Larry Penn: 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 looking at long term gauges of inflation and it just makes sense, right?
And accretion, these borrowers are not going to be making payments, right? So you want to make sure that you’re earning a market interest rate and then some on the loan. And so the long term part of the curve is going to drive that and it’s going to discount and it’s going to create a lower principle amount that the borrower can draw as rates go up. So that’s been hurting all the entire reverse mortgage business. And so it’s a different reason that versus why it hurts the regular forward market. But nevertheless — so you’ve seen the market shrink but then again, you’ve also seen one very notable player and other smaller players sort of go by the wayside. So we see Longbridge as having a larger market share in a market that is smaller, but then the prop business has a lot of room for growth, right, because now you’re tapping into borrowers that, A, have much higher value homes.
So that’s just more profitable on a loan-by-loan basis. And you’re talking about borrowers that may not be as sensitive about taking out less proceeds. So looking forward, like the long term prospects we think are really good for Longbridge and they continue to gain market share. But it’s been a tough market and with — you’re right, with agency spreads wide that’s affected — and volatile — that’s affected the execution on the HMBS that Longbridge and all the other participants issue on a monthly basis. And so the gain on net sale margins aren’t what they could be. And so if spreads normalize there, ultimately, that should also normalize as well. So you’ll see short-term volatility, I think in our ADE coming from volatility from Longbridge origination profits.
And so that’s something that I think the market will have to adjust to for us.
Matthew Howlett: 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…
Larry Penn: 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.
Matthew Howlett: 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.
Larry Penn: 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.
