Fitch Assigns Final Ratings to MFA 2023-NQM4

Fitch Ratings has assigned final ratings to the residential mortgage-backed certificates to be issued by MFA 2023-NQM4 Trust (MFA 2023-NQM4).

RATING ACTIONS

Entity / Debt

Rating

Prior

MFA 2023-NQM4

A1

LT

AAAsf

New Rating

AAA(EXP)sf

A2

LT

AAsf

New Rating

AA(EXP)sf

A3

LT

Asf

New Rating

A(EXP)sf

M1

LT

BBBsf

New Rating

BBB(EXP)sf

B1

LT

BBsf

New Rating

BB(EXP)sf

B2

LT

Bsf

New Rating

B(EXP)sf

B3

LT

NRsf

New Rating

NR(EXP)sf

AIOS

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 MFA 2023-NQM4 Trust (MFA 2023-NQM4) as indicated. The certificates are supported by 508 nonprime loans with a total balance of approximately $295 million as of the cutoff date.

Loans in the pool were originated by multiple originators, including Excelerate Capital, Citadel Servicing Corporation d/b/a Acra Lending and others. Loans were aggregated by MFA Financial, Inc (MFA). Loans are currently serviced by Planet Home Lending and Citadel Servicing Corporation whose loans are subserviced by ServiceMac LLC. The structure was updated post-pricing and the coupons for A1, A2, A3 and M1 classes decreased between 50bps-70bps, which increased the weighted average excess spread to 127bps, a 58bps increase from the previous WA excess spread of 69bps. Additionally, the M1 class is now paying a fixed-rate coupon compared with Net WAC in the previous structure.

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 7.9% above a long-term sustainable level (versus 9.4% on a national level as of 2Q23, up 1.82% % from the prior quarter). Home prices have increased 1.87% yoy nationally as of October 2023. Fitch views the long-term sustainable valuation of assets for the portfolio equal to $428.2 million.

Non-QM Credit Quality (Negative): The collateral consists of 508 loans totaling $295 million and seasoned approximately 10 months in aggregate as calculated by Fitch. The borrowers have a moderate credit profile of a 733 Fitch model FICO and leverage with a 68.8 % sustainable loan-to-value ratio (sLTV).

The pool consists of 44.1% of loans where the borrower maintains a primary residence, while 55.9% comprise an investor property or second home as calculated by Fitch. Additionally, 56.6% are nonqualified mortgage (non-QM) while the QM rule does not apply to the remainder. This pool consists of a variety of weaker borrower/collateral types, including second lien, foreign nationals and nonstandard property types.

Fitch's expected loss in the 'AAAsf' stress is 25.0%. This is mainly driven by the non-QM collateral, the significant investor cash flow product concentration and a pool level adjustment related to loan concentration.

Loan Documentation (Negative): Approximately 90.4% of loans in the pool were underwritten to less than full documentation and 45.4% were underwritten to a bank statement program for verifying income. A key distinction between this pool and legacy Alt-A loans is these loans adhere to underwriting and documentation standards required under the Consumer Financial Protections Bureau's (CFPB) Ability to Repay (ATR) Rule (ATR Rule) or the Rule.

This reduces risk of borrower default arising from lack of affordability, misrepresentation or other operational quality risks due to rigor of the Rule's mandates with respect to the underwriting and documentation of a borrower's ATR.

Fitch's treatment of alternative loan documentation increased 'AAAsf' expected losses by 250bps, compared with a deal of 100% fully documented loans.

High Percentage of DSCR Loans (Negative): There are 225 debt service coverage ratio (DSCR) products in the pool (44.3% by loan count). These business purpose loans are available to real estate investors that are qualified on a cash flow basis, rather than debt to income (DTI), and borrower income and employment are not verified.

Compared with standard investment properties, for DSCR loans, Fitch converts the DSCR values to a DTI and treats as low documentation. Fitch's treatment for DSCR loans results in a higher Fitch-reported nonzero DTI. Further no ratio loans are treats as 100% DTI. Fitch's expected losses for DSCR loans account for 31.25% in the 'AAAsf' stress.

