Securitization Transactions

Participation in Multi-Seller Consumer Loan Securitization

In August 2016, the Company participated in a securitization transaction whereby the Company, together with another entity managed by Ellington (the "co-participant"), sold consumer loans with an aggregate unpaid principal balance of approximately $124 million to a newly formed securitization trust (the "Issuer"). Of the $124 million in loans sold to the Issuer, the Company's share was 51% while the co-participant's share was 49%. The transfer was accounted for as a sale in accordance with ASC 860-10. As a result of the sale the Company recognized a realized loss in the amount of $(0.1) million. Pursuant to the securitization, the Issuer issued senior and subordinated notes in the principal amount of $87 million and $18.7 million, respectively. Trust certificates representing beneficial ownership of the Issuer were also issued. In connection with the transaction, and through a jointly owned newly formed entity (the "Acquiror"), the Company and the co-participant acquired all of the subordinated notes as well as the trust certificates in the Issuer. The Company and the co-participant acquired 51% and 49%, respectively, of the interests in the Acquiror. During 2017, at the co-participant's direction, the Acquiror sold the portion of the subordinated notes beneficially owned by the co-participant, and as a result as of December 31, 2017, the Company's total interest in the Acquiror increased to approximately 75%. The Company's interest in the Acquiror is accounted for as a beneficial interest and is included on the Consolidated Condensed Schedule of Investments in Corporate Equity Investments.

The notes and trust certificates issued by the Issuer are backed by the cash flows from the underlying consumer loans. If there are breaches of representations and warranties with respect to any underlying consumer loans, the Company could, under certain circumstances, be required to purchase or replace such loans. Absent such breaches, the Company has no obligation to repurchase or replace any underlying consumer loans that become delinquent or otherwise default. Cash flows collected on the underlying consumer loans are distributed to service providers to the trust, noteholders, and trust certificate holders in accordance with the contractual priority of payments. In addition, another affiliate of Ellington (the "Administrator"), acts as the administrator for the securitization and is paid a monthly fee for its services.

While the Company retains credit risk in the securitization trust through its beneficial ownership of the most subordinated interests of the securitization trust, which are the first to absorb credit losses on the securitized assets, the Company does not retain control of these assets or the power to direct the activities of the Issuer that most significantly impact the Issuer's economic performance. See Note 9 for further details on the Company’s participation in the multi-seller consumer loan securitization.

Participation in CLO Transactions

In June 2017, the Company and several other affiliates of Ellington (the "CLO I Co-Participants") participated in a CLO securitization transaction (the "CLO I Securitization"), collateralized by corporate loans and sponsored and managed by an affiliate of Ellington (the "CLO Manager"). Pursuant to the CLO I Securitization, a newly formed securitization trust (the "CLO I Issuer") issued various classes of notes totaling $373.6 million in face amount, which were in turn sold to unrelated third parties and the CLO I Co-Participants. The notes issued by the CLO Issuer are backed by the cash flows from the underlying corporate loans, including loans that will be purchased during the reinvestment period, which is expected to end in July 2019.

The Company and one CLO I Co-Participant transferred corporate loans with a fair value of approximately $62.0 million and $141.7 million, respectively, to the CLO I Issuer in exchange for cash. The Company has no obligation to repurchase or replace securitized corporate loans that subsequently become delinquent or are otherwise in default, and the transfer by the Company was accounted for as a sale in accordance with ASC 860-10. As a result of the sale, the Company recognized a realized gain in the amount of $0.2 million.

The Company and each of the CLO I Co-Participants purchased various classes of subordinated notes issued by the CLO I Issuer. In addition, the Company and the CLO I Co-Participants also funded a newly formed entity (the "Risk Retention Vehicle") to purchase approximately 25% of the unsecured subordinated notes issued by the CLO I Issuer, in order to comply with risk retention rules (the "Risk Retention Rules") under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as described below.

The Company purchased a total of $36.6 million face amount of secured and unsecured subordinated notes for an aggregate purchase price of $35.9 million. The Company subsequently sold some of these notes, and as of December 31, 2017 the Company's remaining investment in these notes had an aggregate fair value of $24.3 million, and is included on the Company's Consolidated Condensed Schedule of Investments in Collateralized Loan Obligations. In addition to these investments, the Company holds an approximate 25% ownership interest in the Risk Retention Vehicle, with a fair value of $5.0 million, as of December 31, 2017, and is included on the Company's Consolidated Condensed Schedule of Investments in Corporate Equity Investments.

Pursuant to the CLO I Securitization, the cash flows from the underlying loans are applied in accordance with the contractual priority of payments.

Under the Risk Retention Rules, securitization sponsors are generally required to retain at least 5% of the economic interest in the credit risk of the securitized assets. The unsecured subordinated notes purchased by the Risk Retention Vehicle represent approximately 6% of the economic interest in the credit risk of the underlying corporate loans. While the Risk Retention Vehicle is generally required under the Risk Retention Rules to hold its investment in the CLO I Issuer for a specified minimum amount of time, the Company is not required to hold its investment in the Risk Retention Vehicle for such minimum period. The CLO Manager has full and exclusive management and control of the business of the Risk Retention Vehicle and is required to hold its investment in the Risk Retention Vehicle for the specified minimum amount of time under the Risk Retention Rules.

The Company does not retain control of the assets nor does it have the power to direct the activities of either the CLO I Issuer or the Risk Retention Vehicle that most significantly impact each entity's economic performance.

