Earnings Call Transcript - EFC Q2 2025

Operator, Operator

Good morning, ladies and gentlemen. Thank you for being here. Welcome to Ellington Financial's Second Quarter 2025 Earnings Conference Call. This call is being recorded. Now, I would like to hand it over to Alaael-Deen Shilleh, Associate General Counsel. Please proceed.

Alaael-Deen Shilleh, Associate General Counsel & Secretary

Thank you. Before we begin, I'd like to remind everyone that this conference call may include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our annual and quarterly reports filed with the SEC. Actual results may differ materially from these statements. So they should not be considered to be predictions of future events. The company undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, Co-Chief Investment Officer; and JR Herlihy, Chief Financial Officer. Our second quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Today's call will track that presentation and all statements and references to figures are qualified by the important notice and endnotes in the presentation. With that, I'll hand it over to Larry.

Laurence Eric Penn, CEO

Thanks, Alaael-Deen. Good morning, everyone, and thank you for joining us today. We'll begin on Slide 3 of the presentation. Ellington Financial delivered an excellent second quarter with broad-based contributions from both our diversified investment portfolio and our loan origination platforms. For the quarter, Ellington Financial generated GAAP net income of $0.45 per share, equating to an annualized economic return of nearly 14%, with book value per share increasing quarter-over-quarter to $13.49. Meanwhile, our adjusted distributable earnings per share increased sequentially by $0.08 to $0.47, significantly exceeding our $0.39 of dividends per share. In a volatile, but opportunity-rich second quarter, Ellington Financial once again demonstrated the strength and adaptability of its platform. Early in the quarter, as credit spreads widened amid tariff-related uncertainty, we were very well-positioned as we had a large credit hedge portfolio coming into the quarter. In recent periods, we have tended to increase our corporate credit hedges somewhat in response to tighter corporate credit spreads and then monetize some of those credit hedges if spreads widen. During market-wide negative credit shocks, such as we saw in early April, our corporate credit hedges not only help stabilize our book value, but they also bolster our liquidity as we have daily access in cash to the mark-to-market gains on these positions. During the April sell-off, with markets dislocated and our liquidity position strong, we were well positioned to capitalize on the environment by adding attractively priced securities. That early April market volatility also helped guide our securitization activity. Following a first quarter in which we executed five well-timed securitizations, we temporarily paused issuance during early April and then we resumed activity only after spreads had stabilized. Our patient approach was rewarded as we ended up completing a full six securitizations over the course of the second quarter at attractive levels. As a result of all this activity, our overall portfolio size remained roughly unchanged quarter-over-quarter. Securitizations, tactical sales and steady principal repayments from our short-term loans were largely offset by opportunistic purchases and growth in our mortgage loan portfolios, particularly in non-QM, proprietary reverse and commercial mortgage bridge. Turning back to our adjusted distributable earnings. As I noted, we reported a terrific $0.08 increase this quarter to $0.47 per share. That very strong result reflected both steady credit performance from our loan portfolio as well as standout contributions from our loan origination platforms, most notably $0.13 in ADE contributions from Longbridge. Longbridge's strong quarter was driven by solid performance across all components of its business. Origination profits driven by volume growth and stable margins in both HECM and proprietary reverse, securitization gains, reflecting a successful transaction in May and servicing income driven by recurring MSR revenue and strong tail securitizations. We also benefited from notably strong performance from our non-QM originator affiliates, LendSure and American Heritage, underpinned in each case by high origination volumes and continued solid operating margins. Given our equity stakes in these originators, their profitability contributed nicely to Ellington Financial's bottom line for the quarter. But more importantly, we continue to earn robust net interest income from the non-QM loans and retained non-QM tranches we hold on balance sheet, many of which continue to be sourced from these two affiliates of ours. Meanwhile, we continue to expand our strategic originator partnerships. During the quarter, we closed on another equity investment in a non-QM and RTL originator. This strategic investment was accompanied by our typical forward flow agreement with that originator, consistent with our strategy of securing ongoing access to high-quality loans at attractive pricing and on a predictable timeline. With that, I'll turn the call over to JR to walk through our financial results in more detail. JR?

