Mortgage real estate investment trust (mREIT) Ellington Financial, the parent company of Longbridge Financial, posted positive financial results in the third quarter of 2023 that it largely credits to its diversified portfolio. This is according to an earnings presentation presented by company leaders on Wednesday.

Bucking the general trend of downward pressure brought on in the Reverse Mortgage space by high interest rates, Longbridge, a leading reverse mortgage lender and servicer, also performed positively despite a loss on its reverse mortgage servicing rights (MSR) portfolios.

Ellington CEO Laurence Penn attributed that loss primarily to “offsetting factors,” saying the company remains bullish about Longbridge.

Longbridge performance

Penn continues to see Longbridge as a key component of its diversified portfolio and strategy, he explained.

“Our Longbridge segment […] generated positive results for the quarter despite the volatility,” Penn said. “The segment had substantial interest rate hedging gains and those gains exceeded net losses on originations and on the proprietary reverse mortgage portfolio, as well as a net mark-to-market loss of $8.2 million on the reverse MSR portfolios.”

While Longbridge was profitable in Q3, its contributions to Ellington’s adjusted distributable earnings (ADE) turned negative due to industry market conditions, which compressed gain-on-sale margins and loan valuations in the latter half of Q3, Penn explained.

“Looking ahead, with our updated MSR valuations and our growing proprietary reverse mortgage portfolio and with Longbridge’s increasing market share in the industry, I believe that Longbridge is well positioned to make meaningful, positive ADE contributions respectively,” he said.

Ellington CFO J.R. Herlihy further detailed Longbridge’s financial performance and contributions to the Ellington portfolio.

“Our Longbridge portfolio increased by 14% sequentially to $488 million as of Sept. 30, driven primarily by proprietary reverse mortgage originations and the acquisition of the bankruptcy-related MSR portfolio,” he said. “These increases were partially offset by a smaller HMBS MSR equivalent, driven primarily by the markdown that Larry mentioned.”

The third quarter saw Longbridge originate $307 million in reverse mortgage loans across both the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) product, and the company’s “Platinum” line of proprietary, non-agency loans.

“The share of origination through Longbridge’s wholesale and correspondent channels increased to 82% from 79%, while retail declined to 18% from 21%,” Herlihy said.

Reverse mortgage dynamics

In a Q&A session at the end of the call, Penn assessed the current dynamics of the reverse mortgage industry and what he sees as the benefits of Longbridge’s recent performance despite headwinds.

“You’ve seen the market shrink but then again, you’ve also seen one very notable player and other smaller players sort of go by the wayside,” he said, referring primarily to the bankruptcy of Reverse Mortgage Funding last year. “So we see Longbridge as having a larger market share in a market that is smaller, but then the [private-label] business has a lot of room for growth.”

That growth stems from borrowers seeking the private product out who have much higher loan values, he explained, which leads to more profitability on a loan–by–loan basis.

“And you’re talking about borrowers that may not be as sensitive about taking out less proceeds,” he said. “So looking forward, the long-term prospects, we think, are really good for Longbridge and they continue to gain market share.”

Analyst: Longbridge ‘going to be a home run’

Penn addressed Longbridge’s ADE contribution and explained why there is reverse mortgage industry-wide volatility, but that how Ellington believes that does not negate the long-term prospects for Longbridge.

“[Longbridge continues] to gain market share, but it’s been a tough market,” he said. “With agency spreads, that’s wide — and volatile — [and has] affected the execution on the [HECM-backed Securities (HMBS)] that Longbridge and all the other participants issue on a monthly basis,” Penn explained.

“And so the gain-on-net sale margins aren’t what they could be. […] So you’ll see short-term volatility, I think, in our ADE coming from volatility from Longbridge origination profits. And so that’s something that I think the market will have to adjust to for us,” he added.

An analyst on the call responded positively to Penn’s summary.

“I think Longbridge is going to be a home run for you guys, and I look forward to next year,” he said.

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