DBRS Morningstar Finalizes Provisional Ratings on MFA 2021-NQM1 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2021-NQM1 (the Certificates) issued by MFA 2021-NQM1 Trust (MFA 2021-NQM1):

-- $278.9 million Class A-1 at AAA (sf)
-- $22.3 million Class A-2 at AA (sf)
-- $34.3 million Class A-3 at A (sf)
-- $19.9 million Class M-1 at BBB (sf)
-- $16.0 million Class B-1 at BB (sf)
-- $10.1 million Class B-2 at B (sf)

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

The AAA (sf) rating on the Class A-1 Certificates reflects 29.25% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 23.60%, 14.90%, 9.85%, 5.80%, and 3.25% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 910 mortgage loans with a total principal balance of $394,179,283 as of the Cut-Off Date (February 28, 2021).

Citadel Servicing Corporation (CSC) is the Originator and Servicer for all loans in this pool.

CSC has three programs under which it originates loans. The Non-Prime and Maggi Plus (Maggi+) products are CSC’s core mortgage programs, with Maggi+ aimed at higher credit profiles. CSC’s Outside Dodd-Frank products include loans exempt from the Consumer Financial Protection Bureau’s (CFPB) rules.

Although the applicable mortgage loans were originated to satisfy the CFPB’s Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the Qualified Mortgage (QM)/ATR rules, 63.9% of the loans are designated as non-QM. Approximately 36.1% of the loans are made to investors for business purposes or foreign nationals, who are not subject to the QM/ATR rules.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal interest consisting of the Class B-3 and XS Certificates representing at least 5% of the aggregate fair value of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On or after the earlier of (1) the distribution date in March 2024 or (2) the date when the aggregate unpaid principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Depositor, at its option, may redeem all of the outstanding Certificates at a price equal to the class balances of the related Certificates plus accrued and unpaid interest, including any cap carryover amounts and any preclosing deferred amounts due to the Class XS Certificates (optional redemption). After such purchase, the Depositor must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

On any date following the date on which the aggregate unpaid principal balance of the mortgage loans is less than or equal to 10% of the Cut-Off Date balance, the Servicing Administrator will have the option to terminate the transaction by purchasing all of the mortgage loans and any real estate owned (REO) property from the issuer at a price equal to the sum of the aggregate unpaid principal balance of the mortgage loans (other than any REO property) plus accrued interest thereon, the lesser of the fair market value of any REO property and the stated principal balance of the related loan, and any outstanding and unreimbursed servicing advances, accrued and unpaid fees, and expenses that are payable or reimbursable to the transaction parties (optional termination). An optional termination is conducted as a qualified liquidation.

For this transaction, the Servicer will not fund advances of delinquent principal and interest (P&I) on any mortgage. However, the Servicer is obligated to make advances for taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances).

Of note, if the Servicer defers or capitalizes the repayment of any amounts owed by a borrower in connection with the borrower's loan modification, the Servicer is entitled to reimburse itself (1) from the excess servicing fee and (2) from principal collections for any previously made and unreimbursed servicing advances related to the capitalized amount at the time of such modification.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches, subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). Principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 Certificates (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated certificates. For more subordinate Certificates, including the Class A-3 Certificates after a Trigger Event, principal proceeds can be used to cover interest shortfalls as the more senior Certificates are paid in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid cap carryover amounts due to Class A-1 down to Class B-2.

Coronavirus Disease (COVID-19) Impact
The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many residential mortgage-backed security (RMBS) asset classes, some meaningfully.

The non-QM sector is a traditional RMBS asset class that consists of securitizations backed by pools of residential home loans that may fall outside of the CFPB’s ATR rules, which became effective on January 10, 2014. Non-QM loans encompass the entire credit spectrum. They range from high-FICO, high-income borrowers who opt for interest-only or higher debt-to-income ratio mortgages, to near-prime debtors who have had certain derogatory pay histories but were cured more than two years ago, to nonprime borrowers whose credit events were only recently cleared, among others. In addition, some originators offer alternative documentation or bank statement underwriting to self-employed borrowers in lieu of verifying income with W-2s or tax returns. Finally, foreign nationals and real estate investor programs, while not necessarily non-QM in nature, are often included in non-QM pools.

As a result of the coronavirus pandemic, DBRS Morningstar expects increased delinquencies, loans on forbearance plans, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: March 2021 Update,” dated March 17, 2021), for the non-QM asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than it previously used. Such MVD assumptions are derived through a fundamental home-price approach based on the forecast unemployment rates and GDP growth outlined in the moderate scenario. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the non-QM asset class, while the full effect of the coronavirus pandemic may not occur until a few performance cycles later, DBRS Morningstar generally believes loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value (LTV) ratio borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with prior credit events have exhibited difficulties in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Self-employed borrowers are potentially exposed to more volatile income sources, which could lead to reduced cash flows generated from their businesses. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and therefore slower prepayments. In addition, certain pools with elevated geographic concentrations in densely populated urban metropolitan statistical areas may experience additional stress from extended lockdown periods and the slowdown of the economy.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020, 27.2% of the borrowers have been granted forbearance and/or deferral plans because of financial hardship related to coronavirus pandemic. Approximately 3.1% of the pool satisfied their forbearance or deferral plans and are current. In June 2020, the Servicer developed a hardship review process for borrowers requesting relief on their mortgage loans as a result of the coronavirus pandemic. The Servicer will require each borrower to complete a hardship package of employment, financial, and credit information. As a result, the Servicer, in conjunction with or at the direction of the Sponsor, may offer a repayment plan or other forms of payment relief, such as a loan modification, in addition to pursuing other loss mitigation options.

For this deal, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower P&I collections and (2) no servicing advances on delinquent P&I. These assumptions include:

(1) Increasing delinquencies for the AAA (sf) and AA (sf) rating levels for the first 12 months,
(2) Increasing delinquencies for the A (sf) and below rating levels for the first nine months,
(3) Applying no voluntary prepayments for the AAA (sf) and AA (sf) rating levels for the first 12 months, and
(4) Delaying the receipt of liquidation proceeds for the AAA (sf) and AA (sf) rating levels for the first 12 months.

For more information regarding rating methodologies and the coronavirus pandemic, please see the following DBRS Morningstar press releases and commentary: "DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19)," dated March 12, 2020; "DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19)," dated March 20, 2020; and “Global Macroeconomic Scenarios: March 2021 Update,” dated March 17, 2021.
The ratings reflect transactional strengths that include the following:

-- Satisfactory third-party due-diligence review,
-- Certain loan attributes,
-- Robust pool composition,
-- Improved underwriting standards, and
-- Compliance with the ATR rules.

The transaction also includes the following challenges:

-- Borrowers on forbearance plans,
-- No servicer advances of delinquent P&I,
-- Representations and warranties framework,
-- Weaker documentation types,
-- Foreign borrowers with no FICO score,
-- Nonprime, non-QM, and investor loans, and
-- No master servicer.

The full description of the strengths, challenges, and mitigating factors is detailed in the related rating report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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