Ellington Financial LLC (EFC) Q2 2021 Earnings Call Transcript

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Ellington Financial LLC (EFC 0.82%)
Q2 2021 Earnings Call
Aug 6, 2021, 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. Welcome to the Ellington Financial Second Quarter 2021 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 & 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 16, 2021 as amended. 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'm joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial; Mark Mark Tecotzky, Co-Chief Investment Officer of EFC; and J.R. 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 Eric Penn -- Chief Executive Officer, President & Director

Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. Ellington Financial continued its strong performance during the second quarter of 2021.

As you can see on Slide three, we generated net income of $0.75 per share, good for an annualized economic return of nearly 18%, and we generated core earnings of $0.51 per share, which was 19% higher and 38% higher and our core earnings in Q1 and Q4, respectively. Driven by the strong performance in earnings growth, the Board raised our monthly dividend twice during the second quarter to its current level of $0.15 per share, which is now a full 50% higher than it was in March.

Our loan origination businesses again drove both GAAP earnings and core earnings in the quarter. Beginning with our non-QM business, LendSure had its second consecutive record quarter for origination volume, and the loan flow from LendSure helped us execute our second non-QM securitization of the year.

In connection with that non-QM securitization, we exercised a call option on one of our 2019 securitizations and included the vast majority of those called loans in our new deal. By calling and resecuritizing, we lowered our borrowing cost by over 200 basis points on those $110 million of mortgage loan assets.

In addition, we were able to get a higher advance rate on the securitization as compared to the 2019 securitization. So by calling and resecuritizing, we also freed up additional capital for us to reinvest. This was the third time that we've called one of our non-QM deals and each time, it's created a nice boost to earnings. We currently have five more non-QM securitizations where we retain the call option. None of these options are currently exercisable, but our non-QM call option portfolio continues to represent nice potential upside to future earnings.

Meanwhile, in the reverse mortgage space, Longbridge delivered yet another quarter of excellent results. Longbridge's earnings for the first six months of 2021 are now nearly equal to those from all of 2020, which was itself a record year for Longbridge. While there's been some recent yield spread widening in the HECM market that has caused some margin compression, that could easily reverse itself and either way, I'm still very bullish on Longbridge's growth and earnings prospects. Elsewhere in the credit portfolio, we continue to see excellent performance in our short duration loan portfolios, particularly residential transition mortgage loans, consumer loans and small balance commercial mortgage loans.

And in securities, we generated significant gains in our CLO, CMBS and non-agency strategies. The agency portfolio was a very challenging quarter for Agency RMBS, but our agency strategy managed to generate just a modest loss, thanks to the concentration of our long investments in lower coupons and assisted by our significant TBA short positions in higher coupons. Higher coupons were the weakest performers in the agency RMBS sector during the quarter.

Now please turn to Slide 11. This is a new slide that we've added this quarter to our earnings presentation, where we're including some additional detail on our proprietary loan pipelines. On this slide, we highlight the five primary sectors where we're involved in loan origination. Non-QM loans, small balance commercial mortgage loans, residential transition loans, consumer loans, and reverse mortgage loans. In all of these businesses, we leverage off of Ellington's strong analytics, and we capitalize on the lending void left by banks, which have faced much stricter regulations since the global financial crisis of 2007, 2008.

On the first row of the chart, you can see that in four of these five verticals, we've established strategic equity investments at the origination level. And just in the last couple of months, we've increased the number of our originator investments to a total of five strategic investments following the acquisition of two new small but strategic investments in the residential mortgage origination space. These two additional strategic investments should further expand and diversify our loan sourcing channels.

Furthermore, we are currently engaged in several other active dialogues, and we expect to add a couple more originator investments to our roster by year-end. Moving down the chart, you can see that in addition to the strategic originator stakes, we also source loans via numerous joint ventures and flow agreements with third-party originators, and then on the next row, we highlight our in-house origination teams, specifically in the small balance commercial mortgage space and in the residential transition loan space. Putting it all together, you can see that we have a very diverse, efficient and expanding array of channels that feed our proprietary loan pipelines.

At the bottom of this chart, you can see that we acquired $445 million of loans during the second quarter across these five business lines, and that the combined size of these loan portfolios was nearly $900 million at June 30th. The largest growth in acquisitions last quarter came from non-QM, small balance commercial mortgage and residential transition loans. In fact, we had record quarters for loan originations in non-QM, small balance commercial and RTL in the second quarter, funding $259 million, $87 million, and $68 million respectively.

By the way, residential transition loans in column three is a sector we are particularly excited about, given the strength of the housing market, the supply demand and balance for housing and the chronic underinvestment in housing in many areas of the country. The performance of our RTL loans has been tremendous, including through COVID, and the strategy continues to offer very attractive risk-adjusted returns and improving financing options. In column four, you can see that we acquired about $30 million of consumer loans during the second quarter, but these new originations just kept pace with repayments and the size of our consumer portfolio was actually roughly unchanged at quarter end.

