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spk01: All sides on hold. We appreciate your patience and ask that you please continue to stand by. Thank you. Please stand by, your program is about to begin. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in the listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question during that time, simply press the star, then the number one on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Please begin.
spk11: Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our Annual Report on Form 10-K, filed on March 16, 2021, as amended, Forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Takotsky, Co-Chief Investment Officer of EFC, and J.R. Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.
spk03: Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on slide three. During the third quarter, Ellington Financial generated net income of $0.41 per share and core earnings of $0.46 per share, so core earnings continue to cover our dividend. Through the first nine months of the year, we have now delivered an economic return of over 11%, and a total return to stockholders of over 33 percent. Next, please turn to slide 11. During the quarter, we significantly grew our proprietary loan portfolios as we deployed the capital from our common equity raise in July. We had our second consecutive record quarter for originations in our non-QM business, funding $297 million in the third quarter. And we also had our second consecutive record quarter for originations in our residential transition loan or RTL business, funding $106 million in the third quarter, as you can see here on this slide. Our RTL fundings actually grew more than 50% from the prior quarter. Within RTLs, the fix and flip business is a seasonal one, so I wouldn't expect us to see that kind of RTL growth for the next couple of quarters, but I'm hopeful that RTLs could be a big business for us in 2022. Overall, we grew our proprietary loan portfolios by 41% quarter over quarter to $1.26 billion. And keep in mind that the $368 million of growth was net of pay downs. I was extremely pleased with the pace and quality of our capital deployment during the quarter. Our proprietary loan pipelines continue to provide us with a robust supply of high-yielding investments, and we absorb that supply with relative ease. The new capital, was both raised and fully deployed all within the third quarter, and so we were able to avoid any material drag on core earnings. Looking ahead, the prospects for continued growth in earnings from our proprietary loan pipelines continue to be excellent. Thanks to its record origination volume during the quarter, our non-QM affiliate, Lendsure, posted record profitability as well for the quarter. And thanks to our loan flow from Lendsure, we were able to complete our third non-QM securitization of the year shortly after quarter end. This represented the ninth non-QM securitization that we've completed, and we've now passed the $2 billion mark in total non-QM loans acquired from Lendsure to date. This cycle of non-QM acquisitions, followed by securitizations, has several important benefits for EFC. We reap the benefits of a high-yielding and, we believe, low-risk asset class, We strengthen our balance sheet and enhance earnings thanks to the superior long-term financing provided by the securitization market. And ultimately, we're able to manufacture highly attractive retained tranches at prices not available in the secondary market. Meanwhile, in addition to all the growth we're seeing in our residential mortgage loan businesses, we've also recently seen substantially increased loan flow in our small balance commercial mortgage bridge loan business. And last but certainly not least, we have now closed on three additional strategic equity stakes in loan originators in just the last six months. And we have several others in the works that we hope to complete before year end. With these additional strategic stakes, we're continuing to fortify our vertically integrated loan origination business, which continues to supply a consistent flow of high-quality, high-yielding assets underwritten to our specifications. Our relationships with our originator affiliates are symbiotic, as we not only provide them with a reliable outlet for their production, but we also help them enhance their underwriting guidelines, we help them improve the terms and stability of their financing sources, and we help boost their overall visibility in the marketplace. I am excited about these new strategic equity investments, and I believe that they will further expand and diversify our proprietary loan pipelines. Now, please turn to slide five. where you can see the net interest income in our credit strategies again led the way in the third quarter. This net interest income was driven by our growing loan portfolios, which, by the way, also continue to exhibit excellent credit performance. Our credit strategies also delivered significant net gains during the quarter, with significant contributions from our CMBS, CLO, and non-agency RMBS portfolios, together with the gains driven by our share of Lendsure's record profits for the quarter. As I mentioned, Lendsure's third quarter was a record one, both for origination volume