Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Fourth Quarter 2022 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question during that time, simply press star then the 1 on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Tara Byrne, Vice President of SEC Reporting. 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 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K and part two, Item 1A of our quarterly report on Form 10-Q for quarter ended September 30, 2022. 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 events.
Statements made during this conference call are made as of the date of this call, the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Tecotzky, Co-Chief Investment Officer of EFC, and JR Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the endnotes at the back of the presentation. With that, I will now turn the call over to Larry.
Thanks, Tara. Good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on slide 3 of the presentation. For the fourth quarter, we are reporting net income for the quarter of $0.37 per share and adjusted distributable earnings of $0.42 per share. Excellent performance from Longbridge Financial, our reverse mortgage originator, and from our agency RMBS strategy, in addition to another positive quarter from our loan portfolios, drove Ellington Financial's results. I'll start with Longbridge Financial, since that's driving a change now and going forward to our financial reporting. We had owned a minority stake in Longbridge dating all the way back to 2014, and this past October, we acquired a controlling stake in the company.
As a result, we are now consolidating Longbridge's balance sheet and results of operations into EFC's financials, beginning with the fourth quarter. During the fourth quarter, Ginnie Mae HMBS yield spreads tightened, and that increased the value of the HECM reverse mortgage loans and mortgage servicing rights that Longbridge holds on its balance sheet, and which by consolidation, we now hold on our balance sheet. The tighter yield spreads also expanded Longbridge's gain on sale margins on new originations. As expected, origination volumes were down seasonally, and that led to a modest net loss on originations. Putting it all together, Longbridge generated strong results for the quarter. On the middle of slide 3, you can see Longbridge contributing $0.24 to our net income per share. You can also see on this slide the significant contribution from our agency strategy in the quarter.
Driven by a more benign outlook on inflation and Fed monetary policy, the agency mortgage basis rebounded sharply in the fourth quarter, following 3 consecutive quarters of dismal underperformance in the sector. Our agency strategy delivered net income per share of $0.19 for the quarter as we were able to recover a portion of our losses in the strategy from earlier in the year. We took advantage of the strong agency market to sell some specified pools, especially around the yield spread tightening in November. We rotated that capital to further expand and diversify our credit portfolio, where we see strong earnings potential and attractive net interest margins going forward. Our adjusted distributable earnings, or ADE, did decline quarter-over-quarter, but that was not surprising for a quarter where short-term interest rates spiked so substantially.
Most of our borrowings float off of either SOFR or LIBOR, and those indices have skyrocketed with the multiple recent Fed hikes, so our cost of funds spiked as well. Meanwhile, the purchase yields on some of our existing investments still reflect the lower interest rate environment from the early part of 2022. This includes many of the agency pools that we still hold, as well as many of the fixed rate RTL loans that we originated before the rate hikes. The good news is that our RTL portfolio is very short in nature, with average lives of well under a year. They do have fixed rate coupons, whereas the financing is floating rate. There's a natural drag on our NIM in a market where interest rates are rising and yield spreads are widening.
That should be sure a short-term drag, since we are originating new RTL loans at yields that are often 200+ basis points above the rates on the RTL loans that are paying off. Turnover in this portfolio should be a big boost to our NIM and our ADE in 2023. The contribution to Ellington Financial's ADE from the Longbridge segment was just $0.01 per share for the fourth quarter. The contribution was modest, mainly because of low origination volumes. As I mentioned, that was due to seasonal factors. Once spring comes, I expect Longbridge to start contributing to our ADE in a significant way. Keep in mind that while the fourth quarter appreciation in Longbridge's MSRs contributed to EFC's net income in the fourth quarter, that appreciation isn't factored into ADE.
Another highlight of the fourth quarter was the completion of our fourth non-QM securitization of 2022 in December. We had originally intended for this deal to come to market in September, but securitization spreads were wide in September, so we decided to postpone the launch and instead keep those loans on balance sheet. That patience was rewarded as we were able to take advantage of a more constructive market in December to achieve stronger deal execution. I think it's important to understand how we had the flexibility to delay, because this gets to a core tenet of our risk management. At EFC, we stress maintaining a diversity of borrowing sources as well as keeping extra borrowing capacity and liquidity available so that our hand isn't forced.
In this case, we didn't want to be forced to securitize these non-QM loans and lock in poor long-term financing rates just to get the loans off of repo lines. Our strong balance sheet and liability management enables us to be opportunistic about when we launch our securitizations. In fact, by waiting, we estimate that we were able to price the AAA debt around 30 basis points tighter than what would have cleared the market in September. Looking at how this year has progressed so far, the securitization markets have continued to improve, and we were able to close another non-QM securitization earlier this month with even more attractive long-term financing costs. In fact, our blended cost of funds on this most recent securitization was even lower than our cost of repo. We got that benefit in addition to all the important benefits of financing through securitizations.
Combined, our last two non-QM securitizations have provided us with an incremental $406 million of non-recourse, non-mark-to-market, long-term locked in financing. Finally, we continue to maintain a strong liquidity position during the fourth quarter. As you can see from our cash and unencumbered asset figures, and we were also able to access the preferred equity market earlier this month, which I'll discuss in my concluding remarks. With that, I'll turn it over to JR to discuss our fourth quarter financial results in more detail.
