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Rating Action:

Moody's assigns definitive ratings to Prime RMBS issued by Provident Funding Mortgage Trust 2021-2

11 Jun 2021

New York, June 11, 2021 -- Moody's Investors Service, ("Moody's") has assigned definitive ratings to 23 classes of residential mortgage-backed securities (RMBS) issued by Provident Funding Mortgage Trust (PFMT) 2021-2. The ratings range from Aaa (sf) to Ba3 (sf).

PFMT 2021-2 is the second transaction in 2021 backed by loans originated by the sponsor, Provident Funding Associates, L.P. (Provident Funding). PFMT 2021-2 is a securitization of agency-eligible mortgage loans originated and serviced by Provident Funding (corporate family rating of B1, with stable outlook) and will be the fifth transaction for which Provident Funding is the sole originator and servicer. Approximately 45.25% of the mortgage loans by aggregate unpaid principal balance (UPB) are "Appraisal Waiver" (AW) loans, whereby the sponsor obtained an appraisal waiver for each such mortgage loan from Fannie Mae or Freddie Mac (collective, GSEs) through their respective programs. In each case, neither GSE required an appraisal of the related mortgaged property as a condition of approving the related mortgage loan for purchase by the GSEs.

Overall, the credit quality of the mortgage loans backing this transaction is similar to the previously sponsored Provident Funding securitizations which we have rated and to that of transactions issued by other prime issuers. Borrowers of the mortgage loans backing this transaction have strong credit profiles demonstrated by strong credit scores, high percentage of equity and significant liquid reserves. As of the cut-off date, no borrower under any mortgage loan is in a COVID-19 related forbearance plan with the servicer.

Provident Funding will act as the servicer of the mortgage loans. Wells Fargo Bank, N.A (Wells Fargo, rated Aa1) will be the master servicer, securities administrator, paying agent and certificate registrar and the trustee will be Wilmington Savings Fund Society, FSB.

PFMT 2021-2 has a shifting interest structure with a five-year lockout period that benefits from a senior subordination 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: Provident Funding Mortgage Trust 2021-2

Cl. A-1, Definitive Rating Assigned Aaa (sf)

Cl. A-1A, Definitive Rating Assigned Aaa (sf)

Cl. A-2, Definitive Rating Assigned Aaa (sf)

Cl. A-2A, Definitive Rating Assigned Aaa (sf)

Cl. A-3, Definitive Rating Assigned Aaa (sf)

Cl. A-3A, Definitive Rating Assigned Aaa (sf)

Cl. A-4, Definitive Rating Assigned Aaa (sf)

Cl. A-4A, Definitive Rating Assigned Aaa (sf)

Cl. A-5, Definitive Rating Assigned Aaa (sf)

Cl. A-5A, Definitive Rating Assigned Aaa (sf)

Cl. A-6, Definitive Rating Assigned Aaa (sf)

Cl. A-6A, Definitive Rating Assigned Aaa (sf)

Cl. A-7, Definitive Rating Assigned Aaa (sf)

Cl. A-8, Definitive Rating Assigned Aaa (sf)

Cl. A-9, Definitive Rating Assigned Aa1 (sf)

Cl. A-10, Definitive Rating Assigned Aa1 (sf)

Cl. A-10A, Definitive Rating Assigned Aa1 (sf)

Cl. A-11, Definitive Rating Assigned Aaa (sf)

Cl. B-1, Definitive Rating Assigned A1 (sf)

Cl. B-2, Definitive Rating Assigned A3 (sf)

Cl. B-3, Definitive Rating Assigned Baa2 (sf)

Cl. B-4, Definitive Rating Assigned Ba1 (sf)

Cl. B-5, Definitive Rating Assigned Ba3 (sf)

RATINGS RATIONALE

Summary Credit Analysis and Rating Rationale

Moody's expected loss for this pool in a baseline scenario is 0.18% at the mean (0.07% at the median) and reaches 2.56% at a stress level consistent with our Aaa ratings.

