Longbridge’s parent company reports softer profits in the third quarter of 2024
Ellington financialthe parent company of the top five reverse mortgage lenders and servicers Longbridge financialsaw its net income attributable to common shareholders decline to $16.2 million in the third quarter of 2024 – down from $52.3 million in the second quarter – but company executives said the proprietary reverse mortgage product line offered by Longbridge continues to show strength.
Ellington presented its third-quarter earnings results Thursday during a conference call after the market closed. The company saw an increase in adjusted distributable earnings (ADE), which it attributed to Longbridge’s own programs.
Longbridge has offered its “Platinum” line of proprietary reverse mortgages with credit limits that exceed Federal Housing Administration (FHA) has had a Home Equity Conversion Mortgage (HECM) program for years. Laurence Penn, CEO of Ellington, noted that the lender’s ADE contribution has increased steadily each quarter through 2024.
Longbridge Performance
Longbridge had a net loss attributable to common shareholders of $2.5 million in the third quarter of 2024, largely offsetting a $4.5 million profit in the second quarter. This was “driven by net losses on interest rate hedges, partially offset by positive new production activity results,” the company explained.
“We had a mark-to-market gain on our HMBS MSR equivalent, but these gains were tempered by wider HMBS yield spreads, resulting in a net loss on this position after taking into account the net losses on the interest rate hedges we have closed. stand against this position,” it explained in a statement.
Wider yield differentials on the HMBS impact the value of the HMBS mortgages because they reduce the expected servicing income that “arises from the right to finance and securitize future borrowings.” The segment also recorded declines in HECM production margins, which were also driven by wider yield differentials on HMBS.
But the lender’s own reverse originations saw net gains from securitization work in July, in addition to “better origination margins and higher volumes, [leading] to strong gains in that product line,” the company explains.
“Our Longbridge segment represents approximately 12% of our equity allocation, so it’s great to see that ADE has steadily improved in that segment,” Penn said on the earnings call. “I have consistently emphasized that our Longbridge segment offers significant untapped potential for Ellington Financial. Even if Longbridge’s ADE can stabilize around $0.09 per share per quarter, we should be in great shape from a dividend coverage perspective.”
Net loss, with a catch
Ellington Chief Financial Officer JR Herlihy elaborated on Longbridge’s quarterly results, saying the company delivered “strong results and good results” despite posting a GAAP net loss of $0.03 per share in the third quarter . But that loss must be qualified, he added.
“This net loss was driven by interest rate hedging as interest rates declined during the quarter,” Herlihy said. “We had a mark-to-market gain on our HMBS MSR equivalent, but these gains were tempered by wider HMBS yield spreads, meaning the gains did not keep pace with the net losses on interest rate hedges we maintain on this position. ”
While there was a decline in HECM production margins due to wider HMBS yield differentials, this was “partially offset” by higher volumes, he added. But he reiterated the strong profit contribution from the lender’s own reverse mortgage products.
“Overall, production volumes at Longbridge increased by 16.5%, even as industry-wide volumes fell overall this quarter,” Herlihy said. “Notably, Longbridge contributed $0.12 per ADE share in the third quarter, driven by the strong quarter of proprietary reverse.”