Thanks, Larry, good morning, everyone. For the fourth quarter, we're reporting net income of $0.30 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.42 per share. These results compare to a net loss of $0.55 per share and ADE of $0.44 per share for the prior quarter. You'll notice some changes to our disclosures this quarter around the consolidation of Longbridge Financial. As Larry mentioned, we acquired a controlling interest in Longbridge Financial in October, and beginning with our fourth quarter results, we consolidate Longbridge. In the earnings presentation on slide 5, you can see the attribution of earnings between Longbridge and our existing credit and agency portfolios, as well as corporate-level expenses. On slide 29, you can see each strategy's contribution to EFC's adjusted distributable earnings.
If you turn next to slide 27, you can see the impact that the consolidation has on our balance sheet. Longbridge's largest business is the origination of home equity conversion mortgage loans or HECMs, which are insured by the FHA and eligible for inclusion in Ginnie Mae guaranteed HMBS pools. When issuing these Ginnie Mae HMBS pools, Longbridge retains the mortgage servicing rights and the servicing-related obligations that come with those rights. Even though these HMBS pools are sold to unrelated third-party investors, those sales transactions are not treated as true sales under GAAP. This is a well-known idiosyncrasy of the reverse mortgage industry. In any case, under GAAP, the HECM loans remain on balance sheet even after the HMBS pool is sold, with the HMBS pool treated as a long-term financing of those HECM loans.
Since July 2017, Longbridge has securitized roughly $9.5 billion of HECM loans into HMBS pools. Of course, many of those loans have paid off since origination. As you can see here on slide 27, Longbridge's GAAP liability associated with these HMBS pools stood at $7.8 billion as of December 31st. Now that we consolidate Longbridge, we've brought these GAAP liabilities onto EFC's balance sheet, and this more than doubled our total GAAP liabilities. This is the case even though Longbridge's equity only represents a small portion of EFC's total equity, only about 10% at year-end. That includes all of the reverse MSRs and loans that Longbridge holds on balance sheet.
In fact, EFC's recourse debt to equity ratio actually declined quarter-over-quarter after the Longbridge consolidation because, among other reasons, Longbridge itself had a lower recourse debt to equity ratio than the rest of EFC at year-end. As Larry mentioned, Longbridge generated strong performance for the fourth quarter as tighter yield spreads led to net gains on its HMBS MSR and HECM loans. EFC's results for the fourth quarter also benefited from a bargain purchase gain that resulted from the Longbridge acquisition. Because the transaction occurred at a discount to Longbridge's book value at the time of closing, and also because the fair value of our existing non-controlling stake reflected that same discount to book value at September 30th, the closing of the transaction generated a bargain purchase gain, which you can see on our income statement.
Our agency strategy also had a strong quarter as tighter yield spreads and increased payups drove significant net gains on our portfolio, which, combined with net interest income, exceeded net losses on our interest rate hedges.The credit portfolio had positive results as well, driven by net interest income, primarily from our proprietary loan portfolios and net gains, most notably mark-to-market gains on our non-QM retained tranches, as well as that bargain purchase gain in the Longbridge acquisition. These gains were partially offset by net losses on interest rate and credit hedges, and mark-to-market losses on certain equity stakes in loan originators and certain commercial mortgage-related investments. Finally, our affiliate originator, LendSure, was profitable for the fourth quarter and for 2022 overall, but the fair value of our stake in LendSure did not change meaningfully for the fourth quarter.
Turning back to slide 4, our portfolio summary, you can see that we are now showing the underlying holdings at Longbridge, and toward the top of the page, we are listing the RTL and non-QM portfolios separately, so you can see some more detail on our two largest portfolios. As of year-end, average market yields on the credit portfolio were significantly higher as compared to September 30th. As Larry mentioned, the original purchase yields on many of our assets still reflect the lower interest rate environment that we had earlier last year. As we continue to turn over our assets, we expect that the gap between our purchase yields and market yields will narrow, and that should be supportive of our net interest margin in ADE. Turning next to slide 6.
During the fourth quarter, our total long credit portfolio decreased by 7% to $2.54 billion at year-end. The decrease was due to the closing of the non-QM loan securitization in December, significant paydowns in our small balance commercial mortgage portfolio that we did not replenish with new originations, and because we no longer include our investment in Longbridge as part of the long credit portfolio. These factors were partially offset by a larger RTL portfolio. For the RTL, SBC, and consumer loan portfolios, we received principal paydowns of $335 million during the quarter, which represented 19% of the combined fair value of those portfolios coming into the quarter.
On the next slide 7, you can see that we reduced the size of the long agency portfolio by 15% to $968 million, driven by opportunistic sales and principal repayments. Slide 8 is a new one. Here, we illustrate the components of the Longbridge portfolio. At December 31st, the Longbridge portfolio totaled $328 million and mainly consisted of reverse MSRs, unsecured HECM loans, and proprietary reverse mortgage loans. For the fourth quarter, Longbridge originated $341 million across HECM and proprietary, about 85% through its wholesale and correspondent channels and 15% through retail. Please turn next to slide 9 for a summary of our borrowings.