The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world's economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of consumer assets from a gradual and unbalanced recovery in US economic activity.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

We increased our model-derived median expected losses by 10% (3.38% for the mean) and our Aaa loss by 2.5% to reflect the likely performance deterioration resulting from the slowdown in US economic activity due to the coronavirus outbreak. These adjustments are lower than the 15% median expected loss and 5% Aaa loss adjustments we made on pools from deals issued after the onset of the pandemic until February 2021. Our reduced adjustments reflect the fact that the loan pool in this deal does not contain any loans to borrowers who are not currently making payments. For newly originated loans, post-COVID underwriting takes into account the impact of the pandemic on a borrower's ability to repay the mortgage. For seasoned loans, as time passes, the likelihood that borrowers who have continued to make payments throughout the pandemic will now become non-cash flowing due to COVID-19 continues to decline.

We calculated losses on the pool using our US Moody's Individual Loan Analysis (MILAN) model based on the loan-level collateral information as of the cut-off date. 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 & warranties (R&W) framework of the transaction.

Collateral Description

As of the cut-off date of May 1, 2021, the pool contains of 741 mortgage loans with an aggregate principal balance of $341,279,006 secured by first liens on one- to three-family residential properties, condominiums or planned unit developments, and are fully amortizing, fixed-rate Agency Safe Harbor Qualified Mortgages (QM) loans, each with an original term to maturity of up to 30 years. The mortgage loans have principal balances which meet the requirements for purchase by the GSEs, and were underwritten pursuant to the guidelines of the GSEs, as applicable, using their automated underwriting systems (collectively, agency-eligible loans).

Borrowers of the mortgage loans backing this transaction have strong credit profiles demonstrated by strong credit scores, high percentage of equity and significant liquid reserves. The average stated principal balance is $460,565 and the weighted average (WA) current mortgage rate is 2.6%. The mortgage pool has a WA original term of 358 months. The mortgage pool has a WA seasoning of 1.8 months. The borrowers have a WA credit score of 782, WA combined loan-to-value ratio (CLTV) of 61.7% and WA debt-to-income ratio (DTI) of 31.6%. Furthermore, approximately 64.3% (by loan balance) of the properties backing the mortgage loans are located in five states: California, Washington, Oregon, Colorado and Utah, with 27.9% (by loan balance) of the properties located in California. Properties located in the states of Texas, Massachusetts, Georgia, North Carolina and Pennsylvania round out the top ten states by loan balance. Approximately 85.3% (by loan balance) of the properties backing the mortgage loans included in PFMT 2021-2 are located in these ten states.

Third-Party Review

One TPR firm verified the accuracy of the loan level information. The TPR firm conducted detailed credit, property valuation, data accuracy and compliance reviews on a random sample of approximately 27% (by loan count) of the mortgage loans in the collateral pool. The due diligence results confirm compliance with the originator's underwriting guidelines for the vast majority of loans, no material regulatory compliance issues, and no material property valuation issues. We did not make any adjustments to our base case and Aaa stress loss assumptions based on the TPR results.

However, as described earlier, the compliance, credit, property valuation, and data integrity portion of the TPR was conducted on a random sample of approximately 27% (by loan count) of the initial population of the pre-securitization mortgage loans, up from 24% in PFMT 2021-1 but down from 30% in PFMT 2020-1 and 100% in PFMT 2019-1, the three most recent transactions issued by the sponsor that we have rated. With sampling, there is a risk that loan defects may not be discovered and such loans would remain in the pool. Moreover, vulnerabilities of the R&W framework, such as the lack of an automatic review of R&Ws by independent reviewer and the weaker financial strength of the R&W provider, reduce the likelihood that such defects would be discovered and cured during the transaction's life. We made an adjustment to loss levels to account for this risk.

Representations & Warranties

We assessed Provident Funding Mortgage Trust 2020-2's R&W framework as adequate, consistent with that of other prime RMBS transactions. An effective R&W framework protects a transaction against the risk of loss from fraudulent or defective loans. We assessed the R&W framework based on three factors: (a) the financial strength of the R&W 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 TPR being conducted on a random sample of approximately 27% (by loan count) (with no material findings), and property valuations, as well as any sponsor alignment of interest, to evaluate the overall exposure to loan defects and inaccurate information.

