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Ellington Financial LLCÂ (EFC -1.03%)
Q1Â 2020 Earnings Call
May 11, 2020, 3:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2020 Earnings Conference Call. [Operator Instructions]
It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.
Jason Frank -- Deputy General Counsel and Secretary
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 filed on March 13, 2020, 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, and 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 first 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 end notes at the back of the presentation.
With that, I will now turn the call over to Larry.
Laurence Penn -- Chief Executive Officer & President
Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. After a quiet start to the year, the COVID-19 pandemic and the associated measures to contain the pandemic brought the global economy to a virtual standstill in March, which resulted in extreme volatility and widespread market dislocations, including a collapse of asset values and liquidity. Economic activity plunged as countries around the world implemented social distancing restrictions. Unemployment claims surged, consumer spending plummeted and GDP growth rates turned negative.
In March, equity sold off across the globe as the 11-year boom market ended in spectacular fashion. Yield spreads on most fixed income assets widened sharply. And a flight to safety drove record low yields on long-term US treasuries. Portions of the yield curve inverted and the interest rate volatility surged. On Slide 3, you can see the extraordinary quarter-over-quarter declines in treasury yields.
Repo financing stresses alongside a drop in asset prices, severely reduced liquidity and prompted forced selling across virtually all credit-sensitive fixed income asset classes. Many leverage mortgage investors in response to margin calls from their lenders had to unwind portfolios quickly and in inopportune times and at fire sale prices, while at the same time, many mutual funds and ETFs that offer daily liquidity, also had to sell urgently, in their case, to meet mounting investor redemption requests. A vicious cycle ensued as these four sales put additional pressure on prices, which prompted further stress in liquidations and so on. The selling pressure extended even to perceived safe havens like Agency RMBS, where yield spreads skyrocketed at to levels not seen since the 2008, 2009 financial crisis.
The downward spiral finally started to subside, though it didn't end right away when the Federal Reserve stepped in to restore some stability. The Fed slashed short-term interest rates nearly to 0%, injected liquidity into the repo markets, launched several credit facilities similar to what had implemented during the financial crisis and stepped in with unprecedented levels of quantitative easing, all of which provided meaningful support, especially to more liquid sectors of the market. The US Congress passed three rounds of stimulus packages during March, culminating in the $2 trillion CARES Act on March 27, the largest emergency spending bill in history. These actions were mirrored by central banks and governments around the globe, and the rollout of stimulus programs continued into April. As the Federal Reserve deployed its full crisis playbook, we saw it was in effect almost a full market cycle compressed into just a few weeks. US equities bounced back sharply from their March 23 lows, as what had been a 34% drop in the S&P 500 in less than five weeks was immediately followed by an 18% rise in just three days. The Federal Reserve's injections of capital eased liquidity stresses and yield spreads in the sectors targeted by the Federal Reserve's asset purchase programs tightened sharply, particularly in Agency RMBS, which recovered strongly during the last two weeks of the month.
In the credit space, yield spreads in some sectors such as investment-grade corporate bonds also tightened significantly following the Fed's actions, while other sectors, including noninvestment-grade CMBS and CLOs noticeably lagged. Many measures of market volatility subsided from their highs but still remain greatly elevated at quarter end. What made mark unique -- what made March uniquely challenging was the magnitude and speed of the risk off moves, and during the peak of the frenzy, the high degree of correlation across virtually all asset classes, irrespective of their actual underlying risks. As March progressed, with the asset markets and financing markets looking more and more fragile, we proactively reduced the size of our Agency portfolio in an orderly and measured way, which bolstered our liquidity and lowered our leverage. Most of the Agency assets that we sold in March were sold either early in the month before yield spreads hit their wides or later in the month after yield spreads have already recovered strongly. In this way, we were able to avoid forced asset sales entirely, which would have exacerbated losses.
During periods of acute distress, like what we saw in March, the performance of a leveraged portfolio can vary widely based not just on what you own, but also how you financed it and how you adjusted a quickly changing market environment. So the crisis in March put a spotlight on our risk management, our liquidity and the structure of our liabilities and our leverage. Ellington Financial entered March with a strong balance sheet and prudent leverage ratios. On the asset side, we have lots of liquid Agency RMBS to help provide liquidity. And in credit, we had deliberately built a relatively short-duration, highly diversified portfolio with an emphasis on first liens.
In times of distress, whether it be distressed in the financial markets or broader macroeconomic distress, maintaining a shorter asset duration can help a fixed income portfolio in two very important ways. First, asset prices tend to be less volatile. And second, principal paydowns can come in faster, thereby derisking your position faster. In fact, during March alone, we received proceeds from principal repayments of about $55 million on our small balance commercial mortgage loan, consumer loan and residential transition loan portfolios, which represented about 8.5% of the aggregate size coming into the month of those portfolios.
On the liability side, lessons learned from past market crises have taught us to limit our leverage, to diversify our sources of funding and to structure our financing arrangements to help us better withstand shocks in times of financial distress. Over the past few years, we have issued investment-grade rated senior unsecured notes and have completed several securitizations, all of which provide locked-in term, nonmark-to-market financing.
Several of our secured financing facilities are committed and nonmark-to-market and have repayment schedules that more closely match the repayment schedules of the financed assets as compared to typical repo. Also, our objective has always been to stagger the roll dates of our repo financings and to roll these financings in advance of maturity dates as a standard practice. Our disciplined interest rate hedging and opportunistic credit hedging has also provided additional book value protection in volatile markets.
All of these measures combined with our strong liquidity management practices, helped lessen the impact of the March distress in our portfolios, granting a sufficient time to stay ahead of the curve, unlike many other market participants who became forced sellers at distressed prices in March.
With that, I'll turn the call over to JR to go through our first quarter financial results in more detail.
JR Herlihy -- Chief Financial Officer
Thanks, Larry, and good morning, everyone. Please turn to Slide 7 for a summary of our income statement. For the quarter ended March 31, EFC reported a net loss of $3.04 per common share compared to net income of $0.31 per share for the fourth quarter of 2019. Core earnings for the first quarter was $0.46 per share, up from $0.44 per share in the fourth quarter of 2019 and cover the common stock dividends declared during the first quarter of $0.45 per share. While total net interest income increased 24% sequentially, and gains on our credit hedges were meaningful, the significant net loss for the quarter was driven by losses on our long investment portfolio as the market dislocation in March led to wider yield spreads across virtually all asset classes.
