Fitch Ratings has assigned final ratings to Ellington Financial Mortgage Trust 2022-2.

RATING ACTIONS

Entity / Debt

Rating

Prior

EFMT 2022-2

A-1

LT

AAAsf

New Rating

AAA(EXP)sf

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

Page

of 2

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

Fitch rates the residential mortgage-backed certificates to be issued by Ellington Financial Mortgage Trust 2022-2, Mortgage Pass-Through Certificates, Series 2022-2 (EFMT 2022-2), as indicated above. The certificates are supported by 998 loans with a balance of $425.65 million as of the cutoff date. This will be the fifth Ellington Financial Mortgage Trust transaction rated by Fitch.

The certificates are secured mainly by non-qualified mortgages (non-QM) as defined by the Ability to Repay (ATR) rule. Approximately 85% of the loans were originated by LendSure Mortgage Corporation, a joint venture between LendSure Financial Services, Inc. (LFS) and Ellington Financial, Inc. (EFC). Approximately 13% of the loans were originated by American Heritage Lending. The remaining 3% of the loans were originated by third-party originators.

Of the pool, 54% of the loans are designated as non-QM, and the remaining 46% are investment properties not subject to ATR. Rushmore Loan Management Services LLC will be the servicer and Nationstar Mortgage LLC (Nationstar) will be the master servicer for the transaction.

There is LIBOR exposure in this transaction. While the majority of the loans in the collateral pool comprise fixed-rate mortgages, 0.36% of the pool comprises loans with an adjustable rate based on one-year LIBOR. The offered certificates are fixed rate and capped at the net weighted average coupon (WAC) or 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 8.9% above a long-term sustainable level (versus 9.2% on a national level as of April 2022, down 1.4% since 1Q22). Underlying fundamentals are not keeping pace with growth in prices, resulting from a supply/demand imbalance driven by low inventory, favorable mortgage rates and new buyers entering the market. These trends have led to significant home price increases over the past year, with home prices rising 18.2% yoy nationally as of December 2021.

Nonprime Credit Quality (Mixed): Collateral consists mainly of 30-year or 40-year fully amortizing loans, either fixed rate or adjustable rate, and 24% of the loans have an interest-only (IO) period. The pool is seasoned at about five months in aggregate, as determined by Fitch. The borrowers in this pool have relatively strong credit profiles with a 740 weighted average (WA) FICO score and a 43.5% debt-to-income ratio, both as determined by Fitch, as well as moderate leverage, with an original combined loan-to-value ratio (LTV) of 71.2%, translating to a Fitch-calculated sustainable LTV of 78.4%.

Fitch considered 47.6% of the pool to consist of loans where the borrower maintains a primary residence, while 45.7% comprises investor property and 6.7% represents second homes. Fitch considers loans to nonpermanent residents and foreign nationals as investor occupied, which explains why the investor property percentage is higher than the transaction documentation percentage of 45.6% and the second home percentage is lower than the transaction documentation percentage of 6.8%.

In total, 89% of the loans were originated through a nonretail channel. Additionally, 54% of the loans are designated as non-QM, while the remaining 46% are exempt from QM status. The pool contains 72 loans over $1.0 million, with the largest loan at $3.06 million.

Fitch determined that self-employed, non-debt service coverage ratio (DSCR) borrowers make up 43.9% of the pool; salaried non-DSCR borrowers make up 18.7%; and 37.5% comprises investor cash flow DSCR loans. About 45.7% of the pool comprises loans on investor properties (8.2% underwritten to borrowers' credit profiles and 37.5% comprising investor cash flow loans), and Fitch considered two loans (0.1%) in the pool to be tied to foreign nationals, which Fitch assumes as investor occupied. There are no second liens in the pool, and one loan has subordinate financing.

Around 27% of the pool is concentrated in California with relatively low MSA concentration. The largest MSA concentration is in the Los Angeles MSA (10.3%), followed by the Miami MSA (5.2%) and the San Francisco MSA (4.8%). The top three MSAs account for 20.3% of the pool. As a result, there was no adjustment for geographic concentration.

All loans are current as of April 1, 2022. Overall, the pool characteristics resemble nonprime collateral; therefore, the pool was analyzed using Fitch's nonprime model.

