Rating Action: Moody’s assigns provisional ratings to Prime RMBS issued by Wells Fargo Mortgage Backed Securities 2020-4 Trust
Global Credit Research – 04 Aug 2020
New York, August 04, 2020 — Moody’s Investors Service, (“Moody’s”) has assigned provisional ratings to 25 classes of residential mortgage-backed securities (RMBS) issued by Wells Fargo Mortgage Backed Securities 2020-4 Trust (“WFMBS 2020-4”). The ratings range from (P)Aaa (sf) to (P)Ba3 (sf).
WFMBS 2020-4 is the fourth prime issuance by Wells Fargo Bank, N.A. (Wells Fargo Bank, the sponsor and mortgage loan seller) in 2020, consisting of 427 primarily 30-year, fixed rate, prime residential mortgage loans with an unpaid principal balance of $335,327,214. The pool has strong credit quality and consists of borrowers with high FICO scores, significant equity in their properties and liquid cash reserves. The pool has clean pay history and weighted average seasoning of approximately 5.16 months. The mortgage loans for this transaction are originated by Wells Fargo Bank, through its retail and correspondent channels, in accordance with its underwriting guidelines. In this transaction, all 427 loans are designated as qualified mortgages (QM) under the QM safe harbor rules. Wells Fargo Bank will service all the loans and will also be the master servicer for this transaction.
The securitization has a shifting interest structure with a five-year lockout period that benefits from a senior floor and a subordinate floor. We coded the cash flow to each of the certificate classes using Moody’s proprietary cash flow tool.
The complete rating actions are as follows:
Issuer: Wells Fargo Mortgage Backed Securities 2020-4 Trust
Cl. A-1, Assigned (P)Aaa (sf)
Cl. A-2, Assigned (P)Aaa (sf)
Cl. A-3, Assigned (P)Aaa (sf)
Cl. A-4, Assigned (P)Aaa (sf)
Cl. A-5, Assigned (P)Aaa (sf)
Cl. A-6, Assigned (P)Aaa (sf)
Cl. A-7, Assigned (P)Aaa (sf)
Cl. A-8, Assigned (P)Aaa (sf)
Cl. A-9, Assigned (P)Aaa (sf)
Cl. A-10, Assigned (P)Aaa (sf)
Cl. A-11, Assigned (P)Aaa (sf)
Cl. A-12, Assigned (P)Aaa (sf)
Cl. A-13, Assigned (P)Aaa (sf)
Cl. A-14, Assigned (P)Aaa (sf)
Cl. A-15, Assigned (P)Aaa (sf)
Cl. A-16, Assigned (P)Aaa (sf)
Cl. A-17, Assigned (P)Aa1 (sf)
Cl. A-18, Assigned (P)Aa1 (sf)
Cl. A-19, Assigned (P)Aaa (sf)
Cl. A-20, Assigned (P)Aaa (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)Ba1 (sf)
Cl. B-5, Assigned (P)Ba3 (sf)
Summary Credit Analysis and Rating Rationale
Moody’s expected loss for this pool in a baseline scenario-mean is 0.24% and reaches 3.39% at a stress level consistent with our Aaa ratings.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of US RMBS from the collapse in the US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections.
As a result, the degree of uncertainty around our forecasts is unusually high. We increased our model-derived median expected losses by 15% (9.19% for the mean) and our Aaa losses by 5% to reflect the likely performance deterioration resulting from a slowdown in US economic activity in 2020 due to the COVID-19 outbreak.
We regard the COVID-19 outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
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 and the R&W framework of the transaction.
The WFMBS 2020-4 transaction is a securitization of 427 first lien residential mortgage loans with an unpaid principal balance of $335,327,214. The loans in this transaction have strong borrower characteristics with a weighted average original FICO score of 780 and a weighted-average original loan-to-value ratio (LTV) of 70.0%. In addition, 5.9% of the borrowers are self-employed, rate-and-term refinance and cash-out loans comprise approximately 54.6% of the aggregate pool (inclusive of construction to permanent loans). Of note, 8.4% (by loan balance) of the pool comprises construction to permanent loans. The construction to permanent is a two-part loan where the first part is for the construction and then it becomes a permanent mortgage once the property is complete. For such loans in the pool, the construction was complete and because the borrower cannot receive cash from the permanent loan proceeds or anything above the construction cost, we treated these loans as a rate term refinance rather than a cash out refinance loan. The pool has a high geographic concentration with 54.9% of the aggregate pool located in California and 12.5% located in the New York-Newark-Jersey City MSA. The characteristics of the loans underlying the pool are slightly stronger than recent prime RMBS transactions backed by 30-year mortgage loans that we have rated.