Next, please turn to Slide 8 for the attribution of earnings between our Credit and Agency strategies. During the first quarter, the Credit strategy generated a total gross loss of $2.47 per share, while the Agency strategy generated a total gross loss of $0.38 per share. These compared to gross income of $0.28 per share in the Credit strategy and $0.32 per share in the Agency strategy in the prior quarter. Most of our Credit strategies generated net losses during the quarter. The largest losses occurred in CLOs, CMBS, non-Agency RMBS and non-QM loans, all markets where there was substantial distress selling during the quarter.
Our long strategies with shorter durations had better performance, including small balance commercial mortgage loans, consumer loans and residential transition loans where we received significant proceeds from principal payments, and in the case of small balance commercial mortgage loans, several profitable asset resolutions. The fact that most of our commercial mortgage loans have LIBOR floors was also valuable in the quarter as LIBOR declined sharply. We also had net realized and unrealized losses on the interest rate hedges in credit portfolio as interest rates declined sharply during the quarter and were highly volatile and a net loss from investments in unconsolidated entities. On many of our credit investments, we are anticipating some degree of eventual principal losses as a consequence of the economic impacts of COVID-19, especially in a prolonged shutdown scenario. As has been widely reported, there has been a significant nationwide increase in loan delinquencies and forbearances, and we are seeing the effects of this on our own portfolios.
In the Agency strategy, the precipitous decline in interest rates and high levels of interest rate volatility generated net losses on our hedges. And while our Agency RMBS assets did appreciate in price during the quarter, they significantly underperformed our hedges. As a result, we experienced a net loss for the quarter in the Agency strategy. Furthermore, TBAs outperformed specified pools during the quarter, depressing payoffs on our specified pool portfolio. The underperformance of specified pools relative to TBAs can be largely attributed to marketwide liquidity problems, exacerbated by quarter end balance sheet pressures as well as to the implementation of the Federal Reserve's amplified asset purchase program during the quarter, which was generally limited to TBAs and generic pools as opposed to specified pools of payoffs. With that said, while TBAs outperformed specified pools during the quarter, they severely underperformed interest rate swaps and US treasury securities. So we benefited by having a significant portion of our interest rate hedges and TBA short positions as opposed to interest rate swaps.
Turning next to Slide 9. You can see the size of our long credit portfolio was essentially unchanged quarter-over-quarter. We grew our credit portfolio in January and February, deploying the capital raised in our January offering, but these new purchases were offset by asset paydowns, payoffs and net reductions in asset values related to the -- to market dislocations in March. In light of the market volatility, we substantially suspended new investments in our Credit strategies in March. And as Larry mentioned, it was our Agency portfolio, not our credit portfolio that we use as a source of liquidity.
On Slide 10, you can see that we strategically reduced the size of our Agency portfolio by 48% to $1 billion as of March 31, compared to $1.9 billion at the end of the prior quarter. These sales were orderly and enabled us to reduce leverage and bolster liquidity. Next, please turn to Slide 11 for a summary of our borrowings. As a result of the Agency sales, our debt-to-equity ratio declined to 3.1:1 as of March 31 from 3.8:1 at December 31, adjusting for unsettled purchases and sales. Similarly, our recourse debt-to-equity ratio also adjusted for unsettled purchases and sales, decreased over the same period to 2.1:1 from 2.6:1. Our weighted average cost of funds decreased sequentially during the quarter to 2.58% from 2.86%, driven by lower short-term interest rates. As a result of the significant price declines and general price volatility, we received margin calls under our financing arrangements that were higher than typical historical levels. We satisfied all of these margin calls. At quarter end, we had cash and cash equivalents of approximately $137 million, along with other unencumbered assets of approximately $279 million.
For the first quarter, our total G&A expenses declined to $0.14 per share from $0.16 per share in the prior quarter, primarily due to our higher share count following the raise in January. Other investment related expenses declined quarter-over-quarter to $0.09 per share from $0.16 per share, mainly because we incurred non-QM securitization issuance costs in Q4, but not in Q1.
We had a small income tax benefit related to a decrease in deferred tax liabilities in our domestic taxable REIT subsidiaries. Our book value per common share at March 31 was $15.06. On a more technical note, as of January 1, 2020, we applied the new credit loss standard known as CECL. Because we have always fair valued our portfolio through the income statement, CECL had no net impact on our earnings or book value this quarter. A final note, in response to the challenges presented by COVID-19, the SEC has granted public companies an extension for certain filing obligations this quarter. With everything going on, we intend to take advantage of this option and plan to file our 10-Q on or before May 22.
Now over to Mark.
Mark Tecotzky -- Co-Chief Investment Officer
Thank you, JR. The markets for securitized products in the second half of March and throughout much of April were as challenging as I have ever seen in my career, including even 2008. Larry already gave some of the blow by blow, so I won't repeat it all now. But essentially, COVID-19 created such a sudden and dramatic change to the outlook for US economic growth and employment that almost overnight, both lenders and investors repriced virtually all credit assets to both much higher yields and much higher loss expectations, setting off a wave of forced selling for mutual funds, REITs and hedge funds. If you had a portfolio that was highly leveraged even with senior assets or if you had a portfolio that was only modestly leveraged but with subordinated bonds, either way, your balance sheet was under siege and if you became a forced seller, the prices you realized were quite distressed. The policy response from the Fed was fast and enormous, massive buying of Agency MBS, TALF programs, lending programs and the CARES Act, all went a long way toward stabilizing the market. As we see it, the two big beneficiaries from the government intervention are the consumer and the residential housing market, which are both sectors we have long favored.
Ellington Financial, with its diversified, less levered portfolio, which included lots of liquid Agency assets and which in credit included a concentration of lower LTV loans, was able to weather the storm. While we absolutely have work to do resolving assets, where either the borrower or the property are experiencing a loss of income, we are pleased with the performance of most parts of our portfolio. And while the Agency MBS market did not escape unscathed, our disciplined approach kept our net loss in our Agency portfolio under 10% on allocated capital for the quarter. I want to review how the team managed the portfolio when the crisis hit. Firstly, we recognized relatively early on that the spread of COVID represented the kind of scary unpredictable news that the market really struggles to rationally price. This was not a string of terrible GDP reports or even massive flooding in Houston. As bad as those events can be, they are much more quantifiable. In contrast, nobody has a crystal ball to accurately predict when and at what progression the economy will reopen.
