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Moody's assigns provisional ratings to prime RMBS issued by MFA 2021-AEINV2 Trust

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Rating Action: Moody's assigns provisional ratings to prime RMBS issued by MFA 2021-AEINV2 TrustGlobal Credit Research - 13 Dec 2021New York, December 13, 2021 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to forty-seven (47) classes of residential mortgage-backed securities (RMBS) issued by MFA 2021-AEINV2 Trust. The ratings range from (P)Aaa (sf) to (P)B3 (sf). MFA Financial, Inc. (MFA), a Maryland corporation is the sponsor of the transaction.MFA 2021-AEINV2 Trust is a securitization of first lien, government-sponsored enterprises' (GSE)-eligible mortgage loans on investor properties sponsored by MFA. As of the cut-off date, the securitization is backed by 972 fully amortizing, fixed-rate mortgage loans, with an aggregate stated principal balance (UPB) of approximately $339,655,385. 100% of the pool was originated by loanDepot.com, LLC (loanDepot).In this transaction, the Class A-11, A-11-X, Class A-11-A, and Class A-11-B certificates' coupon is indexed to SOFR. However, based on the transaction's structure, the particular choice of benchmark has no credit impact. First, interest payments to the certificates, including the floating rate certificates, are subject to the net WAC cap, which prevents the floating rate classes from incurring interest shortfalls as a result of increases in the benchmark index above the fixed rates at which the assets bear interest. Second, the shifting-interest structure pays all interest generated on the assets to the certificates and does not provide for any excess spread.Although loanDepot is named servicer, Cenlar FSB (Cenlar) will be the sub-servicer of the loans and Computershare Trust Company, N.A. (Computershare) will be the master servicer. loanDepot will also be responsible for servicer advances, with the master servicer stepping in if loanDepot cannot fulfill its obligation to advance scheduled principal and interest.Servicing compensation is subject to a step-up incentive fee structure. Servicing fee includes base fee plus delinquency and incentive fees. Delinquency and incentive fees will be deducted reverse sequentially starting from the Class B-6 interest payment amount first and could result in interest shortfall to the certificates depending on the magnitude of the delinquency and incentive fees.The complete rating actions are as follows: Issuer: MFA 2021-AEINV2 Trust Cl. A-1, Assigned (P)Aaa (sf) Cl. A-2, Assigned (P)Aaa (sf) Cl. A-3, Assigned (P)Aaa (sf) Cl. A-3-A, Assigned (P)Aaa (sf)Cl. A-3-X*, Assigned (P)Aaa (sf)Cl. A-4, Assigned (P)Aaa (sf)Cl. A-4-A, Assigned (P)Aaa (sf)Cl. A-4-X*, Assigned (P)Aaa (sf)Cl. A-5, Assigned (P)Aaa (sf)Cl. A-5-A, Assigned (P)Aaa (sf)Cl. A-5-X*, Assigned (P)Aaa (sf)Cl. A-6, Assigned (P)Aaa (sf)Cl. A-6-A, Assigned (P)Aaa (sf)Cl. A-6-X*, Assigned (P)Aaa (sf)Cl. A-7, Assigned (P)Aaa (sf)Cl. A-7-A, Assigned (P)Aaa (sf)Cl. A-7-X*, Assigned (P)Aaa (sf)Cl. A-8, Assigned (P)Aaa (sf)Cl. A-8-A, Assigned (P)Aaa (sf)Cl. A-8-X*, Assigned (P)Aaa (sf)Cl. A-9, Assigned (P)Aaa (sf)Cl. A-9-A, Assigned (P)Aaa (sf)Cl. A-9-X*, Assigned (P)Aaa (sf)Cl. A-10, Assigned (P)Aaa (sf)Cl. A-10-A, Assigned (P)Aaa (sf)Cl. A-10-X*, Assigned (P)Aaa (sf)Cl. A-11, Assigned (P)Aaa (sf)Cl. A-11-X*, Assigned (P)Aaa (sf)Cl. A-11-A, Assigned (P)Aaa (sf)Cl. A-11-AI*, Assigned (P)Aaa (sf)Cl. A-11-B, Assigned (P)Aaa (sf)Cl. A-11-BI*, Assigned (P)Aaa (sf)Cl. A-12, Assigned (P)Aaa (sf)Cl. A-13, Assigned (P)Aaa (sf)Cl. A-14, Assigned (P)Aa1 (sf)Cl. A-15, Assigned (P)Aa1 (sf)Cl. A-16, Assigned (P)Aaa (sf)Cl. A-17, Assigned (P)Aaa (sf)Cl. A-X-1*, Assigned (P)Aaa (sf)Cl. A-X-2*, Assigned (P)Aaa (sf)Cl. A-X-3*, Assigned (P)Aaa (sf)Cl. A-X-4*, Assigned (P)Aa1 (sf)Cl. B-1, Assigned (P)Aa3 (sf)Cl. B-2, Assigned (P)A3 (sf)Cl. B-3, Assigned (P)Baa3 (sf)Cl. B-4, Assigned (P)Ba3 (sf)Cl. B-5, Assigned (P)B3 (sf)*Reflects Interest-Only ClassesRATINGS RATIONALESummary Credit Analysis and Rating RationaleMoody's expected loss for this pool in a baseline scenario is 1.14% at the mean, 0.82% at the median and reaches 7.81% at a stress level consistent with our Aaa ratings.We base our ratings on the certificates on the credit quality of the mortgage loans, the structural features of the transaction, our assessments of the origination quality and servicing arrangement, the strength of the third-party due diligence (TPR) and the representations and warranties (R&W) framework of the transaction.Collateral descriptionAs of the cut-off date of December 1, 2021, the collateral comprises 972 GSE-eligible mortgage loans originated by loanDepot, secured by first liens on residential investment properties, with an aggregate principal balance of $339,655,385.. All the loans are underwritten in accordance with Freddie Mac or Fannie Mae guidelines, which take into consideration, among other factors, the income, assets, employment and credit score of the borrower as well as loan-to-value (LTV). These loans are run through one of the GSE automated underwriting systems (AUS) and have received an "Approve" or "Accept" recommendation.The majority of the loans have a 30-year term, with five loans having terms ranging from 25 to 26 