Lindsay Tragler - VP, IR Larry Penn - President and CEO Lisa Mumford - CFO Mark Tecotzky - Co-CIO.

Trevor Cranston - JMP Securities Douglas Harter - Credit Suisse Mike Widner - KBW Jason Stewart - Compass Point Research Brock Vandervliet - Nomura Securities Jim Young - West Family Investments.

Good morning, ladies and gentlemen. Thank you for standing-by and welcome to the Ellington Financial Fourth Quarter 2014 Financial Results Conference Call. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.

[Operator Instructions] It is now my pleasure to turn the floor over to Lindsay Tragler, Investor Relations. You may begin..

Thanks Christine. 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 and they are based on management’s beliefs, assumptions and expectations.

As described under item 1A of our Annual Report filed on Form 10-K on March 14, 2014, 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 have with me on the call today, Larry Penn, our Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. With that, I will now turn the call over to Larry..

Thanks Lindsay. Once again it's our pleasure to speak with our shareholders this morning as we release our fourth quarter results. As always we appreciate you taking the time to participate on the call today.

First some highlights, it was a challenging quarter for Ellington Financial, we did make money, our net income was $0.08 per share and both our agency and non-agency strategies made positive contributions to our net income. However, losses from our interest rate hedges and credit hedges substantially offset those positive contributions.

We tend to be more hedged than our peers and we believe that's the best strategy over the long-term. Nevertheless we were disappointed with the relative performance of our assets and hedges and not surprisingly we're now expecting something of a reversal there.

We continue to see many attractive investment opportunities particularly with our continued diversification.

Keep in mind that we're just beginning to scale several of our newer strategies where we see high growth potential, such as consumer loans and others and we're getting closer to acquiring our first assets under our non-QM mortgage initiative which has the potential to be a very large strategy for us.

These newer strategies didn’t have a significant impact on the fourth quarter results, but we expect them to contribute meaningfully to our earnings in the coming quarters. Finally, we resized our dividend to the opportunities that we're seeing over the medium-term especially in the sectors we're actively ramping up.

We’ll follow the same format as we have on pervious calls. First, Lisa will run through our financial results. Then Mark will discuss how the MBS market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. I will follow with some closing remarks before openings the floor for questions.

As a remainder, we have posted a fourth quarter earnings conference call presentation to our Web site, www.ellingtonfinancial.com. You can find it in three different places; the homepage of the Web site, before our Shareholders page or the Presentations page. Lisa and Mark’s prepared remarks will track the presentation.

So if you have this presentation in front of you, please turn to Page 4 to follow-on. I’m going to turn it over to Lisa now..

Thank you, Larry and good morning everyone. As you can see on our earnings attribution table on Page 4 of the presentation, our fourth quarter net income was $2.6 million or $0.08 per share. For the full year we earned $59.2 million or $2.09 per share.

In the fourth quarter our non-agency strategy generated growth income of $7.7 million or $0.23 per share, while income from our agency strategy was approximately 350,000.

Within our non-agency strategy our legacy RMBS assets net of the associated interest rate and credit hedges generated approximately $2.5 million or $0.07 per share of our non-agency income for the quarter.

However, income from our RMBS assets was significantly offset by our interest rate and credit hedges as interest rates fell and high yield credit rallied in the early part of the quarter. This created a meaningful drag on our fourth quarter earnings.

Related interest rate and credit hedges resulted in net losses for the quarter of approximately $7 million or $0.20 per share. Our CMBS strategy also net of hedges contributed approximately $3.4 million or $0.10 per share to our non-agency income for the quarter.

Although our CMBS portfolio constitutes a relatively small part of our non-agency portfolio of CMBS investments most notably our investments in B-pieces of newly issued CMBS are continuing to perform well.

Our newer strategies including small balance commercial loans, CLOs, European MBS and ABS, residential NPLs, consumer ABS and loans, investments in mortgage related entities and distressed corporate debt generated the remainder of our non-agency income for the quarter of approximately $1.8 million or $0.05 per share.

Within this group small balance commercial loans have done especially well over the course of the year and quarter as many of distressed loans have been successfully resolved often through refinancing. During the quarter these loans generated gross income of $2.6 million or $0.08 per share.

Our total commercial mortgage strategy including CMBS and small balance commercial loans generated a return on allocated capital of over 20% during 2014. As our other investment strategies continue to ramp-up we expect the relative contributions to net income to increase.

As I mentioned and as you can see on the attribution table income from our agency strategies are small but positive for the quarter.

While our loan portfolio which is predominantly comprised of fixed rate specified pools performed well its performance was counted by losses on our interest rate swaps and short TBAs as interest rates declined and prepayment fears remained relatively muted. Interest income on our agencies was augmented by trading gains and unrealized gains.

We turned over approximately 32% of the agency portfolio during the fourth quarter. At the end of the fourth quarter, our long non-agency portfolio had grown to 897 million up from $732 million last quarter and our agency portfolio increased to 1.2 billion as compared to 1.1 billion as of the end of September.