J. R. Herlihy, CFO

Thanks, Larry. Good morning, everyone. For the second quarter, we reported GAAP net income of $0.45 per common share on a fully mark-to-market basis and ADE of $0.47 per share. On Slide 5 of the deck, you can see the portfolio income breakdown by strategy, $0.61 per share from credit, negative $0.01 from Agency, and $0.11 from Longbridge. And on Slide 6, you can see the ADE breakdown by segment, $0.56 per share from the investment portfolio segment and $0.13 per share from the Longbridge segment. In the credit portfolio, net interest income grew sequentially and we also had net realized and unrealized gains on non-QM loans and retained tranches, closed-end second lien loans and retained tranches and other loans in ABS. Positive results from equity investments and loan originators further supported results. Partially offsetting higher net interest income were net unrealized losses on forward MSRs and losses on residential and commercial REO. Our Agency portfolio, meanwhile, had a modest loss as agency yield spreads were volatile and finished the quarter wider overall. The Longbridge segment had an excellent quarter, both in terms of GAAP net income and ADE with strong contributions from both originations and servicing. In originations, higher origination volumes in both HECM and proprietary reverse loans, steady origination margins for both products and net gains related to a proprietary reverse remote mortgage loan securitization drove results. Meanwhile, MSR-related income, strong tail securitization executions and the net gain on the HMBS MSR Equivalent, primarily due to tighter HMBS yield spreads drove the positive contribution from servicing. These gains were partially offset by net losses on interest rate hedges. Turning now to portfolio changes during the quarter. Slide 7 shows a 1% increase of our adjusted long credit portfolio to $3.32 billion quarter-over-quarter. Our portfolios of commercial mortgage bridge loans, non-QM loans and non-Agency RMBS all expanded, driven by net purchases. These increases were largely offset by the impact of securitizations, tactical sales of HELOCs and non-QM loans and a smaller residential transition loan portfolio with principal paydowns in that portfolio exceeding new purchases. In addition, we successfully resolved a larger nonperforming commercial mortgage asset during the quarter and now have only one significant workout remaining. Meanwhile, for our RTL, commercial mortgage and consumer loan portfolios, we received total principal paydowns of $248 million during the second quarter, which represented 15% of the combined fair value of those portfolios coming into the quarter, as the short duration portfolios continued to return capital steadily and provide excellent visibility on evolving credit trends. On Slide 8, you can see that our total long Agency RMBS portfolio, while still small, increased by 5% to $269 million. Slide 9 illustrates that our Longbridge portfolio decreased by 1% sequentially to $546 million as the impact of the securitization of proprietary reverse mortgage loans completed during the quarter slightly exceeded the impact of new originations in that sector. Please turn next to Slide 10 for a summary of our borrowings. At June 30, the total weighted average borrowing rate on recourse borrowings decreased by 2 basis points to 6.07% overall with a notable 15-basis point decline on credit borrowings. Quarter-over-quarter, the net interest margin on our credit portfolio increased by 21 basis points, while the NIM on Agency decreased by 17 basis points. With the size of our overall investment portfolio largely unchanged quarter-over-quarter, our leverage ratios were unchanged as well. At both March 31 and June 30, our recourse debt-to-equity ratio was 1.7:1 and including consolidated securitizations, our overall debt-to-equity ratio was 8.7:1. At June 30, combined cash and unencumbered assets increased to about $920 million or more than 50% of our total equity. Our total economic return for the second quarter was 3.3% non-annualized and our book value per share increased to $13.49. As has consistently been the case, we carry no goodwill on our balance sheet despite having made select corporate acquisitions over the years and we do not recognize any deferred tax assets. As a result, our reported book value is a fully tangible book value. With that, I'll pass it over to Mark.

