New York, September 28, 2020 -- Moody's Investors Service, ("Moody's") has
assigned definitive ratings to 25 classes of residential mortgage-backed
securities (RMBS) issued by Wells Fargo Mortgage Backed Securities 2020-RR1
Trust (WFMBS 2020-RR1). The ratings range from Aaa (sf)
to B1 (sf). The transaction represents the tenth RMBS issuance
sponsored by Wells Fargo Bank, N.A. (Wells Fargo Bank,
the sponsor and mortgage loan seller) since 2018 and features mortgage
loans with strong collateral characteristics.
WFMBS 2020-RR1 is the fifth prime issuance by Wells Fargo Bank
in 2020, but is the first transaction from the sponsor primarily
backed by non-Qualified Mortgage (QM) loans (99.2%
by balance), consisting of 350 primarily 30-year, fixed
rate, prime residential mortgage loans with an unpaid principal
balance of $273,089,920. The mortgage loans
for this transaction were originated by Wells Fargo Bank, through
its retail and correspondent channels, in accordance with its underwriting
guidelines. Unlike typical Wells Fargo Bank sponsored transactions,
this transaction does not include representations from the sponsor that
the mortgage loans in the portfolio are QM loans under the Ability to
Repay (ATR) rules in the Truth-in-Lending Act (TILA).
However, the sponsor will make certain representations that the
mortgage loans will comply with the ATR rules. As a result,
the transaction is subject to the Dodd-Frank Act's risk retention
rules and the sponsor will retain 5% of the securitized exposure
in the transaction.
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 (WA)
seasoning of approximately 14.2 months. Of note, any
loan that has entered into a coronavirus (COVID-19) related forbearance
plan as of the cut-off date has been removed from the mortgage
pool. Additionally, any borrowers that request forbearance
between the cut-off date and closing will be repurchased within
30 days of closing.
Wells Fargo Bank will service all the mortgage loans and will also be
the master servicer for this transaction. The aggregate servicing
fee rate is 25 basis points (bps) and the servicer will advance delinquent
principal and interest (P&I), unless deemed nonrecoverable.
The credit quality of the transaction is further supported by an unambiguous
representation and warranty (R&W) framework and a shifting interest
structure 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-RR1 Trust
Cl. A-1, Definitive Rating Assigned Aaa (sf)
Cl. A-2, Definitive Rating Assigned Aaa (sf)
Cl. A-3, Definitive Rating Assigned Aaa (sf)
Cl. A-4, Definitive Rating Assigned Aaa (sf)
Cl. A-5, Definitive Rating Assigned Aaa (sf)
Cl. A-6, 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 Aaa (sf)
Cl. A-10, Definitive Rating Assigned Aaa (sf)
Cl. A-11, Definitive Rating Assigned Aaa (sf)
Cl. A-12, Definitive Rating Assigned Aaa (sf)
Cl. A-13, Definitive Rating Assigned Aaa (sf)
Cl. A-14, Definitive Rating Assigned Aaa (sf)
Cl. A-15, Definitive Rating Assigned Aaa (sf)
Cl. A-16, Definitive Rating Assigned Aaa (sf)
Cl. A-17, Definitive Rating Assigned Aa1 (sf)
Cl. A-18, Definitive Rating Assigned Aa1 (sf)
Cl. A-19, Definitive Rating Assigned Aaa (sf)
Cl. A-20, Definitive Rating Assigned Aaa (sf)
Cl. B-1, Definitive Rating Assigned Aa3 (sf)
Cl. B-2, Definitive Rating Assigned A3 (sf)
Cl. B-3, Definitive Rating Assigned Baa3 (sf)
Cl. B-4, Definitive Rating Assigned Ba1 (sf)
Cl. B-5, Definitive Rating Assigned B1 (sf)
Summary Credit Analysis and Rating Rationale
Our expected losses in a base case scenario are 0.26% at
the mean and 0.12% at the median. Our losses reach
3.21% at a stress level consistent with our Aaa ratings.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Our analysis
has considered the effect on the performance of residential mortgage loans
from the current weak US economic activity and a gradual recovery for
the coming months. Although an economic recovery is underway,
it is tenuous and its continuation will be closely tied to containment
of the virus. As a result, the degree of uncertainty around
our forecasts is unusually high. We regard the coronavirus outbreak
as a social risk under our ESG framework, given the substantial
implications for public health and safety.
The contraction in economic activity in the second quarter was severe
and the overall recovery in the second half of the year will be gradual.
However, there are significant downside risks to our forecasts in
the event that the pandemic is not contained and lockdowns have to be
reinstated. As a result, the degree of uncertainty around
our forecasts is unusually high. We increased our model-derived
median expected losses by 15% (9.41% 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 coronavirus
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
The WFMBS 2020-RR1 transaction is a securitization of 350 first
lien residential mortgage loans with an unpaid principal balance of $273,089,920.
The mortgage loans in this transaction have strong borrower characteristics
with a WA original FICO score of 783 and a weighted-average original
loan-to-value ratio (LTV) of 69.8%.
