Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released its Q2 2021 earnings results, and has once more touted the success of its investment in top reverse mortgage lender Longbridge Financial, describing the lender’s performance as increasingly strong with positive growth trends helping to bolster its investment portfolio. This signifies to the firm the potential ongoing strength of the reverse mortgage product category as more seniors continue to entertain new ways of bolstering cash flow in retirement, and an executive also alluded to the possibility of purchasing additional Longbridge assets in the future.
In total, Ellington saw improved performance in Q2, increasing its core earnings per share as well as its annualized economic return each at just under 20%. The company raised its monthly dividend twice during the quarter, marking for a rise of over 50% in 2021 to a rate of $0.15 per share. Penn also touted Longbridge’s results in the reverse mortgage space as “tremendous” in a release announcing the financial results ahead of a planned earnings call.
Longbridge 2021 performance, assets discussion
When describing the performance of Longbridge in 2021, Ellington Financial CEO Larry Penn describes a clear performance differential between the company’s business in 2021 compared with the pandemic-marred 2020.
“[I]n the reverse mortgage space, Longbridge delivered yet another quarter of excellent results,” Penn said in an earnings call announcing Q2 2020’s results. “Longbridge’s earnings for the first six months of 2021 are now nearly equal to those from all of 2020, which was itself a record year for Longbridge. Well there has been some recent yield spread widening in the market that has caused some margin compression, that could easily reverse itself.”
Penn remains “very bullish” on the growth and earnings prospects for Longbridge, he explained, and described how the company has not purchased any assets from Longbridge. He left the door open for such a possibility in the future, however.
“[O]ur activity in reverse mortgage loans has so far been limited to our investment in Longbridge itself,” Penn explained. “We have not purchased any assets from Longbridge, at least not yet. Also, when you look at the loan totals on this slide, keep in mind that we are not showing any loans that we’ve securitized, which in many cases are consolidated onto our balance sheet. Of course, if we were to include those loans in this chart, the total would be much, much larger.”
The company is involved in the purchase of loans at all of the key points in the loans’ life cycles, Penn described. This helps to keep the pricing under control at a strategic level.
“We are involved from the outset and at all the most important stages in the life cycle of these loans,” Penn explained. “Our involvement starts with the crafting of the underwriting and pricing guidelines, which enables us to acquire the kinds of loans we want to acquire and a wholesale prices to boot.”
The loans are then warehoused pending securitization before finally being securitized, he said.
‘Largest tangible asset’ from Longbridge
When asked more specifically about the reverse mortgage presence in Ellington’s portfolio in a Q&A session after the main presentation of the earnings call, Penn describes more of Ellington’s philosophy on engaging with Longbridge and indicated what the investment firm sees as its most potentially important asset.
“I think the interesting asset that Longbridge has, so Longbridge’s largest tangible asset is actually its mortgage servicing rights on reverse mortgages, which is a really interesting arcane sector of the market,” Penn explained. “When you’ve got a reverse mortgage, you’ve got the typical sort of fixed servicing strip that goes along with that. So that’s an IO, if you will, similar to other mortgage servicing rights, but you also have the obligation and the right to fund any unfunded draws as they are drawn down by the borrower.”
This makes the MSRs for Longbridge a “very interesting asset class” which could be worthy of acquisition in the future, Penn explains.
“And I think that’s something I get — I’m really getting ahead of myself here — but I think in the future, it’s possible that we could acquire excess servicing rights for example, from Longbridge,” Penn explains. “[T]here [are] no discussions around that right now, but that’s something that I think could be a really interesting asset class for Ellington Financial. But in terms of just the agency product that is their bread and butter and on the origination side, readily available in the market and, so no plans to acquire anything on that front directly from Longbridge.”
Penn was then asked about whether or not the reverse mortgage servicing asset was “priced in an interesting way,” and he replied to that question in the affirmative. However, there is a component of that which Ellington is not predisposed to becoming involved with.
“So actually the servicing is typically done by sub-servicers,” Penn said. “You’re right, it’s certainly a very delicate area. But the servicing rights [themselves], not the sub-servicing is, I think where the the interesting financial asset is. The sub servicing is something that we wouldn’t be interested in getting into.”
Longbridge driving earnings
When asked about the firm’s elevated reported earnings from consolidated entities, Ellington CFO J.R. Herlihy was quick to identify the reverse mortgage lender and one other firm as the key drivers of growth in that area. LendSure Mortgage Corporation is another firm which Ellington has a stake in, which describes itself as a non-QM specialist based in the San Diego, Calif. area.
“Yes, that’s primarily driven by Longbridge and LendSure, where we fair value those investments,” Herlihy said. “And neither makes distributions, so I guess one way to think about it is they – and Larry highlighted that Longbridge earned through mid-year, almost as much as they earned all of last year. And LendSure had a record quarter of originations – in Q2 after having a record quarter of originations in Q1. So earnings have been very strong at the originator level in both cases and our fair value largely reflects GAAP earnings at the originators that aren’t necessarily being distributed.”
Recent history
Ellington has been consistently touting its investment in Longbridge for a while, saying late last year that much of the confidence Ellington has in Longbridge also extends to the larger reverse mortgage industry, which has gone through difficulties in prior years but which is now more steadily recovering.
“Some of the reverse mortgage companies, as is widely known, have gone by the wayside over the past couple of years, it was a tough market,” Penn said in November, 2020. “Now, it’s not a tough market. Now it’s a great market and Longbridge is getting market share there. At some point, it could become a flow provider for us, for example, in getting direct exposure to servicing instead of indirect exposure. But for now we’re going to continue to do what we can to help those companies grow.”
When previously reached for comment, representatives from Longbridge Financial told RMD that they were content with letting the comments from Ellington speak for themselves.
Most recently on the servicing front, Longbridge bolstered its online servicing portal with a series of new features earlier this summer, and launched a new mobile app for loan servicing in February. The portal itself was initially launched in 2019.
Read Ellington Financial’s financial results for Q2 2021.