Finally, in column five, you can see that our activity in reverse mortgage loans has so far been limited to our investment in Longbridge itself. We have not purchased any assets from Longbridge, at least not yet. Also, when you look at the loan totals on this slide, keep in mind that we are not showing any loans that we've securitized, which in many cases are consolidated onto our balance sheet.

Of course, if we were to include those loans in this chart, the total would be much, much larger. And in many ways, those retained tranches from loan securitizations epitomize what it means to be vertically integrated. Instead of just buying loan back security tranches in the secondary market, where we have to pay full retail prices, we are involved from the outset and at all the most important stages in the life cycle of these loans.

Our involvement starts with the crafting of the underwriting and pricing guidelines, which enables us to acquire the kinds of loans we want to acquire and at wholesale prices to build. Then we warehouse these loans pending securitization and finally we securitize. And when we securitize, we think it's useful to look at things two different ways.

First, we view securitizations as providing long-term locked-in financing of our loans at a low-cost of funds. Second, we've used securitizations as a way to manufacture highly attractive retained tranches at prices we could never find in the secondary market.

With that, I'll pass it to J.R. to discuss our second quarter financial results in more detail.

J. R. Herlihy B.A. -- Chief Financial Officer

Thanks, Larry, and good morning, everyone. Please turn back to Slide three of the presentation. For the quarter ended June 30th, Ellington Financial reported net income of $0.75 per share and core earnings of $0.51 per share. These results compare to net income of $0.86 per share and core earnings of $0.43 per share for the prior quarter.

In April, we increased our monthly dividend by 40% to $0.14 per share, and in May, we increased the dividend by another penny to $0.15 per share, which we have maintained since then. Our higher core earnings quarter-over-quarter was primarily driven by larger small balance commercial mortgage, residential transition and non-QM loan portfolios as well as by lower financing costs.

Core earnings also increased due to several small balance commercial mortgage loan resolutions, which included the payment of past due interest and the recovery of previously paid expenses. If you remove the effect of those asset resolutions, our core earnings run rate was in line with our current dividend rate of $0.45 per share. So, for our core earnings run rate, $0.45 per share is probably a better figure to use in the near term.

Moving to Slide four. You can see that we finished the second quarter with 80% of our deployed capital allocated to credit strategies and 20% to agency, similar to how we were allocated last quarter. As I'll discuss in more detail when we turn to Slide six, the credit portfolio grew, while the mix between credit sectors continued recent trends.

Next, please turn to Slide five for the attribution of earnings between our credit and agency strategies. During the second quarter, the credit strategy generated a total gross profit of $1.25 per share, while the agency strategy generated a modest loss of minus $0.03 per share. These results compare to $1.14 per share in the credit strategy and roughly breakeven in the agency strategy in the prior quarter. We benefited from strong performance in all of our primary credit strategies during the quarter.

Loan growth and lower financing costs generated higher sequential net interest income, while we also had substantial net realized and unrealized gains in our CMBS, CLO, non-agency RMBS, non-QM strategies and from our equity investments in loan originators. Credit hedges contributed negatively to results as credit yield spreads continued to tighten during the quarter.

In agency, yield spreads widened during the quarter, driven by declining interest rates, continued elevated prepayment rates and concerns around fed tapering. Most agency RMBS significantly underperformed comparable U.S. treasuries and interest rate swaps on a total return basis. And as a result, we had a small net loss in the strategy.

However, with agency underperformance more pronounced in higher coupons and lower coupons, our portfolio positioning of being disproportionately long, lower coupons and maintaining a portion of our TBA short positions in higher coupons helped mitigate a portion of the MBS spread widening.

Turning next to Slide six. You can see that our total loan credit portfolio increased by 5% in the second quarter to $1.36 billion as of June 30th. The quarter-over-quarter increase was driven by non-QM and residential transition loan acquisitions, which more than offset the impact of the non-QM loan securitization and by the growth of our equity investments in loan originators and the CMBS in the commercial mortgage loan bucket.

Despite a record volume of commercial mortgage loan originations in the second quarter, you are not able to see the growth in this chart, because several small balance commercial mortgage loans converted to equity method investments during the quarter when we finance them and because loan payoffs offset some of this growth. Removing the effects of the loans converting to equity method investments, the overall credit portfolio actually grew by 8% quarter-over-quarter, not 5%. Meanwhile, in CLOs and non-agency RMBS, opportunistic sales caused those two portfolios to shrink quarter-over-quarter.

On Slide seven, you can see that our total long agency RMBS portfolio declined slightly sequentially. However, we did both increase the size of our long TBA portfolio and reduced the size of our TBA short position during the quarter. This caused our net agency pool exposure to increase to 4.2 times from 3.1 times, which you can see on Slide 20.

Turning back to Slide eight. You can see that we finished the quarter with an overall debt-to-equity ratio of 3.2 times, unchanged from last quarter and a recourse debt-to-equity ratio of 1.9 times, down from two times last quarter. A larger portion of our borrowings were non-recourse as of June 30th, mainly due to the completion of the non-QM securitization. Recourse leverage on the credit portfolio was less than one times at June 30th.

As of June 30th, our weighted average borrowing rate decreased to 1.24% as compared to 1.41% at March 31st, due to narrower financing spreads on both our agency and credit borrowings. We continue to extend and improve our sources of financing and leverage in the second quarter.

