ELLINGTON FINANCIAL INC. Management report and analysis of the financial position and operating results (Form 10-Q)

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Except where the context suggests otherwise, references in this Quarterly Report
on Form 10-Q to "EFC," "we," "us," and "our" refer to Ellington Financial Inc.
and its consolidated subsidiaries, including Ellington Financial Operating
Partnership LLC, our operating partnership subsidiary, which we refer to as our
"Operating Partnership." We conduct all of our operations and business
activities through our Operating Partnership. Our "Manager" refers to Ellington
Financial Management LLC, our external manager, "Ellington" refers to Ellington
Management Group, L.L.C. and its affiliated investment advisory firms, including
our Manager, and "Manager Group" refers collectively to officers and directors
of EFC, and partners and affiliates of Ellington (including families and family
trusts of the foregoing). In certain instances, references to our Manager and
services to be provided to us by our Manager may also include services provided
by Ellington and its other affiliates from time to time.
Special Note Regarding Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, in future filings with the
Securities and Exchange Commission, or the "SEC," or in press releases or other
written or oral communications, statements which are not historical in nature,
including those containing words such as "believe," "expect," "anticipate,"
"estimate," "project," "plan," "continue," "intend," "should," "would," "could,"
"goal," "objective," "will," "may," "seek," or similar expressions, are intended
to identify "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E
of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," and,
as such, may involve known and unknown risks, uncertainties, and assumptions.
Forward-looking statements are based on our beliefs, assumptions, and
expectations of our future operations, business strategies, performance,
financial condition, liquidity and prospects, taking into account information
currently available to us. These beliefs, assumptions, and expectations are
subject to risks and uncertainties and can change as a result of many possible
events or factors, not all of which are known to us. If a change occurs, our
business, financial condition, liquidity, results of operations and strategies
may vary materially from those expressed or implied in our forward-looking
statements. The following factors are examples of those that could cause actual
results to vary from our forward-looking statements: changes in interest rates
and the market value of our investments; market volatility; changes in the
prepayment rates on the mortgage loans underlying the securities owned by us for
which the principal and interest payments are guaranteed by a U.S. government
agency or a U.S. government-sponsored entity; increased rates of default and/or
decreased recovery rates on our assets; our ability to borrow to finance our
assets; changes in government regulations affecting our business; our ability to
maintain our exclusion from registration under the Investment Company Act of
1940, as amended, or the "Investment Company Act"; our ability to maintain our
qualification as a real estate investment trust, or "REIT"; and risks associated
with investing in real estate assets, including changes in business conditions
and the general economy, such as those resulting from the economic effects
related to the COVID-19 pandemic, and associated responses to the pandemic.
These and other risks, uncertainties and factors, including the risk factors
described under Item 1A of our Annual Report on Form 10-K, could cause our
actual results to differ materially from those projected or implied in any
forward-looking statements we make. All forward-looking statements speak only as
of the date on which they are made. New risks and uncertainties arise over time,
and it is not possible to predict those events or how they may affect us. Except
as required by law, we are not obligated to, and do not intend to, update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
Executive Summary
We invest in a diverse array of real-estate-related and other financial assets,
including residential and commercial mortgage loans, residential mortgage-backed
securities, or "RMBS," commercial mortgage-backed securities, or "CMBS,"
consumer loans and asset-backed securities, or "ABS," including ABS backed by
consumer loans, collateralized loan obligations, or "CLOs," non-mortgage- and
mortgage-related derivatives, equity investments in loan origination companies,
and other strategic investments. We are externally managed and advised by our
Manager, an affiliate of Ellington. Ellington is a registered investment adviser
with a 26-year history of investing in the Agency and credit markets.
We conduct all of our operations and business activities through the Operating
Partnership. As of September 30, 2021, we have an ownership interest of
approximately 98.8% in the Operating Partnership. The remaining ownership
interest of approximately 1.2% in the Operating Partnership represents the
interests in the Operating Partnership that are owned by an affiliate of our
Manager, our directors, and certain current and former Ellington employees and
their related parties, and is reflected in our financial statements as a
non-controlling interest.
Our primary objective is to generate attractive, risk-adjusted total returns for
our stockholders. We seek to attain this objective by utilizing an opportunistic
strategy to make investments, without restriction as to ratings, structure, or
position in the capital structure, that we believe compensate us appropriately
for the risks associated with them rather than targeting a specific yield. Our
evaluation of the potential risk-adjusted return of any potential investment
typically involves weighing the potential returns of such investment under a
variety of economic scenarios against the perceived likelihood of the various

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scenarios. Potential investments subject to greater risk (such as those with
lower credit ratings and/or those with a lower position in the capital
structure) will generally require a higher potential return to be attractive in
comparison to investment alternatives with lower potential return and a lower
degree of risk. However, at any particular point in time, depending on how we
perceive the market's pricing of risk both generally and across sectors, we may
favor higher-risk assets or we may favor lower-risk assets, or a combination of
the two, in the interests of portfolio diversification or other considerations.
Through September 30, 2021, our credit portfolio, which includes all of our
investments other than RMBS for which the principal and interest payments are
guaranteed by a U.S. government agency or a U.S. government-sponsored entity, or
"Agency RMBS," has been the primary driver of our risk and return, and we expect
that this will continue in the near- to medium-term. For more information on our
targeted assets, see "-Our Targeted Asset Classes" below. We believe that
Ellington's capabilities allow our Manager to identify attractive assets in
these classes, value these assets, monitor and forecast the performance of these
assets, and opportunistically hedge our risk with respect to these assets.
We continue to maintain a highly leveraged portfolio of Agency RMBS to take
advantage of opportunities in that market sector, to help maintain our exclusion
from registration as an investment company under the Investment Company Act, and
to help maintain our qualification as a REIT. Unless we acquire very substantial
amounts of whole mortgage loans or there are changes to the rules and
regulations applicable to us under the Investment Company Act and/or to our
qualification as a REIT, we expect that we will continue to maintain some amount
of Agency RMBS.
The strategies that we employ are intended to capitalize on opportunities in the
current market environment. Subject to maintaining our qualification as a REIT,
we intend to adjust our strategies to changing market conditions by shifting our
asset allocations across various asset classes as credit and liquidity trends
evolve over time. We believe that this flexibility, combined with Ellington's
experience, will help us generate more consistent returns on our capital
throughout changing market cycles.
Subject to maintaining our qualification as a REIT, we opportunistically hedge
our credit risk, interest rate risk, and foreign currency risk; however, at any
point in time we may choose not to hedge all or a portion of these risks, and we
will generally not hedge those risks that we believe are appropriate for us to
take at such time, or that we believe would be impractical or prohibitively
expensive to hedge.
We also use leverage in our credit strategy, albeit significantly less leverage
than that used in our Agency RMBS strategy. Through September 30, 2021, we
financed the vast majority of our Agency RMBS assets, and a portion of our
credit assets, through repurchase agreements, which we sometimes refer to as
"repos," which we account for as collateralized borrowings. We expect to
continue to finance the vast majority of our Agency RMBS through the use of
repos. In addition to financing assets through repos, we also enter into other
secured borrowing transactions, which are accounted for as collateralized
borrowings, to finance certain of our loan assets. We have also obtained,
through the securitization markets, term financing for certain of our
non-qualified mortgage, or "non-QM," loans, certain of our consumer loans, and
certain of our leveraged corporate loans. Additionally, we have issued unsecured
long-term debt.
As of September 30, 2021, outstanding borrowings under repos and Total other
secured borrowings (which include Other secured borrowings and Other secured
borrowings, at fair value, as presented on our Condensed Consolidated Balance
Sheet) were $3.1 billion, of which approximately 47%, or $1.4 billion, relates
to our Agency RMBS holdings. The remaining outstanding borrowings relate to our
credit portfolio.
As of September 30, 2021, we also had $86.0 million outstanding of unsecured
long-term debt, maturing in September of 2022, or the "Senior Notes." The Senior
Notes bear interest at a rate of 5.50%, subject to adjustment based on changes,
if any, in the ratings of the Senior Notes. The indenture governing the Senior
Notes contains a number of covenants, including several financial covenants. The
Senior Notes are rated A by Egan-Jones Rating Company1. See Note 11 of the notes
to our condensed consolidated financial statements for further detail on the
Senior Notes.
1A rating is not a recommendation to buy, sell or hold securities. Ratings may
be subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other rating.


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As of September 30, 2021, our book value per share of common stock, calculated
using Total Stockholders' Equity less the aggregate liquidation preference of
outstanding preferred stock, was $18.35. Our debt-to-equity ratio was 2.9:1 as
of September 30, 2021. Our debt-to-equity ratio does not account for liabilities
other than debt financings and does not include debt associated with
securitization transactions accounted for as sales. Our recourse debt-to-equity
ratio was 1.8:1 as of September 30, 2021. Adjusted for unsettled purchases and
sales, our debt-to-equity ratio and recourse debt-to-equity ratio were 2.9:1 and
1.9:1, respectively, as of September 30, 2021.
On July 9, 2021, we completed a follow-on offering of 6,000,000 shares of our
common stock. On July 29, 2021, we issued an additional 303,000 shares of common
stock pursuant to the exercise of the underwriters' option. The issuance and
sale of the 6,303,000 shares of common stock generated net proceeds, after
underwriters' discounts and commissions and offering costs, of $113.1 million.
On August 6, 2021, we commenced an "at-the-market" offering program, or "ATM
program," by entering into equity distribution agreements with third party sales
agents under which we are authorized to offer and sell up to 10.0 million shares
of common stock from time to time. Through commencement of the ATM program
through September 30, 2021, we issued 1,549,900 shares of common stock under the
ATM program which provided $28.2 million of net proceeds after $0.4 million of
agent commissions and offering costs.
On October 15, 2021, we completed a follow-on offering of 5,750,000 shares of
our common stock, including 750,000 shares of common stock issued pursuant to
the exercise of the underwriters' option. The issuance and sale of the 5,750,000
shares of common stock generated net proceeds, after underwriters' discounts and
commissions and offering costs, of $103.5 million.
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended, or "the Code," commencing with our taxable year ended December 31,
2019. Provided that we maintain our qualification as a REIT, we generally will
not be subject to U.S. federal, state, and local income tax on our REIT taxable
income that is currently distributed to our stockholders. Any taxes paid by a
domestic taxable REIT subsidiary, or "TRS," will reduce the cash available for
distribution to our stockholders. REITs are subject to a number of
organizational and operational requirements, including a requirement that they
currently distribute at least 90% of their annual REIT taxable income excluding
net capital gains.
Our Targeted Asset Classes
Our targeted asset classes currently include investments in the U.S. and Europe
(as applicable) in the categories listed below. Subject to maintaining our
qualification as a REIT, we expect to continue to invest in these targeted asset
classes. Also, we expect to continue to hold certain of our targeted assets
through one or more TRSs. As a result, a portion of the income from such assets
will be subject to U.S. federal and certain state corporate income taxes, as
applicable.

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Asset Class                                                     Principal Assets
Agency RMBS                        .   Whole pool pass-through certificates;
                                   .   Partial pool pass-through certificates;
                                   .   Agency collateralized mortgage

bonds or “CMO”, including

                                       interest only securities, or "IOs," principal only securities, or
                                       "POs," inverse interest only securities, or "IIOs"; and

CLOs                               .   Retained tranches from CLO securitizations, including
                                       participating in the accumulation of the underlying assets for
                                       such securitization by providing capital to the vehicle
                                       accumulating assets; and
                                   .   Other CLO debt and equity tranches.

CMBS and Commercial Mortgage       .   CMBS; and
Loans                              .   Commercial mortgage loans and other commercial real estate debt.

Consumer Loans and ABS             .   Consumer loans;
                                   .   ABS, including ABS backed by consumer loans; and
                                   .   Retained tranches from

securitizations to which we have

                                       contributed assets.

Mortgage derivatives. Mortgage transmission certificates to be announced, or “TBA”;

                                   .   Credit default swaps, or "CDS," on 

Individual RMBS, on the ABX,

                                       CMBX and PrimeX indices and on other 

mortgage loan indices; and

                                   .   Other mortgage-related derivatives.

Non-Agency RMBS                    .   RMBS backed by prime jumbo, Alt-A, 

non-QM prefabricated housing,

                                       and subprime mortgages;
                                   .   RMBS backed by fixed rate mortgages, 

Variable rate mortgages, or

                                       "ARMs," Option-ARMs, and Hybrid 

Arms;

                                   .   RMBS backed by mortgages on 

single-family rental properties;

                                   .   RMBS backed by first lien and second lien mortgages;
                                   .   Investment grade and non-investment grade securities;
                                   .   Senior and subordinated securities;
                                   .   IOs, POs, IIOs, and inverse floaters;
                                   .   Collateralized debt obligations, or "CDOs";
                                   .   RMBS backed by European residential

mortgage loans, or “European RMBS”;

                                       and
                                   .   Retained tranches from 

securitizations in which we have

                                       participated.

Residential Mortgage Loans         .   Residential non-performing mortgage loans, or "NPLs";
                                   .   Re-performing loans, or "RPLs,"

which are generally loans that

                                       were modified and/or formerly NPLs 

where the borrower took over

                                       making payments in some form or amount;
                                   .   Residential "transition loans," such as residential bridge loans
                                       and residential "fix-and-flip" loans;
                                   .   Non-QM loans; and
                                   .   Retained tranches from

securitizations to which we have

                                       contributed assets.

Strategic Loan Investments. Strategic investments in equity and / or debt in loan originators and originators

                            mortgage-related entities;

Other                              .   Real estate, including commercial 

and residential real estate;

                                   .   Corporate debt and equity securities and corporate loans;
                                   .   Mortgage servicing rights, or "MSRs";
                                   .   Credit risk transfer securities, or "CRTs"; and
                                   .   Other non-mortgage-related derivatives.



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Agency RMBS
Our Agency RMBS assets consist primarily of whole pool (and to a lesser extent,
partial pool) pass-through certificates, the principal and interest of which are
guaranteed by a federally chartered corporation, such as the Federal National
Mortgage Association, or "Fannie Mae," the Federal Home Loan Mortgage
Corporation, or "Freddie Mac," or the Government National Mortgage Association,
within the U.S. Department of Housing and Urban Development, or "Ginnie Mae,"
and which are backed by ARMs, Hybrid ARMs, or fixed-rate mortgages. In addition
to investing in pass-through certificates which are backed by traditional
mortgages, we have also invested in Agency RMBS backed by reverse mortgages.
Reverse mortgages are mortgage loans for which neither principal nor interest is
due until the borrower dies, the home is sold, or other trigger events occur.
Mortgage pass-through certificates are securities representing undivided
interests in pools of mortgage loans secured by real property where payments of
both interest and principal, plus prepaid principal, on the securities are made
monthly to holders of the security, in effect "passing through" monthly payments
made by the individual borrowers on the mortgage loans that underlie the
securities, net of fees paid to the issuer/guarantor and servicers of the
securities. Whole pool pass-through certificates are mortgage pass-through
certificates that represent the entire ownership of (as opposed to merely a
partial undivided interest in) a pool of mortgage loans.
Our Agency RMBS assets are typically concentrated in specified pools. Specified
pools are fixed-rate Agency pools consisting of mortgages with special
characteristics, such as mortgages with low loan balances, mortgages backed by
investor properties, mortgages originated through the government-sponsored
"Making Homes Affordable" refinancing programs, and mortgages with various other
characteristics. Our Agency strategy also includes RMBS that are backed by ARMs
or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs.
CLOs
CLOs are a form of asset-backed security collateralized by syndicated corporate
loans. We have retained, and may retain in the future, tranches from CLO
securitizations for which we have participated in the accumulation of the
underlying assets, typically by providing capital to a vehicle accumulating
assets for such CLO securitization. Such vehicles may enter into warehouse
financing facilities in order to facilitate such accumulation. Securitizations
can effectively provide us with long-term, locked-in financing on the related
collateral pool, with an effective cost of funds well below the expected yield
on the collateral pool. Our CLO holdings may include both debt and equity
interests.
CMBS
We acquire CMBS, which are securities collateralized by mortgage loans on
commercial properties. The majority of CMBS issued are fixed rate securities
backed by fixed rate loans made to multiple borrowers on a variety of property
types, though single-borrower CMBS and floating rate CMBS have also been issued.
The majority of CMBS utilize senior/subordinate structures, similar to those
found in non-Agency RMBS. Subordination levels vary so as to provide for one or
more AAA credit ratings on the most senior classes, with less senior securities
rated investment grade and non-investment grade, including a first loss
component which is typically unrated. This first loss component is commonly
referred to as the "B-piece," which is the most subordinated (and therefore
highest yielding and riskiest) tranche of a CMBS securitization. Much of our
focus within the CMBS sector has been on B-pieces, but we also acquire other
CMBS with more senior credit priority.
Commercial Mortgage Loans and Other Commercial Real Estate Debt
We acquire commercial mortgage loans, which are loans secured by liens on
commercial properties, including hotel, industrial, multi-family, office and
retail properties. Loans may be fixed or floating rate and will generally have
maturities ranging from one to ten years. We typically acquire first lien loans
but may also acquire subordinated loans. As of September 30, 2021, all of our
commercial mortgage loans were first lien loans. Commercial real estate debt
typically limits the borrower's right to freely prepay for a period of time
through provisions such as prepayment fees, lockout, yield maintenance, or
defeasance provisions. Some of the commercial mortgage loans that we acquire may
be non-performing, underperforming, or otherwise distressed; these loans are
typically acquired at a discount both to their unpaid principal balances and to
the value of the underlying real estate.
We also participate in the origination of "bridge" loans, which have shorter
terms and higher interest rates than more traditional commercial mortgage loans.
Bridge loans are typically secured by properties in transition, where the
borrower is in the process of either re-developing or stabilizing operations at
the property. Properties securing these loans may include multi-family, retail,
office, industrial, and other commercial property types.
Within both our loan acquisition and loan origination strategies, we generally
focus on smaller balance loans and/or loan packages that are
less-competitively-bid. These loans typically have balances that are less than
$20 million, and are secured by

