Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released its Q4 2022 earnings results this week, citing its acquisition of reverse mortgage lender Longbridge Financial as a primary driver of its positive performance.
While reverse mortgage volume was lower in Q4 for both Home Equity Conversion Mortgages (HECMs) and proprietary loans, Longbridge still recorded gains, according to Ellington’s leadership during the earnings call.
“The Company’s Longbridge portfolio totaled $327.9 million as of December 31, 2022,” the company said in its Q4 earnings release. “Longbridge generated strong performance for the quarter as tighter yield spreads led to net gains on the Company’s HECM loans and HECM-backed Securities (HMBS) mortgage servicing rights (MSR) equivalent. On new originations, while Longbridge had improved gain-on-sale margins quarter over quarter, lower origination volumes led to a net loss in originations overall.”
Longbridge’s core business is a feather in the cap for Ellington’s portfolio, according to Laurence Penn, the company’s CEO.
“Excellent performance from Longbridge Financial and from our agency RMBS strategy, in addition to another positive quarter from our loan portfolios, drove Ellington Financial’s results in the fourth quarter,” Penn said. “For Longbridge, our reverse mortgage platform that we now consolidate, tighter yield spreads benefited the value of our HECM loans and mortgage servicing rights (MSRs), and also expanded gain-on-sale margins on new HECM originations, which mostly offset the effect of lower origination volumes.”
Longbridge’s portfolio mainly consists of reverse MSRs, unsecuritized HECMs and proprietary reverse mortgages, and totaled $328 million as of December 31. Longbridge originated $341 million across HECM and proprietary reverse mortgages, with roughly 85% from its wholesale and correspondent channels and 15% from the retail channel, Ellington CFO J.R. Herlihy said.
Balance sheet consolidation
As of the fourth quarter, Longbridge’s balance sheet was consolidated into Ellington’s, Penn said, and the lender contributed to Ellington’s net income per share.
“During the fourth quarter, Ginnie Mae HMBS yield spreads tightened, and that increased the value of the HECM reverse mortgage loans and mortgage servicing rights that Longbridge holds on its balance sheet, and which by consolidation, we now hold on our balance sheet,” Penn said. “The tighter yield spreads also expanded Longbridge’s gain on sale margins on new originations. But as expected, origination volumes were down seasonally, and that led to a modest net loss on originations. Putting it all together, Longbridge generated strong results for the quarter.”
However, the lender’s contributions to Ellington’s adjusted distributable earnings (ADE) were more modest at $0.01 per share. Penn attributed this to modest reverse mortgage origination volume, but he expects volume to rise in the spring.
“When spring comes, I expect Longbridge to start contributing to our ADE in a significant way,” he said. “Keep in mind that while the fourth quarter appreciation in Longbridge’s MSRs contributed to EFC’s net income in the fourth quarter, that appreciation isn’t factored into ADE.”
Longbridge impact on the EFC portfolio
Under Ellington’s generally accepted accounting principles (GAAP), Longbridge’s HECM loans remain on the company’s balance sheet after the sale of any associated HMBS pools, with pools treated as long-term financing of the HECM loans, according to Herlihy.
“Since July 2017, Longbridge has securitized roughly $9.5 billion of HECM loans into HMBS pools,” he said. “Of course, many of those loans have paid off since origination. Longbridge’s GAAP liability associated with these HMBS pools stood at $7.8 billion as of December 31. Now that we’ve consolidated Longbridge, we brought these GAAP liabilities onto EFC’s balance sheet, and this more than doubled our total GAAP liabilities.”
That’s the case despite the lender’s total equity representing only about 10% of Ellington’s total equity by year’s end, Herlihy said. This includes all of the reverse MSRs and loans on the balance sheet.
“And in fact, EFC’s recourse debt-to-equity ratio actually declined quarter-over-quarter after the Longbridge consolidation because, among other reasons, Longbridge itself had a lower recourse debt-to-equity ratio than the rest of EFC at year-end,” he said.
Penn said Longbridge’s proprietary loan pipeline is “attractive,” noting that he expects the company’s origination income to increase in Q2 2023. Penn also addressed last year’s Reverse Mortgage Funding (RMF) bankruptcy and the impact on the lender.
“I’m sure you saw the bankruptcy towards the end of last year,” Penn said. “I don’t know if you’d call this organic or inorganic, but we were able to pick up a lot of producers, loan officers etc., in the wake of that bankruptcy without having to do anything in terms of an outright acquisition and potentially paying a premium.”
In terms of Ginnie Mae seizing the RMF servicing portfolio, Penn said that MSR could come to market in the near future, which could be an attractive acquisition opportunity.
“It’s a very different MSR from the MSR that Longbridge currently owns,” Penn said. “It’s a much older MSR so it has different benefits and risks. But that could be a very substantial acquisition, and potentially not even require that much capital.”
Shortly after the bankruptcy, Longbridge reportedly expressed interest in acquiring the RMF portfolio, but an acquisition did not materialize prior to Ginnie Mae seizing of the portfolio.