Ellington Financial notes Longbridge discount, industry confidence

Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released its third quarter 2022 earnings results this week, highlighting how its recent acquisition of Longbridge Financial and its reverse mortgage business will factor into its future plans. provides more perspective on

In the earnings call, Ellington CEO Laurence Penn noted that the purchase price of Longbridge Financial, a leading reverse mortgage lender and servicer, fell before the transaction closed. Company executives also noted that the countercyclical nature of the reverse mortgage business to the overall housing market has helped maintain confidence in the acquisition.

Purchase price drop, Q3 profit

On the conference call, Mr. Penn noted a significant change in the Longbridge acquisition price. This happened after the deal was announced but before closing in the third quarter.

“The final purchase price of $38.9 million is well below the initial price estimate of $75 million announced in February and, along with the lower book value, represents a premium to Longbridge’s book value rather than a premium to the original estimate. It was a reflection of the discount,” said Penn. He said. “With the completion of this transaction, Ellington Financial now retains control of Longbridge. As such, we will fully integrate Longbridge into our treasury. [next quarter]”

While the realities of the mortgage business have been challenging, particularly down the road, Penn said he remains confident in Longbridge’s business, which was profitable in the third quarter.

“Given that the final purchase price we paid was significantly lower, we are confident that we are well positioned for a superior return on our investment going forward,” Penn said.

During the call, Penn also acknowledged the harsh reality facing some of its competitors.

“It was a very tough market for all mortgage originators, but Longbridge was actually able to turn a profit in the third quarter. It has become the second largest issuer of new issue HECM HMBS with a market share of 100%,” said Penn.

Still, Longbridge had some challenges with much lower composition volumes early in the fourth quarter. This was brought about by a sharp rise in interest rates and the company’s wide trading of his HECM production by the Ginnie Mae HECM-backed securities (HMBS) outlet it uses.

Still, Penn described these challenges as being most powerful in the short term.

“Undoubtedly, the reverse mortgage market conditions are very different from the forward mortgage market conditions,” Penn said. “Reverse his mortgage market is still largely untapped, Longbridge’s market share is rising, and demographic trends are very positive. target.”

Reverse Mortgages as “Countercyclicals”

Penn said on the conference call that Ellington sees Longbridge as a boost to the company’s diversified income streams, and also explained how the reverse mortgage business could accelerate during a broader economic downturn. Did.

“[That’s] Because reverse mortgages provide liquidity to borrowers without requiring monthly principal and interest payments,” Penn said. “In fact, the last time HECM originations peaked was shortly after the 2009 global financial crisis when home prices fell sharply. In a wobbly second quarter of 2020, it surged during a severe period of COVID.There is definitely a counter-cyclical element to the reverse mortgage business.”

Ellington Chief Financial Officer JR Herlihy said on a conference call that Longbridge’s financials will be further integrated into the company’s earnings in the fourth quarter. Mr Herlihy also noted that Longbridge is reported as a separate operating segment in the company’s Generally Accepted Accounting Principles (GAAP) and non-GAAP financial reports.

recent history

Ellington has been invested in Longbridge since Acquisition of shares the long bridge itself first started by a group of former New York Life employees in 2012 announced plans to obtain a license in the field of reverse mortgages earlier that year.

Ellington’s deal to buy Longbridge announced In February, for a total purchase price of about $75 million. In Q3 2022, Longbridge became the second largest issuer of HMBS backed by his newly issued HECM loans.

Longbridge CEO Chris Mayer previously told RMD: close The transaction leaves the company’s existing management team in their current roles, including Chief Revenue and Marketing Officer Melissa Macherato, Chief Operating Officer Bill Packer and Mayer.

“This acquisition by Ellington will allow Longbridge to continue to grow and secure its position as a leading reverse mortgage company. The company continues to grow strongly,” Mayer said.

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