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real estate and, in some cases, a personal guarantee from the borrower.
Consumer Loans and ABS
We acquire U.S. consumer whole loans and ABS, including ABS backed by U.S.
consumer loans. Our U.S. consumer loan portfolio consists of unsecured loans and
secured auto loans. We are currently purchasing newly originated consumer loans
under flow agreements with originators, as well as seasoned consumer loans in
the secondary market, and we continue to evaluate new opportunities.
TBAs and Other Mortgage-Related Derivatives
In addition to investing in specified pools of Agency RMBS, we utilize TBA
transactions, whereby we agree to purchase or sell, for future delivery, Agency
RMBS with certain principal and interest terms and certain types of underlying
collateral, but the particular Agency RMBS to be delivered is not identified
until shortly before the TBA settlement date. TBAs are liquid, have quoted
market prices, and represent the most actively traded class of mortgage-backed
securities, or "MBS." TBA trading is based on the assumption that mortgage pools
that are eligible to be delivered at TBA settlement are fungible and thus the
specific mortgage pools to be delivered do not need to be explicitly identified
at the time a trade is initiated.
We generally engage in TBA transactions for purposes of managing certain risks
associated with our investment strategies. Other than with respect to TBA
transactions entered into by our TRSs, most of our TBA transactions are treated
for tax purposes as hedging transactions used to hedge indebtedness incurred to
acquire or carry real estate assets, or "qualifying liability hedges." The
principal risks that we use TBAs to mitigate are interest rate and yield spread
risks. For example, we may hedge the interest rate and/or yield spread risk
inherent in our long Agency RMBS by taking short positions in TBAs that are
similar in character. Alternatively, we may opportunistically engage in TBA
transactions because we find them attractive in their own right, from a relative
value perspective or otherwise. For accounting purposes, in accordance with
generally accepted accounting principles in the United States of America, or
"U.S. GAAP," we classify TBA transactions as derivatives.
We also take long and short positions in various other mortgage-related
derivative instruments, including mortgage-related credit default swaps. A
credit default swap is a credit derivative contract in which one party (the
protection buyer) pays an ongoing periodic premium (and often an upfront payment
as well) to another party (the protection seller) in return for compensation for
default (or similar credit event) by a reference entity. In this case, the
reference entity can be an individual MBS or an index of several MBS, such as an
ABX, PrimeX, or CMBX index. Payments from the protection seller to the
protection buyer typically occur if a credit event takes place. A credit event
can be triggered by, among other things, the reference entity's failure to pay
its principal obligations or a severe ratings downgrade of the reference entity.
Non-Agency RMBS
We acquire non-Agency RMBS backed by prime jumbo, Alt-A, non-QM, manufactured
housing, subprime residential, and single-family-rental mortgage loans. Our
non-Agency RMBS holdings can include investment-grade and non-investment grade
classes, including non-rated classes.
Non-Agency RMBS are generally debt obligations issued by private originators of,
or investors in, residential mortgage loans. Non-Agency RMBS generally are
issued as CMOs and are backed by pools of whole mortgage loans or by mortgage
pass-through certificates. Non-Agency RMBS generally are securitized in
senior/subordinated structures, or in excess spread/over-collateralization
structures. In senior/subordinated structures, the subordinated tranches
generally absorb all losses on the underlying mortgage loans before any losses
are borne by the senior tranches. In excess spread/over-collateralization
structures, losses are first absorbed by any existing over-collateralization,
then borne by subordinated tranches and excess spread, which represents the
difference between the interest payments received on the mortgage loans backing
the RMBS and the interest due on the RMBS debt tranches, and finally by senior
tranches and any remaining excess spread.
We also have acquired, and may acquire in the future, European RMBS, including
retained tranches from European RMBS securitizations in which we have
participated.
Residential Mortgage Loans
Our residential mortgage loans include newly originated non-QM loans,
residential transition loans, as well as legacy residential NPLs and RPLs. A
non-QM loan is not necessarily high-risk, or subprime, but is instead a loan
that does not conform to the complex Qualified Mortgage, or "QM," rules of the
Consumer Financial Protection Bureau. For example, many non-QM loans are made to
creditworthy borrowers who cannot provide traditional documentation for income,
such as borrowers who are self-employed. There is also demand from certain
creditworthy borrowers for loans above the QM 43% debt-to-income ratio limit
that still meet all ability-to-repay standards. We hold an equity investment in
a non-QM originator,

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and to date we have purchased the vast majority of our non-QM loans from this
originator, although we could potentially purchase a greater share of non-QM
loans from other sources in the future.
The residential transition loans that we originate or purchase include: (i) "fix
and flip" loans, which are made to real estate investors for the purpose of
acquiring residential homes, making value-add improvements to such homes, and
reselling the newly rehabilitated homes for a potential profit, and (ii) loans
made to real estate investors for a "business purpose," such as purchasing a
rental investment property, financing or refinancing a fully rehabilitated home
awaiting sale, or securing short-term financing pending qualification for
longer-term lower-rate financing. Our residential transition loans are secured
by non-owner occupied properties, and are typically structured as fixed-rate,
interest-only loans with terms to maturity between 6 and 24 months. Our
underwriting guidelines focus on both the "as is" and "as repaired" property
values, borrower experience as a real estate investor, and asset verification.
We remain active in the market for residential NPLs and RPLs. The market for
large residential NPL and RPL pools has remained highly concentrated, with the
great majority having traded to only a handful of large players who typically
securitize the residential NPLs and RPLs that they purchase. As a result, we
have continued to focus our acquisitions on less-competitively-bid, and more
attractively-priced mixed legacy pools sourced from motivated sellers.
Strategic Equity Investments in Loan Originators
We have made, and in the future may make additional, equity investments in loan
originators and other related entities; to date, our investments have
represented non-controlling interests, although we are not restricted from
holding controlling interests in such entities. We have also acquired debt
investments and/or warrants in certain of these loan originators. We have also
entered into various other arrangements, such as entering into flow agreements
or providing guarantees or financing lines, with certain of the loan originators
in which we have invested.
Other Investment Assets
Our other investment assets include real estate, including residential and
commercial real property, corporate debt and equity securities, corporate loans,
which can include litigation finance loans, CRTs, and other non-mortgage-related
derivatives. We do not typically purchase real property directly; rather, our
real estate ownership usually results from foreclosure activity with respect to
our acquired residential and commercial loans. We have not yet acquired mortgage
servicing rights directly, but we may do so in the future.
Hedging Instruments
Interest Rate Hedging
We opportunistically hedge our interest rate risk by using various hedging
strategies, subject to maintaining our qualification as a REIT. The interest
rate hedging instruments that we use and may use in the future include, without
limitation:
•TBAs;
•interest rate swaps (including floating-to-fixed, fixed-to-floating,
floating-to-floating, or more complex swaps such as floating-to-inverse
floating, callable or non-callable);
•CMOs;
•U.S. Treasury securities;
•swaptions, caps, floors, and other derivatives on interest rates;
•futures and forward contracts; and
•options on any of the foregoing.
Because fluctuations in short-term interest rates may expose us to fluctuations
in the spread between the interest we earn on our investments and the interest
we pay on our borrowings, we may seek to manage such exposure by entering into
short positions in interest rate swaps. An interest rate swap is an agreement to
exchange interest rate cash flows, calculated on a notional principal amount, at
specified payment dates during the life of the agreement. Typically, one party
pays a fixed interest rate and receives a floating interest rate and the other
party pays a floating interest rate and receives a fixed interest rate. Each
party's payment obligation is computed using a different interest rate. In an
interest rate swap, the notional principal is generally not exchanged.


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Credit Risk Hedging
We enter into credit-hedging positions in order to protect against adverse
credit events with respect to our credit investments, subject to maintaining our
qualification as a REIT. Our credit hedging portfolio can vary significantly
from period to period, and can encompass a wide variety of financial
instruments, including corporate debt or equity-related instruments, RMBS- or
CMBS-related instruments, or instruments involving other markets. Our hedging
instruments can include both "single-name" instruments (i.e., instruments
referencing one underlying entity or security) and hedging instruments
referencing indices.
Currently, our credit hedges consist primarily of financial instruments tied to
corporate credit, such as CDS on corporate bond indices, short positions in and
CDS on corporate bonds; and positions involving exchange traded funds, or
"ETFs," of corporate bonds. Our credit hedges also currently include CDS tied to
individual MBS or an index of several MBS, such as CDS on CMBS indices, or
"CMBX."
Foreign Currency Hedging
To the extent that we hold instruments denominated in currencies other than U.S.
dollars, we may enter into transactions to offset the potential adverse effects
of changes in currency exchange rates, subject to maintaining our qualification
as a REIT. In particular, we may use currency forward contracts and other
currency-related derivatives to mitigate this risk.


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Trends and Recent Market Developments
Market Overview
•The U.S. Federal Reserve, or the "Federal Reserve," continued its accommodative
monetary policy in the third quarter of 2021. At both its July and September
meetings, the Federal Reserve maintained its target range of 0.00%-0.25% for the
federal funds rate, and also maintained its directions to the Open Market Desk
to increase its holdings of U.S. Treasury securities by $80 billion per month,
and of Agency RMBS by $40 billion per month. In addition, in July, the Federal
Reserve announced the establishment of a standing repurchase agreement facility
to support financing markets. Finally, minutes from the September meeting noted
that "no decision to proceed with a moderation of asset purchases was made at
the meeting, but participants generally assessed that, provided that the
economic recovery remained broadly on track, a gradual tapering process that
concluded around the middle of next year would likely be appropriate.
Participants noted that if a decision to begin tapering purchases occurred at
the next meeting, the process of tapering could commence with the monthly
purchase calendars beginning in either mid-November or mid-December."
•Interest rates declined in July before reversing course and rising in August
and September. For the quarter, the 10-year U.S. Treasury yield rose 2 basis
points to 1.49%, while the 2-year U.S. Treasury yield increased 3 basis points
to 0.28%, and the yield spread between the 2-year and 10-year U.S. Treasury was
essentially unchanged. Interest rate volatility remained relatively elevated for
much of the third quarter, as measured by the MOVE Index.
•Mortgage rates also declined in July before reversing course and rising in
August and September, in sympathy with long-term interest rates. For the
quarter, the Freddie Mac survey 30-year mortgage rate increased by 3 basis
points to 3.01%. Refinancing applications rose modestly during the quarter-after
declining over the first half of 2021-with the Mortgage Bankers Association's
Refinance Index increasing by 9% between July 2nd and October 1st. Overall
Fannie Mae 30-year MBS prepayments decreased from a CPR of 24.6 in June 2021 to
22.2 in July, before returning to 24.6 in August and declining slightly to 24.1
in September.
•LIBOR rates, which drive many of our financing costs, remained very low in the
third quarter of 2021. One-month and three-month LIBOR both declined by 2 basis
points during the quarter, to 0.08% and 0.13%, respectively.
•Real GDP grew for the fifth-consecutive quarter, increasing at an estimated
annualized rate of 2.0% in the third quarter of 2021. Meanwhile, the
unemployment rate declined to 4.8% as of September 30th, from 5.9% at the end of
the previous quarter.
•Forbearance rates on residential mortgages continued to decline in the third
quarter of 2021. According to the Mortgage Bankers Association, the total
forbearance rate decreased to 2.9% at September 26th, from 3.9% at June 27th.
•For the third quarter of 2021, the Bloomberg Barclays U.S. MBS Index generated
a positive return of 0.10%, and an excess return (on a duration-adjusted basis)
of 0.03% relative to the Bloomberg Barclays U.S. Treasury Index. The Bloomberg
Barclays U.S. Corporate Bond Index was unchanged during the quarter, but
generated a negative excess return of (0.15%); while the Bloomberg Barclays U.S.
Corporate High Yield Bond Index generated a gain of 0.92% and an excess return
of 0.89%.
•The strong performance of U.S. equities continued in July and August, with the
S&P 500, Dow Jones Industrial Average, and NASDAQ hitting new highs in each
month. However, the market retreated in September amidst concerns over rising
interest rates, softening economic data, inflation, and continued supply-chain
challenges, among other factors. In September, the S&P 500 posted its worst
month since March 2020. For the third quarter, the S&P 500 rose 0.23%, the Dow
Jones Industrial Average decreased 1.91%, and the NASDAQ fell 0.38%. The VIX
volatility index was relatively stable throughout the third quarter, with
occasional spikes. Meanwhile, London's FTSE 100 index increased 0.70% and the
MSCI World global equity index fell 0.35% quarter over quarter.

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Portfolio Overview and Outlook
The following tables summarize our investment portfolio as of September 30, 2021
and June 30, 2021.
Credit Portfolio(1)
                                                               September 30, 2021                                   June 30, 2021
                                                                              % of Total Long                                 % of Total Long
($ in thousands)                                      Fair Value             Credit Portfolio           Fair Value           Credit Portfolio
Dollar Denominated:
CLOs(2)                                          $          65,678                       2.6  %       $     69,053                       2.9  %
CMBS                                                        13,604                       0.5  %             45,872                       2.0  %
Commercial mortgage loans and REO(3)(4)                    325,733                      12.9  %            316,010                      13.5  %
Consumer loans and ABS backed by consumer
loans(2)                                                   138,568                       5.5  %            138,471                       5.9  %
Corporate debt and equity and corporate
loans                                                       26,373                       1.0  %             27,939                       1.2  %
Debt and equity investments in loan
origination entities                                       106,406                       4.2  %            106,159                       4.5  %
Non-Agency RMBS                                            168,044                       6.6  %            158,798                       6.8  %
Residential mortgage loans and REO(3)                    1,658,879                      65.5  %          1,447,202                      61.8  %
Non-Dollar Denominated:
CLOs(2)                                                      3,746                       0.1  %              3,804                       0.2  %

Consumer loans and ABS backed by consumer
loans                                                          101                         -  %                166                         -  %
Corporate debt and equity                                       14                         -  %                 26                         -  %
RMBS(5)                                                     26,960                       1.1  %             28,717                       1.2  %
Total Long Credit Portfolio                      $       2,534,106                     100.0  %       $  2,342,217                     100.0  %
Less: Non-retained tranches of
consolidated securitization trusts                         845,754                                         982,984
Total Long Credit Portfolio excluding
non-retained tranches of consolidated
securitization trusts                            $       1,688,352                                    $  1,359,233


(1)This information does not include U.S. Treasury securities, interest rate
swaps, TBA positions, or other hedge positions.
(2)Includes equity investments in securitization-related vehicles.
(3)REO is not considered a financial instrument and, as a result, is included at
the lower of cost or fair value, as discussed in Note 2 of the notes to
condensed consolidated financial statements.
(4)Includes investments in unconsolidated entities holding small balance
commercial mortgage loans and REO.
(5)Includes an investment in an unconsolidated entity holding European RMBS.
Agency RMBS Portfolio
                                                                September 30, 2021                                     June 30, 2021
                                                                              % of Long Agency                                  % of Long Agency
($ in thousands)                                      Fair Value                  Portfolio               Fair Value                Portfolio
Long Agency RMBS:
Fixed Rate                                       $       1,424,516                        92.7  %       $  1,333,676                        90.4  %
Floating Rate                                               10,880                         0.7  %             27,093                         1.8  %
Reverse Mortgages                                           63,534                         4.1  %             75,934                         5.1  %
IOs                                                         38,077                         2.5  %             39,045                         2.7  %
Total Long Agency RMBS                           $       1,537,007                       100.0  %       $  1,475,748                       100.0  %


Our total long credit portfolio grew by 24% in the third quarter, to $1.688
billion as of September 30, 2021, from $1.359 billion as of June 30, 2021, as we
deployed proceeds from our July equity offering. The majority of the growth
occurred in the non-QM and residential transition loan strategies, while our
portfolio of small balance commercial mortgage loans and non-Agency RMBS also
expanded. These increases were partially offset by loan payoffs and
opportunistic sales of CMBS and CLOs during the quarter
Our long Agency RMBS portfolio also increased during the quarter, by 4% to
$1.537 billion as of September 30, 2021, from $1.476 billion as of June 30,
2021.
As of September 30, 2021, we had cash and cash equivalents of $103.6 million,
along with unencumbered assets of approximately $648.9 million.