and earnings. Lendsure originated $456 million of loans, which was a 39% increase from their second quarter's total of $326 million. Lendsure is on pace to exceed, just in 2021, its origination volume for the prior two years combined. And critically, loan performance has continued to be excellent, even as origination volumes scale. Most of Lendsure's growth so far has been in existing products and channels, but the Lendsure team is working on amplifying its momentum by rolling out new products and channels, and I'm excited to see what 2022 will bring. I'll turn next to Longbridge Financial, our reverse mortgage originator affiliate. In the agency reverse mortgage market, continued high levels of home price appreciation, together with low interest rates, have led to elevated prepayment speeds as borrowers seek to refinance. In response to these higher speeds, we saw some acute downward repricing in the HMVS market, which is the market for agency reverse mortgage pools. While these market forces have boosted origination volumes for Longbridge, they also caused a decline in the value of Longbridge's portfolio of mortgage servicing rights, or MSRs. This drove an overall quarterly net loss of the company. But importantly, Longbridge's origination segment was still profitable during the quarter. As a result, we see this quarterly net loss as an anomaly for Longbridge. The company hit a monthly record for origination volume in September, and year-to-date, Longbridge is actually number three in the industry in total HMBS issuance. Moving forward, we believe that Longbridge's earnings and growth prospects continue to be excellent, and in fact, the company has bounced right back to profitability in October. With that, I'll pass it to JR to discuss our third quarter financial results in more detail.
spk02: Thanks, Larry, and good morning, everyone. Please turn back to slide three of the presentation. For the quarter ended September 30th, Ellington Financial reported net income of $0.41 per share and core earnings of $0.46 per share. These results compared a net income of $0.75 per share and core earnings of $0.51 per share for the prior quarter. As a reminder, last quarter's core earnings reflected several small balance commercial mortgage loan resolutions. which included the payment of past due interest and recovery of previously paid expenses. Removing the idiosyncratic effects of those asset resolutions, our core earnings per share was roughly unchanged quarter over quarter and was actually slightly above the estimated core earnings run rate that we mentioned on last quarter's call. During the third quarter, we issued 6.3 million shares of common stock through a follow-on common stock offering in July, and we issued another 1.55 million shares of common stock through our at-the-market program. In total, we increased our equity by $141 million, or approximately 15%. Importantly, the proceeds from these issuances were fully invested by the end of the third quarter. Moving to slide four, you can see that we finished the third quarter with just over 80% of our deployed capital allocated to credit strategies and 19% allocated to our agency strategy, similar to how we were positioned last quarter. Our credit portfolio grew by 24% quarter-for-quarter, and I'll get into where that growth occurred shortly. Next, please turn back to slide five for the attribution of earnings between our credit and agency strategies. During the third quarter, the credit strategy generated total gross income of 66 cents per share, while the agency strategy generated gross income of 3 cents per share. These results compare to $1.25 per share in the credit strategy and a loss of $0.03 per share in the agency strategy in the prior quarter. We benefited from strong performance in most of our primary credit strategies during the third quarter. Our loan strategies, including non-QM, residential transition, small balance commercial mortgage, and consumer, generated high returns on equity, driven primarily by net interest income, while performance in the CMBS, CLO, and non-agency strategies, non-agency RMBS strategies were also excellent, driven primarily by net realized and unrealized gains. We also had successful resolutions on a couple of larger commercial mortgage NPLs, and subsequent to quarter end, we closed on the sale of one of the largest commercial real estate REOs in the portfolio at a significant profit. On the other hand, as Larry noted, Longridge Financial incurred a net loss for the quarter, driven by mark-to-market losses on its MSR portfolio, which negatively impacted Ellington Financial's results. In Agency RMBS, performance was mixed during the quarter. In July and early August, interest rates continued to fall and volatility increased, causing Agency RMBS to underperform Treasuries. Moving into the latter half of the quarter, interest rates began to increase and volatility declined, and toward the end of the quarter, agency yield spreads tightened as the market got more clarity on the Federal Reserve's tapering plan. Incrementally higher mortgage rates, particularly in September, led to reduced expectations for prepayment rates and boosted higher coupon RMBS, while the anticipated withdrawal of Fed purchases negatively impacted lower coupon