The growth in our portfolios was driven by deployment of the remaining proceeds from our September capital raise. Within our non-agency portfolio we increased our holdings of RMBS, CLOs, residential NPLs and European non-dollar denominated assets including MBS and CLOs. We also bought our first U.S.

consumer loans and distressed corporate loans and made a strategic investment in a mortgage originator our second investments in an originator. Our leverage ratio excluding repo, general, and U.S. treasuries increased to 1.96 to 1 which is in the range of where it has historically been for us.

Finally our core operating expense ratio was in line with our expectations at an annualized rate of 2.6%. Our repo cost held steady and we increased our number of available counterparties.

In addition our weighted average remaining days to maturity on our repo borrowings increased significantly especially for our non-agency borrowings where average days of maturity at year-end stood at 295 days up from 100 days just two quarters ago.

This largely reflects the impact of the two year non-mark-to-market facility we entered into during the third quarter. I will now turn the presentation over to Mark..

Thanks Lisa. In the fourth quarter there were big stories in U.S. debt markets, the first was the decline in interest rates especially in the long-end of the curve where 10 year and 30 year yields jumped 34 and 46 basis points respectively.

Our long held view is that forecasting interest rates is not the way to generate consistent annual return for investors. So since EFC's inception we’ve made a conscious choice to hedge interest rate risk rather than gamble on the rate move in our favor.

Although interest rate hedge has cost us money in the quarter if you think back to the taper tantrum in the middle of 2013 our ratio just helped us to preserve book value through some very volatile quarters. The second big story was the drop in oil prices and what that will mean to the U.S. consumer going forward.

Over the long run we believe that lower interest rate to lower oil prices will have a net positive effect on our consumer centric credit sensitive portfolio. However at quarter end these forces were not yet strongly reflected in asset pricing so profits on a non-agency portfolio were notably impacted by losses on our interest rate hedges.

In financial markets it often takes longer than the quarter for pricing to fully just to material but slow moving fundamental changes. We expected over the longer term our portfolio will benefit from the shifts that we identified.

Lower interest rates are highly supported by home prices and we expect that they will lead to more voluntary prepayments on our non-agency portfolio. On Slide 11 you can see that as a quarter-end the average cost basis of our Jumbo Alt-A portfolio was 72, well below par. So any increase in prepayments would be a big boost to our yields.

When interest rates drop there is a several month lag before prepayments start to impact bond cash flows. It takes time for borrowers to complete the new financing process and it takes time for services to collect loan payments and to pass them on to bondholders.

There is also a seasonal effect on prepayments during the fourth quarter with the end of the year traditionally being a slower time for refinancings and home sales.

So for the quarter we sell only marginally faster prepayments on our portfolio but we expect prepays to accelerate if rates stay low prepayments speed could also get an additional boost from the incremental loosening of mortgage credit and as we’ve recently observed particularly from the agencies.

Lower mortgage rates for home prices in our portfolio will also benefit home price depreciation accelerate. Mortgage rates jumped at 35 basis points during the fourth quarter which means that by the end of the quarter people can pay about 4% more for a home and secure the same monthly payment.

We probably won't see the effect of this move until the spring buying season and we don’t believe these benefits will reflect in the non-agency RMBS prices for the quarter.

To elaborate a little more on the potential impacts of the second move that we identified the decline in oil prices for consumer focus credit portfolio like ours it acts like an increase in wages.

That should serve to lower default rates in most regions and just like lower interest rates the benefit to house incomes gradually overtime, so it wasn't immediately reflected in asset prices by quarter end.

In the case of interest rates if they stay low we believe that we'll earn back the majority of our hedge losses in the form of lower expected credit losses, faster prepays and higher asset prices overtime. If interest rates go back up we'll recoup our hedge losses on that reversal.

The larger point I am driving to, is that hedge losses or gains are recognized immediately but many times the risk that you're trying to hedge manifests overtime.

At the end of the quarter we sit with a large portfolio of consumer debt mostly secured by houses and borrowers that are now much better positioned to pay off those debts than they were just a quarter earlier.

On Slide 11, you can see the size of our credit portfolio grew substantially as we invested in additional 165 million over the quarter as we continued to deploy the proceeds of our September capital raise.

And on an percentage basis we increased our allocations of some of our newer strategies, European MBS, residential loans, investments and mortgage related entities, consumer ABS loans and distressed corporate loans.

However despite the levels of volatility in broader markets the few episodes of price weakness in mortgage were modest compared to the volatility that we saw in high yield corporate debt. We were busy and we successfully put a lot of money to work.

We believe that many of the strategies we've been ramping up weren't putting the material amount of capital to work which should help us to both increase and diversify returns going forward.

Taking a step back and looking at the larger picture over the past year, yields on basically everything with the CUSIP have come, 100 plus basis point drop in 10 year yields, drops in corporate yields, drops in agency mortgage yields et cetera. As the management manager you have choices to how you respond to lower yield environment.

