Ellington Financial, the parent company of major reverse mortgage lender and servicer Longbridge Financial, announced this week that it has issued a $243 million proprietary reverse mortgage securitization backed entirely by Longbridge’s “Platinum” product line.
The loans will also continue to be serviced by Longbridge, according to the announcement of the securitization. HousingWire’s Reverse Mortgage Daily (RMD) reached out to representatives of Ellington Financial but did not receive an immediate response.
In November, Ellington reported a third-quarter decline in its net income attributable to common stockholders, but company leaders also specifically called out the strength of the proprietary Platinum line.
Proprietary reverse originations saw net gains related to a July 2024 securitization, which worked alongside “improved origination margins and higher volumes, [leading] to strong profits in that product line,” the company said last month.
Laurence Penn, CEO of Ellington Financial, also called out the adjusted distributable earnings (ADE) contribution of Longbridge to the overarching Ellington portfolio.
“Our Longbridge segment represents about 12% of our equity capital allocation, so it’s great to see ADE having steadily improved in that segment,” Penn said during the earnings call. “I’ve been consistently highlighting our Longbridge segment as holding significant untapped potential for Ellington Financial. Even if Longbridge’s ADE can stabilize around $0.09 per share per quarter, we should be in excellent shape from a dividend coverage standpoint.”
JR Herlihy, Ellington’s chief financial officer, also credited the Platinum line with a strong profit contribution to the overall company.
“In total, origination volume at Longbridge increased 16.5% sequentially even as industrywide volumes were down overall for the quarter,” Herlihy said in November. “Notably, Longbridge contributed $0.12 per share of ADE in the third quarter, driven by the strong quarter from proprietary reverse.”
UBS equity research analyst Douglas Harter previously explained for RMD that the portfolio diversity of Ellington has proven positive this year.
“They’ve managed to continue securitizing across their platforms, which has allowed them to grow their portfolio, increase earnings, and get back to covering the dividend from an earnings-available-for-distribution standpoint this quarter, which was a positive development,” Harter said in November.
While RMD states: “Ellington reported a third-quarter decline in its net income attributable to common stockholders,” Ellington wrote: that Longbridge had a loss of “$(2.5) million, or $(0.03) per common share, from Longbridge.”
Some do not seem to recognize that proprietary RMs (PRMs) are a threat to those who offer them. Why? When fixed rate RMs are high, say 10%, the “Rule of 72” tells that a UPB at 30% of a home’s value at closing will double every 7.2 years. That means after approximately 14 years, the UPB will be 121% of the related home’s value (at closing). in 28 years, the UPB will be 488% of the value of the home (at closing). If foreclosure costs, fix up costs, and selling expenses run 20% of the UPB at termination, the annual appreciation rate for 14 years would have to be 2.700% and for 28 years 6.516%.
Since PRMs are nonrecourse but have no insurance protecting note holders from loss at termination, investors can suffer substantial losses if annual appreciation rates are insufficient to cover the UPBs of foreclosed PRMs. While PRMs can be very profitable, they also have significant (if not substantial) risk.
The industry needs PRMs and even PRMs that have the potential to compete with HECMs. While Longbridge tells us that they have a positive outlook on PRMs, we have no means to track such claims without much more PRM data transparency on the part of lenders. In the spring of 2008, the opagueness of the PRM data meant that their sudden peak to valley PRM product offerings were almost dizzying as we watched PRM product by PRM product no longer being offered.