interest income and interest expense on these instruments.



Change in the fair value of long-term debt.

Change in the fair value of long-term debt was a gain of $226 thousand for the quarter ended June 30, 2014, compared to a loss of $478 thousand for the comparable 2013 period. The decrease in the estimated fair value of long-term debt was primarily the result of a decrease in forward LIBOR interest rates. Long-term debt (consisting of trust preferred securities and junior subordinated notes) is measured based upon an analysis prepared by us, which considers the Company's own credit risk, including consideration of settlements with trust preferred debt holders and discounted cash flow analyses. Change in the fair value of long-term debt was a loss of $424 thousand for the six months ended June 30, 2014, compared to a loss of $527 thousand for the comparable 2014 period. The increase in the estimated fair value of long-term debt was primarily the result of a reduction in discount rate during the first quarter of 2014 as well as an increase in forward LIBOR interest rates as compared to the same period in the prior year. Change in fair value of net trust assets, including trust REO gains (losses) For the Three Months For the Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Change in fair value of net trust assets, excluding REO $ 1,769$ (2,953 )$ (1,275 )$ (7,662 ) Gains from REO 2,942 2,346 9,024 5,556 Change in fair value of net trust assets, including trust REO gains (losses) $ 4,711$ (607 )$ 7,749$ (2,106 ) The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $4.7 million for the quarter ended June 30, 2014, compared to a loss of $607 thousand in the comparable 2013 period. The change in fair value of net trust assets, including REO was due to $1.8 million in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of decreased collateral losses and severities in the future and lower interest rates. Additionally, the NRV of REO increased $2.9 million during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. For the quarter ended June 30, 2013, the $607 thousand loss from change in fair value of net trust assets, including REO was due to $3.0 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses in the future and higher interest rates. Partially offsetting the loss was a $2.3 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $7.7 million for the six months ended June 30, 2014, compared to a loss of $2.1 million in the comparable 2013 period. For the six months ended June 30, 2014, the change in fair value of net trust assets, including REO was due to a $9.0 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Partially offsetting the gain was $1.3 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses and severities in the future and higher interest rates. For the six months ended June 30, 2013, the $2.1 million loss from change in fair value of net trust assets, including REO was due to $7.7 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses in the future and higher interest rates. Partially offsetting the loss was a $5.6 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. 44

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Table of Contents Income Taxes We recorded income tax expense of $756 thousand and $1.1 million for the three and six months ended June 30, 2014, respectively. We recorded income tax expense (benefit) of $32 thousand and ($1.1) million for the three and six months ended June 30, 2013, respectively. The tax expense in 2014 is primarily related to alternative minimum taxes associated with taxable income generated from sale of AmeriHome and mortgage servicing rights. The income tax benefit for 2013 is the result of the inclusion of AmeriHome in the IMH federal and California consolidated tax returns as a result of the Company increasing its ownership in AmeriHome to 80% during the first quarter of 2013. As of December 31, 2013, the Company had estimated federal and California net operating loss (NOL) carryforwards of approximately $518.7 million and $437.0 million, respectively, of which approximately $293.1 million (federal) related to discontinued operations. Federal and state net operating loss carryforwards begin to expire in 2027 and 2018, respectively. We have significant NOL carry-forwards from prior years. If there is an improvement in earnings from our continuing operations, we may be able to generate sufficient taxable income in future years to utilize these loss carry-forwards, however, at June 30, 2014; we have recognized a full valuation allowance against our net deferred tax assets. As of June 30, 2014, we have no material uncertain tax positions.



