EFC-PD Q3 2026 earnings call transcript, November 5, 2026

Good morning, Crispin.

I'm going to let Mark handle in terms of, you know, some of the actions we took, but just keep in mind that. Part of it is just putting hedges in place, maintaining hedges, maintaining discipline so that we don't have to do anything very different. We've got very strict protocols in terms of how we modify our credit hedges, how we modify our interest rate hedges. I think we're, you know, one of the only mortgage rates, and this has been true for many years, that makes heavy use of TBA short positions, you know, for example, against the non-QM book. Right, where you've got very similar convexity characteristics. It just makes a lot of sense. You're dealing with a lot of spread to start with. And you can just sleep better at night. And you saw the results, right, if you have a decent amount of TBA hedges there. Mark, I don't know if you want to comment on anything else. I think what Larry said is exactly right. So we, the hedging protocol in Q3 was. Isn't any different than what it's been. It's just this sort of, I kind of alluded to this in my prepared comments that it made more of a difference in Q3 because rates shot up so much. But I mean, basically for all the positions in Ellington Financial, whether it's a non-QM loan or an agency pool or an IO or whatever it is, we think about what sensitivity the price of that asset has to interest rates. And we think about what sensitivity.

The price that asset has to other spread product, you know, investment grade corporates or TBA mortgages. And so we think about how much exposure we want to have to spread risk. We generally don't take any exposure to interest rate risks. And we have enough tools and enough data to feed our historical, you know, models or regression analysis to get pretty. So, you know, when I think about non-QM, you know, Larry mentioned about loans we're buying on the portal each night, loans we're buying from origination partners, loans we're buying from other originators, right? When we buy those and we plan to securitize those, we think about how the investment grade part of those securitizations is going to move relative to, you know, corporate spread. And TBA spreads, and we have the hedges in place. And so we maintained our discipline in Q3. We maintained our discipline in Q4. You know, I think, if anything, the job's getting easier because the mortgage market, the non-agency mortgage market, has gotten a lot more liquid than even what it was two years ago. You know, you're probably going to have between non-QA and non-QA. Jumbo, agency eligible, HELOCs. You're probably going to have $250 or $275 billion of deals priced this year. So you're talking at a pace of, you know, $5 billion of deals a week. So there's continual price points to sort of give you better data on how spreads move. And as...

Our volumes have gone up. The time it takes us to ramp up to deal size and price deals, that's compressed a lot. So the time, you know, the sort of the risk we take on hedges decoupling from the underlying asset, that's been reduced too. And so, you know, we didn't change anything in Q3, and we certainly haven't changed it in Q4. It was just hedges mattered more in Q3. Q3 to preserving book value than it has, you know, the first six months of this year. Yeah, and I'll just, to finalize the response, Crispin, for October, you know us, we put out our monthly book value per share estimate each month on a lag, and we'll do the same for October. It'll be later in November. And yeah, I mean, there are a lot of moving pieces in October, right? So rates have rallied. And the performance of IOs and rate hedges that were so positive in Q3 will reverse to some degree, but you have offsets on loans and securities. Lower rates, all else equal, could generate more origination volume and better margins at the originators, sometimes with a lag, though. So a lot of different moving pieces also with what AAAs are pricing on new securitizations. They have been wider. in the last month or so with market volatility. So we'll be putting out an October update later in November. And you'll see the effect of a few different parts of the market. But kind of the diversification of our portfolio, I think, is really important in a market like this or, frankly, any market. Great. Thank you. Appreciate all the color there. And J.R., I thought I'd just try, but I understand. Thanks for listening.

Sure. Yeah. So look, we used to, I think for many years, we said 80% was the threshold. Now that our stock has more reliably traded at a premium to book, a round book, now in the last month or so… Arr… You know, it's been trading below book. We want to take advantage of that opportunity. We don't think it's an either or. We can take advantage of low asset prices, you know, and do stock repurchases. So we think this is a great opportunity to buy our stock at a 15% discount. We only had a few days before the window closed. We took advantage of it. As I said in my prepared remarks, you know, unless you've got some sort of abnormal market conditions, I do expect… to continue to have that kind of discipline, you know, around that 85% level. That's going to provide support, obviously, for shareholders. I think they should, you know, have confidence that they've got us behind them in terms of supporting the stock price. And I think that's not only just, frankly, a good trade for the company to be buying stock there, but when you look at what it can do in terms of our, for example, you know, what it does to our book value per share. Right. That, that accretion, right. Which then, you know, we can then basically reinvest. You could almost think of them as profits, right. That boost to book value per share. Then just we'll go into supporting our earnings, supporting our ADE. So we think it makes sense on a lot of levels. And, and we, you know, our plan is to continue to do it. Thank you. Thank you. And our next.

