Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial’sT hird Quarter 2023 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be opened for your following the presentation [Operator Instructions]. It is now my pleasure to turn the call over to [Aladdin Chile]. Please begin.

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 Part 1 Item 1A of our annual report on Form 10-K and Part 2 Item 1A of our quarterly report on Form 10-Q for the quarter ended June 30, 2023, 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 obligations 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 third quarter earnings conference call presentation is available on our Web site, 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 backs of the presentation. With that, I will now turn the call over to Larry.

Thanks, [Aladdin], and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on Slide 3 of the presentation. For the third quarter, we have reported net income of $0.10 per share and adjusted distributable earnings of $0.33 per share. Steady performance from our credit portfolio, along with significant net gains on our interest rate hedges exceeded net losses in agency MBS, and we delivered a positive economic return in an extremely volatile market. On this Slide 3, you can see the strong contribution from the credit portfolio, which was led by positive performance from our residential transition, non-QM and commercial mortgage bridge loan businesses and our credit risk transfer securities. Our agency strategy, on the other hand, contributed a loss of $0.16 per share for the third quarter in what was arguably the most challenging environment for agency RMBS investors we've seen since March of 2020. During the quarter, long term interest rates rose sharply and volatility spiked as the market priced in a higher-for-longer interest rate environment and the uncertainty related to a possible gov shutdown. While we did have a significant loss in our agency strategy, our interest rate hedging strategy which included aggressive duration rebalancing throughout the quarter and a positive contribution from our short TBA positions helped prevent further losses. We had entered the third quarter with high levels of liquidity and additional borrowing capacity. And because of that, we were well-positioned to capitalize on the investment opportunities that the market volatility presented. With agency yield spreads near the historical wides, we took advantage by adding portfolio and we also captured attractive yield spreads by expanding our non-QM residential transition loan and reverse proprietary mortgage loan portfolios during the quarter. Moving forward, I expect that our loan portfolios…

Thanks, Larry, and good morning, everyone. For the third quarter, we reported net income of $0.10 per share on a fully mark to mark basis and adjusted distributable earnings of $0.33 per share. These results compare to net income of $0.04 per share and ADE of $0.38 per share for the prior quarter. On Slide 5, you can see the attribution of net income among credit agency in Longbridge. The credit strategy generated $0.37 per share of net income driven by an increase in net interest income sequentially and significant net gains on interest rate hedges. A portion of this income was offset by net realized -- unrealized losses on consumer loans, non-QM loans, commercial mortgage bridge loans and CMBS. We also had small net losses on investments in unconsolidated entities and credit hedges and other activities. Notably, our loan originator affiliates, LendSure, American Heritage, and Sheridan, all posted strong quarterly profits. Although, the fair value marks for those investments on EFCs balance sheet, which are based on third party valuations of these operating companies, did not increase given the challenging market environment. During the quarter, delinquencies again ticked up on our residential and commercial loan portfolios, but those portfolios continue to experience low levels of realized credit losses and strong overall credit performance. In non-QM, we still realized zero cumulative losses life to date on a population that now encompasses nearly 10,000 loans and $4.4 billion of total UPB dating back to 2015. Meanwhile, for RTL and Commercial Mortgage Bridge, realized losses remain low compared to the amount of capital we've invested in profits we've generated, which is largely thanks to our focus on first lien and low LTVs with built-in equity cushions. That said, recently, more loans have progressed to 90 plus day delinquency status and to REO…