Results of Operations by Business Segment

Today, we have three primary operating segments: Mortgage Lending, Real Estate Services and Long-Term Mortgage Portfolio. Unallocated corporate and other administrative costs, including the cost associated with being a public company, are presented in Corporate. Segment operating results are as follows: Mortgage Lending For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Gain on sale of loans, net $ 6,534$ 20,458$ (13,924 ) (68 )% Servicing income, net 1,291 931 360 39 (Loss) gain on mortgage servicing rights (1,564 ) 2,004 (3,568 ) (178 ) Other 43 - 43 N/A Total revenues 6,304 23,393 (17,089 ) (73 ) Other income (expense) 215 (148 ) 363 245 Personnel expense (6,741 ) (16,581 ) 9,840 59 General, administrative and other (1,867 ) (3,301 ) 1,434 43 Net (loss) earnings before income taxes $ (2,089 )$ 3,363$ (5,452 ) (162 )% For the quarter ended June 30, 2014, gain on sale of loans, net were $6.5 million or 1.40% compared to $20.5 million or 2.67% in the comparable 2013 period. The $13.9 million decrease was due to a reduction in mortgage loan origination and sales volumes as well as tighter lending spreads and gain on sale margins associated with $465.2 million and $449.5 million of loans originated and sold, respectively, during the three months ended June 30, 2014, as compared to $780.1 million and $704.7 million of loans originated and sold, respectively, during the same period in 2013. For the quarter ended June 30, 2014, servicing income, net was $1.3 million compared to $931 thousand in the comparable 2013 period. The increase in servicing income, net was the result of the servicing portfolio increasing 31% to an average quarterly balance of $2.5 billion for the three months ended June 30, 2014 as compared to an average quarterly balance of $1.9 billion for the three months ended June 30, 2013. During the second quarter of 2014, we sold $1.0 billion in UPB of servicing rights and retained servicing rights on $432.5 million in loans sales. For the three months ended June 30, 2014, (loss) gain on mortgage servicing rights was an expense of $1.6 million compared to revenue of $2.0 million in the comparable 2013 period. For the three months ended June 30, 2014, (loss) gain on mortgage servicing rights was primarily the result of a ($2.8) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $1.8 million for the same period in 2013. Partially offsetting the change in fair value was a $1.2 million gain on the sale of mortgage servicing rights during the three months ended June 30, 2014, as compared to $155 thousand during the same period in 2013. Personnel expense decreased $9.8 million to $6.7 million for the three months ended June 30, 2014. The decrease is primarily due to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013, reducing staffing to a level appropriate for our lending volumes. The average number of mortgage lending employees declined to 192 in the second quarter of 2014 as compared to 533 during the same period in 2013. Additionally, the decrease is also related to a reduction in loan origination volumes resulting in a decrease in commission expense. 45 --------------------------------------------------------------------------------



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The $1.4 million decrease in general, administrative and other expense is primarily related to reductions in occupancy, legal and professional fees and other marketing costs primarily attributable to a reduction in lending volumes as well as the sale of our retail branches during the fourth quarter of 2013. For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Gain on sale of loans, net $ 11,126$ 37,930$ (26,804 ) (71 )% Servicing income, net 2,859 1,941 918 47 (Loss) gain on mortgage servicing rights (2,541 ) 3,182 (5,723 ) (180 ) Other 1,257 113 1,144 1,012 Total revenues 12,701 43,166 (30,465 ) (71 ) Other income (expense) 371 (305 ) 676 222 Personnel expense (13,543 ) (31,439 ) 17,896 57 General, administrative and other (4,032 ) (7,950 ) 3,918 49 Net earnings before income taxes $ (4,503 )$ 3,472$ (7,975 ) (230 )% For the six months ended June 30, 2014, gain on sale of loans, net was $11.1 million or 1.37% compared to $37.9 million or 2.66% in the comparable 2013 period. The $26.8 million decrease was due to a reduction in mortgage loan origination and sales volumes as well as tighter lending spreads and gain on sale margins associated with $818.3 million and $828.4 million of loans originated and sold, respectively, during the six months ended June 30, 2014, as compared to $1.5 billion and $1.3 billion of loans originated and sold, respectively, during the same period in 2013. For the six months ended June 30, 2014, servicing income, net was $2.9 million compared to $1.9 million in the comparable 2013 period. The increase in servicing income, net was the result of the servicing portfolio increasing 55% to an average balance of $2.7 billion for the six months ended June 30, 2014 as compared to an average balance of $1.7 billion for the six months ended June 30, 2013. During 2014, we sold $1.6 billion in UPB of servicing rights and sold AmeriHome, which had servicing rights of $702.1 million in UPB. Additionally, during the first six months of 2014, we retained servicing rights on $807.0 million in loans sales. For the six months ended June 30, 2014, (loss) gain on mortgage servicing rights was an expense of $2.5 million compared to revenue of $3.2 million in the comparable 2013 period. For the six months ended June 30, 2014, (loss) gain on mortgage servicing rights was primarily the result of a ($3.7) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $3.1 million for the same period in 2013. Partially offsetting the change in fair value was a $1.2 million gain on the sale of mortgage servicing rights during the six months ended June 30, 2014, as compared to $116 thousand during the same period in 2013. For the six months ended June 30, 2014, other revenue was $1.2 million compared to $113 thousand for the comparable 2013 period. The increase in other revenue was due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain. Personnel expense decreased $17.9 million to $13.5 million for the six months ended June 30, 2014. The decrease is primarily due to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013, reducing staffing to a level appropriate for our lending volumes. The average number of mortgage lending employees declined to 199 for the first six months of 2014 as compared to 510 during the same period in 2013. Additionally, the decrease is also related to a reduction in loan origination volumes resulting in a decrease in commission expense. The $3.4 million decrease in general, administrative and other expense is primarily related to reductions in occupancy, legal and professional fees and other marketing costs primarily attributable to the reduction in lending volumes as well as the sale of our retail branches during the fourth quarter of 2013. The reduction in legal and professional fees is primarily due to a non-operational $700 thousand legal settlement expense recorded during the first quarter of 2013. 46