Mark Ira Tecotzky, Co-Chief Investment Officer

Thanks, JR. I'm very happy with our performance this quarter. It feels to me like Ellington Financial has shifted into a new gear. We had broad-based contributions across the investment portfolio, including from our investments in originators and a significant contribution from the Longbridge segment. Despite paying a generous dividend, book value per share increased. Over the past decade, we have methodically and thoughtfully assembled the building blocks of vertical integration and that architecture is now coming through in full force in our GAAP earnings, ADE and securitization volumes. Along the way, we have taken equity stakes in several mortgage originators and have nurtured their growth. Our portfolio of originator affiliates is growing market share, generating significant loan volumes for Ellington Financial and operating highly profitably. We have deliberately constructed Ellington Financial's loan business so that our investments in mortgage originators can secure us a steady pipeline of high-quality loans, which through the securitization process, we can turn into high-yielding investments for our portfolio. And now thanks to a robust origination portal developed by our technology team, Ellington Financial is purchasing non-QM loans from a wider range of lenders who access our competitive pricing and seamless workflow through a web-based platform. Our loan volume growth is enabling more frequent securitizations, which both reduces market risk and creates those high-yielding retained investments for our portfolio. Each incremental securitization also expands the universe of loans on which we benefit from valuable call options and strengthens our brand as a best-in-class securitization platform. A well-branded platform is a huge competitive advantage. It enables us to lower our liability costs relative to our competitors, sharpen our pricing and acquire the loans we find most attractive. One highlight this quarter is that we were able to increase both ADE and net interest margin while keeping our overall portfolio size largely unchanged. One important driver of this improvement in efficiency comes from our expanding portfolio of high-yielding securitization retained tranches, which contribute outsized ADE. We completed six securitizations this quarter, a record for Ellington Financial. These transactions replace repo financing with non-mark-to-market long-term financing, enhancing the stability of our balance sheet and guarding against potential funding shocks. What's more, as our warehouse lenders see the consistency of our deal executions, they are able to provide Ellington Financial with more favorable financing terms on our warehouse lines. In commercial real estate lending, our bridge loan business is back in growth mode with more high-quality properties to lend against and more sponsors we want to work with. Our partnership with Sheridan Capital has been instrumental in driving this expansion. As with non-QM, we have also successfully lowered our financing costs for this product as our lenders recognize both our expanding footprint and the quality of our collateral and sponsors. As with non-QM, lower financing spreads for our commercial bridge business have been a great tailwind for our net interest margin. So we are expanding NIM from both sides of the equation by adding high-yielding assets, including more retained tranches and more commercial bridge loans and by lowering our funding costs in multiple parts of the portfolio. As a result, we were able to expand the NIM on our credit portfolio by 21 basis points in the quarter despite the general tightening of asset spreads in the market. This quarter also featured strong earnings contributions from our portfolio of originator affiliates. Ellington Financial provides our affiliates with consistent and competitive loan pricing. Our originator affiliates have then used that pricing power to grow both market share and profitability. While our investments in these mortgage originators have been highly profitable even in the current interest rate environment, they could be even more profitable should interest rates decline meaningfully from here when I expect both volumes and operating margins to expand significantly. There was a lot of action in the past few months at FHFA, including major turnover at the Fannie Mae and Freddie Mac boards. If as expected, the footprint of the GSEs shrinks, that door will open further for Ellington Financial to expand into a whole host of new loan sectors that Fannie and Freddie Mac pull back from. These market changes could have the potential to broaden our securitization platform and allow us to deploy capital in some very deep, but also very profitable new areas. But there are always things to be careful about. First on our mind is home price appreciation. Weakness in home prices, once more localized, is now more widespread. We are monitoring this closely and believe we are appropriately pricing for the risk. With last week's job report prompting revisions to many economic forecasts, the odds have increased for lower interest rates offering some home price appreciation support. Meanwhile, our research team continues to study monthly remittance reports in detail. Lastly, as we grow our loan volumes, we need to stay laser-focused on execution. We know we have to provide consistent pricing and best-in-class service to our origination partners and ensure that our securitization process remains a well-oiled machine. We also need to closely and vigilantly analyze incoming data so we can adjust our lending guidelines in real-time in response to signs of weakness in housing or consumer health. Now back to Larry.