In addition to the non-QM loan securitization, we also added a new commercial mortgage loan financing facility. For the second quarter, total G&A expenses were $0.17 per share, while other investment related expenses were $0.11 per share, both unchanged from the prior quarter. We also recorded an incentive fee of $7.16 million for the second quarter, as we exceeded our net income hurdle for the rolling fourth-quarter period. We also recorded an income tax expense of $3.14 million for the quarter, primarily due to an increase in current and deferred tax liabilities related to realized and unrealized gains on investments held in a domestic TRS.

Finally, our book value per common share was $18.47 at June 30th, up 1.7% from $18.16 per share at March 31st. Combining this book value per share appreciation was a $0.44 per share of common dividends that we declared during the second quarter, our economic return for the second quarter was plus 4.1%.

Now, over to Mark.

Mark Ira Tecotzky -- Co-Chief Investment Officer

Thanks, JR. EFC had a strong quarter. I feel sometimes that the market's tendency is to analyze quarterly earnings each quarter in isolation on a short-term basis, disconnected from what came before and what will come after, but that's not the way we manage Ellington Financial.

This quarter, what we accomplished was in large part the product of initiatives we have been working on for years, and it's a continuation of themes that we think will continue to drive success in the future. EFC had a very strong quarter as measured by the metrics that I think are most important to investors, which are also some of the metrics that helped guide us for managing our investments.

First, we have a high dividend yield, almost 10%, which is covered by core earnings, and which we raised twice this past quarter despite a drop in interest rates and a market backdrop of tightening credit spreads. We have been able to earn our dividend by building a portfolio of high yielding assets, both loans and securities. With yields suppressed this past year by the Fed QE, we have continued to grow our network to source assets. We know that in the low yield world, it's crucial to our shareholders that we deliver a high dividend.

Second, we care a lot about increasing book value over time. That's the way we as management can try to keep the stock price on an upward trajectory. There are a few ways that work with the portfolio managers in getting us there.

First, we want core earnings to exceed the dividend.

Second, we want assets that can deliver a total return in excess of their current yield, either by realizing gains through sales and loan resolutions or through mark-to-market appreciation.

And third, our strategic originator equity stakes can help us grow book value as these investments should appreciate in value over time, thanks to the synergies of the partnerships between capable experienced loan origination operators and Ellington's considerable resources. Through this past quarter, even with our higher dividend level, core earnings still exceeded the dividend. We grew the portfolio while harvesting gains and monetizing loan resolutions.

And importantly, we avoided a material loss in our agency portfolio in what was a very tough quarter for agency MBS. As measured by gross return on allocated capital, we were down less than 1% in agencies. By design, EFC is diversified across four main sectors; residential, commercial, consumer, and agency MBS. We believe that diversification generates higher returns over time per unit of risk and thus a higher quality earnings stream.

This quarter, we didn't technically hit on all cylinders, because the agency strategy didn't contribute but what is important is that we controlled our downside net strategy, so we were able to have a great quarter. Across the board, our credit strategies had strong performance in both loans and securities. I was particularly pleased this quarter to see strong growth in our residential transition loan portfolio.

This is the result of years of developing relationships with RTL originators that are like-minded with us in their credit decisions. We've spoken a lot about loan strategies in the past two earnings calls, but securities have also been great performers this year. As you can see on Slide six that we harvested gains in some of our security strategies, most notably CLOs and non-agency RMBS. We also had excellent performance in CMBS in the form of mark-to-market gains. This highlights another form of our diversification, not just residential, commercial, consumer and agency but within each credit sector, we have securities and loans and take advantage of opportunities in each that are often out of sync. Then, we diversify further.

Look at Slide 10, which shows our commercial loan portfolio. You can see diversification by property type and geography. We don't like all the eggs in one basket strategy in our small balanced commercial mortgage loan investments. This past year, we have seen some of the best real estate investors in the world get badly hurt in the retail and hotel sectors, which were the sectors hit the hardest by the pandemic.

Looking ahead, we see a market where the competition for high-quality, high-yielding assets will only get tougher. This latest round of QE by the Fed has chased investors into high-yielding, credit strategies by lowering the yields on investment-grade assets. Since quarter end, despite the spread of the Delta variant, real estate focused assets have performed well, but you're starting to see some weakness in high-yield and a little bit of widening in investment-grade spreads.

Also, we would expect to see more interest rate volatility going forward. Unlike the start of the year, the Fed is no longer on autopilot. They are now discussing how they will taper bond purchases, and we expect news on that front by the end of the year. We don't think that Fed tapering will be a big deal for the balance of the year since the Fed has gone out of their way to say they want to avoid another taper tantrum, but that doesn't mean we won't see pockets of volatility. I really like the way that Ellington Financial is positioned right now with ample room to increase leverage and fresh capital to deploy.

And importantly, we need to keep working with our origination partners, both the ones we have worked with for years, and the new ones with whom we have recently partnered to help them grow their platforms in a risk controlled way that can contribute both assets and continued book value growth to EFC.

