Participants

Alaael-Deen Shilleh; Associate General Counsel and Secretary; Ellington Financial Inc

Laurence Penn; President, Chief Executive Officer, Director; Ellington Financial Inc

J. R. Herlihy; Chief Financial Officer, Treasurer; Ellington Financial Inc

Mark Tecotzky; Co-Chief Investment Officer; Ellington Financial Inc

Trevor Cranston; Analyst; JMP

Jason Weaver; Analyst; Jones Trading

Eric Hagen; Analyst; BTIG

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Financial first- quarter 2024 earnings conference call. Today's call is being recorded. (Operator Instructions)
It is now my pleasure to turn the call over to Alaael-Deen Shilleh. You may begin.

Alaael-Deen Shilleh

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 10K and Part two Item 1A of our quarterly report on Form 10 Q.
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 and 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 Tecotzky, Co-Chief Investment Officer of EFC, and J R Herlihy, the Chief Financial Officer of EFC.
As described in our earnings press release, our first quarter earnings conference call presentation is available on our website. Ellington Financial.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 now turn the call over to Larry.

Laurence Penn

Thanks, Elodie, 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 first quarter, we reported net income of $0.32 per share and adjusted distributable earnings of $0.28 per share. The credit strategy was the primary contributor to our quarterly results, generating 48% per share of net income, led by steady performance from our non-QM and residential transition loan businesses, together with strong returns from our secondary CLO CMBS and non-agency RMBS portfolios. Our agency strategy contributed a modest $0.03 per share in a quarter, where agency MBS lagged the broader rally in credit with market consensus shifting to a higher for longer expectation.
Finally, Longbridge generated $0.1 per share of GAAP net income to all note that after taking out the mark-to-market gain on our reverse MSRs and certain interest rate hedges, AGE. from Longbridge, we're still slightly negative for the quarter that slightly negative. Avi from Longbridge again weighed down EFC.'s overall ADE. for the quarter. But on a positive note so far in the second quarter, origination volumes and submissions at Longbridge are pacing well ahead of first quarter volumes and second quarter projections.
And so we expect Long Ridge to contribute positively to our ADE. in the second quarter Meanwhile, in the first quarter, we made progress applying the uninvested capital we held at year end following the closing of the Arlington merger. Our credit portfolio expanded driven by a larger RTL portfolio and opportunistic corporate CLO purchases.
We also grew our commercial mortgage bridge loan portfolio after five consecutive quarters of payoffs exceeding new originations in that portfolio with borrowers finally more realistic about commercial real estate property valuations. We are seeing strong origination flow from our affiliate, Sheraton capital, which also sourced a couple of NPLs so far for us in 2024.
We also achieved some key portfolio objectives during the first quarter that I'd like to highlight. First, we successfully completed our inaugural securitization of proprietary reverse mortgage loans from Longbridge, which converted repo financing into term, not non-mark-to-market financing at an attractive cost of funds. We expect that the securitization marks the beginning of an ongoing program for our proprietary reverse business similar to the program we have established in our non-QM businesses.
Second, we continue to cull lower yielding securities from our portfolio selling agency and lower yielding non-Agency RMBS and CMBS in order to free up capital for higher yielding opportunities since we generally use more leverage in our MBS portfolios, especially in our agency MBS portfolio than we do in our loan portfolios. These MBS sales drove down our overall leverage ratios in the first quarter despite the increased capital deployment overall so far in the second quarter, we further expanded our RTL and commercial mortgage bridge loan portfolios.
We've originated more proprietary reverse mortgage loans on the heels of that March securitization. And we've also begun adding investments in closed-end second lien mortgages and home equity lines of credit or he locks. While we haven't focused on closed-end seconds and he locks until recently, we are optimistic about the prospects of deploying significant capital in this sector going forward after several consecutive years now of home price appreciation, homeowners across the country are sitting on an enormous amount of home equity, but with mortgage rates up sharply it doesn't make sense for most borrowers to refinance their existing low rate mortgage closed-end seconds, and he locks enable these borrowers to tap into that home equity without disturbing their low rate locked and first mortgage, we are seeing a surge of demand for these products from some of the highest credit quality borrowers with Pristine pay histories and attractive yield opportunities.
One wildcard here is potential competition from Freddie Mac and Fannie Mae, as always, will want to focus on products where we're not competing with those agencies. Also in April, we completed our first non-QM securitization in 14 months, taking advantage of the tightest triple-A yield spreads we've seen in two years and booking a significant gain. As a result, in recent months, we have been choosing to sell many of our non-QM loans rather than securitized them to take advantage of strong whole loan bids in the marketplace, but with AAA spreads.
Finally, back to early 2022 levels, we were able to achieve some great economics in the securitization market and retain some high yielding residual tranches to boot.
With that, I'll turn the call over to J.R. to discuss the first quarter financial results in more detail. Jr?

