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Ellington Financial LLC (NYSE:EFC)
Q3 2021 Earnings Call
Nov 8, 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 Third 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. Please 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 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 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 & President, Director

Thanks, Jay, and good morning everyone. As always, thank you for your time and interest in Ellington Financial.

I'll begin on Slide 3. During the third quarter, Ellington Financial generated net income of $0.41 per share and core earnings of $0.46 per share. So core earnings continue to cover our dividend. Through the first nine months of the year, we have now delivered an economic return of over 11% and a total return to stockholders of over 33%.

Next, please turn to Slide 11. During the quarter, we significantly grew our proprietary loan portfolios as we deployed the capital from our common equity raise in July. We had our second consecutive record quarter for originations in our non-QM business, funding $297 million in the third quarter. And we also had our second consecutive record quarter for originations in our Residential Transition Loan or RTL business, funding $106 million in the third quarter as you can see here on this slide. Our RTL fundings actually grew more than 50% from the prior quarter. Within RTLs, the fix and flip business is a seasonal one, so I wouldn't expect us to see that kind of RTL growth for the next couple of quarters. But I'm hopeful that RTLs could be a big business for us in 2022. Overall, we grew our proprietary loan portfolios by 41% quarter-over-quarter to $1.26 billion. And keep in mind that the $368 million of growth was net of pay-downs.

I was extremely pleased with the pace and quality of our capital deployment during the quarter. Our proprietary loan pipelines continued to provide us with a robust supply of high-yielding investments and we absorbed that supply with relative ease. The new capital was, both raised and fully deployed, all within the third quarter, and so we were able to avoid any material drag on core earnings. Looking ahead, the prospects for continued growth in earnings from our proprietary loan pipelines continue to be excellent. Thanks to its record origination volume during the quarter, our non-QM affiliate, LendSure, posted record profitability as well for the quarter. And thanks to our loan flow from LendSure, we were able to complete our third non-QM securitization of the year shortly after quarter end. This represented the ninth non-QM securitization that we've completed and we've now passed the $2 billion mark in total non-QM loans acquired from LendSure to date.

This cycle of non-QM acquisitions, followed by securitizations, has several important benefits for EFC. We reap the benefits of a high-yielding and, we believe, low risk asset class; we strengthen our balance sheet and enhance earnings, thanks to the superior long-term financing provided by the securitization market; and ultimately, we're able to manufacture highly attractive retained tranches at prices not available in the secondary market. Meanwhile, in addition to all the growth we're seeing in our residential mortgage loan businesses, we've also recently seen substantially increased loan flow in our small balance commercial mortgage bridge loan business. And last, but certainly not least, we have now closed on three additional strategic equity stakes in loan originators in just the last six months, and we have several others in the works that we hope to complete before year end.

With these additional strategic stakes, we're continuing to fortify our vertically integrated loan origination business, which continues to supply a consistent flow of high-quality, high-yielding assets underwritten to our specifications. Our relationships with our originator affiliates are symbiotic as we not only provide them with a reliable outlook for their production, but we also help them enhance their underwriting guidelines, we help them improve the terms and stability of their financing sources, and we help boost their overall visibility in the marketplace. I'm excited about these new strategic equity investments and I believe that they will further expand and diversify our proprietary loan pipelines.

Now please turn to Slide 5 where you can see the net interest income in our credit strategies again led the way in the third quarter. This net interest income was driven by our growing loan portfolios, which, by the way, also continue to exhibit excellent credit performance. Our credit strategies also delivered significant net gains during the quarter, with significant contributions from our CMBS, CLO and non-Agency RMBS portfolios, together with the gains driven by our share of LendSure's record profits for the quarter.

As I mentioned, LendSure's third quarter was a record one, both for origination volume and earnings. LendSure originated $456 million of loans, which was a 39% increase from their second quarter's total of $326 million. LendSure is on pace to exceed, just in 2021, its origination volume for the prior two years combined, and critically, loan performance has continued to be excellent, even as origination volumes scale. Most of LendSure's growth so far has been in existing products and channels. But the LendSure team is working on amplifying its momentum by rolling out new products and channels and we're excited to see what 2022 will bring.