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Credit Portfolio Performance Summary
We had strong performance from most of our primary credit strategies in the
third quarter, and similar to the prior quarter, strong net interest income and
substantial net realized and unrealized gains drove results. Our loan
strategies-including non-QM, residential transition, small balance commercial
mortgage, and consumer loans-generated high returns on equity driven primarily
by net interest income, while performance in the CMBS, CLO, and non-Agency RMBS
strategies was also excellent, driven primarily by net realized and unrealized
gains. Finally, despite a record quarter of originations, Longbridge Financial,
LLC, a reverse mortgage originator in which we have an equity investment, had a
net loss for the quarter. The loss at Longbridge Financial was driven by
mark-to-market losses on its MSR portfolio due to yield spread widening and
elevated prepayment speeds in the reverse mortgage sector, and this loss
detracted from our results.
Supplemental Credit Portfolio Information
The table below details certain information regarding our investments in
commercial mortgage loans as of September 30, 2021:
                                                                                                               Gross Unrealized                                                        Weighted Average
                                              Unpaid
                                            Principal              Premium             Amortized
($ in thousands)                             Balance             (Discount)              Cost                Gains            Losses          Fair Value             Coupon              Yield(2)           Life (Years)(3)
Commercial mortgage loans,
held-for-investment(1)                    $   352,936          $    
(1,042)         $  351,894          $    1,517          $ (175)         $  353,236                 7.65  %              7.57  %                     1.02


(1)Includes our allocable portion of small-balance commercial loans, based on
our ownership percentage, held in variable interest entities. Our equity
investments in such variable interest entities are included in Investments in
unconsolidated entities, at fair value on the Condensed Consolidated Balance
Sheet.
(2)Excludes commercial mortgage loans, in non-accrual status, with a fair value
of $40.0 million.
(3)Expected average lives of loans are generally shorter than stated contractual
maturities. Average lives are affected by scheduled periodic payments of
principal and unscheduled prepayments of principal.
The table below summarizes our interests in commercial mortgage loans by
property type of the underlying real estate collateral, as a percentage of total
outstanding unpaid principal balance, as of September 30, 2021:
Property Type         September 30, 2021
Multifamily(1)                    47.7  %
Industrial(1)                     17.5  %
Hotel                             12.7  %
Mixed Use                         10.6  %
Retail                             3.9  %
Other(1)                           7.6  %
                                 100.0  %


(1)Includes our allocable portion of small-balance commercial loans, based on
our ownership percentage, held in variable interest entities. Our equity
investments in such variable interest entities are included in Investments in
unconsolidated entities, at fair value on the Consolidated Balance Sheet.
The table below summarizes our interests in residential mortgage loans by loan
type and REO resulting from the foreclosure of residential mortgage loans as of
September 30, 2021:
                                                                         September 30, 2021
                                                               Unpaid Principal
Property Type                                                       Balance              Fair Value
                                                                            In thousands
Non-QM loans                                                   $    1,374,773          $  1,430,437
Residential transition loans                                             199,144               199,138
Other residential loans                                                   28,631                27,126
Total residential mortgage loans                               $    1,602,548          $  1,656,701
Residential REO(1)                                                                            2,178
Total residential mortgage loans and residential REO(1)                                $  1,658,879


(1) REO is not considered a financial instrument and, therefore, is included at the lower of cost or fair value, as indicated in note 2 of the notes to the condensed consolidated financial statements.

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In early 2020, there was a significant nationwide increase in loan
delinquencies, forbearances, deferments, and modifications, as a result of the
economic impacts of COVID-19. While we saw the effects of this in some of our
portfolios, the effects moderated considerably during the second half of 2020.
As of September 30, 2021, there were no material incremental effects from
COVID-related forbearance or deferment activity in our non-QM, residential
transition, consumer, or small balance commercial mortgage loan portfolios.
The following table provides additional details about our investments in
unconsolidated entities as of September 30, 2021:
Investment in Unconsolidated Entity                         Description                                Fair Value
Loan Originators:                                           Entity Type
Longbridge Financial, LLC                                   Reverse Mortgage Loan Originator         $     65,694
                                                            Residential Mortgage Loan
LendSure Mortgage Corp.                                     Originator                                     27,144
                                                            Residential Mortgage Loan and
Other                                                       Consumer Loan Originators                      10,568
                                                                                                          103,406
Other Unconsolidated Entities:                              Underlying Product Type
Co-investments with Ellington affiliate(s)                  Commercial Mortgage Loans                      23,318
Equity investments in securitization-related risk
retention vehicles                                          Consumer Loans                                 11,698
Other                                                       Various                                         3,597
                                                                                                           38,613
                                                                                                     $    142,019


Agency RMBS Portfolio Performance Summary
Our Agency strategy had modestly positive results during a quarter in which the
Agency RMBS sector had mixed performance. In July and early August, interest
rates continued to fall and volatility increased, causing Agency RMBS to
underperform U.S. Treasuries. Moving into the latter half of the quarter,
interest rates began to increase and volatility declined, and toward the end of
the quarter, Agency yield spreads tightened as the market got more clarity on
the Federal Reserve's tapering plan. Incrementally higher mortgage
rates-particularly in September-led to reduced expectations for prepayment rates
and boosted higher-coupon RMBS, while the anticipated withdrawal of Federal
Reserve purchases negatively impacted lower-coupon RMBS.
Net interest income in our Agency portfolio, strong performance from our Agency
interest-only securities, and net gains on our higher-coupon specified pools
exceeded net losses on our lower-coupon holdings and reverse mortgage portfolio.
On the hedging side, net losses on TBA short positions, particularly on higher
coupons, slightly exceeded net gains on interest-rate swaps and U.S. Treasury
hedges.
Average pay-ups on our specified pools decreased to 1.04% as of September 30,
2021, from 1.10% as of June 30, 2021, as new purchases during the quarter mainly
consisted of pools with lower pay-ups. Pay-ups are price premiums for specified
pools relative to their TBA counterparts.
During the third quarter, we continued to hedge interest rate risk, primarily
through the use of interest rate swaps, and short positions in TBAs, U.S.
Treasury securities, and futures. The size of our short TBA position increased
quarter over quarter relative to our other hedging instruments, as measured by
10-year equivalents. In addition, we continued to maintain a long TBA portfolio
concentrated in lower coupons.
As of both September 30, 2021 and June 30, 2021, the weighted average net
pass-through rate on our fixed-rate specified pools was 3.1%. Portfolio turnover
for our Agency strategy, as measured by sales and excluding paydowns, was
approximately 9% for the three-month period ended September 30, 2021.
We expect to continue to target specified pools that, taking into account their
particular composition and based on our prepayment projections, should:
(1) generate attractive yields relative to other Agency RMBS and U.S. Treasury
securities, (2) have less prepayment sensitivity to government policy shocks,
and/or (3) create opportunities for trading gains once the market recognizes
their value, which for newer pools may come only after several months, when
actual prepayment experience can be observed. We believe that our research team,
proprietary prepayment models, and extensive databases remain essential tools in
our implementation of this strategy.

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The following table summarizes the prepayment rates for our portfolio of
fixed-rate specified pools (excluding those backed by reverse mortgages) for the
three-month periods ended September 30, 2021, June 30, 2021, March 31, 2021,
December 31, 2020, and September 30, 2020.
                                                                                             Three-Month Period Ended
                                          September 30, 2021            June 30, 2021            March 31, 2021            December 31, 2020          September 30, 2020
Three-Month Constant Prepayment
Rates(1)                                         21.6%                      21.7%                     23.4%                      24.4%                       22.0%


(1)Excludes Agency fixed-rate RMBS without any prepayment history.
The following table provides details about the composition of our portfolio of
fixed-rate specified pools (excluding those backed by reverse mortgages) as of
September 30, 2021 and June 30, 2021:
                                                                         September 30, 2021                                                   June 30, 2021
                                                                                                    Weighted                                                          Weighted
                                                         Current                                  Average Loan             Current                                  Average Loan
                                 Coupon (%)             Principal            Fair Value           Age (Months)            Principal            Fair Value           Age (Months)
                                                                (In thousands)                                                    (In 

thousands)

Fixed-rate Agency RMBS:
15-year fixed-rate
mortgages:
                                  1.50-1.99          $      5,101          $     5,186                   8             $      5,387          $     5,514                   5
                                  2.00-2.49                58,368               60,577                   8                   48,818               50,747                   6
                                  2.50-2.99                62,447               65,376                  21                   58,335               61,225                  19
                                  3.00-3.49                69,022               72,889                  12                   72,871               76,963                   9
                                  3.50-3.99                16,514               17,711                  74                   19,530               20,981                  63
                                  4.00-4.49                 4,766                5,085                  63                    5,494                5,877                  59
                                  4.50-4.99                 2,951                3,107                 133                    3,332                3,520                 130
Total 15-year fixed-rate
mortgages                                                 219,169              229,931                  21                  213,767              224,827                  19
20-year fixed-rate
mortgages:
                                  2.00-2.49                 2,815                2,877                  10                    2,953                3,032                   7
                                  2.50-2.99                45,671               47,626                  11                   46,551               48,634                   8

                                  4.50-4.99                   407                  450                  94                      414                  442                  91
Total 20-year fixed-rate
mortgages                                                  48,893               50,953                  12                   49,918               52,108                   9
30-year fixed-rate
mortgages:
                                  2.00-2.49                15,809               15,914                   5                    6,116                6,198                   5
                                  2.50-2.99               449,537              465,503                   6                  360,496              374,603                   4
                                  3.00-3.49               219,897              232,680                  17                  208,395              219,847                  17
                                  3.50-3.99               129,157              139,077                  44                  128,704              138,094                  47
                                  4.00-4.49               133,535              145,379                  53                  147,797              159,995                  51
                                  4.50-4.99                87,400               95,979                  54                   90,879               99,529                  52
                                  5.00-5.49                39,757               44,014                  60                   47,974               53,023                  54
                                  5.50-5.99                 3,393                3,882                  63                    3,419                3,942                  61
                                  6.00-6.49                 1,037                1,204                 112                    1,301                1,510                  95
Total 30-year fixed-rate
mortgages                                               1,079,522            1,143,632                  25                  995,081            1,056,741                  26
Total fixed-rate Agency
RMBS                                                 $  1,347,584          $ 1,424,516                  24             $  1,258,766          $ 1,333,676                  24


Our net Agency premium as a percentage of the fair value of our specified pool
holdings is one metric that we use to measure the overall prepayment risk of our
specified pool portfolio. Net Agency premium represents the total premium
(excess of market value over outstanding principal balance) on our specified
pool holdings less the total premium on related net short TBA positions. The
lower our net Agency premium, the less we believe that our specified pool
portfolio is exposed to market-

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wide increases in Agency RMBS prepayments. Our net Agency premium as a
percentage of fair value of our specified pool holdings was approximately 2.4%
and 3.0% as of September 30, 2021 and June 30, 2021, respectively. These figures
take into account the net short TBA positions that we use to hedge our specified
pool holdings, which had a notional value of $632.4 million and a fair value of
$677.3 million as of September 30, 2021, as compared to a notional value of
$601.1 million and a fair value of $640.1 million as of June 30, 2021. Excluding
these TBA hedging positions, our Agency premium as a percentage of fair value
was approximately 5.4% and 5.7% as of September 30, 2021 and June 30, 2021,
respectively. Our Agency premium percentage and net Agency premium percentage
may fluctuate from period to period based on a variety of factors, including
market factors such as interest rates and mortgage rates, and, in the case of
our net Agency premium percentage, based on the degree to which we hedge
prepayment risk with short TBA positions. We believe that our focus on
purchasing pools with specific prepayment characteristics provides a measure of
protection against prepayments.
Financing
The following table details our borrowings outstanding and debt-to-equity ratios
as of September 30, 2021 and June 30, 2021:
                                                                                    As of
($ in thousands)                                                  September 30, 2021           June 30, 2021
Recourse(1) Borrowings:
Repurchase Agreements                                           $         1,886,094          $    1,696,285
Other Secured Borrowings                                                     51,727                  52,237
Senior Notes, at par                                                         86,000                  86,000
Total Recourse Borrowings                                       $         2,023,821          $    1,834,522
Debt-to-Equity Ratio Based on Total Recourse
Borrowings(1)                                                                    1.8:1                   1.9:1

Debt ratio based on Total borrowings with recourse other than US Treasury securities

                                               1.8:1                   1.9:1
Non-Recourse(2) Borrowings:
Repurchase Agreements                                           $           219,742          $      220,464
Other Secured Borrowings                                                     39,254                  34,137
Other Secured Borrowings, at fair value(3)                                  872,306               1,003,037
Total Recourse and Non-Recourse Borrowings                      $         3,155,123          $    3,092,160
Debt-to-Equity Ratio Based on Total Recourse and
Non-Recourse Borrowings                                                          2.9:1                   3.2:1
Debt-to-Equity Ratio Based on Total Recourse and
Non-Recourse Borrowings Excluding U.S. Treasury
Securities                                                                       2.9:1                   3.2:1


(1)As of September 30, 2021 and June 30, 2021, excludes borrowings at certain
unconsolidated entities that are recourse to us. Including such borrowings, our
debt-to-equity ratio based on total recourse borrowings was 1.9:1 and 2.0:1 as
of September 30, 2021 and June 30, 2021, respectively.
(2)All of our non-recourse borrowings are secured by collateral. In the event of
default under a non-recourse borrowing, the lender has a claim against the
collateral but not any of the Operating Partnership's other assets. In the event
of default under a recourse borrowing, the lender's claim is not limited to the
collateral (if any).
(3)Relates to our non-QM loan securitizations, where we have elected the fair
value option on the related debt.
Our debt-to-equity ratio including repos, Total other secured borrowings, and
our Senior Notes, but excluding repos on U.S. Treasury securities, decreased to
2.9:1 as of September 30, 2021 as compared to 3.2:1 as of June 30, 2021, as
borrowings related to new purchases were partially offset by paydowns of
non-recourse borrowings related to our non-QM securitizations, and as total
equity increased. In addition, excluding repos on U.S. Treasury securities, our
recourse debt-to-equity ratio decreased slightly to 1.8:1 as of September 30,
2021, from 1.9:1 as of June 30, 2021. Our recourse debt-to-equity ratio,
adjusted for unsettled purchases and sales, was 1.9:1 as of both September 30,
2021 and June 30, 2021.
Our debt-to-equity ratio may fluctuate period over period based on portfolio
management decisions, market conditions, capital markets activities, and the
timing of security purchase and sale transactions.
Our financing costs include interest expense related to our repo borrowings,
Total other secured borrowings, and Senior Notes. Historically, the interest
rates on our repo borrowings and Other secured borrowings have been highly
correlated with, and often have been explicitly indexed to, certain benchmark
interest rates such as LIBOR or the Secured Overnight Financing Rate, or "SOFR."
For the three-month period ended September 30, 2021, our average cost of funds
decreased to 1.15%, as compared to 1.33% for the three-month period ended June
30, 2021. The period-over-period decline in our average cost of funds was
primarily due to lower financing rates on our credit borrowings.

