Ellington Financial, the parent company of top-five reverse mortgage lender and servicer Longbridge Financial, reported that its reverse mortgage segment’s adjusted distributable earnings were lower in the first quarter of 2024 than they were in the previous quarter.

Projections of loan originations and submissions, however, are tracking higher thus far in the second quarter and the company expects that Longbridge will soon return to positive contributions.

Beyond that, Ellington completed its first securitization of proprietary reverse mortgages originated by Longbridge under its “Platinum” brand, which company leaders describe as a “milestone.”

Longbridge performance

Ellington CEO Laurence Penn explained in a Q1 earnings call that Longbridge contributed 10 cents per share of GAAP net income to the company, which came out to a slightly negative contribution outcome. But Penn is looking ahead with optimism.

“That slightly negative [adjusted distributable earnings (ADE)] from Longbridge again weighed down EFC’s overall ADE for the quarter,” he said. “But on a positive note, so far in the second quarter, origination volumes and submissions at Longbridge are pacing well ahead of first-quarter volumes and second-quarter projections. And so we expect Longbridge to contribute positively to our ADE in the second quarter.”

Penn also detailed that Ellington successfully completed a securitization of proprietary reverse mortgages originated by Longbridge, which company leaders characterized as a positive.

Securitization a ’key portfolio objective’

“We successfully completed our inaugural securitization of proprietary reverse mortgage loans from Longbridge, which converted repo financing into term non-mark-to-market financing at an attractive cost of funds,” Penn said. “We expect that this securitization marks the beginning of an ongoing program for our proprietary reverse business, similar to the program we have established in our non-QM businesses.”

On the heels of that securitization, Penn added that Longbridge has been able to originate more proprietary reverse mortgages.

Ellington chief financial officer J.R. Herlihy added more context to Longbridge’s contributions to the company, saying that its per-share income was primarily driven by “positive results from servicing and net gains on interest rate hedges.” In origination, improved gain-on-sale margins for Home Equity Conversion Mortgages (HECMs) that were driven by tighter HECM yield spreads “were mostly offset by a decline in overall origination volumes,” he added.

Improved execution on tail securitizations made for generally positive results in the servicing segment, but these were partially offset by net losses on proprietary loans, Herlihy said.

Mark Tecotzky, Ellington’s co-chief investment officer, described the company’s enthusiasm for the proprietary reverse mortgage securitization.

“Proprietary reverse mortgage is a sector with a lot of potential for growth and with few competitors,” he said. “The securitization allowed us to both recycle our capital and create some very high-yielding, long-duration, retained tranches. I’m hoping that this and future prop securitizations will lead to improved gain-on-sale margins and additional prop origination volume, and thus, increased profits for Longbridge.”

Reverse originations

Generally speaking, volume was down at Longbridge in Q1 2024, which is in alignment with broader industry trends. But company leaders were optimistic about the way reverse mortgage originations are trending near the midpoint of the second quarter.

“In the first quarter, Longbridge originated $205 million across HECM and prop, which is a 22% decline from the previous quarter,” Herlihy said. “The share of Longbridge’s originations made through its retail channel increased to 25% in the first quarter from 18%, with the share from its wholesale and correspondent channels declining to 75% from 82%. As Larry mentioned, Longbridge is on track to increase origination volume in Q2.”

This also added to Penn’s commentary about where the company expects future ADE growth to come from. He singled out two specific areas: progress on nonperforming commercial loans and real estate-owned (REOs) notes in the Ellington portfolio, and origination improvements at Longbridge.

“As I mentioned earlier, origination volumes and submissions so far in the second quarter are well ahead of projections, despite higher interest rates, which partially reflects additional sourcing channels that Longbridge has successfully established,” Penn said. “As a result, we’re expecting Longbridge to contribute positively to add in the second quarter.”

Penn reiterated this perspective during the Q&A session at the end of the presentation when asked about a timeline for the company to “normalize earnings.”

“We said [Longbridge] hasn’t contributed to ADE commensurate[ly] with the capital in that segment,” he said. “We think that that’s going to turn around pretty soon. We mentioned the second quarter is looking like it’s going to contribute positively, so that trend is in the right direction.”

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