As you can see on Slide 9, we did not sell -- we did not net sell credit assets into the distressed market in March, and the portfolio was essentially unchanged quarter-over-quarter. That slide doesn't really tell the whole picture because we grew the portfolio in January and February following our capital raise, and these purchases were offset by a lot of paydowns in March, specifically small balance commercial loans, residential transition loans and consumer loans. All had a lot of principal paydowns in the quarter, as Larry and JR mentioned.
As you can see on Slide 10, coming into the quarter, we also had a large portfolio of liquid Agency pools. Lots of our Agency specified pools had low pay-ups that we could efficiently turn into cash, and that's exactly what we did as March progressed. As you can see on this slide that we cut our Agency portfolio in half. Most importantly, we did this in a deliberate, opportunistic way in particular by selling early in March before spreads hit their wides or later in the month and thereby taking advantage of the strong Agency MBS rebound driven by the Fed's unprecedented buying spree. Just like with other periods of QE, Agency MBS recover first and then other structured product sectors follow. So as the market volatility struck, our view was that most prudent way to raise cash was to sell the more generic MBS securities, especially our low pay-up specified pools.
Now that the markets have become more stable, our focus has shifted more toward managing our credit exposure and taking advantage of the tremendous opportunities available, taking into account the potential long-term consequences of COVID. For some sectors, such as credit risk transfer securities, in our opinion, the uncertainty seems too great to have sufficient confidence in asset values. While for others, it seems pretty clear to us that even with conservative assumptions, yields are still very high.
Turning now to our non-QM business. In response to March's volatility, we temporarily stopped new originations, but we are now planning to restart our lending programs with updated guidelines that take into account a potentially weaker economy with higher levels of unemployment and lower income levels and including the effects of these factors on real estate prices. The reason non-QM loans was performing so well between 2015 and February 2020 is that there was a big borrower demand for the product. So capital providers like us could be disciplined on credit and still generate volume.
The GSEs with their automated underwriting systems are the low-cost, low-rate mortgage producer for most borrowers where W-2s and IRS Form 1040s give a close to complete picture of their income and ability to repay. That probably covers about 85% of residential mortgage applicants. For the other 15%, the non-QM business line makes a lot of sense, and COVID does nothing to change that. If anything, we think it makes the non-QM opportunity even more compelling and in demand. This other 15% of mortgage applicants includes many self-employed borrowers, many borrowers with a lot of K-1 or rental income and many borrowers who might be retired with substantial financial assets but limited in note 1099 income. It also includes many highly qualified borrowers who might want to buy an investment property through an LLC. These are the borrowers that non-QM responsibly serves and the very strong credit performance in our non-QM securitizations to date is a testament to the fact that when non-QM loans are thoughtfully underwritten, they are high quality loans.
Meanwhile, at the same time that we are predicting continued demand from the traditional non-QM borrower base, we also think that we'll see additional demand for some non-QM loans from another segment of the residential mortgage borrowers. Specifically, I'm returning to the large number of quite creditworthy borrowers who happen to have certain characteristics that put them toward the edges of the GSE's current credit box. Faced with uncertainty about the future of credit risk transfer market, the GSEs seem to be tightening their credit box. And we expect that this will potentially exclude some very creditworthy borrowers who may have -- may become strong candidates for non-QM loans. Will there be headaches in our non-QM portfolio? Absolutely. Will there be borrowers that need forbearance? Yes. Will there be a delinquency spike? Yes, you can already see that in the data.
So our focus right now on non-QM is two-pronged. First, in partnership with our servicers, we are working with those borrowers who need time to pause their payment obligations because they are experiencing a loss of income. Secondly, we are planning to resume originating high-quality loans with guidelines appropriate for the current more uncertain economic environment. Although non-QM performance will be affected by the economic slowdown that COVID triggered, much of the price movements in the non-QM market in March were related to marketwide financing issues, especially as the securitization market seized up as opposed to fundamentals with the loans. The good news is that the non-QM market seems to be slowly returning to a more normal state. We expect the non-QM securitization market to reopen later this month. We hope to be back in the market with our next securitization as soon as market conditions permit.
We are thinking about residential transition loans in a similar way. The reason we entered the RTL market was because it made sense. The median age of a US home is now 37 years, and many borrowers don't want to buy a home with a lot of deferred maintenance to deal with. So if we pick the right partners, pick the right geographic area, pick the right renovation projects and be disciplined about LTVs lender writing standards, we believe that we can have strong performance and a very high leverage yield on that portfolio. Amazingly, between March 1 and April 30, about 25% of our RTL portfolio paid off at par. That was the kind of outcome we were hoping for when we underwrote those loans. And it really shows the benefit of having shorter duration assets during the credit shock. Could we have sold those loans at par during the panic in March? I highly doubt it. But the combination of our experienced team and our careful underwriting got us that outcome. It's a far better outcome than being a forced seller in the third week of March. Will there be some headaches in that portfolio? Yes. Do we expect to see some credit losses? We do. But from the market color we have gotten, it looks like our portfolio is performing much better than many other RTL portfolios.
Similar to the non-QM, we temporarily shut off new originations in March, but we want to start buying again. We are reformulating our guidelines and looking for secondary packages to buy. The same thought process is guiding our consumer loan portfolio. Despite the COVID dislocation, we have continued to see a substantial velocity of par payoffs. And we are working with our partners to appropriately help borrowers in need. Until we have more visibility, we have cut way back on new purchases, but so far, the performance numbers are very encouraging.
Our smart balance commercial strategy also had some great resolutions in the quarter. It will also have its of share headaches as your outlook for the next 6 months is for things to get a lot messier in commercial real estate than in residential real estate. But again, our low LTVs and shorter duration should help this -- should help in this strategy as well. All that said, we certainly took our lumps this quarter. As always, losses in the credit portfolio took one of two forms. First, we had mark-to-market losses on investments, where we don't expect a big change in the cash flows, but the prices went down because the market yields widened. And second, we had some mark-to-market losses on investments that were not just due to wider market yield spreads, but are also because we have witnessed or we project some degree of fundamental cash flow impairment. That kind of loss is likely to be permanent.So what do we learn from the crisis in March and how will it shape the direction of EFC going forward? One notable difference between what happened in March and previous financial crisis is the speed at which prices dropped and the forced selling occurred. We did not anticipate that over the course of just a week, the yield spreads on Fannie force [Phonetic], for example, could wide from a normal OAS to the widest level since the 2008 financial crisis.
COVID has proven to be unpredictable, but we have to expect more of the unexpected. The next shock could be weather related. There could be another wave of public health crisis related to COVID or to something else or there could be more tensions around global trade or something else geopolitical. But wherever the shock comes from, we need to be prepared to withstand volatility and hopefully thrive from it.