J. R. Herlihy

Thanks, Larry, and good morning, everyone. For the first quarter, we reported GAAP net income of $0.32 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.28 per share.
On slide 5, you can see the attribution of net income among credit agency and Longbridge. The credit strategy generated $0.48 per share of GAAP net income in the quarter, driven by strong net interest income, net gains on our non-Agency RMBS and equity stake in LendSure and net gains on interest rate hedges. Lendsure has now posted several consecutive quarters of solid performance and it made a sizable distribution in the first quarter with YF share EFC share of that distribution well exceeding our total cost basis.
And the investments a portion of the net income in our credit strategy was offset by net losses on credit hedges, negative operating income on certain commercial nonperforming mortgage loans and REO and net losses on residential REO liquidations. We also had a net loss on the Great Ajax common shares. We have purchased in connection with last year's terminated merger, which was partially offset by a net gain on the fixed payer interest rate swap hedges that we hold against those shares.
Meanwhile, the Longbridge segment generated GAAP net income of $0.1 per share for the first quarter, driven by positive results from servicing and net gains on interest rate hedges in originations improved gain on sale margins and help them driven by tighter heck of yield spreads were mostly offset by a decline in overall origination volumes. Tighter heck and yield spreads also led to net gains on the HMBSMSR. equivalent, as well as improved execution on tail securitizations, which contributed to the positive results from servicing Partially offsetting these gains were net losses on proprietary loans.
Finally, our Agency strategy generated GAAP net income of $0.03 per share for the first quarter. Despite lower interest rate volatility during the quarter, agency RMBS lagged a broader rally in credit as market consensus for the timing of the First Federal Reserve rate cut was pushed back. This drove interest rates higher across the yield curve and pressured agency yield spreads, particularly in February and particularly for lower coupons where many of our holdings were concentrated, while agency yield spreads did recover meaningfully in March, driven by lower volatility and capital inflows.
Overall, for the quarter, agency RMBS generated a modestly negative excess return to treasuries. Despite that negative excess return, our agency portfolio was modestly profitable for the quarter as net gains on our interest rate hedges exceeded net losses on our pools and negative managed and net interest income. Our net income for the first quarter also reflects a net loss driven by the increase in interest rates on the fixed receiver interest rate swaps that we used to hedge the fixed payments on both our unsecured long-term debt and our preferred equity, partially offset by a net gain on our senior notes, also driven by the increase in interest rates. As a reminder, we have used interest rate swaps to effectively convert these long-term fixed rate obligations into floating rate obligations.
Turning to slide 6, you can see the breakout of ADE. by segment Longbridge. After excluding the mark-to-market gain on the MSRs and certain interest rate hedge gains generated 80 E. of negative $0.01 per share.
Apart from the lumber segment, AE. from the investment portfolio, net of corporate other expenses totaled $0.29 per share, which is an increase of $0.03 per share sequentially, but which was still weighed down by nonaccrual loans and REO expenses during the first quarter, delinquencies ticked up modestly in our residential loan portfolio, driven by incrementally higher non-QM delinquencies in line with broader market market trends.
Total delinquencies in our commercial mortgage loan portfolio also ticked up quarter over quarter, but that only because we bought a nonperforming loan during the first quarter. Also in commercial, we continue to work through than two nonperforming multifamily bridge loans that we highlighted last quarter.
Next, please turn to slide 7. In the first quarter, our total loan credit portfolio increased by 2% to $2.8 billion as of March 31st, driven by larger residential transition loan and commercial mortgage bridge loan portfolios and net purchases of corporate CLOs. Unfortunately, a portion of the increase was offset by a smaller non-QM loan portfolio where principal paydowns and loan sales exceeded net originations and net sales of non-agency RMBS and CMBS for our TL commercial mortgage bridge and consumer loan portfolios, we received total principal paydowns of $384 million during the first quarter, which represented 23% of the combined fair value of those portfolios coming into the quarter as their short duration portfolios continued to return capital steadily.
On slide 8, you can see that our total loan Agency RMBS portfolio declined by 22% sequentially to $663 million as we continue to shrink the size of that portfolio and rotate capital into higher yielding opportunities.
Slide 9 illustrates that our Longbridge portfolio decreased by 20% sequentially to $441 million, driven primarily by the successful completion of a $208 million proprietary reverse mortgage loan securitization in March. Please note that for this presentation, similar to how we present our consolidated non-QM securitizations, we only include the tranches we retained in the prop securitization, even though the entire securitization is technically consolidated on our balance sheet for GAAP reporting purposes.
In the first quarter, Longbridge originated $205 million across Heckaman prop, which is a 22% decline from the previous quarter. The share of Longbridge as originations made through its retail channel increased to 25% in the first quarter from 18% with the share from its wholesale and correspondent channels declining to 75% from 82%. As Larry mentioned, Longbridge is on track to increase origination volume in Q2.
Please turn next to slide 10 for a summary of our borrowings on our recourse borrowings. The total weighted average borrowing rate increased by 9 basis points to 6.87%. At March 31st, we continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay lower fixed rate asset yields increased for both credit and agency during the quarter. Which drove net expansion in both strategies.
Our recourse debt to equity ratio decreased to [1.821] at March 31st, down from [221] as of year end, driven by a decline in borrowings on our smaller but more highly levered agency RMBS portfolio and a decrease in our recourse borrowings related to our securitization of proprietary reverse mortgage loans in March. As I mentioned, we do consolidate that proper securitization. So the sole tranches, which we represent long-term non-recourse financing for us do stay on our balance sheet.
So while our overall debt equity ratio also decreased over the course of the first quarter from [8.421] to [8.321] . That decrease was smaller than the sequential sequential decrease in our recourse debt to equity ratio. I'll note here too that we added two new loan financing facilities in April and March 31st. Our combined cash and unencumbered assets totaled approximately $732 million, up from $645 million at year end. Our book value per common share was $13.69 at quarter end, down from [1383] at December 31st. Our total economic return was positive 2.1% for the first quarter.
Now over to Mark.