I'll turn next to Longbridge Financial, our reverse mortgage originator affiliate. In the Agency reverse mortgage market, continued high levels of home price appreciation, together with low interest rates, have led to elevated pre-payment speeds as borrowers seek to refinance. In response to these higher speeds, we saw some acute downward repricing in the HMBS market, which is the market for agency reverse mortgage pools. While these market forces have boosted origination volumes for Longbridge, they also caused a decline in the value of long bridges portfolio of Mortgage Servicing Rights or MSRs. This drove an overall quarterly net loss for the company. But importantly, Longbridge's originations segment was still profitable during the quarter. As a result, we see this quarterly net loss as an anomaly for Longbridge. The company had a monthly record for origination volume in September and year-to-date, Longbridge is actually Number 3 in the industry in total HMBS issuance. Moving forward, we believe that Longbridge's earnings and growth prospects continue to be excellent. And in fact, the company has bounced right back to profitability in October.

With that, I'll pass it to JR to discuss our third quarter financial results in more detail.

JR Herlihy -- Chief Financial Officer

Thanks, Larry, and good morning everyone. Please turn back to Slide 3 of the presentation. For the quarter ended September 30, Ellington Financial reported net income of $0.41 per share and core earnings of $0.46 per share. These results compare to net income of $0.75 per share and core earnings of $0.51 per share for the prior quarter. As a reminder, last quarter's core earnings reflected several small balance commercial mortgage loan resolutions, which included the payment of past due interest and recovery of previously paid expenses. Removing the idiosyncratic effects of those asset resolutions, our core earnings per share was roughly unchanged quarter-over-quarter and was actually slightly above the estimated core earnings run rate that we mentioned on last quarter's call.

During the third quarter, we issued 6.3 million shares of common stock through a follow-on common stock offering in July. And we issued another 1.55 million shares of common stock through our at-the-market program. In total, we increased our equity by $141 million or approximately 15%. Importantly, the proceeds from these issuances were fully invested by the end of the third quarter.

Moving to Slide 4, you can see that we finished the third quarter with just over 80% of our deployed capital allocated to credit strategies and 19% allocated to our Agency strategy, similar to how we were positioned last quarter. Our credit portfolio grew by 24% quarter-over-quarter, and I'll get into where that growth occurred shortly.

Next, please turn back to Slide 5 for the attribution of earnings between our credit and Agency strategies. During the third quarter, the credit strategy generated total gross income of $0.66 per share, while the Agency strategy generated gross income of $0.03 per share. These results compare to $1.25 per share in the credit strategy and a loss of $0.03 per share in the Agency strategy in the prior quarter. We benefited from strong performance in most of our primary credit strategies during the third quarter. Our loan strategies, including non-QM, residential transition, small balance commercial mortgage and consumer generated high returns on equity, driven primarily by net interest income, while performance in the CMBS, CLO and non-Agency strategies -- non-Agency RMBS strategies were also excellent, driven primarily by net realized and unrealized gains. We also had successful resolutions on a couple of larger commercial mortgage NPLs and subsequent to quarter end, we closed on the sale of one of the largest commercial real estate REOs in the portfolio at a significant profit.

On the other hand, as Larry noted, Longbridge Financial incurred a net loss for the quarter, driven by mark-to-market losses on its MSR portfolio, which negatively impacted Ellington Financial's results. In Agency RMBS, performance was mixed during the quarter. In July and early August, interest rates continued to fall and volatility increased, causing Agency RMBS to underperform treasuries. Moving into the latter half of the quarter, interest rates began to increase and volatility declined, and toward the end of the quarter, Agency yield spreads tightened as the market got more clarity on the Federal Reserve's tapering plan. Incrementally higher mortgage rates, particularly in September, led to reduced expectations for pre-payment rates and boosted higher-coupon RMBS, while the anticipated withdraw of Fed purchases negatively impacted lower-coupon RMBS.

Net interest income on our Agency portfolio, strong performance from our interest-only securities, and net gains on our higher-coupon specified pools exceeded net losses on our lower-coupon holdings and reverse mortgage portfolio. On the hedging side, net losses on TBA short positions, particularly on higher coupons, slightly exceeded net gains on interest rate swaps and U.S. Treasury hedges.

