MFA Financial is preparing a $294.5 million securitization of home mortgages, amid what Fitch Ratings determined is a deteriorating outlook for the U.S. residential MBS asset class.
The sponsor will sell notes to investors through the MFA 2023-NQM4 Trust, according to the rating agency, with Goldman Sachs, Barclays Capital, Atlas SP Securities and Wells Fargo Securities as lead underwriters. The transaction will issue notes through seven classes of A notes, mezzanine and class B notes, according to a pre-sale report from Fitch Ratings. All of the notes, regardless of their place in the payment hierarchy or credit enhancement function, have a stated final maturity of December 2068.
Fitch’s expects home prices to be negative or stay flat and in the single digits nationally, even with significant regional variations. Perhaps in a sign of some potential credit vulnerability among the borrowers, Fitch noted that this deal has the highest percentage of loans where the funds are used for cash out purposes, 31.8%, compared with the industry’s non-prime average of 26.5%.
The cashout is just one metric of a more mixed credit outlook, including one where a plurality of the collateral, at 46%, has a debt-to-income ratio of below 45%.
The rating agency noted a few areas of potential credit concern. For one, the coupon on the class A notes steps up after four years by 100 basis points. This might sound like a windfall on the surface, but the coupon is subject to a net weighted average coupon (WAC) cap.
“Given the likelihood that the net WAC is lower than the step-up cap, the coupons for classes A-1, A-2 and A-3 are unlikely to realize the 100 bps increase,” analysts wrote. Further, 51 loans in the collateral pool, which represents 7.4% of the collateral pool’s unpaid principal balance (UPB), are second-lien loans, and Fitch says that it treats all second liens with a 100% loss severity. Another potential issue arises from the fact that foreign national borrowers and borrowers with individual tax identification numbers make up 10.6% of the pool by unpaid principal balance, the rating agency said.
The sponsor also aggregated the loans from multiple sources, which included Excelerate Capital and Acra Lending, Fitch noted.
Fitch assigns ratings of AAA, AA and A to the A1, A2 and A3 notes, respectively. The class M1 notes received a BBB ratings; the B1 notes receive a BB rating and the B2 notes, a B rating.