You take more credit risk by going down in credit quality. You take more interest rate risk, you increase leverage. The path we have chosen is to try to generate much return as we can without increasing the risk borne by the shareholders.

We have set out to accomplish this by diversifying our sources of returns and using active trading to monetize market inefficiencies and trading opportunities. Clearly the fourth quarter wasn't our strongest but we haven’t increased leverage, we haven’t exposed the portfolio to more interest rate or credit risk.

You see the more diversified source of return reflecting the portfolio of compositions chart, you don't see big changes quarter-to-quarter, if you were to go back and compare to a year ago as we do on Slide 12, you do see bigger changes. We think we're building the right portfolio to respond to both the challenges and opportunities that lie ahead.

In addition the markets may well have to navigate a Fed rate hike later in the year this would be the first one in a long time. Markets might have to contend with the Greek exit from the euro, the fact that the U.S.

rates are subject to potentially strong opposing forces much lower European interest rates are pulling them down or potential fed reserve tightening is pulling them up, has a potential to drive the continuation of high levels of volatility we have seen since the start of the year.

Given this backdrop we don't think it's the right time to reach for yield and volatility may present us with some very compelling opportunities in the coming months. As you can see on Page 12, the agency portfolio also grew as we deployed capital from the raise.

Our preference for lower loan balance taper didn't do much to help our fourth quarter returns despite the drop in rates but those assets have become more valuable since quarter end as the refinancing index starts to move up. On the hedging side our hedges grew roughly in line with the loan portfolio.

Within the fourth quarter there was some volatility between different tranches and different series in the high yield indices which allowed us to opportunistically reposition some of our CDS hedges. As I discussed before lower mortgage rates and lower oil prices should significantly boost the performance of our loan credit portfolio overtime.

With that I'll turn the call back to Larry..

Thanks Mark. As you can see we're ramping up nicely in our newer strategies. Now we're still seeing excellent value in many non-agency RMBS sectors. So I expect that non-agency RMBS will continue to represent the largest sector allocation in our portfolio for some time.

That said on Slide 12, you can see the clear trend toward more diversified returns and a larger opportunity set over the past year with non-agency RMBS representing only 59% of our non-agency portfolio at the end of 2014 down from almost 80% from the portfolio at the end of 2013. Meanwhile our CMBS strategies continue to shine.

As we continue to trade that portfolio extremely actively and wherein 2014 we achieved our highest returns on equity on any of our strategies.

The areas we're expanding into such as consumer ABS loans, non-QM mortgages and European MBS and ABS are all sectors where we believe we can leverage our expertise and analytical capabilities to achieve compelling risk adjusted returns. We're casting a wider net but we're still in our wheelhouse and within our core competencies.

There is also a definite theme to our expansion. We're naturally gravitating to areas of the market that are now under served by banks because the new regulatory and market environment limits bank’s ability to participate in them.

Faced with the supplementary leverage ratio, banks just can't earn an adequate return on equity in many previously lucrative sectors and business lines. Banks that underwrite conduit CMBS deals can no longer retain the risk of your tranches and try to sell them overtime.

Faced with a vocal rule banks are severely limited in their ability to hold illiquid spread product and inventory and faced with explicit regulatory constraints and implicit regulatory pressures they can no longer participate in many of the lending activities in which they dominated before the financial crisis.

While we are pleased with our diversification effort so far we have further to go. We look forward to launching our non-QM loan acquisition business in the near future and that has the potential to create a steady pipeline of attractive opportunities for us for a long time to come.

Although the P&L impact of some of our newer initiatives has been relatively small to-date we’re now looking forward to scaling up further and we expect them to contribute more meaningfully to our financial results in the coming quarters.

As an example of a sector we’ve entered more recently and are scaling up in the latter half of 2014 we started purchasing consumer ABS in loans. We like the relatively short duration of these assets and we believe they offer an excellent risk reward profile.

We have focused our investment activity on originators that have long track-records and can provide us with extensive loan level performance data for us to analyze. In fact we’re able to apply loan level data analytics, techniques and models similar to those that we utilize in our RMBS strategies.

We’ve also made progress on our initiative to invest in mortgage origination platforms which we expect to lead to a pipeline of newly originated non-QM mortgages. During the fourth quarter we announced a strategic investment in Skyline Financial, a multichannel mortgage lender led by an experienced and highly regarded management team.

We’re seeing numerous opportunities for these types of investments and relationships and we believe that we are sort after not only it is the capital partner but also as the strategic partner as we’re willing and able to share our technology, capital markets expertise and loan analytics to help our partners improve everything from the efficacy of their hedging programs to their loan performance.

Another natural area for us to expand into with the right origination partners is mortgage servicing rights or MSRs. However with interest only security still trading too tight in our opinion we aren’t actively looking at MSRs right now. With interest rates so low a shake up in the IO market could change that pretty quickly though.

And while we’re talking about prepayment risk, once again looming large let’s not forget about agency RMBS.