However, we applied an adjustment to our losses to account for the following two risks. First, we accounted for the risk that Provident Funding (rated B1), the R&W provider, may be unable to repurchase defective mortgage loans in a stressed economic environment, given that it is a non-bank entity with a monoline business (mortgage origination and servicing) that is highly correlated with the economy. However, we tempered this adjustment by taking into account Provident Funding' relative financial strength and the strong TPR results which suggest a lower probability that poorly performing mortgage loans will be found defective following review by the independent reviewer.

Second, we accounted for the risk that while the sponsor has provided R&Ws that are generally consistent with a set of credit neutral R&Ws that we've identified in our methodology, the R&W framework in this transaction differs from that of some other prime RMBS transactions we have rated because there is a risk that some loans with R&W defects may not be reviewed because an independent reviewer is not named at closing and there is a possibility that an independent reviewer will not be appointed altogether. Instead, reviews are performed at the option and expense of the controlling holder, or if there is no controlling holder (which is the case at closing, because an affiliate of sponsor will hold the subordinate classes and thus there will be no controlling holder initially), a senior holder group.

Origination quality

We consider Provident Funding an adequate originator of agency-eligible mortgage loans based on the company's staff and processes for underwriting, quality control, risk management and performance. The company, a limited partnership that is closely held by senior management, including CEO Craig Pica, was formed in 1992, as a privately held mortgage banking company headquartered in Burlingame, California. The company originates, sells and services residential mortgage loans throughout the US. The company sources loans through a nationwide network of independent brokers, correspondent lenders and in-house retail channel.

Servicing arrangement

Provident Funding will service the mortgage loans pursuant to the pooling and servicing agreement. We consider the overall servicing arrangement for this pool to be adequate given the servicing abilities of the Provident Funding as primary servicer. We also consider the presence of a strong master servicer to be a mitigant against the risk of any servicing disruptions. We did not make any adjustments to our base case and Aaa stress loss assumptions based on the servicing arrangement.

Other Considerations

The servicer has the option to purchase any mortgage loan which is 90 days or more delinquent, which may result in the step-down test used in the calculation of the senior prepayment percentage to be satisfied when otherwise it would not have been. Moreover, because the purchase may occur prior to the breach review trigger of 120 days delinquency, the loan may not be reviewed for breaches of representations and warranties and thus, systemic defects may remain undetected. In our analysis, we considered that the loans will be purchased by the servicer at par and a TPR firm having performed a review on a random sample of approximately 27% (by loan count) of the mortgage loans. Moreover, the reporting for this transaction will list the mortgage loans purchased by the servicer.

Tail Risk & 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 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 0.70% of the closing pool balance, and a subordination lock-out amount of 0.60% of the closing pool balance. The floors are consistent with the credit neutral floors for the assigned ratings according to our methodology.

Transaction Structure

The transaction is structured as a one pool shifting interest structure in which the senior bonds benefit from a senior floor and a subordination floor. Funds collected, including principal, are first used to make interest payments to the senior bonds. Next principal payments are made to the senior bonds and then interest and principal payments are paid to the subordinate bonds in sequential order, subject to the subordinate class percentage of the subordinate principal distribution amounts.

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 the super senior bonds until their principal balances are written off. As in all transactions with shifting-interest structures, the senior bonds benefit from a cash flow waterfall that allocates all prepayments to the senior bonds for a specified period of time, and allocates increasing amounts of prepayments to the subordinate bonds thereafter only if loan performance satisfies both delinquency and loss tests.

Factors that would lead to an upgrade or downgrade of the ratings:

Down

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.

Up

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.

Methodology

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.

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 DISCLOSURES

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_1288608.

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_1263068.

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.

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.

Jay H. Thacker
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

Padma Rajagopal
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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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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.

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