So how do you do that? I think the experience in the past couple of months gives us even stronger incentive to do securitizations as a way to transform repo financing into nonmark-to-market term financing. There are plenty of times in the cost and time commitment of doing securitizations make it seems like they may not be worth it. But in times like March 2020, having done them was well worth it. If all the non-QM loans that we had securitized over the past two years have been sitting on our balance sheet finance with repo, we would have had to reserve a lot more cash or potential margin calls. Secondly, so far, the loans we've sourced from origination channels where we've carefully chosen our partners and help shape the underwriting guidelines seems to be performing well relative to their peer group. So we are more inclined to continue to look for partnerships where we aligned and work in tandem with the originator to make credit decisions.
Thirdly, it reaffirms that the liquidity of Agency MBS portfolio can be a great balance for our credit portfolio. Agency MBS is the primary sector of structured products that benefit from direct Fed buying. And this has been an important governor on spreads and time of stress. So while Agency MBS liquidity was absolutely awful at times in March, it was still much better than any fixed income sector without a government guarantee. And we're able to efficiently raise cash in that market. So I like the balance EFC had between agencies and credit. Looking forward, I and the rest of the Ellington portfolio management team remain very focused on navigating these markets and doing the best to earn back losses we sustained in March.
Now back to Larry.
Laurence Penn -- Chief Executive Officer & President
Thanks Mark. While an economic return of negative 16% for a quarter is painful to say the least, I'm extremely proud of how our team managed through the unprecedented challenges of the quarter, especially given that leveraged credit portfolios were in the crosshairs of the distress in the financial markets. Our liquidity management, risk management and hedges did what they're designed to do. They protected book value and they protected our shareholders. This past quarter, that meant protecting our shareholders not only by avoiding any forced asset sales, but it also meant protecting our shareholders by avoiding any expensive or highly dilutive capital raises.
In addition to a GAAP loss for the quarter, we also estimate a taxable loss for the period. For REIT purposes, a first quarter taxable loss would technically lower our distribution requirement for the full year. The Board has set the two most recently announced dividends at $0.08 per share. While our outlook for future core earnings for Ellington Financial is strong, these reduced dividend levels balance that optimistic outlook on core earnings against our now eased REIT distribution requirement, and our desire to preserve liquidity, both to take advantage of investment opportunities and liquidity just to be prudent in these continued uncertain times. The Board will continue to assess the dividend rate on an ongoing basis as market conditions and our financial position continue to evolve.
Financial crises can also create opportunities. And as we look ahead, the diversified credit-sensitive sectors, which Ellington Financial has deep experience, particularly in many of our loan businesses, are facing a severe supply demand imbalance with net interest margins that are as wide as we've seen in years. We believe that this imbalance will present highly attractive asset acquisition opportunities for Ellington Financial for some time to come.
All that said, while the global government and central bank responses have provided a boost to liquidity and meaningfully improved market performance in the short-term, the path forward for the economy remains unclear. We don't know what the length and severity of the economic downturn will be, what the ultimate path to recovery will look like and what the exact effects of all this will be on our current portfolio or on future investments. And on the liability side, it's unclear what the exact terms and availability of financing for these assets will be. In light of this uncertainty, our goal will be to balance defense, that is building in a margin of safety to absorb additional market shocks with offense, that is the ability to capture what we see as great opportunities.
Ellington's core risk management principles have served us well over many market cycles, including during Ellington Financial's very first years from 2007 through 2009, when Ellington Financial, not only maintained book value stability through the financial crisis, but then absolutely thrived in its aftermath. We believe that these same risk management principles continue to be critical now, both in protecting EFC's book value and keeping EFC well positioned to capitalize on the opportunities that we are seeing and that we are anticipating. And as always, management remains strongly aligned with our shareholders with a significant coinvestment in EFC.
Before we open the floor to questions, I would like to take this opportunity to thank the numerous members of the entire Ellington team for their hard work over the past weeks despite difficult circumstances. And for all of those listening on the call today, and to all of those in our communities and around the globe impacted, we hope that you and your families stay healthy and safe.
With that, we'll now open the call to your questions. Operator, please go ahead.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Trevor Cranston with JMP Securities.
Trevor Cranston -- JMP Securities -- Analyst
Hi guys. Thanks.
Laurence Penn -- Chief Executive Officer & President
Hi Trevor.
Trevor Cranston -- JMP Securities -- Analyst
I hope you guys are doing well.
Laurence Penn -- Chief Executive Officer & President
Thanks, you too.
Trevor Cranston -- JMP Securities -- Analyst
A couple of questions on the financing side. You guys talked about the uncertainty that there remains about the terms and availability of financing for new asset purchases. I was wondering if you could talk about how much of the credit repo you guys have was actually rolled between sort of the middle in March and today. And of repo that hasn't yet rolled, sort of what your level of confidence is that the lenders are going to be -- continue to be willing to finance the assets going forward? Thanks.
Laurence Penn -- Chief Executive Officer & President
Yes. I don't want to know -- first of all, I don't have, obviously, all those figures at our fingertips. But I can tell you that we're feeling good. We did extend actually some repo. As I think I mentioned, we not just stagger maturities, but we also roll kind of ahead in advance of repo maturities, not just waiting till the last minute to roll a repo. So we did take some proactive steps. I'm not going to be too specific with which counterparties and with -- in which markets, but there was some significant credit repo that we actually extended well in advance of its maturity during March. We've -- after quarter end, we've also significantly extended some other very large amounts of our loan -- I'm talking now about loan repo, which is perhaps what you were focusing on.
In securities, I would say that the situation is definitely clearer. And that securities repo, we've -- I don't want to say that it's been business as usual, but we really have not had significant issues rolling securities repo. Loan repo, again, we've been ahead of the game, staying ahead of the game. But the availability and terms, exactly what we're going to see in the future -- but let's just take non-QM, for example, right? So we have some nice term repo on non-QM right now. So we've got, we think, ample runway there, but nobody can predict exactly where that repo market is going to settle in. Nor -- and it's going to be related to the securitization market as well, right? So there's still non-QM out there in the marketplace, sitting online awaiting securitization. And there have been some distressed sales, as you may or may not have heard about, especially in March. So we have to see how that will play out. And that's going to affect the rates that the non-QM borrowers are going to pay, right, it all sort of is a cycle, if you will.