Now back to Larry.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Thanks, Mark. I'm extremely pleased with our performance so far in 2021. Our origination partners and affiliates have done a tremendous job growing their market share and earnings, which Ellington Financial has translated into higher earnings and a larger flow of high-yielding loans for our portfolio. We have also generated significant profits and our credit securities portfolios.

Overall, Ellington Financial delivered an economic return of 9.2% for the first half of the year or 19.3% annualized and increased both core earnings and the dividend significantly. We've also delivered a total return to shareholders of 35% over this period. I'm proud to say that as of June 30th, our book value per share was $18.47, which is actually $0.20 higher than our $18.27 book value per share as of February 20, 2020, right before the 2020 COVID lows. And that's without giving credit to the $1.70 of dividends on our common stock over that time period.

With all that we've achieved, I believe that it was no coincidence that Ellington Financial was added to the S&P Small-Cap 600 index in May. This was a significant milestone for the company and has not only provided greater liquidity and visibility for the company, but has substantially broadened our shareholder base. To support the continuing growth of our loan portfolios and our strategic initiatives, we access the capital markets shortly after quarter end, raising approximately $113 million of common equity right around book value.

This new capital will help drive additional growth of our portfolio and should be accretive to earnings per share. We've been actively deploying that fresh capital and have so far grown our non-QM and RTO portfolios meaningfully since quarter end. I'd like to close by reemphasizing the importance to us of our vertically integrated loan businesses. Our goal in these businesses is to lock in a steady flow of high-quality, high-yielding loan originations, while leveraging off of Ellington's core strengths of data analysis and modeling to help shape the underwriting of those loans.

For many of these loans, the securitization markets provide us with superior long-term financing, which enhances earnings and strengthens our balance sheet. These businesses have produced superior long-term risk-adjusted returns for us. They continue driving our earnings growth, and we believe they continue to represent underappreciated franchise value for Ellington Financial.

And with that, I'll open the call for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions]. We'll take a question from Bose George of KBW. Your line is open.

Mike Smyth -- KBW -- Analyst

Hey, everyone. This is actually Mike Smyth on for Bose. So, on the recent equity offering, when I look at Slide 25, it looks like 10% of that capital is undeployed. So I'm just wondering if you could talk or provide a little bit of color on the timeline for putting some of this money work.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Sorry, you're a little staticky at there. Was the question that after the recent equity raise, you said that 10% of capital was undeployed, but that -- was it June 30th, right?

Mike Smyth -- KBW -- Analyst

Right. Right.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Would you mind repeating the question?

Mike Smyth -- KBW -- Analyst

Yes. Sorry about that. I was just eyeballing that based off on Slide 25. So, I was just wondering if you could provide some guidance on the timeline for putting that money to work?

Laurence Eric Penn -- Chief Executive Officer, President & Director

Sure. So we closed on the deal in July. It's been about a month's time. The rough estimate is that we've deployed about 35% to 40% of that capital so far, which is on track with I think to invest the proceeds within a quarter as planned. That number would be a little bit higher if we weren't being opportunistic in securities, and we've turned over some other investments at the same time. So there are a few inputs into the capital available to invest. But in any event, 35% to 40% is a rough estimate of where we are so far investing proceeds.

Mike Smyth -- KBW -- Analyst

Okay. Great. That is helpful. And then on the agency side of things, you provided some color on the taper. But just wondering, what are your thoughts on the current level of Fed? And where do you think they need to taper for you to increase allocation to the agency business?

Mark Ira Tecotzky -- Co-Chief Investment Officer

This is Mark. It's a great question. When we think about the most optimal way to partition the capital in Ellington Financial among the four main strategies, the expected return in the agency portfolio, which is better than what it was coming into the second quarter, because you did have the underperformance.

But -- so we look at that but then we also look at what's the opportunity set and the credit strategies, right? And what you're seeing on the credit strategies is you're seeing increased quality loan flow, and you can get a sense of the magnitude of that on the new slide, Slide 11. But in addition to that, we're seeing better financing terms. So, I think the opportunity set in the agency space is a little better than what it was.

We are mindful of that, although the Fed does not want to cause volatility when they give further details on tapering. You can see volatility. It can sort of be inadvertent on the part of the Fed. So, we think about that. And we also look at the loan flow opportunity. So, I think that in all four sectors, we're seeing an opportunity set consistent to something that can outpace the dividend. So, I don't think right now, we see a strong need or a strong desire to increase the capital allocation to the agency side. I think sort of we're comfortable with how we have it set right now.

Laurence Eric Penn -- Chief Executive Officer, President & Director

And if I could just add to that, Mark. So if you go back really to our inception in 2007, so we got a 14-year history now. Our allocation to agency versus credit has probably ranged between -- it's never been lower than the low teens. I don't believe, and it's never been -- I don't think it's ever gotten to 25%. So that's kind of the range. Now, maybe we're slightly -- and we've been mostly between 15% and 20% over that time period. That's pretty typical for us, occasionally a little higher.