Thanks, JR. This was a very volatile quarter and EFC wound up with a slightly positive economic return. This was a quarter where it seemed like there were two completely disconnected fixed income markets, one for rate products and one for credit. Our credit portfolio had steady returns and maintained strong overall credit performance. Macroeconomic data released during the quarter supported the narrative of a surprisingly strong consumer and a resilient jobs market, which kept credit spreads well anchored. Ellington Financial's short duration portfolio was a lot of floating loans loans and bonds was largely immune from the really violent price movements in the rates market. Investment grade bond indices traded in a relatively narrow spread range [additive] spreads on leverage loans. That stable backdrop for credit spreads and continued strong credit performance of our portfolios drove solid results for our short duration credit strategies, specifically RTL, commercial bridge, non-QM and credit risk transfer. One exception for us, I would say, was in unsecured consumer loans. We see potential headwinds for that sector with student loan repayments restarted, persistent inflation for necessities like food and rent and potentially slowing wage growth. Our consumer loan portfolio underperformed during the quarter, but we have been shrinking that portfolio and don't have a lot of capital deployed in that sector. At September 30th, our consumer loan portfolio was about one-third the size it was pre-COVID. For rate strategies, it was a different story. The 10-year treasury yield was incredibly volatile, trading in a massive 85 basis point range with lots of twists and turns along the way and it ended the quarter around its 15 year high. It was a terrible quarter for Agency MBS performance with most coupons underperforming treasury and swap hedges by well over a full point. Interest rate volatility…

Thanks, Mark. I'm pleased with Ellington Financial's positive third quarter results in a very challenging market. As usual, our interest rate hedging was key in achieving this. Going back to the launch of EFC in 2007, we've never tried to predict the direction of interest rates and have instead endeavored to hedge them. In this past quarter with interest rate spiking, our interest rate hedges were again very profitable and that helped offset mark to market losses on other parts of the portfolio. The extreme pace of rate hikes since last year clearly caught a lot of the market off guard, but our hedging has kept EFC relatively unscathed. Our hedging program is one of our core strengths, along with our strong track record underwriting credit risk, our expertise in modeling consumer borrower behavior and our willingness to continually improve our portfolio through active trading and portfolio rotation. Looking ahead, whether we are in a higher for longer interest rate environment or not, I believe that Ellington Financial is well positioned, thanks to our hedging expertise and liquidity management, our short duration, high yielding loan portfolios and a highly diversified array of strategies, which will soon include agency MSRs as well. Thanks to Arlington's highly attractive MSR portfolio. Historically, we've concentrated our investment activities in sectors where banks are less active and where there's less competition, and we have built up deep and experienced teams and strong track records across market cycles in these businesses, especially in the residential mortgage and commercial mortgage sectors. Add to that, EFC now has access to servicing and workout platforms across a variety of loan businesses by virtue of our strategic equity investments. You can see these business lines on Slide 12. These platforms have significantly broadened the scope of potential investments that Ellington…

[Operator Instructions] And we have our first question from Crispin Love with Piper Sandler.

First off, just with the majority of your small balance commercial portfolio and multifamily, which I believe is primarily bridge and grew meaningfully in 2020 and 2021. Would you expect a good portion of those loans to be extended given the current environment we're in or would you expect more to roll off as you alluded to during the call?

Mark, do you want to take that?

So with this portfolio, the borrowers have been having to pay higher borrowing costs all this past year as this Fed has been hiking. So as opposed to what you see, say in conduit, where they're typically 10-year IO loans and then all of a sudden, they're getting a big shock at maturity. This portfolio, these borrowers, have been having to adjust to the higher rates all along the life of the loan. So, so far, we've seen resolutions. These were -- what we do in bridge, all the properties are almost by definition in some form of transition. So there's some number of units that are offline that need some -- maybe there was some mold in them or they need some renovation and it's a plan where you get these things online, you get tenants in, sometimes there's some CapEx on the property that's going to bring rents up to fair market rents. So what we do in bridge, pretty much every loan on the multifamily, there's a business plan and there's an expectation that they're going to be growing net operating income, right? So they've been growing net operating income and their debt costs have been increasing. So, so far, our resolutions have been fine. If you look at what happened to the portfolio, it's been shrinking because of resolution. So I expect that to continue.

And are they -- yes, go ahead.