So again, to summarize on the loan side, I think we've been very proactive about that even during the depths of the crisis, it's going to be more expensive to finance loans. There's no question about it. But the rates that we're going to be able to get from borrowers, the yields we're going to be available to earn on our loans are going to be significantly higher. So we think that, all told, this is going to be a great opportunity, talked about that supply demand imbalance between borrowers and lenders. So I hope that answers your question.
Trevor Cranston -- JMP Securities -- Analyst
Yes, that was very helpful. Thank you for that. And then next question. Mark talked a little bit about sort of the differentiation in the types of price movements among assets like some where you do expect a meaningful change in the actual cash flows and credit performance in some assets where there isn't necessarily so big a change. I guess as some liquidity returns to the credit markets, how are you guys thinking about the composition of the portfolio? Are there certain sectors where you might like to sell assets to the extent you feel that you can do that and reallocate into something else? Or how should we think about the mix of the asset classes?
Laurence Penn -- Chief Executive Officer & President
Yes. So let me -- yes, I'm going to -- let me take that question first, and then I'm going to pass it to Mark because I'm sure he's going to want to supplement. So during March, especially, right? The markets were so illiquid that -- for credit product, that rotation wasn't really an option, right? It was traversing the bid-ask spread was just too expensive. Going forward, I think you're right on. Now we're always though going to have to look at what are we selling, right, versus what are we buying or where are we reallocating. And so what I would say is that I think that when you -- when we think about Ellington Financial and what kind of company it is, and how the market in the past has rewarded us for building the types of sustainable core earnings, for example. And I think -- so I do believe that as the year progresses, we will, at the right time, sell certain of our securities portfolios when, again, we think that it makes sense on a relative value basis and redeploy more into some of these asset classes where I think the supply demand imbalance is going to be more sustained.
There is currently a supply demand imbalance still in a lot of securities markets, right? Even non-Agency RMBS, which was the star performer right after the financial crisis of 2008, 2009, and which is obviously a much smaller market than it was back then, even that market is trading at very wide levels. So we're not saying that we're just going to be selling things right away. But as those markets continue to fall, which we believe they will, as the security markets continue to fall and as more clarity comes to the market, we absolutely will be looking at rotating out of some of those -- I'll just call them more noncore assets for us at this point and getting good total returns, making sure that we have the right -- we're selling at the right time and redeploying probably into more of the loan businesses where we think that the opportunity is going to be sustainable, really for a long time. So we want to build those businesses there. Mark, is there anything you want to supplement?
Mark Tecotzky -- Co-Chief Investment Officer
I guess I would just say that our interest is in sectors where the outcomes aren't binary and the outcomes aren't contingent upon guessing right on potential policy moves. So if we think about hotels, or we think about student housing, the outcomes on those kind of loans are highly dependent on when the economy reopens, once it reopens, what consumer psychology is, when universities reopen. And so I think we have a great research effort here supported by vast amounts of data that we purchased. But that effort and that data isn't -- doesn't give us an edge in predicting the sort of things that are going to drive outcomes for those two sectors, where I think it is very good in understanding for different levels of unemployment, what income losses, how the CARES Act and more generous unemployment benefits, offset income loss and translating all that into what might happen with home prices. And so I'd say, sectors where you don't -- the outcomes aren't binary, and it's not really contingent upon getting the policy response right, sort of where we think not only do you get very attractive yields, but your downside is much more limited.
Trevor Cranston -- JMP Securities -- Analyst
Okay. Great. That's helpful. And then you guys talked about the amount of principal repayments you had in March, which was obviously very helpful to have during that time period. Is there any way you can provide sort of an estimate of what your expectation would be for the average amounts of monthly principal repayments looking forward?
Laurence Penn -- Chief Executive Officer & President
Yes. Unfortunately, I don't think that's something that we can provide with enough confidence. The portfolio is -- whether it be our small balance commercial portfolio, our residential transition loan portfolio. Those are less statistical, right? Those are more individual loan based and certainly hard to predict. Even enduring times of stability, pre-COVID, those were hard to predict. But the maturities are short, right? So we're certainly hopeful that we will still have a steady stream of repayments there. In terms of the more statistical parts of our portfolio, whether that be consumer loans, non-QM loans, etc. We -- Mark, I don't know if you want to say -- I don't think we can be too quantitative, but if there's something -- anything qualitative you could say about those portfolios. There we probably -- we have a little more data. And again, I think we remarked on the call that so far, we're very pleased with how those continue to pay down. Mark, is there anything you want to add there?
Mark Tecotzky -- Co-Chief Investment Officer
There is always -- there is two factors. One is that the portfolio, some of those sectors, say, like RTL is smaller now than what it was two months ago. So just because it's smaller, there I would expect probably a slowdown in repayments. And also two, as I said on the call, we're going to have headaches to work through. And so as some of the easier loans to resolve pay off, then on a percentage basis, the headaches are a little bit higher percentage. Just for those reasons, I expect it to come down a little bit. But there's also things like consumer loan portfolio is a fair bit of just straight amortization. So if the portfolio were to just stay where it is and without new -- without substantial new purchases, I expect it to come down a little bit over time.
Trevor Cranston -- JMP Securities -- Analyst
Okay. Got you. And then I guess the last question for me. You guys talked about focusing on the sort of core businesses going forward, along with origination partners. Of the investments you've made in the origination companies so far, can you comment on sort of how those companies are broadly faring and how they were able to come through sort of the March and April time period if they're still reasonably healthy and continuing to operate or what their status is?
Laurence Penn -- Chief Executive Officer & President
Yes. I don't think we're going to get into too many specifics here. I think that our -- as you may know, our primary investment in terms of equity investment is in a reverse mortgage originator. We think that there is tremendous demand for that product now. It's an Agency product. I mean, there's private label as well, so there's demand for both. And so in terms of the ability to securitize that, there's no question there. And it's a product where, as you can imagine, the opportunity to basically borrow money with no requirements to make monthly payments thereafter is looking quite attractive right now for people. So, yes. So we feel very optimistic about that business in terms of -- our other investments are much smaller in terms of our investment in LendSure. Again, we've talked about how the non-QM market, I think we said -- Mark said it a couple of times. We're getting ready. We're planning to get out there again and start seeing where the right balance is between note rates that will be attractive to borrowers and will work for us after leverage, whether they be after repo leverage or after securitization leverage. So we think that the competition in both of those spaces has been severely hobbled. I mean, I think there's no question there. And so we're, again, very optimistic about the opportunities in that market. I'll just leave it that.
