Q1 2021 Ellington Financial Inc Earnings Call
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Thank you for standing by and welcome to the Ellington Financial first quarter 2021 earnings Conference call. Today's call is being recorded at this time all participants have been placed in a listen only mode.
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It is now my pleasure to turn the call over to Jason Frank GAAP.
The General Counsel and Secretary, Sir you may begin.
Thank you before we start I would like to remind everyone that certain statements made during this conference call may constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Forward looking statements are not historical in nature as described under item one a of our annual report on form 10-K filed on March 16, 2021 forward looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs expectations estimates and projections.
Consequently, you should not rely on these forward looking statements as predictions of future of that statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward looking statements whether as the result of new information future events or otherwise I am joined on the call today by Larry Penn Chief Executive Officer of Bell.
For the financial Mark the Kottke co Chief investment officer of the FC and Jr. Herlihy, Chief Financial Officer of UFC.
Scott in the earnings press release, our first quarter earnings Conference call presentation is available on on our website Ellington financial Dot com.
Management's prepared remarks will track the presentation.
Please note that any references to figures on this presentation are qualified in their entirety by the endnotes at the back of the presentation with that please turn to slide three and I will now turn the call over to Larry.
Thanks, Jay and good morning, everyone as always thank you for your time and interest today.
I'd like to the financial continued its strong performance through the first quarter of 2021 significantly increasing book value and core earnings as we built on a profitable 2020, and the strong momentum we had coming into 2021.
Turning to slide three you can see that for the quarter. We generated net income of 86 per share good for an annualized economic return of 21%.
We also generated core earnings per share of <unk>, 43 tests, which was up 16% sequentially and covered our new dividend run rate, which we increased by 40% last month.
The continued growth of our high yielding loan portfolios drove the sequential increase in core earnings.
We also had significant gains in our C MBS and clo's sectors that are steadily recovered following the COVID-19 related stress of early 2020.
We also generated significant earnings and our non QM loan business, where we completed our first securitization deal of the new year.
I'd have to say that we executed that securitization at the tightest yields of any of our deals so far.
Finally, our consumer loan residential transition loan and neither agency RBS portfolios also had excellent performance this quarter.
Besides growing our proprietary loan portfolios during the quarter, which we did to the tune of about 21% across small balance commercial mortgage residential transition and consumer loans. We also used our strong balance sheet to rotate capital Opportunistically to where we see the best relative value.
We monetize gains and some of the more liquid parts of the credit portfolio. In fact, several of our Sam B S sales where are prices the were actually higher than pre COVID-19 levels, and we redeploy that capital to acquire more loans from our pipelines and also added some attractively priced agency specified pools as wider agency yield spreads.
Provided an attractive entry point.
While those agency pool purchases did cause our recourse debt to equity ratio to increase the two to one from one six to one quarter over quarter that leverage ratio is still well below the 2.7 to one that we average during 2018 in 2019.
As it stands today you have significant additional capacity in many of our financing facilities and this should enable us to continue to be opportunistic with our investment approach and to grow earnings further R.
We're very comfortable taking leverage up from here, especially the fund more loan growth.
With that I'll pass it the Jr, which has got to discuss our first quarter financial results in more detail.
Thanks, Larry and good morning, everyone I'll continue on slide three of the presentation.
For the quarter ended March 31, Ellington financial reported net income of 86 cents per share and core earnings of 43 per share. These results compare to net income of $1 44 per share and core earnings of 37 per share for the prior quarter.
On April 5th we announced the increase of our monthly dividend of <unk> 14 per share from 10 cents.
Next please turn to slide five for the attribution of earnings between our credit in the agency strategies during.
During the first quarter the credit strategy generated a total gross profit of $1 14 per share while the agency strategy was roughly breakeven.
These results compare to $1 69 per share in the credit strategy and <unk> 13 per share on the agency strategy in the prior quarter.
The two primary drivers of the excellent results in our credit portfolio. During the first quarter were number one higher net interest income quarter over quarter, which was the result of larger small balance commercial mortgage residential residential transition.
Non QM and consumer loan portfolios.
Bind with the lower financing costs.
And number two significant net realized and unrealized gains which were mainly in our C. N B S CLO and non QM strategies as well as our equity investments in mortgage originators.
