DBRS Morningstar Assigns Provisional Ratings to MFA 2023-NQM1 Trust

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage Pass-Through Certificates, Series 2023-NQM1 (the Certificates) to be issued by MFA 2023-NQM1 Trust (MFA 2023-NQM1):

-- $189.6 million Class A-1 at AAA (sf)
-- $26.4 million Class A-2 at AA (high) (sf)
-- $37.0 million Class A-3 at A (high) (sf)
-- $19.1 million Class M-1 at BBB (high) (sf)
-- $14.6 million Class B-1 at BB (high) (sf)
-- $11.9 million Class B-2 at B (high) (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 39.55% of credit enhancement provided by subordinate certificates. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (high) (sf) ratings reflect 31.15%, 19.35%, 13.25%, 8.60%, and 4.80% of credit enhancement, respectively.

This is a securitization of a portfolio of fixed- and adjustable-rate expanded prime and nonprime primarily (99%) first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 586 mortgage loans with a total principal balance of $313,653,110 as of the Cut-Off Date (December 31, 2022).

The pool is, on average, 10 months seasoned with loan age ranges from one month to 94 months. The top originators are Citadel Servicing Corporation (67.2% of the pool), FundLoans Capital, Inc. (16.0% of the pool), and Castle Mortgage Corporation d/b/a Excelerate Capital (12.9% of the pool). The Servicers are Citadel Servicing Corporation (CSC; 67.2% of the pool), Planet Home Lending, LLC (30.4% of the pool), and Select Portfolio Servicing (2.3% of the pool). ServiceMac, LLC (ServiceMac) will subservice all but one of the CSC-serviced mortgage loans under a subservicing agreement dated September 18, 2020.

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, 47.0% of the loans are designated as non-QM. Approximately 47.2% and 5.4% of the loans are made to investors for business purposes and foreign nationals, respectively, which are not subject to the QM/ATR rules.

In addition, second-lien mortgage loans make up 1% of the pool. These seven closed-end second-lien loans were originated by Fund Loans and have lower CLTV (57.7%) and higher average FICO (739) than the pool weighted average CLTV and FICO..

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain the Class XS and an eligible horizontal interest consisting of the Class B3 and some portion of the B-2 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) three years after 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, any pre-closing deferred amounts due to the Class XS certificates, and other amounts described in the transaction documents (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 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, and expenses that are payable or reimbursable to the transaction parties, as described in the transaction documents (optional termination). An optional termination is conducted as a qualified liquidation.

For this transaction, the Servicers will not fund advances of delinquent principal and interest (P&I) on any mortgage. However, the Servicers are 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 a 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 (applicable to the loans serviced by such Servicer), 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, A-2, and A-3 certificates before being applied sequentially to senior and subordinate certificates. For the Class A-3 certificates (only after a Trigger Event) and more subordinate certificates, principal proceeds can be used to cover interest shortfalls after the more senior certificates are paid in full. Also, the excess spread can be used to cover realized losses by reducing the balance of the Class A certificates and then, sequentially, of the other certificates, before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to Class A-3.

On January 15th, FEMA announced that Federal Disaster Assistance was made available to the State of California related to several winter storms, flooding, landslides, and mudslides that began on December 27, 2022. At this time, the sponsor has informed DBRS Morningstar that it was not aware of Mortgage Loans secured by Mortgaged Properties that are located in a FEMA disaster area that have suffered any disaster-related damage. The transaction documents include representations and warranties regarding the property conditions, which state that the properties have not suffered damage that would have a material and adverse impact on the values of the properties (including events such as windstorm, flood, earth movement, and hurricane).

In a sensitivity analysis, DBRS Morningstar ran an additional scenario applying reduction of property values in certain areas of California that may have been impacted.

The transaction assumptions consider DBRS Morningstar's baseline macroeconomic scenarios for rated sovereign economics, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: December 2022 Update,” dated December 21, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar's moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

The ratings reflect transactional strengths that include the following:

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

The transaction also includes the following challenges:

-- Debt service coverage ratio loans,
-- Nonprime, non-QM, and 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, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology applicable to the ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020; https://www.dbrsmorningstar.com/research/359116).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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/407678/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2022-update

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].

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (May 4, 2020),
https://www.dbrsmorningstar.com/research/360574/

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153/

-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
https://www.dbrsmorningstar.com/research/366613/

-- Representations and Warranties Criteria for U.S. RMBS Transactions (April 22, 2020),
https://www.dbrsmorningstar.com/research/359902/

-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008/

-- U.S. Residential Mortgage Originator Rankings (August 28, 2020), https://www.dbrsmorningstar.com/research/366186/

-- Operational Risk Assessment for U.S. RMBS Originators (November 23, 2022),
https://www.dbrsmorningstar.com/research/405664/

-- Operational Risk Assessment for U.S. RMBS Servicers (November 23, 2022),
https://www.dbrsmorningstar.com/research/405665/

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