DBRS Morningstar Finalizes Provisional Ratings on MFA 2023-NQM2 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2023-NQM2 (the Certificates) issued by MFA 2023-NQM2 Trust:

-- $230.0 million Class A-1 at AAA (sf)
-- $33.8 million Class A-2 at AA (high) (sf)
-- $44.9 million Class A-3 at A (high) (sf)
-- $20.4 million Class M-1 at BBB (high) (sf)
-- $15.4 million Class B-1 at BB (high) (sf)
-- $15.4 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 38.10% 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 29.00%, 16.90%, 11.40%, 7.25%, and 3.10% of credit enhancement, respectively.

This is a securitization of a portfolio of fixed- and adjustable-rate expanded prime and nonprime primarily (97.2%) first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 717 mortgage loans with a total principal balance of $371,581,844 as of the Cut-Off Date (March 31, 2023).

The pool is, on average, 11 months seasoned with loan age ranges from two months to 66 months. The top two originators are Castle Mortgage Corporation dba Excelerate Capital (48.8% of the pool) and Citadel Servicing Corporation dba Acra Lending (44.5% of the pool). The Servicers are Planet Home Lending, LLC (55.5% of the pool) and Citadel Servicing Corporation (CSC; 44.5% of the pool). ServiceMac, LLC will subservice all but four of the CSC-serviced mortgage loans under a subservicing agreement.

Although the applicable mortgage loans were originated to satisfy the Consumer Financial Protection Bureau's (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 QM/ATR rules, 59.0% of the loans are designated as non-QM. Approximately 40.9% and 2.4% 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 2.8% of the pool. These 28 closed-end second-lien loans were originated by Fund Loans and have lower CLTV (58.5%) and a higher average FICO (731) 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 some portion of the Class B-3 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. Additionally, the Sponsor will initially own the Class M-1, Class B-1, Class B-2 and Class A-IO-S Certificates and the portion of the Class B-3 Certificates not required to be held to satisfy the U.S. credit risk retention rules.

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. Class B-1 and Class B-2 are principal-only certificates and are not entitled to distributions of interest on any distribution date and do not have pass-through rates.

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 rating 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 (March 3, 2023; https://www.dbrsmorningstar.com/research/410473).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

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 (April 28, 2023),
https://www.dbrsmorningstar.com/research/413297
-- 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].