years. All of the loans have a fixed rate. The WA original credit score is 765 for the primary borrower only and the WA combined original LTV (CLTV) is 65.0%. The WA original debt-to-income (DTI) ratio is 34.8%. Around 35.1% of the mortgage loans by UPB are backed by properties located in California.Approximately 6.07% of the mortgage loans by count are "Appraisal Waiver" (AW) loans, whereby the sponsor obtained an AW for each such mortgage loan from Fannie Mae or Freddie Mac through their respective programs. In each case, neither Fannie Mae nor Freddie Mac required an appraisal of the related mortgaged property as a condition of approving the related mortgage loan for purchase by Fannie Mae or Freddie Mac, as applicable. We made an adjustment in our analysis to account for the increased risk associated with such loans. However, we have tempered this adjustment by taking into account the GSEs' robust risk modeling, which helps minimize collateral valuation risk, as well as the GSEs' conservative eligibility requirements for AW loans which helps to support deal collateral quality.Origination qualityThe mortgage loans for this transaction were acquired by MFA, the sponsor. The sponsor does not originate any mortgage loans, including the mortgage loans included in the mortgage pool. Instead, MFA acquired the mortgage loans pursuant to contracts with loanDepot, the originator.While we consider there to be some weaknesses in the MFA's aggregation platform, such as a lack of a formal audit/quality control process to review mortgage loans, overall, we consider the aggregation platform to be adequate and as a result did not apply an adjustment to our losses mainly due to the following mitigants: (a) loanDepot originated 100% of the pool and loanDepot conducted audit/quality control on all their investor agency loans. We reviewed loanDepot investors agency program and consider loanDepot's origination quality to be in line with its peers; (b) MFA relied on their custodian to verify the presence of required collateral documents such as the original mortgage note, as well as completeness of certain elements in each document; and (c) MFA has back-end representations and warranties with loanDepot through a private mortgage loan purchase agreement.Servicing arrangementsWe consider the overall servicing arrangement for this pool to be adequate and as a result did not make any adjustments to our base case and Aaa stress loss assumptions based on this servicing arrangement.loanDepot has engaged Cenlar to subservice the mortgage loans pursuant to a separate subservicing agreement between the servicer and the subservicer. Computershare Trust Company, N.A. will serve as the master servicer. loanDepot the servicer, will be primarily responsible for funding certain servicing advances of delinquent scheduled interest and principal payments for the mortgage loans, unless it determines that such amounts would not be recoverable. The master servicer will be obligated to fund any required monthly advances if the servicer fails in its obligation to do so.Computershare is a national banking association and a wholly-owned subsidiary of Computershare Ltd (Baa2, long term rating), an Australian financial services company with over $5 billion (USD) in assets as of June 30, 2021. Computershare Ltd and its affiliates have been engaging in financial service activities, including stock transfer related services since 1997, and corporate trust related services since 2000.Servicing compensation in this transaction is based on a fee-for-service incentive structure. The servicer receives higher fees for labor-intensive activities that are associated with servicing delinquent loans, including loss mitigation, than they receive for servicing a performing loan, which is less labor intensive. The fee-for-service compensation is reasonable and adequate for this transaction because it better aligns the servicer's costs with the deal's performance. Furthermore, higher fees for the more labor-intensive tasks make the transfer of these loans to another servicer easier, should that become necessary.Third-party reviewOne independent third-party review firm, Consolidated Analytics, Inc. (Consolidated Analytics) was engaged to conduct due diligence for credit, regulatory compliance, property valuation, and data accuracy on a total of 25.0% (by loan count) of the loan pool. Of the 972 mortgage loans in the pool, the TPR firm conducted due diligence on a sample of 243 mortgage loans. We calculated the credit-neutral sample size using a confidence interval, error rate and a precision level of 95%/5%/2%, respectively. The number of mortgage loans that went through a full due diligence review (243) is below our calculated credit-neutral threshold. We therefore applied an adjustment to our losses.Representations and Warranties FrameworkThe R&W provider is MFA (unrated). We assessed the R&W framework based on three factors: (a) the financial strength of the remedy provider; (b) the strength of the R&Ws (including qualifiers and sunsets) and (c) the effectiveness of the enforcement mechanisms. We evaluated the impact of these factors collectively on the ratings in conjunction with the transaction's specific details and in some cases, the strengths of some of the factors can mitigate weaknesses