RMBS. Net interest income on our agency portfolio, strong performance from our interest-only securities, and net gains on our higher coupon specified pools exceeded net losses on our lower coupon holdings and reverse mortgage portfolio. On the hedging side, net losses on TBA short positions, particularly on higher coupons, slightly exceeded net gains on interest rate swaps and U.S. Treasury hedges. Turning next to slide six, during the third quarter, our total long credit portfolio grew by 24% to $1.69 billion as we deployed proceeds from our July equity issuance. The vast majority of the growth occurred in the non-QM and residential transition loan strategies, which are both captured in the residential loan slice on this page. Our small balance commercial mortgage portfolio also grew, although opportunistic sales of CMBS, where we generated some significant gains, caused the overall commercial real estate slice to shrink sequentially. On slide seven, you can see that our long agency RMBS portfolio also increased during the quarter, by 4% to $1.54 billion as of September 30th. Turning to slide 8, our debt-to-equity ratio adjusted for unsettled purchases and sales decreased to 2.9 to 1 as of September 30th as compared to 3.2 to 1 as of June 30th as borrowings related to new purchases were partially offset by paydowns of non-recourse borrowings related to non-QM securitizations and as total equity increased. Our recourse debt-to-equity ratio, adjusted for unsettled purchases and sales, was unchanged at 1.9 to 1 as of September 30th, as borrowings related to new purchases increased roughly in proportion to total equity. Finally, our weighted average borrowing rate was just slightly higher at 1.27% as of September 30th, as compared to 1.24% at June 30th. For the third quarter, total G&A expenses declined by a penny to $0.16 per share, while other investment-related expenses were $0.06 per share as compared to $0.11 per share in the prior quarter, mainly due to non-QM securitization issuance costs that we incurred in the prior quarter but not in the third quarter. Also during the quarter, we recorded an incentive fee of $5.3 million as we exceeded our net income hurdle for the trailing four-quarter period. and we recorded an income tax benefit of $2 million, primarily due to a decrease in current and deferred tax liabilities related to the reduction and the unrealized gain on our investment in Long Bridge Financial. Finally, our book value per common share was $18.35 per share at September 30th, down slightly from $18.47 per share at June 30th, including the $0.45 per share of common dividends that we declared during the third quarter Our economic return for the third quarter was positive 1.8%. Now, over to Mark.
spk04: Thanks, JR. Q3 was interesting in that we saw a lot of interest rate volatility as the Treasury market seemed to grapple with the tension between the spread of the Delta variant and high inflation. In contrast, credit spreads were relatively calm. In the third quarter, we got a lot of clarity from the Fed about the pace of taper, and we now have further specifics on the plan based on the timeline discussed for last week's Fed meeting. Starting this month, the markets are entering a new phase of diminished Fed support. The Fed has gone out of its way to provide clarity about its plans, but that doesn't mean the taper is a non-event. growth in the Fed's agency MBS and Treasury portfolios has provided support for all financial markets by putting cash in the system. And during the taper period, which is expected to end next June, they will continue to put cash in the system, albeit at a slower pace. So we think that means over the course of 2022, we may see somewhat wider credit spreads and yields. So for EFC, those are welcome changes as wider spreads higher core earnings, plus we have dry powder to deploy from our capital raise in October. Already in September, and continuing into October, we have seen some spread widening. Spreads on investment-grade non-QM, CMBS, and CLOs have all widened in an orderly fashion. We've talked on previous calls about how loans had not compressed as much as security yields in the past year. Well, that has partially reversed since quarter end as spreads have widened so far into Q4. But this spread widening is not the result of any hiccups in credit performance. Rather, it's the result of a market demanding wider spreads because of an influx of new issues. The other thing we are paying close attention to is supply and demand and affordability trends in the housing market. Since COVID, the housing market has been appreciating at an incredible pace. If mortgage rates drift higher without robust wage growth, affordability may become an issue. So for EFC, we can't get complacent about the strength of the housing market. We will be monitoring it quite closely. Since quarter end, we have also seen lower loan prices in some sectors, which inevitably happens when securitization economics are squeezed by wider spreads and higher yields. I like the balance we have at EFC, achieved by owning both originators and securitization machines. When loan prices are high, like this quarter, EFC benefits through robust gains on sale. As loan prices come off and loan sale margins compress, that