Turning next to Slide 6. During the third quarter, our total long credit portfolio grew by 24% to $1.69 billion as we deployed proceeds from our July equity issuance. The vast majority of the growth occurred in the non-QM and residential transition loan strategies, which are both captured in the residential loans slice on this page. Our small balance commercial mortgage portfolio also grew, although opportunistic sales of CMBS, where we generated some significant gains, caused the overall commercial real estate slice to shrink sequentially.

On Slide 7, you can see that our long Agency RMBS portfolio also increased during the quarter by 4% to $1.54 billion as of September 30.

Turning to Slide 8, our debt to equity ratio adjusted for unsettled purchases and sales decreased to 2.9:1 as of September 30 as compared to 3.2:1 as of June 30 as borrowings related to new purchases were partially offset by paydowns of non-recourse borrowings related to non-QM securitizations and as total equity increased. Our recourse debt to equity ratio adjusted for unsettled purchases and sales was unchanged at 1.9:1 as of September 30 as borrowings related to new purchases increased roughly in proportion to total equity. Finally, our weighted average borrowing rate was just slightly higher at 1.27% as of September 30 as compared to 1.24% at June 30.

For the third quarter, total G&A expenses declined by $0.01 to $0.16 per share, while other investment-related expenses were $0.06 per share as compared to $0.11 per share in the prior quarter, mainly due to non-QM securitization issuance costs that we incurred in the prior quarter, but not in the third quarter. Also during the quarter, we recorded an incentive fee of $5.3 million as we exceeded our net income hurdle for the trailing four-quarter period. And we recorded an income tax benefit of $2 million, primarily due to a decrease in current deferred tax liabilities related to the reduction in the unrealized gain on our investment in Longbridge Financial. Finally, our book value per common share was $18.35 per share at September 30, down slightly from $18.47 per share at June 30. Including the $0.45 per share of common dividends that we declared during the third quarter, our economic return for the quarter -- for the third quarter was positive 1.8%.

Now, over to Mark.

Mark Tecotzky -- Co-Chief Investment Officer

Thanks, JR. Q3 was interesting in that we saw a lot of interest rate volatility as the Treasury market seemed to grapple with the tension between the spread of the Delta variant and high inflation. In contrast, credit spreads were relatively calm. In the third quarter, we got a lot of clarity from the Fed about the pace of taper and we now have further specifics on the plan based on the timeline discussed in the last week's Fed meeting. Starting this month, the markets are entering a new phase of diminished Fed support. The Fed has gone out of its way to provide clarity about its plans, but that doesn't mean the taper is a non-event. Growth in the Fed's Agency MBS and Treasury portfolios has provided support for all financial markets by putting cash in the system. And during the taper period, which is expected to end next June, they will continue to put cash in the system, albeit at a slower pace. So we think that means, over the course of 2022, we may see somewhat wider credit spreads and yields.

So for EFC, those are welcome changes as wider spreads [Technical Issues] higher core earnings plus we have dry powder to deploy from our capital raise in October. Already in September and continuing into October, we have seen some spread widening. Spreads on investment-grade non-QM, CMBS and CLOs have all widened in an orderly fashion. We've talked on previous calls about how loans had not compressed as much as security yields in the past year. Well, that has partially reversed since quarter-end as spreads have widened so far into Q4. But this spread widening is not the result of any hiccups in credit performance, rather it's the result of a market demanding wider spreads because of an influx of new issue.

The other thing we are paying close attention to is supply and demand and affordability trends in the housing market. Since COVID, the housing market has been appreciating at an incredible pace. If mortgage rates drift higher without robust wage growth, affordability may become an issue. So for EFC, we can't get complacent about the strength of the housing market. We will be monitoring it quite closely.

This quarter end, we have also seen lower loan prices in some sectors, which inevitably happens when securitization economics are squeezed by wider spreads and higher yields. I like the balance we have at EFC, achieved by owning both originators and securitization machines. When loan prices are high, like this quarter, EFC benefits through robust gains on sale. As loan prices come off, and loan sale margins compress, that benefit accrues to the securitization business. We believe that by being more vertically integrated in the raw loan to security supply chain, EFC can thrive whether the economics favor the loan originator or the securitization sponsor.