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Table of Contents Real Estate Services For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Real estate services fees, net $ 4,360$ 5,155$ (795 ) (15 )% Other income (expense) - 5 (5 ) (100 ) Personnel expense (1,357 ) (1,568 ) 211 13 General, administrative and other (177 ) (250 ) 73



29

Net earnings before income taxes $ 2,826$ 3,342$ (516 ) (15 )%

For the quarter ended June 30, 2014, real estate services fees, net were $4.4 million compared to $5.2 million in the comparable 2013 period. The $795 thousand decrease in real estate services fees, net was the result of a $448 thousand decrease in real estate and recovery fees real estate services, $279 thousand decrease in loss mitigation fees and a $68 thousand decrease in real estate services. For the quarter ended June 30, 2014, personnel expense decreased to $1.4 million as compared to $1.6 million for the comparable 2013 period. The $211 thousand decrease is primarily related to a reduction in personnel as well as a reduction in commissions associated with reduced transactions and the decline in loans and balance of the long-term mortgage portfolio. For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change



Real estate services fees, net $ 8,039$ 9,583$ (1,544 )

(16 )% Other income (expense) - 11 (11 ) (100 ) Personnel expense (2,574 ) (3,452 ) 878 25 General, administrative and other (482 ) (580 ) 98



17

Net earnings before income taxes $ 4,983$ 5,562$ (579 )

(10 )% For the six months ended June 30, 2014, real estate services fees, net were $8.0 million compared to $9.6 million in the comparable 2013 period. The $1.5 million decrease in real estate services fees, net was the result of a $1.3 million decrease in real estate and recovery fees real estate services and a $631 thousand decrease in loss mitigation fees partially offset by a $344 thousand increase in real estate services. For the six months ended June 30, 2014, personnel expense decreased to $2.6 million as compared to $3.5 million for the comparable 2013 period. The $878 thousand decrease is primarily related to a reduction in personnel as well as a reduction in commissions associated with reduced transactions and the decline in loans and balance of the long-term mortgage portfolio. 47 --------------------------------------------------------------------------------

Table of Contents Long-term Mortgage Portfolio For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Other revenue $ 41$ 381 (340 ) (89 )% Personnel expense (64 ) (257 ) 193 75 General, administrative and other (201 ) (158 ) (43 ) (27 ) Total expenses (265 ) (415 ) 150 36 Net interest income 94 211 (117 ) (55 ) Change in fair value of long-term debt 226 (478 ) 704 147 Change in fair value of net trust assets, including trust REO gains (losses) 4,711 (607 ) 5,318 876 Total other income (expense) 5,031 (874 ) 5,905 676 Net earnings (loss) before income taxes $ 4,807$ (908 )$ 5,715 629 %



For the quarter ended June 30, 2014, other revenue totaled $41 thousand as compared to $381 thousand for the comparable 2013 period. The $340 thousand decrease is primarily due to a $305 thousand decrease in investment earnings.