Trevor Cranston -- JMP Securities -- Analyst
Okay. Appreciate the comments. Thank you guys.
Operator
Your next question comes from the line of Crispin Love with Piper Sandler.
Crispin Love -- Piper Sandler -- Analyst
Good morning guys. I hope you're doing well and staying safe.
Laurence Penn -- Chief Executive Officer & President
Yes. Thank you Crispin. You too.
Crispin Love -- Piper Sandler -- Analyst
Thank you. Can you talk a little bit at some of the at-risk areas that you might have in your portfolio right now? I guess, first, kind of what percent of your loans are currently in forbearance? And then also what percent of loans are in kind of certain sectors, whether it's retail, hotels, restaurants, small business loans or kind of any other areas you'd like to point out?
Laurence Penn -- Chief Executive Officer & President
Yes. We're not -- we have not historically given that type of transparency. Our -- on the commercial side, commercial mortgage side, it's diversified, right? So we have exposure in all sectors. And obviously, some of those sectors, like hotel and lodging are going to be, at least in the short term, certainly more challenged than others, like multifamily, but it's diversified. In terms of the actual figures on what's in forbearance and all that. Again, I think all we can say is that when we put out our Q, which you'll see, as JR said, we're going to put that out probably a couple of weeks later than we might have otherwise without the SEC release, so we can take our time. You'll see it some information there, and you'll see also information in the valuations, right? And we -- as Mark said, there were two components to the valuations, right? And some of those are just yield spread widening, and some of that will be disclosed in the Q, and there'll be some of it due to kind of projected future credit impairments.
And but we're not like -- up to-date information about what's in forbearance right now, et cetera, we're -- I'm sorry, but we're not providing that. But we do believe -- but I will say that we do believe and I think we sort of implied that, for example, in non-QM, in RTL, certainly, we believe -- we don't -- there's no there's no almanac to go to for me to prove this, but we believe anecdotally, based upon what we've seen and what we've seen reported to us that our portfolios are holding up very well relative to the -- those sectors at large.
Crispin Love -- Piper Sandler -- Analyst
Okay. Thanks. That's helpful. One last one for me. What are your views on buying back shares right now? Are you more focused on preserving liquidity to buy other assets? Or do you see a good opportunity here to be buying back with the stock? I think it's around 70% in book. I know in the past, you've talked about the 80% to 85% level as a threshold, but definitely different times here. Just sort of curious about what your focus is right now, whether it's buying back or investing elsewhere or any other color.
Laurence Penn -- Chief Executive Officer & President
Yes, that's a great question. So -- and it is -- it's one that is -- you're right, precrisis, 80% was kind of a level that made sense. And we are trading lower than that. Obviously, we just put out book value. But our threshold now will be lower. I don't want to, again, predict exactly how much lower it will be. And our window, obviously, for -- well, maybe not obviously, but our window for repurchases typically opens after we've had these calls, right? We also have to consider that we have a Q coming out with more information as well. So we haven't made any decisions yet as to whether we'll be restarting our repurchases. But the threshold has to be higher because the investment opportunities are so considerable right now. And it's a lot different when you're buying back at 80% a $1 when the credit markets are pretty frothy and -- versus now. So that's something that we'll be looking at very closely and trying to be as scientific about it as we can. And at the same time, liquidity preservation, I think I mentioned, is always going to be a balancing factor as well. Just like we lowered the dividend, but we didn't lower it to zero, it's going to be a balancing act. And I'm sorry, I can't give more visibility there other than to say that I'm sure the threshold will be lower than it was before.
Crispin Love -- Piper Sandler -- Analyst
Okay. Thanks for taking my question.
Laurence Penn -- Chief Executive Officer & President
Thank you.
Operator
Your next question comes from the line of Doug Harter with Credit Suisse.
Joshua Bolton -- Credit Suisse -- Analyst
Hey guys. This is actually Josh on for Doug. Thanks for taking the questions. First, on the Agency portfolio, it seems like a great source of liquidity for you guys in the first quarter. Curious how you're thinking about that portfolio going forward. And if you could just talk a little bit about how you're thinking about the Agency strategy in general, fitting into the broader portfolio mix of the company? Thanks.
Laurence Penn -- Chief Executive Officer & President
Mark?
Mark Tecotzky -- Co-Chief Investment Officer
Sure. So I mentioned in my prepared remarks that there is a real benefit to having that balance between the Agency portfolio and the credit portfolio for -- yes, you really saw it in this quarter, right? The Agency portfolio provides a lot of liquidity and at times when the credit market can be less liquid. And the other benefit, and I mentioned in the prepared remarks is that it's really only Agency MBS until much -- to a lesser extent, Agency CMBS that benefit from direct Fed buying at a time of real stress. And you saw that in Q1, and we availed ourselves that opportunity. And I think it was a thoughtful way for us to manage the portfolio. So historically, if you take the longer view of how Ellington Financial has partitioned capital between Agency and Credit, it's typically been somewhere between the low end, 15% of our capital on Agency strategy up to at the high end, maybe 23%, 24% in an Agency strategy. So I don't see those guardrails changing that dramatically. I will say that now you have seen really, if you include April, a pretty material performance reversal in the Agency market.
So initially, you saw TBAs turnaround and rebound from the substantial widening in March to a very strong performance in the second -- once the Fed started buying, we took advantage of that. And sort of the next leg of Agency performance, which you saw in April and continuing on to the first week of May, is very, very strong performance of specified pools relative to TBA. So with both those legs of Agency performance, the TBAs versus swaps, and then the pools versus TBA, having recovered a lot of ground from the wide levels of second half of March. The Agency market, to our way of looking at things is still a very attractive ROE. But it has -- its recovery has proceeded a recovery we think is likely to happen, should the economy reopen on sort of the projected path that you can see in the credit market. So I'd say, right now, I don't see us being in a rush to rebuild the Agency portfolio back to the size it was pre-COVID.
But over the long view, I think it'll get back to sort of the capital ranges that you've seen historically for EFC. And it still provides, even given the recovery of -- you've seen through May, very meaningful ROEs. It's just -- it doesn't have that distressed component to it that you can see in some of the credit sectors where you can get -- not only capture potentially very high yields, but also capture additional total return should asset prices on the credit side retrace some of the precipitous decline you saw in March and April.