In fact, we've already made three additional equity investments in originators so far this year. We plan to use the same playbook with these new investments that we used successfully for LendSure. We make small investments so we don't have a lot of capital at risk. We secure loan volume for EFC and we look for situations where EFC's financial strength and Ellington's data science and industry relationship can give our partners a competitive advantage over peers that lack those resources. We also give new partners the benefit of our experience in growing origination platforms.

Turning to third quarter results, overall credit performance for our portfolio was very strong. Consumer balance sheets remain in good shape. HPA has surprised to the upside and a continued rebound in commercial real estate values and deal activity drove solid performance in our commercial loan portfolio. Core earnings covered the dividend and I think that's great, given our increased capital base.

You can see on Slide 6 that we had significant growth in our credit portfolio. The residential mortgage strategies grew most significantly this quarter, driven by non-QM and RTL. The commercial real estate portfolio actually shrunk sequentially, but that was due to opportunistic CMBS sales. Nonetheless, our small balance commercial mortgage holdings actually increased quarter-over-quarter and we continue to see a lot of attractive deals in that sector.

You can see on Slide 9 that we have 95% of our credit portfolio in our three primary sectors: residential mortgage, commercial mortgage, and consumer. We also had modest growth in our Agency MBS portfolio during the quarter. We are positioned to increase our net Agency mortgage exposure, should diminishing Fed support and year-end liquidity issues present us with opportunities.

On Slide 10, you can see that our small balance commercial mortgage loan portfolio, we are well diversified across many dimensions and are in a first lien positions on every loan with the vast majority being floating-rate loans that benefit from interest rate floors. We issued stock in Q3. It's great that our portfolio companies and other loan sourcing relationships have grown and matured to the point where it was relatively easy for us to deploy the additional capital. I've also been really happy to see the greater liquidity in our stock. Despite substantial portfolio growth this quarter, with our growing capital base, we have a lot of room to take advantage of market opportunities. Consistent Fed purchases have been a great source of stability in 2021 as the Fed has grown its Agency MBS portfolio by over $400 billion. As that support wanes, we think that private capital may be able to demand even more attractive yields.

Now, back to Larry.

Laurence Penn -- Chief Executive Officer & President, Director

Thanks, Mark. I'm very pleased with Ellington Financial's performance so far in 2021 and particularly with the progress that we've made growing our origination businesses and loan portfolios. Following quarter end, we again accessed the capital markets to continue driving this growth. In October, we raised just over $100 million of common equity, again at around book value. We've already invested the majority of this new capital but in addition to fueling continued loan portfolio growth, the additional capital should provide us with additional economies of scale in our portfolio and the capital markets and operationally. This additional capital also positions us to be opportunistic, should we see any pockets of volatility around year-end, whether they be related to macro concerns around inflation or COVID, Fed tapering concerns or even just typical year-end balance sheet pressures.

So we're in a strong position to play offense as we move into the final weeks of the year. Meanwhile, we will continue to work on cultivating and expanding our proprietary loan pipelines, while also being opportunistic with our security strategies and staying disciplined on risk and liquidity management to protect and preserve book value.

Finally, I'd like to point out that with our latest capital raise, Ellington Financial has now passed the $1 billion mark in total common equity market capitalization. That's a significant milestone for EFC and it's one that we believe will further increase our visibility in the market, increase the liquidity of our stock for our stockholders and enable us to access both the debt and equity capital markets more efficiently. In fact, if you look at our capital structure, you can see that at this point, we're especially well-positioned to add debt or preferred equity to our balance sheet. In particular, our $86 million of senior unsecured notes will become freely refinanceable on March 1. And with the additional equity on our balance sheet following our recent stock issuances, that could be a good time to both lower the cost of, and increase the size of our outstanding unsecured debt, thereby leveraging up our balance sheet and helping drive core earnings higher still.

