Ellington Financial Inc
For the period ended Jun 30, 2024. Filed Aug 9, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 9, 2024
EFC$11.26-2.0%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-10.
0001411342-24-000053
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-09.
0001411342-24-000078
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 312 previous paragraphs and 364 current paragraphs.
204 unchanged; 91 reworded; 35 added; 13 removed; 4 previous and 34 current paragraphs rearranged.
Tables are not compared: 30 previous and 39 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (35)
Current report
•The U.S. Federal Reserve, or the "Federal Reserve," maintained its target range for the federal funds rate of 5.25%–5.50% at both its April/May and June 2024 meetings. In its June press release, the Federal Reserve observed that "there has been some further progress toward the Committee's 2 percent inflation objective," but also noted that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." The Summary of Economic Projections released by the Federal Reserve in June implied just one interest rate cut by the end of 2024, as compared to three cuts in the previously released projections in March.
Current report
In addition, as announced in May and implemented in June, the Federal Reserve slowed the pace of decline of its securities holdings by reducing the monthly reinvestment cap on U.S. Treasury securities from $60 billion to $25 billion (meaning the Federal Reserve will reinvest principal payments that exceed $25 billion per month, rather than $60 billion per month), while maintaining the monthly cap of $35 billion on Agency RMBS.
Current report
•After rising in the prior quarter, interest rates continued to increase in April, with the yield on the 2-year U.S. Treasury increasing by 42 basis points and the 10-year U.S. Treasury up 48 basis points on the month. Interest rates then declined for much of May and June, but finished up slightly overall for the quarter—the yield on the 2-year U.S. Treasury increased by 13 basis points quarter over quarter to 4.75%, while the yield on the 10-year U.S. Treasury increased by 20 basis points to 4.40%. Meanwhile, interest rate volatility, as measured by the MOVE index, increased in mid-April before declining over the remainder of the second quarter.
Current report
Realtors Housing Affordability Index declined by an additional 8.9% year-to-date through May 2024, as high mortgage rates and elevated home prices continued to stress housing affordability.
Current report
Strong net interest income and net gains from non-QM loans, retained non-QM RMBS, non-Agency RMBS, and commercial mortgage loans drove the positive results in the credit strategy in the second quarter. We also benefited from mark-to-market gains on our equity investments in the loan originators LendSure and American Heritage Lending, which reflected strong performance at those originators driven by increased origination volumes and strong gain-on-sale margins. With interest rates slightly higher quarter over quarter, we also had net gains on our interest rate hedges. Offsetting a portion of all these gains was a modest net loss in NPL/RPL pools.
Current report
The table(1)(2) below summarizes our interests in commercial mortgage loans by payment status of the loan as of June 30, 2024:
Current report
(2)As discussed in Note 2 and Note 5 of the Notes to Condensed Consolidated Financial Statements, commercial loans that are 90 days or more delinquent are considered non-performing.
Current report
As discussed in Note 16 of the notes to our condensed consolidated financial statements, we have investments in participation certificates related to consumer loans, collateralized by automobile loans, titled in the name of a related party of Ellington. Through these participation certificates, we have beneficial interests in the loan cash flows, which are net of servicing-related fees and expenses including a deferred performance-based fee to the loan originator, in which we have a non-controlling equity interest. The total fair value of these participation certificates, which is included in Securities, at fair value on the Condensed Consolidated Balance Sheet, was $68.9 million as of June 30, 2024. The table below provides additional information about the automobile loans underlying these participation certificates, which comprise our investments in ABS backed by consumer loans, as of June 30, 2024:
Current report
(1)Fair value excludes accrued deferred performance-based fees to loan originator of $0.1 million.
Current report
(2)Excludes charged-off consumer loans with an aggregate unpaid principal balance and fair value of $71.8 million and $1.4 million, respectively, for which the Company has determined that it is probable the servicer will be able to collect principal and interest. See Note 5 of the Notes to Condensed Consolidated Financial Statements for additional details on charged-off consumer loans.
Current report
In April, interest rates and volatility increased over renewed concerns about inflation and a more hawkish Federal Reserve, which pushed Agency RMBS yield spreads wider. In May and June, however, interest rates and volatility generally declined, and Agency RMBS yield spreads reversed most of their April widening. Overall for the second quarter, the U.S. Agency MBS Index generated a negative excess return of (0.09)%. Nevertheless, our Agency RMBS strategy generated positive results for the quarter, as net gains on interest rate hedges and net interest income exceeded net losses on Agency RMBS.
Current report
Total interest expense in our investment portfolio segment decreased to $53.6 million for the three-month period ended June 30, 2024, as compared to $54.2 million for the three-month period ended June 30, 2023. The decrease in interest expense was primarily the result of a decline in average secured borrowings on our credit and Agency RMBS assets, partially offset by an increase in financing rates.
Current report
For the three-month period ended June 30, 2024, other income (loss) was $27.6 million, consisting primarily of net realized and unrealized gains of $14.5 million on our securities and loans, $12.5 million on our financial derivatives, and $2.6 million of Other, net. These gains were partially offset by net unrealized losses of $(1.0) million on real estate owned, net and $(1.0) million on our Other secured borrowings, at fair value. Net realized and unrealized gains of $14.5 million on our securities and loans were primarily on non-QM loans, commercial mortgage loans, and non-Agency RMBS. These gains were partially offset by net realized and unrealized losses on non-Agency CMBS and Agency RMBS. Net realized and unrealized gains of $12.5 million on our financial derivatives were primarily related to net realized and unrealized gains, driven by higher interest rates, on our interest rate swaps, and to a lesser extent, our TBAs and our short positions in U.S. Treasury futures. Other, net of $2.6 million consisted primarily of various origination and loan income, rental income, and income and net realized and unrealized gains on our Forward MSR-related investment. We recognized net unrealized losses of $(1.0) million on our Other secured borrowings, at fair value for the three-month period ended June 30, 2024, related to borrowings on our securitized non-QM loans. These securitized non-QM loans had net unrealized gains of $6.0 million, which are included in Unrealized gains (losses) on securities and loans, net.
Current report
For the three-month period ended June 30, 2023, other income (loss) was $13.4 million, consisting primarily of net realized and unrealized gains on our financial derivatives of $32.5 million and net unrealized gains of $12.2 million on our Other secured borrowings, at fair value, partially offset by net realized and unrealized losses on our securities and loans of $(32.9) million. Net realized and unrealized gains of $32.5 million on our financial derivatives were primarily related to net gains on interest rate swaps, short positions in TBAs, and futures, driven by higher interest rates. We recognized net unrealized gains of $12.2 million on our Other secured borrowings, at fair value for the three-month period ended June 30, 2023, related to borrowings on our securitized non-QM loans. These securitized non-QM loans had net unrealized losses of $(10.5) million, which are included in Unrealized gains (losses) on securities and loans, net. The gains on our financial derivatives and Other secured borrowings, at fair value, were partially offset by net realized and unrealized losses of $(32.9) million on our securities and loans, which primarily related to our non-QM loans and Agency RMBS. Such losses were partially offset by net realized and unrealized gains on our commercial mortgage loans.