Our weighted average borrowing rate increased by 107 basis points to 4.83%, driven by sharply higher short-term rates and a greater proportion of our borrowings secured by our loan and now our MSR portfolios, which carry higher borrowing rates than the agency assets. Book asset yields for both our credit and agency strategies also increased over the same period, thanks to portfolio turnover, though by a lesser amount than their respective cost of funds. Our recourse debt-to-equity ratio, adjusted for unsettled purchases and sales, declined to 2.5 to 1 from 2.6 to 1 in the third quarter as a result of a smaller investment portfolio as well as an increase in total equity. Also, as I mentioned, Longbridge's stand-alone recourse debt-to-equity ratio declined sequentially and was also marginally lower than the rest of the EFC's at year-end.
On the other hand, our overall debt-to-equity ratio, adjusted for unsettled purchase and sales, increased to 10.1 to 1 at year-end from 4 to 1 at September 30th, driven by our consolidation of Longbridge's HMBS-related obligations, which I discussed earlier. This increase was partially offset by the fact that we recognized true sale treatment on our fourth quarter non-QM securitization, which means those loans truly came off the books. G&A expenses increased due to the expenses associated with Longbridge's substantial operating business. Investment-related expenses also increased as we now consolidate Longbridge's sub-servicing expenses and certain loan sourcing expenses onto our income statement. At December 31st, our combined cash and unencumbered assets totaled approximately $495 million, and our book value per common share was $15.05, down 1.1% from September 30th.
Including the $0.45 per share of common dividends that we declared during the quarter, our total economic return for the fourth quarter was 1.8%. Over to Mark.
Thanks, J.R. Over the first 9 months of 2022, we had seen elevated volatility, that continued to be the case in October. In November and December, however, volatility came down considerably, interest rates ended the year significantly off their intra-quarter highs. agency MBS, which had been the first sector to widen, was not surprisingly also the first sector to materially outperform hedging instruments, which we saw in Q4. You often see spread tightening and spread widening cycles for agency MBS and credit-sensitive parts of fixed income that are out of phase with each other. We've seen this numerous times, most notably in late March 2020, when Fed buying of agency MBS initially led to extreme outperformance for agency only to see credit sectors catch up and outperform agency 1 or 2 quarters later.
In 2022, we saw a different scenario play out. When money managers, pension funds, and insurance companies need to raise cash quickly to meet redemptions or address other cash needs, they often sell agency MBS first because MBS are liquid and these investors typically have large MBS holdings. This kind of selling is a negative technical for agency MBS, and because prices for MBS are highly transparent, the underperformance these abrupt sales can cause are very visible to the market in real time. We saw this scenario play out for much of 2022 as selling that was concentrated in agency was at least one of the reasons that agencies significantly underperformed many credit-sensitive fixed income sectors. Q4 felt like an inflection point for the bond market and for agency MBS specifically.
Beginning in the second half of the quarter, money manager outflows stabilized and then turned into inflows. What had been a technical headwind for agency MBS for much of 22 suddenly turned into a tailwind and drove agency outperformance for the fourth quarter overall. You can see that EFC's agency strategy posted some very strong results as a result after 3 challenging quarters. Given the elevated risks of recession, we have been very focused on underwriting and closely monitoring performance of our residential and commercial mortgage loans. So far, performance has remained strong, and given the size of our holdings, we have surprisingly few headaches to work through. Recently, there have been a lot of headlines about increased current expected credit loss or CECL reserves on commercial loans, as well as some high-profile defaults on office buildings.
CECL is not a concept that applies to EFC in the same way as it does for many others because we are already fully mark to market and always have been. Any credit reserves or impairments are automatically reflected in fair value adjustments which flow through our income statement. Putting aside the CECL nuances, we are not seeing big performance issues in our commercial and bridge loan portfolio. Part of that is sound underwriting and appropriate LTVs, and part of that is property type concentrations. As you can look on slide 10, you can see that less than 10% of our portfolio is in office, which is where many of the recent headlines have been concentrated.
With more employees working from home, the economics for office buildings are challenging, especially with greatly increased cost of tenant improvements when replacing an existing tenant. Rising interest rates are predictably pressuring cap rates higher, and we don't think prices fully reflect that yet. Also, with SOFR marching higher, debt costs have exceeded NOI on many properties. Of course, rising interest rates impact all sectors of the commercial space, but we think multifamily, which is more than 70% of our portfolio, will hold up the best in a recession. So far, we have very few headaches in our commercial mortgage bridge loan portfolio. We are watching things very closely, staying in very close contact with our borrowers, and monitoring the progress on implementing their business plans.
Thinking more about the dynamic where a recovery in agency MBS sector leads to recoveries in other sectors, by the end of 2022, we'd also seen a material recovery in non-QM liquidity and pricing. What happened to the non-QM sector overall in 2022 had many parallels to what happened in the agency mortgage sector. Yields rose, so prices dropped, then bonds extended because prepayments slowed, so prices dropped even more. Spreads widened on the newer, longer duration bonds, so prices dropped even more. We were by no means unscathed, our disciplined cash management and focus on longer-term staggered financing arrangements was very helpful. We had ample repo capacity and ample cash to remain disciplined, we were actively buying loans opportunistically at what turned out to be very advantageous levels in many cases.
Working with our financing team, we saw storm clouds potentially gathering way back in Q1 of 2022. We added more repo capacity to both non-QM and RTL, both by adding new lenders and by increasing capacity on our existing lines. Eventually, by Q4, the non-QM sector was cheap enough relative to agency MBS and other sectors to attract new capital to take advantage of the opportunity. First, insurance companies started buying, which drove securitization liquidity to improve. Spreads start to tighten. We did one deal in Q4 and have done one deal so far in 2023. Now with securitization spreads tight again and coupons and new originations very attractive, we have come full circle, and it's back to being a battle to buy loans.