We’ve been very patient over the past several years and in that sector we have largely avoided agency IO product because we didn’t feel that the risk reward was right but we’re ready to increase our allocations to agency RMBS in general and agency IOs in particular should the opportunity arise.

Given the current environment we see potential catalyst for compelling opportunities at all of our markets. We’re seeing global interest rates at all-time lows. We’re seeing spikes in agency MBS prepayment activity and Europe is still struggling.

If the federal reserve goes ahead with its plan to raise short-term interest rate later this year we could be on our way to a flat yield curve which tends to create lots of opportunities in the mortgage market.

With the low leverage that we like to maintain we feel that we’re ready to capitalize in opportunities that may emerge suddenly in many different markets in which we’re now after. More generally with a wide variety of asset classes to allocate among we can be even more strategic and nimble in our asset allocation.

We’re active traders by nature, so should one area like agency IOs all of a sudden present a great buying opportunity, we’re always ready to sell other asset classes to make room for one that offers better relative value.

I’d like to conclude by reminding everyone that with our focus on mark-to-market returns as opposed to more stable metrics, like core earnings. Our reported earnings will tend to vary a lot from quarter-to-quarter. However, I think we’ve rewarded our investors with consistent performance over the longer horizons.

Since our inception in 2007, we’ve achieved an average annual economic return of 12.7% with our worst year being just down to 0.41% less than half a percent down and that was in 2008 nonetheless. Keep in mind that this track-record dates back to 2007 when many if not most of today’s mortgage REITs didn’t even exist yet.

As we said before, we won’t necessarily be the highest flyer in our peer group in bull markets but we believe that our approach will generate better risk adjusted returns over market cycles. Our standout performance in 2013 when interest rates rose dramatically is a fairly recent example of this.

With our successful diversification initiatives and with the potential for high interest rate volatility in 2015 we believe our portfolio is well positioned for strong performance in the coming year. This concludes our prepared remarks.

And we’re now pleased to take your questions, operator?.

Question-and:.

Thank you. The floor is now open for questions. [Operator Instructions] Thank you. Our first question is coming from Trevor Cranston with JMP Securities..

And Mark thanks for the comments about some of the timing differences on your hedge positions versus the assets. To follow-up on that a little bit.

Can you maybe comment on kind of how much potential benefit you think there could be in things like the FHA reducing insurance premiums and just the drop in rates being potential increase in your refinance ability to some borrowers? And talk about kind of how many borrowers in your non-agency portfolio you think might still be in a position to benefit from that?.

Sure. So if you look at the conventional refi-index that’s roughly doubled this year from the end of the year and if you look at the FHA time series it’s up a lot more than that.

So that 50 basis point reduction in the FHA insurance premium for the FHA borrowers it is going to be a big deal and it also is going to slowdown some of the FHA to conventional refis that we've been seeing.

In terms of our own portfolio one measure we look at is we track what borrowers now current mark-to-market below our ABL/LTV above a certain fancy score of FICO, threshold and have been consistent under mortgage payments we think those are the ones that most likely would take advantage of refi opportunities.

And it varies a lot by sector, like in a subprime sector you're not going to see a lot of that, when you get into the prime jumbo, you can see pools where 15%-20% of borrowers look as though, they can take advantage, some of the lower interest rates.

The other thing that we thought was significant about the FHA reduction is that we think you might see you know what sort of FHFA do something also to ease credit a little bit. So there is lot of people speculating they could change the loan level price adjustments the standard free charge or these adverse market charges.

So you might see a response from on the Fannie Freddie side that might gradually loosen the credit box. So it's been sort of incremental but we have definitely seen credit loosening a little bit and also you're seeing some of the conduits that have been doing jumbo origination in the past year now also look to get into Alt-A originations.

So I think for self employed borrowers that have a short tail in their past, there is going to be few more lending options for them..

And you mentioned some people expanding into Alt-A originations and obviously you guys have talked about potentially accessing the non-QM market. Can you give some color on kind of what you're currently seeing in that market in terms of there are people out there who are getting a good consistent flow of originations.

And kind of what you think the returns on those whole loans might be kind of versus the CUSIP market today?.

We haven't seen securitizations yet, and I think people are just sort of getting started with rolling out prices. So it’s hard to say what volume they're getting. But we've seen in some of the higher note rate lending and this is note rates stay 8% to 9% was articular volume from a few originators.

But I think there are people now with lower pricing, they're looking for the better credit borrowers. They are going to roll it out to more mainstream originators. So I think maybe by next quarter's call you have actually like gained something.

And I think when the originators talk about might potentially having enough volume to do Q4 securitization I think Shellpoint said something recently. And then just in terms of the rates I think we would be focusing more typically as opposed to the 8% to 9% that Mark mentioned was almost the hard money loan.

We'll be focusing more on stuff that we priced maybe say call it 200 basis points above conventional rates, but with probably better convexity characteristics. So that's where I think we’d probably grow. And we haven't started it yet but I think that's probably where we see a setting..