Current report
For the three-month period ended June 30, 2024, other income (loss) from the Longbridge segment was $29.9 million, consisting primarily of gains from Net change from HECM reverse mortgage loans, at fair value of $146.7 million, other income of $5.1 million, net realized and unrealized gains of $3.5 million on financial derivatives and $2.8 million on securities and loans. These gains were partially offset by Net change related to HMBS obligations, at fair value of $(127.7) million and net unrealized losses of $(0.5) million on Other Secured borrowings, at fair value. Gains from Net change from HECM reverse mortgage loans at fair value of $146.7 million primarily consisted of interest income on HECM loans of $144.9 million, net realized and unrealized gains on HECM loans of $8.5 million, and net realized and unrealized losses on the HMBS MSR Equivalent of $(6.7) million. The net realized and unrealized gains on the HECM loans were primarily driven by tighter yield spreads on seasoned HECM loans quarter over quarter. The losses on HMBS MSR Equivalent were driven by higher interest rates and runoff during the quarter. Other income, included in Other, net of $5.1 million, is primarily related to servicing fees of $2.0 million, origination fees of $2.2 million, and a net gain of $1.7 million on loan commitments, which is partially offset by net realized and unrealized losses on MSRs of $(0.4) million. Losses from Net change related to HMBS obligations, at fair value of $(127.7) million primarily consisted of interest expense on the HMBS obligations of $(136.4) million and net unrealized gains on the HMBS obligations of $8.8 million, which partially offset the interest income on HECM loans and net realized and unrealized gains on HECM loans.
Current report
For the three-month period ended June 30, 2023, other income (loss) from the Longbridge segment was $30.6 million, consisting primarily of gains from Net change from HECM reverse mortgage loans, at fair value of $32.1 million and realized and unrealized gains on financial derivatives and loans of $14.0 million and $4.1 million, respectively. Such gains were partially offset by Net change related to HMBS obligations, at fair value of $(24.6) million.
Current report
For the three-month period ended June 30, 2024, other income (loss) was $0.1 million, consisting primarily of a net gain on our Unsecured borrowings, at fair value, driven by the increase in interest rates. This gain was mostly offset by net losses on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt and our preferred equity, also driven by the increase in interest rates. For the three-month period ended June 30, 2023, other income (loss) was $(9.3) million, consisting of net realized and unrealized losses on interest rate swaps related to our outstanding unsecured borrowings and preferred stock.
Current report
Income tax expense (benefit) was $0.1 million for each of the three-month periods ended June 30, 2024 and 2023, respectively.
Current report
For the six-month period ended June 30, 2024 we had net income (loss) attributable to common stockholders of $79.3 million, compared to $41.8 million for the six-month period ended June 30, 2023. The increase in our results of operations was primarily due to increases in total other income and net interest income, along with earnings from investments in unconsolidated entities in the current period, as compared to losses from investments in unconsolidated entities in the prior period.
Current report
Interest Income
Current report
Interest income from our investment portfolio segment for the six-month period ended June 30, 2024 increased to $180.2 million, as compared to $165.5 million for the six-month period ended June 30, 2023.
Current report
For the six-month period ended June 30, 2024, interest income from our credit portfolio was $158.9 million, as compared to $143.5 million for the six-month period ended June 30, 2023. This period-over-period increase was due to higher average asset yields and the slightly larger size of the credit portfolio for the six-month period ended June 30, 2024.
Current report
For the six-month periods ended June 30, 2024 and 2023, interest income from our Agency RMBS was $13.9 million and $14.9 million, respectively. This period-over-period decrease was due to the smaller size of the Agency portfolio partially offset by higher average asset yields for the six-month period ended June 30, 2024.
Current report
For the six-month periods ended June 30, 2024 and 2023, interest income not allocated to either the investment portfolio segment or Longbridge segment was $3.8 million and $3.1 million, respectively.
Current report
Interest Expense
Current report
The table below summarizes the components of interest expense in our Investment Portfolio for the six-month periods ended June 30, 2024 and 2023.
Current report
Other Investment Related Expenses
Current report
For the six-month periods ended June 30, 2024 and 2023, Other investment related expenses in our investment portfolio segment were $6.3 million and $4.4 million, respectively. The increase in other investment related expenses was primarily due to an increase in servicing expense on our residential mortgage loan portfolio, and various loan origination expenses related to our residential mortgage loan portfolio.
Current report
Other Operating Expenses
Current report
For the six-month periods ended June 30, 2024 and 2023, other operating expenses not allocated to either the investment portfolio segment or the Longbridge segment were $10.7 million and $12.0 million, respectively. The period-over-period decline in other operating expenses was primarily due to lower professional fees, which were partially offset by higher compensation and benefits expense.
Current report
Other Income (Loss)
Current report
For the six-month period ended June 30, 2023, other income (loss) from the Longbridge segment was $64.0 million, consisting primarily of gains from Net change from HECM reverse mortgage loans, at fair value of $195.2 million and net realized and unrealized gains of $9.7 million on loans and $9.4 million on financial derivatives. These gains were partially offset by Net change related to HMBS obligations, at fair value of $(156.1) million.
Current report
Income Tax Expense (Benefit)
Current report
Income tax expense (benefit) was $0.2 million for the six-month period ended June 30, 2024, as compared to $0.1 million for the six-month period ended June 30, 2023.
Current report
Earnings (losses) from investments in unconsolidated entities of $(2.4) million for the six-month period ended June 30, 2023 primarily includes unrealized losses on investments in loan originators, partially offset by unrealized gains on investments in risk retention vehicles holding tranches of non-consolidated Ellington-sponsored non-QM securitizations in which we have participated.
Removed paragraphs (13)
Previous report
•After a dovish shift at its final meeting of 2023, the U.S. Federal Reserve, or the "Federal Reserve," maintained its target range for the federal funds rate of 5.25%–5.50% at its January and March 2024 meetings. At a press conference following the March meeting, Chair Powell stated that "if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," while also acknowledging that "the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably down toward 2 percent." In addition, the Federal Reserve continued to reinvest only principal payments that exceeded monthly caps of $60 billion on U.S. Treasury securities and $35 billion on Agency RMBS.
Previous report
•After falling sharply in the prior quarter, interest rates reversed course and rose in the first quarter of 2024 as market expectations for the timing of Federal Reserve rate cuts were pushed to later in the year. Overall, the yield on the 2-year Treasury increased by 37 basis points quarter over quarter to 4.62%, while the yield on the 10-year Treasury increased by 32 basis points to 4.20%. Meanwhile, interest rate volatility declined during the first quarter, with the MOVE Index at quarter end reaching its lowest level in two years.
Previous report
Strong net interest income and net gains on non-Agency RMBS, interest rate hedges, and investments in loan originators drove the positive results in the credit strategy in the first quarter. These gains were partially offset by net losses on credit hedges, negative operating income on certain commercial non-performing mortgage loans and REO, and net losses on residential REO liquidations. We also had a net loss on the Great Ajax common shares we had purchased in connection with last year's terminated merger, which was partially offset by a net gain on the fixed payer interest rate swap hedges we hold against those shares.