Yes, I just want to add one thing, which is that I think, we're not sort of the extend and pretend type. When we do extend a loan, we usually we'll demand something in return, right? Like we're very LTV focused and so, we'll expect if the loan is in maturity, we'll expect some additional principal pay down or something to compensate us for extending that loan. When we made these loans, we were very LTV focused and that's something that we're not just going to just extend for because we're afraid to take any sort of more aggressive action, whether it's foreclosure or anything else. Now some of these loans do have extension options built in in those on the part of the borrower and those will be extended per their -- in terms of their contracts…

And the ones that are…

I was just going to add that part of the reason why that portfolio is shrunk is when we see new origination, we are kind of shining the bright light on it of increasing insurance costs, in some cases increasing property taxes, slowing expectation of rent growth. And I mentioned that we are seeing fewer deals come across our desk that you have that pencil out that sort of work given that SOFR is 5.30% and these are SOFR plus 5.5% or 6%. So that -- not skepticism, but that level of caution or that level of conservatism and the underwriting is part of the reason the portfolio has shrunk. It’s just we don't want to get into situations where you have properties where the owner is having a challenging time covering the debt service cost.

That makes sense…

Remember, also -- so I just want to say, we mark our portfolio to market, right? So our loans, we will mark those down and recognize a loss that will flow through our income statement and you will see it in our financials, if we think there is an issue, a significant potential issue in terms of that loan defaulting a maturity, for example. And if we think that we are ultimately going to take a loss, that will be reflected in the mark. So it’s already reflected in the mark. And for real estate, the lower cost to market.

Okay, that all makes sense. But on the loans that are maturing, are they receiving permanent financing through the agencies or elsewhere?

Yes, some of them are through the agencies. Some of them, they will just get a longer erm loan for another credit source. There has been -- there's an opportunity coming, we believe in commercial real estate as loans come to maturity and certain types of loans we mentioned are going to have a harder time refinancing. But there has also been capital raised to take advantage of that opportunity. So you are seeing -- the agencies are certainly active. But there is other pools of capital too that are out there extending credit. It’s sort of filling in the gap left by the retreat of the regional banks.

And a lot of the loans that we make in multifamily, right, why did they come to us in the first place? Often because they are making improvements to units, could be some sort of renovation, some sort of transition, right? We are a transitional loan for them. So a lot of the times, even with rates higher, they have done what they need to do and so they can get more permanent financing.

And then just one last question for me. The FDIC has announced that it’s selling some of the Signature Bank's commercial real estate loans. Are these the types of assets that you would be interested in acquiring? And I guess if you can't necessarily speak to those specifically, just more broadly, have you begun to see opportunities for blown acquisitions on both the security and loan side?

Well, on FDIC, in particular, we are absolutely seeing that and we are considering putting a bid in for one or more of those portfolios. Mark, do you want to elaborate on that at all or talk about other opportunities?

Yes, so I think the FDIC Signature Bank portfolio sales is interesting to us and the teams here have been doing a lot of work on that. And we also think away from sort of that big public portfolio that sort of everyone knows about, you're going to just see a steady drumbeat of properties. And I mentioned like a lot of times good properties that are coming up to their maturity date and the size of new loan that's going to be appropriate given current income growth and current debt levels is going to be smaller than the old loan. And the limitation generally isn't going to be loan to value but the limitation is going debt service coverage. So I think there is a big signature portfolio that's been well publicized. But there is going to be just constant flow of properties where the debt is hitting a maturity date and they might require some sort of capital infusion or some sort of restructuring. And that's -- I think, we spoke about on the previous call, that was really the bread and butter of our commercial loan strategy for years after the financial crisis. And so that team that drove really exceptional results in that strategy, that workout strategy for us, I'd say, that's what we were doing primarily prior to 2017. That team is still in place, they've pivoted to bridge and they've added additional resources in terms of sourcing and workout capabilities, but that team has so much experience in doing these workouts. So we are really, really well positioned and excited about that being the future driver of returns for EFC 2024 and beyond.

And we have our next question from Trevor Cranston with JMP Securities.

A question about the agency MSR asset class, as you look beyond sort of the initial acquisition of the Arlington portfolio. Can you talk about how you sort of envision being involved there, whether it's opportunistic bulk purchases or if you potentially look to have some sort of flow agreements on new production MSR?

