Funding Agency Happy With High Reverse Mortgage Lender, Signifies Attainable Future Purchases
Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released earnings results for its 2nd investment portfolio. This means for the company the potential continued strength of the reverse mortgage product category as more seniors consider new ways to increase cash flow in retirement, and one executive also pointed out the possibility of additional Longbridge assets in the future .
Overall, Ellington posted improved performance in the second quarter, increasing both core earnings per share and annualized economic return by nearly 20% each. The company increased its monthly dividend twice in the quarter, up over 50% to $ 0.15 per share in 2021. Penn also described Longbridge’s reverse mortgage results as “tremendous” in a press release announcing financial results ahead of a planned profit call.
Longbridge 2021 performance, asset discussion
In describing Longbridge’s performance in 2021, Larry Penn, CEO of Ellington Financial, describes a significant difference in performance between the company’s operations in 2021 versus the pandemic-marked 2020.
“[I]In the reverse mortgage segment, Longbridge delivered another quarter of excellent results, “Penn said on a conference call to announce the results for the second quarter of 2020.” Longbridge’s results for the first six months of 2021 are now almost in line with all of 2020, which was a record year in itself for Longbridge. Well, there has been some widening in yield spreads in the market recently that has resulted in margin compression that could easily be reversed. “
Penn remains “very optimistic” about Longbridge’s growth and earnings prospects, he said, describing that the company had not bought any assets from Longbridge. However, he left the door open for such a possibility in the future.
“[O]Our reverse mortgage loan activity has so far been limited to our investment in Longbridge itself, ”said Penn. “We haven’t bought any assets from Longbridge, at least not yet. Also, as you look at the loan amounts on this slide, note that we are not viewing any loans securitized by us, which in many cases are consolidated on our balance sheet. Of course, if we were to include these loans in this graph, the total would be much, much larger. “
The company is involved in the purchase of loans at all important points in the credit life cycle, Penn described. This helps keep pricing under control at a strategic level.
“We are involved from the start and at every key stage in the life cycle of these loans,” explains Penn. “Our engagement begins with developing the underwriting and pricing guidelines that will allow us to acquire the types of loans we wish to acquire, plus wholesale prices at that.”
The loans are then stored pending securitization before finally being securitized, he said.
Longbridge’s “greatest asset”
When asked about the presence of reverse mortgages in Ellington’s portfolio in a question-and-answer session following the main earnings call presentation, Penn described more of Ellington’s philosophy of working with Longbridge, citing what the investment firm is considered to be its potentially most important asset looks at.
“I think Longbridge’s interesting asset, which is Longbridge’s largest tangible asset, is actually its reverse mortgage servicing, which is a really interesting and mysterious sector of the market,” said Penn. “When you have a reverse mortgage you have the typical kind of solid service strip that comes with it. So that’s an IO, if you will, similar to other mortgage service rights, but you also have an obligation and right to fund any uncovered drawings as soon as they are claimed by the borrower.
This makes the MSRs a “very interesting asset class” for Longbridge that could be worth buying in the future, explains Penn.
“And I think that’s something I get – I’m really great here – but I think we could get excess service rights from Longbridge in the future, for example,” explains Penn. “[T]here [are] No discussions about it right now, but I think this could be a really interesting asset class for Ellington Financial. But only in relation to the agency product, which is their bread and butter and is easily available in the market on the origin side, and therefore no plans to purchase directly from Longbridge in this regard. “
Penn was then asked whether or not the reverse mortgage servicing asset was “interestingly priced” and he replied in the affirmative. There is, however, a component of that that Ellington is not inclined to get involved.
“So maintenance is usually done by sub-service providers,” said Penn. “You are right, it is certainly a very sensitive area. But the service rights [themselves], not the sub-servicing, I think where the interesting financial asset lies. The sub-maintenance is something we wouldn’t be interested in. “
Longbridge increases revenue
When asked about the company’s increased reported income from consolidated entities, Ellington CFO JR Herlihy quickly identified the reverse mortgage lender and another company as the top growth drivers in this space. LendSure Mortgage Corporation is another company Ellington has a stake in that describes itself as a non-QM specialist based in San Diego, California.
“Yes, that is primarily driven by Longbridge and LendSure, where we value these investments fairly,” said Herlihy. “And neither of them make payouts, so I think they’re a way to think about it – and Larry pointed out that Longbridge was making almost as much by the middle of the year as it was all of last year. And LendSure had a record quarter of additions – the second quarter after seeing a record quarter of additions in the first quarter. As a result, the returns at the originator level have been very strong in both cases and our fair value largely reflects the originators’ GAAP results, which are not necessarily distributed. “
Ellington has been consistently promoting its investment in Longbridge for some time, and said late last year that much of the confidence Ellington has in Longbridge extends to the larger reverse mortgage industry, which has struggled in previous years but is now more steady recovered.
“Some of the reverse mortgage companies, as everyone knows, have fallen by the wayside for the past few years, it’s been a tough market,” Penn said in November 2020. “Well, it’s not a tough market. Now it’s a great market and Longbridge is gaining market share there. At some point it could become a flow provider for us, for example by dedicating ourselves directly to servicing instead of indirect engagement. But for now we will continue to do everything we can to help these companies grow. “
When Longbridge Financial representatives previously sought comment, they told RMD that they were satisfied with letting Ellington’s comments speak for themselves.
Most recently, Longbridge on the service front expanded its online service portal with a number of new functions at the beginning of summer and launched a new mobile app for loan processing in February. The portal itself was launched for the first time in 2019.
Read Ellington Financial’s financial results for the second quarter of 2021.