So, I think our 20% allocation, that's probably a pretty healthy allocation, I think over time. So, one thing that the agency strategy also does in addition to diversifying, obviously the portfolio, it provides liquidity at key times, like it did in mid-March and in April of last year. It was a huge source of liquidity for us, which was obviously very important, and it also helps our 40 Act tests, our REIT test. It enables us, for example, on the REIT testing side to have a lot of the -- what are non qualifying assets in our TRS like the investment in Longbridge and LendSure, for example. So, I don't think you're going to see that strategy certainly going away for a very long time, and I think thinking about it in that 15% to 20% range is I think a good range to think about where that is and is going to stay for a while.

Mike Smyth -- KBW -- Analyst

Great. That is very helpful color. And then just one more for me. Can you provide an update on how book guidance trended since this quarter end?

Laurence Eric Penn -- Chief Executive Officer, President & Director

No. No. We're not sort of on a schedule for that. We report book value monthly, typically on the fifth business day. Sorry, mid-month now. We used to be on the fifth business today, now we're more mid month, yes. So that will probably -- that will come out mid-month. [Indecipherable].

Mike Smyth -- KBW -- Analyst

That is good. Thank you for taking the questions.

Operator

We'll take our next question from Doug Harter of Credit Suisse. Your line is open. And Mr. Harter please check your main switch. -- Yes. Proceed with your question.

Doug Harter -- Credit Suisse -- Analyst

Sir, looking at the loan categories you have on Slide 11, could you just walk through what the kind of expected duration of each of those four categories would be?

Mark Ira Tecotzky -- Co-Chief Investment Officer

Sure. Mark here. It's just to get it right. Non-QM loans, our 30-year loans. Typically though, I think, an effective duration of -- we think about two years on those. They tend to pay pretty quickly. They come with a high coupon. So, when you do a securitization, you wind pertaining not only the credit risk, but also essentially in IO. So they have a particular duration during the ramp-up period, which is somewhere between one and two years, but then when you do the securitization, your debt duration shift changes and it becomes shorter. The small balance commercial loans, those are higher coupons and their floating rate. So those really don't have interest rate risk.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Right, and they typically the average life of those loans has been about 15 months historically.

Mark Ira Tecotzky -- Co-Chief Investment Officer

Now the residential transition loans, those loans are typically six months to a year. They're also higher coupons. So, we think about those of having an interest rate risk of maybe half a year. On the consumer loans, that can be a range of things, right? Most of those loans are somewhere between six months and three years. They tend to come with a pretty high coupon. So I'd say, on average, it's probably about a one year interest rate risk.

And then on the reverse mortgage loans, those aren't what you see on the balance sheet of Ellington Financial are reverse mortgage securities that we bought in the open market. They haven't come directly from Longbridge, and those can be either pools or IOs and those just get run with our normal interest rate processes in our models on the agency MBS side. And then the loans that are being originated by Longbridge. The company manages, Longbridge manages that interest rate risk.

Laurence Eric Penn -- Chief Executive Officer, President & Director

And we like that, obviously, you can tell, a lot of these sectors, not just the interest rate risk from a duration standpoint, but also the cash flow duration is quite sure. Residential transition loans, maybe 10 or 11 months, consumer loans between one and two years also. So, we like the fact that these are high cash flowing portfolios.

It enables us, first of all, to pivot the portfolio, reallocate capital a lot faster. It helps us during times of stress like in COVID when we got a tremendous amount of cash flow, which is obviously very valuable at the time from the shorter duration loan portfolios, enabling us to redeploy the capital into things like non-agency, which was a tremendous opportunity for time, enabling us to repay financing lines when appropriate. So those, we like -- the non-QM loans not quite as much, although they're still fairly short relative to a lot of other sectors. But we like these short duration portfolios, especially spreads are historically at the tight end of the range, right? So that's just another reason to keep the portfolio shorter.

Doug Harter -- Credit Suisse -- Analyst

Got it. I guess just the other side of that would be, I guess, what is your thoughts as the ability to kind of continue to meaningfully grow the portfolio, kind of given how short they are and that you're kind of always kind of needing to replace the runoff of the portfolio?

Laurence Eric Penn -- Chief Executive Officer, President & Director

Yeah. Look, obviously it makes things makes more work for us, but we've been growing the portfolio. We'll continue to grow the portfolio. I think as JR mentioned, we had basically 8% growth in the credit portfolio over -- from the first quarter and the first quarter and the end of the second quarter. So yes, I think we've got a really, really good pipeline, I think of small balance commercial loans.

Non-QM continues to grow. RTL, we mentioned is now really taking off for us. So, I don't think -- I'm certainly optimistic that that's not going to be a problem, and that's also why we're making these additional investments in strategic investments in originators, and we have more of those dialogues, as we mentioned, that are active right now. So, I think we're OK there.

Doug Harter -- Credit Suisse -- Analyst

Great. And did you say what types of loans, the two new partners are originally?

Mark Ira Tecotzky -- Co-Chief Investment Officer

Both residential mortgage loans.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Yes, we weren't specific on that.

Doug Harter -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

We'll move next to Trevor Cranston of JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

Hey. Thanks. Good morning.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Good morning.