Laurence Penn -- Chief Executive Officer & President
And if I could just add -- no, that was great, Mark, thanks. If I could just add, just keep in mind that we have those extra levers of how much we dial up and down our TBA shorts against our specified pools. And even whether we want to replace the specified pools with TBA longs, right? So we have those extra levers, especially on the TBA short side that really, I think makes Ellington Financial and Ellington Residential stand out in the marketplace, to the extent that which we can vary those levers. So for example, and look, things continue to move around a lot, right?
As Mark said, OAS has got as wide as they've ever gotten since the financial crisis. And then if you look at some of the material we provided, you can see that OAS is by some measures, got incredibly tight on Agency pools when you got to the under the month. So these things are still moving around a lot. If we see an opportunity in specified pools, where we can buy stuff at extremely low pay-ups and hedge with TBAs, even if the overall Agency RMBS market is tight at that point, perhaps because volatility is high, for example, and the market is not adequately taking that into account, these are traits that we can put on that necessarily take a lot of capital. But I agree wholeheartedly with Mark that longer term, right, we see the more extraordinary opportunities on the credit side.
Joshua Bolton -- Credit Suisse -- Analyst
Great. Appreciate the details guys, thank you.
Operator
Your next question comes from the line of Eric Hagen with KBW.
Eric Hagen -- KBW -- Analyst
Hey. Good morning guys.
Laurence Penn -- Chief Executive Officer & President
Good morning.
Eric Hagen -- KBW -- Analyst
Good morning. Just following up on some of the commentary here. I mean, I guess we heard about some firming up in the market over the last couple of weeks on the credit side and spec pools, to your point, have done very well relative to TBAs. I mean, any detail on what drove the book value a little weaker in April? And then within the unrealized loss bucket, where do you guys think things are most likely to bounce back on some sort of recovery? Thanks.
Laurence Penn -- Chief Executive Officer & President
JR, you want to take that one?
JR Herlihy -- Chief Financial Officer
Sure. So in the -- well, sorry, the unrealized part, a significant portion of that is the application of CECL this quarter, actually. So I mentioned in the earnings script that for EFC, it was mainly a nonevent because we have always fair valued our portfolio through the income statement. And CECL is, I think, more designed for companies that don't do that. So part of the impact of CECL is that expected credit losses are appearing in unrealized rather than realized as they would have previously with impairments. I think that we have talked about in the earnings release and the script comments, prepared remarks this morning that some of these sectors, we expect to incur losses over time, some of them we don't. I don't know if, Mark, you want to get into more specifics. I think we mentioned that CLOs and CMBS have lagged in the recovery, partly for technical reasons with the Fed purchasing other sectors and not those. But I think in those we'll probably expect some credit impairments over time. Mark, do you want to elaborate on those points?
Mark Tecotzky -- Co-Chief Investment Officer
Yes. Those were certainly the sectors. I guess, our expectation is this will change as we get new information that the default cycle you're going to see in commercial real estate is going to be a little bit more attenuated. And we'll take a little bit more time to sort through than what we currently expect to see in the residential market. And I do think that view is -- partially informs pricing on some of those assets. So what's interesting that if you look at some of the CMBX indices, which are -- they function like the old ABX indices, right? Where they reference the different tranches on a basket of CMBS conduit deals, certain sectors of those indices are as low now as they were in the depths of March. And if you look on sort of residential non-Agency securities, I don't think there is any sectors that are trading now where they were in March.
So I think that while we expect great opportunities on the commercial side. And it's been historically one of the highest ROE sectors for EFC, there is going to be a little bit more unpredictability there. If you think about retail, you think about hotels, student housing. And I think unpredictability is factored into prices right now, but I think that unpredictability is going to create some fantastic opportunities. So if you ask me, where do you think going to be the best opportunities to deploy a marginal dollar three months from now, it may well be in some part of the commercial real estate world, either loans or CMBS securities. But it was the commercial side and CLOs that were the -- detracted somewhat from our April performance.
JR Herlihy -- Chief Financial Officer
Yes. And I think just to add on April, I mean, of course, it's just one month. But we also had sold down about half of our Agency book during March, so we didn't get the same pop on the Agency recoveries we otherwise would have, especially with specified pool pay-ups. Another point and important one is we had much larger cash holdings going into quarter end than we typically have for kind of obvious reasons. We had delevered and built up our liquidity. So that gives us dry powder going forward. It helps us balance playing offense with playing defense, as Larry mentioned in his remarks, and we think it's the right place to be. So I'd encourage you to -- it's just a month and we'll kind of give you the -- continue to give you the updates as we go along.
Laurence Penn -- Chief Executive Officer & President
Yes. And I would just -- sorry, I just want to add one more thing, which is -- and yes, you've seen -- just to amplify what JR just said. You've seen the Agency -- some of the Agency mortgage REITs that report -- have reported an April and book value per share. You've seen some pretty big increases right there. So that sort of follows on JR's point about how our Agency portfolio is noticeably smaller than it was before, so we didn't get that same pop. Plus, of course, it was always a smaller part of our capital allocation for a long time now. The other thing I just want to mention is that there are some markets, for example, non-Agency RMBS, which I mentioned before, which were clearly very distressed in March. And a lot of that was -- we mentioned -- I think I mentioned the mutual fund selling, for example, that really exacerbated that. So you had extreme distress in March. And you had a -- I mean, they're still cheap, and they're one of the sectors that certainly we think could be attractive from a total return perspective and core earnings perspective.
But that's going to be a more short-lived opportunity perhaps. But you -- the valuations on that at the end of April, clearly higher than at the end of March. A lot of other sectors and especially our loan books, just until we get more visibility, we're not going to be just marking that book up just because we feel better. So I think that there is -- yes, I think that explains a lot of it as well in addition to some of the sectors that Mark and JR mentioned.
Eric Hagen -- KBW -- Analyst
That was helpful color guys. Thank you.
Operator
Your next question comes from the line of Tim Hayes with B. Riley FBR.
Timothy Hayes -- B. Riley FBR -- Analyst
Hey good afternoon guys. Hope you're all doing well. And thanks for taking my question. I just have a quick one since most have been asked. I know you've meaningfully reduced your non-REIT compliance strategies over the past year. But just curious if you feel the need to further reduce exposure there to give yourselves a little bit more cushion now that the Agency portfolio has been meaningfully reduced.