With that, we'll now open the call to questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And we will take our first question from Doug Harter with Credit Suisse.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Hoping you could talk a little bit more about the three investments you made in originators. What type of products do they make? And I guess how would you think about that adding to the pipeline of loan opportunities?

Laurence Penn -- Chief Executive Officer & President, Director

Yeah, we're not going to provide any additional color on that other than to say that they are all in the residential area. We are working on at least one of the commercial area as well now, but those are just all in the residential area and they are, as we said, they're small investments and it's probably going to be a little while before you see very meaningful growth to portfolios, but in markets like non-QM and a little bit of everything in the residential space.

Douglas Harter -- Credit Suisse -- Analyst

Okay. And then you mentioned some of the spread widening in securitizations, can you just -- given that, can you just talk about kind of where you see returns and how the execution of the securitization, where that moves returns today?

Mark Tecotzky -- Co-Chief Investment Officer

Sure, it's Mark. So you saw just a tremendous amount of supply in a lot of sectors in October. You had a lot of mortgage 2.0 supply, some of that non-QM, some of that Agency-eligible investor deals, you saw a lot of CLO supply, you saw a lot of CMBS supply. And so you've seen a little bit of widening investment-grade bonds and now I think that's being matched by slightly lower loan prices. So when I net the two together, I don't see a big difference in securitization economics, other than that, it means with lower loan prices, we are retaining less pre-payment risk which I think is generally a good thing.

Douglas Harter -- Credit Suisse -- Analyst

Great, thank you.

Operator

We'll go next to Crispin Love with Piper Sandler.

Crispin Love -- Piper Sandler -- Analyst

Thanks. Thanks, good morning and thank you for taking my questions. First, looking at Slide 9 with the credit portfolio breakout, I can't recall a time where the residential portfolio was near the 64% level that you are now. So, is that largely due to the opportunities you're seeing in non-QM and RTL and the flow you're getting? Or are you at all incrementally more negative on the commercial mortgage market? And also in the presentation, it looks like you might have increased your CMBS hedging a little bit. So just a little color there would be great.

JR Herlihy -- Chief Financial Officer

Sure. Hey, Crispin, it's JR. Yeah, I think the first thing you suggested is spot on, namely, it's driven by larger non-QM portfolio quarter-over-quarter. I mean, just to put some numbers on it, at September 30, our non-QM portfolio was about $585 million of the around $1.7 billion of the credit portfolio, so about 35% whereas at June 30, those numbers were about $300 million and 22%. So, by far, the biggest driver there is non-QM, followed by Residential Transition Loans. Larry mentioned that those two strategies were record quarters for Ellington Financial in terms of origination volume. So that's directly reflected on this pie chart. I would say that the point about commercial mortgages, we are definitely -- and Larry mentioned it as well in his prepared remarks, we're definitely seeing growth there. The slide also has CMBS where we had opportunistic sales. So you have some offsetting sales and pay-downs offsetting growth in the small balance commercial mortgage sector. So I would say we are very excited about the loans we're seeing in commercial real estate. We would expect to see continued portfolio growth there as well.

Crispin Love -- Piper Sandler -- Analyst

Okay. Thanks, JR. And then did you also mention that LendSure is looking at adding some additional products in addition to non-QM? And is there any color that you could give there or would you expect to get flow from the new products as well, should they happen?

Mark Tecotzky -- Co-Chief Investment Officer

Sure, it's Mark. So I think there is a lot LendSure can do. The senior management team is extremely experienced and extremely thoughtful about mortgage credit. So there could come a time where they start getting involved in the RTL space. They have been having a lot of internal discussions and they're starting to lay the groundwork to potentially get involved in the prime jumbo space. So I would say those two sectors, I think now, are the ones that are closest to actually them starting to originate loans. We've liked non-QM. It's played well to us, because you don't have much of a bank presence there. There is an IO component to it that you have to value. So just a lot of things that sort of we have core expertise at, have sort of meshed nicely with non-QM. So that's why that's been the initial focus.

Crispin Love -- Piper Sandler -- Analyst

Okay and then just one quick clarifying question on the originator stakes. Is there -- did you disclose one more than you did last quarter because I think last quarter you said that you added two and then I saw the commentary, OK, you've added, I believe it's three in the last six months. So is there one additional one or all three are new?