One theme I think will play out in 2023 for both agency and non-QM is a big drop in loan volume resulting from much slower new and existing home sales and almost no refinancing. Existing home sales dropped again this month for the 12th month in a row. That hasn't happened since the 90s. Now for what worked and what didn't this quarter for EFC. I talked about the recovery in agency, and we were well positioned for it as we came into the quarter with fewer TBA shorts than we typically hold, and we were able to make back a good portion of 2022's losses. Despite a reduced capital allocation, that strategy was a significant contributor to EFC's results in the quarter. If you look on slide 6, RTL is now our largest credit portfolio. We grew that strategy significantly during the year.
We added sellers, and we added dedicated staff. It has been a great performer for us. In contrast to non-QM, the loans are so short that even in a rising short-term rate environment, any drags on NIM tend to be short-lived. Because the tenors of our repo financing closely match the expected maturity of the loans, we don't need to securitize, so we aren't riding up and down with securitization spreads. At some point in the future, if economics are sufficiently compelling, we could opt to securitize these loans, but it's not at all necessary. With their short average lives, these loans are typically maturing before the repo lines mature, and that gives us a lot of flexibility. We are watching performance here very closely.
With home prices slumping, this is the first time that the RTL sector is confronting an environment where home prices are lower nationally at the time the builder is intending to sell the property as compared to when they bought it. That is a clear and obvious headwind. What have we done to protect ourselves? We're focusing on lower loan-to-cost ratios, and we're favoring projects on more affordable properties and properties with lower cost renovations. We have an immense amount of data that we pour over every month, and we leverage that data in conjunction with our own origination experience in the business, information drawn from our boots on the ground, as well as the analytics that are Ellington's specialty. Data is our North Star, and it helps inform our underwriting.
For example, we've been reducing exposure in some, in some areas, most notably certain parts of California, where some cities have seen price declines that are multiple of what the declines have been nationally. We did see some weakness in our consumer business in the quarter, and we have been tightening underwriting there too. If you look at the data, you can clearly see that consumers have been spending down their COVID savings given elevated inflation, so they are not as flush as they have been. How is 2023 shaping up? So far, we are up off to a good start. Liquidity and securitizations is much better, and we've had numerous financing counterparties reach out to us about growing existing and initiating or initiating new lending facilities. Home prices are still too high for many buyers, given a 6.5% mortgage rate.
We've seen a modest correction in the second half of the year, but not enough yet to bring housing affordability back to historical norms. Just as there were a lot of regional differences in HPA on the way up, you are seeing a lot of regional differences on the way down. We think some of the post-COVID high-flyer markets, like Boise, for example, have corrected 20% or more already. Being really granular in understanding home prices is crucially important now. Thanks to our originator stakes, we're well-positioned to originate, generate gain on sale, and securitize at high ROEs. Given the short duration and equity cushions, our RTL portfolio has limited mark-to-market volatility. Our origination team is joined at the hip with our capital markets desk, which allows us to lean in when markets are wide and pump the brakes when they tighten.
We have to keep a laser focus on performance and stay vigilant in our underwriting. Now back to Larry.
Thanks, Mark. 2022 certainly had its challenges. We had to navigate periods of extreme volatility and market dysfunction, with interest rates rising rapidly and yield spreads widening along the way. In the agency MBS sector in particular, there was truly nowhere to hide. As you can see on slide 24, our agency strategy was responsible for the more than half of our portfolio losses for the year, even though it only represented a small fraction of our capital allocation. Most importantly, we were able to largely avoid crystallizing mark-to-market losses in our credit portfolio. We were patient with our securitization activity, opportunistic with capital management, and disciplined with hedging and leverage.
We were able to limit our book value decline during the year, we maintained our dividend throughout, and we capitalized on the market volatility to add attractive assets and add origination market share, growing the credit portfolio significantly over the course of the year while strategically downsizing our agency portfolio. We took advantage of some extreme stock market sell-offs last year to repurchase our common shares at a big discount to book value. When markets rebounded, we efficiently raised capital through our ATM program to provide just-in-time capital to fund attractive investment opportunities. We also extended several loan facilities throughout the year, including in the fourth quarter. We acquired Longbridge, a top 3 reverse mortgage originator at a very attractive level. I believe that acquisition gives us huge upside as well as great synergies, including access to Longbridge's attractive prop loan pipeline.
We really accomplished a lot last year. We closed out the year well. We entered 2023 with strong liquidity and a balanced portfolio positioned to drive earnings growth going forward. On last quarter's earnings call, we discussed our excitement about the ample investment opportunities in both securities and loans, and also the opportunity for our loan originator affiliates to continue adding market share in a consolidating market. Earlier this month, we raised $100 million of dry powder in the preferred equity market to help us access these opportunities. Our newly issued Series C preferred equity, along with our existing Series A and B, carries the only NAIC-1 preferred equity rating in our sector. I believe that this rating rightly reflects Ellington Financial's effective risk management and long-standing protection of book value across market cycles, principles that are as important now as ever.
Thanks to strong institutional demand for the offering, we were able to price the transaction at a similar spread to where we priced our Series B preferred in December 2021, which was priced in an environment where yield spreads on our targeted assets were much tighter. This new capital should allow us to take advantage of the tremendous opportunities that we are seeing across our diversified set of investment strategies.