Mark Tecotzky

Thanks, J.R. The market backdrop in Q1 was a good one for many levered structured spread products. Rate volatility declined during the quarter as uncertainty about the Fed's shifted from wondering about how high they would hike to speculating about when they will cut. That's a much more conducive environment for spread assets, implied volatility came down and yield spreads across corporates. Most structured products came in, you'll see did what is your read?
What I read is supposed to do in that environment. We captured spread income. We converted some repo financing to tighter spread non-mark-to-market financing through securitization, we selectively sold assets that we believe could reach their full potential, and we source some higher-yielding assets for our portfolio. For the quarter, we had broad-based contributions across our strategies, including both commercial and residential, both loans and securities. We came into the year with ample cash to deploy from the Arlington merger that closed in mid-December and we put some of that to work growing our credit portfolio.
One of the highlights was the growth of our commercial mortgage Bridge Portfolio for both new originations and nonperforming loan acquisitions. Has picked up even as we substantially tightened our underwriting criteria. In recent quarters, we mentioned an approach and opportunity for EFC related to commercial real estate dislocation and regional bank de-risking and that opportunity is here now including an eight a purchase in April this year, we bought two nonperforming loans at substantial discounts to par, which we believe are well secured by the underlying real estate, one of them coming from a regional bank, our partnership with Sheridan capital and the deep experience of our in-house team, it leaves us well positioned to capitalize on these types of situations.
Another big highlight for the quarter was the reverse mortgage prop securitization. The underlying loans for the securitization were not FHA-insured heck and reverse mortgage loans, but rather private label loans. So this securitization is the non-agency Virgin version for reverses proprietary versus mortgages is a sector with a lot of potential for growth. And with few competitors to securitization allows us to both recycle our capital and create some very high yield and long-duration retained tranches.
I'm hoping that this and future prop securitizations will lead to improved gain on sale margins and additional prop origination volume and thus increased profits for Longbridge. In addition, early in the second quarter, we priced our first non-QM securitization and over a year in 2023, we had slowed down securitizations in the face of relatively wide spreads on the debt tranches. We could issue these spreads have tightened significantly in 2024. However, making securitizations attractive. Again, our securitization in April allowed EFC to leverage these tighter spreads and create high-yielding retained tranches for our portfolio.
Turning back to slide 7, let's look at how the portfolio evolved during the first quarter. You can see here that we had modest portfolio growth. We grew commercial bridge and also our TL, but working in the other direction we took advantage of tighter spreads to harvest some gains in our non-Agency RMBS portfolio. That portfolios had tremendous returns over the past 12 months, portfolio growth has continued following quarter-end, we scaled up further in commercial bridge in our TL.
And we've also started buying some closed end seconds, and he locks with so many homeowners sitting on both substantial equity in their homes and first mortgages with very low rates. We see equity extraction is potentially large, high credit quality, high yielding opportunities. Both closed end seconds, if you like, can provide us with very high note rates, modest purchase premiums, substantial levered Mims and potential securitization outlets to manufacture more high yielding retained investments.
On slide 8, you can see we continue to shrink our agency portfolio as we are seeing what we believe are more interesting opportunities in some other sectors, and we'll continue to be opportunistic about sales, our agency MBS.
