Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Ellington Financial LLC (NYSE:EFC)
Q2 2020 Earnings Call
Aug 7, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Ellington Financial Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. [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 and under Part II Item 1A of our quarterly report on Form 10-Q as amended for the three-month period ended March 31, 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 second 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 and President

Thanks, Jay, and good morning everyone. As always, thank you for your time and interest in Ellington Financial. Over the course of the second quarter, we saw a significant rebound across most credit-sensitive fixed income assets following that violent sell-off in March and early April. Thanks to our risk and liquidity management, EFC had avoided forced or distressed asset sales during the market turmoil and so we avoided locking in losses at depressed prices. If you recall from our previous earnings call, we explained that when we had strategically sold Agency MBS in March and early April, we focus those sales on our most generic lower pay-ups specified pools, keeping our deep value pools with higher pay-ups in anticipation of an eventual market rebound. This selective selling in Agency MBS enabled us to get through the market crisis with our credit portfolio intact and our liquidity solid.

After the worst had past, we first resumed only very limited purchase in sales and credit, but moving into May and June, markets have stabilized enough that we fully resumed new investments, both in credit and Agency. With many specialty finance companies still hobbled in the aftermath of the marketwide deleveraging events of March and early April, we are seeing compelling net interest margins on new loan originations and are exploring some exciting potential strategic investments in loan originators. As of today, our Agency portfolio is about back to where it was in March 31st, but more importantly, our credit portfolio is already about 5% larger today than it was on June 30th, just a little over a month ago.

To summarize, all the steps we took during the depths of the market stresses have not only enabled us to participate in the market rebound in our existing credit assets, but since then, we've been able to add and we continue to add credit assets at highly attractive prices.

As you can see on Slide 4, we had $0.85 per share of net income and $0.39 per share of core earnings. Since these both easily covered our $0.25 of dividends declared for the quarter, we rebuilt a nice amount of book value during the quarter. We are demonstrating that there is ample room for us to grow our dividend. Our economic return for the quarter was 5.7% which is around 25% annualized. Importantly, we had excellent performance from our loan businesses. In our non-QM business, we completed our fifth securitization in June with strong investor demand and a non-QM loan production has now come roaring back.

Our short duration loan portfolios, especially our residential transition loan and consumer loan portfolios generated great ROEs this quarter. As with previous quarters, our short duration loan portfolios have continued to return principal quickly. During the second quarter, we received proceeds from principal repayments of about $70 million on our small balance commercial mortgage loan, consumer loan, and residential transition loan portfolios, which represented more than 11% of the aggregate size of those portfolios coming into the quarter. When the opportunity set for new investments is changing quickly, like it has this year for our loan businesses, short duration can be a huge benefit as we can redeploy our incoming stream of principal payments exactly in those sub-sectors where we see the best opportunities.

Additionally, Longbridge Financial, the reverse mortgage originator, in which we hold a minority stake, had one of its strongest quarters yet, driven by strong borrower demand in the current environment and higher origination margins. The cost of reverse mortgage business provides liquidity to borrowers without the need for them to make monthly principal and interest payments, that business has a counter-cyclical component to it and not surprisingly, borrower demand for the product has soared in recent months amid the economic pain and uncertainty brought on by COVID.

Finally, we also had an exceptional quarter in our Agency RMBS portfolio, which Mark will discuss in more detail. On the liability side of the balance sheet, we took substantial steps during the second quarter to further improve and extend our sources of financing and leverage. The non-QM securitization deal we completed at yet another term non-mark-to-market facility to our balance sheet. We also extended the terms of several of our credit facilities and obtained term financing for numerous loan assets that were previously unfinanced.

Furthermore, the market for standard repo financing of securities has now largely returned to pre-March levels. We finished the second quarter with lower leverage and more cash even then we held at March 31st. So we continue to maintain ample dry powder to capitalize on opportunities and to withstand any future shocks.

With that, I'll turn the call over to JR, to go through our second quarter financial results in more detail.

JR Herlihy -- Chief Financial Officer

Thanks, Larry, and good morning everyone. Please turn to Slide 6 for a summary of our income statement. For the quarter ended June 30th, EFC reported net income of $0.85 per common share compared to a net loss of $3.04 per share for the first quarter. As Larry mentioned, prices in many credit-sensitive fixed income sectors rebounded in the second quarter, generating significant net realized and unrealized gains on our credit assets which reversed a portion of our losses from the first quarter. Core earnings for the second quarter was $0.39 per share compared to $0.46 per share in the first quarter and exceeded the common stock dividends declared during the second quarter of $0.25 per share. The sequential decline in core earnings per share was primarily due to lower average holdings period-over-period.

Next, please turn to Slide 7 for the attribution of earnings between our credit and agency strategies. During the second quarter, the credit strategy generated a total gross profit of $0.76 per share while the Agency strategy generated a total gross profit of $0.33 per share. These compared to a gross loss of $2.47 per share in the credit strategy and a total gross loss of $0.38 per share in the Agency strategy in the prior quarter.

Most of our credit strategies performed well during the second quarter. We recorded large gains on non-QM loans, non-agency RMBS, and CMBS, all sectors that had experienced substantial distressed selling during the first quarter followed by a sharp rebound in prices and liquidity in the second quarter. Our loan strategies also performed well led by strong performance in a consumer loan and residential transition loan portfolios.