Laurence Penn -- Chief Executive Officer & President, Director

No, you're right, it's one additional one during the third quarter. And so it's three in total the last six months, so one incremental in Q3, and then we have several others that are, I would say, in discussion that we're hoping to close by year end.

Crispin Love -- Piper Sandler -- Analyst

Great, thank you.

Laurence Penn -- Chief Executive Officer & President, Director

Thank you.

Operator

We'll go next to Brock Vandervliet with UBS.

Brock Vandervliet -- UBS -- Analyst

Hey, good morning. Could you just talk generally about competitive dynamics in resi transition and non-QM as well? Are you seeing other much larger organizations take another look at those sectors, look to move in and broaden the market? And if and when that happens, is that any sort of -- do you look at that as any sort of a competitive threat to your program or kind of a rising tide where it just boosts the profile of these loan niches?

Mark Tecotzky -- Co-Chief Investment Officer

Hey, Brock, it's Mark. So I would say in the RTL space, that has -- there has been more of a focus there. It's gotten sort of more publicity in the past year than what it has had in the past. So in that space, I do think there are some larger pools of capital focused on that space, but it's a very fragmented space and the way we do it is really dependent upon thoughtful underwriting of the projects and really understanding the local housing market. So I don't see it as a threat. Larry mentioned in his prepared comments that we think that can be a lot of growth for us over the long run. The median age of homes in this country is very old. There is a lot of deferred maintenance that needs to get done. So I think we have ample opportunities to grow our volumes there. But I do -- just from what I read, I do think there has been a little bit more focus on that sector from some large pools of capital than what you might have seen, say, pre-COVID, say, 2019.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay. And just rotating over to Longbridge and the MSR, looking at the yield curve now, it seems like the pain trade may be on here in terms of lower rates and a flattening. Any changes contemplated in terms of their hedging methodology, those sorts of thing?

Laurence Penn -- Chief Executive Officer & President, Director

No -- hey, it's Larry, no expected changes in terms of hedging methodology. It's just a little different from the forward MSR market where it's so tied just to the absolute level of mortgage rates in comparison to the outstanding stock of mortgages. Here, yes, rates have sort of been low, but it wasn't low rates alone that was the trigger. It was also combined with just continued home price appreciation and then you've got a bunch of borrowers who can take advantage of that by borrowing more against their homes, basically, it's a cash-out situation where they can replace their old loan with just a bigger loan. So it's not -- so that aspect really isn't all that hedgeable and the other aspect that's also not that hedgeable is that there is really no TBA market where you could sell HMBS forward. And so -- but I think the good news is that we do believe that this is behind us. HMBS prices are about as low as they've been in a while or they were about as low as they were in a while when this write-down took place. And so I think that -- I certainly think that when you look at the fact that originations continue to be incredibly strong and their market share continues to grow, we just feel great about company's prospects.

Brock Vandervliet -- UBS -- Analyst

Okay. Thanks for taking my questions.

Laurence Penn -- Chief Executive Officer & President, Director

Thank you.

Operator

We'll go next to Bose George of KBW.

Bose George -- Keefe, Bruyette and Woods -- Analyst

Hey, guys, good morning. So just maybe one more on Longbridge. Just in terms of the -- I guess, the positive side of the home price appreciation, etc., can you just talk about gain on sale trends in the reverse business, sort of, how are some of those fundamentals trending?

Laurence Penn -- Chief Executive Officer & President, Director

Yeah, sure. The -- Longbridge itself, really we don't believe there's that much exposure sort of from a credit perspective, right, because these are FHA-guaranteed mortgages ultimately that they are originating. So, yeah, so in terms of gain on sale, right, the biggest headwind there, right, was just that they had loans in the pipeline, right, that we're committed to, and in some cases already closed on. It takes a little while to sell those in the form of HMBS and so the gain on sale was just a lot lower and in some cases, on some loans, negative after the HMBS market had that spread widening event. So again, that was sort of once that -- loans that were either already closed or in the pipeline, once those are flushed out of the system, now we've seen profit margins come back and there is elasticity in the market, because where they are originating loans, buying loans, there is -- especially in the wholesale market, there is definitely elasticity there.