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Critical Accounting Estimates
Our interim unaudited condensed consolidated financial statements include the
accounts of Ellington Financial Inc., its Operating Partnership, its
subsidiaries, and variable interest entities, or "VIEs," for which we are deemed
to be the primary beneficiary. All intercompany balances and transactions have
been eliminated. Certain of our critical accounting policies require us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. We believe that all of the decisions
and assessments upon which our consolidated financial statements are based were
reasonable at the time made based upon information available to us at that time.
We rely on the experience of our Manager and Ellington and analysis of
historical and current market data in order to arrive at what we believe to be
reasonable estimates. See Note 2 of the notes to our condensed consolidated
financial statements for a complete discussion of our significant accounting
policies. We have identified our most critical accounting policies to be the
following:
Valuation: We have elected the fair value option for the vast majority of our
assets and liabilities for which such election is permitted, as provided for
under ASC 825, Financial Instruments ("ASC 825"). For financial instruments that
are traded in an "active market," the best measure of fair value is the quoted
market price. However, many of our financial instruments are not traded in an
active market. Therefore, management generally uses third-party valuations when
available. If third-party valuations are not available, management uses other
valuation techniques, such as the discounted cash flow methodology. Summary
descriptions, for various categories of financial instruments, of the valuation
methodologies management uses in determining fair value of our financial
instruments are detailed in Note 2 of the notes to our condensed consolidated
financial statements. Management utilizes such methodologies to assign a good
faith fair value (the estimated price that, in an orderly transaction at the
valuation date, would be received to sell an asset, or paid to transfer a
liability, as the case may be) to each such financial instrument.
See the notes to our condensed consolidated financial statements for more
information on valuation techniques used by management in the valuation of our
assets and liabilities.
Purchases and Sales of Investments and Investment Income: Purchase and sales
transactions are generally recorded on trade date. Realized and unrealized gains
and losses are calculated based on identified cost. We generally amortize
premiums and accrete discounts on our fixed-income investments using the
effective interest method.
See the notes to our condensed consolidated financial statements for more
information on the assumptions and methods that we use to amortize purchase
premiums and accrete purchase discounts.
Income Taxes: We made an election to be taxed as a REIT for U.S. federal income
tax purposes commencing with our taxable year ended December 31, 2019. As a
REIT, we generally are not subject to corporate-level federal and state income
tax on net income we distribute to our stockholders within the prescribed
timeframes. To qualify as a REIT, we must meet a number of organizational and
operational requirements, including distributing at least 90% of our taxable
income to our stockholders. Even if we qualify as a REIT, we may be subject to
certain federal, state, local and foreign taxes on our income and property, and
to federal income and excise taxes on our undistributed taxable income. If we
fail to qualify as a REIT, and do not qualify for certain statutory relief
provisions, we will be subject to U.S. federal, state, and local income taxes
and may be precluded from qualifying as a REIT for the four taxable years
following the year in which we fail to qualify as a REIT.
We elected to treat certain domestic and foreign subsidiaries as TRSs, and may
in the future elect to treat other current or future subsidiaries as TRSs. In
general, a TRS may hold assets and engage in activities that we cannot hold or
engage in directly and generally may engage in any real estate or non-real
estate-related business. A domestic TRS may, but is not required to, declare
dividends to us; such dividends will be included in our taxable income/(loss)
and may necessitate a distribution to our stockholders. Conversely, if we retain
earnings at the level of a domestic TRS, such earnings will increase the book
equity of the consolidated entity. A domestic TRS is subject to U.S. federal,
state, and local corporate income taxes. We have elected and may elect in the
future to treat certain of our foreign corporate subsidiaries as TRSs and,
accordingly, taxable income generated by these TRSs may not be subject to U.S.
federal, state, and local corporate income taxation, but generally will be
included in our income on a current basis as Subpart F income, whether or not
distributed. However, certain of our foreign subsidiaries may be subject to
income taxes in the relevant foreign jurisdictions. Our financial results are
generally not expected to reflect provisions for current or deferred income
taxes, except for any activities conducted through one or more TRSs that are
subject to corporate income taxation.
We follow the authoritative guidance on accounting for and disclosure of
uncertainty on tax positions, which requires management to determine whether a
tax position is more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. For
uncertain tax positions, the tax benefit to be recognized is measured as the
largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement. We did not have any unrecognized tax benefits resulting
from tax positions

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related to the current period or our open tax years. In the normal course of
business, we may be subject to examination by federal, state, local, and foreign
jurisdictions, where applicable, for the current period and our open tax years.
We may take positions with respect to certain tax issues which depend on legal
interpretation of facts or applicable tax regulations. Should the relevant tax
regulators successfully challenge any such positions, we might be found to have
a tax liability that has not been recorded in the accompanying consolidated
financial statements. Also, management's conclusions regarding the authoritative
guidance may be subject to review and adjustment at a later date based on
changing tax laws, regulations, and interpretations thereof.
See the notes to our condensed consolidated financial statements for additional
details on income taxes.
Recent Accounting Pronouncements
Refer to the notes to our condensed consolidated financial statements for a
description of relevant recent accounting pronouncements.
Financial Condition
The following table summarizes the fair value our investment portfolio(1) as of
September 30, 2021 and December 31, 2020.
(In thousands)                                                    September 30, 2021           December 31, 2020
Long:
Credit:
Dollar Denominated:
CLO(2)                                                          $            65,678          $          181,229
CMBS                                                                         13,604                     117,652
Commercial Mortgage Loans and REO(3)(5)                                     325,733                     269,287
Consumer Loans and ABS backed by Consumer Loans(2)                          138,568                     112,077
Corporate Debt and Equity and Corporate Loans                                26,373                      12,606
Debt and Equity Investments in Loan Origination
Entities(4)                                                                 106,406                      79,536
Non-Agency RMBS                                                             168,044                     154,492
Residential Mortgage Loans and REO(3)                                     1,658,879                   1,188,731
Non-Dollar Denominated:
CLO(2)                                                                        3,746                       6,108

Consumer Loans and ABS backed by Consumer Loans                                 101                         306
Corporate Debt and Equity                                                        14                          28
RMBS(6)                                                                      26,960                      51,388
Agency:
Fixed-Rate Specified Pools                                                1,424,516                     807,704
Floating-Rate Specified Pools                                                10,880                       6,454
IOs                                                                          38,077                      47,656
Reverse Mortgage Pools                                                       63,534                      97,629

Total Long                                                      $         4,071,113          $        3,132,883
Short:
Credit:
Dollar Denominated:
Corporate Debt and Equity                                       $                 -          $             (218)
Government Debt:
Non-Dollar Denominated                                                      (30,294)                    (38,424)
Total Short                                                     $           (30,294)         $          (38,642)


(1)For more detailed information about the investments in our portfolio, please
see the notes to the condensed consolidated financial statements.
(2)Includes equity investments in securitization-related vehicles.
(3)REO is not eligible to elect the fair value option as described in Note 2 of
the notes to the condensed consolidated financial statements and, as a result,
is included at the lower of cost or fair value.
(4)Includes corporate loan to a loan origination entity in which we hold an
equity investment.
(5)Includes investments in unconsolidated entities holding small balance
commercial mortgage loans and REO.
(6)Includes an investment in an unconsolidated entity holding European RMBS.

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The following table summarizes our financial derivatives portfolio(1)(2) as of
September 30, 2021.
                                                                               Notional                                     Net
(In thousands)                                             Long                 Short                  Net               Fair Value
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices                            $       589          

$ (13,208) $ (12,619) $ 1,864
Total net mortgage derivatives

                                                                                       1,864
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond
Indices                                                     2,206               (26,022)              (23,816)              (1,882)

Options                                                    30,000                     -                30,000                  146
Warrants(3)                                                 1,897                     -                 1,897                  938
Total Net Corporate-Related Derivatives                                                                                       (798)
Interest Rate-Related Derivatives:
TBAs                                                      291,283              (923,651)             (632,368)                (682)
Interest Rate Swaps                                       246,599            (1,430,497)           (1,183,898)                (234)
U.S. Treasury Futures(4)                                    1,900              (221,400)             (219,500)               1,347

Total Interest Rate-Related Derivatives                                                                                        431
Other Derivatives:
Foreign Currency Forwards(5)                                    -               (16,725)              (16,725)                 360

Total Net Other Derivatives                                                                                                    360
Net Total                                                                                                              $     1,857


(1)For more detailed information about the financial derivatives in our
portfolio, please refer to Note 8 of the notes to the condensed consolidated
financial statements.
(2)In the table above, fair value of certain derivative transactions are shown
on a net basis. The accompanying financial statements separate derivative
transactions as either assets or liabilities. As of September 30, 2021,
derivative assets and derivative liabilities were $16.0 million and $(14.1)
million, respectively, for a net fair value of $1.9 million, as reflected in
"Net Total" above.
(3)Notional represents the maximum number of shares available to be purchased
upon exercise.
(4)Notional value represents the total face amount of U.S. Treasury securities
underlying all contracts held. As of September 30, 2021, a total of 19 long and
1,965 short U.S. Treasury futures contracts were held.
(5)Short notional value represents U.S. Dollars to be received by us at the
maturity of the forward contract.


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The following table summarizes our financial derivatives portfolio(1)(2) as of
December 31, 2020.
                                                                                 December 31, 2020
                                                                           Notional                                 Net
(In thousands)                                            Long              Short               Net              Fair Value
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices                            $     874          $ (13,846)         $ (12,972)         $     2,401
Total Net Mortgage-Related Derivatives                                                                               2,401
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond
Indices                                                  67,779           (121,197)           (53,418)              (3,765)
Total Return Swaps on Corporate Bond Indices
and Corporate Debt(3)                                     4,161                  -              4,161                 (475)
Warrants(4)                                               1,897                  -              1,897                   36
Total Net Corporate-Related Derivatives                                                                             (4,204)
Interest Rate-Related Derivatives:
TBAs                                                    149,990           (504,067)          (354,077)                  37
Interest Rate Swaps                                     253,423           (408,295)          (154,872)              (6,655)
U.S. Treasury Futures(5)                                  1,900           (178,500)          (176,600)                (374)
Total Interest Rate-Related Derivatives                                                                             (6,992)
Other Derivatives:
Foreign Currency Forwards(6)                                  -            (22,330)           (22,330)                (279)
Total Net Other Derivatives                                                                                           (279)
Net Total                                                                                                      $    (9,074)


(1)For more detailed information about the financial derivatives in our
portfolio, please refer to Note 8 of the notes to condensed consolidated
financial statements.
(2)In the table above, fair value of certain derivative transactions are shown
on a net basis. The accompanying financial statements separate derivative
transactions as either assets or liabilities. As of December 31, 2020,
derivative assets and derivative liabilities were $15.5 million and $(24.6)
million, respectively, for a net fair value of $(9.1) million, as reflected in
"Net Total" above.
(3)Notional value represents the face amount of the underlying asset.
(4)Notional represents the maximum number of shares available to be purchased
upon exercise.
(5)Notional value represents the total face amount of U.S. Treasury securities
underlying all contracts held. As of December 31, 2020, a total of 19 long and
1,558 short U.S. Treasury futures contracts were held.
(6)Short notional value represents U.S. Dollars to be received by us at the
maturity of the forward contract
As of September 30, 2021, our Condensed Consolidated Balance Sheet reflected
total assets of $4.4 billion and total liabilities of $3.3 billion. As of
December 31, 2020, our Condensed Consolidated Balance Sheet reflected total
assets of $3.4 billion and total liabilities of $2.5 billion. Our investments in
securities, loans, and unconsolidated entities, financial derivatives, and real
estate owned included in total assets were $4.1 billion and $3.1 billion as of
September 30, 2021 and December 31, 2020, respectively. Our investments in
securities sold short and financial derivatives included in total liabilities
were $44.4 million and $63.2 million as of September 30, 2021 and December 31,
2020, respectively. As of both September 30, 2021 and December 31, 2020,
investments in securities sold short consisted principally of short positions in
sovereign bonds. We primarily use short positions in sovereign bonds and U.S.
Treasury securities to hedge the risk of rising interest rates and foreign
currency risk.
Typically, we hold a net short position in TBAs. The amounts of net short TBAs,
as well as of other hedging instruments, may fluctuate according to the size of
our investment portfolio as well as according to how we view market dynamics as
favoring the use of one hedging instrument or another. As of September 30, 2021
and December 31, 2020, we had a net short notional TBA position of $632.4
million and $354.1 million, respectively. The size of the net short notional TBA
position increased in conjunction with the increased size of our Agency RMBS
portfolio. In addition, we increased the notional amount of long TBAs held for
investment as of September 30, 2021 as compared to December 31, 2020.
For a more detailed discussion of our investment portfolio, see "-Trends and
Recent Market Developments-Portfolio Overview and Outlook" above.
We use mortgage-related credit derivatives primarily to hedge credit risk in
certain credit strategies, although we also take net long positions in certain
CDS on RMBS and CMBS indices. Our CDS on individual RMBS represent "single-name"
positions whereby we have synthetically purchased credit protection on specific
non-Agency RMBS bonds. As there is no longer an active market for CDS on
individual RMBS, our portfolio in this sector continues to run off. We also use
CDS on corporate bond indices, options thereon, and various other instruments as
a means to hedge credit risk. As market conditions

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change, especially as the pricing of various credit hedging instruments changes
in relation to our outlook on future credit performance, we continuously
re-evaluate both the extent to which we hedge credit risk and the particular mix
of instruments that we use to hedge credit risk.
We may hold long and/or short positions in corporate bonds or equities. Our long
and short positions in corporate bonds or equities may serve as outright
investments or portfolio hedges.
We use a variety of instruments to hedge interest rate risk in our portfolio,
including non-derivative instruments such as U.S. Treasury securities and
sovereign debt instruments, and derivative instruments such as interest rate
swaps, TBAs, Eurodollar and U.S. Treasury futures, and options on the foregoing.
The mix of instruments that we use to hedge interest rate risk may change
materially from one period to the next.
We have also entered into foreign currency forward and futures contracts in
order to hedge risks associated with foreign currency fluctuations.
We have entered into repos to finance many of our assets. We account for our
repos as collateralized borrowings. As of September 30, 2021 indebtedness
outstanding on our repos was approximately $2.1 billion. As of September 30,
2021, our assets financed with repos consisted of Agency RMBS of $1.5 billion
and credit assets of $924.7 million. As of September 30, 2021, outstanding
indebtedness under repos was $1.4 billion for Agency RMBS and $669.0 million for
credit assets. As of December 31, 2020 indebtedness outstanding on our repos was
approximately $1.5 billion. As of December 31, 2020, our assets financed with
repos consisted of Agency RMBS of $947.0 million and credit assets of $884.2
million. As of December 31, 2020, outstanding indebtedness under repos was
$921.9 million for Agency RMBS and $575.1 million for credit assets.
In addition to our repos, as of September 30, 2021 we had Total other secured
borrowings of $963.3 million, used to finance $1.056 billion of non-QM loans,
consumer loans and ABS backed by consumer loans, and small balance commercial
mortgage loans. This compares to Total other secured borrowings of $806.0
million as of December 31, 2020, used to finance $906.4 million of non-QM loans,
consumer loans and ABS backed by consumer loans, and small balance commercial
mortgage loans. In addition to our secured borrowings, we had $86.0 million of
Senior Notes outstanding as of both September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020 our debt-to-equity ratio was
2.9:1 and 2.6:1, respectively. Excluding repos on U.S. Treasury securities, our
recourse debt-to-equity ratio was 1.8:1 as of September 30, 2021 as compared to
1.6:1 as of December 31, 2020. See the discussion in "-Liquidity and Capital
Resources" below for further information on our borrowings.
Equity
As of September 30, 2021, our equity increased by approximately $173.7 million
to $1.095 billion from $921.6 million as of December 31, 2020. The increase
principally consisted of net income of $101.7 million, net proceeds from the
issuance of shares of common stock of $141.3 million, after underwriters'
discounts and commissions and offering costs, and contributions from our
non-controlling interests of $11.5 million. These increases were partially
offset by common and preferred dividends of $61.9 million and distributions to
non-controlling interests of $20.3 million. Stockholders' equity, which excludes
the non-controlling interests related to the minority interest in the Operating
Partnership as well as the minority interests of our joint venture partners, was
$1.063 billion as of September 30, 2021.