In addition, our investments and loan originators generated solid returns during the quarter, driven by an excellent quarter by Longbridge Financial. Conversely, our CLO holdings and euro denominated RMBS portfolio generated net losses for the quarter and credit hedges were a drag to performance. Despite the partial market recovery in the second quarter, prices for many of our credit investments remain below pre-COVID levels and we are still anticipating some principal losses in our credit portfolio.

As has been widely reported, there has been a significant nationwide increase and loan delinquencies, forbearances, deferments and modifications and we are seeing effects of this on our own portfolios. Our Agency strategy performed exceptionally well during the second quarter, driven by significantly higher pay-ups on specified pools. In the first quarter, pay-ups had declines due to market wide liquidity problems as well as the implementation of the Federal Reserve's asset purchase program, which is focused on TBA's in generic pools as opposed to specific -- specified pools.

In the second quarter, asset purchases by the Federal Reserve continued to be significant and the liquidity stresses of the previous quarter subsided. At the same time, mortgage rates declines and actual and projected prepayment rates rose significantly, which drove the expansion of pay-ups on our prepayment protected specified pools. Average pay-ups on our specified pools increased to 3.3% as of June 30th from 1.47% as of March 31st.

Also in our Agency portfolio, our reverse mortgage portfolio performed well with much of the yield spread widening from March reversing during the second quarter.

Turning next to Slide 8, you can see that the size of our long credit portfolio decreased approximately 14% to $1.26 billion at June 30th. The decrease in the credit portfolio was mainly due to the completion of our non-QM securitization in June, otherwise, sales and principal repayments roughly offset purchases and net realized and unrealized gains during the quarter. As Larry mentioned, we've continued making new credit investments into the third quarter and as of today, the credit portfolio is back above $1.3 billion.

On Slide 9, you can see the Agency portfolio. As Larry mentioned, we continued selling Agency RMBS into April as markets remain choppy, but moving into May and June, market stabilized and we began building the Agency portfolio back up again. Overall, the sales in April and principal repayments during the quarter exceeded the new purchases and the portfolio declined in size by 10% quarter-over-quarter to $913 million. As of today, the Agency portfolio is back up to about $1 billion.

Next, please turn to Slide 10 for a summary of our borrowings. Primarily as a results of Agency sales, our debt-to-equity ratio declined to 2.7 to 1 as of June 30th from 3.1 to 1 at March 31st, adjusting for unsettled purchases and sales. Our recourse debt-to-equity ratio also adjusted for unsettled purchases and sales decreased over the same period to 1.5 to 1 from 2.1 to 1. The decline in our recourse debt-to-equity ratio was also driven by the completion of our non-QM securitization in June, which converted about $215 million of repo borrowings into non-recourse term financing.

Our weighted average cost of funds continued to decrease in sympathy with short-term rates, decreasing sequentially to 2.35% at June 30th from 2.58% at March 31st. At quarter-end, we had cash and cash equivalents of approximately $147 million along with other unencumbered assets of approximately $312 million. For the second quarter, our total G&A expenses were $0.15 per share, up slightly from $0.14 per share in the prior quarter. Other investment-related expenses increased quarter-over-quarter to $0.12 per share from $0.09 mainly because we incurred non-QM securitization issuance costs into Q2, but not in Q1.

For the second quarter, we had accrued income tax expenses of $1.5 million as net taxable income in our domestic taxable REIT subsidiaries led to an increase in deferred tax liabilities. Finally, our book value per common share at June 30th was $15.67 up 4.1% from $15.06 at the end of the first quarter.

Now, over to Mark.

Mark Tecotzky -- Co-Chief Investment Officer

Thanks, JR. Q2 was a strong quarter for EFC with broad-based contributions from many strategies and strong core earnings. This was a quarter where our focus changed as the quarter progressed. Early in April, markets were still volatile, credit performance was uncertain and many investors were still being forced to sell assets. EFC was able to avoid having to fell to weakness, helped by our high credit quality short duration portfolio and low leverage that we brought into the COVID crisis. Even in March and April, we were still getting substantial loan pay-offs at par across our various loan strategies, which is the best way to delever a portfolio.

In early May, we were starting to see green shoots of recovery and we began to focus on growing our portfolio and being an opportunistic buyer of distressed securities and loans. One of the first sectors we added with seasons non-Agency RMBS, you can see the growth of that strategy on Slide 8. The legacy non-Agency market for the brunt of relentless REIT and mutual fund selling in March and in April, which -- was pushed prices to very distressed levels. Against the backdrop of aggressive Fed intervention, we are confident that housing would fare relatively well which would support non-Agency fundamentals. So that sector made a lot of sense to us early in the quarter, and indeed has subsequently repriced higher since.

When the recovery started in earnest, we were a little surprised by how quickly the credit market rebounded, that really any material good news about either containment of the virus or about any economic turnaround. It seem that within a matter of weeks, the market went from too many sellers to too many buyers. The QE playbook was working as designed. The Fed was buying more than what was being produced in treasuries and Agency MBS, which was driving down yields. Investors were selling these low yielding safe assets to the Fed and receiving cash that pays them literally zero. And so they were using that cash to buy riskier assets that still have some yield.