Wells Fargo Bank, N.A. (long term debt Aa2) is an indirect, wholly-owned subsidiary of Wells Fargo & Company (long term debt A2). Wells Fargo & Company is a U.S. bank holding company with approximately $1.98 trillion in assets and approximately 263,000 employees as of March 31, 2020, which provides banking, insurance, trust, mortgage and consumer finance services throughout the United States and internationally.
Wells Fargo Bank has sponsored or has been engaged in the securitization of residential mortgage loans since 1988. Wells Fargo Home Lending (WFHL) is a key part of Wells Fargo & Company’s diversified business model. The mortgage loans for this transaction are originated by WFHL, through its retail and correspondent channels, generally in accordance with its underwriting guidelines. The company uses a solid loan origination system which include embedded features such as a proprietary risk scoring model, role based business rules and data edits that ensure the quality of loan production. After considering the company’s origination practices, we made no additional adjustments to our base case and Aaa loss expectations for origination.
Third Party Review (TPR)
One independent third-party review firm, Clayton Services LLC, was engaged to conduct due diligence for the credit, regulatory compliance, property valuation, and data accuracy for all 427 loans in the initial population of this transaction (100% of the mortgage pool). For an initial population of 437 loans, Clayton Services LLC identified 391 loans with level A and 46 loans with level B credit component grades. Most of the level B loans were underwritten using underwriter discretion. Areas of discretion included insufficient cash reserves, length of mortgage/rental history, cash out amount exceeds guidelines, and explanation for other multiple credit exceptions. The due diligence firm noted that these exceptions are minor and/or provided an explanation of compensating factors.
Also, Clayton Services LLC identified 434 loans with level A, two (2) loans with level B, and one (1) loan with level C property valuation grade. For the one (1) level C loan there is finding related to property valuation review, because Clayton determined that the appraisal value used in the origination of such mortgage loan was not supported by field review within a negative 10% variance. Low DTI and LTV along with a long history of self employment were cited as compensating factors. For the two loans with property valuation grade of B, one loan had the home escrow requirement waived with compensating factors such as high credit score, low loan-to-value (LTV) and debt-to-income (DTI) ratios. The other loan with a property valuation grade B was located in a FEMA disaster area and was missing a post disaster inspection report post a hurricane. No subsequent inspection was performed on the property after the disaster and there was no contact from the borrower regarding property damage. High credit score, income, and cash reserves and low DTI and CLTV are the compensating factors. We therefore, did not run any additional sensitivity analysis on these loans.
Representation & Warranties (R&W)
Wells Fargo Bank, as the originator, makes the loan-level representation and warranties (R&Ws) for the mortgage loans. The loan-level R&Ws are strong and, in general, either meet or exceed the baseline set of credit-neutral R&Ws we have identified for US RMBS. Further, R&W breaches are evaluated by an independent third party using a set of objective criteria to determine whether any R&Ws were breached when loans become 120 days delinquent, the property is liquidated at a loss above a certain threshold, or the loan is modified by the servicer. Similar to J.P. Morgan Mortgage Trust (JPMMT) transactions, the transaction contains a “prescriptive” R&W framework. These reviews are prescriptive in that the transaction documents set forth detailed tests for each R&W that the independent reviewer will perform.
It should be noted that exceptions exist for certain excluded disaster mortgage loans that trip the delinquency trigger. These excluded disaster loans include COVID-19 forbearance loans or any other loan with respect to which (a) the related mortgaged property is located in an area that is subject to a major disaster declaration by either the federal or state government and (b) has either been modified or is being reported delinquent by the servicer as a result of a forbearance, deferral or other loss mitigation activity relating to the subject disaster. Such excluded disaster mortgage loans may be subject to a review in future periods if certain conditions are satisfied.
Overall, we believe that Wells Fargo Bank’s robust processes for verifying and reviewing the reasonableness of the information used in loan origination along with effectively no knowledge qualifiers mitigates any risks involved. Wells Fargo Bank has an anti-fraud software tools that are integrated with the loan origination system and utilized pre-closing for each loan. In addition, Wells Fargo Bank has a dedicated credit risk, compliance and legal teams oversee fraud risk in addition to compliance and operational risks. We did not make any additional adjustment to our base case and Aaa loss expectations for R&Ws.