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Results of Operations for the Three- and Nine-Month Periods Ended September 30,
2021 and 2020
The following table summarizes our results of operations for the three- and
nine-month periods ended September 30, 2021 and 2020:
                                                        Three-Month Period Ended                      Nine-Month Period Ended
                                                   September 30,         September 30,                                   September 30,
(In thousands except per share amounts)                 2021                  2020             September 30, 2021            2020
Interest Income (Expense)
Interest income                                   $      40,146          $    43,075          $     126,115              $  134,463
Interest expense                                        (10,604)             (12,937)               (33,111)                (49,713)
Net interest income                                      29,542               30,138                 93,004                  84,750
Other Income (Loss)
Realized and unrealized gains (losses) on
securities and loans, net                                 3,147               25,654                 13,633                 (67,753)
Realized and unrealized gains (losses) on
financial derivatives, net                                 (627)              (1,918)                10,621                 (27,811)
Realized and unrealized gains (losses) on
real estate owned, net                                      622                  104                 (1,498)                   (341)
Other, net                                                2,986               (2,747)                 9,310                  (1,503)
Total other income (loss)                                 6,128               21,093                 32,066                 (97,408)

Expenses

Base management fee to affiliate (Net of
fee rebates of $395, $201, $784, and $853,
respectively)(1)                                          3,675                2,981                 10,308                   8,330
Incentive fee to affiliate                                5,255                    -                 12,412                       -
Other investment related expenses                         2,879                3,578                 12,565                  12,805
Other operating expenses                                  4,438                3,919                 12,716                  11,508
Total expenses                                           16,247               10,478                 48,001                  32,643
Net Income (Loss) before Income Tax Expense
(Benefit) and Earnings (Losses) from
Investments in Unconsolidated Entities                   19,423               40,753                 77,069                 (45,301)
Income tax expense (benefit)                             (2,009)               2,494                  3,149                   3,490
Earnings (losses) from investments in
unconsolidated entities                                   2,549               11,443                 27,786                  10,590
Net Income (Loss)                                        23,981               49,702                101,706                 (38,201)
Net income (loss) attributable to
non-controlling interests                                 1,476                1,559                  4,809                   1,894
Dividends on preferred stock                              1,941                1,940                  5,822                   5,822
Net Income (Loss) Attributable to Common
Stockholders                                      $      20,564          $    46,203          $      91,075              $  (45,917)
Net Income (Loss) Per Common Share                $        0.41          $      1.06          $        1.99              $    (1.06)


(1)See Note 13 of the notes to the condensed consolidated financial statements
for further details on management fee rebates.
Core Earnings
We calculate Core Earnings as U.S. GAAP net income (loss) as adjusted for: (i)
realized and unrealized gain (loss) on securities and loans, REO, financial
derivatives (excluding periodic settlements on interest rate swaps), other
secured borrowings, at fair value, and foreign currency transactions; (ii)
incentive fee to affiliate; (iii) Catch-up Premium Amortization Adjustment (as
defined below); (iv) non-cash equity compensation expense; (v) provision for
income taxes; and (vi) certain other income or loss items that are of a
non-recurring nature. For certain investments in unconsolidated entities, we
include the relevant components of net operating income in Core Earnings. The
Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium
amortization triggered by changes in actual and projected prepayments on our
Agency RMBS (accompanied by a corresponding offsetting adjustment to realized
and unrealized gains and losses). The adjustment is calculated as of the
beginning of each quarter based on our then-current assumptions about cashflows
and prepayments, and can vary significantly from quarter to quarter.
Core Earnings is a supplemental non-GAAP financial measure. We believe that the
presentation of Core Earnings provides a consistent measure of operating
performance by excluding the impact of gains and losses and other adjustments
listed above from operating results. We believe that Core Earnings provides
information useful to investors because it is a

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metric that we use to assess our performance and to evaluate the effective net
yield provided by our portfolio. In addition, we believe that presenting Core
Earnings enables our investors to measure, evaluate, and compare our operating
performance to that of our peers. However, because Core Earnings is an
incomplete measure of our financial results and differs from net income (loss)
computed in accordance with U.S. GAAP, it should be considered as supplementary
to, and not as a substitute for, net income (loss) computed in accordance with
U.S. GAAP.
The following table reconciles, for the three- and nine-month periods ended
September 30, 2021 and 2020, Core Earnings to the line on the our Condensed
Consolidated Statement of Operations entitled Net Income (Loss), which we
believe is the most directly comparable U.S. GAAP measure.
                                                             Three-Month Period Ended                      Nine-Month Period Ended
                                                        September 30,         September 30,                                   September 30,
(In thousands, except per share amounts)                     2021                  2020             September 30, 2021            2020
Net income (loss)                                      $      23,981          $    49,702          $     101,706              $  (38,201)
Income tax expense (benefit)                                  (2,009)               2,494                  3,149                   3,490
Net income (loss) before income tax expense
(benefit)                                                     21,972               52,196                104,855                 (34,711)

Adjustments:

Realized (gains) losses on securities and loans,
net                                                           (6,359)              (1,446)                (8,627)                  2,335
Realized (gains) losses on financial
derivatives, net                                               1,782                1,620                 (4,438)                 25,702
Realized (gains) losses on real estate owned,
net                                                               50                   18                     63                    (121)
Unrealized (gains) losses on securities and
loans, net                                                     3,212              (24,208)                (5,006)                 65,418
Unrealized (gains) losses on financial
derivatives, net                                              (1,155)                 298                 (6,183)                  2,109
Unrealized (gains) losses on real estate owned,
net                                                             (672)                (122)                 1,435                     462
Other realized and unrealized (gains) losses,
net(1)                                                        (1,133)               4,217                 (3,901)                  5,850
Net realized gains (losses) on periodic
settlements of interest rate swaps                            (1,069)              (1,150)                (1,808)                 (1,900)
Net unrealized gains (losses) on accrued
periodic settlements of interest rate swaps                      252                  516                    (47)                    541
Incentive fee to affiliate                                     5,255                    -                 12,412                       -
Non-cash equity compensation expense                             244                  186                    717                     532
Negative (positive) component of interest income
represented by Catch-up Premium Amortization
Adjustment                                                     2,944                 (319)                   (10)                  4,440
Debt issuance costs related to Other secured
borrowings, at fair value                                          -                    -                  3,704                   2,075
Non-recurring expenses                                           471                  143                    719                     143
(Earnings) losses from investments in
unconsolidated entities(2)                                       647              (10,895)               (19,845)                 (8,489)
Total Core Earnings                                           26,441               21,054                 74,040                  64,386
Dividends on preferred stock                                   1,941                1,940                  5,822                   5,822
Core Earnings attributable to non-controlling
interests                                                      1,544                1,148                  4,200                   3,683
Core Earnings Attributable to Common
Stockholders                                           $      22,956          $    17,966          $      64,018              $   54,881
Core Earnings Attributable to Common
Stockholders, per share                                $        0.46          $      0.41          $        1.40              $     1.26


(1)Includes realized and unrealized gains (losses) on foreign currency and
unrealized gain (loss) on other secured borrowings, at fair value, included in
Other, net, on the Condensed Consolidated Statement of Operations.
(2)Adjustment represents, for certain investments in unconsolidated entities,
the net realized and unrealized gains and losses of the underlying investments
of such entities.
Results of Operations for the Three-Month Periods Ended September 30, 2021 and
2020
Net Income (Loss) Attributable to Common Stockholders
For the three-month period ended September 30, 2021 we had net income (loss)
attributable to common stockholders of $20.6 million compared to $46.2 million
for the three-month period ended September 30, 2020. The period-over-period
decrease in our results of operations was primarily due to a decrease in
realized and unrealized gains on securities and loans, net, and earnings from
investments in unconsolidated entities as well as an increase in incentive fees
incurred.

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Interest Income
Interest income was $40.1 million for the three-month period ended September 30,
2021, as compared to $43.1 million for the three-month period ended
September 30, 2020. Interest income for both periods included coupon payments
received and accrued on our holdings, the net accretion and amortization of
purchase discounts and premiums on those holdings, and interest on our cash
balances, including those balances held by our counterparties as collateral.
For the three-month period ended September 30, 2021, interest income from our
credit portfolio was $34.7 million, as compared to $36.4 million for the
three-month period ended September 30, 2020. This period-over-period decrease
was primarily due to lower average asset yields, partially offset by a larger
credit portfolio for the three-month period ended September 30, 2021.
For the three-month period ended September 30, 2021, interest income from our
Agency RMBS was $5.2 million, as compared to $6.7 million for the three-month
period ended September 30, 2020. This period-over-period decrease was due to
lower average asset yields, partially offset by a larger Agency portfolio for
the three-month period ended September 30, 2021.
The following table details our interest income, average holdings of
yield-bearing assets, and weighted average yield based on amortized cost for the
three-month periods ended September 30, 2021 and 2020:
                                               Credit(1)                                                       Agency(1)                                                       Total(1)
                         Interest                                                        Interest                                                        Interest
(In thousands)            Income            Average Holdings            Yield             Income            Average Holdings            Yield             Income            Average Holdings            Yield
Three-month
period ended September
30, 2021               $  34,666          $       2,168,359              6.39  %       $   5,246          $       1,474,354              1.42  %       $  39,912          $       3,642,713              4.38  %
Three-month
period ended September
30, 2020               $  36,354          $       1,974,414              7.37  %       $   6,663          $         835,533              3.19  %       $  43,017          $       2,809,947              6.12  %


(1)Amounts exclude interest income on cash and cash equivalents (including when
posted as margin) and long positions in U.S. Treasury securities. Also excludes
long holdings of corporate securities that represent components of certain
relative value trading strategies.
Some of the variability in our interest income and portfolio yields is due to
the Catch-up Premium Amortization Adjustment. For the three-month period ended
September 30, 2021, we had a negative Catch-up Premium Amortization Adjustment
of $(2.9) million which decreased our interest income. Comparatively, for the
three-month period ended September 30, 2020 we had a positive Catch-up Premium
Amortization Adjustment of $0.3 million which increased our interest income.
Excluding the Catch-up Premium Amortization Adjustment, the weighted average
yield of our Agency portfolio and our total portfolio was 2.22% and 4.71%,
respectively, for the three-month period ended September 30, 2021. Excluding the
Catch-up Premium Amortization Adjustment, the weighted average yield of our
Agency portfolio and our total portfolio was 3.04% and 6.08%, respectively, for
the three-month period ended September 30, 2020.
Interest Expense
Interest expense primarily includes interest on funds borrowed under repos and
Total other secured borrowings, interest on our Senior Notes, coupon interest on
securities sold short, the related net accretion and amortization of purchase
discounts and premiums on those short holdings, and interest on our
counterparties' cash collateral held by us. Our total interest expense decreased
to $10.6 million for the three-month period ended September 30, 2021, as
compared to $12.9 million for the three-month period ended September 30, 2020.
The decline in interest expense was the result of a significant decrease in
borrowing rates on both our Agency and credit assets.
The table below summarizes the components of interest expense for the
three-month periods ended September 30, 2021 and 2020.
                                                                       Three-Month Period Ended
(In thousands)                                              September 30, 2021         September 30, 2020
Repos and Total other secured borrowings                    $         8,684          $            11,585
Senior Notes                                                          1,248                        1,248
Securities sold short (1)                                               613                           20
Other (2)                                                                59                           84
Total                                                       $        10,604          $            12,937


(1)Amount includes the related net accretion and amortization of purchase
discounts and premiums.
(2)Primarily includes interest expense on our counterparties' cash collateral
held by us and reverse repurchase agreements with negative interest rates.

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The following table summarizes our aggregate secured borrowings, including repos
and Total other secured borrowings, for the three-month periods ended
September 30, 2021 and 2020.
                                                                                  Three-Month Period Ended
                                                      September 30, 2021                                            September 30, 2020
                                                                                Average                                                       Average
Collateral for Secured                 Average             Interest             Cost of              Average             Interest             Cost of
Borrowing                             Borrowings           Expense               Funds              Borrowings           Expense               Funds
(In thousands)
Credit(1)                           $ 1,577,246          $   8,060                  2.03  %       $ 1,356,028          $  10,817                  3.17  %
Agency RMBS                           1,408,058                624                  0.18  %           876,995                768                  0.35  %
Subtotal(1)                           2,985,304              8,684                  1.15  %         2,233,023             11,585                  2.06  %
U.S. Treasury Securities                    441                  -                  0.10  %                25                  -                 (0.02) %
Total                               $ 2,985,745          $   8,684                  1.15  %       $ 2,233,048          $  11,585                  2.06  %
Average One-Month LIBOR                                                             0.09  %                                                       0.16  %
Average Six-Month LIBOR                                                             0.15  %                                                       0.31  %


(1)Excludes U.S. Treasury Securities.
Among other instruments, we use interest rate swaps to hedge against the risk of
rising interest rates. If we were to include as a component of our cost of funds
the amortization of upfront payments and the actual and accrued periodic
payments on our interest rate swaps used to hedge our assets, our total average
cost of funds would increase to 1.31% and 2.24% for the three-month periods
ended September 30, 2021 and 2020, respectively. Excluding the Catch-up Premium
Amortization Adjustment, our net interest margin, defined as the yield on our
portfolio of yield-bearing targeted assets less our cost of funds (including
amortization of upfront payments and actual and accrued periodic payments on
interest rate swaps as described above), was 3.40% and 3.84% for the three-month
periods ended September 30, 2021 and 2020, respectively. These metrics do not
include costs associated with other instruments that we use to hedge interest
rate risk, such as TBAs and futures.
Base Management Fees
For the three-month period ended September 30, 2021, the gross base management
fee, which is based on total equity at the end of each quarter, was
$4.1 million, and our Manager credited us with rebates on our base management
fee of $0.4 million, resulting in a net base management fee of $3.7 million. For
the three-month period ended September 30, 2020, the gross base management fee
was $3.2 million, and our Manager credited us with rebates on our base
management fee of $0.2 million, resulting in a net base management fee of $3.0
million. For each period, the base management fee rebates related to those of
our CLO investments for which Ellington or one of its affiliates earned CLO
management fees. The increase in the net base management fee period over period
was due to a larger capital base at September 30, 2021.
Incentive Fees
In addition to the base management fee, our Manager is also entitled to a
quarterly incentive fee if our performance (as measured by adjusted net income,
as defined in the management agreement) over the relevant rolling four quarter
calculation period (including any opening loss carryforward) exceeds a defined
return hurdle for the period. For the three-month period ended September 30,
2021, the incentive fee was $5.3 million. There was no incentive fee for the
three-month period ended September 30, 2020, since on a rolling four quarter
basis, our income did not exceed the prescribed hurdle amount. Because our
operating results can vary materially from one period to another, incentive fee
expense can be highly variable.
Other Investment Related Expenses
Other investment related expenses consist of servicing fees on our mortgage and
consumer loans, as well as various other expenses and fees directly related to
our financial assets and certain financial liabilities carried at fair value.
For the three-month periods ended September 30, 2021 and 2020 other investment
related expenses were $2.9 million and $3.6 million, respectively. The decrease
in other investment related expenses was primarily due to a decrease in
servicing expenses on our consumer loan portfolios, partially offset by an
increase in various other expenses related to our residential mortgage loan
portfolio.
Other Operating Expenses
Other operating expenses consist of professional fees, compensation expense
related to our dedicated or partially dedicated personnel, and various other
operating expenses necessary to run our business. Other operating expenses
exclude management and incentive fees, interest expense, and other investment
related expenses. Other operating expenses were $4.4 million for the three-month
period ended September 30, 2021 as compared to $3.9 million for the three-month
period ended

