Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released its Q4 2021 earnings results, a presentation arriving on the heels of the announcement that it will acquire leading reverse mortgage lender Longbridge Financial in a deal valued at approximately $75 million for a 49.6% interest, effectively putting the lender under the complete ownership of the investment firm upon the deal’s closing.
Details on Ellington’s perspective on the deal were shared by Ellington CEO Laurence Penn on the earnings call, who related that Ellington has been observing strong and growing business fundamentals in Longbridge’s operations as one of the factors that led to the deal announced yesterday.
Penn also describes general confidence in the reverse mortgage industry at-large due to favorable demographics and the trend of growing senior-held home equity in the United States.
Partnership with Longbridge, and reverse mortgage growth potential
Describing the company’s investment in Longbridge and its history, Penn also went into greater detail about the partnership Ellington has been observing at the lender through its leadership team, particularly CEO Chris Mayer.
“Dr. Mayer is a renowned economist and a thought leader in housing policy generally,” Penn said during the presentation. “Ellington’s relationship with Longbridge has been highly synergistic. And over the past nearly eight years, Ellington has helped Longbridge develop into a top-three reverse mortgage originator today with significant current earnings and franchise value.”
The reverse mortgage business is also generally moving in a positive direction, according to Penn. Utility for seniors entering into a reverse mortgage is high in retirement, owing to the cash flow and stability such a loan could create through responsible usage by a borrower, he says.
“As you know, reverse mortgages enable seniors to convert a portion of their home equity into cash without having to make regular monthly mortgage payments, so they can be valuable retirement tools,” Penn explained. “With the baby boomer generation continuing to age, the advantages of serving such a growing demographic are obvious. And similar to other markets into which Ellington Financial has expanded, we’re not really competing with banks in the reverse mortgage space. This space is dominated by non-banks, largely for regulatory reasons.”
As alluded to in the announcement of the acquisition, Longbridge has achieved notable growth over the past two years that has seen its annual loan volume triple and its net income increase over five-fold in the same period, Penn said. He also reiterated that Longbridge is the only reverse mortgage lender to be given the second-highest ranking by global credit rating agency DBRS Morningstar, which happened in early 2021.
Mortgage servicing rights, origination and the future of reverse mortgages
Ellington and Penn have, in the past, expressed interest in Longbridge’s portfolio of Mortgage Servicing Rights (MSRs), and Penn certainly attributed those assets as a factor in the ultimate decision to acquire the company.
“Similar to what Ellington Financial does in its non-QM business, Longbridge originates and subsequently securitizes the loans that it originates, taking advantage of the stable long-term financing offered by the securitization markets,” Penn explained. “Longbridge then retains the mortgage servicing rights in the loans which it has securitized. At Ellington Financial, we view these reverse mortgage MSRs as highly attractive assets. In fact, about half of Longbridge’s current tangible book value is in these MSRs.”
There is also pre-existing commonality between Longbridge and Ellington in the ways that both companies account for their assets, in that Longbridge holds its MSRs at fair value, Penn said.
“Given that Longbridge is securitizing about $200 million of loans each month, [it is] producing more MSRs every month, including a healthy refinancing recapture program,” Penn said. “We project that the cash flows from these MSRs will generate high investment yields. And so, we expect these MSR assets to be highly accretive to Ellington Financial’s core earnings.”
The lender’s origination revenue in addition to the MSR portfolio is seen as two components that will help add to the general business diversification goals of Ellington, Penn said. The company is excited about the potential of having more direct involvement in Longbridge not only because of potential, but because of Longbridge’s track record particularly during the pandemic.
“Longbridge is in a non-commoditized industry with significant barriers to entry and attractive margins, and it has been a star performer for Ellington Financial over the past few years, generating some pretty incredible returns for us, even during the depths of COVID, by the way,” Penn said. “Because reverse mortgage loans provide liquidity to borrowers without the requirement of monthly principal and interest payments, borrower demand for the product actually surged amidst the economic turmoil brought on by COVID.”
Reverse mortgage commitments, portfolio diversity
That generally positive position that Longbridge and much of the reverse mortgage industry found itself in during the earliest, most uncertain days of the COVID-19 pandemic only helps to enhance the general outlook brought about by the ongoing economic recovery as well, Penn added.
“With the economic recovery, strong home price appreciation has only solidified the reverse mortgage value proposition,” he said. “In fact, the significant nationwide home price appreciation over the last 18 months has substantially increased seniors’ home equity, and thus the size of the potential market. And the reverse mortgage market penetration in the U.S. is only a fraction of what it is in more established markets, like the U.K.”
Penn then cites the data point provided earlier this year by the National Reverse Mortgage Lenders Association (NRMLA) and data analytics firm RiskSpan which pegged the total amount of senior-held home equity at over $10 trillion, in addition to positive demographic trends as a reinforcement of Ellington’s commitment to both Longbridge and the broader reverse mortgage space in the future.
“Our incremental investment associated with this acquisition is about $75 million,” Penn said. “But our entire combined investment in Longbridge will still just be 11% of Ellington Financial’s total equity. As such, the reverse mortgage business will continue to be one of the multiple sectors that Ellington Financial invests in as we continue to manage a highly diversified portfolio. We also think that this acquisition will offer synergies of its own.”
Some of those synergies include cross-selling opportunities that will allow Ellington to tailor an approach for a customer based on a host of different needs, Penn said.
Read the initial story about the acquisition deal, which includes an interview with Longbridge CEO Chris Mayer.