I think it could be both of those. So the agency servicing portfolio that we're acquiring given where rates are we think is going to be steady high return asset for us, and it gives us the capabilities. And we've always had sort of the capabilities on the modeling side, because modeling prepayments is so much a part of sort of our DNA. But now we're going to have more capabilities on all the necessary infrastructure. So it could be bulk purchases, it could be flow. If I had to guess, I'd guess in the beginning probably more of our focus would be on bulk purchases, but that can be either way, we mentioned in the prepared remarks that we've been buying non-QM servicing for years and it's flowed into the portfolio and it's been a nice offset for some of the interest rate risk on non-QM loans. And so I think this acquisition gives us a lot of flexibility and a lot of capability on the agency servicing. And with banks potentially being less interested in having significant capital outlay there, I think it's a natural time for us to be able to acquire more portfolios.

And then on Longbridge, the portfolio there's been growing this year. I was curious if you could talk about specifically I guess with the proprietary loan bucket, how you think about sort of capital allocation there over time? And if the different cash flow characteristics of reverse loans sort of limit how much capital overall you'd be willing to allocate there?

Sorry, what would limit -- can you say that again, what would limit the amount of capital?

Just the different cash flow characteristics of reverse loans, not getting like the regular monthly payments, like if you want a forward mortgage, if that has any…

So I don't think that's really so much of an issue for us. Given -- I mean one of the things we talked about on the call is how much principal payments we got on the rest of the portfolio. So again, it's a good complement to have something that's accreting but with a very high yield, right, versus something that is very short and amortizing principle all the time. So that's actually a good combination of both are high yielding and doesn't really create any cash flow issues for us. But it is a long term product and we're not -- if you look at the way that we've run other loan businesses like non-QM, for example, it's not really our strategy to hold long term loans and finance them with short term financing sort of indefinitely. So I think that sort of looking to where that strategy is going, I think, it's probably better to think of accumulating critical -- similar to non-QM, right, because those are long term loans too. Accumulating critical mass for securitizations or -- and then doing those securitizations and retaining junior pieces, or just home loan sales, right? So -- and it's different buyers potentially for non-QM versus in the whole loan market versus reverse proprietary reverse mortgages. But maybe not that different. I mean, insurance companies have -- I think we've spoken about this before, have really increased their appetite substantially in the last year for non-QM. And we sort of see that given the long duration, which is something that insurance companies tend to like and the high yielding aspect of these proprietary reverse mortgages, we think that's a natural home there as well. So I think, I would think of it more in terms of those accumulating critical mass than either doing home loan sales or securitization.

And we have our next question from Eric Hagen with BTIG.

I wanted to check in on conditions for non-agency repo, other term financing for retained securities that you guys retain office securitization. How stable the availability of that capital is and maybe even how rate sensitive you think that financing is going forward?

I mean, we -- go ahead, Mark…

No, I was going to say in a word, it's been stable, right? Even with -- there was a lot of price volatility and spread volatility in some of the credit products in 2022, there hasn't been a lot of price volatility in spread products in 2023. But even in 2022 and now continuing this year, spreads have been stable. So that financing to us is basically a spread to SOFR. So the actual rate we're paying is going up and down with SOFR goes up and down. But what's been stable is that spread between SOFR and our ultimate borrowing costs. And the pools of capital interested in doing that financing has actually grown. In the last couple years, we've expanded our range of counterparties, so on the really short duration or the floating rate loans. Then what you're really locking in as sort of, ADE or net interest margin is if we've got a loan that's SOFR plus six, we're financing, it’s SOFR plus one and three quarters. Then every turn of leverage you're locking in that difference. So 425 beats just for kind of like ballpark numbers. And then on -- when you have the fixed rate bonds there, say non-QM, then you're doing generally a -- we've had two kind of hedges for non-QM this year. It's been paying fixed on SOFR swaps or it's been short TBA, now it's more paying fixed on SOFR swaps. So you're paying a fixed rate, you're getting a fixed rate from the loan, so you're getting that spread. And then the SOFR we receive on the floating leg of the swap that we're getting paid that essentially pays to repo counterparties the floating leg, we owe them on the financing. So they were also still kind of locking in the spread there. It's just the difference between the fixed rate on the loan and the rate we're paying on the SOFR swap. But the pool of capital and the spreads to SOFR has been stable. And if anything, it's actually been coming down a little bit. And I think the reason for that is, is just repo now, given the shape of the curve, is a really high yielding asset. If you can -- if you have a repo book at SOFR plus [175], you're sort of earning 7%, so that -- it's a low LTV loan, it's daily mark-to-market. There's a lot of protections repo lenders get that make that a very desirable asset for a lot of pools of capital. And I think that's why the financing has been stable. If you go back to sort of days when SOFR was close to zero, then it was LIBOR, then the all in yield on the financing just wasn't that attractive. And then I felt like the financing markets were not as deep as they are right now.