Laurence Eric Penn, CEO

Thank you, Mark. Ellington Financial's GAAP earnings and ADE have exceeded our dividend so far in 2025 and I am confident that trend will carry through the back half of the year. Building on that momentum, our third quarter is off to a great start with four securitizations priced so far, bringing our year-to-date total to 15. We continue to see strong performance across both our investment portfolio and our origination platforms. Longbridge's momentum has also carried right into the third quarter with July setting a new high for originations in 2025. We are particularly excited about the recent launch of Longbridge's HELOC for Seniors program, which we believe has the potential to become a meaningful contributor to Ellington Financial's earnings. While we haven't talked much about it before today, Mark mentioned the clear benefits we're seeing from the recent rollout of Ellington's non-QM loan origination portal, which enables our approved non-QM sellers to lock in loan sales to Ellington Financial through a fully automated web-based platform. This proprietary technology not only enables us to significantly scale our non-QM loan purchase volumes, but at the same time, it delivers real-time market feedback to our loan origination partners and ultimately streamlines the entire underwriting process. Our non-QM portal has enabled us to expand and further diversify our origination footprint by deepening relationships with both affiliate and non-affiliate originators alike with new origination partners signing on to the platform virtually every week. Looking ahead to the remainder of the year, Ellington Financial is truly firing on all cylinders now. And so I'm really optimistic that we will continue to both comfortably cover our dividend and grow book value per share. As you can see on the bottom of Slide 3, we're doing this even while keeping our liquidity position strong and our recourse leverage low, thus providing us with ample capacity to jump on any extraordinary opportunities as they emerge like we saw in April. Finally, we are also committed to further strengthening our liability structure, not only through additional securitizations, but also by strategically increasing our unsecured borrowings over time. And with that, let's open the floor to Q&A. Operator, please go ahead.

Operator, Operator

We go first this morning to Bose George of KBW.

Bose Thomas George, Analyst

Can you talk about the outlook for Longbridge? If rates decline, just how it helps the business? And then to the extent that volumes are increasing across the board for a lot of other asset mortgage types as well, how does that impact it? Is there kind of a shift of attention for some of the producers to other loan types? Or yes, just if you can just walk through that.

Laurence Eric Penn, CEO

Thanks, Bose. I will discuss Longbridge and then turn it over to Mark for the latter part of your question. Yes, declining rates will definitely benefit Longbridge in several ways. In the reverse mortgage business, known as the principal factors, the percentage of the home value a borrower can withdraw depends on their age. Generally, older borrowers can access a higher percentage, leading to a higher starting loan-to-value ratio. As rates decline, these principal factors increase because they are calculated based on the present value, which is largely influenced by the 10-year treasury yield. This makes reverse mortgages more appealing as borrowers can withdraw more funds. This applies to both the HECM product, where HUD sets the principal balance factors, and our proprietary product, which also considers long-term rates. As we've seen in the past, when rates drop, particularly the 10-year treasury, the starting loan-to-value ratio increases, encouraging borrowers to take out more reverse mortgages, thereby raising the loan balance of each. Additionally, with fixed-rate loans in our portfolio, lower rates will lead to increased refinance activity. Importantly, Longbridge's market share has grown over the past few years, allowing us to capture a larger share of the market, even from lenders that are no longer operational. Interestingly, we have a specific hedge in the Longbridge segment that acknowledges this trend. While we profit from the hedge when rates rise, we do incur losses when rates decrease, but these losses are compensated by higher origination and refinance activity. Now, I'll let Mark address the second part of your question.