So they've been able to cut their prices that they're buying loans out in the wholesale market and therefore restore most of the gain on sale profitability per unit that they had previously. So again, October was nicely profitable, again, very profitable and we think that origination volumes should continue to be very strong. It's a -- as you probably know, it's a market that there's just not that many players in, and Longbridge is one of the most significant, obviously, as we said, Number 3 HMBS issuer. So yeah, we really feel good about the gain on sale prospects going forward.

Bose George -- Keefe, Bruyette and Woods -- Analyst

Okay. And then the spread widening that you saw there, I mean was that caused by the pickup in pre-payments or was that the main driver?

Laurence Penn -- Chief Executive Officer & President, Director

Yes.

Bose George -- Keefe, Bruyette and Woods -- Analyst

Okay, great, thanks. And then next, just switching over to the capital in operating companies. Can you just talk about the incremental allocation? Is there kind of a level of allocation that you'd -- where we could think this could go as you obviously are continuing to sort of invest in new operating companies?

Laurence Penn -- Chief Executive Officer & President, Director

Yeah, I don't think -- we're going to continue to take the opportunities as they present themselves and as we find them. We have been definitely proactively looking at -- we sometimes -- it will be, for example, an originator that we're buying loans from and then we'll -- after seeing the quality of their business, we'll then approach them and see if they're interested in selling us a stake and obviously, as we said, we give them lots of things in return. Sometimes we give them additional credit lines, the data and analytics that Mark mentioned before. So we don't really have a budget in terms of how big we want this portfolio to grow. We're certainly able to have substantial growth and still meet the retest as you probably know that the TRS test is measured on a gross asset basis. So we have plenty of growth there.

We've -- as Mark said, we focused more on smaller investments initially. I mean, just, example, LendSure, our original investment was under $5 million, right, and now that's obviously worth a lot more. So we would rather make these investments and not have as much capital at risk just based upon overall cyclical changes in the origination business. We'd rather have less at stake there. And obviously, if we can symbiotically increase their origination and our flows, that just works for everyone. And that's an important -- obviously been a very important component as you can see with LendSure in terms of what -- the way we've been able to grow our loan portfolios.

Bose George -- Keefe, Bruyette and Woods -- Analyst

Okay, great, thanks.

Operator

We'll go next to Trevor Cranston with JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. Question on the couple of the recent changes we've seen from the FHFA, specifically in terms of bringing back CRT issuance and removing the caps on the GSE investor loan purchases. But just curious if you guys have any thoughts on how bringing back CRT and potentially reducing some of the private label issuance of the industrial loans impacts the overall supply demand dynamics of the resi credit sector?

Mark Tecotzky -- Co-Chief Investment Officer

It's a great question, Trevor. So, it's Mark. So I would say, for the caps on the investor loans, I don't think that's going to have a big impact on private label issuance in that sector because private label issuance in that sector right now is being driven by -- it's just economically better for -- it's just better economically to issue in the private label market if people are willing to -- if you have private capital willing to underwrite the credit risk levels better than what the GSEs have done, and if you have private capital willing to take some of the aggregation risks. So I think you could continue to see private capital involved in the Agency-eligible sector.

In regards to CRT, I guess we sort of view that pause as what was the aberration and not so much the restarting of it. I think CRTs has been an important way for the GSEs to mitigate shareholder risk on the guarantee fee business. So we think that will continue. The one thing I would say that you have these changes now in leadership at FHFA, so we wouldn't be surprised at all to see additional changes. And there is a lot that can be done with the GSEs to promote some of the goals of more affordable housing, more first-time homeowners, and there has obviously been challenges to that from some business lines that are out there now. There have been some people that have been critical about the single-family rental business, that it squeeze that first-time homebuyers. And so I think you're going to see dynamic policy changes going forward.

Trevor Cranston -- JMP Securities -- Analyst

Okay, that's helpful color. Thank you, guys.

Operator

We'll go next to Eric Hagen with BTIG.