Previous report
Despite lower interest rate volatility during the quarter, Agency RMBS lagged a broader rally in credit as market consensus for the timing of the first Federal Reserve rate cut was pushed back. This drove interest rates higher across the yield curve and pressured yield spreads on Agency RMBS, particularly in February and particularly for lower coupons. While Agency yield spreads did recover meaningfully in March, driven by lower volatility and capital inflows, overall for the quarter Agency RMBS generated a modestly negative excess return to U.S. Treasuries. Despite the negative excess return, our Agency portfolio was profitable for the quarter, as net gains on our interest rate hedges exceeded net realized and unrealized losses on our pools and negative net interest income.
Previous report
(1)See Note 16 of the notes to the condensed consolidated financial statements for further details on management fee rebates.
Previous report
(1)See Note 16 of the notes to the condensed consolidated financial statements for further details on management fee rebates.
Previous report
(1)Amount includes the related net accretion and amortization of purchase discounts and premiums.
Previous report
(1)Amount includes the related net accretion and amortization of purchase discounts and premiums.
Previous report
Base Management Fees
Previous report
Incentive Fees
Previous report
For both the three-month periods ended March 31, 2024 and 2023, other investment related expenses were entirely allocated to our investment portfolio or Longbridge segments.
Previous report
For the three-month period ended March 31, 2023, other income (loss) from Longbridge was $33.4 million, consisting primarily of gains from Net change from HECM reverse mortgage loans, at fair value of $163.1 million, which were partially offset by Net change related to HMBS obligations, at fair value of $(131.5) million.
Previous report
Income tax expense (benefit) was $61 thousand for the three-month period ended March 31, 2024, as compared to $21 thousand for the three-month period ended March 31, 2023.
Reworded paragraphs (91)
Previous wording
Forward-looking statements are based on our beliefs, assumptions, and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our securities or our investments; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities owned by us for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity; increased rates of default and/or decreased recovery rates on our assets; our ability to borrow to finance our assets and the available terms for such borrowings; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; our ability to achieve cost savings and efficiencies, operating efficiencies, synergies and other benefits, including the increased scale, and avoid potential business disruption from our completed merger with Arlington Asset Investment Corp.; our ability to maintain our qualification as a real estate investment trust, or "REIT"; and risks associated with investing in real estate assets, including changes in business conditions and the general economy such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2023, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Current wording
Forward-looking statements are based on our beliefs, assumptions, and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our securities or our investments; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities owned by us for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity; increased rates of default and/or decreased recovery rates on our assets; our ability to borrow to finance our assets and the available terms for such borrowings; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; our ability to maintain our qualification as a real estate investment trust, or "REIT"; and risks associated with investing in real estate assets, including changes in business conditions and the general economy such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of our Quarterly Report on Form 10-Q for the three-month period ended March 31, 2024, as well as our Annual Report on Form 10-K for the year ended December 31, 2023, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Previous wording
We conduct all of our operations and business activities through the Operating Partnership. As of March 31, 2024, we had an ownership interest of approximately 99.3% in the Operating Partnership. The remaining ownership interest of approximately 0.7% in the Operating Partnership represents the interests in the Operating Partnership that are owned by an affiliate of our Manager, our current and certain former directors, and certain current and former Ellington employees and their related parties, and is reflected in our financial statements as a non-controlling interest. We are externally managed and advised by our
Current wording
We conduct all of our operations and business activities through the Operating Partnership. As of June 30, 2024, we had an ownership interest of approximately 99.2% in the Operating Partnership. The remaining ownership interest of approximately 0.8% in the Operating Partnership represents the interests in the Operating Partnership that are owned by an affiliate of our Manager, our current and certain former directors, and certain current and former Ellington employees and their related parties, and is reflected in our financial statements as a non-controlling interest. We are externally managed and advised by our Manager, an affiliate of Ellington. Ellington is a registered investment adviser with a 29-year history of investing in the Agency and credit markets.
Previous wording
The majority of CMBS utilize senior/subordinate structures, similar to those found in non-Agency RMBS. Subordination levels vary so as to provide for one or more AAA credit ratings on the most senior classes, with less senior securities rated investment grade and non-investment grade, including a first loss component which is typically unrated. This first loss component is commonly referred to as the "B-piece," which is the most subordinated (and therefore highest yielding and riskiest) tranche of a CMBS securitization. Much of our focus within the CMBS sector has been on B-pieces, but we also acquire other CMBS with more senior credit priority.
Current wording
The majority of CMBS utilize senior/subordinate structures, similar to those found in non-Agency RMBS. Subordination levels vary so as to provide for one or more AAA credit ratings on the most senior classes, with less senior securities rated investment grade and non-investment grade, including a first loss component which is typically unrated. This first loss component is commonly referred to as the "B-piece," which is the most subordinated (and therefore highest yielding and riskiest) tranche of a CMBS securitization. We acquire investment grade, non-investment grade, and non-rated CMBS. Our target assets also include single-asset single-borrower CMBS, or "SASB CMBS." SASB CMBS can be collateralized by single properties or by a portfolio of properties.
Previous wording
•Secured Overnight Financing Rates, or “SOFR” rates, declined modestly in the first quarter. One- and three- month SOFR rates both declined by 3 basis points, to 5.33% and 5.30%, respectively, at quarter end. SOFR rates drive many of our financing costs.
Current wording
•Secured Overnight Financing Rates, or "SOFR" rates, rose modestly in the second quarter with one-month SOFR increasing by 1 basis point to 5.34% and three-month SOFR rising by 3 basis points to 5.32%. SOFR rates drive many of our financing costs.
Previous wording
•Mortgage rates moved in sympathy with long-term interest rates during the quarter. The Freddie Mac survey 30-year mortgage rate increased from 6.61% at the start of the year to 6.94% at the end of February, before declining modestly in March and finishing the quarter at 6.79%. The Mortgage Bankers Association’s Refinance Index increased by 27% over the course of the quarter, but remained at depressed levels on a historical basis, with current mortgage rates still much higher than the rates on the vast majority of outstanding Agency mortgages. Similarly, overall prepayment speeds remained extremely low, with Fannie Mae 30-year MBS registering CPRs of 4.4 in January, 4.7 in February, and 5.4 in March.
Current wording
•Mortgage rates moved in sympathy with long-term interest rates during the second quarter. The Freddie Mac survey 30-year mortgage rate increased from 6.79% at the end of March to 7.22% on May 2 nd, before declining to 6.86% at June 27th. The Mortgage Bankers Association's Refinance Index increased by 20% over the course of the quarter, but remained at depressed levels on an historical basis, with current mortgage rates still much higher than the rates on the vast majority of outstanding Agency mortgages. Similarly, overall prepayment speeds remained low, with Fannie Mae 30-year RMBS registering CPRs of 6.0 in April, 6.6 in May, and 6.0 in June.
Previous wording
After rising 5.5% in 2023, the S&P CoreLogic Case-Shiller US National Home Price NSA Index increased by 0.5% during the first two months of 2024. Meanwhile, after decreasing by 7% in 2023, the National Association of Realtors Housing Affordability Index increased by 0.8% through February 2024.