benefit accrues to the securitization business. We believe that by being more vertically integrated in the raw loan to security supply chain, EFC can thrive whether the economics favor the loan originator or the securitization sponsor. In fact, we've already made three additional equity investments in originators so far this year. We plan to use the same playbook with these new investments that we use successfully for LendSure. We make small investments so we don't have a lot of capital at risk. We secure loan volume for EFC and we look for situations where EFC's financial strength and Ellington's data science and industry relationship can give our partners a competitive advantage over peers that lack those resources. We also give new partners the benefit of our experience in growing origination platforms. Turning to third quarter results, overall credit performance for our portfolio is very strong. Consumer balance sheets remain in good shape, HPA has surprised to the upside, and a continued rebound in commercial real estate values and deal activity with solid performance in our commercial loan portfolio. Core earnings covered the dividend, and I think that's great given our increased capital base. You can see on slide six that we had significant growth in our credit portfolio. The residential mortgage strategies grew most significantly this quarter, driven by non-QM and RTL. The commercial real estate portfolio actually shrunk sequentially, but that was due to opportunistic CMBS sales. Nonetheless, our small-balance commercial mortgage holdings actually increased quarter over quarter, and we continue to see a lot of attractive deals in that sector. You can see on slide 9 that we have 95% of our credit portfolio in our three primary sectors, residential mortgage, commercial mortgage, and consumer. We also had modest growth in our agency MBS portfolio during the quarter. We are positioned to increase our net agency mortgage exposure should diminishing Fed support and year-end liquidity issues present us with opportunities. On slide 10, you can see that our small balance commercial mortgage loan portfolio We are well diversified across many dimensions and are in a first lien positions on every loan with the vast majority being floating rate loans that benefit from interest rate floors. We issued stock in Q3. It's great that our portfolio companies and other loan sourcing relationships have grown and matured to the point where it was relatively easy for us to deploy the additional capital. I've also been really happy to see the greater liquidity in our stock. Despite substantial portfolio growth this quarter with our growing capital base, we have a lot of room to take advantage of market opportunities. Consistent Fed purchases have been a great source of stability in 2021 as the Fed has grown its agency MBS portfolio by over $400 billion. As that support wanes, we think that private capital may be able to demand even more attractive yields. Now, back to Larry.
spk03: Thanks, Mark. I'm very pleased with Ellington Financial's performance so far in 2021, and particularly with the progress that we've made growing our origination businesses and loan portfolios. Following quarter end, we again accessed the capital markets to continue driving this growth. In October, we raised just over $100 million of common equity, again at a round-book value. We've already invested the majority of this new capital, but in addition to fueling continued loan portfolio growth, the additional capital should provide us with additional economies of scale in our portfolio, in the capital markets, and operationally. This additional capital also positions us to be opportunistic should we see any pockets of volatility around year-end, whether they be related to macro concerns around inflation or COVID, Fed tapering concerns, or even just typical year-end balance sheet pressures. So we're in a strong position to play offense as we move into the final weeks of the year. Meanwhile, we will continue to work on cultivating, expanding, and expanding our proprietary loan pipelines, while also being opportunistic with our security strategies and staying disciplined on risk and liquidity management to protect and preserve book value. Finally, I'd like to point out that with our latest capital raise, Ellington Financial has now passed the $1 billion mark in total common equity market capitalizations. That's a significant milestone for EFC, and it's one that we believe will further increase our visibility in the market, increase the liquidity of our stock for our stockholders, and enable us to access both the debt and equity capital markets more efficiently. In fact, if you look at our capital structure, you can see that at this point, we're especially well positioned to add debt or preferred equity to our balance sheet. In particular, our $86 million of senior unsecured notes will become freely refinanceable on March 1st. And with the additional equity on our balance sheet following our recent stock issuances, that could be a good time to both lower the cost of and increase the size of our outstanding unsecured debt, thereby leveraging up our balance sheet and helping drive core earnings higher still. With that, we'll now open the call to questions. Operator?