Eric Hagen -- BTIG -- Analyst

Hey, thanks, good morning. Maybe just one. How sensitive do you guys expect the cost of repo in the credit segment might be to changes at the short end of the yield curve, including the haircut that gets applied on that collateral? And can you remind us the collateral which is pledged there right now? Thanks.

Laurence Penn -- Chief Executive Officer & President, Director

I can take [Speech Overlap] go ahead, Mark. Go ahead.

Mark Tecotzky -- Co-Chief Investment Officer

Okay. So I would say, we don't anticipate significant changes in haircuts, and that's because you've had stable credit performance and you've had relatively stable asset prices. Increases in haircuts are normally a consequence of either weakness in performance and/or weakness in asset prices. Yeah, we think that the changes in repo costs, we think they're going to track what the Fed is going to do on the short end. One thing we've done on the Agency side of the portfolio where you have a little bit more dynamic financing market is we have extended the term of our repo because we thought it was advantageous. So we've done some one-year repo. And we think that the one-year repo rates are certainly going to go up because now that's sort of spilling into -- close to a period of time where people think the Fed could be active. So in terms of net interest margin, if you have assets priced off the front end of the curve like a lot of the non-QM loans or floating-rate assets like a lot of the commercial bridge loans, I think our net interest margins are going to hold up very well because we don't expect a change in repo spread to a change in haircut, but I do think, just the overall levels of LIBOR are going to affect our financing costs.

Laurence Penn -- Chief Executive Officer & President, Director

And I just -- just to add to what Mark said, so I think if you look at Agency repo, the haircuts there, historically, I mean they have been incredibly steady and resilient, really since the financial crisis, I would say, the 2008 financial crisis. So right around -- for customers like us, right around in that 5% to 6% area. And frankly, that's plenty of leverage, being able to lever 16, 20 times, 5% or 6% haircut is plenty of leverage. So we certainly don't see, let's say, if rates go up or something like that because of the taper or the end of easing or whatever you want to call it, it's -- I don't think you're going to see a significant increase in Agency haircuts at all. And in terms of spreads, those really have tracked -- again, other than in certain extreme situations like COVID, those really have tracked very closely just the general collateral, treasury, SOFR market now, you call it. So obviously a few basis points here or there, it can move, but if you look at, and certainly in recent times, and I think we -- in our Ellington Residential deck, we actually have a slide on that in terms of just repo costs and things like that. But it's a very close tracking.

Now, I think where it gets interesting is in the credit sector, right, because we also -- we have repo not just in Agency mortgages, we also have them in non-Agency RMBS and in all the other products that we invest, including loans, right? Some of our loans are actually financed via repo. And there, when you look at the haircuts and spreads, you've seen nothing but compression. And I think the pattern there is that you'll have an event in the market like COVID in early 2020 and then in response to that, right, that's a liquidity crisis, you're going to see haircuts go up immediately, you're going to see yield spreads go up on the assets themselves and you're also going to see financing spreads go up. So that happened and then the asset always seems to lead the financing historically. I think that's been the pattern, really both ways. So you'll -- since then, obviously in the last year and a half, you've seen haircuts steadily come down, you've seen spreads steadily come down. They haven't come down as fast as the asset yields have come down, but I think the trend is still in that direction. So we're certainly hopeful that we'll continue to see and I believe you will continue to see spreads on the credit assets and their repo continue to compress and haircuts maybe compress a little bit from here.

Eric Hagen -- BTIG -- Analyst

Thanks a lot. Appreciate it.

Mark Tecotzky -- Co-Chief Investment Officer

Thank you.

Laurence Penn -- Chief Executive Officer & President, Director

Thank you, Eric.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Jason Frank -- Deputy General Counsel and Secretary

Laurence Penn -- Chief Executive Officer & President, Director

JR Herlihy -- Chief Financial Officer

Mark Tecotzky -- Co-Chief Investment Officer

Douglas Harter -- Credit Suisse -- Analyst

Crispin Love -- Piper Sandler -- Analyst

Brock Vandervliet -- UBS -- Analyst

Bose George -- Keefe, Bruyette and Woods -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Eric Hagen -- BTIG -- Analyst

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