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September 30, 2020. The increase in other operating expenses for the three-month
period ended September 30, 2021 was primarily due to an increase in compensation
expense.
Other Income (Loss)
Other income (loss) consists of net realized and unrealized gains (losses) on
securities and loans, financial derivatives, and real estate owned. Other, net,
another component of Other income (loss), includes rental income and income
related to loan originations, as well as realized gains (losses) on foreign
currency transactions and unrealized gains (losses) on foreign currency
remeasurement and Other Secured Borrowings, at fair value. For the three-month
period ended September 30, 2021, other income (loss) was $6.1 million,
consisting primarily of $3.1 million of net realized and unrealized gains on our
securities and loans, $3.0 million of Other, net, which primarily comprises
other non-interest income related to our loan portfolios, and $0.6 million of
net realized and unrealized gains on real estate owned. These gains were
partially offset by net realized and unrealized losses on our financial
derivatives of $(0.6) million. Net realized and unrealized gains of $3.1 million
on our securities and loans primarily resulted from net realized and unrealized
gains on CLOs and CMBS, partially offset by net realized and unrealized losses
on Agency RMBS and non-QM loans. The net realized and unrealized gains on our
CLOs and CMBS were driven by tighter yield spreads and opportunistic sales,
while the net realized and unrealized losses on Agency RMBS were related to
underperformance of lower-coupon holdings and net unrealized losses on our
non-QM loans were due to higher interest rates and wider yield spreads during
the quarter. Net realized and unrealized losses on our financial derivatives of
$(0.6) million were primarily related to net realized and unrealized losses on
TBAs and total return swaps, partially offset by net realized and unrealized
gains on interest rate swaps and futures.
For the three-month period ended September 30, 2020, other income (loss) was
$21.1 million, consisting primarily of net realized and unrealized gains of
$25.7 million on our securities and loans, partially offset by net realized and
unrealized losses on our financial derivatives of $(1.9) million, and Other, net
of $(2.7) million. Net realized and unrealized gains of $25.7 million on our
securities and loans primarily resulted from net realized and unrealized gains
on our non-QM loans, non-Agency RMBS, CMBS, CLOs, and asset-backed securities
backed by consumer loans, partially offset by net realized and unrealized losses
on consumer loans. These gains were primarily due to a tightening in credit
yield spreads as liquidity continued to improve in these markets. Net realized
and unrealized losses of $(1.9) million on our financial derivatives was
primarily related to net realized and unrealized losses on CDS on corporate bond
indices, forwards, CDS on corporate bonds, and total return swaps, partially
offset by net realized and unrealized gains on TBAs and interest rate swaps.
Other, net of $(2.7) million primarily comprised net unrealized losses on Other
Secured Borrowings, at fair value, partially offset by other income related to
our loan portfolios.
Income Tax Expense (Benefit)
Income tax expense (benefit) was $(2.0) million for the three-month period ended
September 30, 2021, as compared to $2.5 million for the three-month period ended
September 30, 2020. The reversal in income tax expense (benefit) for the
three-month period ended September 30, 2021 was primarily due to a decrease in
current and deferred tax liabilities related to net unrealized losses on
investments held in a domestic TRS for the three-month period ended September
30, 2021, as compared to unrealized gains on investments held in a domestic TRS
for the three-month period ended September 30, 2020.
Earnings (Losses) from Investments in Unconsolidated Entities
We have elected the fair value option for our equity investments in
unconsolidated entities. Earnings (losses) from investments in unconsolidated
entities was $2.5 million for the three-month period ended September 30, 2021,
as compared to $11.4 million for the three-month period ended September 30,
2020. Earnings from investments in unconsolidated entities for the three-month
period ended September 30, 2021 were primarily due to net realized and
unrealized gains on our investments in entities holding commercial mortgage
loans and REO, in which we co-invest with other Ellington affiliates, and
unrealized gains on an equity investment in a securitization-related risk
retention vehicle. Such gains were partially offset by net unrealized losses on
our investments in mortgage loan originators. For the three-month period ended
September 30, 2020, Earnings from investments in unconsolidated entities was
primarily due to unrealized gains on our investments in mortgage originators.
Results of Operations for the Nine-Month Periods Ended September 30, 2021 and
2020
Net Income (Loss) Attributable to Common Stockholders
For the nine-month period ended September 30, 2021 we had net income (loss)
attributable to common stockholders of $91.1 million compared to $(45.9) million
for the nine-month period ended September 30, 2020. The period-over-period
reversal in our results of operations was primarily due to net realized and
unrealized gains on securities and loans, net realized and unrealized gains on
financial derivatives, and earnings from investments in unconsolidated entities
in the current period, as

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compared to losses on our securities, loans, and financial derivatives in the
prior period, which were primarily the result of the market and economic
disruptions caused by the COVID-19 pandemic in early 2020.
Interest Income
Interest income was $126.1 million for the nine-month period ended September 30,
2021, as compared to $134.5 million for the nine-month period ended
September 30, 2020. Interest income for both periods included coupon payments
received and accrued on our holdings, the net accretion and amortization of
purchase discounts and premiums on those holdings, and interest on our cash
balances, including those balances held by our counterparties as collateral.
For the nine-month period ended September 30, 2021, interest income from our
credit portfolio was $102.0 million, as compared to $111.4 million for the
nine-month period ended September 30, 2020. This period-over-period decrease was
primarily due to lower average asset yields, partially offset by the larger size
of the credit portfolio for the nine-month period ended September 30, 2021.
For the nine-month period ended September 30, 2021, interest income from our
Agency RMBS was $23.3 million, as compared to $22.1 million for the nine-month
period ended September 30, 2020. This period-over-period increase was due to the
larger size of the Agency portfolio, partially offset by lower average asset
yields, for the nine-month period ended September 30, 2021.
The following table details our interest income, average holdings of
yield-bearing assets, and weighted average yield based on amortized cost for the
nine-month periods ended September 30, 2021 and 2020:
                                               Credit(1)                                                        Agency(1)                                                        Total(1)
                         Interest                                                         Interest                                                        Interest
(In thousands)            Income             Average Holdings            Yield             Income            Average Holdings            Yield             Income             Average Holdings            Yield

Nine months

period ended September
30, 2021               $  102,015          $       2,062,442              6.60  %       $  23,326          $       1,380,854              2.25  %       $  125,341          $       3,443,296              4.85  %

Nine months

period ended September
30, 2020               $  111,377          $       1,941,332              7.65  %       $  22,116          $       1,196,610              2.46  %       $  133,493          $       3,137,942              5.67  %


(1)Amounts exclude interest income on cash and cash equivalents (including when
posted as margin) and long positions in U.S. Treasury securities. Also excludes
long holdings of corporate securities that represent components of certain
relative value trading strategies.
Some of the variability in our interest income and portfolio yields is due to
the Catch-up Premium Amortization Adjustment. For the nine-month period ended
September 30, 2021 we had a positive Catch-up Premium Amortization Adjustment of
$10 thousand, which increased our interest income. In contrast, for the
nine-month period ended September 30, 2020 we had a negative Catch-up Premium
Amortization Adjustment of $(4.4) million, which decreased our interest income.
Excluding the Catch-up Premium Amortization Adjustment, the weighted average
yield of our Agency portfolio and our total portfolio was 2.25% and 4.85%,
respectively, for the nine-month period ended September 30, 2021. Excluding the
Catch-up Premium Amortization Adjustment, the weighted average yield of our
Agency portfolio and our total portfolio was 2.96% and 5.86%, respectively, for
the nine-month period ended September 30, 2020.
Interest Expense
Interest expense primarily includes interest on funds borrowed under repos and
Total other secured borrowings, interest on our Senior Notes, coupon interest on
securities sold short, the related net accretion and amortization of purchase
discounts and premiums on those short holdings, and interest on our
counterparties' cash collateral held by us. Our total interest expense decreased
to $33.1 million for the nine-month period ended September 30, 2021, as compared
to $49.7 million for the nine-month period ended September 30, 2020. The decline
in interest expense was the result of a significant decrease in borrowing rates
on both our Agency and credit assets.

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The table below summarizes the components of interest expense for the nine-month
periods ended September 30, 2021 and 2020.
                                                                        Nine-Month Period Ended
(In thousands)                                              September 30, 2021         September 30, 2020
Repos and Total other secured borrowings                    $        27,870          $            45,377
Senior Notes                                                          3,745                        3,745
Securities sold short (1)                                               932                          450
Other (2)                                                               564                          141
Total                                                       $        33,111          $            49,713


(1)Amount includes the related net accretion and amortization of purchase
discounts and premiums.
(2)Primarily includes interest expense on our counterparties' cash collateral
held by us and reverse repurchase agreements with negative interest rates.
The following table summarizes our aggregate secured borrowings, including repos
and Total other secured borrowings, for the nine-month periods ended
September 30, 2021 and 2020.
                                                                                   Nine-Month Period Ended
                                                      September 30, 2021                                            September 30, 2020
                                                                                Average                                                       Average
Collateral for Secured                 Average             Interest             Cost of              Average             Interest             Cost of
Borrowing                             Borrowings           Expense               Funds              Borrowings           Expense               Funds
(In thousands)
Credit(1)                           $ 1,472,463          $  25,836                  2.35  %       $ 1,389,000          $  34,132                  3.28  %
Agency RMBS                           1,344,165              2,034                  0.20  %         1,176,191             11,241                  1.28  %
Subtotal(1)                           2,816,628             27,870                  1.32  %         2,565,191             45,373                  2.36  %
U.S. Treasury Securities                    258                  -                  0.06  %               513                  4                  0.96  %
Total                               $ 2,816,886          $  27,870                  1.32  %       $ 2,565,704          $  45,377                  2.36  %
Average One-Month LIBOR                                                             0.10  %                                                       0.65  %
Average Six-Month LIBOR                                                             0.18  %                                                       0.84  %


(1)Excludes U.S. Treasury Securities.
Among other instruments, we use interest rate swaps to hedge against the risk of
rising interest rates. If we were to include as a component of our cost of funds
the amortization of upfront payments and the actual and accrued periodic
payments on our interest rate swaps used to hedge our assets, our total average
cost of funds would increase to 1.46% and 2.45% for the nine-month periods ended
September 30, 2021 and 2020, respectively. Excluding the Catch-up Premium
Amortization Adjustment, our net interest margin, defined as the yield on our
portfolio of yield-bearing targeted assets less our cost of funds (including
amortization of upfront payments and actual and accrued periodic payments on
interest rate swaps as described above), was 3.39% and 3.41% for the nine-month
periods ended September 30, 2021 and 2020, respectively. These metrics do not
include costs associated with other instruments that we use to hedge interest
rate risk, such as TBAs and futures.
Base Management Fees
For the nine-month period ended September 30, 2021, the gross base management
fee, which is based on total equity at the end of each quarter, was $11.1
million, and our Manager credited us with rebates on our base management fee of
$0.8 million, resulting in a net base management fee of $10.3 million. For the
nine-month period ended September 30, 2020, the gross base management fee was
$9.2 million, and our Manager credited us with rebates on our base management
fee of $0.9 million, resulting in a net base management fee of $8.3 million. For
each period, the base management fee rebates related to those of our CLO
investments for which Ellington or one of its affiliates earned CLO management
fees. The increase in the net base management fee period over period was due to
a larger capital base at each quarter end in 2021, as compared to the respective
quarter ends in 2020.
Incentive Fees
In addition to the base management fee, our Manager is also entitled to a
quarterly incentive fee if our performance (as measured by adjusted net income,
as defined in the management agreement) over the relevant rolling four quarter
calculation period (including any opening loss carryforward) exceeds a defined
return hurdle for the period. For the nine-month period ended September 30,
2021, the incentive fee was $12.4 million. There was no incentive fee for the
nine-month period ended September 30, 2020, since for each quarter during that
period, our income did not exceed the prescribed hurdle amount on a

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rolling four quarter basis. Because our operating results can vary materially
from one period to another, incentive fee expense can be highly variable.
Other Investment Related Expenses
Other investment related expenses consist of servicing fees on our mortgage and
consumer loans, as well as various other expenses and fees directly related to
our financial assets and certain financial liabilities carried at fair value.
For the nine-month periods ended September 30, 2021 and 2020 other investment
related expenses were $12.6 million and $12.8 million, respectively. The
decrease in other investment related expenses was primarily due to a decrease in
servicing expenses on our consumer loan portfolios partially offset by an
increase in debt issuance costs related to our non-QM loan securitizations, as
well as an increase in various other expenses related to our residential
mortgage loan portfolio.
Other Operating Expenses
Other operating expenses consist of professional fees, compensation expense
related to our dedicated or partially dedicated personnel, and various other
operating expenses necessary to run our business. Other operating expenses
exclude management and incentive fees, interest expense, and other investment
related expenses. Other operating expenses were $12.7 million for the nine-month
period ended September 30, 2021 as compared to $11.5 million for the nine-month
period ended September 30, 2020. The increase in other operating expenses for
the nine-month period ended September 30, 2021 was primarily due to an increase
in compensation expense.
Other Income (Loss)
Other income (loss) consists of net realized and unrealized gains (losses) on
securities and loans, financial derivatives, and real estate owned. Other, net,
another component of Other income (loss), includes rental income and income
related to loan originations, as well as realized gains (losses) on foreign
currency transactions and unrealized gains (losses) on foreign currency
remeasurement and Other Secured Borrowings, at fair value. For the nine-month
period ended September 30, 2021, other income (loss) was $32.1 million,
consisting primarily of $13.6 million of net realized and unrealized gains on
our securities and loans, $10.6 million of net realized and unrealized gains on
our financial derivatives, and $9.3 million of Other, net, which primarily
comprises other non-interest income related to our loan portfolios. Net realized
and unrealized gains of $13.6 million on our securities and loans primarily
resulted from net realized and unrealized gains on CMBS and CLOs, partially
offset by net realized and unrealized losses on Agency RMBS. The net realized
and unrealized gains on our CMBS and CLOs were driven by tighter yield spreads,
while the net realized and unrealized losses in the Agency portfolio were due to
wider yield spreads. Net realized and unrealized gains of $10.6 million on our
financial derivatives were primarily related to net realized and unrealized
gains on interest rate swaps, short TBAs, futures, and forwards, as long-term
interest rates increased during the period, partially offset by net realized and
unrealized losses on CDS on corporate bond indices and total return swaps.
For the nine-month period ended September 30, 2020, other income (loss) was
$(97.4) million, consisting primarily of net realized and unrealized losses of
$(67.8) million on our securities and loans and net realized and unrealized
losses on our financial derivatives of $(27.8) million. Net realized and
unrealized losses of $(67.8) million on our securities and loans primarily
resulted from net unrealized losses on CLOs, non-Agency RMBS, CMBS, and consumer
loans and ABS backed by consumer loans, partially offset by net unrealized gains
on Agency RMBS and non-QM loans. These unrealized losses were primarily due to
the market and economic disruptions caused by the COVID-19 pandemic. Net
realized and unrealized losses of $(27.8) million on our financial derivatives
was primarily related to net realized and unrealized losses on interest rate
swaps, TBAs, futures, and total return swaps, partially offset by net realized
and unrealized gains on CDS on asset-backed indices, CDS on corporate bond
indices, and CDS on corporate bonds.
Income Tax Expense (Benefit)
Income tax expense (benefit) was $3.1 million for the nine-month period ended
September 30, 2021, as compared to $3.5 million for the nine-month period ended
September 30, 2020. The income tax expense in both periods was related to net
realized and unrealized gains on investments held in a domestic TRS.
Earnings (Losses) from Investments in Unconsolidated Entities
We have elected the fair value option for our equity investments in
unconsolidated entities. Earnings (losses) from investments in unconsolidated
entities was $27.8 million for the nine-month period ended September 30, 2021,
as compared to $10.6 million for the nine-month period ended September 30, 2020.
The increase in earnings from investments in unconsolidated entities primarily
relates to an increase in unrealized gains on investments in loan originators
period over period, an increase in net realized and unrealized gains on our
investments in entities holding commercial mortgage loans and REO, in

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which we co-invest with other Ellington affiliates, and unrealized gains on an
equity investment in a securitization-related risk retention vehicle for the
nine-month period ended September 30, 2021.
Liquidity and Capital Resources
Liquidity refers to our ability to meet our cash needs, including repaying our
borrowings, funding and maintaining positions in our targeted assets, making
distributions in the form of dividends, and other general business needs. Our
short-term (one year or less) and long-term liquidity requirements include
acquisition costs for assets we acquire, payment of our base management fee and
incentive fee, compliance with margin requirements under our repos, reverse
repos, and financial derivative contracts, repayment of repo borrowings and
other secured borrowings to the extent we are unable or unwilling to extend such
borrowings, payment of our general operating expenses, payment of interest
payments on our Senior Notes, and payment of our dividends. Our capital
resources primarily include cash on hand, cash flow from our investments
(including principal and interest payments received on our investments and
proceeds from the sale of investments), borrowings under repos and other secured
borrowings, and proceeds from equity and debt offerings. We expect that these
sources of funds will be sufficient to meet our short-term and long-term
liquidity needs.
The following summarizes our borrowings under repos by remaining maturity:
(In thousands)                           September 30, 2021                    December 31, 2020
                                    Outstanding                           Outstanding
Remaining Days to Maturity           Borrowings         % of Total         Borrowings         % of Total
30 Days or Less                  $        395,780           18.8  %    $        303,351           20.3  %
31 - 60 Days                              235,407           11.2  %             469,695           31.4  %
61 - 90 Days                              394,898           18.7  %             327,012           21.8  %
91 - 120 Days                              60,787            2.9  %              89,931            6.0  %
121 - 150 Days                            196,073            9.3  %              69,104            4.6  %
151 - 180 Days                             90,435            4.3  %              70,920            4.7  %
181 - 364 Days                            698,522           33.2  %              72,670            4.9  %
> 364 Days                                 33,934            1.6  %              94,248            6.3  %
                                 $      2,105,836          100.0  %    $      1,496,931          100.0  %