I expect our loan origination businesses to continue to provide much of the asset sourcing, and that now includes access to some new investment strategies, such as proprietary reverse mortgage loans that are now available to us at the source as a direct consequence of our acquisition of Longbridge. I'm hopeful that the timing of our Series C preferred equity issuance will follow in the footsteps of other recent well-timed capital transactions for EFC, including our March 2022 issuance of $210 million of single-A rated senior unsecured notes. We priced that transaction inside a window of stability right before all the second quarter market turmoil. While I think EFC is known as a fast deployer of capital, we'll be as patient as we need to be, picking our spots as always within the wide range of sectors that we manage well.
Once the proceeds from this preferred offering are fully deployed, and as we continue to rotate the portfolio into higher reinvestment yields, we believe that the offering will be accretive to both earnings and adjustable distributable earnings, and that both metrics will again cover the dividend. With that, we'll now open up the call to questions. Operator.
Thank you, sir. At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. Our first question comes from Eric Hagen with BTIG.
Hey, good morning. Hope you guys are doing all right. I think I got a couple of questions. The 1.8 times recourse leverage at Longbridge, does that apply to the origination pipeline or the MSRs? Can you say what that funding is supporting and what the cost of funds looks like? How many counterparties you have supporting that funding. In the resi transition loans, are you guys buying loans directly from brokers, or are you buying from other originators that can't necessarily hold the loans themselves? Maybe you can also give some color around the credit characteristics, the profile, how big the average balance is, the LTV and that sort of thing. Thank you, guys.
Hey, Eric. Okay, let me tackle the first one. On Longbridge, the recourse leverage we cite, that has to do with the holdings at Longbridge, not the HECM loans that have been securitized, but it's really two major principal categories, HECM loans awaiting securitization. Well, I guess three, and the prop loans on balance sheet that are on these loan facilities, and then the MSRs have financing themselves. Those are the three categories. The amount is summarized on slide 9. You see $238 million of Longbridge recourse financings in the middle of the page. You divide that by the equity in Longbridge, the capital allocated to Longbridge, that's where the ratio comes from.
Buyouts don't represent a significant factor at all for Longbridge. Their MSR is relatively new and young, I should say, and doesn't experience, you know, much buyout activity at all.
Right. You can see the weighted average borrowing rate was 7.86% on combined on those portfolios. Those borrowings at year-end, the number of counterparties it's with, 4 or 5, counterparties.
Okay. That's really helpful.
The next question was?
Was about the LTVs.
Resi transition loans. Okay.
Yes. Right.
Yep. Hey, Eric. We don't buy individual loans from brokers. We have several originators, some of whom we have an equity stake in, some of whom we just have a very long-standing relationship with, you know, where we have seen how they underwrite, see how they think about property improvements, and we're sort of like-minded on credit that we buy from. In terms of attributes, that market as opposed to like non-QM, that just sort of has a single loan-to-value ratio. In the one of the big metrics of risk control in residential transition loans is sort of 2 LTVs, if you will. The first is loan to cost. How much are you lending that builder versus what they're paying for the property? It's a property that generally needs some sort of renovation to maximize value.
What are you lending them versus what they're paying for it as is. Then, at the time of loans, you know, most loans we do, there's a rehab component. There is a rehab budget, there's a rehab plan. Then they get paid in arrears for draws once they've done some of that construction. At the time of origination, there's this second LTV, which is how much you're lending versus as-repaired value. You're lending a certain amount day one, then you're going to be funding either all or some portion of that renovations. At the end, how much...
Oh yeah, what's the total debt you've extended to that builder versus what your expectation is and their expectation of what the property is gonna be worth, when the renovations are done, right? One important metric, you know, I talked a little bit in the prepared comments about, data and, you know, real-time analysis of what's going on in the markets 'cause things are so dynamic now. One thing that we look at a lot is every month we look at, okay, where are the properties selling versus what we thought the underwritten as-repaired value is. What's nice about that product isBecause it's so short, you're getting, you know, quick feedback, like feedback in six, seven months, right?
We can look and say, "Okay, you know, this month, property sold 3% higher 3% above what we thought the as-repaired value is, or this month they're selling right on top of as-repaired value." We can look at that regionally. We can look at that as a function of the, you know, how big the house is. You know, home prices are coming down. We think it's probably more likely than not that they come down more. I think we talked in the prepared comments how it's not just gonna be every, you know, every region performs sort of the same. You saw huge regional differences on the way up. I think we said, you know, in the prepared comments, we're gonna see big regional differences on the way down.
One thing with the RTL relative to non-QM is that there's a lot of focus on lending in areas where there's a dynamic housing market because, you know, the way you get paid back most of the time is the properties are sold, right? You need to be in markets where there's some dynamism to the to the housing market. That's, you know. Right now you're at a time where existing home sales have obviously come way down. That's another area we focus on a lot.
I appreciate your comments, guys. Thank you very much.
Thanks, Eric.
Thanks, Eric.
Thank you. Our next question comes from Crispin with Piper Sandler.