If not that 5.50% to 7% type range, but I think on those kinds of loans I think unlevered returns, to the unlevered yields might be as much as maybe 100 wider than CUSIPs but I think you have the potential to securitize them and so a certain portion of the securitization and lock tighter yields.

So then to leave yourself with remaining pieces maybe low double-digit yields..

And then the last thing we saw, I think, last week, or maybe the week before, we heard that a few large money market funds had switched to a government-only mandate. So they wouldn't be buying non-agency repo anymore.

Can you say if you think that might be a trend that's coming in that industry? Or if it has had any noticeable impact on the non-agency repo market so far?.

Yes so in the non-agency, no I think that frankly there are banks lend on balance sheet, the agency repo is I think a business that's a little more challenging actually for some of the big banks now, because with the SLRs their return on equity is going to be probably fairly mediocre in that business.

So I think if anything we've seen a shift from the bigger banks to the ones that have traditionally been in the non-agency market which will be really the U.S. banks, we have seen no let up there at all. I think a lot of them, like I said are just willing to balance sheet lending. As opposed you say run a match book.

The agency market I think is a little more interesting, so you've got what you just mentioned which is going to be supporting for us for agency repo, but then you have the other factor which is from the bank’s point of view.

So I think that there is looking a little bit longer term I think this is probably going to end up being some dis-intermediation, some other players maybe getting in the game non-banks et cetera to basically bridge the gap, because you've got this inefficient obstacle in the middle which is bank capital requirements but you’ve got to very willing lender in the money market funds as you mentioned and you’ve got a very willing borrower in terms of everybody who like the REITs that need mortgage REITs remediation to repo that’s where I see that heading longer term..

Thank you. Next question comes from Douglas Harter with Credit Suisse..

I was hoping you could just give a little more detail on the consumer loan, or consumer ABS strategy? And what's the underlying collateral there? And how are you -- where are you sourcing that?.

We hired a specialist in 2014 and he’s been using both his established relationships with various different originators some of it is in the installment loan space staying away pay day loans obviously some of it is in the auto space looking at other more off the run sectors as well.

So we’re looking to basically get into business with borrowers that we think and we’re doing extensive due diligence on them meet our criteria in terms of doing the business the right way and we don’t want them to or us to be part of some of the consumer lending sectors that’s been tarred lately so that’s very important to us.

But we’re pretty open minded I mean I think the banks once you get away from the largest bank relationships the ultra and high net worth customers et cetera it’s just much tougher for people now to get credit. So we’re looking at lots of different areas that we think could make sense.

Right now our greatest focus is in the consumer installment loan sector and then secondarily in the auto sector. But we think that it’s a pretty open playing field out there and especially we’re going to go with the big banks are not going..

And then you had mentioned that the CMBS portion was one of the more attractive strategies.

Looking forward, when risk retention rules go into effect, did that impact your willingness or interest in the B-pieces of new issue securitizations?.

Yes I mean it’s a confluence of factors I would say that was part of it and also we’ve had limited competition.

We like the fact that we can get involved to some extent and in the -- sort of dealers know kind of what kind of collateral we like and what kind we don’t so that helps a lot as opposed to buying something in the secondary market that your kind of stuck with it.

So I think that’s an area where so in terms of B-pieces that’s certainly an area where I think we’ll continue to cautious of some of the risk potentials and others to be a player but at the same time it’s been a great trading market even just the tranches the mezzanine tranches et cetera because there are -- the calendar can be very lumpy in terms of the issuance calendar.

So you’ve got a lot of volatility and spreads our portfolio management in that area have a real trading mentality to them which we love and so I think they’ve timed the markets extremely well in terms of when to get in and when to get out as I mentioned we really have actively traded that.

So that’s an area that we would love to sort of a balance between putting more capital to work but also continuing to actively trade it. We make extensive use of the CMBX market to hedge so that helps a lot.

As we’ve mentioned before the ABX market in residential is pretty dead at this point so we don’t have that tool the way that we do in the commercial market. So it all really helps so I think that’s a strategy that we would love to continue to increase our capital allocation..

And then last question from me.

On the investments you are making with mortgage originators, do those investments give you -- do any of the current partners you've had there, do they originate non-agency product that could be -- that you guys could fund on your balance sheet?.

Yes, I mean we’re working on that. So that is one of the goals for sure. So that is -- whether we would by the way I think there are warehouse lines out there I am not sure that we want to be in the warehouse business but -- because that’s again unless you’re a bank probably doesn’t make sense from an ROE perspective.

But in terms of being a takeout right as an investor there that’s really where we’re interested in. In loans, non-agency loans as you mentioned and then it should be IO market widen out and MSRs widen in sympathy and the MSR market potentially as well..

Thank you. Your next question comes from Mike Widner with KBW..