spk01: At this time, if you'd like to ask a question, please press star one on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question, and we will take our first question from Doug Harder with Credit Suisse.
spk00: Thanks. Hoping you could talk a little bit more about the three investments you made in originators. What type of products do they make? And, you know, I guess, how would you think about that adding to the pipeline of loan opportunities?
spk03: Yeah, we're, you know, we're not going to provide any additional color on that. Other ventures say that they are all in the residential area. We are working on at least one of the commercial areas as well now. But, yeah, those are just all in the residential area. And they're, as we said, they're small investments, and it's probably going to be a little while before you see, you know, very meaningful growth to portfolios. But, you know, markets like non-QM and, you know, a little bit of everything in the residential space.
spk00: Okay. And then you mentioned some of the spread widening and securitizations. Can you just, given that, can you just talk about kind of where you see returns and how the execution of a securitization, you know, where that moves returns today?
spk04: Sure. It's Mark. So you saw just a tremendous amount of supply in a lot of sectors in October. You had a lot of Mortgage 2.0 supply, some of that non-QM, some of that agency-eligible investor deals. You saw a lot of CLO supply. You saw a lot of CMBS supply. And so you've seen a little bit of widening in investment-grade bonds. And now I think that's being matched by slightly lower loan prices. So when I net the two together, I don't see a big – difference in securitization economics. Other than that, it means, you know, with lower loan prices, we're retaining less prepayment risk, which I think is generally a good thing.
spk00: Great. Thank you.
spk01: We'll go next to Crispin Love with Piper Sandler.
spk12: Thanks. Thanks. Good morning, and thanks for taking my questions. First, looking at slide nine with the credit portfolio breakout, I can't recall a time where the residential portfolio was near the 64% level that you are now. So is that largely due to the opportunities you're seeing in non-QM and RTL and the flow you're getting? Or are you at all incrementally more negative on the commercial mortgage market? And also in the presentation, it looks like you might have increased your CMBX hedging a little bit. So just a little color there would be great.
spk02: Sure. Hey, Crispin. It's JR. Yeah, I think the first thing you suggested is spot on. Namely, it's driven by a larger non-QM portfolio, quarter to quarter. I mean, just to put some numbers on it, at September 30th, our non-QM portfolio was about $585 million of the around $1.7 billion of the credit portfolio, so about 35%. whereas at June 30th, those numbers were about 300 million and 22%. So by far the biggest driver there is non-QM followed by residential transition loans. Larry mentioned that those two strategies were record quarters for Ellington Financial in terms of origination volume. So that's directly reflected on this pie chart. I would say that the point about commercial mortgages, we're definitely, and Larry mentioned it as well in his prepared remarks, we're definitely seeing growth there. The slide also has CMBS, where we had opportunistic sales. So you have some offsetting sales and paydowns, offsetting growth in the small-balance commercial mortgage sector. So I would say we are very excited about the loans we're seeing in commercial real estate. We would expect to see continued portfolio growth there as well.
spk12: Okay, thanks, JR. And then did you also mention that Lensure is looking at adding some additional products in addition to non-QM? And is there any color that you could give there? Or would you expect to get flow from the new products as well, should they happen?
spk04: Sure. It's Mark. So I think there is a lot Lensure can do. senior management team is extremely experienced and extremely thoughtful about mortgage credit. So, you know, there could come a time where they start getting involved in the RTL space. They have been having a lot of internal discussions and are starting to lay the groundwork to potentially get involved in the prime jumbo space. So I would say those two sectors, I think now, are the ones that are closest to actually them starting to originate loans. We've liked non-QM. It's played well to us because you don't have much of a bank presence there. There is an IO component to it that you have to value. sort of we have core expertise at, have sort of meshed nicely with non-QM, so that's why that's been the initial focus.