Hey, good morning, guys. It's actually, Justin Crowley on for Crispin this morning. Just, you know, looking at the credit and agency portfolios in the quarter, both were down due to pay downs and other factors. I think you mentioned in the prepared remarks, you know, maybe seeing an inflection point on the agency side. You know, I guess taking that and then the preferred issuance this month. You know, curious where you're seeing some of the, you know, the most investment opportunities right now. You know, how you foresee deployment of preferred progressing. You know, maybe like square that with what sort of a wait and see approach you anticipate there.
Yeah. I guess I would say that, you know, markets aren't as volatile as what they were, say, you know, Q3 and early Q4 of 2022, but they're still volatile, right? When they're volatile, you're incented to invest, I think, at a more measured pace because, you know, typically the markets from time to time, like maybe today's an example, hit some air pockets, and then you can really get some good investments, right?
I think just the volatility and the uncertainty around how high the Fed is gonna hike argues for being a little bit more measured in the pace of deployment because the likelihood of just, you know, on a certain day or a couple of days, you know, being presented with some portfolios you can pick up at really advantageous levels, we assign a higher probability to that than we would sort of in a normal market. In terms of the sectors we like, you know, J.R. talked about how we had a lot of pay downs in Small Balance Commercial. You know, we're looking at new opportunities there. It's a space we like. I think we're also gonna get some opportunities to buy some Non-Performing Loans there.
You know, that had been a huge driver of EFC returns, you know, 2010, 2011, 2012. Then you had a lack of supply for the NPLs. We think that's gonna pick up. We still like, you know, we talked about the residential transition loans. We talked about non-QM securitizations tightening. Sort of the levered returns on retained pieces looks pretty good to us there. You know, also still some co-issue opportunities. I think all that. Then Larry mentioned that, you know, now that we have, now that we own all of Longbridge, that's gonna create some opportunities for us that we didn't have before. I didn't know if Larry wanted to expand on that.
Yeah. Thanks, Mark. No, that's great. Yeah, I would like to add. First of all, this market is very bipolar, right? I mean, everything's to be either risk on or risk off. You know, then you have a day like today when, you know, oh my gosh, inflation is still a big risk. I mean, obviously it's been a big risk. We don't wanna be too, you know, be too enthusiastic one way or the other. When it comes to raising capital, you gotta go for what you think is... because those are opportunities that, you know, you're not doing a preferred deal every day or a, or a debt deal every day, right?
When we saw the opportunity to do a deal at a spread, like I said, was similar to what we had done in December of 2021, which was a much, much tighter spread investment environment, we had to capitalize on that. You know, as Mark said, you're gonna hit a pocket where, you know, all of a sudden the market will overreact on the downside, and that's when you're gonna pick up more assets. I think, being patient here is gonna be really, really good for us because, you know, Mark mentioned, just mentioned commercial NPLs. We have, you know, very few commercial NPLs right now. You know, we were buying loans as NPLs several years ago.
We think with all the distress in office and even retail to some extent, you know, we think that you're gonna see a lot of NPL opportunities, and we wanna be ready for those. You know, if you try to raise capital when spreads are wide. Well, you're gonna be raising capital at wide spreads, right? We wanna raise capital, these are long-term, you know, preferred equity is something that we're gonna live with potentially forever, right? That is a perpetual preferred. We wanna jump on those opportunities when they come at attractive spreads, we'll absolutely take advantage of opportunities. We'll be patient. We have so many different strategies, you know, Mark just mentioned with the Longbridge acquisition. You know, I mentioned prop, right?
That is a new asset class for us, and it's a very, very attractive asset class. Not one that you hear much about 'cause it's a tiny market. You know, our biggest competitor in reverse mortgages, that's, you know, rightly one of the focuses of their business model too. You know, with this acquisition now, Longbridge can ramp up its activities and prop and, you know, we can put those. Well, those go right on our balance sheet, right? We just have lots and lots of different sectors that we can choose from, and we'll see where, you know, we'll see where those opportunities are. RTL continue to be big inflows for us. Non-QM goes in waves. Maybe we wanna have lend or sell those, you know, on the open market.
Maybe we wanna buy them and securitize. We have a lot of flexibility.
Okay. Got it. That's helpful. Taking that, you know, the idea of the capital deployment, fitting from higher rates to drive higher ADE, you know, with regards to ADE and covering dividend, you know, what are your thoughts there in the near term, as far as covering the dividend? You know, could it take a few quarters as funding costs remain elevated? Just wanted to get your commentary there.
It's a great question. It really depends on the pace of deployment. It's not gonna happen probably in Q1, just given the amount of capital that we've raised, but that's okay. You know, we have no plans to cut the dividend. We look, you know, that is a. We look longer term and, you know, we're confident that we're gonna cover it. You know, could it, you know, could the inflection point happen in the second quarter? Sure, it could happen in the second quarter. We're not gonna force it. Certainly that would be a good target.
Okay. Got it. Helpful.
The second quarter. Sorry, to add one more thing. You know, the second quarter also should be much different for Longbridge as well. You know, they, you know, again, I don't wanna say past performance is always indicative of future results, but if you look back to 2021, what was their net income for the year? It was well over $30 million, right?
Yeah.
I believe. We'll have to check that. But you know. That could be a very large addition to our core ADE, excuse me, in, you know, starting potentially in the second quarter. You know, as I mentioned the seasonality, right? Spring, you should start to see, second quarter, you should start to see, you know, strong origination income again from Longbridge.