I guess I just wanted to follow -- I had a few questions on the more consumer mortgage related stuff, and just following up. If I turn to Page 13 in the presentation, I'm just -- I'm trying to figure out what these consumer ABS loans are. And I know you give a brief description, as installment loans, and maybe some auto.

But I look at the numbers on there, and I realize it's a small amount, 24 million. But weighted average life of half a year, and a yield of basically 9%, and trading above par. I guess I'm just trying to figure out what that actually is..

Well it's tough, you can't. I mean you've got a -- and I am going to let Mark answer but you have got remember that's ABS and loans. So the loans are much higher yielding and the ABS are these very short duration things that are pulling down the weighted average life and the yield. So I'll pass it to Mark..

That's a mixture of things, so we did buy a few securities in that space that are very short. Now maybe they are quarter of year long and that's bringing down the average life a little bit. On the loan side our preference has been typically things less than two years to maturity.

And we have not been going for the higher note rate stuff, we're trying to align ourselves with borrowers that we think don't have traditional banking relationships but are good credit risks.

And so for those things on an average life standpoint we will be about three quarters of a year, so even if it was all loans, I think that portfolio we're building now is going to be a less than a year in average life..

It is replenishing them..

Yes it will replenish right. And then as we get into auto there you are probably looks to things that are more like throughout your average life. So it will be relatively short, as Larry mentioned we want to make sure that we're clearly far from the edge as to in terms of note rate, we don't want to be anywhere near the highest in the space.

But we think there are a lot of opportunities there as you have seen an economy that has not generated a lot of wage increases for the investment to people and it's very typical for people to tap equity in their homes.

So people that need periodically short-term loans, we think it's a good risk award for us as long as we're really focused on partnering with the right lenders that are getting to the borrowers that really need that loan or in the position to responsibly handle additional debt..

And in these -- under a year, and like you said, they are not the highest rates -- but 9% and above in -- for less than 1 year loan does sounds to me -- that's not the traditional….

The loans are much higher yielding than that, so what I was saying before is that, the loans are yielding, I mean the note rates are even higher but the loans are yielding well into the teens..

I'm just trying to get a better picture of -- debt consolidation loans, are these medical loans? Are these online -- is your source in online lender that's….

Yes, we haven't gone down the online route, but we're looking at it..

Yes..

But again just to be clear, what you're seeing in that one row has been dragged down both in average life and in yield by the fact that almost as a cash management tool we saw some what we thought were minimal risk, very short high yielding, almost like money market instruments that are sort of weighing that down.

So when we're looking together towards to the growth, I wouldn't focus on that, and it's just sort of the work of what we bought first which was some of the ABS tranches, as opposed to the loans that's making this row look funny..

Yes, so I understand the funny part. I guess I'm just trying to reconcile. You said they are not hard money, but they would clearly appear to be sub-prime. You didn't give an average FICO score, but I have to imagine that anybody who is paying double digits….

Absolutely, yes, subprime for sure, yes..

Okay..

And yields to us of definitely in the teen, so that's our projection of course, so….

Net of credit expense?.

Net of credit losses, exactly..

And any sense for how big -- I hate to make too big a deal out of it, because it's 24 million at the moment. But it's getting tougher in the mortgage market. We can come back to the non-QM in a minute, but….

Yes, I mean this could be a 10% strategy for us, absolutely..

So then I guess just -- you've answered a little bit, but similar question, trying to understand non-QM, and exactly what you are doing, and the timing and size and all that stuff. And I guess maybe, just to put a little finer detail on the questions that were already asked and answered.

What kind of FICO scores are we talking about here? And is it going to be full dock, low dock.

And at this juncture, do you think it's securitizable? And what kind of leverage and that sort of thing do you envision?.

Yes so what we're looking to do is partner with a group that we think are very thoughtful about credit and hopefully start with them, something de novo.

Where we think is the biggest opportunity is probably for self employed borrowers, self employed borrowers have been one sector of the market that if you look at the early years of all day say 2002-2003, a lot of the things that RFC was doing performance on those loans was incredible their typical guide was 700 FICO self employed 70 LTB they got very solid credit performance out of those borrowers.

So, that’s the space that we think right off the back looks to us like the most underserved and potentially the most interesting for risk reward.

Yes, so without a W-2 obviously those are challenged borrowers for accessing mortgage credit right now so we feel that we can do the right due diligence get comfortable with their credit, their ability to repay everything else and that’s definitely an area that we see as one that could be very good for us..

That said, the 2001 vintage loans had a tremendous benefit from the home price appreciation that came. So, I don't know. It's -- and the reason I just push on a little is because we've been hearing about non-QM, and the different anecdotes about the great opportunities out there, for at least three years now.

And we have yet to see any material -- as you have said, there is not a lot out there to look at, at the moment..

Right I mean you don’t need to stress on LTV by the way you’re talking about home price appreciation. But that’s not something where in this market we don’t feel and I don’t think anyone else either feels like that’s where they want to stretch..