Tail Risk and Subordination Floor
The transaction cash flows follow a shifting interest structure that allows subordinated bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool shrinks, senior bonds are exposed to increased performance volatility, known as tail risk. The transaction provides for a senior subordination floor of 1.40% of the closing pool balance, which mitigates tail risk by protecting the senior bonds from eroding credit enhancement over time. Additionally, there is a subordination lock-out amount which is 1.40% of the closing pool balance.
We calculate the credit neutral floors for a given target rating as shown in our principal methodology. The senior subordination floor of 1.40% and subordinate floor of 1.40% are consistent with the credit neutral floors for the assigned ratings.
The securitization has a shifting interest structure that benefits from a senior 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 unscheduled principal collections to the senior bond for a specified period of time and increasing amounts of unscheduled principal collections to the subordinate bonds thereafter, but only if loan performance satisfies delinquency and loss tests.
All certificates in this transaction are subject to a net WAC cap. Realized losses are allocated reverse sequentially among the subordinate and senior support certificates and on a pro-rata basis among the super senior certificates.
In WFMBS 2020-4, unlike other prime jumbo transactions, Wells Fargo Bank acts as servicer, master servicer, securities administrator and custodian of all of the mortgage loans for the deal. The servicer will be primarily responsible for funding certain servicing advances and delinquent scheduled interest and principal payments for the mortgage loans, unless the servicer determines that such amounts would not be recoverable. The master servicer and servicer will be entitled to be reimbursed for any such monthly advances from future payments and collections (including insurance and liquidation proceeds) with respect to those mortgage loans (see also COVID-19 impacted borrowers section for additional information).
In the case of the termination of the servicer, the master servicer must consent to the trustee’s selection of a successor servicer, and the successor servicer must have a net worth of at least $15 million and be Fannie or Freddie approved. The master servicer shall fund any advances that would otherwise be required to be made by the terminated servicer (to the extent the terminated servicer has failed to fund such advances) until such time as a successor servicer is appointed. Additionally, in the case of the termination of the master servicer, the trustee will be required to select a successor master servicer in consultation with the depositor. The termination of the master servicer will not become effective until either the trustee or successor master servicer has assumed the responsibilities and obligations of the master servicer which also includes the advancing obligation.
After considering Wells Fargo Bank’s servicing practices, we did not make any additional adjustment to our losses.
COVID-19 Impacted Borrowers
As of the cut-off date, no borrower under any mortgage loan has entered into a COVID-19 related forbearance plan with the servicer. The mortgage loan seller will covenant in the mortgage loan purchase agreement to repurchase at the repurchase price within 30 days of the closing date any mortgage loan with respect to which the related borrower requests or enters into a COVID-19 related forbearance plan after the cut-off date but on or prior to the closing date. In the event that after the closing date a borrower enters into or requests a COVID-19 related forbearance plan, such mortgage loan (and the risks associated with it) will remain in the mortgage pool.
In the event the servicer enters into a forbearance plan with a COVID-19 impacted borrower of a mortgage loan, the servicer will report such mortgage loan as delinquent (to the extent payments are not actually received from the borrower) and the servicer will be required to make advances in respect of delinquent interest and principal (as well as servicing advances) on such loan during the forbearance period (unless the servicer determines any such advances would be a nonrecoverable advance). At the end of the forbearance period, if the borrower is able to make the current payment on such mortgage loan but is unable to make the previously forborne payments as a lump sum payment or as part of a repayment plan, the servicer anticipates it will modify such mortgage loan and any forborne amounts will be deferred as a non-interest bearing balloon payment that is due upon the maturity of such mortgage loan.
At the end of the forbearance period, if the borrower repays the forborne payments via a lump sum or repayment plan, advances will be recovered via the borrower payment(s). In an event of modification, Wells Fargo Bank will recover advances made during the period of Covid-19 related forbearance from pool level collections.
Any principal forbearance amount created in connection with any modification (whether as a result of a COVID-19 forbearance or otherwise) will result in the allocation of a realized loss and to the extent any such amount is later recovered, will result in the allocation of a subsequent recovery.
Factors that would lead to an upgrade or downgrade of the ratings:
Levels 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.
Levels 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.
The principal methodology used in these ratings was “Moody’s Approach to Rating US RMBS Using the MILAN Framework” published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
In addition, Moody’s publishes a weekly summary of structured finance credit ratings and methodologies, available to all registered users of our website, www.moodys.com/SFQuickCheck.
For 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_1240299.
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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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.
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.
Chinmay Kulkarni Asst Vice President - Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Sonny Weng Vice President - Senior Analyst Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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