While our U K nonconforming MBS portfolio generated gains for the quarter, our euro denominated RMB S portfolio generated losses of <unk>.
Finally, our credit hedges detracted from results as credit yield spreads tightened during the quarter.
Our agency strategy was roughly breakeven for the quarter in the face of of challenging market marked by sharply higher long term interest rates.
Increased volatility and a steepening yield curve.
Agency RMB aspiration of extended and yield spreads widened and most agency RBS prices declined sharply, particularly for lower coupon MBS.
The increase in long term interest rates also reduced the demand for prepayment protection, which caused our prepayment protected specified pools to further underperform.
Meanwhile, the rise in long term interest rates drove net gains on our interest rate hedges and agency interest only securities, which along with net carry from the portfolio more than offset the net losses on our net on our long agency RBS holdings.
Turning next to slide six our.
Our total long credit portfolio decreased by approximately 9% to $1 $3 billion in the first quarter.
The quarter over quarter decrease was due to opportunistic sales of Clo's see MBS and European arm MBS as well as the completion of the non QM loan securitization in February.
Other portions of the portfolio did grow sequentially, however, including our small balance commercial mortgage residential transition and consumer loan portfolios, which grew by a combined 21%.
Moving now to slide seven as Larry mentioned, we capitalized on the agency yield spread widening during the quarter to add some attractively priced specified pools, which increased our agency portfolio of by 55% to nearly $1 5 billion.
In conjunction with these purchases we also increased the size of our short TBA position significantly.
Flipping flipping back to slide for now you can see the impact of these portfolio changes on our asset yields not.
Not surprisingly you can see here that the market yield on our agency portfolio at 2% is significantly lower than that on our credit portfolio, which was nine 8% at March 31.
The 2% yield on our agency portfolio was actually of 40 basis point increase from year end, but because we grew our agency portfolio of significantly. This quarter. We are now allocating 21% of our equity to agency versus 15% last quarter.
This larger agency allocation brought down the blended yield on the overall portfolio.
I'd also note that the average market yield on our credit investments actually increased to nine 8%.
From eight 8% of December 31 as.
As a result of our rotating capital from lower yielding CLO is CBS and European RBS into higher yielding loan investments.
Turning ahead to slide eight you can see that our recourse debt to equity ratio adjusted for unsettled purchases and sales increased during the quarter to two to one from $1 61, driven by the growth of the agency portfolio, while our overall debt to equity ratio increased to three one times from two six times.
Our average cost of funds decreased in the first quarter as well to 164% as compared to the two points here of 3% in the prior quarter, mainly due to a higher proportion of borrowings on the agency securities.
Also during the quarter, we continued making progress extending and improving our sources of financing and leverage.
In addition to the non QM loan securitization. We also added a new loan financing facility and extended the term improve the economics of two others.
For the first quarter.
G&A expenses per share were up <unk> <unk> per share to <unk> 17.
The other investment related expenses decreased depending on quarter over quarter to <unk> 11 per share we accrued an income tax expense of $2 million for the quarter, primarily due to an increase in deferred tax liabilities related to realized and unrealized gains on investments held in the domestic Trs.
Finally, our book value per common share at March 31 was $18 16.
Up three 2% from $17 59 per share at year end.
Now over to Mark.
Yeah.
Thank you Jr will.
For the vaccine news was great for the economy and in Q1 as evidenced by our recently reported GDP growth of six 4% three.
Of the reopening of the economy, which is still gathering steam was the strong tailwind for <unk> and its diversified origination businesses across the board in residential commercial and consumer strategies credit performance was good and we are generally seeing healthier loan growth as the economy reopens.
First let me discuss housing and non QM and residential transition loans, we picked up the pace of origination volumes and we completed another successful non QM securitization in the quarter the.
The technicals for the housing market are phenomenal and we are seeing some housing statistics that are absolutely eye popping.
First the supply demand imbalance is quite acute in many regions, resulting in some truly bizarre statistics the inventory of homes for sale is the lowest it's been in 40 years, but that data series. The only goes back 40 years. So it might be the lowest in 50 years and that ignores the population growth.
According to redfin, the average time on the market before of home cells is the mere 25 days and incredibly 45 per cent of homebuyers in the past year made an offer on the property sight unseen up from 28% the year ago.
And of course home price appreciation has been off the charts.
