Longbridge acquisition a positive sign for the reverse mortgage industry

Deal speaks to upside in the reverse space, analysts said

Last week, mortgage investment firm Ellington Financial announced that it had reached a deal to acquire leading reverse mortgage lender Longbridge Financial from Home Point Capital, in a deal valued at roughly $75 million for a 49.6% stake.

Since EFC had already maintained a stake in Longbridge, the deal will basically serve to close the remaining gap in ownership and situate EFC as wholly owning Longbridge.

Soon after the deal was announced, EFC outlined its reasons for wholly acquiring Longbridge: generally favorable demographics for the reverse mortgage industry; Longbridge’s portfolio of mortgage servicing rights (MSRs); and well-established confidence in the lender’s financial standing.

To gain a clearer understanding of what this deal means for the reverse mortgage industry, RMD spoke to multiple mortgage industry analysts.

Positive signs

Reaction from analysts and watchers of the reverse space has been largely positive.

“I was surprised, but to a certain extent just because there was already an existing ownership stake there, it’s a pretty natural next step from that perspective,” John Lunde, president of Reverse Market Insight (RMI), told RMD in an interview. “I think that’s a vote of confidence. They’ve obviously had a significant ownership stake for a while and have been pleased with it enough to put more money to work there, and take additional ownership. So, I think that it’s a really positive thing.”

The deal could have positive reputational effects for the reverse industry. Reverse mortgage lenders, brokers and other participants celebrate any time a mainstream company says anything good about reverse mortgages.

Lunde bisects the reputational impact into two buckets: reputation among consumers, and reputation among investors.

“On the consumer side, and I don’t know that this deal really changes anything from that perspective only because I don’t know that Ellington is a really well-known brand name,” Lunde said. “I think they’re more of a financial institution on the back-end and in financing, and are active behind the scenes a little bit more as opposed to a direct, public-facing consumer brand.”

As such, it might legitimize the perception that the reverse mortgage business as a good one in the eye of other potential investors, Lunde said.

“On that front, this deal is certainly a positive thing,” he said. “When I think about acquisitions and how they might help the industry, I think this is a good one. We’ve seen some others that are a little bit similar, with Starwood coming in and backing RMF. The other key piece and the thing that’s been lacking for 10 years in the industry is that big, retail brand presence of some of the big banks or others that have a much more direct-consumer brand.”

On the investor side, this deal also gives a major reverse mortgage lender potential access to new investor markets, said Michael McCully, partner at New View Advisors.

“Ellington has a multi-decade history as a successful mortgage capital markets investor,” McCully tells RMD. “Having Ellington consolidate its ownership of Longbridge not only helps Longbridge, it brings additional well-placed intellectual capital to our industry.”

Upside for EFC

The deal is also a smart move for Ellington, said Douglas Harter, a market analyst at Credit Suisse who covers EFC and also covers Finance of America Companies, another big player in the reverse space.

“[I’m] familiar with the favorable demographics and the favorable environment that has been [prevalent in] the past year or two, with the strong home price appreciation helping volumes,” Harter said. “I think the backdrop and the investment case to be made in Longbridge is favorable. For EFC specifically, the fact that [Longbridge] is still about 10% or so of their equity even with this deal, I think it fits very much into what they are looking to do.”

EFC’s goal is to have a diversified model by investing in certain niche areas to bolster its available sourcing channels, according to Harter.

Another major factor is Home Point’s precarious position in the forward market. The company, which controls wholesale lender Homepoint, has been selling off parts of its business amid significant margin pressures and strong competition.

“[Home Point was] looking to sell their non-strategic or non-core assets in order to improve their liquidity,” Harter said. “I think if you put all those pieces together, you have an attractive return to EFC and a partner looking to raise liquidity. I think that when you put those two together, it makes sense for EFC to have acquired the remaining stock.”

The fact that this is a pre-existing, longstanding relationship between EFC and Longbridge also plays into the perceptions surrounding this deal for Harter.

“[EFC is] optimistic about its continuous ability to drive returns from the reverse business,” he said. “Both in the ownership of the MSRs, but also the ability to continue to write new business and wanting to own the entity as opposed to just the asset. So, I think it would express a management-favorable view on the outlook for the industry.”

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