Laurence Penn -- Chief Executive Officer & President
I think we have a lot of flexibility there, actually. So I don't think we feel pressure from a REIT testing perspective. But I think I mentioned earlier that we're not going to sell at the wrong time, and we're going to make sure if we sell the non-REIT qualifying assets that it makes sense versus what we can replace that capital with. But I think when you think about, again, what businesses we see as having longer-term opportunities in terms of supply demand imbalance, in terms of the competition being hobbled, it's in a lot of those loan strategies. So I don't want to make a prediction in the short-term, but in the long term, certainly, I would think that, that is where we would ultimately be heading the company. And I think that's consistent, frankly, with where we were pre-COVID.
Timothy Hayes -- B. Riley FBR -- Analyst
Yes. Okay. So maybe if -- oh, go ahead. Sure.
JR Herlihy -- Chief Financial Officer
I will just add real quick, I'm sorry. Yes, I would just add to what Larry said, I mean, the majority of our assets are now requalifying even away from just the Agency. So if you think about the size of our non-QM portfolio and small balance commercial and residential and transitional loans, those are all -- and have levered -- have some leverage and they're all real estate qualifying assets. So that helps as well.
Timothy Hayes -- B. Riley FBR -- Analyst
Right. Yes. Fair enough. Appreciate the color there guys.
Laurence Penn -- Chief Executive Officer & President
Thank you.
Operator
Your next question comes from the line of Matt Howlett with Nomura.
Matthew Howlett -- Nomura Securities -- Analyst
Hey guys. Thanks for taking my questions. Hope you're staying safe. First, I've got to comment here, I mean, it's one of the more upbeat, bullish calls I've been on here in this earnings season. You seemed to know exactly what you want and directionally where you're going with the company. My question is you have all these originators that you get proprietary for a product, what's the trade-off between buying that or finding something that you want that's in the secondary market that may be at more of a distressed price? And I have a follow-up.
Laurence Penn -- Chief Executive Officer & President
No, we want to do that too, Mark. You want to take that. We're all for looking at good opportunities in the secondary market if the price is right. Mark, you want to talk about what you're seeing?
Mark Tecotzky -- Co-Chief Investment Officer
No, that's a very good question. I think we want to do both. And I think we've worked very hard through March and through April, getting ourselves in a position where it's prudent for us to take advantage of these opportunities. So I think we talked about we're restarting non-QM origination. But in the short run, we expect volumes to be significantly smaller than where they were running January and February. So while we start that, we don't anticipate that being a big capital drain. So I think we'll be in a position to be able to do both.
And I think that we can price appropriately. We -- when we look at potentially a secondary package of non-QM loans, we have to really carefully analyze the underwriting standards that were used to originate those loans and compare that to the underwriting standards that we have enforced at LendSure, and think about the consequences for potential performance if we see gaps in the underwriting guidelines. So we can do all that. So I think both opportunities are compelling, right? If there is secondary packages from people that needs to raise cash, and it looks like they're well underwritten or we can get a subset of them that are well underwritten, it's a very high loss adjusted yield that will make sense.
We also think restarting our own non-QM origination with guidelines that are similar to what they were like a couple of years ago and pricing to reflect generally higher credit yields in the marketplace make sense as well. So I think they're both good opportunities. And I don't think we have to choose one or the other. I just think we need to price them appropriately and take into account all the sort of relevant factors. But that's a good question, and they are both good opportunities for this company.
Laurence Penn -- Chief Executive Officer & President
Yes. And if I could just add. I think the small balance commercial mortgage space for us is really interesting there, too. For years, we've been doing that strategy for a long time here at Ellington. And for years, especially after the financial crisis, we started it shortly after financial crisis. It was mostly a secondary market NPL business. As you can imagine, after financial crisis, there were a lot of loans that were hitting maturity defaults and things like that. And so that ended up slowly evolving. And in recent years, became more of a bridge loan business, where we were seeing less of the distressed product available in the secondary market, which would typically be an NPL, right? Or -- and we were seeing more opportunities to originate bridge loans. And that's sort of -- that's a business that's kind of always there.
Well, now I think I'm not saying that the balance is going to swing completely back to NPLs, but I'm going to -- but I do believe that, again, longer term, a lot of commercial properties in specific sectors, in specific regions, right, are going to get distressed. And our strategy in small balance commercial NPL space has always been -- and our thoughts have always been that most banks, they want to focus on working out bigger loans, so $50 million loans and bigger loans. And smaller loans, they get pressure from their regulators. It's a headache for them. We have a lot -- we have built up a lot of sourcing providers over the years, whether it be brokers, partners, joint venture partners, etc, where we can source this product.
So I'm also really looking forward to seeing more in the secondary market in NPLs and small balance commercial. And that historically has been a very profitable business for us because you're really taking a headache off of someone else's plate. And you have an opportunity also to work with the borrowers there, you're buying loans at a discount. A lot of banks don't like to take discounted payoffs. They -- it sort of creates almost like a moral hazard for their borrower base. They'd rather sell the loan at a discount and now that gives us a lot more flexibility to work with the borrower on a discounted payoff, ultimately. And so anyway, so that's a business in terms of your question about looking for things in the secondary market. As opposed to origination, we're absolutely hopeful that this will be now another sustained opportunity after a financial crisis, just like it was after the 2008-2009 crisis.
Matthew Howlett -- Nomura Securities -- Analyst
Yes. And certainly, with the agreement to the GSEs, you're going to be coming out with stuff in the banks as well. Just getting back to Mark's comments on the GSEs tightening the standards. They could even raise the GSE, how interested are you guys in taking another stake, finding an originator? I'm sure there's a lot of cheap stuff out there, taking bigger stakes into what you own, getting ready for maybe a tighter GSE window and being on that new origination front down the road, take a bigger piece of it?
Laurence Penn -- Chief Executive Officer & President
Yes. I can't make any predictions, but I can tell you that you're thinking how we're thinking. And we're seeing a lot of opportunities out there to do exactly that. And I can't predict whether any of them will come through, but we're -- I think we're on the same wavelength.
Matthew Howlett -- Nomura Securities -- Analyst
Great. Thanks everyone.
Operator
[Operator Closing Remarks]
Duration: 76 minutes
Call participants:
Jason Frank -- Deputy General Counsel and Secretary
Laurence Penn -- Chief Executive Officer & President
JR Herlihy -- Chief Financial Officer
Mark Tecotzky -- Co-Chief Investment Officer
Trevor Cranston -- JMP Securities -- Analyst
Crispin Love -- Piper Sandler -- Analyst
Joshua Bolton -- Credit Suisse -- Analyst
Eric Hagen -- KBW -- Analyst
Timothy Hayes -- B. Riley FBR -- Analyst
Matthew Howlett -- Nomura Securities -- Analyst
