Longbridge parent posts softer Q3 earnings while touting proprietary reverse performance

Ellington Financial, the parent company of top-five reverse mortgage lender and servicer Longbridge Financial, saw its net income attributable to common stockholders fall in the third quarter of 2024 to $16.2 million — down from $52.3 million in Q2 — but company leaders said that the proprietary reverse mortgage product line offered by Longbridge continues to show strength.

Ellington presented its third-quarter earnings results in a conference call on Thursday following the close of the market. The company noted an increase in its adjusted distributable earnings (ADE), which it credited to Longbridge’s proprietary programs.

Longbridge has offered its “Platinum” line of proprietary reverse mortgages with lending limits in excess of the Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) program for years. Ellington CEO Laurence Penn noted that the lender’s ADE contribution has steadily increased each quarter in 2024.

Longbridge performance

Longbridge had a net loss attributable to common stockholders of $2.5 million in Q3 2024, largely reversing a gain of $4.5 million in Q2. This was “driven by net losses on interest rate hedges, partially offset by positive results in originations,” the company explained.

“We had a mark-to-market gain on our HMBS MSR equivalent, but this gain was muted by wider HMBS yield spreads, which resulted in a net loss on this position after taking into account the net losses on the interest rate hedges that we hold against this position,” it explained in a statement.

Wider HMBS yield spreads impact the value of its HMBS mortgage servicing rights, since they lower projected servicing income that “stems from the right to fund and securitize future borrower draws.” The segment also recorded declines in HECM origination margins that were also driven by wider HMBS yield spreads.

But the lender’s proprietary reverse originations saw net gains related to a July securitization work alongside “improved origination margins and higher volumes, [leading] to strong profits in that product line,” the company explained.

“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.”

Net loss, with a catch

JR Herlihy, Ellington’s chief financial officer, went deeper into the quarterly earnings of Longbridge, saying that the company had “strong results and originations” despite recording a GAAP net loss of $0.03 per share in Q3. But that loss needs to be qualified, he added.

“This net loss was driven by interest rate hedges as rates fell during the quarter,” Herlihy said. “We had a mark-to-market gain on our HMBS MSR equivalent, but this gain was muted by wider HMBS yield spreads, so the gain didn’t keep pace with the net losses on interest rate hedges that we hold against this position.”

While there was a decline in HECM origination margins driven by the wider HMBS yield spreads, this was “partially offset” by higher volumes, he added. But he reiterated the strong profit contribution of the lender’s proprietary reverse mortgage products.

“In total, origination volume at Longbridge increased 16.5% sequentially even as industrywide volumes were down overall for the quarter,” Herlihy said. “Notably, Longbridge contributed $0.12 per share of ADE in the third quarter, driven by the strong quarter from proprietary reverse.”