ELLINGTON FINANCIAL INC.
Fitch Ratings has assigned final ratings to
RATING ACTIONS
Entity / Debt
Rating
Prior
EFMT 2022-3
A-1
LT
AAAsf
New Rating
A-2
LT
AAsf
New Rating
AA(EXP)sf
A-3
LT
Asf
New Rating
A(EXP)sf
M-1
LT
BBBsf
New Rating
BBB(EXP)sf
B-1
LT
BBsf
New Rating
BB(EXP)sf
B-2
LT
Bsf
New Rating
B(EXP)sf
B-3
LT
NRsf
New Rating
NR(EXP)sf
A-IO-S
LT
NRsf
New Rating
NR(EXP)sf
XS
LT
NRsf
New Rating
NR(EXP)sf
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
Fitch rates the residential mortgage-backed certificates to be issued by
The certificates are secured mainly by nonqualified mortgages (non-QM) as defined by the Ability to Repay (ATR) rule (the Rule). Approximately 79.4% of the loans were originated by
Of the pool, 58% of the loans are designated as non-QM, and the remaining 42% are investment properties not subject to ATR.
There is LIBOR exposure in this transaction. While the majority of the loans in the collateral pool comprise fixed-rate mortgages, 0.75% of the pool comprises loans with an adjustable rate. 0.26% of the pool comprise loans based on LIBOR and the remaining 0.49% of the pool comprises loans based on SOFR. The offered certificates have the following coupon rates: A-1, A-2 and A-3 are fixed rate with a step-up coupon at year four and capped at the net weighted average coupon (WAC) while M-1, B-1, B-2 and B-3 pay the net WAC.
KEY RATING DRIVERS
Updated Sustainable Home Prices (Negative): Due to Fitch's updated view on sustainable home prices, Fitch views the home price values of this pool as 9.7% above a long-term sustainable level (versus 9.2% on a national level as of
Nonprime Credit Quality (Mixed): Collateral consists mainly of 30-year fully amortizing loans, either fixed rate or adjustable rate, and 22% of the loans have an interest-only period. The pool is seasoned at about four months in aggregate, as determined by Fitch. The borrowers in this pool have relatively strong credit profiles with a 743 WA FICO score (745
Fitch considered 53.2% of the pool to consist of loans where the borrower maintains a primary residence, while 41.9% comprises investor property and 4.9% represents second homes. 2.09% of the pool is comprised of non-permanent residents that were underwritten to a foreign national program, Fitch does not make adjustments to occupancy, documentation scores or liquid reserves for non-permanent, since historical performance has shown they perform the same or better than
In total, 100% of the loans were originated through a nonretail channel. Additionally, 58% of the loans are designated as non-QM, while the remaining 42% are exempt from QM status. The pool contains 70 loans over
Fitch determined that self-employed, non-debt service coverage ratio (DSCR) borrowers make up 45.2% of the pool; salaried non-DSCR borrowers make up 24.1%; and 30.7% comprises investor cash flow DSCR loans. About 41.9% of the pool comprises loans on investor properties (11.2% underwritten to borrowers' credit profiles and 30.7% comprising investor cash flow loans). There were no loans made to foreign nationals in the pool. There are no second liens in the pool, and three loans have subordinate financing.
Around 28% of the pool is concentrated in
All loans are current as of
Loan Documentation: Bank Statement, Asset Depletion, DSCR Loans (Negative): Fitch determined that about 79.2% of the pool was underwritten to less than full documentation, and 38.6% was underwritten to a 12-month or 24-month bank statement program for verifying income, which is not consistent with Appendix Q standards and Fitch's view of a full documentation program. A key distinction between this pool and legacy Alt-A loans is these loans adhere to underwriting and documentation standards required under the
This reduces the risk of borrower default arising from lack of affordability, misrepresentation or other operational quality risks due to the rigor of the Rule's mandates with respect to underwriting and documentation of the borrower's ATR. Additionally, 4.8% comprises an asset depletion product, 0.0% is a CPA or P&L product and 30.7% is a DSCR product.
Limited Advancing (Mixed): The deal is structured to six months of servicer advances for delinquent P&I. The limited advancing reduces loss severities, as there is a lower amount repaid to the servicer when a loan liquidates, and liquidation proceeds are prioritized to cover principal repayment over accrued but unpaid interest. The downside is additional stress on the structure side, as there is limited liquidity in the event of large and extended delinquencies.
Modified Sequential Payment Structure (Neutral): The structure distributes collected principal pro rata among the class A notes while excluding subordinate bonds from principal until classes A-1, A-2 and A-3 are reduced to zero. To the extent that either a cumulative loss trigger event or delinquency trigger event occurs in a given period, principal will be distributed sequentially to classes A-1, A-2 and A-3 until they are reduced to zero.
The transaction has excess spread that will be available to reimburse the certificates for losses or interest shortfalls. The excess spread may be reduced on and after
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at the MSA level. Sensitivity analyses was conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.
This defined negative rating sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10.0%, 20.0% and 30.0% in addition to the model-projected 41.4% at '
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper MVDs than assumed at the MSA level. Sensitivity analyses was conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.
This defined positive rating sensitivity analysis demonstrates how the ratings would react to positive home price growth of 10% with no assumed overvaluation. Excluding the senior class, which is already rated 'AAAsf', the analysis indicates there is potential positive rating migration for all of the rated classes. Specifically, a 10% gain in home prices would result in a full category upgrade for the rated class excluding those being assigned ratings of 'AAAsf'.
This section provides insight into the model-implied sensitivities the transaction faces when one assumption is modified, while holding others equal. The modeling process uses the modification of these variables to reflect asset performance in up and down environments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. It should not be used as an indicator of possible future performance.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by Evolve and AMC. The third-party due diligence described in Form 15E focused on three areas: compliance review, credit review and valuation review. Fitch considered this information in its analysis. Based on the results of the 100% due diligence performed on the pool, Fitch reduced the overall 'AAAsf' expected loss by 0.44%.
DATA ADEQUACY
Fitch relied on an independent third-party due diligence review performed on 100% of the pool. The third-party due diligence was generally consistent with Fitch's '
Fitch also utilized data files that were made available by the issuer on its SEC Rule 17g-5 designated website. Fitch received loan-level information based on the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
ESG Considerations
EFMT 2022-3 has an ESG Relevance Score of '4' [+] for Transaction Parties & Operational Risk. Operational risk is well controlled for in EFMT 2022-3, including strong transaction due diligence as well as 'RPS1-' Fitch-rated servicer, which resulted in a reduction in expected losses. This has a positive impact on the credit profile and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
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