While we were confident about the resiliency of housing during the pandemic, we believe that the impact of COVID on commercial real estate was going to be more significant and longer-lasting, whereas the residential housing market is being helped by record low mortgage rates and generous forbearance programs, there is simply not the same amount of government programs that directly support commercial lending or offer relief distressed commercial borrowers. That said, our CMBS and small balance commercial loan portfolios performed extremely well in the second quarter.

Please turn to Slide 12. You can see that we've expanded our small balance commercial loan disclosure in this quarter's earnings presentation. While our commercial mortgage portfolio will have some challenges, we are optimistic that these challenges will be limited and meanwhile, you can see that we are well diversified among property types, geography and all our loans are first liens.

One huge positive development for the commercial real estate sector this quarter was the return of an active securitization market. After the Global Financial Crisis of 2008 and 2009, it took years for the securitization markets to reopen. And this crisis, the securitization market reopened in a matter of weeks, and this is so significant because securitization allows capital to flow. That means that real estate can be financed, so it can be bought and sold, commercial bridge loans can get termed out into conduit CMBS loans and property owners can take advantage of record low interest rates. And in fact, EFC is continuing to have favorable resolutions on a small balance commercial loan portfolio.

Moving to the residential market. Aggressive Fed intervention lowered mortgage rates below 3% which is very supportive of home prices. In addition, the widespread availability of forbearance is keeping any possible distress mortgage supply off the market and this should continue for a while. Given the economic uncertainty, you have seen a marginal tightening of the GSE credit box and as a result, we expect the non-QM sector to continue to fulfill an important role in the mortgage origination landscape for home-buyers that don't fit into what is now a narrower GSE box.

Residential securitization markets also reopened this quarter, allowing EFC to price its fifth non-QM securitization. Because of the tremendous support from the Fed and the GSEs for the housing market, we're very aggressive about restarting our non-QM lending programs, and being an early mover is paying off for us now. Our non-QM volumes in June and July surprises with their strength. And as with many origination businesses right now, margins are healthy, like Larry mentioned with respect to the reverse mortgage sector as well.

While we do expect the non-QM origination market to become more competitive over time, right now, we are enjoying strong market share and benefiting from being one of the first platforms to start originating again after the market stress in March. The non-QM business looks very attractive to us right now. This rates on new originations are similar or higher than prior to COVID, but both deal execution and financing rates have improved. While the Federal Reserve support helped our mortgage strategies, government stimulus through the CARES Act helped the performance of our consumer strategies. Between stimulus checks and enhanced unemployment benefits, many consumers who have suffered a COVID-related loss of income have been able to remain current on the debt obligations. Of course, we're closely monitoring the ongoing negotiations for continuation of these benefits. We have seen strong collections across the board in our consumer loan portfolio. We have worked very closely with our partners on deferment strategies and they realized the faults that we are seeing have actually been quite modest. Another boost in that strategy is lower LIBOR rates. Our repo rates have dropped over 150 basis points this year, directly adding to our net interest margin.

Turning to the Agency portfolio, we had very strong performance, returning to double-digit ROE for the quarter not annual -- non-annualized. Early in the second quarter, we saw some signs that the market environment was a very good one for Agency MBS, first, after an absolutely wild March, interest rate volatility was very low in the second quarter. That was the first indication that the Fed intervention was succeeding. As mortgage rates dropped and origination volumes increased, combined with Fed front-month buying, it was clear to us that current coupon rolls were going to be very attractive. In anticipation, EFC did something, it rarely does, it positioned itself as long current coupon 30-year MBS. Roll levels in the current coupon mortgage are so high right now and hedging costs are so low that rolling TBA provides a powerful earnings stream. One month of roll income can be 20 basis points, much more than that hedging cost for an entire year at current levels.

Now back in March and April, EFC sold a portion of its Agency portfolio after the Fed stabilized Agency MBS prices. We did that to increase our cash holdings, which was a much better alternative to selling credit sensitive securities at distressed prices. As cash built up on our credit holdings with pay downs in consumer loans, residential transition loans and small balance commercial mortgage loans, we have largely replenished our Agency MBS holdings and have continued to add to those holdings into Q3 as Larry and JR mentioned.

Looking ahead, I think EFC is in a strong position for the rest of the year. Our origination partners really demonstrated their value through the credit chart this year, weathering the crisis and posting strong loan performance. In addition, controlling the pricing of our asset pipeline, which was such an important part of our success last year as credit spreads tightened is becoming more important -- more and more important this year as massive Fed purchases are pushing investors out of government assets in the search for yield. Our ability to keep our asset acquisition yields high and are staying disciplined on credit quality, given the economic uncertainty, are going to be key ingredients for the second half of this year.

Now, back to Larry.

Laurence Penn -- Chief Executive Officer and President

Thanks, Mark. I'm very pleased with Ellington Financial's performance, both for this past quarter and so far this year. We protected book value during the extreme market stresses and then participated in the upside of the market recovery. Beside some strong strategy level performance, the key to our successful second quarter was the fact that we avoided for sales in the first quarter and could benefit from the rebound. All of this was thanks to our adherence to the liquidity management, risk management and hedging principles that have served us so well over the years.

Please turn to Slide 13, which is our usual slide where we show the stability of the EFC's returns over time, as well as those of the other hybrid mortgage REITs. I'm really proud of Ellington Financial's performance so far this year, both on an absolute basis and relative to the other hybrid mortgage rates. I was especially excited to restart new credit investments as quickly as we did, especially in our loan businesses. We're seeing a great opportunity to grab larger market share in several of our lending programs especially in non-QM. And to boot, we seeing much wider net interest margins in these programs than we saw pre-COVID.