Current wording
After rising 5.5% in 2023, the S&P CoreLogic Case-Shiller US National Home Price NSA Index increased by another 4.1% year-to-date through May 2024. Meanwhile, after decreasing by 6.5% in 2023, the National Association of
Previous wording
•U.S. real GDP increased at an estimated annualized rate of 1.6% in the first quarter of 2024, as compared to 3.4% in the prior quarter. Meanwhile, the unemployment rate remained low, registering 3.7% in January, 3.9% in February, and 3.8% in March.
Current wording
•U.S. real GDP increased at an estimated annualized rate of 2.8% in the second quarter of 2024, as compared to 1.4% in the prior quarter. Meanwhile, the unemployment rate increased during the quarter, registering 3.9% in April, 4.0% in May, and 4.1% in June.
Previous wording
•In the first quarter, the 12-month percentage change in the Consumer Price Index for All Urban Consumers (“CPI-U"), not seasonally adjusted, registered 3.1% in January, 3.2% in February, and then increased moderately to 3.5% in March. This compared to 12-month percentage changes of 3.2% in October, 3.1% in November, and 3.4% in December 2023.
Current wording
•After increasing in the first quarter, inflation reversed course and moderately declined in the second quarter. The 12-month percentage change in the Consumer Price Index for All Urban Consumers (“CPI-U"), not seasonally adjusted, registered 3.4% in April, 3.3% in May, and 3.0% in June 2024. This compared to 12-month percentage changes of 3.1% in January, 3.2% in February, and 3.5% in March 2024.
Previous wording
•For the first quarter, the Bloomberg U.S. MBS Index posted a negative return of (1.04%) and a negative excess return (on a duration-adjusted basis) of (0.14%) relative to the Bloomberg U.S. Treasury Index. Meanwhile, the Bloomberg U.S. Corporate Bond Index generated a negative return of (0.40%) but a positive excess return of 0.89%, while the Bloomberg U.S. Corporate High Yield Bond Index generated a positive return of 1.47% and a positive excess return of 1.59%, for the quarter.
Current wording
•For the second quarter, the Bloomberg U.S. MBS Index posted a positive return of 0.07% but a negative excess return (on a duration-adjusted basis) of (0.09%) relative to the Bloomberg U.S. Treasury Index, driven by underperformance of the mortgage basis in April. Meanwhile, the Bloomberg U.S. Corporate Bond Index generated a negative return of (0.09%) and a negative excess return of (0.04%), while the Bloomberg U.S. Corporate High Yield Bond Index generated a positive return of 1.11% and an excess return of 0.38%, for the quarter.
Previous wording
•Corporate credit spreads tightened during the first quarter, with spreads on the Markit CDX North America Investment Grade and High Yield Indices declining by 5 and 26 basis points quarter over quarter, respectively. Additionally, according to PitchBook/LCD, default rates on U.S. leveraged loans declined further, with the twelve-month trailing default rate on the Morningstar LSTA Leveraged Loan Index decreasing to 1.14% at quarter end, as compared to 1.53% at December 31, and well below the 10-year historical average of 1.82%. Morningstar LSTA US Leveraged Loan Index prices rose for the sixth straight quarter, increasing to $96.70 at March 31, up from $96.20 at year end.
Current wording
•Corporate credit spreads widened during the second quarter, with spreads on the Markit CDX North America Investment Grade and High Yield Indices increasing by 2 and 14 basis points quarter over quarter, respectively. Additionally, according to PitchBook/LCD, default rates on U.S. leveraged loans declined further, with the twelve-month trailing default rate on the Morningstar LSTA Leveraged Loan Index decreasing to 0.92% at quarter end, as compared to 1.14% at March 31st, and well below the 10-year historical average of 1.76%. After rising for six consecutive quarters, Morningstar LSTA US Leveraged Loan Index prices fell slightly in the second quarter to $96.50 at June 30th, compared to $96.70 at the end of the first quarter.
Previous wording
•U.S. CLO issuance activity ramped up significantly in the first quarter. According to PitchBook/LCD, the U.S. CLO market saw $49 billion of new CLO issuance in the first quarter, which was the second highest quarter of CLO issuance dating back to 2011, and up from $32 billion in the fourth quarter.
Current wording
•U.S. CLO issuance activity remained elevated during the second quarter. According to PitchBook/LCD, the U.S. CLO market saw $53 billion of new CLO issuance in the second quarter, which was the second highest quarter of CLO issuance dating back to 2011, and up from $49 billion in the first quarter.
Previous wording
•U.S. equity markets generated strong performance in the first quarter, with many major indices reaching record highs. For the quarter, the NASDAQ rose by 9.1%, the S&P 500 was up 10.2%, and the Dow Jones Industrial Average increased by 5.6%. The VIX volatility index remained relatively low throughout the first quarter. Meanwhile, London's FTSE 100 index increased by 2.8% and the MSCI World global equity index rose by 8.5%, quarter over quarter.
Current wording
•In the second quarter, the NASDAQ rose by 8.3% and the S&P 500 increased by 3.9%, with both indices setting record highs during the quarter. The Dow Jones Industrial Average, on the other hand, fell by 1.7% quarter over quarter, despite also reaching a record high intra-quarter. The VIX volatility index spiked in mid-April before reversing course and ending the quarter modestly lower overall. Meanwhile, London's FTSE 100 index increased by 2.7% and the MSCI World global equity index rose by 2.2%, quarter over quarter.
Previous wording
(5)Includes equity investment in an unconsolidated entity which purchases certain other loans for eventual securitization.
Current wording
(5)Includes equity investment in an unconsolidated entity which held certain other loans for securitization.
Previous wording
Our total long credit portfolio, excluding non-retained tranches of consolidated non-QM securitization trusts, increased to $2.80 billion as of March 31, 2024, from $2.74 billion as of December 31, 2023. The increase was driven primarily by larger residential transition loan and commercial mortgage bridge loan portfolios, where net originations exceeded principal paydowns, and net purchases of corporate CLOs. A portion of the increase was offset by net sales of non-Agency RMBS, net sales of CMBS, and a smaller non-QM loan portfolio, where principal paydowns and loan sales exceeded net originations.
Current wording
Our total long credit portfolio, excluding non-retained tranches of consolidated securitization trusts, decreased to $2.73 billion as of June 30, 2024, from $2.80 billion as of March 31, 2024. The decline was driven by the cumulative impact of a non-QM loan securitization completed during the second quarter and net sales of non-Agency and retained non-QM RMBS, and non-QM loans, which more than offset net purchases of commercial mortgage bridge loans, HELOCs, closed-end second lien loans, NPL/RPL pools, CMBS, and CLOs.
Previous wording
In addition, we saw a further uptick in delinquencies in our residential and commercial mortgage loan portfolios, and while those portfolios continue to experience low levels of realized credit losses and strong overall credit performance, we are monitoring developments closely and diligently working out a handful of non-performing commercial mortgage assets. Loans in non-accrual status, as well as negative operating income on certain REOs, continued to weigh on our Adjusted Distributable Earnings.
Current wording
In our residential mortgage loan portfolio, after excluding the impacts of the purchase of one non-performing loan portfolio and the consolidation of another loan portfolio, our percentage of delinquent loans increased only slightly quarter over quarter. In our commercial mortgage loan portfolio (including loans accounted for as equity method investments) the delinquency percentage ticked down sequentially. Both of these mortgage loan portfolios continue to experience low levels of realized credit losses and strong overall credit performance, though we are monitoring developments closely and diligently working out a handful of non-performing commercial mortgage assets.
