Two Ways to Play Mortgage Lenders

Impac, like other holders of mortgage assets, is now dealing with increased delinquencies and defaults from homeowners as adjustable-rate loans made in recent years begin to reset from low "teaser" rates. Buyers are facing a tougher refinancing market, because of higher interest rates and falling housing prices.

Thus, a good chunk of Impac's mortgage assets likely will go bad.

The bull case on Impac, however, is that the worst of times are behind it because the company has adequately set up loss reserves to handle loan defaults.

The added bonus is that the company may raise its dividend back to the level of a year ago, says Roth Capital Partners analyst Richard Eckert.

News of a dividend boost could propel the stock, which trades at a 33% discount to book value and has a 32% short interest. Impac shares currently trade around $5.90. Assuming a 0.35% loss rate on its loan assets held for investment, Impac can generate $1.05 per share of taxable income and pay a $1 annual dividend, up from the current 40-cent annual level, according to Eckert's projection.

The notion of taxable EPS is important for Impac, since the company must pay out at least 90% of its taxable income to maintain its REIT status.