In our residential transition loan business, while we're not seeing a resurgence of supply yet in that market, and while we don't expect a resurgence right away, we're gearing up anyway. My personal belief is that in the medium-term, the opportunities in that market will actually be much greater than they were pre-COVID. Sadly, one of the negative effects of COVID will be an increase in foreclosures, but one of the positive effects of COVID will be an increase in remote working, and therefore, the mobility of the workforce. Both of these after effects, foreclosures and mobility will contribute positively to housing turnover, and some of the highest and best use of that housing stock, especially the older housing stock will be in the hands of fix-and-flip and fixed-in-rent operators.

At Ellington Financial, we plan to be ready to supply even more capital to these markets, when the time comes. As you can see from our balance sheet, we have lots of room to add assets from any and all of our loan pipelines, which we think to drive significant core earnings expansion going forward.

In the second quarter, the Board increased our monthly dividend to $0.09 per share. And as I mentioned before, there is ample room for future dividend growth as we move into the back half of the year. All that said, a fair degree of caution is warranted as it's still too early to predict the length and severity of the economic downturn, not to mention that there is always uncertainty associated with upcoming presidential elections. So, with these risks in mind, we will continue to depend on our core risk management principles and disciplined investment approach to protect shareholder capital and drive returns.

Before we open the floor to questions, I would like to thank the entire Ellington team for their hard work over the past few months despite difficult circumstances. And for all of those listening on the call today, we hope that you and your family stay healthy and safe.

And with that, we'll now open the call to your questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question is from Crispin Love of Piper Sandler.

Crispin Love -- Piper Sandler Companies -- Analyst

Hi. Thanks for taking my questions. So first, the release mentioned the potential for new investments in mortgage originators, would any of these potential investments be similar to your LendSure and Longbridge relationships? And are there any specific asset types that you are most interested in right now for originators?

Laurence Penn -- Chief Executive Officer and President

Yeah. I think, well, yes -- I think, Longbridge right now is not an investment yet where we are, kind of directly buying assets from them, but it's a business that we believe in, there are lots of potential areas of growth and it does give us exposure to a unique asset class, which is reverse mortgage MSRs.

Now, our investment in LendSure and some others where we are getting a pipeline, we are actually looking at making investments in other loan originators, which would include getting access to their origination capabilities that would include RTL in a couple of cases, we're looking at non-QM as well to diversify our sources there. So, yes, I would say that at least as of now, we are looking at minority stakes as we've had before, and in originators that are originating product that is similar to product that we have now. We're also looking, nothing that's late stage or anything like that, but we're also looking at some completely different products as well that we think could over time gain traction.

Crispin Love -- Piper Sandler Companies -- Analyst

Okay. And then,and looking at the Slide 12, where you have the detail on the small balance commercial portfolio, how are those loans performing currently and how has that trended over the last few months, and then especially among the hotel and retail segments?

Laurence Penn -- Chief Executive Officer and President

Sure. JR, do you want to handle that?

JR Herlihy -- Chief Financial Officer

Sure. So, the -- I think, the first point to make is -- and we mentioned it in today's call as well as last quarter's call, repayments and pay-downs on small balance commercial have been strong, kind of going back even to March and April and kind of current through the current period. So, we've been getting resolution, favorable resolutions and pay-downs, and that's helped of course delever there. In terms of forbearance and deferment activity, I think I mentioned that it's affected the portfolio broadly and it has affected small balance commercial specifically. We've had and we'll have statistics in the queue when we file it. But we have granted some forbearance agreements in our small balance commercial.

I would say overall, performance has been strong, helped by repayments, but also just as measured by 90 plus delinquency has not really changed all that much. Of course, the forbearance is an important point to kind of attach on to that comment. So, yeah, so again, we'll put out some specific statistics in the queue, but I think the performance has been strong. And I guess related to the property types that you ask about, I think we've -- here you see hotel is 16% and retail is 11$, so those are limited to a quarter of UPB and we haven't been, I guess, specific where exactly the performance has shaken out among the different property types, and I think the diversification by property type and geography you can see here and of course the fact that everything is first lien helps us well.

Laurence Penn -- Chief Executive Officer and President

Yeah. And I just want to say that I think, not whether -- we feel that, for example, even in the hotel sector, we feel that we're in good shape there and that we've got our properties underwritten with enough cushion. First liens, as you can see in the slide, they are all first liens, and even post-COVID, we feel really good about our -- the equity that's still in these properties even on a mark-to-market basis. So we feel good about these assets ultimately resolving favorably.

Crispin Love -- Piper Sandler Companies -- Analyst

Okay, great. I think that's all very helpful and congrats on a great quarter during these tough times.

Laurence Penn -- Chief Executive Officer and President

Thank you.

JR Herlihy -- Chief Financial Officer

Thanks, Crispin.

Operator

Thank you. Your next question is from Doug Harter of Credit Suisse.

Joshua Bolton -- Credit Suisse Group -- Analyst

Hey guys, this is actually Josh Bolton on for Doug. Larry, you mentioned in your prepared remarks and in the press release that you see upside to the dividends. Just curious any more context around that as you're looking at the "run rate earnings potential of the portfolio" as it sits today? Thanks.

