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Ellington Financial notes Longbridge discount, confidence in industry

The Q3 earnings call also revealed Ellington’s outlook after its purchase of Longbridge in October

Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released its Q3 2022 earnings results this week, offering more perspective on its recent acquisition of Longbridge Financial and how the reverse mortgage business will figure into its future plans.

During the earnings call, Ellington CEO Laurence Penn noted that the purchase price for Longbridge Financial, a leading reverse mortgage lender and servicer, declined prior to the deal closing. Company executives also noted that the reverse mortgage business’ countercyclical nature to the broader housing market has helped maintain confidence in the acquisition.

Lower purchase price, Q3 profit

Penn noted during the call that there was a substantial change in the Longbridge purchase price, which occurred after the deal was announced but prior to it closing in Q3.

“The final purchase price of $38.9 million was substantially lower than the initial estimated price of $75 million that we announced in February, and reflected a discount to Longbridge’s book value rather than a premium as originally estimated, along with a lower book value,” Penn said. “With the closing of this transaction, Ellington Financial now holds a controlling stake in Longbridge. And so, we will fully consolidate Longbridge onto our financials, beginning [next quarter].”

While the realities of the mortgage business have been challenging — particularly on the forward side — Penn noted that there is ongoing confidence in Longbridge’s business, and that it turned a profit in Q3.

“Given the substantially lower final purchase price that we paid, we believe that the stage is set for an excellent return on our investment going forward,” Penn said.

During the call, Penn also acknowledged the tough reality some of its competitors are facing.

“While it’s been a really tough market for all mortgage originators, Longbridge actually managed to turn a profit in the third quarter. And with much of its competition hobbled, Longbridge also became the second largest issuer of new-issue HECM HMBS with a 20% market share,” Penn said.

Still, Longbridge has had its share of challenges, as origination volume was far lower in the early days of Q4, Penn said. This has been driven by a surge in interest rates and wide-level trading of the company’s HECM production by the Ginnie Mae HECM-backed Securities (HMBS) outlet the company uses.

Still, Penn described these challenges as most potent in the near-term.

“Make no mistake: the situation in the reverse mortgage market is quite different from that of the forward mortgage market,” Penn said. “The reverse mortgage market is still largely untapped, Longbridge’s market share has been rising, and the demographic trends are extremely favorable. So we’re definitely constructive on Longbridge’s long-term prospects.”

Reverse mortgages as ‘countercyclical’

Penn noted during the call that Ellington views Longbridge as an enhancement to the company’s diversified income stream, and also described how the reverse mortgage business is capable of accelerating during a broader economic downturn.

“[That’s] because reverse mortgages provide liquidity to borrowers without the requirement to make monthly principal and interest payments,” Penn said. “In fact, the last peak in HECM originations was in the wake of the global financial crisis in 2009, when home prices were falling rapidly. And Longbridge’s origination profits soared in the second quarter of 2020 during the depths of COVID, when other fixed-income businesses were teetering. There is definitely a countercyclical component to the reverse mortgage business.”

Ellington Chief Financial Officer J.R. Herlihy noted during the call that Longbridge’s financials will be more integrated into the company’s earnings in Q4. Herlihy also noted that Longbridge will be reported as a separate operating segment in the company’s generally accepted accounting principles (GAAP) and non-GAAP financial reporting.

Recent history

Ellington has been invested in Longbridge since acquiring a stake in the company in 2014. Longbridge itself was initially started in 2012 by a group of former New York Life employees who announced plans to gain licensing in the reverse mortgage space earlier that year.

The deal for Ellington to acquire Longbridge was announced in February, with a total purchase price of about $75 million. In Q3 2022, Longbridge became the second largest issuer of HMBS backed by newly-issued HECM loans.

Longbridge CEO Chris Mayer previously told RMD that after the closure of the deal, the company’s existing leadership team would remain in their current positions including Chief Revenue and Marketing Officer Melissa Macerato, COO Bill Packer, and Mayer.

“This purchase by Ellington allows Longbridge to continue to grow and secure its position as the leading reverse mortgage company. The company has continued its strong growth,” Mayer said.