Trevor Cranston -- JMP Securities -- Analyst

I was curious, you guys laid out the sort of five buckets, you guys are really currently focused on on Slide 11. We've heard some discussion about opportunities in GSE eligible, non-owner-occupied loans. I was curious if you guys had any thoughts about that opportunity? And if it's something that could potentially make sense for EFC in the near term? Thanks.

Mark Ira Tecotzky -- Co-Chief Investment Officer

Hey, Trevor, it's Mark. That's a great question. Right, so as part of the PSPA agreement, Fannie put a 7% cap on investor loans that they will buy from each originator and some of the originators, in particularly the non-banks are running in excess of that 7%. So we are looking at that. I do think that can be an opportunity.

It's a little bit different than non-QM and that you have seen the investment banks being aggressive in working on that sector as well. So, it's just a little bit different dynamic in terms of where the capital is coming from, but that's something we're looking at. And I definitely think that there's a good chance that could make sense for our portfolio.

Trevor Cranston -- JMP Securities -- Analyst

Got it. Okay. That is helpful. And then I was just looking through the your non-QM securitizations. The WACC on the most recent deal looked like it was the lowest it had been so far for the non-QM deals. I was curious if you could just kind of talk about where you guys are seeing WACCs on new originations relative to where they have been over the last year or so? And how that impacts the expected returns on the investments, if some WACC compression is offset by improved execution or if you're actually seeing returns being somewhat compressed by more originations and more competition in the non-QM space?

Mark Ira Tecotzky -- Co-Chief Investment Officer

This is Mark, I'll answer that also. So note rates have come down. They have come down sort of consistent with what you've seen on the agency MBS side, which is a little bit different than how non-QM behaved in say 2017, 2018. It was kind of a market into itself. Right now, it's showing a little bit more of a correlation to other parts of the mortgage market if you look at sort of prime jumbo or agency MBS. So note rates have come down.

With that, loan prices have come down as well, and I also think that with note rates coming down, I think this newer production on the non-QM side have potential for some slower prepayment speeds, because some of the elevated speeds you've seen in the last six months have been non-QM borrowers refinancing into new non-QM loans to take advantage of the lower non-QM rates. So I would say, if I look at expected return on equity for non-QM now, I think the peak was probably something like the second half of 2020, where non-QM note rates were still very high, they hadn't come down, but securitization spreads have come in a lot.

And there, we saw sort of outsized returns and our expectation was that those outside returns would normalize by either the coupon on securities going up or new rates of non-QM coming down or a little bit of both. What you've seen happen is it's been the note rates on non-QM loans that have come down. So, I think the ROEs there are still very attractive. They're probably materially more attractive than what they were in 2018 but there was a period of time, and I'd say the second half of 2020, maybe first few months of 2021 when they were outsized relative to what they are now.

So, I would say that they've normalized but we have a lot of -- we get a big tailwind, the fact that our origination volumes are up, because what that means is more frequent securitizations. So you're not warehousing the loans on the higher-priced repo lines for a long period of time. There's also a little bit of a virtuous cycle you get into with investors and that if you're a repeat issuer, you tend to get rewarded with tighter securitization spreads, which we've certainly seen ourselves, our last two deals have benefited from. So the yields have come in.

When I put it all together, the ROE is not as good as second half of 2020, but certainly better than 2018, and the benefits of our increased scale are certainly something that really do translate into the bottom line as well.

Trevor Cranston -- JMP Securities -- Analyst

Got it. Okay. That is a good color. Thank you for the comments.

Mark Ira Tecotzky -- Co-Chief Investment Officer

Thanks, Trevor.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Thanks, Trevor.

Operator

Our next question is from Eric Hagen of BTIG. Your line is open.

Eric Hagen -- BTIG -- Analyst

[Indecipherable]. Some good questions already on QM and such, but maybe one on the credit hedging portfolio. I think you guys added $30 million of options. I'm still hoping you can share what those options are tied to? And if you can just maybe address what you're looking for more generally to get aggressive on that portfolio? That would be the first question. Thanks.

Mark Ira Tecotzky -- Co-Chief Investment Officer

Hey, Eric, it's Mark. So that's another good question. We had very strong performance on our CLO portfolio in the past quarter, and I would characterize a lot of that strong performance is the reversal of the big drawdown in prices, many parts of the CLO sector experienced in 2020. So when we saw lower CLO prices in 2020, and we got more comfortable with the efficacy of the vaccines and when we thought a lot about what are the likely consequences of the really massive QE, the Fed started March 2020, our expectation was that you were going to see a strong rebound in bank loan prices and with a little bit of a lag, a strong rebound in CLO prices, right?

Now, when we looked at the market through the second quarter of 2020, we started to see some very high prices on some of the high-yield indices. So, the most liquid high-yield indices sort of on the run is something called Series 36. It got to a price of 110. That's about as high as that thing has gone. So, it made sense in our minds to lock in some of the gains on the CLO portfolio in two ways. One way was through sales of securities, and I mentioned that in my prepared remarks, you saw the percentage of our portfolio in CLO investments drop, and that was through opportunistic security sales, but the other thing we did to sort of lock in some of these gains was to add some credit hedges on the portfolio.