Previous wording
During the quarter, the net interest margin on our credit portfolio (which represents the weighted average asset yield less the weighted average secured financing cost of funds, as adjusted to include the effect of actual and accrued periodic payments on interest rate swaps used to hedge the assets) increased to 2.86% from 2.66%, driven by higher asset yields, partially offset by a higher cost of funds. We continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.
Current wording
The net interest margin on our credit portfolio decreased quarter over quarter, to 2.76% from 2.86%. We continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.
Previous wording
The following tables provide supplemental information to, and should be read in conjunction with, the notes to our financial statements. See Note 5—Investments in Loans, Note 7—Forward MSR-related Investments, and Note 8—Investments in Unconsolidated Entitiesto the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Current wording
The following tables provide supplemental information to, and should be read in conjunction with, the notes to our financial statements. See Note 5—Investments in Loans, Note 7—Forward MSR-related Investments, and Note 8—Investments in Unconsolidated Entities, to the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Previous wording
(1)Excludes commercial mortgage loans in non-accrual status, with a fair value of $48.0 million.
Current wording
(1)Excludes commercial mortgage loans in non-accrual status, with a fair value of $53.6 million.
Previous wording
Additionally, as of March 31, 2024, an unconsolidated variable interest entity, in which we co-invest with other Ellington affiliates, held a commercial multi-family REO property; our allocable portion of such REO was approximately $30.9 million.
Current wording
Additionally, as of June 30, 2024, an unconsolidated variable interest entity, in which we co-invest with other Ellington affiliates, held a commercial multi-family REO property; our allocable portion of such REO was approximately $31.2 million.
Previous wording
Our total long Agency RMBS portfolio decreased by 22% quarter over quarter to $662.6 million, driven by net sales, principal repayments, and net realized and unrealized losses.
Current wording
Our total long Agency RMBS portfolio decreased by 31% quarter over quarter to $457.7 million, driven primarily by net sales.
Previous wording
During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. We ended the quarter with a net short TBA position, both on a notional basis and as measured by 10-year equivalents. Ten-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.
Current wording
During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in U.S. Treasury securities and futures. We ended the quarter with a net short TBA position on a notional basis but a net long TBA position as measured by 10-year equivalents. Ten-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.
Previous wording
In the Agency strategy, the asset yields on our Agency RMBS increased while our borrowing costs were roughly unchanged. At the same time, we continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate. As a result, the net interest margin on our Agency RMBS, excluding the Catch-up Amortization Adjustment, increased quarter over quarter to 1.50% from 0.69%. Average pay-ups on our specified pools increased to 0.89% as of March 31, 2024, as compared to 0.84% as of December 31, 2023.
Current wording
During the quarter, our Agency RMBS asset yields and our borrowing costs both declined, and we received a larger benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate. As a result, the net interest margin on our Agency RMBS, excluding the Catch-up Amortization Adjustment, increased to 1.99% from 1.50% quarter over quarter.
Previous wording
As of both March 31, 2024 and December 31, 2023, the weighted average net pass-through rate on our fixed-rate specified pools was 3.9%. Portfolio turnover for our Agency strategy, as measured by sales and excluding paydowns, was 31.2% for the three-month period ended March 31, 2024.
Current wording
As of June 30, 2024 and March 31, 2024, the weighted average net pass-through rate on our fixed-rate specified pools was 4.1% and 3.9%, respectively. Portfolio turnover for our Agency strategy, as measured by sales and excluding paydowns, was 32.4% for the three-month period ended June 30, 2024.
Previous wording
We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS and U.S. Treasury securities, (2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.
Current wording
(2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.
Previous wording
As discussed in Note 13 of the Notes to the Condensed Consolidated Financial Statements, when Longbridge pools HECM loans into HMBS, such transfers do not qualify as sales under U.S. GAAP, and as a result, such transactions are treated as secured borrowings on our Condensed Consolidated Balance Sheet. The HECM loans are included in Loans, at fair value, and the related liabilities are reflected as HMBS-related obligations, at fair value. After pooling the HECM loans into HMBS, Longbridge retains the mortgage servicing rights associated with such HMBS, which we refer to as the "HMBS MSR Equivalent." Additionally, Longbridge typically retains the MSRs associated with the proprietary reverse mortgage loans that it originates and has acquired MSRs on reverse mortgage loans in the secondary market ("Reverse MSRs"). We refer to the HMBS MSR Equivalent and Reverse MSRs collectively as our "Reverse MSR-related Net Assets." We have also securitized some of the proprietary reverse mortgage loans originated by Longbridge, and we have retained certain securitization tranches in compliance with credit risk retention rules.
Current wording
As discussed in Note 13 of the Notes to the Condensed Consolidated Financial Statements, when Longbridge pools HECM loans into HMBS, such transfers do not qualify as sales under U.S. GAAP, and as a result, such transactions are treated as secured borrowings on our Condensed Consolidated Balance Sheet. The pooled HECM loans are included in Loans, at fair value, and the related liabilities are reflected as HMBS-related obligations, at fair value. After pooling the HECM loans into HMBS, Longbridge retains the mortgage servicing rights associated with such HMBS, which we refer to as the "HMBS MSR Equivalent." Additionally, Longbridge typically retains the MSRs associated with the proprietary reverse mortgage loans that it originates and has acquired MSRs on reverse mortgage loans in the secondary market (collectively, "Reverse MSRs"). We refer to the HMBS MSR Equivalent and Reverse MSRs collectively as our "Reverse MSR-related Net Assets." We have also securitized some of the proprietary reverse mortgage loans originated by Longbridge, and we have retained certain securitization tranches in compliance with credit risk retention rules.
Previous wording
(3)As of March 31, 2024, includes $9.3 million of assignable HECM Buyout Loans, $9.4 million of non-assignable HECM Buyout Loans, and $4.5 million of other inactive HECM loans. As of December 31, 2023, includes $6.9 million of assignable HECM Buyout Loans, $10.2 million of non-assignable HECM Buyout Loans, and $4.9 million of other inactive HECM loans.
Current wording
(3)As of June 30, 2024, includes $5.1 million of active HECM Buyout Loans, $9.9 million of inactive HECM Buyout Loans, and $4.3 million of other inactive HECM loans. As of March 31, 2024, includes $9.3 million of active HECM Buyout Loans, $9.4 million of inactive HECM Buyout Loans, and $4.5 million of other inactive HECM loans.
Previous wording
(4)Includes $184.9 million of securitized proprietary reverse mortgage loans and $4.7 million of cash held in a securitization reserve fund.
Current wording
(4)As of June 30, 2024, includes $181.1 million of securitized proprietary reverse mortgage loans and $4.5 million of cash held in a securitization reserve fund. As of March 31, 2024, includes $184.9 million of securitized proprietary reverse mortgage loans and $4.7 million of cash held in a securitization reserve fund.