Looking ahead, the current market backdrop should continue to generate further investment opportunities for high returns and high ADV market expectations for interest rate cuts should both dampen rate volatility and continue to draw more capital into the market, which should support spread products. In addition, the Fed has recently announced a slowdown in their portfolio runoff, which should support bank balance sheets and by extension, the assets they buy we see several new exciting opportunities and EFC has been bouncing. First, pace of sales of deeply discounted CMBS and commercial NPLs is increasing.
We are well positioned to capitalize on those opportunities. As last year, we deliberately allowed our commercial mortgage portfolio to runoff organically as only a few of our bridge loans are currently in workout. Securitization spreads have tightened significantly from last year, which is a tailwind for our non-QM and proper diverse businesses. We'll be exploring securitization financing in our RTL business as the first rated RTL securitizations recently got done significantly improving financing economics. Finally, we are ramping up both in closed end seconds and Helix.
Now back to Larry.

Laurence Penn

Thanks, Mark. As you can tell, we have a wide variety of high yielding loan strategies where we're currently putting significant capital to work for the second quarter. So far, we've added meaningfully to our credit and Longbridge portfolios in April, and we've continued to make room for more loan flow by further trimming our agency specified pool portfolio and by securitizing a significant portion of our non-QM loan portfolio.
From a leverage perspective, the net effect of our recent purchases and originations has been outweighing the impact of our agency sales and non-QM securitization. So our recourse debt to equity ratio is on the rise again, moving forward I expect leverage to continue to ratchet up. But as was the case in the first quarter, it won't always be a linear progression given the push and pull from different elements our portfolio management strategy.
As always, our aim is to balance the dual objectives of growing earnings in the near term. We're preserving dry powder to capitalize on opportunistic situations such as what we are currently seeing play out in distressed commercial real estate debt to that end, even after April's activity, we continue to have ample cash and borrowing capacity with lots of unencumbered assets plus other lightly leveraged assets such as our forward MSRs. Besides portfolio expansion, we expect AD. growth to come from two other principal areas.
First, continued progress on a handful of nonperforming commercial loans and REOs in our portfolio. So far this year, this progress has been slow but steady and second, Longbridge returning to profitability in originations, as I mentioned, earlier origination volumes and submissions so far in the second quarter are well ahead of projections despite higher interest rates, which partially reflects additional sourcing channels and loan, which has successfully established as a result, we're expecting Longbridge to contribute positively to ADE. in the second quarter.
Before wrapping up, I'd like to comment on how EMC is positioned for interest rate changes from here over EFC.'s almost 17 year history. We have always endeavored through active hedging to protect the FC.'s book value per share against movements in interest rates rather than speculating on the direction of interest rates. This philosophy was again important in the first quarter were rising. Longer-term interest rates drove profits on our hedges, which offset losses on some of our longer duration investments moving forward, if we are indeed in a higher for longer interest rate environment, as it seems, I believe that Ellington Financial is well-positioned with our hedging expertise, short duration, yielding loan portfolios and mortgage servicing rights portfolios.
With that, we'll now open the call up to questions. Operator, please go ahead.

