DBRS Morningstar Finalizes Provisional Ratings on MFA 2023-INV2 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional credit ratings on the following Mortgage Pass-Through Certificates, Series 2023-INV2 (the Certificates) issued by MFA 2023-INV2 Trust (MFA 2023-INV2):

-- $117.6 million Class A-1 at AAA (sf)
-- $22.4 million Class A-2 at AA (high) (sf)
-- $23.9 million Class A-3 at A (high) (sf)
-- $15.0 million Class M-1 at BBB (high) (sf)
-- $12.5 million Class B-1 at BB (high) (sf)
-- $10.0 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) credit rating on the Class A-1 certificates reflects 45.25% of credit enhancement provided by subordinate certificates. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (sf) credit ratings reflect 34.80%, 23.65%, 16.65%, 10.85%, and 6.20% of credit enhancement, respectively.

This 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 the Certificates. The Certificates are backed by 945 mortgage loans with a total principal balance of $214,721,152 as of the Cut-Off Date (August 31, 2023).

The primary originator of the loans in the mortgage pool is Lima One Capital, LLC (Lima One; 97.8%). Lima One will service 100% of the loans within the pool. MFA Financial, Inc. (MFA) 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 (ATR) 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 the Class B-3 and all of the 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 is expected to initially own the Class B-1, Class B-2, and the portion of the Class B-3 not required to be held as noted above.

Computershare Trust Company, N.A. (Computershare; rated BBB with a Stable trend by DBRS Morningstar) will act as the Securities Administrator and Certificate Registrar. Computershare, Deutsche Bank National Trust Company, 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 noninterest bearing 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 noninterest bearing 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, Class A-2, and Class 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 Class A-2 Certificates (IIPP) 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, 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.

Of note, the Class A-1, Class A-2, and Class A-3 Certificates' coupon rates step up by 100 basis points on and after the payment date in October 2027. Of note, on and after the October 2027 payment date, interest and principal otherwise available to pay the Class B-3 interest and principal may be used to pay the Cap Carryover Amounts.

The credit ratings reflect transactional strengths that include the following:

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

The transaction also includes the following challenges:

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

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

DBRS Morningstar’s credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated Certificates are the related Interest Distribution Amount, any Interest Carryforward Amount, and the related Class Balance.

DBRS Morningstar’s credit ratings on Classes A-1, A-2, and A-3 also address the credit risk associated with the increased rate of interest applicable to these Certificates if they remain outstanding on the step-up date (October 2027) in accordance with the applicable transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, in this transaction, DBRS Morningstar's ratings do not address the payment of any cap carryover amounts.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms, under which a long-term obligation has been issued.

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/416784 (July 4, 2023).

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

The principal methodology applicable to the credit ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023; https://www.dbrsmorningstar.com/research/420108).

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/407678.

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

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

This is a solicited credit rating.

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

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

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

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023; https://www.dbrsmorningstar.com/research/420333)

-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023; https://www.dbrsmorningstar.com/research/414076)

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

-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023; https://www.dbrsmorningstar.com/research/420106)

-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023; https://www.dbrsmorningstar.com/research/420107)

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