spk12: Okay, and then just one quick clarifying question on the originator stakes. Did you disclose one more than you did last quarter? I think last quarter you said that you added two, and then I saw the commentary, okay, you've added, I believe it's three in the last six months. So is there one additional one or all three new?
spk02: No, you're right. It's one additional one during the third quarter, and so it's three in total the last six months, but one incremental in Q3. And then we have several others that are, I would say, in discussion that we're hoping to close by year end.
spk12: Great, thank you.
spk02: Thank you.
spk01: We'll go next to Brock Randolph with UBS.
spk10: Hey, good morning. Could you just talk generally about competitive dynamics in resi-transition and non-QM as well? Are you seeing other much larger organizations take another step? look at those sectors, look to move in and broaden the market. And if and when that happens, do you look at that as any sort of a competitive threat to your program or kind of a rising tide where it just boosts the profile of these loan niches?
spk04: Hey, Brock. It's Mark. So I would say in the RTL space, That has been more of a focus there. It's gotten sort of more publicity in the past year than what it has had in the past. In that space, I do think there are some larger pools of capital focused on that space, but it's a very fragmented space, and the way we do it is really dependent upon thoughtful underwriting of the projects, and really understanding the local housing market. So I don't see it as a threat. You know, Larry mentioned his prepared comments that we think that can be a lot of growth for us over the long run. You know, the median age of homes in this country is very old. There is a lot of deferred maintenance that needs to get done. So I think we have, you know, ample opportunities to grow our volumes there. But I do, you know, just from what I read, I do think there has been a little bit more focused on that sector from some large pools of capital than what you might have seen, say, pre-COVID, say, 2019. Got it.
spk10: Okay. And just rotating over to Longbridge and the MSR, looking at the yield curve now, it seems like the pain trade may be on here in terms of lower rates and a flattening. Any changes contemplated in terms of their hedging methodology, those sorts of things?
spk03: No. Hey, it's Larry. No expected changes in terms of hedging methodology. It's a little different from the forward MSR market where it's so tied just to the absolute level of mortgage rates, you know, in comparison. to the outstanding stock of mortgages. Here, yes, rates have sort of been low, but it wasn't low rates alone that was the trigger. It was also, you know, combined with just continued home price appreciation, and then you've got a bunch of borrowers who can take advantage of that, you know, by borrowing more against, you know, their homes. Basically, it's a cash-out situation. where they can replace their old loan with just a bigger loan. So that aspect really isn't all that hedgeable. And the other aspect that's also not that hedgeable is that there's really no TBA market where you could sell HMBS forward. But I think the good news is that we do believe that this is behind us You know, HMBS prices are about as low as they've been in a while, or they were about as low as they were in a while when, you know, this write-down took place. And so I think that, you know, I certainly think that when you look at the fact that originations continue to be incredibly strong and their market share continues to grow, we just, you know, feel great about that company's prospects.
spk10: Okay. Thanks for taking my questions. Thank you.
spk01: We'll go next to Bose George of KBW.
spk09: Hey, guys. Good morning. Actually, just maybe one more on Longbridge. You know, just in terms of the, I guess, the positive side of all the home price appreciation, et cetera, you know, can you just talk about, you know, gain on sale trends in the reverse business? Sort of how are some of those fundamentals trending?