Okay. Understood. Then I guess, you know, shifting gears, you know, you provided some commentary on credit quality across the portfolio. You know, are there any areas where you're beginning to see, you know, signs of stress, areas you're becoming more cautious on? I know you talked a little bit about the office portfolio and then also, you know, retail to some extent. I guess just broad commentary on credit, you know, signs that you're paying attention to. Then, you know, certainly on the office side, I'd love for you to dig a little bit more into that and sort of how you see that asset class shaping out, over, you know, just looking into your crystal ball over the next couple of years.
I'll let Mark handle that. Before he does, I do wanna just emphasize that if you look at our portfolio, Mark mentioned, you know, you can see on slide 10, you know, how multifamily-focused it is. We have very little office and retail. I don't think. By the way, I did just confirm the $30 million number for Longbridge in 2021. I don't think that, you know, we really have any headaches, you know, in those sectors where we're seeing the headaches in the, you know, in the rest of the market. Mark, you know, go ahead where you think the, you know, the problem spots for the market are gonna be.
I guess the first thing I'd say is that if you look at affordability, just how much consumers, how much a homebuyer has to pay if they buy a house now and they borrow, you know, anywhere near the, you know, Fannie Freddie rate, which is, you know, six and five-eighths or something, that things aren't affordable, right? Things are not affordable. That can correct a few ways. It can correct from home prices coming down, and you're already down about 5% from the peak, and in some areas you're down 20% from the peak. It can correct with if mortgage rates drop. It can correct if incomes increase, right? It's probably gonna be, you know, who knows, maybe some combination of those three.
Right now, you know, homes generally are not affordable to most people, and that's one of the reasons why you're seeing sales numbers come off. I think, you know, we gotta be cautious about things. We have to protect ourselves with loan-to-value ratios. We have to protect ourselves in the residential transition portfolios by being in sectors where we think that are gonna hold up better. You have to respond to the market as it evolves. It's a, you know. We started non-QM. We started that originator in end of 2014 with the first loan in 2015. Did the first Securitization 2017.
You know, there's a lo-- you know, we had many years, you know, six odd years where home prices were sort of marching higher, and we thought affordability looks good. You know, come last year, you know, things are really different. I think you have to make focusing on credit a big, big part of how you spend your day. On the commercial side, I think I mentioned it in the prepared comments that you have a lot of... You know, if a you have a mature property, a stable property, and the person has a 10-year fixed rate loan with Freddie Mac or whatever, that's sort of one thing, and they're in good shape, and they'll probably grow rents, and that's fine.
You know what's in our portfolio on the loan side, not necessarily on, you know, the CMBS securities we own, but on the loan side, it's floating rate debt, right? You know, while we're enjoying materially higher note rates on that portfolio, you know, you get SOFR at 4.75% and a loan has, you know, a 5.5% SOFR margin, you're at 10.25% on that loan. What's great for the portfolio is a challenge for the borrower, right? When you get to this point, and this is what I was trying to get in the prepared remarks, when you have the debt cost is higher than the income the property is throwing off, that's always a challenge, right? It's always a challenge, it probably leads to some correction.
The correction can come from higher rents on the multifamily, or the correction can come from maybe SOFR comes down if, you know, if you believe the forward curve or property values come down. It's a big thing to focus on, and it's a real risk. I think we focus on it, and we're very, you know, we think a lot about downside, and we think a lot about housing shocks. I think about, like, the shocks we run when we buy credit risk transfer bonds. We're looking at how many multiples of the GFC home price shocks can the bond withstand. That was 30% decline. I don't think we see that. We're in a different world than what we were in for the last, certainly the last, you know, seven, eight years.
We're aware of it, and we're really focused on it. You know, I think you got to worry about other sectors. In the consumer side, you can definitely see borrowers They increased their savings massively during COVID. Now they're starting to spend it down. In auto, you're seeing, you know, used auto went way up. People are taking out these 7-year loans. They were buying older cars because, you know, everything was so expensive. Now you're seeing increased delinquencies, not in our portfolio, but just sort of the market. You're seeing an increase in delinquency in subprime auto because you have people that took a 7-year loan on an older car, and now when the car breaks and they have a big loan outstanding, they stop paying. There's a lot of things to worry about.
To me, it that's what creates the opportunity, right? If everything is sanguine, if everything's performing perfectly, if everything's going according to plan, then that's typically a world where spreads are very tight. I think the challenge for us is to watch our credit closely and have our underwriting continually adjust to what's happening real time. You know, to be opportunistic and see, like, it's a pendulum, right? It never stops in the middle, right? Like, people get too optimistic, they also get too pessimistic, right? I think this kind of market is going to lead to lots and lots of great investment opportunities. That was one of the motivations, and, you know, Larry articulated it behind the preferred deal. He's saying we did that in, you know, a relatively stable market, right?
Since then, think, you know, yields have come off and spreads are a little bit wider and all that stuff. Like, you gotta get your dry powder in a more stable market if you wanna have reasonable borrowing costs. I think we achieved that there. I think now, you know, we're sitting in a good position to be able to be opportunistic when you're gonna get some dislocations.
Okay. Appreciate that color. Sort of, you know, taking that, and looking at multifamily, which, you know, has been a pretty resilient asset class, and, you know, squaring that with some of the home affordability hurdles that you mentioned, you know, do you see demand starting to pull back just given cap rates, compared to debt costs? Are some of those other factors as far as, you know, single-family home ownership, do you anticipate that continuing to lend support to, the strength of multifamily?