Question and Answer Session

Operator

Thank you. The call is now open for your questions. (Operator Instructions)
Bose George, KBW.
Please go ahead and both your line is live. Please unmute and proceed with your question.

Laurence Penn

Why don't we come back to BoS for the second question?

Operator

Trevor Cranston, JMP.

Trevor Cranston

Thanks. Good morning, um, on the on the opportunity you guys talked about on a closed end seconds and he walks on. Can you maybe add a little bit of color in terms of are those things you're able to source from the existing proprietary originator relationships you have? Are those coming from different sources? And maybe if you could also talk about sort of the longer-term financing strategy for those products?

Mark Tecotzky

Sure. Hi, Trevor. It's Mark on. Yes, those have generally been sourced from different entities that the real pool of borrowers that are where it makes sense for them to take the closed-end seconds are generally people that have on agency first-lien mortgages that they took out, say, during '20 or '21. They have a note rates around 3%. They've had a lot of HPA. So it's primarily working with them originators, originators that have an agency presence in terms of financing, I think there's two options.
One is repo financing. So in this way, it's not really different than non-QM or tailed is repo financing. And then there's also securitization outlets. So Bill, that is an area where we have so far been big yet, but you're able to get pretty high note rates, not real high premiums and debt. What looks on the surface like very high credit quality underlying loans.

Trevor Cranston

Got it. Okay. That's helpful. And then, you know, across all the different investment opportunities, it sounds like there is a lot of focus on the more proprietary things you guys have been doing. I was curious if you could maybe talk a little bit more about the CLO side, which is relatively small right now, but seems like are pretty good returns available there? Just kind of how you see the opportunity and deploying capital into that versus some of the other loans you guys have been doing? Right?

Laurence Penn

Yes, thanks. It's opportunistic there, CLOs, secondary CLOs. This is first of all, it's similar to what we're doing over at Ellington credit as part of that transformation, right, focusing on secondary CLOs. And I'm so Ellington Financial has been getting allocations in that strategy as well, alongside Ellington credit. So it's just opportunistic. I think I'm these are obviously more liquid than, say, residential transition loans or things like that, but we do see good opportunities there. So it's still long.
It's still a very small part of our portfolio. And while the growth was certainly significant enough to mention on this call, I wouldn't necessarily think of that as something sort of a core holding for a long period of time that would represent a very significant section of portfolio but we did we are opportunistic and we did like the risk reward there. So Ellington Financial has been participating to some extent there as well.

Trevor Cranston

Okay. Makes sense. Thank you.

Operator

[Frank Calabrese], KBW.

Good morning. This is Frankie Dan on for Bose. And just wanted to touch on your comfort level on the dividend, when do you see normalized earnings being roughly in line with the dividend? And how comfortable are you at the current level? Thank you.

Laurence Penn

Yes, we're comfortable. Yes, I think we said it at a level where we hope to keep it there stably for some time just like we have with prior dividend recess. So yes, I would remind everyone that it's actually not that different from the dividend. I think $0.14 that we had a few years back, so but done. But yes, we were quite comfortable that this is where the dividend is going to be for a while.

Thank you. And just a follow up, when do you see the Company getting to normalize earnings?

Laurence Penn

Yes, that's a little harder to project because as we've mentioned on the call, we've got some you have some some volatility and drag. So first of all, Longbridge we said hasn't done contributed to a DY. sort of commensurate with the capital in that segment. We think that that's going to turn around pretty soon. We mentioned the second quarter is looking like it's going to contribute positively.
So that trend is in the right direction. And then a big thing as well is that we've got some NPLs and a couple of NPLs less REO that are also not giving us a yield, right? It's really a yield that contributes yield bearing assets that contribute to RADE. in the investment part of our portfolio. So on So while we're working those out and that can be a drag to idea, of course, when we ultimately resolve those assets, we are certainly hopeful that we're going to catch up a lot from an earnings perspective.
But the on that, that doesn't always even flow into 80. Sometimes it does sometimes it doesn't depending upon the nature of the resolution. That's just how the sort of from a the accounting works. So I would say that I can't give you a precise date, but I certainly hope that sort of the eight that RADE. will sort of approach continue to get closer and closer to our dividend.
But in the meantime, we also are seeing strong gains on sale and other things that don't necessarily translate into a DY. per se, but translate into GAAP earnings. So I don't want to sort of ever give the impression that we're focusing more on 80, even GAAP earnings. And ultimately, well, our goal is to earn earn the dividend gap wise and thereby kind of maintain book value, preserve book value and maintain book value while paying out that dividend.

