DBRS Morningstar Finalizes Provisional Ratings on MFA 2021-NQM2 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2021-NQM2 (the Certificates) issued by MFA 2021-NQM2 Trust (MFA 2021-NQM2):

-- $210.3 million Class A-1 at AAA (sf)
-- $16.5 million Class A-2 at AA (sf)
-- $27.8 million Class A-3 at A (sf)
-- $13.7 million Class M-1 at BBB (sf)
-- $9.0 million Class B-1 at BB (sf)
-- $5.4 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 27.35% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 21.70%, 12.05%, 7.35%, 4.25%, and 2.40% 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 678 mortgage loans with a total principal balance of $289,279,453 as of the Cut-Off Date (June 30, 2021).

The pool is, on average, 13 months seasoned with loan age ranges from two months to 58 months. Citadel Servicing Corporation doing business as Acra Lending (CSC) is the Originator and Servicer for all loans in this pool. Approximately 97.1% of the mortgage loans will be subserviced by ServiceMac, LLC (ServiceMac), pursuant to a subservicing agreement, dated as of September 18, 2020. Each of these mortgage loans were boarded onto ServiceMac's servicing system on March 1, 2021.

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 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, 73% of the loans are designated as non-QM. Approximately 27.0% of the loans are made to investors for business purposes or foreign nationals, which 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 July 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 pre-closing 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 in respect of 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 from the excess servicing fee, first, and from principal collections, second, 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 Class A-2 Certificates (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated certificates. For more subordinate Certificates, including 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 Disease (COVID-19) pandemic and the resulting isolation measures caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the pandemic, DBRS Morningstar saw an increase in the delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief that may perform very differently from traditional delinquencies. At the onset of the pandemic, the option to forbear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low loan-to-value ratios, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months, delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios - June 2021 Update,” published on June 18, 2021), DBRS Morningstar may assume higher loss expectations for pools with loans on forbearance plans.

For more information regarding rating methodologies and the coronavirus, 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 - June 2021 Update,” dated June 18, 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 and deferral 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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