Laurence Penn -- Chief Executive Officer and President

Yeah, I don't want to give any more guidance in terms of timing. But as I said, my personal view is that there is upside there, the -- obviously that's a Board decision. For now we like rebuilding book value and I think we've mentioned on a prior call that, because of some tax elections that we've made, we actually don't have pressure on our, so much on our dividend, so it's not like we will have to raise it from a tax perspective, at least not in the very near-term, but I think that you will continue to sort of monitor when the right time might be.

I think, but for now, so we like rebuilding the book value, the stock price is depressed, clearly very depressed. And look, if you look at the book we just announced, you look at where our stock is trading. So for now, it's a still a decent yield I think we disclosed, it's around a 9% yield for investors, which is still a healthy yield as we see that stock price recover hopefully, I think that we will put more pressure on us to kind of maintain that dividend yield, so that will be being other factor as well.

Joshua Bolton -- Credit Suisse Group -- Analyst

Great, that makes sense. And I guess given the increased liquidity you guys have built up in the first half of the year, how are you thinking about the pace of asset growth? I appreciated the detail about current asset levels and how you've grown the book since June 30th. And then I guess following up on what you just said, how are you thinking about asset growth versus share buyback given where the stock trades versus book value? Thanks.

Laurence Penn -- Chief Executive Officer and President

Yeah, so we mentioned in the last call that we lowered our target for buybacks before we have been -- before COVID I think, anything below 80 we were buying pretty aggressively and we've clearly lowered that and you can see that in terms of our share count. But I think that we are seeing great production in non-QM now. I think we could be in store for some record months there in the near future. As I mentioned in my remarks, I think we're going to see a resurgence of RTL product, can maybe not the very short-term.

And on the commercial side, we're starting to see our origination, bridge loan origination capabilities there really come into play, as you can imagine that's going to be a sector where we're going to be able to really pick and choose what geographies, what property types and what individual assets we're going to want to lend against and I think that business is going to grow a lot too.

So we want to keep a lot of room for what we see as a pretty healthy pipeline for the remainder of the year in credit assets and especially loan, in our loan businesses. So I don't unless, our stock really drops a lot back to well, certainly, I think I mentioned in the last call, above 75% price-to-book were probably not buyers, not now either, even though we were in the past. So hopefully that gives you some color there.

Joshua Bolton -- Credit Suisse Group -- Analyst

Great. Thanks, Larry.

Operator

Thank you. Your next question is from Trevor Cranston of JMP Securities.

Trevor Cranston -- JMP Securities LLC -- Analyst

Hey, thanks. Question on the incremental deployment into new credit assets. I think Mark mentioned that earlier in the quarter you found some pretty compelling opportunities on the security side. I was curious if you guys are seeing any areas in the securities market where prices are sort of lagged and there are still distressed opportunities or if the incremental deployment is really primarily just going to be focused on the whole loan opportunities? Thanks.

Laurence Penn -- Chief Executive Officer and President

Mark?

Mark Tecotzky -- Co-Chief Investment Officer

Hey, Trevor. So I would say when I think back about March and April, what created the opportunity in securities was the fact that COVID from a financial perspective, it quickly morphed into a balance sheet crisis, right, and you had mutual funds and some levered investors that were forced to sell assets in a short period of time and typically, the turnaround time pre-selling loans is much longer than it is for selling securities. So the price drop in securities, we thought was exaggerated relative to the risks that we saw that in March and April, and hence we bought some non-agencies early on, we are constructive on housing, and that worked out very well because we wanted to get EFC more invested, we wanted to take advantage of the opportunity, we built up cash, and we knew starting our loan origination yield partnerships was going to take a little time. So we were aggressive on the security side, that worked out as well, it was in residential as well as also selectively in CMBS.

So now, you've seen a pretty strong recovery in legacy non-agency securities to the point where we don't necessarily view them is more attractive versus some of our loan strategies. There have been some other sectors of the securities market that aren't as big where we found some opportunities, so single-family rental is one. But I would say that I'd mentioned about QE sort of working as designed and it has sort of pushed a lot of investors that are government-guaranteed assets into a non-government guaranteed-assets. And so that process has caused a broad-based recovery in securities prices. So I would say selectively, opportunistically we're still finding opportunities in securities, but it's not sort of on a beta basis, the way it was earlier in the quarter.

Laurence Penn -- Chief Executive Officer and President

I just wanted to add to that, Mark, that I think in, on the commercial side in CMBS, we're hopeful that there's going to be, that there are good opportunities, there are going to be good opportunities where as you may know from time-to-time, we've been a substantial BPs buyers in that market. As you can imagine, a lot of the BP's buyers are that were traditional BP's buyers have been hobbled by COVID and are now not in the mix in terms of new purchases, so I think we've got less competition there. And there's going to be some distress, obviously, especially in certain deals versus others.

So I think that's one market where we've had really great, great performance in the past, it's a long-short strategy for us. We are not afraid to dial-up and down our CMBS hedges in that product, put on relative value traits, take off the hedge when it makes sense. And so that's a market where I think from a security standpoint, we're certainly hopeful that we'll be able to add a lot for the remainder of the year, at great levels, much better than the levels in pre-COVID.