Laurence Eric Penn -- Chief Executive Officer, President & Director

And these options are -- you can almost think of it as tail hedges, right, or out of the money puts. So, which is -- I think one of our hallmarks as a manager is to try to do the best we can to manage tail risk.

Mark Ira Tecotzky -- Co-Chief Investment Officer

And since then, you have seen a little bit of weakness in high yield.

Eric Hagen -- BTIG -- Analyst

Got it. So that is -- to top all. Second one is maybe just more general. I mean, can you offer a little perspective on how you think the potential for spread widening brought on by Fed tapering and other things potentially could transmit onto areas of the non-agency and credit markets and really just what you guys think that might mean for your investment outlook?

Mark Ira Tecotzky -- Co-Chief Investment Officer

Sure. It's interesting, I think a lot of people, their memory of the taper tantrum is really what happened in the first month of the taper tantrum. And so what happened in the first month of the taper tantrum is Chairman Bernanke talked about tapering fed purchases, and at that time, the market didn't have any sort of playbook for how that might look. So, the initial expectation was that they might just start selling securities, right?

Well, what they wound up doing instead, and the market didn't get clarification on this until later in 2013 was what tapering meant was buying less. So right now, for example, if you look at the agency mortgage space, they are reinvesting all their paydowns each month and their paydowns to substantially, it can be $70 odd billion or so, and then they're buying in excess another $40 billion each month. So when they start to taper, what that means is they'll stop buying $40 billion a month, and maybe we'll start buying $35 billion or $30 billion a month.

And then they'll keep stepping that down if the market is orderly over an attenuated period of time to the point where they're just reinvesting paydowns, right? And so what happened in 2013, when they first started the taper tantrum in May, initially not only agency MBS, but investment-grade corporate bonds, high-yield bonds, everything underperformed treasuries by about 100 basis points, right?

But then by the end of the year, agency mortgages had actually outperformed for the year. So once the market got clarity on what tapering meant and the pace at which the Fed intended to do it, both credit assets and agency assets wound up outperforming in 2013.

So, I think if you think about the market now, we don't have a crystal ball on this. I think, the Fed will go out of their way to keep the markets orderly. I think there are a lot of people that are saying that the amount they're spending in asset purchase is above and beyond what they need to do for orderly markets.

So, we certainly expect them to taper. I think, that it might wind up being a bigger deal for the non Fannie, Ginnie part of their portfolio, because what has worked so well in this round of QE from the Fed's perspective is this whole notion they have of imperfect substitution that by buying treasuries and agency MBS, you chase investors out of those assets.

You give them cash and then the investors find somewhere else to invest, in high-yield bonds or CMBS or non-agency mortgages. And so when the Fed starts buying less agency mortgages, what you might see is some investors have sold agency mortgages to the Fed and bought something else, might sell that something else and go back into agency MBS.

We think tapering could be a big deal for credit sectors as it will be for the agency sector. It sort of ties into what Larry was saying before when we stepped through the -- not only the interest rate duration, but the sort of cash flow duration of the loan sectors, right? Our long sectors are short, right? And the way you protect the portfolio in an environment where there's potential for spread widening is to keep your spread duration short, and so that's sort of how we're set up right now. I don't know what the likely path of spreads are going to be. It wouldn't surprise me to see some volatility, but I think the Fed is going to be putting money into the system for at least through the middle of 2022.

Eric Hagen -- BTIG -- Analyst

Thank you.

Operator

And we'll move next to Brock Vandervliet of UBS. Your line is open.

Brock Vandervliet -- UBS -- Analyst

Great. Thanks for the question. I was just curious from that new slide which I liked, I guess Slide 11 where you kind of profile each of the loan verticals. The HECMs are kind of conspicuously absent as part of your portfolio. What would -- and you mentioned the spreads there have widened. Are they yet attractive enough to pull in from Longbridge? Or is there something that makes them kind of structurally not suitable?

Laurence Eric Penn -- Chief Executive Officer, President & Director

Hey. This is Larry, Brock. Thanks. No, there's nothing structurally that makes them not suitable. It's an agency asset. It's typically been an agency asset that trades relatively cheap on an OAS or spread basis versus other agency pools. We had them in our portfolio. We've had IOs in our portfolio as well. I think they'll continue to be from time-to-time a portion of our agency portfolio.

There's no -- we wouldn't have to get them from Longbridge and they're available in the market, readily available. So I think there'll just be a small segment of our agency portfolio and varying from time-to-time based on spreads. I think the interesting asset that Longbridge has, so Longbridge's largest tangible asset is actually its mortgage servicing rights on reverse mortgages, which is a really interesting arcane sector of the market.

When you've got a reverse mortgage, you've got the typical sort of fixed servicing strip that goes along with that. So that's an IO, if you will, similar to other mortgage servicing rights, but you also have the obligation and the right to fund any unfunded draws as they are drawn down by the borrowers. So, it makes it a very, very interesting asset class, and I think that's something again, I'm really getting ahead of myself here.

But I think in the future, it's possible that we could acquire excess servicing rights, for example from Longbridge. We're not -- there's no discussions around that right now but that's something that I think that could be a really interesting asset class for Ellington Financial. But in terms of just the agency product that is their bread and butter on the origination side, readily available in the market and so no plans to acquire anything on that front directly from Longbridge.