Mark Ira Tecotzky, Co-Chief Investment Officer

Yes. Hey, Bose, could you repeat the second half again?

Bose Thomas George, Analyst

Yes. The second half was just if volumes pick up in a lot of the other mortgage asset classes, I was just curious whether some of the originators shift to other things or a lot of the folks you deal with dedicated to the product?

Mark Ira Tecotzky, Co-Chief Investment Officer

So the originator stakes we have, they are focused almost exclusively on non-QM and then to a lesser extent, residential transition lending. I think what you have seen though is some of the larger non-banks doing more non-QM origination at a time when Agency volumes are very low. So what I would expect to happen if rates were to drop from here, you might see a shift from some of the non-banks to focus more on their core agency business and less on non-QM. But for the originators we are working with, they're really non-QM primarily focused all the time.

Bose Thomas George, Analyst

Okay. Great. I have a question about your outlook for home prices. If home prices continue to decrease, do you think that’s a possibility? What is the likelihood of that happening? Also, what are your thoughts on how that could affect credit spreads?

Mark Ira Tecotzky, Co-Chief Investment Officer

Yes. Reflecting on our internal portal that aggregates data from various sources, we can analyze local markets closely. Six months ago, we observed some localized weakness in home prices, particularly in areas like the Gulf Coast of Florida, Gulf Coast of Texas, and San Francisco. Currently, the weakness appears to be more widespread. This can be attributed to several factors, notably the significant increase in home prices which has created affordability challenges. Additionally, rising taxes and insurance costs in certain regions are further complicating the affordability issue. We are addressing this in our pricing strategy and monitoring it diligently. Regarding our forecast for national home price appreciation, we anticipate it to be modest, around a couple of percent for the next year. Notably, many forecasters have adjusted their home price appreciation expectations downward. Compared to six months to a year ago, when we were more bearish than most, we now consider ourselves to be more in line with prevailing forecasts, as we anticipated this weakness. Examining non-QM delinquencies compared to 2020, they are certainly higher now. The non-QM product, which began in 2016, showed impressive performance from 2016 to 2021, leading to numerous upgrades in tranches. However, the performance has since normalized. Although delinquencies have increased, there remains a substantial amount of credit enhancement in securitizations relative to expected losses. As a result, securitization spreads are stable, but performance has aligned more closely with expectations than it did a few years ago.

Operator, Operator

We go next now to Christian Love.

Crispin Elliot Love, Analyst

On loan originator platforms, definitely been some more activity in deals in the mortgage originator space broadly. So curious if you're seeing more opportunities brought to you directly. It sounds like you added one in the quarter, may be interested in adding more. So what areas could those be to build on the current platform of non-QM and RTL today?

Mark Ira Tecotzky, Co-Chief Investment Officer

The playbook we've used is we've generally made equity investments in platforms that we've worked with for a while, platforms we know, platforms where there's been ongoing dialogue about how they think about credit, how they think about underwriting. Some of the more high-profile transactions you've seen this year, those have been bigger, more established platforms that require a more significant check. We have liked on the non-QM side and the RTL side smaller checks, securing some volume and then growing that originator by virtue of sort of the economic heft Ellington Financial can bring to the table in terms of guaranteeing warehouse lines and things like that. And also sharing with these platforms, what we're seeing in terms of credit performance as a function of guidelines, maybe doing forward trades with them. So I think for us, we'll continue to see opportunities. I think it's less likely you'd see us make a significant acquisition in non-QM that would require a large check only because we've been able to secure volume with a different model of a small check and then putting in some sweat equity and that's worked out well for us.

Laurence Eric Penn, CEO

Yes. To add to that, Mark, I completely agree with you. If you look at the ratio of volume we secure from these investments compared to the investment itself, it has been very substantial. We prefer this approach compared to some higher profile transactions that are not nearly as efficient. We're not aiming to build a large portfolio of investments in these companies, which is in the ballpark of around $60 million to $70 million, not including Longbridge. Longbridge is an exception since it is a unique company, and the majority of our investment in that platform is in MSRs, which are a yield-bearing asset for us. Overall, we are pleased with our strategy so far, and I don't anticipate us making any significant purchases of originators, as that would likely introduce some cyclicality.

