Ellington Financial (NYSE:EFC), the parent company of leading reverse mortgage lender Longbridge Financial, reported net income attributable to common stockholders of $38.9 million, or $0.58 per common share, in the first quarter of 2023.

In addition to returns from its other investments, Ellington CEO Laurence Penn described the Q1 performance of Longbridge as “excellent.”

Longbridge’s performance in Q1 is attributable to sales margin and market-to-market gains on its mortgage servicing rights (MSRs) and its proprietary reverse mortgage loan program, “Platinum.”

Reverse mortgage performance

While reverse mortgage volume was down across the industry in Q1, Longbridge saw a net gain in its originations business due to margins, according to Ellington CFO J.R. Herlihy.

“During the first quarter, yield spreads in the reverse mortgage market actually tightened which, combined with lower interest rates, increased the value of our Home Equity Conversion Mortgage (HECM) MSRs and our proprietary reverse mortgage loan portfolio,” Herlihy said during Wednesday’s earnings call. “In addition, higher gain on sale margins more than offset lower origination volumes sequentially. So Longbridge also had a net gain on its origination business, which supports our adjusted distributable earnings.”

Herlihy also offered context to loan volume via dollar amounts.

“In the first quarter, Longbridge originated $234 million across HECM [and] prop, 77% through its wholesale and correspondent channels and 23% through retail,” he said. “The shares for retail increased from 15% in the prior quarter.”

However, the company’s Ginnie Mae HECM-backed Securities (HMBS) yield spreads began to widen in late March, creating margin pressure, according to Herlihy.

“On the bright side, we’re entering a more seasonally active month for originations, and Longbridge’s market share continues to rise,” Herlihy said. “In January, it actually hit number one in newly-originated HECMs.”

So far, this year has largely resulted in Longbridge taking the position of third-largest lender in the reverse mortgage industry, behind American Advisors Group (AAG) and Mutual of Omaha Mortgage. However, the months ahead are likely to see further shifts in the top-performing lenders, due in part to the acquisition of AAG by Finance of America Companies (FOA) and its subsidiary, Finance of America Reverse (FAR).

Penn and Herlihy also spoke about the HECM buyout loan portfolio purchase at what the company called “distressed prices.” This led the size of the company’s reverse mortgage portfolio to increase, though the size of its agency and credit portfolios declined for the quarter.

“Our Longbridge portfolio increased to $442.5 million as of March 31st, driven by an opportunistic purchase of a portfolio of HECM buyout loans and incremental originations of proprietary reverse mortgage loans,” Herlihy said.

Reverse mortgage outlook

Ellington is optimistic about the trajectory of the reverse mortgage business, according to company leaders. In a Q&A session during the earnings call, the leadership team was asked about the distressed HECM portfolio purchase, and the company indicated that it was sourced from the Reverse Mortgage Funding (RMF) bankruptcy.

“This was related to a bankruptcy that occurred late last year in the reverse mortgage space,” Penn said. “And actually, those loans were financed. We actually bought that package, that was essentially seized from the lender. And I think there could absolutely be more of that product coming out, especially from that bankruptcy in particular, because all the product has not come out at this point. So you could see us add to that.”

While Penn does not see that as recurring business, he did note a chance for a “follow-up purchase” in the future.

Penn also discussed the overall position of Longbridge in the reverse mortgage market, noting that market share is growing, but there could be a path forward for the company to reduce its equity investment in Longbridge.

However, Penn said that Ellington views the majority of the current equity investment in the company as consisting of yield-bearing assets like MSRs or the loans themselves.

According to the most recent HECM endorsement data compiled by Reverse Market Insight (RMI), Longbridge’s total 2023 market share is 9.7% on the HECM side, an increase from the 7.4% in 2022. This data does not include information related to proprietary loans, as the lenders do not release substantive proprietary origination data.

In the 12 months ending in April 2023, Longbridge has originated 4,534 HECMs, according to RMI.