Brock Vandervliet -- UBS -- Analyst

Got it. And just as a follow-up there. That sounds really interesting on the servicing. Given the third rail issues and the delicacy of servicing [Indecipherable], do you think that, that servicing asset is priced in an interesting way? It sounds like it but I would think that's a very specialized skill.

Laurence Eric Penn -- Chief Executive Officer, President & Director

Yeah. So actually, the servicing is typically done by sub servicers. And you're right, that's certainly a very delicate area but the mortgage service right itself, not the sub-servicing. I think is where the interesting financial asset is. Yes, the sub-servicing is something that we wouldn't be interested in getting into.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay. And just comparing the yield profile of the RTL versus non-QM, how do those line up? Are the RTLs pricing at a premium to standard non-QM paper?

Laurence Eric Penn -- Chief Executive Officer, President & Director

Sure. Yes. Go ahead, Mark.

Mark Ira Tecotzky -- Co-Chief Investment Officer

The RTLs, so they differ from non-QM pricing in two significant ways. One is just the actual note rate is higher in RTLs than it is non-QM. But and the other way in which they differ is that the purchase price. The price for those loans trade in the market is lower than where non-QM loans trade, and so I think it's for two reasons.

One is that the financing rates, either in the repo market or more significantly in the securitization market are lower for non-QM, right? So, if we think about sort of what's the yield of the asset that you put on your balance sheet if you buy non-QM loans into a securitization, then you're getting the benefit of the lower securitization yields on non-QM than what people get in the RTL market. The other thing is that the loans are shorter in the RTL market. So, they just can't support much of a premium, because that premium, you have to amortize it maybe over the expected tenor of the loan, which might be eight months.

Brock Vandervliet -- UBS -- Analyst

Okay. Right. Thanks for the great color.

Mark Ira Tecotzky -- Co-Chief Investment Officer

[Indecipherable]

J. R. Herlihy B.A. -- Chief Financial Officer

And the RTL loans are also -- the whole process, the underwriting, and the servicing processes is much, much more involved, looking at what's effectively a business plan, if you will, on the part of the operator, purchasing the property renovating whatever needs to be renovating, and then ultimately selling the property. That's verifying all of the work has been done when the next stage of the draw, typically, the money is put out, not necessarily all at once, but in draws. So, it's a much more involved product. So, I think justifiably deserves premium yields relative to non-QM.

Brock Vandervliet -- UBS -- Analyst

Okay. Thank you.

Operator

We'll take a question from Crispin Love of Piper Sandler. Your line is open.

Crispin Love -- Piper Sandler -- Analyst

Thanks. Thanks for taking my questions. Can you speak to the credit quality you're seeing? I saw in the release and also heard you earlier that you had some SBC asset resolutions. So you just talk about the overall health and credit quality? And also, would you expect to see some similar asset resolutions going forward? Or were those just more one-offs?

Laurence Eric Penn -- Chief Executive Officer, President & Director

Look, I think the portfolio is in great shape. And we did have another very large resolution that's post quarter end in July. So I think, there's no significant problems in the portfolio right now, and I think you'll just continue to see things. These loans are typically one or two-year loans, they get extension sometimes. We do have stuff that's turned into REO. I think you can see we've had really almost negligible credit losses recently.

I think we're going to see more of the same. We have seen coupon compression, just like we have in other sectors, but we also have seen financing spread compression as well in our borrowing costs. So, we're still seeing ROEs that vary from, I'd say, low-to-mid teens to high teens on the new money we're putting out, and the pipeline is very robust. So, I think we'll see high velocity on the portfolio. Obviously, these are short-term loans and they are resolving, but we'll also seeing greatly larger inflow as well on the acquisition side.

Crispin Love -- Piper Sandler -- Analyst

Okay. Great. Thank you. That is helpful. And then one more, just earnings from unconsolidated entities was pretty elevated in the quarter. Was that driven by a single originator? Or is there anything else at play there?

Mark Ira Tecotzky -- Co-Chief Investment Officer

Yes. It's primarily driven by Longbridge and LendSure, where we fair value those investments and either make distributions. So I guess one way to think about it is, Dave and Larry highlighted that Longbridge earned through midyear, almost as much as they earned all of last year. And LendSure had a record quarter of originations in Q2 after having a record quarter of originations in Q1. So earnings have been very strong at the originator level in both cases and our fair value largely reflects GAAP earnings at the originators that aren't necessarily being distributed.

Crispin Love -- Piper Sandler -- Analyst

Great. Thank you. That is helpful.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Jason Frank -- Deputy General Counsel & Secretary

Laurence Eric Penn -- Chief Executive Officer, President & Director

J. R. Herlihy B.A. -- Chief Financial Officer

Mark Ira Tecotzky -- Co-Chief Investment Officer

Mike Smyth -- KBW -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Eric Hagen -- BTIG -- Analyst

Brock Vandervliet -- UBS -- Analyst

Crispin Love -- Piper Sandler -- Analyst

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