Crispin Elliot Love, Analyst

Great. I appreciate all that. And then can you just share your latest on credit quality? I know you had some bridge multifamily workouts. I think there's just one left today. So just curious on progress there, current view on the credit portfolio. And then also just what's the drag on net interest income today from the workouts?

Laurence Eric Penn, CEO

JR, do you want to take that?

J. R. Herlihy, CFO

Sure. We have one significant workout remaining after completing one in Q2. There are some other delinquent loans we are resolving, but we don't see them as major impacts on earnings aside from the one we've identified, which has a fair value of over $30 million. As we've mentioned in previous calls, this resolution will take some time and likely has a longer-term timeline. However, other resolutions are progressing quickly. We will present delinquency percentages for residential and commercial loans as usual in the MD&A and notes, and you will be able to observe ongoing trends. Some percentages may not accurately represent our resolution speed, but we are achieving a high recovery percentage in relation to delinquencies. We believe it's important to consider temporary delinquencies alongside ultimate resolution proceeds. Consequently, our realized losses, which result from these factors, remain very low across all residential and commercial loan strategies.

Laurence Eric Penn, CEO

Yes. Regarding the $30 million workout, we are approaching breakeven, so we're looking at less than $0.01 a year in drag. Once we redeploy that capital into one of our typical strategies, we expect an additional $0.04 a year in positive impact. This translates to a total swing of $0.05 per year, which we anticipate will materialize in 2026. Resolving that loan is not expected in 2025, but I am optimistic it will occur in 2026.

Operator, Operator

We go next now to Trevor Cranston of Citizens JMP.

Trevor John Cranston, Analyst

Question on Longbridge. Larry, you briefly mentioned the new HELOC for Seniors product that they're offering. I was wondering if you could provide some color on kind of what that product is and how it differs from sort of a traditional HELOC? And then second part of the question, with the momentum you're seeing at Longbridge in general, has there been a change in how you guys are thinking about sort of the long-term run rate's earnings contribution from them? And if you could maybe comment on how that potentially flows through to your thinking about the dividend level?

Laurence Eric Penn, CEO

Sure. A few quarters ago, we were optimistic that Longbridge would contribute $0.09 of ADE each quarter, and we've actually exceeded that. I'm cautiously optimistic that we will continue to surpass that expectation. The HELOC for Seniors program may take some time to gain traction, but I believe it has strong potential. It's similar to other reverse products in that it doesn't have a specific maturity date, and unlike other reverse products, it does not involve negative amortization. Therefore, there's no pressure from a fixed maturity date. I think that addresses both parts of your question.

Operator, Operator

We go next now to Doug Harter of UBS.

Douglas Michael Harter, Analyst

You talked about kind of keeping your leverage low in the current environment, waiting for opportunities. How are you thinking about kind of the ability if loan volume picks up to kind of handle regular way increase? Do you need to kind of raise more capital to do that? And what is your appetite to do that?

Laurence Eric Penn, CEO

Yes, in my closing remarks, I mentioned that considering our capital structure, there's a need for more unsecured debt, which seems like the logical next step for us. Looking ahead, it would be beneficial if a greater portion of our debt was longer-term unsecured debt. Currently, the debt markets, both high-yield and investment grade, have significantly tighter spreads for newer issuers compared to a while ago. It would be advantageous for our company to swap much of our shorter-term funding for longer-term unsecured debt. This approach would allow us to maintain low leverage while investing in assets that yield higher returns than the current debt spreads. We aim to pursue this strategy. If we achieve better execution on our unsecured notes, those notes could yield costs that are competitive with our repo and warehouse financing, which would enhance our capital structure compared to holding short-term debt. This is our long-term aspiration, and we see other companies in the mortgage REIT space that have successfully made this transition.