So the type of I mean I don’t know if this is just anecdotal or this is what you think the opportunity for you guys is but I mean it sounds like you’re describing not 100% LTV I don’t know if you’re like in 80 or 90 or whatever, but….

No not 90, it is probably 80 or 80 or less absolutely, yes. No need to push it these are borrowers that have the cash they just….

I think about it this way you go to 2005-2006 new issue upfront business was about $600 billion a year securitized business so we can be orders and orders of magnitude smaller than that right. We can originate in a year 100 million loans, 200 million loans that are good solid credits that’s meaningful to us so that allows us to be extremely choosy.

So I don’t think see I don’t -- I think it’s unclear to know how big the opportunity is until you really get out there but we can be so much smaller than how these markets used to be and so have been meaningful to us that you’re not talking about needing to get to some tremendously large number of borrowers for it to be a good program for us.

So I think you’ll see that reflected in our guidelines, right, that we are going to be extremely thoughtful about the credit risk we want to take and for the size how we want to start this thing we can be very selective..

Yes, I mean the whole market could easily be 50 billion maybe 100 billion, right, it’s certainly possible. So, for 1% of that that’s a lot. And there is not that many people doing it right now. So there you go..

And then just finally, on that topic, would you envision -- probably in the short term, they sit on the balance sheet unlevered. But how would you think about generating -- what kind of ROEs could you generate? Because presumably, the bogey is going to be north of 10%, once you apply levers..

So I think the first thing for us is not look to securitization the first thing for us is to get an asset that where the credit is going to be solid that we think it is reasonably easy to hedge the interest rate risk we’d probably be looking at 7:1s, right, shorter durations and to get returns that with maybe….

We think financing is probably out there in the plus 200 range, right.

So Mark was talking before that 5.5 to 7 in terms of the no rate so you can do the math but you will get a good return on equity with that and I think that we know a philosophy in these areas is often if the asset is a good asset and from a risk reward standpoint take into account credit and convexity and everything else then it will -- it make sense and we can look at loan sales, we can look at securitization, we can look at buying a whole there is just a lot of different things, lot of options..

And while they’re on the balance sheet you build up a track record of performance which I think is an important precursor to efficient securitization.

So the main thing for us is find borrowers that are good credits that we think will have a note rate gets us to our ROE targets, make sure we're thoughtful on our diligence and build up a portfolio of solid performers and then once we’re at that point then we’ll see what the next steps are..

And just to put that all in context, you wouldn't envision any kind of securitization on that stuff, certainly this year. If you want to track record….

Maybe from some others, I would not expect it to see it from us..

And then so -- and then to get to the ROEs that you are talking about, if I do the simple math, you're talking about two turns of leverage, that vicinity?.

Yes, 1.5 to two turns something like that..

Thank you. Next question comes from Lucy Webster with Compass Point..

It's Jason here. Hopefully, the last question on the consumer lending segment, but there was a large alternative asset manager that did a securitization of marketplace loans, I think in late January.

Is that what we should think about the end goal being there?.

Right now we have assets that we're happy to fund on balance sheet. If we thought that we want to lever that position, be it securitization, we would do for the size we're at now we don't have critical mass with securitization, we didn’t even really had critical mass yet to do financing. So we haven't thought so much about that.

I think it's a portfolio growth, we'll think about both options if you want to just finance them on balance sheet or do you want to access term financing in the securitization markets. So we could either way..

Yes as it ramps up I think, there will be a fork in the road where we'll have to make a decision about how to finance that. The good news is that these loans just on a leverage basis have really nice returns, so into the double-digit. So we're not going to be forced to do anything for sure, but we'll consider all options..

I mean given the leverage we run at. We're generally a lot less levered than most other people in the States. So right now balance sheet is fine for us and as we ramp-up we'll consider all these different paths..

It just seems like we have been talking about non-QM, and here we are sitting talking about, maybe this year, we get a securitization done. And consumers, seems like it's just accelerated that much faster.

So if you think about getting that to a 10% position versus non-QM, it seems like there's just much more of an opportunity there?.

No that makes a lot of sense, look we have the consumer on the balance sheet, we don't have the non-QM. So I think you're dead on..

And then on the RPL/MPL activity, it seems like, to us, we've seen a lot more supply come in 2015, yet we're seeing indications, at least, that pricing remains just as strong, any thoughts there, on when or if that breaks and becomes a much more attractive market? Or is the demand simply that strong?.

I will tell you and we were frustrated with the pricing of the big packages, the HUD packages, the big bank packages, in 2014 we did not participate, we didn't think it was good ROE, we didn't think it was good for the shareholders.

So what we did towards the end of 2014, we got more active in buying some smaller packages, maybe in the $10 million to $40 million range, we thought the pricing was much more effective, we think the turns are going to be far-far superior.

So we have found things to do there, our sense of I guess some of the more recent larger trades is that it seems to us that there are fewer people really aggressively bidding. So I don't know if it's really transited into lower prices, my sense is they are a little bit lower.