I wanted to go back to your comments around the consumer conditions. I think you gave some cautious commentary around the consumer loan portfolio. Like how does that outlook tie into other areas of the portfolio where there's maybe some more asset level risk, like obviously, the resi portfolio or some aspects of that portfolio?

So it's interesting. We were looking at just some charts today that were tracking delinquencies in different loan categories as a function of -- whether borrowers had student loans or not and you definitely see the impact of student loans turn on. So I guess what I would say is where we have seen weakness has been lower credit score borrowers. So the difference in performance between lower FICO and high FICO, that's always been there, but the magnitude of the difference has gone up. And I think the reason why we think that's the case is just pretty high gas prices and in some parts of the country, very high gas prices, like you look in California. So higher gas prices, higher rent. And now what's sort of squeezing people a little bit is a little bit slower wage gains. So consumer, we have seen it. You haven't seen it in Fannie Freddie portfolios if you look at sort of credit risk transfer performance. You are seeing it a little bit, and this is just sort of not because it impacts the portfolio, just it is a useful data point, you have seen it a little bit on Ginnie Mae portfolios. It's a lower -- it's a higher LTV, lower FICO borrower than what you see on Fannie Freddie. Sub-prime auto, you have certainly see it. So it's happening. I think that the borrowers that you want to lend to primarily are the borrowers that have locked in low debt costs with a 30 year low interest rate mortgage. So if you look at credit risk transfer performance this year, CAS and [Stacker], it’s been phenomenal. Because I think people pick up on the fact, okay, it’s the floating rate product the investors like, because it floats off a SOFR and SOFR has been high relative to other points in the yield curve. But it’s a floating rate product where ultimate borrower has termed out their debt. And even better than sort of corporate debt or high yield debt, it never rolls, it just amortizes. So those borrowers have sort of had the best and most stable credit performance. And then as you get to sort of, like non-QM is second, but non-QM, you have [Technical Difficulty] delinquencies pick up a little bit and that has nothing to do with servicing transfer, I mentioned in the prepared remarks, but you've seen a little bit of an uptick in non-QM. And then when you get to borrowers that are renters that are basically having to deal with rising rents to past year that you have seen a little bit weaker performance.

And I could just add to that. If you look at, for example, Slide 4, right, and you can see the consumer loan row, $90 million, that includes some ABS, it includes some equity investments. But -- so you have gotten basically less than $90 million. I just want to make the point that the remarks that we made were somewhat a little backward looking as opposed to forward-looking in the sense that we have already -- if you look at -- we are projecting 11.5% yield on that portfolio to where we have marked it. So we have marked it down. And so we think that's a good yield going forward. And I just -- after the mark-to-market price drops that we have put in place, and I also want to point out that most of that portfolio is actually secured consumer not unsecured secured consumer. So I don't -- it's a small portfolio, it is under $90 million. We think it is marked right, we think it's going to yield 11.5% and that's on a unlevered basis. So we feel good about that portfolio going forward and it's possible that we add to that portfolio if we get some good situations.