None of this is indicative of a normal housing market.
It may stay this way for a while but it is certainly at odds with historical norms and there are clear headwinds many of the commodity inputs to a new home are way up in price look at lumber, it's tripled in price plus labor shortages of bound so affordability is going to be challenged and the cost to build of new home has risen cigna.
<unk>.
And our portfolio, we have to resist just looking at last year's housing statistics, and extrapolating them into the future because last year's statistics were greatly impacted by COVID-19 and everybody loves the technicals for housing so capital has poured into housing related investments.
Of the price of non QM loans is up materially from the start of the year. So some of the outsized securitization economics. We saw on Q1 are a thing of the past and margins are back to more normal levels.
In addition to increasing non QM volumes in the last 12 months, we have seen a nice pickup in our residential transition loan volume.
These loans of shorter term typically one year and they are typically made to builders that are acquiring and renovating the home the expectation is that within a year. The generally complete their work and sell the property.
With the median age of the U S home nearing 40 years, and large parcels of land either difficult to acquire or difficult to get permitted in much of the country. We believe that you can increase the value of many U S homes with renovations that focus on addressing deferred maintenance.
And the evolving the way in which homes are being used with COVID-19 lockdowns such as more home offices makes this need for renovation even more compelling the challenge here for these operators is that so few homes of for sale.
We have already been on this business for several years the performance of our loans has been excellent and we have a very experienced team in RTL lending running the operation.
We're pursuing potential equity investments in RTL originators to give us additional control over underwriting and secure for the company our pipeline of new originations and we expect to close on one of these this quarter.
This is the sector that we believe over time will need capital and we clearly have the expertise. So I look forward to continuing to grow the RTL portfolio from here.
Moving next to commercial real estate when you after the first COVID-19 Lockdowns of commercial real estate has performed much better than market projections. Our own included a year ago. We're bullish on residential housing, but had many areas of concern about commercial real estate well, while we are still cautious on the on some commercial sectors.
Performance has been strong and the pace of activity Youre seeing on the commercial space of the good sign capital is flowing as evidenced by the increasing amount of new transactions. This quarter, we were able to grow our commercial bridge loan portfolio of significantly which is of great driver of core earnings.
Turning next to consumer lending consumers are sitting on a mountain of savings now which has increased from $1 five trillion pre COVID-19 to an estimated six trillion now and while a portion of that increases obviously from the rising stock market a lot comes from stimulus checks and lower spending during COVID-19 Lockdowns also.
Many of cut down their monthly mortgage payments by refinancing of an all time low in mortgage rates for us. This dynamic has been of mixed blessing.
The good news is the performance of our portfolio has been very good.
Last year, we saw many consumer loans entered the permit and we have seen borrowers leave the from it and continue making their payments. This is how the permit is supposed to work when it's well designed helping borrowers manage through of temporary loss of income without permanent damage to their lifestyle of their credit history on the flip side for us with consumers less.
Active in 2020, there was less demand for consumer loans. So in addition to managing our current portfolio and our origination of partnerships. We have continued to actively look to expand our consumer loan flow arrangements.
We believe very strongly that our analytics and data science gives us a significant advantage in underwriting many types of borrowers.
I'm very happy we were able to grow that portion of the portfolio. This quarter as loan growth has started to pick up.
The most important story on the agency MBS space this quarter with the big yield with the big increase in yields in the much deeper yield curve. The magnitude of both of these changes with similar to the taper tantrum.
<unk> of MBS was much better this time as fed support was consistent and fed messaging was clear that their support will be with us for a while longer.
When that supported eventually reduced we expect that the fed will taper gradually meaning that they will continue buying they'll just be buying less we manage the interest rate move and the yield curve move by dynamically hedging, but negative convexity hedging costs were substantial.
On the netting out a positive carry we had a very slight positive gain for the quarter in this strategy.
Agency MBS origination has been strong and our reverse mortgage portfolio the <unk>.
Company Longbridge has continued to grow its volume market share and profits.
Let's look at how the portfolio of evolved during the quarter.
You can see from slide six the credit portfolio might look as though it's shrunk quarter over quarter, but that's just the result of a non QM securitization, where we retained the good portion of the economics, we have.
We had not done this had been not on the securitization the portfolio of would've grown by about 100 million the.