Previous wording
Our Longbridge portfolio generated positive income for the first quarter, driven by positive results from servicing and net gains on interest rate hedges. In originations, improved gain-on-sale margins in HECM, driven by tighter HECM yield spreads, were mostly offset by a decline in overall origination volumes. Tighter HECM yield spreads also led to net gains on the HMBS MSR Equivalent, as well as improved execution on tail securitizations, which contributed to the positive results from servicing. Partially offsetting these gains were net losses on proprietary reverse mortgage loans.
Current wording
Our Longbridge segment generated positive income for the second quarter, driven by net interest income and net gains on proprietary reverse mortgage loans, along with positive results from servicing. In HECM originations, higher volumes were mostly offset by a decline in gain-on-sale margins, driven by wider yield spreads on newly originated HMBS. In servicing, tighter yield spreads on more seasoned HMBS led to improved execution on tail securitizations, which contributed to the positive results from servicing.
Previous wording
Our Longbridge portfolio, excluding non-retained tranches of a consolidated securitization trusts, decreased by 20% sequentially to $441.0 million as of March 31, 2024, driven primarily by the successful completion of our inaugural proprietary reverse mortgage loan securitization in March.
Current wording
Our Longbridge portfolio, excluding non-retained tranches of a consolidated securitization trust, increased by 18% sequentially to $520.8 million as of June 30, 2024, driven primarily by proprietary reverse mortgage loan originations.
Previous wording
Our results for the quarter also reflect a net loss, driven by the increase in interest rates, on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt and our preferred equity, partially offset by a net gain on our senior notes, also driven by the increase in interest rates.
Current wording
In addition to expenses not allocated to either the investment portfolio or Longbridge segments, our results for the quarter also reflect a net gain, driven by the increase in interest rates, on our senior notes. This gain was partially offset by a net loss, also driven by the increase in interest rates, on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt and our preferred equity.
Previous wording
2024, we had $297.7 million of outstanding Unsecured borrowings including: (i) senior notes of $210.0 million, maturing in April 2027 and bearing an interest rate of 5.875%; (ii) senior notes of $34.9 million, maturing in March 2025 and bearing an interest rate of 6.75%; and (iii) senior notes of $37.8 million, maturing in August 2026 and bearing an interest rate of 6.00% (collectively, the "Senior Notes") as well as $15.0 million of unregistered junior subordinated unsecured debt securities (the "Trust Preferred Debt"). The indentures governing the outstanding Senior Notes contain a number of covenants, including several financial covenants. See Note 14 of the Notes to the Condensed Consolidated Financial Statements for additional details on our Unsecured borrowings.
Current wording
We have various financing arrangements in place as of June 30, 2024, including both secured and unsecured borrowings. We use repos, secured lines of credit, and various other secured borrowings to finance our portfolios, each of which we account for as collateralized borrowings. We have also obtained, through the securitization markets, term financing for certain of our non-QM loans, certain of our proprietary reverse mortgage loans, and certain of our consumer loans. Additionally, as an issuer of HMBS, we account for HMBS-related obligations as secured borrowings. Finally, as of June 30, 2024, we had $297.7 million of outstanding Unsecured borrowings including: (i) senior notes of $210.0 million, maturing in April 2027 and bearing an interest rate of 5.875%; (ii) senior notes of $34.9 million, maturing in March 2025 and bearing an interest rate of 6.75%; and (iii) senior notes of $37.8 million, maturing in August 2026 and bearing an interest rate of 6.00% (collectively, the "Senior Notes") as well as $15.0 million of unregistered junior subordinated unsecured debt securities (the "Trust Preferred Debt"). The indentures governing the outstanding Senior Notes contain a number of covenants, including several financial covenants. See Note 14 of the Notes to the Condensed Consolidated Financial Statements for additional details on our Unsecured borrowings.
Previous wording
As of March 31, 2024, outstanding borrowings under repos and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Condensed Consolidated Balance Sheet) were $4.3 billion, of which approximately 14.5%, or $617.3 million, related to our Agency RMBS holdings. The remaining outstanding borrowings related to our credit portfolio and Longbridge. Additionally, we had $8.6 billion of HMBS-related obligations.
Current wording
As of June 30, 2024, outstanding borrowings under repos and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Condensed Consolidated Balance Sheet) were $4.1 billion, of which approximately 9.3%, or $383.4 million, related to our Agency RMBS holdings. The remaining outstanding borrowings related to our credit portfolio and Longbridge. Additionally, we had $8.8 billion of HMBS-related obligations.
Previous wording
(1)As of March 31, 2024 and December 31, 2023, excludes borrowings at certain unconsolidated entities that are recourse to us. Including such borrowings, our debt-to-equity ratio based on total recourse borrowings was 2.0:1 and 2.4:1 as of March 31, 2024 and December 31, 2023, respectively.
Current wording
(1)As of June 30, 2024 and March 31, 2024, excludes borrowings at certain unconsolidated entities that are recourse to us. Including such borrowings, our debt-to-equity ratio based on total recourse borrowings was 1.9:1 and 2.0:1 as of June 30, 2024 and March 31, 2024, respectively.
Previous wording
(2)For unsettled purchases and sales, assumes associated borrowings are subject to haircuts of 5.2% and 5.1% as of March 31, 2024 and December 31, 2023, respectively.
Current wording
(2)For unsettled purchases and sales, assumes associated borrowings are subject to haircuts of 5.4% and 5.2% as of June 30, 2024 and March 31, 2024, respectively.
Previous wording
(4)Relates to our non-QM and reverse mortgage loan securitizations, where we have elected the fair value option on the related debt.
Current wording
(4)Relates to our non-QM, European residential mortgage, and reverse mortgage loan securitizations, where we have elected the fair value option on the related debt.
Previous wording
Our recourse debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, decreased to 1.8:1 as of March 31, 2024 as compared to 2.0:1 as of December 31, 2023. This decline was primarily driven by a decline in borrowings on our smaller Agency RMBS portfolio and a decrease in recourse borrowings resulting from the securitization of proprietary reverse mortgage loans in March. Such securitization financing is consolidated non-recourse debt, however, and our debt-to-equity ratio based on total recourse and non-recourse borrowings excluding U.S. Treasury securities, adjusted for unsettled purchases and sales, also decreased, but by a lesser degree, to 8.3:1 as of March 31, 2024 as compared to 8.4:1 as of December 31, 2023.
Current wording
Our recourse debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, decreased to 1.6:1 as of June 30, 2024 as compared to 1.8:1 as of March 31, 2024. The decline was primarily driven by the completion of a non-QM securitization in the second quarter, a decline in borrowings on our smaller Agency RMBS portfolio, and an increase in shareholders' equity. Our overall debt-to-equity ratio based on total recourse and non-recourse borrowings excluding U.S. Treasury securities, adjusted for unsettled purchases and sales, also decreased during the quarter, to 8.2:1 as of June 30, 2024, as compared to 8.3:1 as of March 31, 2024.