One thing with our approach to multifamily space is it's never really been Class A, right? It's never really been properties that are new construction, rents of $2,000 a month, lots of amenities. We've always been sort of Class B and Class C workforce properties rent $600-$800. The reason why we've liked that sector is, you know, it's unfortunate, there's a huge shortage of affordable housing in this country. There's need and there's demand for that, apartments that have lower rent costs. Also, two, there's no new construction there. 2023 is interesting because there is a lot of multifamily construction that's gonna come online in 2023, it's all at the higher end, right?
No one's building, you know, properties to rent them out for $700 a month, right? What happens on these Class B multis is that we're lending at, you know, a discount to property value. Obviously, you know, LTV and that third cushion.
The buyer is buying those properties at a big discount to replacement costs. Construction costs are high. You know, the operators we see buying the Class B, Class C multis, they're getting into these properties at... It's, you know, the market level, but the market level is way below the cost of new construction. That's why you're not seeing new construction there. I think it kind of gives us a double layer of protection. Do I think some of the ops are gonna have a hard time pushing rents as much as they thought they were gonna be able to push them when they first bought the thing? Yeah. You know, are they gonna be feeling it as SOFRs march higher since they took out the loan? They are.
You know, we work closely with them. That's our job. Their job is to manage through it. You know, this is such a big move in rates and such a big U-turn from the Fed that everyone's gonna have their headaches, ours included. I just think for us, the headaches we have are gonna be small relative to the much, much greater opportunities that this market is presenting to us.
Excellent. Awesome. Well, I appreciate you guys taking my questions. I'll leave it there.
Okay, thank you.
Thank you.
Thank you. Our next question comes from Trevor Cranston with JMP Securities.
Hey, thanks.
You're welcome.
You guys mentioned, the potential opportunity to add more in the proprietary reverse mortgage space, after the acquisition of Longbridge. Can you elaborate a little bit on, you know, what the terms of the proprietary reverse loans look like compared to the sort of standard Ginnie Mae product and, you know, how you guys would look to, sort of utilize a financing structure around investments in that space?
Yeah. I mean, it's pretty simple. They are generally fixed rate loans. They have spreads that are obviously wider than the HECM product. They, you know, in terms of they can be securitized. We, you know, we'd probably wait to get some critical mass before doing so. The big, you know, the big reason why someone gets a prop loan as opposed to a HECM loan is really gonna be loan size. You know, from an underwriting perspective, the LTVs are gonna be much lower than on the HECM product. You know, the HECM product is the LTVs there are driven by these so-called principal limit factors, where essentially FHA dictates exactly what LTV they're willing to guarantee the loan at.
In prop, you know, we have much more flexibility and, you know, so we can be more conservative on LTVs. It's a pretty similar product to the fixed rate product, that you see in, you know, that goes into the Ginnie Maes.
Got it. Okay. Then on the book value update you guys gave for the end of January, I was just curious, you know, credit spreads and agency spreads seem to have done pretty well in January. I was wondering if you could maybe provide some color around sort of what drove the, kind of flat book value performance over the month. Thanks.
Sure. Right, the agency and non-QM had strong months. We obviously declared a $0.15 dividend, that would be netted out. We also were active in the ATM. That, there's some dilution from ATM is factored into that $15 a share. It's, you know, if you, if you factor in that last adjustment, it's pretty close to on top of the dividends.
Okay, got it. Thank you.
Thanks.
Thank you. Our next question comes from Bose George with KBW.
Yes, good afternoon. In terms of the growth outlook at Longbridge, I was curious, is there any sort of inorganic opportunities on the bulk side, either MSR or, you know, origination capacity?
Sure. Yeah, I don't think from an origination... Well, I'm sure you saw the bankruptcy, towards the end of last year, right?
Yes.
I don't know if you call this organic or inorganic, but we were able to pick up a lot of producers, you know, loan officers, et cetera, in the wake of that bankruptcy. You know, without having to sort of do, you know, to do anything, you know, in terms of an outright acquisition, you know, potentially paying a premium, whatever. You know, that also, you know, Ginnie Mae basically acquired, took over, seized, if you will, that MSR. That MSR will probably come to market in the near future. It's a very different MSR from the MSR that Longbridge currently owns. It's a much older MSR.
It has different sort of benefits and risks, but that could be, you know, a very, very substantial acquisition, and potentially not even requiring that much capital to, you know. So yeah. I don't think we would have any plans to sort of go out there and, you know, look for MSRs to acquire at this point in time, nor looking to sort of acquire any other existing operations per se.
Okay.
You know, Longbridge is, has shown actually great flexibility in terms of being able to dial up and down its capacity, including, you know, in terms of its staffing, you know, in response to market opportunities.
Okay, great. That makes sense. Thanks. Then just in terms of the returns on HECM MSRs, like what are the kind of, I guess, the unlevered yields on that in your book on this?
Talking about the reverse MSRs? Yeah.
Yeah, the reverse MSRs. Yeah.
Yeah. They're in the, you know, I'd say the low, you know, very low double digits. You know, between 10 and 15%.
Okay, great. Okay, that's all for me. Thank you.
Thank you.
Thank you. That was our final question for today. We thank you for participating in Ellington Financial fourth quarter 2022 earnings conference call. You may disconnect your line at this time, and have a wonderful day.