In December 2017, Ellington priced another CLO securitization (the "CLO II Securitization"). Participants in the CLO II Securitization include Ellington, the Company, several other affiliates of Ellington, and several third parties (the "CLO II Co-Participants"). This transaction closed in January 2018 and while certain details differ, it is structured similarly to the CLO I Securitization which closed in June 2017. The Company and each of the CLO II Co-Participants purchased various classes of notes issued by the CLO II Issuer. In accordance with the Company's accounting policy for recording investment transactions, these purchases were recorded on the trade date (CLO pricing date) rather than the closing date.

The Company purchased a total of $18.2 million face amount of secured senior and secured and unsecured subordinated notes for an aggregate purchase price of $16.6 million. The Company subsequently sold the senior notes, and as of December 31, 2017 the Company's remaining investment in the subordinated notes had an aggregate fair value of $13.4 million, and is included on the Company's Consolidated Condensed Schedule of Investments in Collateralized Loan Obligations. Pursuant to the CLO II Securitization, the cash flows from the underlying loans are applied in accordance with the contractual priority of payments. Upon the closing of the transaction in January 2018, the Company will purchase an interest in the associated risk retention vehicle, which was formed in order for the CLO transaction to comply with the Risk Retention Rules. Prior to the CLO pricing date, the Company along with certain other CLO II Co-Participants that are also affiliates of Ellington advanced funds (in the form of loans) to the CLO II Issuer to enable it to establish a warehouse facility for the purpose of acquiring assets for the securitization. The CLO II Issuer will repay these loans upon the closing of the CLO transaction. As of December 31, 2017, the Company's loan receivable from the CLO II Issuer was in the amount of $16.9 million and is included on the Consolidated Statement of Assets, Liabilities and Equity in Other assets.

The Company does not have the power to direct the activities of the CLO II Issuer that most significantly impact its economic performance.

See Note 9 for further details on the Company’s participation in CLO transactions.

Residential Loan Securitization

In November 2017, the Company, through its wholly owned subsidiary, Ellington Financial REIT TRS LLC (the "Sponsor"), sponsored a $141.2 million securitization of non-QM loans. The Sponsor transferred $141.2 million of non-QM loans to a wholly owned, newly created entity (the "Depositor") and on November 15, 2017 (the "Closing Date") such loans were deposited into a newly created securitization trust (the "Issuing Entity"). Pursuant to the securitization, the Issuing Entity issued various classes of mortgage pass-through certificates (the "Certificates") totaling $141.2 million in face amount and which are backed by the cash flows from the underlying non-QM loans. In order to comply with the Risk Retention Rules, the Sponsor purchased the two most subordinated classes of Certificates and the excess cash flow certificates, with an aggregate value equal to 5.1% of the fair value of all Certificates issued. The Sponsor also purchased, for an aggregate purchase price of $0.7 million, the Certificates entitled to excess servicing fees, while the remaining classes of Certificates were purchased by unrelated third parties.

The Certificates have a final scheduled distribution date of October 25, 2047. However, the Depositor may, at its sole option, purchase all of the outstanding Certificates (the "Optional Redemption") following the earlier of (1) the two year anniversary of the Closing Date or (2) the date on which the aggregate stated principal balance of the underlying non-QM loans has declined below 30% of the aggregate stated principal balance of the underlying non-QM loans as of October 1, 2017. The purchase price that the Depositor is required to pay in connection with the Optional Redemption is equal to the sum of the unpaid principal balance of each class of Certificates as of the redemption date and any accrued and unpaid interest thereon. In light of this Optional Redemption right held by the Depositor, the transfer of non-QM loans to the Issuing Entity does not qualify as a sale under ASC 860, Transfers and Servicing.

In the event that certain breaches of representations or warranties are discovered with respect to any underlying non-QM loans, the Company could be required to repurchase or replace such loans.

The Sponsor also serves as the servicing administrator and as such, is entitled to receive a monthly fee equal to one-twelfth of the product of (a) 0.03% and (b) the stated principal balance of the non-QM loans as of the first day of the related due period. The Sponsor in its role as servicing administrator provides direction and consent to the third-party servicer for certain loss mitigation activities. In certain circumstances, the servicing administrator will be required to reimburse the servicer for principal and interest advances and servicing advances made by the servicer.

In light of the Company’s retained interests in the securitization, together with the Optional Redemption right and the Company's ability to direct the third-party servicer regarding certain loss mitigation activities, the Issuing Entity is deemed to be an extension of the Company's business. The non-QM loans held by the Issuing Entity are included on the Consolidated Condensed Schedule of Investments in Mortgage Loans. Interest income from these loans and the expenses related to the servicing of these loans are included in Interest income and Other investment related expenses—Servicing expense, respectively, on the Consolidated Statement of Operations.

The Issuing Entity meets the definition of a CFE as defined in Note 2, and as a result the assets of the Issuing Entity have been valued using the fair value of the liabilities of the Issuing Entity, as such liabilities have been assessed to be more observable than such assets.

The debt of the Issuing Entity is included in Other secured borrowings, at fair value on the Consolidated Statement of Assets, Liabilities, and Equity and is shown net of the Certificates held by the Company.

The following table details the assets and liabilities of the consolidated securitization trust included in the Company’s Consolidated Statement of Assets, Liabilities, and Equity as of December 31, 2017 and 2016:



	As of
(In thousands)	December 31, 2017		December 31, 2016
Assets:
Cash and cash equivalents	$	333	$	—
Investments, at fair value	132,424		—
Liabilities:
Interest and dividends payable	333		—
Other secured borrowings, at fair value	125,105		—