Repos involving underlying investments that were sold prior to September 30,
2021 for settlement following September 30, 2021, are shown using their
contractual maturity dates even though such repos may be expected to be
terminated early upon settlement of the sale of the underlying investment.
The amounts borrowed under our repo agreements are generally subject to the
application of "haircuts." A haircut is the percentage discount that a repo
lender applies to the market value of an asset serving as collateral for a repo
borrowing, for the purpose of determining whether such repo borrowing is
adequately collateralized. As of September 30, 2021, the weighted average
contractual haircut applicable to the assets that serve as collateral for our
outstanding repo borrowings (excluding repo borrowings related to U.S. Treasury
securities) was 25.4% with respect to credit assets, 5.5% with respect to Agency
RMBS assets, and 13.2% overall. As of December 31, 2020 these respective
weighted average contractual haircuts were 33.0%, 6.0%, and 19.1%. The decrease
in the weighted average contractual haircut on our overall portfolio is
primarily due to lower haircuts on repo borrowings related to our Credit
portfolio and to a lesser extent from the higher share of our outstanding
borrowings on Agency assets at September 30, 2021 as compared to December 31,
2020.
We expect to continue to borrow funds in the form of repos as well as other
similar types of financings. The terms of our repo borrowings are predominantly
governed by master repurchase agreements, which generally conform to the terms
in the standard master repurchase agreement as published by the Securities
Industry and Financial Markets Association as to repayment and margin
requirements. In addition, each lender may require that we include supplemental
terms and conditions to the standard master repurchase agreement. Typical
supplemental terms and conditions include the addition of or changes to
provisions relating to margin calls, net asset value requirements, cross default
provisions, certain key person events, changes in corporate structure, and
requirements that all controversies related to the repurchase agreement be
litigated in a particular jurisdiction. These provisions may differ for each of
our repo lenders.
As of September 30, 2021 and December 31, 2020, we had $2.1 billion and $1.5
billion, respectively, of borrowings outstanding under our repos. As of
September 30, 2021, the remaining terms on our repos ranged from 1 day to 730
days, with a weighted average remaining term of 147 days. Our repo borrowings
were with a total of 24 counterparties as of September 30, 2021. As of
September 30, 2021, our repos had a weighted average borrowing rate of 0.80%. As
of September 30, 2021, our repos had interest rates ranging from 0.10% to 3.75%.
As of December 31, 2020, the remaining terms on our repos ranged from

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4 days to 516 days, with a weighted average remaining term of 94 days. Our repo
borrowings were with a total of 24 counterparties as of December 31, 2020. As of
December 31, 2020, our repos had a weighted average borrowing rate of 1.20%. As
of December 31, 2020, our repos had interest rates ranging from 0.20% to 5.00%.
Investments transferred as collateral under repos had an aggregate fair value of
$2.4 billion and $1.8 billion as of September 30, 2021 and December 31, 2020,
respectively.
Historically, the interest rates of our repos have been highly correlated with,
and often have been explicitly indexed to, certain benchmark interest rates such
as LIBOR or SOFR. It is expected that amounts due upon maturity of our repos
will be funded primarily through the roll/re-initiation of repos and, if we are
unable or unwilling to roll/re-initiate our repos, through free cash and
proceeds from the sale of securities.
We have continued to extend and improve our sources of financing and leverage in
2021. In addition to adding two new loan financing facilities and extending the
terms of other financing facilities, we completed two non-QM loan
securitizations during the nine-month period ended September 30, 2021, and a
third non-QM loan securitization subsequent to the third quarter.
The following table details total outstanding borrowings, average outstanding
borrowings, and the maximum outstanding borrowings at any month end for each
quarter under repos for the past twelve quarters:
                                                  Borrowings                 Average              Maximum Borrowings
                                                Outstanding at              Borrowings            Outstanding at Any
Quarter Ended                                     Quarter End              Outstanding                 Month End
                                                                           (In thousands)
September 30, 2021                            $      2,105,836          $     1,958,411          $        2,175,918
June 30, 2021                                        1,916,749                1,971,441                   2,062,580
March 31, 2021                                       1,909,511                1,736,912                   1,909,511
December 31, 2020                                    1,496,931                1,408,935                   1,496,931
September 30, 2020                                   1,439,984                1,368,191                   1,551,147
June 30, 2020(1)                                     1,294,549                1,520,985                   1,542,577
March 31, 2020(2)                                    2,034,225                2,440,982                   2,485,496
December 31, 2019(3)                                 2,445,300                2,119,394                   2,445,300
September 30, 2019                                   2,056,422                1,796,310                   2,056,422
June 30, 2019                                        1,715,506                1,769,909                   1,962,866
March 31, 2019                                       1,550,016                1,471,592                   1,550,016
December 31, 2018                                    1,498,849                1,509,819                   1,595,118


(1)During this quarter, we continued to lower leverage and improve our liquidity
given the uncertainty as a result of the COVID-19 pandemic.
(2)In March 2020, in response to significant volatility and heightened risks in
the financial markets as a result of the spread of COVID-19, we significantly
reduced our outstanding borrowings to lower leverage and increase our liquidity.
(3)At the end of 2019 we increased the size of both our credit and Agency
portfolios which we subsequently financed through repos.
In addition to our borrowings under repos, we have entered into various other
types of transactions to finance certain of our investments, including non-QM
loans and REO, commercial mortgage loans, and consumer loans and ABS backed by
consumer loans; such transactions are accounted for as collateralized
borrowings. As of September 30, 2021 and December 31, 2020, we had outstanding
borrowings related to such transactions in the amount of $963.3 million and
$806.0 million, respectively, which is reflected under the captions "Other
secured borrowings" and "Other secured borrowings, at fair value" on the
Condensed Consolidated Balance Sheet. As of September 30, 2021 and December 31,
2020, the fair value of non-QM loans, consumer loans and ABS backed by consumer
loans, and small balance commercial mortgage loans collateralizing our Total
other secured borrowings was $1.056 billion and $906.4 million, respectively.
See Note 11 in the notes to our condensed consolidated financial statements for
further information on our other secured borrowings.
As of both September 30, 2021 and December 31, 2020, we had $86.0 million
outstanding of Senior Notes, maturing in September 2022 and bearing interest at
a rate of 5.50%, subject to adjustment based on changes, if any, in the ratings
of the Senior Notes. See Note 11 in the notes to our condensed consolidated
financial statements for further detail on the Senior Notes.
As of September 30, 2021, we had an aggregate amount at risk under our repos
with 24 counterparties of approximately $337.6 million, and as of December 31,
2020, we had an aggregate amount at risk under our repos with 24 counterparties
of approximately $363.1 million. Amounts at risk represent the excess, if any,
for each counterparty of the fair value of collateral held by such counterparty
over the amounts outstanding under repos. If the amounts outstanding under repos
with a particular

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counterparty are greater than the collateral held by the counterparty, there is
no amount at risk for the particular counterparty. Amount at risk as of
September 30, 2021 and December 31, 2020 does not include approximately $3.7
million and $4.2 million, respectively, of net accrued interest receivable,
which is defined as accrued interest on securities held as collateral less
interest payable on cash borrowed.
Our derivatives are predominantly subject to bilateral master trade agreements
or clearing in accordance with the Dodd-Frank Act. We may be required to deliver
or receive cash or securities as collateral upon entering into derivative
transactions. Changes in the relative value of derivative transactions may
require us or the counterparty to post or receive additional collateral.
Entering into derivative contracts involves market risk in excess of amounts
recorded on our balance sheet. In the case of cleared derivatives, the
clearinghouse becomes our counterparty and the future commission merchant acts
as an intermediary between us and the clearinghouse with respect to all facets
of the related transaction, including the posting and receipt of required
collateral.
As of September 30, 2021, we had an aggregate amount at risk under our
derivative contracts, excluding TBAs, with 10 counterparties of approximately
$27.9 million. We also had $12.0 million of initial margin for cleared
over-the-counter, or "OTC," derivatives posted to central clearinghouses as of
that date. As of December 31, 2020, we had an aggregate amount at risk under our
derivatives contracts, excluding TBAs, with eight counterparties of
approximately $11.2 million. We also had $7.2 million of initial margin for
cleared OTC derivatives posted to central clearinghouses as of that date.
Amounts at risk under our derivatives contracts represent the excess, if any,
for each counterparty of the fair value of our derivative contracts plus our
collateral held directly by the counterparty less the counterparty's collateral
held by us. If a particular counterparty's collateral held by us is greater than
the aggregate fair value of the financial derivatives plus our collateral held
directly by the counterparty, there is no amount at risk for the particular
counterparty.
We purchase and sell TBAs and Agency pass-through certificates on a when-issued
or delayed delivery basis. The delayed delivery for these securities means that
these transactions are more prone to market fluctuations between the trade date
and the ultimate settlement date, and therefore are more vulnerable, especially
in the absence of margining arrangements with respect to these transactions, to
increasing amounts at risk with the applicable counterparties. As of
September 30, 2021, in connection with our forward settling TBA and Agency
pass-through certificates, we had an aggregate amount at risk with 9
counterparties of approximately $4.8 million. As of December 31, 2020, in
connection with our forward settling TBA and Agency pass-through certificates,
we had an aggregate amount at risk with six counterparties of approximately $4.1
million. Amounts at risk in connection with our forward settling TBA and Agency
pass-through certificates represent the excess, if any, for each counterparty of
the net fair value of the forward settling transactions plus our collateral held
directly by the counterparty less the counterparty's collateral held by us. If a
particular counterparty's collateral held by us is greater than the aggregate
fair value of the forward settling transactions plus our collateral held
directly by the counterparty, there is no amount at risk for the particular
counterparty.
We held cash and cash equivalents of approximately $103.6 million and $111.6
million as of September 30, 2021 and December 31, 2020, respectively.
On June 13, 2018, our Board of Directors approved the adoption of a share
repurchase program under which we are authorized to repurchase up to 1.55
million shares of common stock. The program, which is open-ended in duration,
allows us to make repurchases from time to time on the open market or in
negotiated transactions, including under 10b5-1 plans. Repurchases are at our
discretion, subject to applicable law, share availability, price and our
financial performance, among other considerations. In addition to making
discretionary repurchases, we from time to time use 10b5-1 plans to increase the
number of trading days available to implement these repurchases. From inception
of the current repurchase plan through August 6, 2021, we repurchased 701,965
shares at an average price per share of $13.36 and a total cost of $9.4 million,
and have authorization to repurchase an additional 848,035 common shares. We did
not purchase any shares during the nine-month period ended September 30, 2021.
We may declare dividends based on, among other things, our earnings, our
financial condition, the REIT qualification requirements of the Internal Revenue
Code of 1986, as amended, our working capital needs and new opportunities. The
declaration of dividends to our stockholders and the amount of such dividends
are at the discretion of our Board of Directors.

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The following table sets forth the dividend distributions authorized by the
Board of Directors payable to common stockholders and holders of Convertible
Non-controlling Interest Units (as defined in Note 2 of the condensed
consolidated financial statements) for the periods indicated below:
Nine-Month Period Ended September 30, 2021
Declaration Date                        Dividend Per Share           Dividend Amount                Record Date                    Payment Date
                                                                     (In thousands)

September 8, 2021                      $             0.15          $          7,855             September 30, 2021               October 25, 2021
August 4, 2021                                       0.15                     7,691               August 31, 2021               September 27, 2021
July 8, 2021                                         0.15                     7,614                July 30, 2021                 August 25, 2021
June 7, 2021                                         0.15                     6,669                June 30, 2021                  July 26, 2021
May 6, 2021                                          0.15                     6,669                May 28, 2021                   June 25, 2021
April 4, 2021                                        0.14                     6,224               April 30, 2021                   May 25, 2021
March 5, 2021                                        0.10                     4,446               March 31, 2021                  April 26, 2021
February 5, 2021                                     0.10                     4,444              February 26, 2021                March 25, 2021
January 8, 2021                                      0.10                     4,444              January 29, 2021               February 25, 2021

Nine month period ended September 30, 2020

        Declaration Date                Dividend Per Share           Dividend Amount                Record Date                    Payment Date
                                                                     (In thousands)

September 8, 2020                      $             0.09          $          3,997             September 30, 2020               October 26, 2020
August 7, 2020                                       0.09                     3,995               August 31, 2020               September 25, 2020
July 8, 2020                                         0.09                     3,995                July 31, 2020                 August 25, 2020
June 5, 2020                                         0.09                     3,995                June 30, 2020                  July 27, 2020
May 7, 2020                                          0.08                     3,551                May 29, 2020                   June 25, 2020
April 7, 2020                                        0.08                     3,551               April 30, 2020                   May 26, 2020
March 6, 2020                                        0.15                     6,658               March 31, 2020                  April 27, 2020
February 7, 2020                                     0.15                     6,699              February 28, 2020                March 25, 2020
January 8, 2020                                      0.15                     6,699              January 31, 2020               February 25, 2020


On October 7, 2021, the Board of Directors approved a dividend in the amount of
$0.15 per share of common stock payable on November 26, 2021 to stockholders of
record as of October 29, 2021. On November 5, 2021, the Board of Directors
approved a dividend in the amount of $0.15 per share of common stock payable on
December 27, 2021 to stockholders of record as of November 30, 2021.
The following table sets forth the dividend distributions authorized by the
Board of Directors during the nine-month periods ended September 30, 2021 and
2020 and payable to holders of our Series A Preferred Stock:
                                         Dividend Per
Declaration Date                            Share               Dividend Amount               Record Date                    Payment Date
                                                                (In thousands)
July 8, 2021                           $    0.421875          $          1,941               July 19, 2021                  July 30, 2021
April 4, 2021                               0.421875                     1,941               April 19, 2021                 April 30, 2021
January 8, 2021                             0.421875                     1,941              January 19, 2021               February 1, 2021

July 8, 2020                                0.421875                     1,941               July 20, 2020                  July 30, 2020
April 7, 2020                               0.421875                     1,941               April 17, 2020                 April 30, 2020


On October 7, 2021, the Board of Directors approved a dividend in the amount of
$0.421875 per share of Series A Preferred Stock payable on November 1, 2021 to
stockholders of record as of October 18, 2021.

