Ellington Financial (NYSE:EFC), the parent company of leading reverse mortgage lender Longbridge Financial, reported net income attributable to common stockholders of $2.9 million, or $0.04 per common share, in the second quarter of 2023.

While this figure is far lower than what was reported in the first quarter of the year, the results remained in positive territory for the company and led to “a modestly positive economic return overall,” according to EFC President and CEO Laurence Penn.

Top 10 reverse mortgage lender and servicer Longbridge contributed positively to the company’s results for the quarter, the company said, though pressures in the reverse mortgage market offset an overall gain in origination volumes in both its Home Equity Conversion Mortgage (HECM) and private-label loan options, the company said.

Longbridge performance

Longbridge is a positive contributor to EFC’s profitability, Penn said. While there are headwinds in the reverse mortgage industry overall, they helped facilitate an asset purchase of mortgage servicing rights (MSRs) from Reverse Mortgage Funding (RMF).

“Longbridge contributed a positive four cents per share, even as wider HECM yield spreads, compressed gain-on-sale margins weighed on results,” Penn said. “The lower margins at Longbridge were also the primary driver of the sequential decline in EFC’s overall adjusted distributable earnings.”

Despite that, HECM margins “recovered somewhat in July,” Penn said, and the acquisition from RMF is seen as a positive investment.

“Shortly after quarter-end, Longbridge was able to acquire a reverse mortgage servicing portfolio out of a bankruptcy proceeding at a distressed price, which we expect will be immediately accretive to EFCs earnings and adjusted attributable earnings going forward,” he said.

EFC is also took advantage of an entry point to add credit risk transfer investments early in the quarter before the spread tightening in that sector this summer, and continues to expand its portfolio of “high-yielding residential transition loans and proprietary reverse mortgage loans,” Penn explained.

EFC CFO J.R. Herlihy also described Longbridge’s results as “positive,” driven by net gains related to resolving HECM buyout loans and the company’s proprietary reverse mortgage loan program, Platinum. Longbridge also reported net gains on interest rate hedges that were “partially offset” by the HECM-backed Securities (HMBS) MSR equivalent, Herlihy said.

Portfolio activity, and looking to the future

In Q2, EFC’s Longbridge portfolio decreased by 3% to $430 million as of the end of June, Herlihy said, but was primarily driven by the “success” Longbridge had in resolving HECM buyout loans, many of which were acquired in a transaction of a distressed HECM portfolio purchase sourced from RMF in March of this year.

“This decline was partially offset by originations of [private-label] reverse mortgage loans,” he said. “In the second quarter, Longbridge originated $297 million across HECM and [private-label], which was up 27% quarter over quarter. The share of origination through Longbridge’s wholesale and correspondent channels increased incrementally to 79% from 77% while retail declined to 21% from 23%.”

EFC is “excited” about the addition of private-label reverse mortgages to its portfolio, Herlihy said, which the company sees as a “growing part of the reverse mortgage market.”

Longbridge continues to give EFC confidence in the reverse mortgage market overall. In the Q&A session held after the conclusion of the main earnings presentation, Penn was asked about whether or not the company is focused on shorter-duration assets. While reverse mortgages cannot be described that way, access to the market provides additional acquisition opportunities, he said.

“I think we intend or are inclined to keep durations short, especially seeing how there are opportunities that are pretty visible now that could be coming around the corner, like in a commercial mortgage bridge in distress,” he said. “And distressed opportunities in the reverse mortgage space that Longbridge has been able to take advantage of, starting at the end of last year. [At the] beginning of this year, it acquired some of those [reverse mortgage] buyout loans [which] look like they’re going to be very profitable.”

According to the most recent HECM endorsement data compiled by Reverse Market Insight (RMI), Longbridge’s total 2023 market share is 10% on the HECM side, an increase from the 7.4% share it held in 2022. This data does not include information related to proprietary loans, as lenders do not release substantive proprietary origination data.

In the 12 months ending in July 2023, Longbridge has originated 3,873 HECMs, according to RMI. It currently stands as the third-largest originator in the industry behind American Advisors Group (AAG) and Mutual of Omaha Mortgage, respectively, though these rankings are likely to change in the coming months considering the acquisition of AAG by Finance of America Companies (FOA).