For the quarter ended June 30, 2014, personnel expense was $64 thousand as compared to $257 thousand for the comparable 2013 period. The $193 thousand decrease in personnel expense was primarily due to a decrease in allocated personnel expenses associated with ongoing activities in the long-term mortgage portfolio associated with a decline in loans and balances of the long-term mortgage portfolio.

For the quarter ended June 30, 2014, net interest income totaled $94 thousand as compared to $211 thousand for the comparable 2013 period. Net interest income decreased $117 thousand for the quarter ended June 30, 2014 primarily attributable to a $132 thousand decrease in net interest spread on the long-term mortgage portfolio due to increases in pricing and the corresponding reduction in investor yield requirements between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio. Additionally, interest expense on the long-term debt increased $88 thousand due to an increase in interest rates. Partially offsetting the decrease was a $103 thousand decrease in interest expense on the note payable due to the repayment of the note in April 2013. Change in the fair value of long-term debt was a gain of $226 thousand for the quarter ended June 30, 2014, compared to a loss of $478 thousand for the comparable 2013 period. The decrease in the estimated fair value of long-term debt was primarily the result of a decrease in forward LIBOR interest rates. The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $4.7 million for the quarter ended June 30, 2014, compared to a loss of $607 thousand in the comparable 2013 period. The change in fair value of net trust assets, including REO was due to $1.8 million in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of decreased collateral losses and severities in the future and lower interest rates. Additionally, the NRV of REO increased $2.9 million during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. 48

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Table of Contents For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Other revenue $ 211$ 853 (642 ) (75 )% Personnel expense (155 ) (507 ) 352 69 General, administrative and other (351 ) (427 ) 76 18 Total expenses (506 ) (934 ) 428 46 Net interest (expense) income 26 826 (800 ) (97 ) Change in fair value of long-term debt (424 ) (527 ) 103 20 Change in fair value of net trust assets, including trust REO gains (losses) 7,749 (2,106 ) 9,855 468 Total other income (expense) 7,351 (1,807 ) 9,158 507 Net earnings (loss) before income taxes $ 7,056$ (1,888 )$ 8,944 474 %



For the six months ended June 30, 2014, other revenue totaled $211 thousand as compared to $853 thousand for the comparable 2013 period. The $642 thousand decrease is primarily due to a $614 thousand decrease in investment earnings.

For the six months ended June 30, 2014, personnel expense was $155 thousand as compared to $507 thousand for the comparable 2013 period. The $352 thousand decrease in personnel expense was primarily due to a decrease in allocated personnel expenses associated with ongoing activities in the long-term mortgage portfolio associated with a decline in loans and balances of the long-term mortgage portfolio. For the six months ended June 30, 2014, net interest income totaled $26 thousand as compared to $826 thousand for the comparable 2013 period. Net interest income decreased $800 thousand for the six months ended June 30, 2014 primarily attributable to an $854 thousand decrease in net interest spread on the long-term mortgage portfolio due to increases in pricing and the corresponding reduction in investor yield requirements between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio. Additionally, interest expense on the long-term debt increased $245 thousand due to an increase in interest rates. Partially offsetting the decrease in net interest income was a $303 thousand decrease in interest expense on the note payable due to the repayment of the note in April 2013. Change in the fair value of long-term debt was a loss of $424 thousand for the six months ended June 30, 2014, compared to a loss of $527 thousand for the comparable 2013 period. The increase in the estimated fair value of long-term debt was primarily the result of a reduction in discount rate during the first quarter of 2014, partially offset by a decrease in forward LIBOR interest rates at June 30, 2014. The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $7.7 million for the six months ended June 30, 2014, compared to a loss of $2.1 million in the comparable 2013 period. For the six months ended June 30, 2014, the change in fair value of net trust assets, including REO was due to a $9.0 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Partially offsetting the gain was $1.3 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses and severities in the future and higher interest rates. Corporate The corporate segment includes all compensation applicable to the corporate services groups, public company costs, unused office space as well as debt expense related to the Convertible Notes and capital leases. This corporate services group supports all operating segments. A portion of the corporate services costs is allocated to the operating segments. The costs associated with being a public company, unused space as well as the interest expense related to the Convertible Notes and capital leases are not allocated to our other segments and remain in this segment. 49

