Ellington Financial, parent company of top 10 reverse mortgage lender Longbridge Financial, reported a lower economic return for the fourth quarter of 2023, which was partially driven by net losses from Longbridge “and other positions,” according to CEO Laurence Penn.
Penn added, however, that Longbridge is in the process of regaining profitability, and some of the lagging performance attributed to the reverse division is tied to seasonal realities and the ongoing interest rate environment. In a response to a question from an investor during a recent earnings call, Penn said that the company remains strongly committed to Longbridge and the reverse mortgage business.
Economic outlook for Longbridge
While Longbridge’s economic performance in Q4 2023 lagged compared to recent quarters — generating a net loss of $0.04 per share — Ellington chief financial officer J.R. Herlihy relayed confidence in the company’s ability to positively contribute to the economic performance of Ellington later in the year.
A net loss in originations and a “drag from interest rate hedges exceeded net gains on proprietary loans, reverse MSR-related net assets and servicing income,” Herlihy explained. While Longbridge had a lower origination volume on a quarterly basis, largely due to seasonal and macroeconomic factors, “tighter yield spreads and lower interest rates did improve gain on sale margins” for both Home Equity Conversion Mortgages (HECMs) and proprietary products.
Ellington leadership expects Q1 2024 to be another slow period for originations, but noted that more constructive margins are improving the odds that originations will become profitable later this year and begin contributing to the company’s adjusted distributable earnings.
HECM and proprietary performance
The Longbridge portfolio increased to $552 million at the end of last year, Herlihy said, up from $328 million to end 2022. This growth was driven primarily by proprietary reverse mortgage originations under Longbridge’s Platinum brand.
In Q4 2023, Longbridge originated $262 million across HECM and Platinum products, which was a 15% decline from the previous quarter. The share of originations through Longbridge’s wholesale and correspondent channels remained steady at 82%, with retail accounting for the remaining 18%.
Longbridge should also see some benefits from the economic climate in the future, according to Mark Tecotzky, vice chairman and head of credit strategies at Ellington.
“A steeper yield curve with lower interest rates should also benefit Longbridge as reverse mortgages offer homeowners bigger lines of credit when rates are lower, and reverse mortgage borrowers are generally very sensitive to the size of the credit line they can get,” Tecotzky said.
Looking ahead
Penn said that Ellington is reasonably optimistic about Longbridge’s forecast performance.
“As J.R. mentioned, we expect Longbridge’s origination platform to turn the corner back to profitability later this year, barring any unexpected increases in long-term interest rates,” he said. “I expect this to happen around midyear.”
Penn reminded investors on the call that Ellington reports Longbridge’s origination income as a component of its adjusted distributable earnings. This means that “the return of their origination platform to profitability would be a significant boost to our ADE, since it’s been a drag on our ADE for the last three quarters or so,” he said.
Belief remains
In a Q&A segment at the end of the call, Penn was asked about the long-term outlook for Longbridge and its commitment level from Ellington’s perspective.
Penn described Longbridge as a significant investment, and he highlighted its financial and origination performance relative to other players in the reverse mortgage industry.
“It’s a business that we absolutely believe in long term,” Penn said. “Since we started many years ago, and even since late 2022 when we bought the other half of it … Longbridge has been growing market share quite a bit. It’s been a tough business. Longbridge has actually, I think, done great relative to the competition.”
Penn cited the addition of servicing values, which he anticipates more of since they can serve as “a great ADE generator,” he explained. He also expects more of Longbridge’s competitors to exit the space.
“And demographically, this is an area where I think just obviously there’s a lot of growth,” he said