But people that bought big packages first half of 2014, are now starting to see whether those loans are performing according to their expectations, if they're not, they're probably either not going to participate or adjust the level at what should they chose to participate. So we think the market is going through that adjustment..

And so they get out of the way, there is a few very large buyers that just frankly seem to have a much a lower return on capital bogie or are probably over estimating the returns. So we'll see where that shapes out but until those few buyers get out of the way, we're not going to be able to buy those bigger packages..

I would say we were more active last quarter of 2014 than have been the first half of 2014 definitely..

Thank you. Your next question comes from Brock Vandervliet with Nomura Securities..

Especially for those of us those are newer to the story, if you could just take a minute and scale through some of the products, or all the products, that you've mentioned, to the extent you can? Just give us a ladder of returns, highest to lowest, or vice versa? Just in terms of, given a finite amount of capital, where would you try and maximize returns? Thanks..

Well one thing that's tough is that -- not tough but we are very total return oriented.

So there are many securities that we'll buy that have a mid single-digits yield for example in the RMBS space now where we'll buy it, because we think that there is a very high probability of that will tighten say 100 basis points over the relatively short period of time.

And so you end with a total return in that case that could be well into the double-digits.

But if you turn to Page 13 of the presentation that's I think a good place to start and that certainly the categories it's the portfolio has been stratified in a way that we think is maybe the most logical now as we were talking that consumer ABS and loan row and some of the other rows are kind of guilty of this too sometimes you have some things that are lumped together because we couldn’t have we could go on for pages and pages obviously if we really got granular sometimes things are lumped together that are pretty different.

But I think if you look at sub-prime RMBS and Jumbo Alt-A you can look at those yields they’re lower than they were a year or two ago but we still think that they in many sectors have room to run.

And as Mark mentioned some of these sectors have the possibility especially let us say in Alt-A sector have the possibility where prices are still discounted have the possibility of increased prepayments. So you can see yield boost there as well.

And looking down I mean just you can see in CMBS that’s one of the highest yields there 13-odd percent that’s because of the B-pieces that we’ve been buying in Europe we’ve got again a wide variety of obviously we’ve got all MBS just in one row some things that are shorter and safer that we think could have good total returns some things that are more buying hold for a while with higher yields.

You’ve got -- we have talked about in the consumer ABS space where you’ve got a barbell right now of very short most money market type securities with lower yields and loans that are in the double-digits and that’s where certainly we’re going to see some growth there.

And you’ve got non-QM hopefully waiting to come aboard and we talked about how the unleveraged asset might be in the 5.5% to 7% range but then with a warehouse line allowed us for 200 you can easily get double-digit returns there as well. So it’s a lot of different obviously a lot of different strategies a lot of different asset classes.

But we are going to continue to be focused on total return in some of the more liquid sectors and you might see some lower kind of stated yields on this page there. But still we think hopefully can achieve a good return on equity through active trading which is what we’ve done for years. And then higher yields on some of the newer sectors as well.

So happy to walk through things in more detail with you feel free to call us at any time..

Just a follow-up on the non-QM strategy, does the Skyline Financial relationship limit you to simply sourcing loans through them? Or are you free to source across the space?.

Absolutely that transaction does not limit us in any way in terms of who we deal with..

Sure. Your final question comes from Jim Young with West Family Investments..

Could you talk about your near-term and longer-term outlook? And opportunities that you see in the reverse mortgage sector? Thank you..

Sure. Hey Jim, it’s Mark. So in the reverse mortgage sector we’ve been active there we have liked the reverse mortgage pools the government guaranteed pools they have very stable cash flows, they’ve absolutely no credit risks the Ginnie Mae backed and they’re easy to finance. And we put a stake in….

And also IOs we’ve had….

Yes and they have had reverse more than us and then we bought an equity stake in a very small reverse mortgage originator because when we look at the demographics of the country we think potential of that product to become a very big mortgage product going forward.

To-date it has sort of not been marketed we think in most efficient way so been a lot in commercial stuff but it is a product that makes a lot of sense to retirement tool for people that have a lot of equity in their home and want to do some state planning.

So this long bridge investment I think gives us sort of a lot of option value to partner with someone that we think can grow, so certainly have found interesting things to do there, both the pool side the IO side and then the stake in the originator..

And just like anything on the pool space, especially anything that is liquid as Ginnie Mae these are less liquid certainly than your garden variety MBS things move around so we trade that actively we had accumulated I think what was considered a pretty large position amongst our care group.

I am not there was maybe one other mortgage REIT that I think had a presence in that space.

But it’s kind of a niche product and we had taken a pretty big stake in it a little while ago and things tightened a lot and we got out and then things exceptionally widened a little we got back in but not necessarily to as large extent before so we absolutely can actively trade that and it’s a very specified pool space each pool is different and we like it, it suits us..

There are no further questions at this time. Ladies and gentlemen, this concludes Ellington Financial’s fourth quarter 2014 financial results conference call. Please disconnect your lines at this time and have a wonderful day..