Loan Documentation: Bank Statement, Asset Depletion, DSCR Loans (Negative): About 86.9% of the pool was underwritten to less than full documentation, and 40.1% 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 Consumer Financial Protection Bureau's ATR Rule. 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, 5.6% comprises an asset depletion product, 0.0% is a CPA or P&L product and 37.5% 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 after April 2026, since class A-1 has a step-up coupon feature that goes into effect after that date. To mitigate the impact of the step-up feature, class B-2 will have a stepdown coupon feature whereby the coupon will reduce to 0.0% after April 2026.

After the presale published on April 11, 2022, the third party review firm determined that 11 loans that were coded with a 'Not Applicable' ATR status have an ATR status of 'Non-QM'. As a result, Fitch re-ran the losses re-coding these 11 loans as 'Non-QM' loans for the ATR status. Since this only impacted 11 loans, there were no material changes to the losses, and Fitch maintained the same expected losses as were disclosed in the published presale report. In addition, this did not have an impact on the ratings that Fitch assigned to the transactions, and as a result there were no changes to the ratings from the expected ratings to the final ratings.

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 'AAA'. The analysis indicates that there is some potential rating migration with higher MVDs for all rated classes compared with the model projection. Specifically, 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:

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 0.47%.

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 'U.S. RMBS Rating Criteria.' Evolve and AMC were engaged to perform the review. Loans reviewed under this engagement were given compliance, credit and valuation grades, and assigned initial grades for each subcategory. Minimal exceptions and waivers were noted in the due diligence reports. Refer to the Third-Party Due Diligence section for more detail.

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 American Securitization Forum's (ASF) data layout format, and the data are considered to be comprehensive. The ASF data tape layout was established with input from various industry participants, including rating agencies, issuers, originators, investors and others to produce an industry standard for the pool-level data in support of the U.S. RMBS securitization market. The data contained in the ASF layout data tape were reviewed by the due diligence companies, and no material discrepancies were noted.

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 2022-2 has an ESG Relevance Score of '4[+]' for Transaction Parties & Operational Risk. Operational risk is well controlled for in EFMT 2022-2, 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

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

APPLICABLE CRITERIA

Criteria for Rating U.S. and Canadian Residential and Small Balance Commercial Mortgage Servicers (pub. 07 Feb 2020)

U.S. RMBS Rating Criteria - Effective from May 4, 2021 to April 18, 2022 (pub. 04 May 2021) (including rating assumption sensitivity)

Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 20 Sep 2021)

Global Structured Finance Rating Criteria (pub. 26 Oct 2021) (including rating assumption sensitivity)

Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 04 Nov 2021)

U.S. RMBS Loan Loss Model Criteria (pub. 16 Nov 2021) (including rating assumption sensitivity)

U.S. RMBS Cash Flow Analysis Criteria (pub. 16 Feb 2022) (including rating assumption sensitivity)

U.S. RMBS Surveillance and Re-REMIC Rating Criteria (pub. 16 Feb 2022) (including rating assumption sensitivity)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Third-party Model (1)

U.S. RMBS Cash Flow Assumptions Model, v2.11.0 (1)

US RMBS Loan Loss Model (Excel platform), v5.10.4 (1)

Read More On This Topic

Ellington Financial Mortgage Trust 2022-2 - Appendix Ellington Financial Mortgage Trust 2022-2 (US RMBS)

ADDITIONAL DISCLOSURES

Dodd-Frank Rating Information Disclosure Form

ABS Due Diligence Form 15E 1

ABS Due Diligence Form 15E 2

Solicitation Status

Endorsement Policy

ENDORSEMENT STATUS

EFMT 2022-2 	EU Endorsed, UK Endorsed

DISCLAIMER & DISCLOSURES

All Fitch Ratings (Fitch) credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimers by following this link: https://www.fitchratings.com/understandingcreditratings. In addition, the following

Read More

Solicitation Status

The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below.

Endorsement Policy

Fitch's international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch's approach to endorsement in the EU and the UK can be found on Fitch's Regulatory Affairs page on Fitch's website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.

Structured Finance

Structured Finance: RMBS

North America

United States

ENTITIES

Ellington Financial Mortgage Trust 2022-2

ISSUER CONTENT

Ellington Financial Mortgage Trust 2022-2 - Appendix Ellington Financial Mortgage Trust 2022-2 (US RMBS)

Fitch Assigns Expected Ratings to Ellington Financial Mortgage Trust 2022-2

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