spk03: Yeah, sure. The, you know, the Longbridge itself, really, you know, we don't believe has that much exposure from a credit perspective, right? Because these are FHA guaranteed mortgages, ultimately, that they're originating. So, yeah, so in terms of gain on sale, right, the biggest headwind there, right, was just that They had loans in the pipeline, right, that were committed to, and in some cases already closed on. It takes a little while to sell those in the form of HMBS. And so, you know, the gain on sale was just a lot lower. And in some cases on some loans, negative, after the HMBS market had, you know, that spread widening event. So, you know, again, that was sort of once that loans that were either already closed or in the pipeline, once those were flushed out of the system, you know, now we've seen profit margins come back and, you know, there is elasticity in the market because, you know, where they're originating loans and buying loans, you know, there's, especially in the wholesale market, there's definitely elasticity there. So they've been able to cut their prices that they're buying loans out in the wholesale market. and, you know, and therefore restore most of the gain-on-sale profitability per unit that they had previously. So, you know, again, October was nicely profitable, again, very profitable, and we, you know, think that origination volumes should continue to be very strong. As you probably know, It's a market that there's just not that many players in, and Longbridge is one of the most significant, obviously, as we said, number three HMES issuer. So, yeah, we really feel good about the gain on sale prospects going forward.
spk09: Okay. And the spread widening that you saw there, I mean, was that caused by the pickup and prepayments, or was that the main driver?
spk03: Yes.
spk09: Okay. Okay. Great, thanks. And then actually just switching over to the capital and operating companies, you know, can you just talk about, you know, the incremental allocation? Is there, you know, kind of a level of allocation that, you know, where we could think this could go as you, you know, you're obviously continuing to sort of invest in new operating companies?
spk03: Yeah, I don't think, you know, we're going to continue to take the opportunities as they, you know, present themselves. And as we find them, we have been Definitely proactively looking at, you know, sometimes it'll be, for example, an originator that we're buying loans from, and then we'll, you know, after seeing the quality of their business, we'll then approach them, you know, to see if they're interested in selling us a stake. And obviously, as we said, we give them lots of things in return. Sometimes we give them additional credit lines, you know, the data. and analytics that Mark mentioned before. So we don't really have a budget in terms of how big we want this portfolio to grow. We're certainly able to have substantial growth and still meet the retests. As you probably know, the TRS test is measured on a gross asset basis. We have plenty of growth there. As Mark said, we focused more on smaller investments initially. I mean, just to give an example, Lensure original investment was under $5 million, right? And now that's obviously worth a lot more. So we would rather make these investments and not have as much capital at risk just based upon overall cyclical changes in the origination business. we'd rather have less at stake there. And, you know, obviously if we can symbiotically increase their origination and our flows, you know, that just works for everyone. And that's an important, obviously been a very important component, as you can see with Lensure in terms of, you know, what the way we've been able to grow our loan portfolios.
spk09: Okay, great. Thanks.
spk01: We'll go next to Trevor Pranston, JMP Securities.
spk08: Hey, thanks. Question on the couple of the recent changes we've seen from the FHFA, specifically in terms of bringing back CRT issuance and, you know, removing the caps on the GSE investor loan purchases. I'm just curious if you guys have any thoughts on, you know, how you know, bringing back CRT and potentially reducing some of the private label issuance of the investor loans, you know, impacts the overall supply-demand dynamics of the resi credit sector.
spk04: That's a great question, Trevor. So, it's Mark. So, I would say for the caps on the investor loans, I don't think that's going to have a big impact on private label issuance in that sector. Because private label issuance in that sector right now is being driven by, it's just economically better for, it's just better economically to issue in the private label market if people are willing to, if you have private capital willing to underwrite the credit risk, your level's better than what the GSEs have done, and if you have private capital willing to take some of the aggregation risk. So I think you're going to continue to see private capital involved in the agency eligible sector. In regards to CRT, I guess we sort of viewed that pause as what was the aberration and not so much the restarting of it. You know, I think CRTs has been an important way for the GSEs to mitigate shareholder risk on the guarantee fee business. So we think, you know, we think that'll, you know, that'll continue. You know, the one thing I would say that you have these changes now in leadership at FHFA, so we wouldn't be surprised at all to see additional changes. And, you know, there's a lot that can be done with the GSEs to promote some of the goals of, you know, more affordable housing, more first-time homeowners. And there's obviously been challenges to that from some business lines that are out there now. There's been some people that have been critical about the single-family rental business, that it squeezes out first-time homebuyers. And so, you know, I think you're going to see dynamic policy changes going forward. Okay.