Certainly of risk on quarter and credit spreads tightened, but that doesn't mean, we were sitting on our hands, we aggressively sold down our CLO portfolio, which has had phenomenal performance since the start of the year.
We also rotated out of the C M B S into commercial real estate loans.
The wild year of 'twenty 'twenty UFC did a good job of allocating capital to the best opportunities last summer there was distressed and securities prices of loan origination volumes were still pretty small so it made sense for <unk> to take advantage and deploy capital in securities.
Well when legacy non agencies got cheap we added aggressively and we hold off of trimming, our clo's or see MBS positions when prices were distressed.
Now the CLO and see MBS have recovered for a large degree so it makes sense to recycle that capital back into loan opportunities. We also sold some of our non dollar holdings.
This is one of the biggest benefits of being part of a larger manager with the broad platform and a wide and wide ranging expertise, we're able to look across sectors, so commercial versus residential and within sectors, namely loans versus securities to find the best opportunities.
The reach for yield is really strong right now and we took the giant vantage of that this past quarter to sell some securities and bullishness about housing strategies is very high the challenge moving forward is staying disciplined on working closely with our origination partners to secure of high quality loans of prices that will allow us to continue to grow.
Core earnings and support a higher dividend now back to Larry.
Thanks Mark.
The year is off to a great start for Ellington financial we.
We have continued our strong performance following the COVID-19 liquidity Crunch of last spring and the board just approved a big dividend increase last month, our third in the past year.
Given the magnitude of the most recent dividend increase I wanted to share a few thoughts on our dividend.
When determining our dividend recommendation levels. Besides first making sure that we are fulfilling our REIT distribution requirements, we usually start with core earnings that's.
That's because of core earnings helps isolate the most recurrent components of our earnings and so we and many other market participants believe that this metric provides valuable insight into our GAAP earnings potential and thus our GAAP earnings to dividend coverage potential.
Our core earnings has been growing nicely lately fueled largely by long growth and this quarter of core earnings covered even our new higher dividend run rate.
The.
That said our portfolio has also been generating substantial non core earnings in recent quarters.
This has included not only the typical non core earnings items, such as price your price appreciation on loans and securities and opportunistic trading gains, but importantly, we've also had significant additional non core earnings generated by our equity Stakes in originators and.
These originators are not only experiencing very strong earnings lately.
Just as importantly, they are experiencing rapid earnings growth and we think that growth is sustainable.
Longbridge has increased its market share on the reverse mortgage business by over 50% compared to pre COVID-19 periods, while lend sure recorded its first $100 million plus origination months in March.
At the same time, both companies are seeing excellent margins and we think that's sustainable to remember these two companies operate in non commoditized markets with significant barriers to entry, namely reverse mortgage origination and non QM origination.
The bottom line is that each of these companies is on pace in 2021 for over 50% year over year earnings growth.
And while none of these tremendous results are technically captured in our core earnings.
All operating businesses always present risks, we do see these strategic investments of ours as providing recurring sustainable earnings for us and so we view these as helping support earnings earnings growth and yes, even dividend growth in the future.
Meanwhile, we are in active negotiations on multiple additional small, but strategic equity investments in loan originators, which we hope will not only generating earnings for us directly but also indirectly thanks to loan flow of agreements, which would help us expand our asset base and loan pipeline volume underwritten to our standards.
We're hopeful that we'll close on one or two of these strategic investments later this quarter, we believe that our equity investments represent underappreciated franchise value for Ellington financial.
As the economy continues to reopen but market volatility returns our focus continues to be on our dual mandate of growing the portfolio and earnings while also staying disciplined on risk and liquidity management to preserve book value of cross market cycles, as we did last year.
We will continue to seek to grow our high yielding loan portfolios. We will continue to be operating at the opportunistic about where and how to allocate our capital and we will continue to hold the appropriate levels of leverage and liquidity and this way. We can continue building a powerful and consistent earnings stream for shareholders. While also protecting downside.
With that we'll now open the call to questions operator.
Once again, if you have a question press star one on your channel.
Thank you Pat.
The first question you have it.
From Doug Harter with credit Suisse.
Oh thanks.
I was hoping you could just talk a little bit of.
There were some differential of legacy loans versus securities today.
How much of that difference would be kind of on the.
Versus the.
The sort of in some structures that are available for loans versus securities.
Hey, Doug it's Mark.
So it's a good question I think.
I guess, what I would say is debt.
We've seen.
Term financing via Securitizations.
As very attractive, but we've also seen of repo rates come down too. So it's not so much of the financing differential I guess part of it is debt.
The price of Securities now sort of.
Right right now the price of the securities in bed pretty good.
Optimism about the health of the economy, which is a lot different than where they were last summer then we added them.
So you're not seeing big discounts to par and you're not seeing a lot of scenarios, where we see price appreciation significantly above where securities currently trade. So.
That's sort of what the tilted us back to loans, you know loans have well they've done well they haven't performed as well as securities.
And so when we think about total return which essentially.
For the Levered carry plus price appreciation.
Given the strong price appreciation, we've seen the securities and given that many securities now our price too.
Very optimistic.
Optimistic.
Economic.
The projections, which may well be true, we just don't see as much upside in the securities right now.
Thank you.
Okay.
The next question is from Bose, George with K B W.
Hey, guys. This is actually Mike Smith on for Bose.
Quick question on leverage sort of increased two to three one times from two six and you mentioned youre comfortable taking it up below the more so I was just wondering if you. If you can provide a target leverage range.
I think the first thing to point out is the overall leverage of two 6% to $3 one increase.
Has a lot to do with the consolidated non QM securitizations. So we really focus on the recourse, which also increased one six to two times.
I think we've made the point in our prepared remarks that day.
During 2018 in 2019 is kind of pre COVID-19.
Years that recourse leverages more on the two and a half to three times area.
So certainly above where it is today.
You know I think it's the it's a function of what investment opportunities are we seeing in financing and where as we continue to grow loan portfolios, which we continue to do in Q2.
That's a good candidate to increase leverage and we can do that on a few ways we can.
On Unutilized financing capacity on some assets, we have very large shares of of unencumbered assets, which we disclosed this in the kind of 400 plus million area. So there on finance assets that can be financed theres also.
In the situations, where we're not just cloud of seeing the minimum amount of haircut capital. So.
Yes, I think there is.
Haven't provided.
Guidance on where that leverage will be and could be because it's really a function of what the composition mixes, but suffice to say, we could see it going up from two times for the right kind of the right opportunities.
And if I could.
To add to that J R.
If you turn to page 24 in the deck.
You can see there the two charts on the top I think of pretty useful.
For this discussion the one is of course, just our capital usage.
By the strategy credit versus agency on unemployed and you can see that.
We increased the agency allocation as we said in the remarks to about 21%. So that was the substantial increase and then if you look at the chart to the right on the top right of the slide.
You can see basically the breakdown for each strategy of how much leverage we employ any strategy. So you can see that on an agency strategy.
We increased leverage.
272 to one.
And in the credit strategy remained fairly level and now at $2 one to one so as we allocate capital, which we do Opportunistically between agency and non agency sorry between credit and the agency that will obviously affect the overall mix, which as you can see on the slide is at three one and I think we've said before.
For that we're comfortable especially given the.
Our ability and our practice of using tpa is to hedge our agencies, which really creates a much lower volatility and lower risk strategy in agencies were comfortable bringing that agency leverage probably up into the nines at certain times.
From seven point too and of course, the the credit strategy is going to be very asset specific in terms of how much leverage we employ there, but I think two to one is of very comfortable level and we have room to increase that as well.
Great. Thank you very much for the detailed answer.
Okay.
Your next question is from Crispin Love with Piper Sandler.
Thanks, Good morning, Larry you hit on my first question on some of your final comments, but I'm just looking for a little more detail or clarification. So the new dividend is <unk> <unk> per quarter and in the release, you talked about but even having potential increases to that going forward. So how should we be thinking about the core earnings.
For the company in the near term do you expect to continue to be covering the dividend with core earnings following that 40% bump to the dividend or could the core earnings probably be even higher than that 40 twos that run rate.
Right. So yes, we do expect to be able to continue to cover that dividend with core.
As I mentioned, we there are other components of our earnings that we think are core like if not core.
I'll mention for example of that.
Longbridge most of the tangible net worth in Longbridge is in the form of Msr's now of those Msr's, we're directly on our balance sheet right that would.
Low right to the core the.
The sort of the core yield if you will on on those msr's, but since there <unk>.
Trapped if you will.
And in long bridge.
So just by virtue of of our structure if you will.
Those earnings don't flow through each of our core but rather flow through.
I appreciate the book value of.
Of long bridges Longbridge earns generates earnings through MSR is an origination and of course as Longbridge is book value grows through earnings and otherwise that's going to increase.
On the value for us so.
But in any case, yes, so I think we absolutely see the new dividend as being covered by core going forward.
Otherwise I don't think we would of Ray.
Of raised it to that level, but.
Going forward.
I think that it's.
I think we'll be in a position to raise the dividend.
Not necessarily if we're covering it at that moment, but just as long as we see the visibility and half the portfolio.
And the.
Especially with the some of these pipelines, we havent flow agreements if we can see.
On the core and the near term as covering the dividend and I think that would be another reason to be able to cover it so as we.
We mentioned on the call we are working on some other strategic equity investments should those be consummated and should we get flow agreements, where we have good visibility in terms of what the flow will be from those that could be another reason to to raise the dividend.
Okay. Thanks, that's all that's all really helpful. And then just one more from me so with with the recent news of debt the QM patch potentially expiring in July and then some complexity in the revised final rule, how would you expect that to impact the ESC and non QM originations coming out of lend share and just I guess overall.
Just your overall thoughts on the non QM market currently.
Sure, it's Marc I can take debt.
That's a good question so what's interesting is debt.
The shifts we've seen.
From the GSE as this year has been too.
Pull back a little.
Little bit.
And let some market share of go to the private label market and where you've seen that.
Most significantly in the last two months.
<unk> been in la.
The loans that Fannie and Freddie.
Had originated two for.
Uh huh.
Investors right. So it's a property that someone owns and their name and they rent out right. So what Fannie and Freddie recently did was the limited that to 7%.
On the originators deliveries right and there are some originators that were significantly above that 7% limit and so what youre seeing now is a bit of of transition for some of that volume.
Now going either a securitization route.
The.
The private label or or just winding up in.
In the loan portfolio so.
You know the.
Linked non QM patch as you mentioned has has changed.
And you know, we're sort of waiting to see what the final.
You know what the real final details are but I guess the overall the overall trend. We are seeing is a growing private label market and that backdrop I think is beneficial.
Beneficial for Ellington financial because I think theres going to be a greater percentage of loans that originated the theyre going to not go through Fannie Freddie guarantee and they're either going to go into loan portfolios or through private label Securitizations.
Thanks, Mark and Larry that's helpful.
Sure.
Okay.
The next question is from the Doberman with J P. J M P Securities.
Hi, Thanks, Good morning, I, just wanted to jump on it quickly ask.
For you guys are maybe seeing more opportunities to make strategic investments in any originator partners.
Hey, Macau, it's Larry.
Yes.
We are we're focusing on.
As we did with the we have a few strategic.
Investments as you know and those all started out small.
And that's kind of been our preferences to.
To help.
The gross something more organically.
With the capital to buy the product Thats originated and the capital I think to answer the by the product that's originated.
But.
To not buy into let's just say in operation.
That's huge that's going to.
Yeah.
Really put us at maybe more risk from an operational standpoint so.
So we're looking at a number of smaller.
<unk> right now.
In many cases $5 million and under.
But in a variety of originators that we think either have some good capabilities today to provide flow or with the help of our capital can step up and expand their.
Our presence in a variety of markets.
Where we have.
One that we're looking at in the RTL space, which I think we mentioned we have one that we're looking at in actually the conforming space.
We have one that we're looking at.
In the.
The non QM space, so there's a whole bunch of ones that we're sort of actively pursuing and.
I think as I said I wouldn't be surprised to see one or two of those close this very quarter.
Got you. Thank you very much I think for me.
Thank you.
Your next question is from Eric Hagen with B T I D.
Thanks, Good morning, I've got a couple first on non QM I think the prepayment speeds have been pretty elevated there across the market. Some originators I think are starting to.
The include prepayment penalties on those loans I imagine most of what you guys are acquiring is that of premium.
So can you share of how you structure around prepayment risk as you continue building out that portfolio.
On the second one is can you just talk about the overall approach to credit hedging right now just given the way you see of the world on the capital markets and then can you remind us which corporate credit indices, your long on which ones Youre short thanks.
Sure Eric This is Marc can.
Talking about the non QM speeds.
So yes, you have seen the.
Note rates offered to non QM borrowers come down in the last six months when the.
Non QM market sort of started to reopen.
You know last May or June initially the difference of note rates between non QM and the agency loans was wide.
And that has certainly come in and as the rates are lower and also of you have.
Borrowers sitting on a lot of equity no you've seen faster speeds, but you know youre seeing faster speeds relative to sort of the slow speeds we saw in 2020.
Ever since its.
Inception, you've seen non QM speeds pretty fast right.
And there are certain things.
We know about non QM speeds as a function of loan attributes that we think about that you tend to see.
Self employed borrowers a little bit slower than.
Borrowers that are you know.
Two employees and so in terms of penalties.
You can put them on the investor loans.
Not a huge part of what we do.
And if you look at the premiums in the non QM market.
Theres still you know a.
A big discount to where.
A lot of the pools in the agency space trade so.
The way we approach is that there are certain things, we can't control of that we can't control HPA.
We can't control how aggressive.
Is it going to be on non QM rates. So it's the risks that we manage through and we hedged through and it's something that we've dealt with really since.
2015, and it'll be with us I think as long as we're in.
The origination space, because essentially originators of selling loans at a premium because.
They are advancing on par to the bar with the closing table and then they have a fixed expenses. So.
You know it ebbs and flows I think now you've seen this a little bit of of backup in agency origination rates. So maybe that'll feedback into non QM rates you haven't seen that yet.
But it's something we watch.
I think we have.
You know really good analytic tools to stay on top of it but it's sort of of risk inherent in that business.
And Mark I'll take the.
The part about the corporate credit hedges.
Sure.
Yeah, so and.
And the other hedges. So if you turn to slide 17, we show each quarter, what our credit hedging portfolio. It looks like it's fairly light right now or as of quarter end I should say.
The two.
And then you can see there are three bars that have any significant to them.
The European sovereign debt is that's really almost exclusively on currency hedge so I wouldn't focus on that we do have some European RBS.
That's very straightforward, it's really just the hedge the.
The currency risk.
On the <unk> is certainly something that we use a lot against our CBS portfolio, specifically and that market is a is a terrific market to be to be a trader in an active trader, which we are spreads can move around a lot.
Deals new deals the new issues can get hung up.
And there's often a pretty good disconnect between the CMV actually can use to hedge.
And the cash markets. So and of course, you know our outlook can change there too in terms of how much we want to be hedged as a result so.
So that's the <unk> portion now the corporate portion of the portfolio.
We have pretty much used almost exclusively against our CLO switches, where on corporate credit is an issue.
<unk> talked about that portfolio is shrinking in favor of more of the.
The mortgage and consumer loan portfolios that we have flow agreements on it otherwise.
And I would expect it to continue to shrink now of course, we're opportunistic sort of any great opportunities arise. There then you could see that increase and then you would see the the.
The CD accident, we use the corporate hedges used to increase as well you can see that as of March 31.
Our you can see the height of that bar is $20 million in terms of our hedge we measure that because we use different instruments.
We can use etfs. So we can you see the ax, but here, we sort of equate things to what we calculated the CTX equivalent. So our portfolio is the equivalent of just a bit over $20 million of <unk>.
The long protection on high yield CTX, so that's a relatively small.
Small hedge right now.
We view a lot of the risks that we have on the credit side of the portfolio as idiosyncratic.
As you can imagine not related really to corporate credit directly.
On the resi side being in first mortgages.
To be of significant downturn in housing prices really for us to tell.
Take a hit there.
And same even on the commercial mortgage side as well, where it's even more of your synchronic our loans.
So.
We don't view really having a corporate credit hedge as anything more than potentially a on out of the money put like if that's something that from time to time.
We've considered doing just to kind of hedge of tail risks, but we.
We don't have currently.
Any kind of direct or in the money hedges and corporate credit against.
Our portfolio other than the CLO portion would be the really the substantial thing that we'd be hedging there.
Thanks for that was really helpful color.
Okay.
That was our final question for today, we thank you for your participation.
Ellington financial first quarter 2021 earnings Conference call. You may disconnect. Your line at this time and have a wonderful day.
Okay.