Douglas Michael Harter, Analyst

Great. I mean, I guess, how scalable do you think that is in the near term? And how deep do you think that market would be for you to look to increase the size of that?

Laurence Eric Penn, CEO

Oh, the market is very deep and that's not the issue. I believe the market is there for us, so it's just a matter of getting it done. I'll leave it at that.

Operator, Operator

We go next now to Randy Binner of B. Riley.

Randy Binner, Analyst

I have one question, which has mostly been covered, but I want to ask about your comments on the FHFA and the possibility of a smaller footprint for the GSEs regarding non-QM. We have discussed this before, and it seems intuitive. My question is whether you could share more specific details about what this might look like. Are we talking about more opportunities, or is there the potential for new product types and distribution methods instead of just using your existing ones? As we move forward, it appears something is going to change with Fannie and Freddie, and there are headlines coming out while we are on this call. I would like to know more about the specifics of what this might mean as a market opportunity for Ellington.

Mark Ira Tecotzky, Co-Chief Investment Officer

Sure. This is Mark. Historically, a significant percentage of loans that are eligible for a Fannie/Freddie guarantee fee have actually gone to Fannie/Freddie, similar to pre-financial crisis levels. In the past, many loans were securitized through the private label market, which had lower credit enhancement costs than the GSEs. Following the financial crisis, the private label market became inactive and spreads widened, making GSEs the predominant option from 2010 to around 2015. Then, there was a growth in non-QM loans, which cater to borrowers who do not qualify for Fannie/Freddie loans. Currently, Fannie and Freddie require full documentation, while non-QM includes a variety of loans such as those with debt service coverage ratios that lend to LLCs, which GSEs do not provide. Our immediate opportunity lies in the fact that GSEs have a cross-subsidy approach and do not price their insurance solely based on risk. Their pricing may reflect their mission, leading to guarantee fees and loan price adjustments, especially for second homes and investor properties, that significantly exceed both historical and projected future losses. As a result, loans eligible for Fannie/Freddie with insurance are being bought by investors who choose to self-insure for the extra spread or are being placed into private label securitizations. This represents the most immediate opportunity for us. There are ongoing discussions about the future of Fannie and Freddie, and we'll need to see how that evolves. However, we are currently focused on second homes and investor loans that qualify for Fannie/Freddie guarantee fees, even when their costs are much higher than expected credit losses, as these loans are not seen as core to their mission and profits from them are used to support other loans that align more closely with their goals.

Randy Binner, Analyst

Got it. Is that why RTL has been around for a while but seems to be gaining more attention now? Is the pricing for those increasingly included in the guarantee fee, moving more towards the private market? Is that what's happening?

Mark Ira Tecotzky, Co-Chief Investment Officer

Yes. That market is really a market Fannie and Freddie haven't been involved in. Those are typically cyclical products that we have built through our originator affiliates.

Operator, Operator

We go next now to Eric Hagen of BTIG.

Eric J. Hagen, Analyst

Following up on this discussion here, I mean, would you say you're more constructive on the RTL space or the non-QM right now? I mean it seems like the returns in RTL could be higher, but there's probably more stable funding and access to leverage for non-QM. So how should investors like adjust for those? Where would you say the better, like, risk-adjusted return is in the market right now?

Mark Ira Tecotzky, Co-Chief Investment Officer

We appreciate both segments, and they each play a significant role in our balance sheet. Larry mentioned earlier that we are considering a potential RTL securitization, which has traditionally been a product we manage on our balance sheet with repo financing. Now, we are looking into converting that financing to a term structure. There are additional options with non-QM loans; for instance, we can hold them with repo financing, securitize them, or take both vertical and horizontal slices. There are also call options available, allowing us to act if interest rates change favorably. The non-QM market offers a broader range of opportunities for both loan ownership and deal sponsorship. However, in terms of expected returns, I do not see a significant difference between the two. They each target different markets and have distinct roles within our portfolio. A consistent factor for us is our focus on maintaining strong relationships, whether through equity stakes or ongoing discussions, with most of the originators of these products. This has proven to be very beneficial for us. Our team engages daily with originators to discuss the lending landscape, guidelines, and housing price appreciation. This ongoing dialogue has remained a constant in both sectors and contributes to our confidence in allocating significant capital to each.