Thanks.

Operator

Jason Weaver, Jones Trading.

Jason Weaver

Hey, good morning. I wonder if you could give some context behind the sort of reluctance of regional banks to be involved in our TL and commercial transitional space amid what we're hearing for the last few quarters from more competition from nonbanks and how that's affecting available yields?

Mark Tecotzky

Yes, this is Mark. It doesn't surprise me. The regional banks aren't involved in the sector. This is the sector where it is a it's a heavy underwrite. You need to have a arm team of people that are knowledgeable about construction costs, construction time lines. It's not necessarily the kind of expertise you have in a lot of these regional banks. And the other thing is it's on a lot of work for the dollars you put out as opposed to like lending to a commercial developers.
But in a multifamily here, we're putting out money, you know, 250, 300,000 at a time and there's not only the initial write underwrite, but there's also draws you have to and supervise. So we like the fact that this sector doesn't attract regional banks and it doesn't really attract sort of generic middle of the fairway mortgage originators. Yet the space is competitive but it always seems like every space for and is competitive. I don't I don't view this space as more competitive now than what it was a few years ago.
You've had a couple of new entrants, but you've had some entrants. Some you have had some other people that used to be involved no longer involved. So we have not had an ability on sourcing loans. And we do not feel like on guidelines among the competitors have loosened and as pressured UPS pressured us to relax guidelines at all. If anything, we got actually a fair bit tighter in 2022, Peter, in terms of our guidelines and how we underwrite.

Jason Weaver

Well, thank you. And then apologies if I missed it during the prepared remarks, but can you give a updated book value in leverage where you're seeing that currently?

Laurence Penn

And so we haven't given on April yet ordinary course. We put out a book value per share estimate for each month's end on that will happen later later in May. And then in terms of leverage, we haven't given a precise current leverage amount of Larry did mention in his prepared remarks that we've been active deploying in April and that we also securitize the non-QM loans, which come off balance sheet, but net-net leverages has ticked up quarter to date so far, we haven't quantified that, but that's the color we did provide.

Jason Weaver

All right. Thanks for taking my questions.

Laurence Penn

Yes, thank you.

Operator

Eric Hagen, BTIG.

Eric Hagen

Hey, good morning. How are you doing guys? Hey, you talked about being well hedged for a higher for longer environment. Are those mostly interest rate hedges that you're you're talking about? And do you think about adding any credit hedges to help mitigate some of the risks in areas like the bridge portfolio and the CRE portfolio, the underwriting really kind of a hedge, if you will.

Mark Tecotzky

And thanks, Pierre. It's Mark. So but being well hedged for higher for longer, I mean, I think I would just say I take a step back in that we're always well hedged. We do we don't we've never we've always tried to mitigate interest rate risk at the company level. You know, by a series of rate hedges. So I just think Larry's comments in the prepared remarks is that if you are in this higher for longer environment, we think our portfolio construction and our sourcing channels can do really well, their commercial bridge, our TL short spread duration, the commercial bridge, all indexes.
So for so that's the kind of stuff where you get a big yield, a big coupon if the Fed keeps rates higher in terms of credit hedges, we've had those like we've had some credit hedges against non-QM for a while. And they function two ways. One is one is just really sort of like overall macro economic credit hedge. But the other way they function is hedging on spread risk for securitizations or in particular, like some of the IG indices now have done real well on the year like the current IG index, right around 50.
So that to us seems like a hedge where you know how on owning protection on that. We don't we have kind of limited downside and it can certainly mitigate mitigate on net volatility of spreads widening. It was kind of interesting, we priced our non-QM deal and right when you had that sort of a little like credit cheapening in April, and that IG index widened out five or six basis points in time for pricing.
And when we priced, you know, we were able to get good execution, but now that we had sold some of that risk into market into the market. We bought back some of that head. So I think credit hedges on we go for a long time. We have CMBX specific credit hedges on CMBS B-pieces that's less of what we're doing now. CMBS has gotten a little bit less liquid, but the credit hedges you see from us now are more referencing corporate indices and they're in part for sort of overall macroeconomic risks, but they're also to just sort of manage them BRAD volatility.