Trevor Cranston -- JMP Securities LLC -- Analyst

Okay. Got it. That's very helpful. And I was interested in the comment you guys made about securities repo being pretty much back to pre-March levels. I think that might be the first time we've heard anyone say that on the calls, this quarter. Can you comment on if you guys are seeing availability of repo on all the same types of collateral, you were previously interested in using it on or if you were really, primarily, referring to sort of haircuts and rates when you made the comment?

Laurence Penn -- Chief Executive Officer and President

We were talking about...

Trevor Cranston -- JMP Securities LLC -- Analyst

And then secondary, just as a secondary follow-up. I was curious if you guys are utilizing any repo on the retained bonds from the June securitization?

Laurence Penn -- Chief Executive Officer and President

So we -- so first of all, that was limited, that statement I think was qualified as related to securities. So...

Trevor Cranston -- JMP Securities LLC -- Analyst

Great.

Laurence Penn -- Chief Executive Officer and President

So, yeah. So I think on the security side of things, I think we, for your generally or non, lets just say non-distressed securities, I think we are seeing rates comparable to what we saw pre-COVID, so yeah. So, now on the loan side, things are not back to where they were and, but as we said, we made a lot of progress getting them closer back to where they were and we continue to. So I think that's going to take a little bit longer for some of the lenders to get reaggressive in that market, but we see it happening, but it's not there yet. It's not back to pre-COVID levels yet, in terms of loan rebound.

Mark Tecotzky -- Co-Chief Investment Officer

Yeah. I wanted to add a couple of things. One is, if you look at agency repo, by any measure, spread to LIBOR, absolute levels, that's better than what it was pre-COVID. And I think that's because there's just been a tremendous appetite among money market funds for agency collateral, so that repo is probably better than what it was pre-COVID. And I talked about the importance of a restart of securitization markets. And so one thing I didn't mention in the prepared comments, but one other benefit of the restart of securitization markets is that it gives lenders transparency on dollar proceeds of securitization. So by that I mean, when you were going through March and April, and lenders were lending against non-QM loans, it wasn't clear to them what secured -- securitization proceeds these loans would generate. Well, now you've seen several deals get done and securitizations have ranged from as high as 95, 96 I think down to as low as 90.

So now for lenders, it's a much, they have, that's an important metric, they can use for thinking about how much they want to lend against assets. So the fact that there has been the securitization market restart and there hasn't been one or two deals, right, it's been a lot of deals where pricing has been consistent. It's been orderly, that has we've seen improved the availability of non-QM lending both, on sort of the terms you get in terms of advance rates and the tenure of these facilities, but also the spread to LIBOR.

Trevor Cranston -- JMP Securities LLC -- Analyst

Okay, that's helpful. And then...

Laurence Penn -- Chief Executive Officer and President

Hold on for a second. JR, do you want to?

JR Herlihy -- Chief Financial Officer

Yeah, Just the second part of that question about, I think you specifically asked had we financed the retained tranches of our last non-QM deal...

Trevor Cranston -- JMP Securities LLC -- Analyst

Yes.

JR Herlihy -- Chief Financial Officer

And the answer is, yes.

Trevor Cranston -- JMP Securities LLC -- Analyst

Okay, great. Thank you. And then a question on the agency portfolio. You guys made a point in one of the slides about the biggest risk being a drop in pay-ups. I was curious if you could talk about how you think about the risk of that in light of the potential for mortgage rates in the primary, secondary spreads maybe continue compressing over the balance of the year and pre-pay speeds, either remaining very faster or potentially even moving higher going forward?

Mark Tecotzky -- Co-Chief Investment Officer

So pay-ups are high now, they're high for good reason. They're high, because actual prepayment speeds are high and projected prepayment speeds are very high, and not something we mentioned on this call, but on the earning call, we talked about some of the technological workarounds to social distancing that the GSE's put in place, we think are going to be -- become sort of codified in mortgage origination.

So availability of online notaries, more and more properties getting refinanced or purchased without necessity of an appraiser actually entering the home. And so all those things, so it's steepen the S curve. So pay-ups are high now, they're high for good reason. We spend a lot of time focusing on, in the higher coupons focusing on, where do we get the best prepay protection for the money, right. So the best prepay protection is generally the loan balance, but sometimes, if you look at that pricing you might think well, here is another story where the prepay protection isn't strong, but the price is a lot lower. So managing pay-up risk is that's an integral part of managing a levered agency mortgage portfolio, but that's been, that statement has been a truism for a long, long time.

So the market has sort of embraced, it is slower for longer, it's embraced the famous -- now famous J. Paulo [Phonetic] statement, I am not even thinking about raising rates. So what's built into pay-ups is to believe that you're going to be in this 3-ish percent mortgage rate regime for a foreseeable future, and that's going to lead to relatively fast prepayments on mortgage rate, mortgages that have an incentive given that rate for a long time.

So it's something we always think about. I think that we have enough tools on the hedging side and on the research side to manage through that, but we certainly acknowledge that, that when you have pay-ups that have run up a lot then, there is a potential that they can come back down to. I think, the scenarios where they would come back down appreciably you'd need to see a move in interest rates. So I think it's not right now really priced into the forward curve, it can certainly happen, but you know the market right now is standing relatively low probability to it.

Laurence Penn -- Chief Executive Officer and President

And if I could just add to that. So I think there's two ways that pay-ups drop. I mean I am obviously oversimplifying. So one of them is when you've got a liquidity crisis, and people are just paying up for the liquid TBAs and not paying up for the value in specified pools, right, so that's one way that pay-ups can drop.