And we have our next question from Matthew Howlett with B. Riley.

Just at a high-level, when we look at the results by segment, the credit was terrific, it was stable, then you had obviously a negative contribution from Longbridge and it looks like the agency was negative, it had negative contribution. Backing those out in normalized, I mean, those are probably going to be -- Longbridge, I think, was contributing $0.10 in the first quarter and then, of course, the agency side, you're shrinking that, but that will likely be a positive contributor. I mean, when I look at dividend, ADE to dividend coverage, I mean, what sort of -- you are probably there ex the sort of one time-ish events. I mean, how do I look at it going forward on a run rate basis?

I think we're close, right? So -- I mean, one way to approach it is Longbridge was 14% of our allocated equity at quarter end, and they've certainly had quarters where they've contributed $0.05, $0.10 per share of ADE, if they're contributing 6 to 7, 14% times $0.45. If you add to that, we picked up about $0.38 from the investment portfolio net of corporate overhead. So the sum of those is pretty close to the dividend. We did include in there prepared remarks, I guess, you could say some caveats on how to model or think about ADE in the near-term, because you have some idiosyncratic behavior on our interest income when loans move into delinquency and we stop accruing interest income or when they reperform and we expect to be paid at par and then interest income kicks in again. So -- but there will be some noise there and we expect that to continue. But, net-net, I think we're on track run rate wise. Given October was a continuation of some of the challenges as we saw in Q3, namely rates selling off and volatilities continue to be high, we're not out with October numbers yet, but wouldn't be surprised to see some of the same challenges in October that we saw in Q3 and origination channels and agencies that might weigh on ADE in Q4. But all that said, on a normalized basis, I think we should be tracking, if not in Q4 then as we get into next year. And then you add in the contribution from Arlington, including deploying additional dry powder, which would be accretive. So I know there are a lot of pieces there that I threw up, but hopefully that…

No, I'm glad you clarified. I'm thinking about it the same way you are. I'm looking at the book value stability to me what really mattered in the quarter. When we think about Longbridge, I mean, when we think about modeling, I mean, it's the highest, clearly, one of the highest gain on sale margin channels. When we think about what could impact margins and volumes? Is it very much like -- I mean, when we think about it, is it like the conforming conventional side, when we think about spreads, are they track agency spreads, the HECM spreads? I mean, just walk me through -- is it all about [HPA] or is it about lower rates, sort of what could influence positively or negatively Longbridge when we get into next year and some of the volatility comes down?

I'll address that. Before I do, I just want to point out that - and it's a great question because it actually impacts what I'm about to say, which is that as long as we continue to see -- Longbridge continuing to add market share, right? And to do the things that we think, they need to do so that they will go, I mean, this was a tough quarter from an ADE perspective, but not from a market to market perspective. So we think that that ADE, once it normalizes with Longbridge, that -- as JR said, we're going to be right there in terms of our dividend. So we have no plans to sort of have our dividend fluctuate because of the fluctuations in origination profits at Longbridge, absolutely not. So I think -- so from an analyst point of view, I think, yes, you're going to see -- I mean, I hate to sort of even think about another non-GAAP metric. But you could think about our ADE ex Longbridge as another thing to look at. But with this acquisition, with their increasing market share -- and yes, it's been a really tough market. So to get back to sort of what is driving things at Longbridge, we have now the MSR. We feel very good that it's now conservatively marked and it's going to generate a great yield. We have -- unfortunately, we're still in a high interest rate environment. And what that means is that the amount -- the long term interest rates, especially around the 10 year part of the curve are what drive how much borrowers can borrow in a reverse mortgage, that's just the way that the program -- the HECM program works. And it sort of makes sense, right, because you're…

I appreciate that, you clarify, it makes a lot of sense now. And not to get too complex on this call, but the MSR related to reverse, it has no prepayment. So just the higher rates negatively impacted that. I mean, going forward and is that going to perform the same way a conventional MSR perform, we get lower rates or…