Eric Hagen

And that's great detail. I appreciate that. You mentioned the non-QM execution. Let's talk about that when you do it when you do a securitization at these rates and spreads, can you share kind of what you think is the all in return, including the ROE on the retained piece of the credit from that trend, the transactions and including any loss estimates you sort of expect that's embedded in that return profile. Thank you, guys.

Laurence Penn

Yes, Jay, or do you want to take that wasn't sure how much disclosure we normally give.

J. R. Herlihy

Let me think about that on. We don't give precise ROEs. I think we can speak broadly on we can start with where we price the AAAs and we can compare that. And the total capital stack on I think I mean, mid 10s is where we pencil on is kind of the punchline as we build up to the components of that, let me let me think about that, Eric, and how we can kind of provide some more color on how we get from A. to BEA. to B. But big picture, mid 10s with, I think conservative underwriting assumptions going forward is where we're penciling.

Laurence Penn

Yes, on those. Yes. Let's let some let's see what we can provide here. So first of all, when we do a securitization, right, like sometimes weak, those are non-QM securitizations. Sometimes they're consolidated and sometimes they're not right. And that's an accounting distinction, obviously. But we don't we really don't think of them that differently, right?
We really are thinking of them always as okay, we did a securitization. And now we've transformed our loans into the retained tranches and we put a value on those retained tranches, right? So if you sort of think of this as a sale of the loans and a purchase of the retained tranches, which it's not always accounted for that way. But let's just say we kind of tried to think of it that way, then you're going to recognize a gain or a loss kind of on that securitization, right.
Is the difference between what the loans were worth that you put into the securitization and what your securitization expenses were and right, because there are expenses and doing securitization, legal underwriting, et cetera. And then what the retained tranches are worth that you're taking back and so that sort of gives you, let's say, a gain on sale, even if it's not necessarily accounting wise, a gain on sale. And for that, that's going to be very variable so that will make a long story short, that sort of securitization gain is can be very variable, depending upon everything from how well we hedge the loans going into the securitization as Mark mentioned, sometimes we use IG hedges.
Now in addition to interest rate hedges, we use TBA, sometimes our interest rate swaps, depending upon what we think of some of the basis. So but whatever we'll have a gain on sale or loss on sale, hopefully a gain on sale when we do that. And so that's more of a one-time event.
Right and then we're going to be retaining the pricing. And I don't think I'd be giving way too much to say that if you look at the tranches that we retain, right what are they they're subordinated tranches that have principle the maybe the single B rated or non-rated a portion of the deal. And then there's an IO, right? And so we hold those knowing that in some cases, we're subject to risk retention and are not able to sell those. And we're going to own those basically forever until if and until we call the deal.
So we're going to we're going to value those where we think the market values the meal, and we tried to be conservative on that. But if you look at the spreads on where those deals price and you can sort of extrapolate these are quite wide and as we can get financing on them as well.
So as J.R. mentioned, we're well into the mid 10s in terms of the IOs and do we want to serve and we have call rights or another thing that we retain as well. And we value those as well because those often have value now our call rights on the super old deals that we did with really low coupons, those don't those don't have much value now so they we've as we revalue those every quarter, those have gone down in value from where they were a few years ago.
But when we priced one of these deals were using what kind of an OAS on the iOS, generally speaking, mark to you, if you don't know off the top of your head, you don't we don't need to I think answer that. But yes, it's extremely wide, right?
I mean, this is something where even before leverage, where in that where we're in the 10s, I believe, yes, you're low 10s unlevered and the other thing I would add, Eric, the other thing I would add, Eric, is if you look back, we have called a lot of old securitizations that those those calls were executed before the big sell-off in 2022. But those call options can prove very valuable because you have spreads tighten as the loan season. The rating agencies look very favorably on bus expectations of seasoned loans.
So we've called, you know, our 2017 '18, most of our 2019 deals. And we generally speaking, recycled loans, put them into new securitizations and it was very helpful economics for us. I think there's an ancillary benefit to doing these securitizations that you don't realize at the time when you do it, but it can pay dividends in the future.

Eric Hagen

Great stuff, guys. Thank you so much for the thorough response to those Atlanta.

Operator

Yes, thank you. That was our final question for today and thank you for participating in the Ellington Financial first-quarter 2024 earnings conference call. You may disconnect your line at this time and have a wonderful day.