Following the slight loss contributed by Longbridge Financial to the first-quarter earnings of parent company Ellington Financial, the reverse mortgage lender turned its fortunes around in the second quarter, which led to praise from the Ellington executive team in a Q2 2024 earnings report released this week.
Ellington reported net income contributable to common stockholders of $52.3 million, and $69.1 million from its investment portfolio. Longbridge contributed $4.2 million to the total.
Ellington CEO Laurence Penn praised Longbridge in both an earnings release and on a call with investors that delved into the details of the Q2 report.
Longbridge performance
Ellington reported that Longbridge’s positive contribution in the second quarter was primarily driven by net interest income and net gains on the company’s proprietary reverse mortgage products, branded as “Platinum.”
Longbridge is also a top 10 lender of Federal Housing Administration (FHA)-insured Home Equity Conversion Mortgages (HECMs). While the company did have a higher HECM loan volume in Q2 2024, this was “mostly offset by a decline in gain-on-sale margins, driven by wider yield spreads on newly originated [HECM-backed Securities (HMBS)],” the company said.
“In servicing, tighter yield spreads on more seasoned HMBS led to improved execution on tail securitizations, which contributed to the positive results from servicing.”
Overall, the Longbridge portfolio increased by 18% to $520.8 million when excluding “non-retained tranches of a consolidated securitization trust,” the company added. This was largely tied to proprietary loan originations, typically geared for higher-value homes with loan limits of up to $4 million. Proprietary loans from Longbridge are also available to borrowers as young as 55 in certain states.
Across its retail, wholesale and correspondent channels, Longbridge originated 1,706 loans for a total of $304.5 million in Q2 2024, which includes its proprietary loans. Of the total volume, 20% came from its retail channel.
Leadership response
Penn praised Longbridge’s performance.
“Driven by broad-based contributions from our diversified credit and agency portfolios, as well as from our reverse mortgage platform, Longbridge, Ellington Financial generated a nonannualized economic return of 4.5% for the second quarter, and grew adjusted distributable earnings and book value per share sequentially,” he said.
Penn added that Ellington saw positive performance in its nonqualified mortgage (non-QM) business, and he went on to describe Longbridge’s contribution to the company as “robust” due to proprietary loan performance.
“Following quarter end, we successfully completed our second securitization of proprietary reverse mortgage loans originated by Longbridge, achieving incrementally stronger execution than our inaugural deal in the first quarter,” Penn added. “Our second-quarter results also significantly benefited from the performance of our residential transition and commercial mortgage loan strategies, as well as non-agency RMBS.”
Penn mentioned in the Q1 earnings call that the company expected Longbridge’s performance to improve in Q2, which came to fruition.
“On last quarter’s earnings call, we predicted a second-quarter turnaround at Longbridge, and Longbridge did a great job and delivered both on a GAAP basis and [adjusted distributable earnings (ADE)] basis,” he said. “Longbridge is an important part of [our] ADE momentum.”
J.R. Herlihy, Ellington’s chief financial officer, noted that “Longbridge […] contributed $0.06 per share to our ADE, in contrast to its negative $0.01 per share contribution last quarter,” and credited Longbridge’s contribution with an overall increase in the full company’s ADE.
Looking ahead
Penn said that the work for Longbridge is trending in a positive direction based on loan volumes and projections for mortgage rates.
“At Longbridge, we have more work to do to grow origination volumes further, but the positive developments in the prop[rietary] reverse securitization markets and a strong July in originations should bode well for Longbridge going forward,” he said.
“Lower long-term interest rates could also provide a big boost to Longbridge’s origination business, since the size of the loans that borrowers are able to take out generally increases as long-term interest rates decline.”
Loan size, more than interest rates, Penn said, stands as the key driver of reverse mortgage origination volume.