The other way that they can drop, as you said is just by, across the board increases in prepayments, right. So, and if that happens, so for example, you mentioned the primary, secondary mortgage rate spread narrowing, you'll see that affect not only specified pools, right, but you'll also see it affect TBAs. And sort of the reason I mentioned that, is that right now going, if you look at our presentation and I guess it's on slide 19, where you can see that as of June 30th we had a pretty modest TBA short measured by 10-year equivalents in terms of our hedging portfolio.

On the next slide, slide 20, you can see that we had measured a little differently. We had a larger TBA short portfolio. But if you go back to where we were at the end of the year. So for example, you can go on our website and you can look at our presentation of fourth quarter presentation, and you can turn to slide 19, it looks like it is there, and you can see that we were -- our TBA percentage of our hedging portfolio is measured by 10-year equivalents was 44%.

And if you look at our next short TBA position than it was over a $1 billion. So we can dial up and down. So to make a long story short, we can dial up and down that TBA short a lot. And so we can help control our prepayment risk by doing so, and again, that will address, that won't necessarily address the compression, perhaps that's due to another liquidity crisis, but I think it will address across the board increase in prepayments of the type A, you also mentioned.

Trevor Cranston -- JMP Securities LLC -- Analyst

Yeah, OK. I appreciate the comments. Thank you you guys.

Operator

Thank you. Your next question is from Eric Hagen at KBW.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Hey, hope you guys are doing well. Following up on your comments on the benefits of the short duration portfolio, how much do you expect the portfolio to pay down over the next couple of quarters? And can you get specific on how set the spreads are that you're seeing in the loan strategies and how much will be your run off, you think might be ready to deploy into those new originations?

Laurence Penn -- Chief Executive Officer and President

Those are some tough questions. It's hard to predict. JR, do you have the number? I think it's probably better if we just reiterate what the number was in the first quarter and the second quarter.

JR Herlihy -- Chief Financial Officer

Yes

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Yeah, that's helpful, yeah.

JR Herlihy -- Chief Financial Officer

Yeah. So we had $70 million of pay-downs for the second quarter across consumer residential transition loans and small balance commercial and we said that was about 11% of where we started the quarter. And the previous quarter, I believe, that number was $55 million for the same set of strategies. I can look that up as we talk.

Laurence Penn -- Chief Executive Officer and President

Yeah, so let's I think the order of magnitude then...

JR Herlihy -- Chief Financial Officer

Yeah, it was $55 million.

Laurence Penn -- Chief Executive Officer and President

Great, yeah. So I think that's a good range to think about they are.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Okay.

Laurence Penn -- Chief Executive Officer and President

In terms of exactly where we would deploy it, I think our most predictable pipeline right now is the is non-QM and consumer. But as I mentioned, I am certainly hopeful that our commercial mortgage bridge loan business is picking up and so we can see some increases there. It's really hard to know, it's very asset-specific, but certainly would no question, I think that we'll see an increase in non-QM from the second quarter, where we really started getting going in the latter part of that quarter.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Got it. And the spreads on non-QM right now versus where they were say three...

Laurence Penn -- Chief Executive Officer and President

Yeah, the yields. Yeah, I mean they're better. The yields are really not materially different, maybe a little lower than they were pre-COVID, but the financing is just much, much lower. And then that's financing whether you measure it by repo or whether you measure it by the securitization execution.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Right. Yeah, that actually kind of ties into my follow-up question, which is what is the net loss that you're expecting on the non-QM portfolio? And what was the loss adjusted yields on the retained tranches in the securitization from June and the repo rate that you're funding the securities there?

Laurence Penn -- Chief Executive Officer and President

Not even sure we have a year-to-date loss in non-QM.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

So the expectation for losses, the forward expectation.

Laurence Penn -- Chief Executive Officer and President

Oh, I see in terms of our...

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

The aggregate loss in the collateral over the life of the asset, what is that number?

Laurence Penn -- Chief Executive Officer and President

Right, right. Yeah, well, that's when I sort of quarter yield, I'm thinking about that. Remember, the new production we are doing the best we can to, we can be selective in terms of borrowers and where it's part of our underwriting now is kind of COVID underwriting if you will, making sure that the employment status is where we wanted to be and etc. So I think we're certainly hopeful that in the new originations that there is not going to be any material I mean we maybe a few basis points a year of losses going forward.

Now on the existing portfolio, you've got some forbearances. I don't know Mark, do you have a number that you're a range that you're comfortable quoting in terms of where you think the, our pre-COVID non-QM portfolio is going to shake out in terms of per annualized loss rates?

Mark Tecotzky -- Co-Chief Investment Officer

Yeah, I wouldn't want to do that off the top of my head. I would say one thing is we have to separate out the very unfortunate situation in two ways, that some borrowers made have had a COVID related loss of income that they won't fully get back, right, and then they might need to seek lower shelter costs. So if that's situation, which is terrible. But given what home prices do and given the LTVs of our loans, it doesn't necessarily translate into a loss for us. So there is nothing I would want to quote off the top of my head other than that, broadly speaking, if you look at what's been going on with forbearance, forbearance numbers have been coming down and borrowers, many borrowers that originally opted for forbearance, I think in anticipation of potentially a loss of income have been making payments on those plans.