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Table of Contents For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Interest expense $ (405 )$ (276 ) (129 ) (47 ) Other expenses (3,467 ) (3,265 ) (202 ) (6 ) Net loss before income taxes $ (3,872 )$ (3,541 )$ (331 ) (9 )% For the quarter ended June 30, 2014, interest expense increased as compared to the comparable 2013 period primarily due to a $122 thousand increase in interest expense on the $20.0 million Convertible Notes issued in April 2013. For the quarter ended June 30, 2014, expenses increased to $3.5 million as compared to $3.3 million for the comparable 2013 period. The increase was due to a net reduction in allocated corporate expenses. Although corporate costs decreased $724 thousand in the second quarter of 2014 as compared to second quarter of 2013, the sale of the retail branch network and closure of the lending fulfillment center at the end of 2013 resulted in a reduced allocation of certain fixed corporate costs due to reduced headcount primarily in mortgage lending and the associated reductions in business operations. The combination of the two resulted in a net increase in expenses recorded in the corporate segment. For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Interest expense $ (806 )$ (296 ) (510 ) (172 ) Other expenses (7,570 ) (5,516 ) (2,054 )



(37 ) Net loss before income taxes $ (8,376 )$ (5,812 )$ (2,564 ) (44 )%

For the six months ended June 30, 2014, interest expense increased as compared to the comparable 2013 period primarily due to a $500 thousand increase in interest expense on the $20.0 million Convertible Notes issued in April 2013.

For the six months ended June 30, 2014, expenses increased to $7.6 million as compared to $6.2 million for the comparable 2013 period. The increase was primarily due to non-cash lease impairment charge and a net reduction in allocated corporate expenses. With the further consolidation of the mortgage lending and real estate services operations in the first quarter of 2014, the Company recorded a non-cash lease impairment charge of $548 thousand for the space that we no longer used and expect to sublease in the future. Additionally, the sale of the retail branch network and closure of the lending fulfillment center at the end of 2013 resulted in a reduced allocation of certain fixed corporate costs due to reduced headcount primarily in mortgage lending and the associated reductions in business operations. The combination of the two resulted in a net increase in expenses recorded in the corporate segment. Discontinued Operations For the Three Months Ended June 30, Increase % 2014 2013 (Decrease) Change Provision for repurchases $ (231 )$ (705 )$ 474 67 % General, administrative and other (603 ) (228 ) (375 ) (164 ) Net loss after income taxes $ (834 )$ (933 ) $ 99 11 % We recorded approximately $231 thousand in provision for repurchases during the quarter ended June 30, 2014 as compared to $705 thousand for the comparable 2013 period. The decrease is the result of a decrease in estimated repurchase losses during the three months ended June 30, 2014 related to repurchase claims as compared to the same period in 2013. For the quarter ended June 30, 2014, general, administrative and other expense increased to $603 thousand as compared to $228 thousand for the comparable 2013 period. The increase of $375 thousand between periods is primarily due legal expenses for various matters pertaining to the discontinued non-conforming mortgage operations. 50

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Table of Contents For the Six Months Ended June 30, Increase % 2014 2013 (Decrease) Change Provision for repurchases $ (231 )$ (1,312 )$ 1,081 82 % General, administrative and other (715 ) (462 ) (253 ) (55 ) Net loss after income taxes $ (946 )$ (1,774 )$ 828 47 % We recorded approximately $231 thousand in provision for repurchases during the six months ended June 30, 2014 as compared to $1.3 million for the comparable 2013 period. During the six months ended June 30, 2014, we paid approximately $3.5 million to settle previous repurchase claims related to our previously discontinued operations and such amount was charged against the reserve on our consolidated balance sheets. For the six months ended June 30, 2014, general, administrative and other expense increased to $715 thousand as compared to $462 thousand for the comparable 2013 period. During 2014, we incurred approximately $1.3 million in legal expenses and $288 thousand in occupancy expense for various matters pertaining to the discontinued non-conforming mortgage operations. Offsetting the legal expenses was a $950 thousand recovery from a settlement associated with previous litigation settlements.


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