Question comes from the line of Doug Harder from BTIG. Your question, please. Actually, Doug, Doug, Doug, before you answer that, ask that question, I do want to just follow up one more thing on Frankie's question, which is that I do want to say that in terms of, you know, again, repurchasing stock at a discount. That's right. Ask your question. And I'll follow up later. Sorry. Go ahead. Great. Thank you. Obviously, you guys came through this quarter with relative strengths. You know, can you talk about the potential opportunities to maybe add more originator partners, you know, kind of as others in the industry might need capital or are struggling with the higher rate environment? Yeah, all I can say is that we're always looking at it. We have some deals that we're looking at that are, you know, more alive than others. You can call them in the pipeline, nothing that's imminent. But, you know, we're looking at some platforms, some are bigger than others. And we do expect, I mean, this is not, again, something we necessarily expect in the short term, but we do expect that there could be some platforms for sale and we would absolutely take a close look at that.

Great. Appreciate it. Thank you.

Yep.

Hey, Marissa, this is Mark.

So we just looked at things and we didn't see great options where we could really. Get what we think are best in class protocols and really have a dialogue and really be able to use our data analysis and our kind of native experience and expertise in the product to effectuate outcomes. So look, this, it's going to take a while to build this out. I think it's going to be valuable for EFC, but I also do. Recognize what you pointed out to that, you know, you're seeing change and significantly seeing a change in the modification policies coming out of FHA. Their pipeline of delinquencies has increased. Non-QM market as a whole is growing, you know, with, you know, you know, delinquencies in non-QM first started were trivially small, trivially, trivially small because, you know, we had that big COVID HPA tailwind. We don't think. That's, you know, we don't see that HPA tailwind right now, obviously. So we think non-QM delinquencies will tick up to sort of, you know, levels that are more consistent with reasonable expectations. For years, they were way below that. So I would not at all be surprised that as we build this out and we demonstrate the quality of the resolutions we believe State Bridge can get, that they'll be. The opportunities for, you know, others may want to use their services. But I think, you know, the first thing and what we're really focused on now is building it, right? And I think what's exciting about that process is that AI and some of the technology you've seen in the last few or four years, I think, allows us to build a servicer faster and less expensively than what you could do historically. And so...

That sort of moved the needle to us on making this investment, and we've committed a lot of resources to it, a lot of really, you know, very sophisticated people that have built out complicated systems, and they're hard at work. And I think it's going to be definitely valuable for EFC and gives us, you know... Another line of defense if you do see a weaker economy and you do see HPA decline. But I do also think there is sort of a, you know, a fee-for-service opportunity out there as well in the future if we can really build something great.

Hey, I just want to add one thing. A little inside baseball, I guess you could say. So this sort of gets to your question about is this kind of a... almost a counter-cyclical play in terms of what could be developing in the, let's just call it the delinquency market. So when we first looked at Statebridge, we actually looked at it. It was originally going to be, Mark, I'm sure you remember this. It was originally going to be almost like a joint venture between us and some other, I'm not going to name names, but some other major players. in the mortgage market. And they sort of got distracted. One of those companies actually ended up getting bought by someone else, I believe. But in any case, this just sort of shows you that the industry really needs this. Now, is Statebridge going to be incredibly profitable just based upon the loan flow they get from us? No. But as Mark said, we're going to build this. into, you know, the premier special servicer. And then once we built that and people see because of the dearth and, you know, the dynamics that we talked before about and Mark talked about in terms of just the ability to get really the attention from the mega servicers and get the highest quality special servicing, you know, to the standards that I think investors like us and others need, you know, I think then the business will come to them. And absolutely. Even with, by the way, what we see as the pipeline, the delinquency pipeline now, you know, once we've built this, then I think there'll be plenty of business for StateBridge to grow and thrive on.

Okay. Makes sense. Appreciate all the color.

Thank you, guys.

Thanks, Trevor.

I think most points have been touched on. So I just wanted to ask a quick follow-up regarding an answer to a previous question. You mentioned in 27 adding new products at Longbridge. And I guess it'd be great to just hear some color on maybe what borrower needs you're looking to address with those new products. And then maybe if you could provide some characteristics or just any input on those potentially new products. Question 27.

Thank you provide any details.

Thanks for the question, but I can't provide any details on the products themselves. But, you know, you can imagine, right, you're you're dealing with, you know, let's just say seniors, just to keep it simple. There are lots of times when a reverse mortgage just in the tradition. sense may not be the best fit, but some other, you know, hybrid product, right, between a reverse and a standard. You can imagine ones where you're paying, you know, some interest, but not as much interest. You know, you could imagine there are lots of products and we're, you know, we are working on, we have some in the pipeline and, you know, really, you know, we will continue. Um, to address the fact that there's a ton of home equity, right? That's out there that, uh, the homeowners want and need access to in many cases. And, um, a first mortgage, you know, especially if you've already got a first mortgage in place, um, isn't always the most economical solution. So, um, so right in cases. Like that, you've already got a first mortgage on the property. So you're not going to look at a first mortgage. That's a reverse to replace that. But although in some cases you will, if that, you know, if, uh, continuing to make monthly payments is an issue. Um, but some, you know, some sort of home equity releasing product, uh, makes just a lot of sense. And there are just many, many ways of, uh, of structuring those, um, in ways that can, you know, can make.

A lot of sense for the consumer. Okay. Thank you. That's all for me today. Thank you. This does conclude the question and answer session as well as today's program.