It is complex. So first of all, a lot of the value is in a regular old servicing strip, right? And it's not quite as prepayment sensitive as a forward mortgage strip will be. But when rates go down, people do sometimes refinance their reverse mortgages to take advantage of lower rates. As home prices appreciate, they sometimes refinance to do cash out refi. So it's sort of a lot of the similar factors affect that. So there is a prepayment aspect to it, which is mildly negatively correlated to interest rates. So that's actually good for that portion of the MSR high interest rates. But then there's a couple other portions but most notably there these future draws where the borrower can take out more money on their reverse mortgage and a significant portion of the value of these MSRs is the profit you're going to have from turning those into Ginnie Mae's, these are so-called tails. And that is also not -- it's really sensitive to spreads and rates, but more spreads. So yes, there's also maybe a correlation going the other way there. And yes -- so there are sort of offsetting factors.

So I think Longbridge is going to be a home run for you guys, and I look forward to next year. Real quickly on, does -- did I hear you correctly on the MSRs, you're going to begin to leverage with bank lines and some of the MSRs they have there, because I know they report something called MSR financing receivable. I take it's like a nexus, MSR. But what type of leverage -- if you are, what type of leverage can you get -- will the banks give you on MSRs? And then I think you said you want to put even some corporate debt like you preferred or something on once the deal closes. Just go over those two points.

I think when -- the preferred [Technical Difficulty] saying that Arlington already has preferred stock and unsecured debt outstanding on those travel with the merger, so we inherit that, so that will become our preferred and our unsecured debt. And those are -- we're done in a different environment, so that's very attractive, financing or future financing for us. And then in terms of financing the MSR, yes, there's forward MSRs are -- there's a lot of financing availability for those. I think, you can get financing north of a 50% advance rate, but I think we would probably in practice stick to around 50%. So one turn -- you could call that one turn to leverage.

We look forward -- but the timing was terrific. Look forward you to closing the transaction and look forward to continued success. Thank you.

And we have our next question from George Bose with KBW.

This is actually Frankie filling in for Bose. Just one question. On Slide 14, you provide interest rate sensitivity. Can you talk about how sensitive your agency MBS position is to the changes in spreads? And then just a follow up, how much do you hedge the agency spreads? Thanks.

It’s sensitive to spreads or to rates?

The spreads.

You can't see that on this Slide. But if you look to the that shows the -- yes, exactly. Yes, I think 22 is the place to go. Slide 22.

Okay, thank you…

Yes, if you turn to that, I will elaborate. So you can see that when you net out our TBA shorts, which really had spreads dollar-for-dollar on the equivalent amount of longs, right? You can see that our net agency we call net agency pool assets to equity ratio was 5.4:1. So then you can go and basically say, okay, what does that mean? Well, actually, if you look on the slide, you can see there are net long exposure to agency pools of $698 million. And so if you think about 10 basis points in spreads on the portfolio. Mark, would you say that's 10 basis points is what, is it 0.5-ish? What do you think?

Yes, that's exactly what I was going to say. Yes, five year spreads…

So you are talking about spreads move by 10 basis points then half a percent of $690 million is about $3.5 million. So 10 basis points is -- it’s a significant move in spreads. We could see 20, it’s possible to maybe, but we are already near all-time wide. So it is not -- I think in the context of our entire portfolio, it’s not a huge exposure. But it is one that we like right now given that as we said, I mean, spreads are pretty close certainly on a notional basis, but even by other metrics. But certainly on a notional [Technical Difficulty] back close to where they were right after COVID hit. So it’s measure wide.

And another kind of rule of thumb or shortcut you could take is the prior Slide 21, you could see that 35% of our interest rate hedging portfolio is in TBA at September 30th, up a little bit from 32% at 6/30. But you can roughly say that, that 35% is also addressing the spread widening risk whereas the swaps don't. So as that fluctuates you can see how much of the mortgage basis were hedging through TBAs versus not through swaps.

And that was our final question for today. We thank you for participating in the Ellington Financial's third quarter 2023 earnings conference call. You may disconnect your line at this time and have a wonderful day.