spk08: That's helpful, Colin. Thank you, guys.
spk01: We'll go next to Eric Hagan with BPIG.
spk05: Hey, thanks. Good morning. Maybe just one. How sensitive do you guys expect the cost of repo and the credit segment might be to changes at the short end of the yield curve, including the haircut that gets applied on that collateral? And can you remind us of the collateral which is pledged there right now? Thanks.
spk04: Yeah. Hey, Mark.
spk05: Go ahead, Mark.
spk04: Go ahead. So I would say we don't anticipate significant changes in haircuts, and that's because you've had stable credit performance and you've had relatively stable asset prices increases in haircuts are normally a consequence of either weakness in performance and or, you know, weakness in asset prices. Yeah, we think that the changes in repo costs, we think they're going to track what the Fed is going to do on the short end. You know, one thing we've done on the agency side of the portfolio where you have a little bit more dynamic financing market is we have... extended the term of our repo because we thought it was advantageous. So we've done, you know, some one-year repo. And we think that the one-year repo rates are certainly going to go up because now that's sort of spilling into close to a period of time where people think the Fed could be active. So in terms of net interest margin, you know, if you have assets priced off the front end of the curve, like a lot of the non-QM loans or floating rate assets, like a lot of the commercial bridge loans, I think our net interest margins are going to hold up very well because we don't expect a change in repo spreads or a change in haircut. But I do think just the overall, you know, levels of LIBOR are going to affect our financing costs.
spk03: And I just, just to add to what Mark said. So I think if you look at agency repo, the haircuts there historically, I mean, they've been incredibly steady and resilient really since the financial crisis, I would say, you know, the 2008 financial crisis. So, um, you know, right around for customers like us, you know, right around in that five to 6% area. And frankly, that's plenty of leverage, you know, being able to lever 16, 20 times five or 6% haircut, uh, is, um, is, is plenty of leverage. Uh, so, um, We certainly don't see, you know, let's say if rates go up or something like that because of a taper or, you know, the end of easing or whatever you want to call it, it's, you know, I don't think you're going to see a significant increase in agency haircuts at all. And in terms of spreads, those really have tracked, again, other than in certain extreme situations like COVID, those really have tracked very closely just the, um, you know, the general collateral treasury, so for market, um, now you'd call it. So, um, obviously a few basis points here or there, um, it, it can move, but if you look, it certainly, certainly in recent times, and I think we, in our, uh, Ellison residential deck, we actually have a slide on that in terms of just, uh, you know, repo costs and things like that. But, um, it's, uh, You know, it's a very close tracking. Now, I think where it gets interesting is in the credit sector, right? Because we also, we have repo not just in agency mortgages, but we also have them in non-agency RMBS and in all the other products that we invest in, including loans, right? Some of our loans are actually financed via repo. And there, when you look at the haircuts and spreads, you know, you've seen nothing but compression. And I think the pattern there is that You'll have an event in the market like COVID in early 2020. And then in response to that, right, that's a liquidity crisis. You're going to see haircuts go up immediately. You're going to see yield spreads go up on the assets themselves. You're also going to see financing spreads go up. So that happened. And then the asset always seems to lead the financing historically. I think that's been the pattern really both ways. You know, since then, obviously in the last year and a half, you've seen haircuts steadily come down. You've seen spreads steadily come down. They haven't come down as fast as the asset yields have come down. But I think the trend is still in that direction. So we're certainly hopeful that we'll continue to see, and I believe you will continue to see, spreads on the credit, you know, the credit assets on their repo continue to compress. And haircuts, you know, maybe compress a little bit from here.
spk05: Thanks a lot. Appreciate it.
spk03: Thank you. Thank you, Eric.
spk01: That was our final question for today. We thank you for participating in the Ellington Financial Third Quarter 2021 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.
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