Laurence Eric Penn, CEO

Yes. To elaborate on that, the securitization market for non-QM has become well-developed and quite flexible. As asset spreads have tightened, so have the liability spreads, which we monitor closely. We have a portal through which we adjust the rates we offer to lenders based on securitization spreads. We continuously receive information about various non-QM securitizations, and we will continue to purchase that product. We've also sold packages and have been engaging in vertical risk retention rather than horizontal risk retention. This allows us to sell the riskier tranches of securities in the open market when needed. The non-QM market will definitely remain part of our strategy, and we’re also considering securitizing RTL products, although we haven't done that yet. RTL would be structured like a revolver, while non-QM is more liquid and RTL has shorter maturities, both of which we find appealing. Additionally, following the issues in the commercial bridge loan market due to rising rates in 2022, we now see many opportunities, including more nonperforming loans and bridge loan prospects with strong sponsors and properties. We are certainly focusing our efforts in these areas.

Operator, Operator

We'll go next now to Matthew Erdner of JonesTrading.

Matthew Erdner, Analyst

In terms of extended opportunities in the senior HELOCs, what are you seeing and what are your plans for that product?

Laurence Eric Penn, CEO

We just rolled it out, and I don't want to make any projections about its potential. It's a unique product, and we believe we are the only ones offering it. When you consider its simplicity, the product makes a lot of sense. We'll see how successful it is, and any success will be an added bonus. As I mentioned earlier, Longbridge has been performing exceptionally well, and we expect that to continue, but this could add another dimension to our offerings. For now, I'd prefer not to make projections, but the product has significant promise.

Matthew Erdner, Analyst

Got it. That's helpful. And then JR, I was wondering if you could comment on how you're thinking about the dividend over earnings this quarter. And if you and the Board have to see that in trajectory to allow it to grow? Or just kind of your thoughts there on what you're thinking around the dividend.

Laurence Eric Penn, CEO

Sure. It's Larry. Our adjusted earnings and GAAP earnings this year have covered the dividend, and I'm optimistic that they will continue to do so. We are really performing well. If there is a next move, I believe it will be upward. We've maintained a very stable dividend for a long time. Looking back to 2018, our dividend was roughly where it is now, although it was quarterly then instead of monthly. We've made the right choice to keep our dividend steady over this extended period. If there is an increase in the future, I think it will be upward, but I don't want to speculate on when that might happen. Ultimately, that's a decision for the Board, and given the consistency of our dividend, it won't be made lightly. Increasing the amount of unsecured notes on our balance sheet could also lead to an increase in the dividend, as it would allow us to safely raise our leverage and generate more earnings and dividend potential. I see various factors that could contribute to increasing the dividend, but I prefer not to assign a specific timeline to it.

J. R. Herlihy, CFO

We have not yet. We'll do that later this month, the month of August in ordinary course. But we did talk about how Q3 is off to a good start with securitization volumes, with the platforms doing well, with Longbridge hitting its high month of the year, but we did not give a number yet, but we'll be doing so later this month.

Laurence Eric Penn, CEO

Yes. And the typical timing for that is, what, maybe fourth week of the month is typically when we would put that out? Yes, something like that.

Operator, Operator

And gentlemen, that was our final question for today. So that will bring us to the conclusion of today's call. We thank you all for participating in the Ellington Financial second quarter 2025 earnings call. You may disconnect your lines at this time and have a wonderful day. Goodbye.