Previous wording
Our secured financing costs include interest expense related to our repo borrowings and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Condensed Consolidated Balance Sheet but exclude HMBS-related obligations). For the three-month period ended March 31, 2024, the average cost of funds on our secured financings increased to 5.78%, as compared to 5.69% for the three-month period ended December 31, 2023. The period-over-period increase was primarily driven by higher short-term interest rates. Our unsecured financing costs consist of interest expense related to our Unsecured borrowings. For the three-month periods ended March 31, 2024 and December 31, 2023, the average borrowing rate on our unsecured financings was 6.14% and 5.85%, respectively. The period-over-period increase was driven by additional unsecured debt, carrying a higher average borrowing rate, that was assumed in December 2023 in connection with the Arlington Merger. Our average cost of funds, including both secured and unsecured financings, increased to 5.80% from 5.70% over the same period.
Current wording
Consolidated Balance Sheet but exclude HMBS-related obligations). For the three-month period ended June 30, 2024, the average cost of funds on our secured financings decreased slightly to 5.73%, as compared to 5.78% for the three-month period ended March 31, 2024. Our unsecured financing costs consist of interest expense related to our Unsecured borrowings. For the three-month periods ended June 30, 2024 and March 31, 2024, the average borrowing rate on our unsecured financings was 6.15% and 6.14%, respectively. The period-over-period increase was driven by higher interest rates on our floating rate Unsecured borrowings. Our average cost of funds, including both secured and unsecured financings, decreased to 5.76% from 5.80% over the same period.
Previous wording
The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments. Future prepayment rates are difficult to predict. We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors. We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase. When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment, or "Catch-up Amortization Adjustment," is made to interest income to reflect the cumulative impact of the changes in effective yields. For the three-month periods ended March 31, 2024, and 2023, we recognized a Catch-Up Amortization Adjustment of $(1.3) million, and $(0.5) million, respectively. The Catch-up Amortization Adjustment is reflected as an increase (decrease) to Interest income on the Condensed Consolidated Statement of Operations.
Current wording
The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments. Future prepayment rates are difficult to predict. We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors. We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase. When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment, or "Catch-up Amortization Adjustment," is made to interest income to reflect the cumulative impact of the changes in effective yields. For the three-month periods ended June 30, 2024, and 2023, we recognized a Catch-Up Amortization Adjustment of $0.7 million and $(0.5) million, respectively. For the six-month periods ended June 30, 2024, and 2023, we recognized a Catch-Up Amortization Adjustment of $(0.6) million, and $(1.0) million, respectively. The Catch-up Amortization Adjustment is reflected as an increase (decrease) to Interest income on the Condensed Consolidated Statement of Operations.
Previous wording
(2)In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As of March 31, 2024, derivative assets and derivative liabilities were $150.3 million and $(40.4) million, respectively, for a net fair value of $109.9 million, as reflected in "Net Total" above.
Current wording
(2)In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As of June 30, 2024, derivative assets and derivative liabilities were $162.2 million and $(44.1) million, respectively, for a net fair value of $118.1 million, as reflected in "Net Total" above.
Previous wording
(4)Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of March 31, 2024, a total of 19 long and 2,992 short U.S. Treasury futures contracts were held.
Current wording
(4)Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of June 30, 2024, a total of 19 long and 3,797 short U.S. Treasury futures contracts were held.
Showing the first 40 of 91 pairs. Open the source sections for the rest.
Rearranged current paragraphs (34)
Current report — wording carried from elsewhere
(1)Includes our allocable portion of commercial mortgage loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Condensed Consolidated Balance Sheet.
Current report — wording carried from elsewhere
We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS and U.S. Treasury securities,
Current report — wording carried from elsewhere
Our secured financing costs include interest expense related to our repo borrowings and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Condensed
Current report — wording carried from elsewhere
Certain items of interest expense are not allocated to either the investment portfolio segment or Longbridge segment, such as interest expense on our Unsecured borrowings and certain cash collateral held by us. Total interest expense not allocated to either the investment portfolio or Longbridge segments increased to $4.6 million as compared $3.1 million for the three-month periods ended June 30, 2024 and 2023, respectively. This increase was due to interest expense on unsecured borrowings assumed by us from Arlington as a result of the Arlington Merger.
Current report — wording carried from elsewhere
Other investment related expenses related to the Longbridge segment primarily consist of servicing expense related to reverse mortgage loans and various loan origination expenses. For the three-month periods ended June 30, 2024 and 2023, Other investment related expenses were $7.8 million and $7.6 million, respectively. The increase in Other investment related expenses related to the Longbridge segment was primarily due to an increase in servicing expense related to reverse mortgage loans and various loan origination expenses.
Current report — wording carried from elsewhere
Other operating expenses for our investment portfolio segment were $2.0 million for each of the three-month periods ended June 30, 2024 and 2023.
Current report — wording carried from elsewhere
Results of Operations for the Six-Month Periods Ended June 30, 2024 and 2023
Current report — wording carried from elsewhere
The following tables summarizes our results of operations by segment (as applicable) for the six-month periods ended June 30, 2024 and 2023:
Current report — wording carried from elsewhere
Net Income (Loss) Attributable to Common Stockholders
Current report — wording carried from elsewhere
Interest income was $202.0 million for the six-month period ended June 30, 2024, as compared to $175.3 million for the six-month period ended June 30, 2023. Interest income includes coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on various holdings, and interest on our cash balances, including those balances held by our counterparties as collateral.
Current report — wording carried from elsewhere
The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the six-month period ended June 30, 2024 and 2023:
Current report — wording carried from elsewhere
(1)Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions in U.S. Treasury securities.
Current report — wording carried from elsewhere
Some of the variability in our interest income and portfolio yields is due to the Catch-up Amortization Adjustment. For the six-month periods ended June 30, 2024 and 2023, we had a negative Catch-up Amortization Adjustment of $(0.6) million and $(1.0) million, respectively, which decreased our interest income. Excluding the Catch-up Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 4.21% and 7.04%, respectively, for the six-month period ended June 30, 2024. Excluding the Catch-up Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 3.30% and 6.17%, respectively, for the six-month period ended June 30, 2023.
Current report — wording carried from elsewhere
In addition, we had $5.6 million and $6.0 million of interest income related to long U.S. Treasury securities and repo on short U.S. Treasury securities for the six-month periods ended June 30, 2024 and 2023, respectively, which we generally use to adjust our exposure to changes in interest rates.
Current report — wording carried from elsewhere
For the six-month periods ended June 30, 2024 and 2023, interest income from the Longbridge segment was $18.0 million and $6.7 million, respectively. The increase was primarily related to a larger average portfolio of proprietary reverse mortgage loans period over period.
Current report — wording carried from elsewhere
Interest expense primarily includes interest on funds borrowed under repos and Total other secured borrowings, interest on our unsecured borrowings, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. For the six-month periods ended June 30, 2024 and 2023, we had total interest expense of $137.3 million and $123.1 million, respectively.
Current report — wording carried from elsewhere
The following table summarizes our aggregate secured borrowings, including repos and Total other secured borrowings, for the six-month periods ended June 30, 2024 and 2023.
Current report — wording carried from elsewhere
(1)Excludes U.S. Treasury securities.