Pool Level Adjustments (Negative): The pool has a weighted average number (WAN) of 176 and is incurring approximately a 243bps penalty at 'AAA'. RMBS pools with an initial WAN below 300 loans are subject to PD penalties that are applied to the pool's model-generated PD. The variability of defaults inherently increases when a portfolio depends on a small number of assets. The WAN for this portfolio is significantly less than the number of assets due to the lumpy largest loans. The pool consists of 508 loans and the 10 largest loans by UPB account for 17.0% of the pool.

Additionally, the largest 20 loans account for 27.2% of the UPB. The WAN for this portfolio is significantly less than the number of assets due to the lumpy largest loans. If some of the large loans prepay, the concentration risk will decrease.

Approximately 42.768% of the pool is concentrated in California with moderate MSA concentration. The largest MSA is Los Angeles MSA (25.6%) followed by the Miami MSA (13.5%) and the San Diego MSA (5.1%). The top three MSAs account for 44.2% of the pool. As a result, there was a 1.06x PD penalty applied, which increased the 'AAA' expected loss by 64bps.

In total, Fitch adjusted the 'AAA' pool level loss expectations by 307bps due to loan and geographic concentration risks.

Modified Sequential-Payment Structure with No Advancing (Mixed): The structure distributes principal pro rata among the senior certificates while shutting out the subordinate bonds from principal until all senior classes are reduced to zero. If a cumulative loss trigger event or delinquency trigger event occurs in a given period, principal will be distributed sequentially to class A-1, A-2 and A-3 certificates until they are reduced to zero.

Advances of delinquent principal and interest (P&I) will not be made on the mortgage loans. The lack of advancing reduces loss severities, as a lower amount is repaid to the servicer when a loan liquidates and liquidation proceeds are prioritized to cover principal repayment over accrued but unpaid interest. The downside to this is the additional stress on the structure, as there is limited liquidity in the event of large and extended delinquencies.

MFA 2023-NQM4 has a step-up coupon for the senior classes (A-1, A-2 and A-3). After four years, the senior classes pay the lesser of a 100-bp increase to the fixed coupon or the net weighted average coupon (WAC) rate. Any class B-3 interest distribution amount will be distributed to the class A-1, A-2 and A-3 certificates on and after the step-up date if the cap carryover amount is greater than zero. This increases the P&I allocation for the senior classes.

As additional analysis to Fitch's rating stresses, the agency took into account a WAC deterioration that varied by rating stress. The WAC cut was derived by assuming a 2.5% cut, based on the most common historical modification rate) on 40% (historical Alt-A modification percentage) of the performing loans. Although the WAC reduction stress is based on historical modification rates, Fitch did not include the WAC reduction stress in its testing of the delinquency trigger.

Fitch viewed the WAC deterioration as more of a pre-emptive cut given the ongoing macroeconomic and regulatory environment. A portion of borrowers will likely be impaired but will not ultimately default due to modifications and reduced P&I. Furthermore, this approach had the largest impact on the back-loaded benchmark scenario.

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 analysis was conducted at the state and national level to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.

The 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 40.2% at 'AAA'. The analysis indicates that there is some potential rating migration with higher MVDs for all rated classes, compared with the model projection. A 10% additional decline in home prices would lower all rated classes by one full category.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The 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. A 10% gain in home prices would result in a full category upgrade for the rated class excluding those assigned 'AAAsf' ratings.

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 Clayton, Consolidated Analytics, Infinity, Canopy, Selene, Stonehill and Evolve. The third-party due diligence described in Form 15E focused on credit, compliance and property valuation review. Fitch considered this information in its analysis and, as a result, Fitch made the following adjustment to its analysis: a 5% credit at the loan level for each loan where satisfactory due diligence was completed. This adjustment resulted in 44bps reduction to 'AAAsf' losses.

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com