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On August 6, 2021, we commenced an "at-the-market" offering program, or "ATM
program," by entering into equity distribution agreements with third party sales
agents under which we are authorized to offer and sell up to 10.0 million shares
of common stock from time to time. From commencement of the ATM program through
September 30, 2021, we issued 1,549,900 shares of common stock under the ATM
program, which provided $28.2 million of net proceeds after $0.4 million of
agent commissions and offering costs. Through November 5, 2021, we have issued
1,549,900 shares of common stock under the ATM program.
On July 9, 2021, we completed a follow-on offering of 6,000,000 shares of our
common stock. On July 29, 2021, we issued an additional 303,000 shares of common
stock pursuant to the exercise of the underwriters' option. The issuance and
sale of the 6,303,000 shares of common stock generated net proceeds, after
underwriters' discounts and offering costs, of $113.1 million.
On October 15, 2021, we completed a follow-on offering of 5,750,000 shares of
our common stock, including 750,000 shares of common stock issued pursuant to
the exercise of the underwriters' option. The issuance and sale of the 5,750,000
shares of common stock generated net proceeds, after underwriters' discounts and
commissions and offering costs, of $103.5 million.
For the nine-month period ended September 30, 2021, our operating activities
provided net cash in the amount of $58.8 million and our investing activities
used net cash in the amount of $1.222 billion. Our repo activity used to finance
many of our investments (including repayments of amounts borrowed under our
repos) provided net cash of $620.1 million. We received $599.3 million in
proceeds from the issuance of Total other secured borrowings and we used $137.2
million for principal payments on our Total other secured borrowings. Thus our
operating and investing activities, when combined with our repo financings and
Other secured borrowings (net of repayments), used net cash of $81.4 million for
the nine-month period ended September 30, 2021. We received proceeds from the
issuance of common stock, net of underwriters' discounts and commissions and
offering costs paid, of $141.1 million, and we received contributions from
non-controlling interests of $10.7 million. We used $58.5 million to pay
dividends and $20.3 million for distributions to non-controlling interests (our
joint venture partners). As a result there was a decrease in our cash holdings
of $8.0 million, from $111.8 million as of December 31, 2020 to $103.8 million
as of September 30, 2021.
For the nine-month period ended September 30, 2020, our operating activities
provided net cash in the amount of $82.5 million and our investing activities
provided net cash in the amount of $713.5 million. Our repo activity used to
finance many of our investments (including repayments of amounts borrowed under
our repos) used net cash of $975.6 million. We received $251.3 million in
proceeds from the issuance of Total other secured borrowings and we used $59.9
million for principal payments on Other secured borrowings. Thus our operating
and investing activities, when combined with our repo financings and Other
secured borrowings (net of repayments), provided net cash of $11.7 million for
the nine-month period ended September 30, 2020. We received proceeds from the
issuance of common stock, net of offering costs paid, of $95.3 million and
contributions from non-controlling interests provided cash of $9.1 million. We
used $50.6 million to pay dividends, $8.0 million for distributions to
non-controlling interests (our joint venture partners), and $3.1 million to
repurchase common stock. As a result there was an increase in our cash holdings
of $54.5 million, from $72.5 million as of December 31, 2019 to $127.0 million
as of September 30, 2020.
Based on our current portfolio, amount of free cash on hand, debt-to-equity
ratio, and current and anticipated availability of credit, we believe that our
capital resources will be sufficient to enable us to meet anticipated short-term
and long-term liquidity requirements. However, the unexpected inability to
finance our Agency RMBS portfolio would create a serious short-term strain on
our liquidity and would require us to liquidate much of that portfolio, which in
turn would require us to restructure our portfolio to maintain our exclusion
from registration as an investment company under the Investment Company Act and
to maintain our qualification as a REIT. Steep declines in the values of our
credit assets financed using repos, or in the values of our derivative
contracts, would result in margin calls that would significantly reduce our free
cash position. Furthermore, a substantial increase in prepayment rates on our
assets financed by repos could cause a temporary liquidity shortfall, because we
are generally required to post margin on such assets in proportion to the amount
of the announced principal paydowns before the actual receipt of the cash from
such principal paydowns. If our cash resources are at any time insufficient to
satisfy our liquidity requirements, we may have to sell assets or issue
additional debt or equity securities.
Although we may from time to time enter into financing arrangements that limit
our leverage, our investment guidelines do not limit the amount of leverage that
we may use, and we believe that the appropriate leverage for the particular
assets we hold depends on the credit quality and risk of those assets, as well
as the general availability and terms of stable and reliable financing for those
assets.
Contractual Obligations and Commitments
We are a party to a management agreement with our Manager. Pursuant to that
agreement, our Manager is entitled to

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receive a base management fee, an incentive fee, reimbursement of certain
expenses and, in certain circumstances, a termination fee. Such fees and
expenses do not have fixed and determinable payments. For a description of the
management agreement provisions, see Note 13 to our condensed consolidated
financial statements.
We have numerous contractual obligations and commitments related to our
outstanding borrowings (see Note 11 of the notes to our condensed consolidated
financial statements) and related to our financial derivatives (see Note 8 of
the notes to our condensed consolidated financial statements).
See Note 21 of the notes to our condensed consolidated financial statements for
further detail on our other contractual obligations and commitments.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any material relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. Further, we have not
guaranteed any obligations of unconsolidated entities nor do we have any
commitment to provide funding to any such entities that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or resources that would be material to an investor in our
securities. As such, we are not materially exposed to any market, credit,
liquidity, or financing risk that could arise if we had engaged in such
relationships.
At September 30, 2021 we have not entered into any repurchase agreements for
which delivery of the borrowed funds is not scheduled until after period end.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in
nature. As a result, interest rates and other factors influence our performance
far more so than does inflation. Changes in interest rates do not necessarily
correlate with inflation rates or changes in inflation rates. Our activities and
balance sheet are measured with reference to historical cost and/or fair market
value without considering inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary components of our market risk at September 30, 2021 are related to
credit risk, prepayment risk, and interest rate risk. We seek to actively manage
these and other risks and to acquire and hold assets that we believe justify
bearing those risks, and to maintain capital levels consistent with those risks.
Credit Risk
We are subject to credit risk in connection with many of our assets, especially
non-Agency RMBS, CMBS, residential and commercial mortgage loans, corporate debt
investments including CLOs and investments in securitization warehouses, and
consumer loans.
Credit losses on real estate loans can occur for many reasons, including, but
not limited to, poor origination practices, fraud, faulty appraisals,
documentation errors, poor underwriting, legal errors, poor servicing practices,
weak economic conditions, decline in the value of homes, businesses or
commercial properties, special hazards, earthquakes and other natural events,
such as the COVID-19 pandemic, or an outbreak of another highly infectious or
contagious disease, over-leveraging of the borrower on a property, reduction in
market rents and occupancy rates and poor property management services, changes
in legal protections for lenders, reduction in personal income, job loss, and
personal events such as divorce or health problems. Property values are subject
to volatility and may be affected adversely by a number of factors, including,
but not limited to, national, regional, and local economic conditions (which may
be adversely affected by industry slowdowns and other factors), local real
estate conditions (such as an oversupply of housing), changes or continued
weakness in specific industry segments, construction quality, age and design,
demographic factors, and retroactive changes to building or similar codes.
The ability of borrowers to repay consumer loans may be adversely affected by
numerous borrower-specific factors, including unemployment, divorce, major
medical expenses or personal bankruptcy. General factors, including an economic
downturn, high energy costs or acts of God or terrorism, pandemics such as the
COVID-19 pandemic or another highly infectious or contagious disease, may also
affect the financial stability of borrowers and impair their ability or
willingness to repay their loans. Whenever any of our consumer loans defaults,
we are at risk of loss to the extent of any deficiency between the liquidation
value of the collateral, if any, securing the loan, and the principal and
accrued interest of the loan. Many of our consumer loans are unsecured, or are
secured by collateral (such as an automobile) that depreciates rapidly; as a
result, these loans may be at greater risk of loss than residential real estate
loans.

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Our corporate investments, especially our lower-rated or unrated CLO
investments, corporate equity, and our investments in loan originators, have
significant risk of loss, and our efforts to protect these investments may
involve substantial costs and may not be successful. The risk of loss with
respect to these investments has been, and will likely continue to be,
exacerbated by the COVID-19 pandemic. We also will be subject to significant
uncertainty as to when and in what manner and for what value the corporate
debt in which we directly or indirectly invest will eventually be satisfied
(e.g., through liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the debt securities or a payment of some amount in
satisfaction of the obligation). In addition, these investments could involve
loans to companies that are more likely to experience bankruptcy or similar
financial distress, such as companies that are thinly capitalized, employ a high
degree of financial leverage, are in highly competitive or risky businesses, are
in a start-up phase, or are experiencing losses.
Similarly, we are exposed to the risk of potential credit losses on the other
assets in our credit portfolio. For many of our investments, the two primary
components of credit risk are default risk and severity risk.
Default Risk
Default risk is the risk that a borrower fails to make scheduled principal and
interest payments on a mortgage loan or other debt obligation. We may attempt to
mitigate our default risk by, among other things, opportunistically entering
into credit default swaps and total return swaps. These instruments can
reference various MBS indices, corporate bond indices, or corporate entities. We
often rely on third-party servicers to mitigate our default risk, but such
third-party servicers may have little or no economic incentive to mitigate loan
default rates.
Severity Risk
Severity risk is the risk of loss upon a borrower default on a mortgage loan or
other secured or unsecured debt obligation. Severity risk includes the risk of
loss of value of the property or other asset, if any, securing the mortgage loan
or debt obligation, as well as the risk of loss associated with taking over the
property or other asset, if any, including foreclosure costs. We often rely on
third-party servicers to mitigate our severity risk, but such third-party
servicers may have little or no economic incentive to mitigate loan loss
severities. In the case of mortgage loans, such mitigation efforts may include
loan modification programs and prompt foreclosure and property liquidation
following a default. Many of our consumer loans are unsecured, or are secured by
collateral (such as an automobile) that depreciates rapidly; as a result, these
loans may be at greater risk of loss than residential real estate loans.
Pursuing any remaining deficiency following a default on a consumer loan is
often difficult or impractical, especially when the borrower has a low credit
score, making further substantial collection efforts unwarranted. In addition,
repossessing personal property securing a consumer loan can present additional
challenges, including locating and taking physical possession of the collateral.
We rely on servicers who service these consumer loans, to, among other things,
collect principal and interest payments on the loans and perform loss mitigation
services, and these servicers may not perform in a manner that promotes our
interests. In the case of corporate debt, if a company declares bankruptcy, the
bankruptcy process has a number of significant inherent risks. Many events in a
bankruptcy proceeding are the product of contested matters and adversarial
proceedings and are beyond the control of the creditors. A bankruptcy filing by
a company whose debt we have purchased may adversely and permanently affect such
company. If the proceeding results in liquidation, the liquidation value of the
company may have deteriorated significantly from what we believed to be the case
at the time of our initial investment. The duration of a bankruptcy proceeding
is also difficult to predict, and our return on investment can be adversely
affected by delays until a plan of reorganization or liquidation ultimately
becomes effective. A bankruptcy court may also re-characterize our debt
investment as equity, and subordinate all or a portion of our claim to that of
other creditors. This could occur even if our investment had initially been
structured as senior debt.
Prepayment Risk
Prepayment risk is the risk of change, whether an increase or a decrease, in the
rate at which principal is returned in respect of fixed-income assets in our
portfolio, including both through voluntary prepayments and through liquidations
due to defaults and foreclosures. Most significantly, our portfolio is exposed
to the risk of changes in prepayment rates of mortgage loans, including the
mortgage loans underlying our RMBS, and changes in prepayment rates of certain
of our consumer loan holdings. This rate of prepayment is affected by a variety
of factors, including the prevailing level of interest rates as well as
economic, demographic, tax, social, legal, and other factors. Changes in
prepayment rates will have varying effects on the different types of securities
in our portfolio, and we attempt to take these effects into account in making
asset management decisions. Additionally, increases in prepayment rates may
cause us to experience losses on our interest only securities and inverse
interest only securities, as those securities are extremely sensitive to
prepayment rates. Prepayment rates, besides being subject to interest rates and
borrower behavior, are also substantially affected by government policy and
regulation. For example, the government sponsored HARP program, which was
designed to encourage mortgage refinancings, was a steady contributor to Agency
RMBS prepayment speeds from its inception in 2009 until its expiration at the
end of 2018. Mortgage rates declined significantly during 2020, and remain very
low by historical standards. As a result, prepayments continue to represent a
meaningful risk, especially with respect to our Agency RMBS.

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Interest Rate Risk
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond our control. We are subject to interest
rate risk in connection with most of our assets and liabilities. For some
securities in our portfolio, the coupon interest rates on, and therefore also
the values of, such securities are highly sensitive to interest rate movements,
such as inverse floating rate RMBS, which benefit from falling interest rates.
Historically, the interest rates of our repurchase agreements have been highly
correlated with, and often have been explicitly indexed to, certain benchmark
interest rates such as LIBOR or SOFR. Whenever one of our repo borrowings
matures, it will generally be replaced with a new repo borrowing based on market
interest rates prevailing at such time. Subject to maintaining our qualification
as a REIT and our exclusion from registration under the Investment Company Act,
we opportunistically hedge our interest rate risk by entering into interest rate
swaps, TBAs, U.S. Treasury securities, Eurodollar futures, U.S. Treasury
futures, and other instruments. In general, such hedging instruments are used to
mitigate the interest rate risk arising from the mismatch between the duration
of our financed assets and the duration of the liabilities used to finance such
assets. The majority of this mismatch currently relates to our Agency RMBS.
The following sensitivity analysis table shows the estimated impact on the value
of our portfolio segregated by certain identified categories as of September 30,
2021, assuming a static portfolio and immediate and parallel shifts in interest
rates from current levels as indicated below.
(In thousands)        Estimated Change for a Decrease in Interest Rates by        Estimated Change for an Increase in Interest Rates by
                           50 Basis Points             100 Basis Points             50 Basis Points                 100 Basis Points
                                        % of                        % of                          % of                              % of
Category of                             Total        Market         Total                         Total                             Total
Instruments           Market Value     Equity         Value        Equity      Market Value      Equity        Market Value        Equity
Agency RMBS-Fixed
Pools and IOs
excluding TBAs        $   19,256        1.76  %    $  28,139        2.57  %    $   (29,632)      (2.71) %    $       (69,637)      (6.36) %
Non-Agency RMBS,
CMBS, ABS and
Loans                     10,021        0.92  %       16,679        1.52  %        (13,383)      (1.22) %            (30,129)      (2.75) %
U.S. Treasury
Securities, and
Interest Rate
Swaps, Options,
and Futures              (23,654)      (2.16) %      (47,984)      (4.38) %         22,979        2.10  %             45,282        4.13  %
Long TBAs                  7,377        0.67  %       12,359        1.13  %         (9,771)      (0.89) %            (21,937)      (2.00) %
Short TBAs               (10,174)      (0.93) %      (13,980)      (1.28) %         16,543        1.51  %             39,454        3.60  %
Other
Mortgage-Related
Derivatives                    1           -  %            3           -  %             (1)          -  %                 (1)          -  %
Corporate
Securities and
Derivatives on
Corporate
Securities                     7           -  %           14           -  %             (7)          -  %                (15)          -  %
Repurchase
Agreements,
Reverse Repurchase
Agreements, and
Senior Notes              (1,433)      (0.13) %       (1,430)      (0.13) %          3,824        0.35  %              8,009        0.73  %
Total                 $    1,401        0.13  %    $  (6,200)      (0.57) %    $    (9,448)      (0.86) %    $       (28,974)      (2.65) %


The preceding analysis does not show sensitivity to changes in interest rates
for instruments for which we believe that the effect of a change in interest
rates is not material to the value of the overall portfolio and/or cannot be
accurately estimated. In particular, this analysis excludes certain of our
holdings of corporate securities and derivatives on corporate securities, and
reflects only sensitivity to U.S. interest rates.
Our analysis of interest rate risk is derived from Ellington's proprietary
models as well as third-party information and analytics. Many assumptions have
been made in connection with the calculations set forth in the table above and,
as such, there can be no assurance that assumed events will occur or that other
events will not occur that would affect the outcomes. For example, for each
hypothetical immediate shift in interest rates, assumptions have been made as to
the response of mortgage prepayment rates, the shape of the yield curve, and
market volatilities of interest rates; each of the foregoing factors can
significantly and adversely affect the fair value of our interest rate-sensitive
instruments.
The above analysis utilizes assumptions and estimates based on management's
judgment and experience, and relies on financial models, which are inherently
imperfect; in fact, different models can produce different results for the same
securities. While the table above reflects the estimated impacts of immediate
parallel interest rate increases and decreases on specific categories of
instruments in our portfolio, we actively trade many of the instruments in our
portfolio, and therefore our current or future portfolios may have risks that
differ significantly from those of our September 30, 2021 portfolio estimated
above.

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Moreover, the impact of changing interest rates on fair value can change
significantly when interest rates change by a greater amount than the
hypothetical shifts assumed above. Furthermore, our portfolio is subject to many
risks other than interest rate risks, and these additional risks may or may not
be correlated with changes in interest rates. For all of the foregoing reasons
and others, the table above is for illustrative purposes only and actual changes
in interest rates would likely cause changes in the actual fair value of our
portfolio that would differ from those presented above, and such differences
might be significant and adverse. See "-Special Note Regarding Forward-Looking
Statements."
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC, and that such information is accumulated and communicated to our
management as appropriate to allow timely decisions regarding required
disclosures. An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of September 30, 2021. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2021 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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