Current report — wording carried from elsewhere
Among other instruments, we use interest rate swaps to hedge against the risk of rising interest rates. If we were to include as a component of our cost of funds the actual and accrued periodic payments on our interest rate swaps used to hedge our assets, our total average cost of funds would decrease to 4.35% and 3.74% for the six-month periods ended June 30, 2024 and 2023, respectively. Excluding the Catch-up Amortization Adjustment, our net interest margin, defined as the average yield on our portfolio of yield-bearing targeted assets less the average cost of funds on our secured borrowings (including actual and accrued periodic payments on interest rate swaps as described above), was 2.68% and 2.43% for the six-month periods ended June 30, 2024 and 2023, respectively. These metrics do not include costs associated with any unsecured debt or costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures.
Current report — wording carried from elsewhere
Interest expense in the Longbridge segment primarily relates to Other secured borrowings and repurchase agreements. For the six-month periods ended June 30, 2024 and 2023, interest expense related to the Longbridge segment was $17.2 million and $10.5 million, respectively. The increase in interest expense in the current period was primarily due to an increase in the average size of borrowings on the Longbridge portfolio and an increase in financing costs. For the six-month period ended June 30, 2024, our average borrowings related to the Longbridge portfolio were $421.5 million, and our average cost of funds was 8.17%. This compares to average borrowings of $271.5 million and an average cost of funds of 7.77% for the six-month period ended June 30, 2023.
Current report — wording carried from elsewhere
The table below summarizes the components of interest expense not included in either segment for the six-month periods ended June 30, 2024 and 2023.
Current report — wording carried from elsewhere
For the six-month period ended June 30, 2024, the gross base management fee, which is based on total equity at the end of each quarter, was $11.7 million, and our Manager credited us with rebates on our base management fee of $0.2 million, resulting in a net base management fee of $11.5 million. For the six-month period ended June 30, 2023, the gross base management fee, which is based on total equity at the end of each quarter, was $10.2 million, and our Manager credited us with rebates on our base management fee of $0.3 million, resulting in a net base management fee of $9.9 million. For each period, the base management fee rebates related to those of our CLO investments for which Ellington or one of its affiliates earned CLO management fees. The increase in the net base management fee period over period was primarily due to a larger capital base at the end of the first and second quarters of 2024, as compared to 2023.
Current report — wording carried from elsewhere
In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period (including any opening loss carryforward) exceeds a defined return hurdle for the period. No incentive fee was incurred for either of the six-month periods ended June 30, 2024 and 2023, since for each quarter during these periods, our income did not exceed the prescribed hurdle amount on a rolling four quarter basis. Because our operating results can vary materially from one period to another, incentive fee expense can be highly variable.
Current report — wording carried from elsewhere
Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets and certain financial liabilities carried at fair value. For the six-month periods ended June 30, 2024 and 2023, other investment related expenses were $24.3 million and $18.1 million, respectively.
Current report — wording carried from elsewhere
Other operating expenses consist of professional fees, compensation and benefit expenses related to our dedicated or partially dedicated personnel, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses were $50.8 million for the six-month period ended June 30, 2024 as compared to $52.6 million for the six-month period ended June 30, 2023.
Current report — wording carried from elsewhere
For the six-month periods ended June 30, 2024 and 2023, other operating expenses related to the Longbridge segment were $37.9 million and $37.6 million, respectively. These expenses primarily consist of compensation and benefits expense, and consist to a lesser extent of various overhead costs including rent expense, licensing fees, expenses related to office equipment, and amortization of intangible assets. The period-over-period increase was primarily due to an increase in technology expenses and compensation and benefits expense, which were partially offset by a decline in professional fees.
Current report — wording carried from elsewhere
Other income (loss) consists of net realized and unrealized gains (losses) on securities and residential mortgage, commercial mortgage, consumer, and corporate loans, financial derivatives, and real estate owned, unrealized gains (losses) on other secured borrowings, at fair value and Unsecured borrowings, at fair value, net change from HECM reverse mortgage loans, at fair value, and net change related to HMBS obligations, at fair value. Other, net, another component of Other income (loss), includes rental income and income related to loan originations, as well as loan commitments, MSRs and Forward MSR-related investments, realized gains (losses) on foreign currency transactions, and unrealized gains (losses) on foreign currency remeasurement.
Current report — wording carried from elsewhere
Earnings (Losses) from Investments in Unconsolidated Entities
Current report — wording carried from elsewhere
We have elected the fair value option for our equity investments in unconsolidated entities. Earnings (losses) from investments in unconsolidated entities was $14.3 million for the six-month period ended June 30, 2024, as compared to $(2.4) million for the six-month period ended June 30, 2023. For the six-month period ended June 30, 2024, Earnings (losses) from investments in unconsolidated entities of $14.3 million primarily consisted of realized and unrealized gains on investments in loan originators and on investments in entities holding commercial mortgage loans and REO, in which we co-invest with other Ellington affiliates, partially offset by unrealized losses on investments in unconsolidated entities related to risk retention related vehicles related to non-QM securitizations.
Current report — wording carried from elsewhere
(2)Includes unrealized (gains) losses on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps), borrowings carried at fair value, and foreign currency translations which are components of Other Income (Loss) on the Condensed Consolidated Statement of Operations.
Current report — wording carried from elsewhere
(4)For the three-month period ended June 30, 2024, includes $1.1 million of non-capitalized transaction costs, $0.3 million of non-cash equity compensation expense, and $0.2 million of various other expenses. For the three-month period ended June 30, 2023, includes $3.6 million of expenses related to the pending mergers of Arlington Asset Investment Corp. and Great Ajax Corp., $0.9 million of non-capitalized transaction costs, $0.4 million of non-cash equity compensation expense, and $0.4 million of various other expenses.
Current report — wording carried from elsewhere
(1)Includes realized (gains) losses on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps and foreign currency transactions which are components of Other Income (Loss) on the Condensed Consolidated Statement of Operations.
Current report — wording carried from elsewhere
(3)Represents net change in fair value of HMBS MSR Equivalent and mortgage servicing rights related to proprietary mortgage loans attributable to changes in market conditions and model assumptions. This adjustment also includes net (gains) losses on certain hedging instruments, which are components of realized and/or unrealized gains (losses) on financial derivatives, net on the Condensed Consolidated Statement of Operations.
Current report — wording carried from elsewhere
(5)Includes net interest income and operating expenses for certain investments in unconsolidated entities.
Rearranged previous paragraphs (4)
Previous report — wording carried elsewhere
Manager, an affiliate of Ellington. Ellington is a registered investment adviser with a 29-year history of investing in the Agency and credit markets.
Previous report — wording carried elsewhere
We have various financing arrangements in place as of March 31, 2024, including both secured and unsecured borrowings. We use repos, secured lines of credit, and various other secured borrowings to finance our portfolios, each of which we account for as collateralized borrowings. We have also obtained, through the securitization markets, term financing for certain of our non-QM loans, certain of our proprietary reverse mortgage loans, and certain of our consumer loans. Additionally, as an issuer of HMBS, we account for HMBS-related obligations as secured borrowings. Finally, as of March 31,
Previous report — wording carried elsewhere
It is expected that amounts due upon maturity of our repos will be funded primarily through the roll/re-initiation of repos and, if we are unable or unwilling to roll/re-initiate our repos, through free cash and proceeds from the sale of securities.
Previous report — wording carried elsewhere
Our derivatives are predominantly subject to bilateral master trade agreements or clearing in accordance with the Dodd-Frank Act. We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions.