This article first appeared on GuruFocus .
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GAAP Net Income:$0.43 per share for the second quarter.
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Adjusted Distributable Earnings (ADE):$0.60 per share, exceeding the quarterly dividend.
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Annualized Economic Return:13.6% for the quarter.
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Book Value per Share:Increased by $0.05 to $13.61 after paying $0.39 per share in dividends.
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Longbridge Originations:Approximately $590 million, a 38% year-over-year increase.
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Longbridge Product Mix:Proprietary reverse mortgages represented approximately 54% of volume, with HECMs representing the remaining 46%.
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Securitization Volume:Approximately $2 billion of loans securitized during the quarter; approximately $4 billion UPB securitized in the first half of 2026.
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Net Interest Margin:336 basis points, roughly unchanged quarter over quarter.
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Recourse Debt-to-Equity Ratio:Remained at 1.9:1 at quarter end.
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Overall Debt-to-Equity Ratio:Increased modestly to 9.2:1, primarily due to additional non-recourse borrowings from securitizations.
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Weighted Average Borrowing Rate:5.5% on recourse borrowings, essentially unchanged from the prior quarter.
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Credit Losses:Inception-to-date cumulative realized credit losses were 17 basis points on approximately $20.4 billion of residential mortgage loan fundings and 39 basis points on more than $2.5 billion of commercial mortgage bridge loan originations.
Release Date: August 07, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
Positive Points
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Ellington Financial Inc ( NYSE:EFC ) delivered strong Q2 2026 results with GAAP net income of $0.43 per share and adjusted distributable earnings (ADE) of $0.60 per share, well above the $0.39 dividend, while book value per share increased to $13.61.
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The company achieved an annualized economic return of 13.6% for the quarter, driven by strong performance across its diversified platform, including excellent securitization execution and robust credit performance.
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Longbridge, a key subsidiary, had another standout quarter with originations up 38% year-over-year, record proprietary reverse mortgage volumes, and strong servicing contributions, supported by improved securitization executions.
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The company's securitization program continued to replace short-term mark-to-market financing with longer-term non-recourse funding, with approximately $4 billion UPB securitized in the first half of 2026, enhancing funding stability and reducing refinancing risk.
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Credit performance remained excellent, with inception-to-date cumulative realized credit losses of only 17 basis points on residential loans and 39 basis points on commercial loans, reflecting strong underwriting and asset management capabilities.
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The company is expanding its platform through strategic investments, including the pending acquisition of a residential servicer, which is expected to enhance special servicing capabilities and unlock value in managing delinquent loans.
Negative Points
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Higher interest rates during the quarter led to unrealized losses on fixed receiver interest rate swaps used to hedge fixed payments on unsecured notes and preferred equity, impacting corporate other results.
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The company recognized an unrealized loss in corporate other due to tightening spreads on its unsecured debt, which increased the fair value of the liabilities.
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Credit spreads have tightened across the board, making it more challenging to find attractive risk-adjusted returns, particularly in lower FICO score segments and cash-out refinancing, which the company is closely monitoring.
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The company's overall debt-to-equity ratio increased modestly to 9.2:1, primarily due to additional non-recourse borrowings associated with recent securitizations, which could increase leverage risk.
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The pending acquisition of a residential servicer is small and not expected to have an appreciable impact on balance sheet or earnings initially, indicating limited near-term financial benefit.
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The company expects some noise in Longbridge's earnings due to securitization activity, and the high ADE contribution from securitizations may not be sustainable as a run rate, with management guiding to a lower 'high 40s' ADE run rate.
Q & A Highlights
Q: Can you provide additional color on the pending acquisition of a residential servicer, including whether it comes with MSR assets or sub-servicing contracts? A: Mark Tecotzky (Co-Chief Investment Officer) and Laurence Penn (CEO) explained that it is a small servicer with single-digit billions in servicing rights and some sub-servicing contracts, expected to close in September. It will not bring appreciable MSR size to the balance sheet initially, but the strategic motivation is to build a best-in-class special servicing platform to manage delinquent loans across multiple products, filling a gap left by the consolidation of third-party servicers.
Q: How are Longbridge volumes and margins trending early in the third quarter, and what is the expected relationship with higher interest rates? A: JR Herlihy (CFO) noted that proprietary reverse mortgages are less sensitive to higher rates than HECMs. Q2 submissions were $870 million, up from under $750 million in Q1, providing a positive leading indicator for Q3 volumes. Larry Penn (CEO) added that higher rates make the proprietary product more competitive versus the government HECM product, allowing Longbridge to gain market share.
Q: What is a more normalized earnings run rate or contribution to ADE from Longbridge as the segment continues to scale? A: JR Herlihy (CFO) stated that Longbridge contributed $0.23 and $0.21 to ADE in the last two quarters, versus an average of $0.12 in 2025. While securitization execution was notably strong in the first half, the recurring base servicing income is growing. Larry Penn (CEO) guided that even with just one securitization per quarter, the company is comfortable with a high-40s ADE run rate.
Q: Where do you see the best risk-adjusted returns in credit today, and conversely, where are you least comfortable adding? A: Mark Tecotzky (Co-CIO) explained that while credit spreads have tightened across the board, the spread between loan purchase prices and securitization bond sales has been preserved, keeping retained yields attractive. He noted weakness in lower FICO score loans and cash-out refinancings, which is why the consumer portfolio has been kept relatively small. Larry Penn (CEO) added that the commercial mortgage space is seeing increased supply of stressed assets, particularly in the sub-$50 million range, which could present opportunities.
Q: Given the attractiveness of returns, how are you thinking about maintaining short duration versus adding duration to lock in returns for longer? A: Mark Tecotzky (Co-CIO) highlighted that the company retains call rights on securitizations, providing a long-term option value. He noted that short-duration assets like residential transition loans (RTLs) are intentional because they represent the risk profile the company prefers. Larry Penn (CEO) added that while reverse mortgages are long-duration, the overall portfolio is deliberately weighted toward shorter-duration, high-cash-flowing assets to manage liquidity and reduce refinancing risk.
Q: How much of the benefits from investments in operating companies come through ownership stakes versus returns from the investment portfolio of retained assets? A: JR Herlihy (CFO) quantified that the total investment in originator stakes is about $100 million out of a $5 billion portfolio. The contribution to ADE from these originators is roughly a nickel per share, or less than 10% of the $0.60 ADE. While the majority of earnings come from loans sourced through affiliates and securitized into retained tranches, the originator stakes are "punching above their weight," contributing more than 2% of earnings on just 2% of the portfolio.
Q: On non-QM, where is EFC differentiating from peers on origination focus, and how has securitization execution trended on spread? A: Mark Tecotzky (Co-CIO) stated that EFC focuses on loans with the best prepayment S-curves, favoring purchase money loans with higher income and FICO scores. He believes non-QM bonds are fairly priced, possibly slightly cheap, and the market's growth to an estimated $250 billion in new issuance this year is attracting more institutional investors. Larry Penn (CEO) added that the proprietary loan portal uses loan-level price adjustments to penalize or benefit certain loan attributes, which has contributed to strong prepayment and credit performance.
Q: How are you thinking about hedge construction under Chair Warsh's framework, and how are you sizing TBA shorts and CDX? A: Mark Tecotzky (Co-CIO) explained that credit hedges are used tactically to lock in execution during deal marketing and strategically to protect the portfolio from economic shocks. On the interest rate side, the company focuses on ring-fencing rate risk to generate ADE as spreads to SOFR. While Warsh's communication style may lead to more rate volatility, it has been manageable so far. Larry Penn (CEO) pointed to slide 16, showing the portfolio is well-immunized to instantaneous rate shocks.
Q: Why did you stop breaking out the agency contribution to earnings, and should we expect agency to decrease further? A: JR Herlihy (CFO) confirmed the decision was driven by size, as the agency portfolio is now sub-$200 million on an invested basis, down from over $2 billion several years ago. The company has rotated capital into credit strategies where it sees better returns and clearer competitive advantages. The agency portfolio is no longer needed for REIT test purposes, so it is now appropriately considered one of several diversified strategies within the broader investment portfolio.
Q: Is additional M&A and investment into loan originators part of the playbook into 2027, and how would you fund it? A: Larry Penn (CEO) confirmed it is absolutely part of the playbook, citing a 12-year history of investing in smaller originators. The company is looking at opportunities in non-QM, commercial mortgage, and asset-based finance. Funding would come from cash on hand, and given the high returns on equity (20%+) versus the low cost of unsecured debt (low 7s%), it represents a great use of capital.
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
