DBRS Morningstar Finalizes Provisional Ratings on MFA 2022-INV3 Trust

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the Mortgage Pass-Through Certificates, Series 2022-INV3 (the Certificates) issued by MFA 2022-INV3 Trust (the Issuer) as follows:

-- $137.8 million Class A-1 at AAA (sf)
-- $22.5 million Class A-2 at AA (high) (sf)
-- $27.5 million Class A-3 at A (high) (sf)
-- $13.7 million Class M-1 at BBB (sf)
-- $11.2 million Class B-1 at BB (sf)
-- $8.9 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 41.30% of credit enhancement provided by subordinate certificates. The AA (high) (sf), A (high) (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 31.70%, 20.00%, 14.15%, 9.40%, and 5.60% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate (including loans with initial Interest-Only (IO) period) investor debt service coverage ratio (DSCR), first-lien residential mortgages funded by the issuance of Certificates. The Certificates are backed by 1,005 mortgage loans with a total principal balance of $234,781,631 as of the Cut-Off Date.

The originators for the mortgage pool are Lima One Capital, LLC (Lima One; 91.0%) and other originators, each comprising less than 5.0% of the mortgage loans. Lima One (91.0%), Fay Servicing, LLC (4.4%), Select Portfolio Servicing, Inc. (3.2%), and Planet Home Lending, LLC (1.4%) will service the loans within the pool as of the Closing Date. MFA Financial, Inc. is the Sponsor and the Servicing Administrator of the transaction.

The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and the DSCR, where applicable. Since the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s Ability-to-Repay rules and TILA/RESPA Integrated Disclosure rule.

The Sponsor and Servicing Administrator are the same entity, and the Depositor is its affiliate. The initial Controlling Holder is expected to be the Depositor. The Depositor will retain an eligible horizontal interest consisting of a portion of Class B-2, and all of 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. Such retention aligns Sponsor and investor interest in the capital structure. Additionally, the Depositor will initially own the Class M-1, B-1, the portion of the B-2 not required to be held as noted above, and A-IO-S Certificates.

Computershare Trust Company, N.A. (Computershare; rated BBB with a Stable trend by DBRS Morningstar) will act as the Securities Administrator and Certificate Registrar. Deutsche Bank National Trust Company, Computershare, and Wilmington Trust, National Association will act as the Custodians.

On or after the earlier of (1) the third anniversary of the Closing Date or (2) the date when the aggregate unpaid principal balance (UPB) 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 may 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 UPB 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 UPB 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, any preclosing deferred amounts, 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 or any other transaction party will not fund advances on 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).

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the Class A-1, A-2, and A-3 Certificates (Senior Classes) 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 (Interest, Interest, Principal and Principal) before being applied sequentially to amortize the balances of the senior and subordinated bonds after a Trigger Event has occurred. For the Class A-3 Certificates (only after a Trigger Event) and for the mezzanine and subordinate classes of Certificates (both before and after a Trigger Event), principal proceeds will be available to cover interest shortfalls only after the more senior classes have been paid off in full. Also, the excess spread, if available, can be used to cover (1) realized losses and (2) cumulative applied realized loss amounts preceding the allocation of funds to unpaid Cap Carryover Amounts due to Class A-1 down to Class M-1.

CORONAVIRUS DISEASE (COVID-19) IMPACT

The pandemic and the resulting isolation measures have 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 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, delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2022 Update,” dated September 19, 2022.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards,
-- Certain loan attributes,
-- Robust pool composition, and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Investor loans,
-- No servicer advances of delinquent P&I,
-- Representations and warranties framework, and
-- No master servicer.

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

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERTIONS
There were no environmental, Social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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