DBRS Morningstar Finalizes Provisional Ratings on MFA 2022-NQM3 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2022-NQM3 (the Certificates) issued by MFA 2022-NQM3 Trust:

-- $208.0 million Class A-1 at AAA (sf)
-- $28.7 million Class A-2 at AA (high) (sf)
-- $37.1 million Class A-3 at A (high) (sf)
-- $20.9 million Class M-1 at BBB (high) (sf)
-- $16.8 million Class B-1 at BB (high) (sf)
-- $13.2 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 39.20% 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 30.80%, 19.95%, 13.85%, 8.95%, and 5.10% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 597 mortgage loans with a total principal balance of $342,139,245 as of the Cut-Off Date (August 31, 2022).

The Certificates are backed by 607 loans with a total principal balance of $345,858,866 as of the Statistical Calculation Date (July 31, 2022). Unless specified otherwise, all the statistics regarding the mortgage loans in the rating report are based on the Statistical Calculation Date.

The pool is, on average, nine months seasoned with loan ages ranging from zero months to 72 months. The top originators for the mortgage pool are Citadel Servicing Corporation (Citadel; 60.9% of the pool) and FundLoans Capital, Inc. (24.6% of the pool). The remaining originators each comprise less than 10.0% of the mortgage loans. Citadel (60.9% of the pool), Planet Home Lending, LLC (31.2% of the pool), and Select Portfolio Servicing (8.0% of the pool) are Servicers for this pool. ServiceMac, LLC will subservice all but 13 of the Citadel-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 QM/ATR rules, 60.6% of the loans are designated as non-QM. Approximately 39.4% of the loans are made to investors for business purposes or foreign nationals and 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 and some portion of the Class B-2 certificates, representing at least 5% of the aggregate fair value of the Certificates (reduced by proportion of CDFI loans) 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 preclosing 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 Credit 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-1 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.

Coronavirus Disease (COVID-19) Impact
The coronavirus 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 coronavirus, 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 coronavirus, 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.

As of the Statistical Calculation Date, there are no loans that are subject to an active coronavirus-related forbearance plan with the Servicer.

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:

-- 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:

-- Weaker documentation types,
-- Foreign borrowers with no FICO score,
-- 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, AND GOVERNANCE CONSIDERATIONS
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.

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 info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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