Laurence Penn -- Chief Executive Officer and President

Yeah. And we've been very LTV focused, right, for the entire life of that program. So there have been other originators that captured larger volume and wider yield spreads, higher coupons on their products by going after higher LTV products and that was just never emo, and still isn't.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Right, right.

Laurence Penn -- Chief Executive Officer and President

Yeah. So I think that ultimately is going to be a big saving race to the extent that we do see delinquency rates and default rates in that portfolio, which there inevitably will be some.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

I hate to be that analysts kind of pressing for numbers on Friday after a along week of earnings, but the loss adjusted yield on the securitization from June, if I kind of estimated that to be in the maybe 10% zip code and then you've got maybe 70% advance rate with -- on a repo line at maybe around 4%, would that be kind of the right zip code there?

Laurence Penn -- Chief Executive Officer and President

JR, do you have that handy or off the top of your head?

JR Herlihy -- Chief Financial Officer

Yeah. I mean to the second point, any repo spreads for non-QM home loans are in kind of the 200s, low 200s range.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Okay.

Laurence Penn -- Chief Executive Officer and President

Yeah, we are...

JR Herlihy -- Chief Financial Officer

There are more depending on what line you're talking about.

Laurence Penn -- Chief Executive Officer and President

Yes, spreads have compressed even more right, in securitization, execution has gotten even better since we did that deal, not surprisingly. And when we did that deal the execution was not as good as it was pre-COVID, but we were very happy because, as Mark mentioned, securitization market bounced back even more quickly I think than we had expected. So, and we were happy to jump on that for lots of reasons. So ultimately, our securitization in that transaction was not as good as it was in prior transactions because of that fact. We had bought most of those loans pre-COVID, and we were securitizing still with one of the first few securitizations really in that market, I can't remember maybe the third or something like that, but it was around their securitization done post-COVID.

So, yeah so that execution was still though was still great at the time and we had those loans were trading, those that traded in the marketplace were trading much, much lower than we were able to execute via that securitization. So it was a great, it's a great deal for us to have gotten off. And as the securitizations even tighter now market and the yields that we can get on new assets are hanging in there. So I think...

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Great.

Laurence Penn -- Chief Executive Officer and President

Yeah. So yeah, so as you said, not as maybe not the mid-teens that we have seen before in terms of the yield on our retained tranches but certainly, something that's respectable.

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Yeah, no, I mean it looks like a fantastic return on equity. I just wanted to make sure I had the kind of the right numbers there. So thank you, guys. Enjoy your weekend.

Laurence Penn -- Chief Executive Officer and President

Sure, thanks.

Operator

Thank you. Your next question is from Tim Hayes with B. Riley.

Timothy P. Hayes -- B.Riley FBR -- Analyst

Hey, good afternoon guys. Hope you're doing well. Just one from me. You had a small balance commercial focused competitor today say that they expect asset values broadly to decline by 10% and then also, kind of highlight that they expect a lot more acquisition opportunities toward the end of the year as maybe some kind of bank capital ratio forbearance period start to expire. So just wondering how are you feeling about those comments if that's consistent with the view internally and if you're seeing any opportunities to execute on portfolio acquisitions today?

Laurence Penn -- Chief Executive Officer and President

Yeah. We're seeing -- right, I don't -- I mean as far as 10%, I think it's going to be very obviously geographically and property type-specific.

Timothy P. Hayes -- B.Riley FBR -- Analyst

Sure.

Laurence Penn -- Chief Executive Officer and President

I don't want to comment on some overall number. Certainly New York office space and certain hotels and things like that will definitely be challenged, I would say, probably more than that. But yeah, we haven't seen a flood yet, but similar to what we were talking about in the residential transition loan space, yeah, there is no question in my mind, that there is going to be a lot of supply. We -- before we really got big in the bridge loan business and commercial mortgages, a much bigger business for us was NPLs, and we bought those really from two sources, banks and deals, conduit deals from special servicers. So, I think you're going to see both of that activity.

And the the workout groups in banks are usually overwhelmed when crisis like these take place, and they got to focus their energies on the bigger assets. And that leaves us -- we're in that $20 million and under sweet spot, that's our sweet spot, right, for NPLs, and it's a great place to be. And I think there's going to be a lot of supply, and I agree that the banks are going to be under pressure to sell product at some point, right? Too soon, now for them to be seeing a lot of pressure, but I think we will see it. And then of course, you've got the CMBS deals as well that are going to be selling at some point. So, I had written that's going to be a good market for us and that's where, our roots started was in the NPL space, and we only kind of migrated into the original space when that became, in our view, a more fertile market.

Timothy P. Hayes -- B.Riley FBR -- Analyst

Got it. Thanks for the color, Larry.

Laurence Penn -- Chief Executive Officer and President

Sure.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Jason Frank -- Deputy General Counsel and Secretary

Laurence Penn -- Chief Executive Officer and President

JR Herlihy -- Chief Financial Officer

Mark Tecotzky -- Co-Chief Investment Officer

Crispin Love -- Piper Sandler Companies -- Analyst

Joshua Bolton -- Credit Suisse Group -- Analyst

Trevor Cranston -- JMP Securities LLC -- Analyst

Eric Hagen -- Keefe, Bruyette and Woods, Inc. -- Analyst

Timothy P. Hayes -- B.Riley FBR -- Analyst

More EFC analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.