in others. We also considered the R&W framework in conjunction with other transaction features, such as the independent due diligence, custodial receipt, and property valuations, as well as any sponsor alignment of interest, to evaluate the overall exposure to loan defects and inaccurate information.We increased our loss levels to account for weaknesses in the overall R&Ws framework due to the financial weakness of the R&Ws provider and because the loss amount remedy is subject to conflicts of interest and will likely not adequately compensate the transaction for loans that breach R&Ws. Unlike most other comparable transactions that we have rated, the R&Ws framework in this transaction has a "loss amount" remedy, namely, in case there is a material breach to the R&Ws, the sponsor, who is the R&W provider, is tasked with calculating the loss amount to indemnify the trust instead of buying the loan at par, which is subject to conflicts of interest. The party determining the loss amount will have a natural incentive to determine a low amount since it will have to pay that amount. Furthermore, there may be no objective way to determine such amount since the decrease in value of a loan that breaches a R&W may not be quantifiable at the time the breach is discovered. The fact that the controlling holder can bring the sponsor to arbitration in the event that it disagrees with the loss amount is a partial mitigant. However, there may be no good way to prove in arbitration that the sponsor's determination is not adequate because the determination of the loss payment will be, in many cases, subjective. Furthermore, the controlling holder must expend its own funds to go to arbitration, which could disincentivize it to pursue arbitration. Another partial mitigant is that the sponsor has purchased the loans from one seller, loanDepot, an originator whose repurchase statistics are equal to or better than the GSEs' average.Transaction structureThe securitization has a shifting interest structure that benefits from a senior subordination floor and a subordinate floor. Funds collected, including principal, are first used to make interest payments and then principal payments to the senior bonds, and then interest and principal payments to each subordinate bond. As in all transactions with shifting interest structures, the senior bonds benefit from a cash flow waterfall that allocates all prepayments to the senior bond for a specified period of time and increasing amounts of prepayments to the subordinate bonds thereafter, but only if loan performance satisfies delinquency and loss tests.Realized losses are allocated in a reverse sequential order, first to the lowest subordinate bond. After the balances of the subordinate bonds are written off, losses from the pool begin to write off the principal balances of the senior support bonds until their principal balances are reduced to zero. Next, realized losses are allocated to super senior bonds until their principal balance is written off.Tail risk & subordination floorThe transaction cash flows follow a shifting interest structure that allows subordinate bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinate bonds to pay down over time as the loan pool balance declines, senior bonds are exposed to eroding credit enhancement over time, and increased performance volatility as a result. To mitigate this risk, the transaction provides for a senior subordination floor of 1.05% (UPB) as of the cut-off date pool balance, and as subordination lock-out amount of 1.05% (UPB) as of the cut-off date pool balance. We calculate the credit neutral floors for a given target rating as shown in our principal methodology. The senior subordination floor and the subordination lock-out of 1.05% are consistent with the credit neutral floors for the assigned ratings.Factors that would lead to an upgrade or downgrade of the ratings:DownLevels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody's original expectations as a result of a higher number of obligor defaults or deterioration in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.UpLevels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline from Moody's original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market.MethodologyThe principal methodology used in rating all classes except interest-only classes was "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1271478. The methodologies used in rating interest-only classes were "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1271478 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179. Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. Please note that a Request for Comment was published in which Moody's requested market feedback on potential revisions to one or more of the methodologies used in determining these Credit Ratings. If the revised methodologies are implemented as proposed, it is not currently expected that the Credit Ratings referenced in this press release will be affected. Request for Comments can be found on the rating methodologies page on www.moodys.com.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1313202.The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Philip Rukosuev Asst Vice President - Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​