In addition, by stated principal balance, 34.3%
of the borrowers are self-employed, refinance loans account
for approximately 46.1% (inclusive of construction to permanent
loans), of which 7.6% are cash-out loans.
Construction to permanent loans account for 9.50% (by stated
principal balance) of the pool. 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 mortgage 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 mortgage
loans as a rate-and-term refinance rather than a cash-out.
Approximately 59.1% (by stated principal balance) of the
properties backing the mortgage loans are located in five states:
California, Illinois, Texas, Florida and Maryland with
37.9% (by stated principal balance) of the properties located
in California. Properties located in the states of Virginia,
Washington, New York, Colorado and Massachusetts round out
the top ten states by loan stated principal balance. Approximately
75.2% (by stated principal balance) of the properties backing
the mortgage loans included in WFMBS 2020-RR1 are located in these
Wells Fargo Bank, N.A. (Aa1 long term deposit;
Aa2 long term debt) 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
$1.97 trillion in assets and approximately 266,000
employees as of June 30, 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, 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
In this transaction, no mortgage loans were underwritten specifically
to Fannie Mae and Freddie Mac, i.e. government-sponsored
enterprise (GSE) guidelines. All mortgage loans were underwritten
and priced to WFHL portfolio requirements. In other words,
while 100% of all non-conforming mortgage loans receive
some level of support from an automated underwriting system (AUS),
the evaluation is not intended to replace or supersede the underwriter
as many factors used in the underwriting process may not be embedded in
WFHL does not have underwriting guidelines that relate solely to mortgage
loans that are intended to be non-QM or QM and therefore,
the underwriting guidelines are applicable to both. The term "non-QM"
generally applies to types of loans or mortgage products with certain
characteristics, such as interest-only loans, negative
amortization loans and most balloon loans, loans not underwritten
in compliance with Appendix Q, among others. However,
the identification of a mortgage loans as a non-QM is based upon
WFHL's categorization of such mortgage loans under its underwriting policies
and procedures in place at the time of origination of such mortgage loans
(including WFHL's interpretation of Appendix Q). Other lenders
or market participants may interpret and apply the ATR rules differently
than WFHL and therefore may arrive at different conclusions regarding
whether any such mortgage loans would meet the definition of a QM or is
otherwise a non-QM mortgage loan. Therefore, WFHL
may classify a mortgage loan at the time it was originated under its guidelines
as a QM that it would have previously classified (or would in the future
classify) as a non-QM loan or vice versa. In fact,
the third-party review (TPR) firm reviewed the mortgage loans in
this transaction for compliance with the QM criteria. With respect
to 261 mortgage loans (out of 376 reviewed) (approximately 69.5%
by stated principal balance), the TPR firm concluded that such mortgage
loans are QMs (notwithstanding WFHL's categorization of such mortgage
loans). The two main underwriting factors which WFHL deems as non-QM
that the TPR firm does not are (1) self-prepared year-to-date
profit and loss (P&L) statement and balance sheet (while not specified
in QM/Appendix Q, WFHL still requires two years of personal and
business tax returns) and (2) for self-employed borrowers,
documentation which has been waived, self-prepared or does
not exist such as the P&L and/or balance sheet and was deemed non-material
or not used in the credit decision process.
It should be noted that while WFHL implemented a number of policy changes
to address the Covid-19 environment, all of the mortgage
loans in this transaction have been originated prior to such policy changes.
Additionally, WFHL has temporarily stopped originating non-conforming
correspondent mortgage loans, until further notice.
After considering the company's origination practices, we made no
additional adjustments to our base case and Aaa loss expectations for
Third Party Review
One independent TPR firm, Clayton Services LLC, was engaged
to conduct due diligence for the credit, regulatory compliance,
property valuation and data accuracy for all of the 376 mortgage loans
in the initial population of this transaction. The TPR results
indicate that the majority of reviewed mortgage loans were in compliance
with the underwriting guidelines, no material compliance or data
issues, and no appraisal defects. There was one mortgage
loan with a level "C" grade which was due to missing income
documentation on a particular bonus the borrower received, which
was subsequently excluded from the income calculation. While this
increased DTI to approximately 46%, this exception was addressed
adequately owing to general adherence to Wells Fargo Bank's underwriting
guidelines, compliance with applicable law, in addition to
the presence of strong compensating factors. We did not make any
additional adjustments in our model analysis to account for this exception.
The TPR firm's property valuation review consisted of reviewing the valuation
materials utilized at origination to ensure the appraisal report was complete
and in conformity with the underwriting guidelines. The TPR firm
also compared third-party valuation products to the original appraisals.
The TPR firm generally obtained a collateral desktop analysis (CDA) through
an independent third-party valuation company to determine whether
such CDA supported the appraisal value used in connection with the origination
of the mortgage loan within a negative 10% variance. Instances
where 10% negative variances (between the CDA and the appraised
value) were reported, a field review was ordered to reconcile value
per the original appraisal. Additionally, any loan more than
12 months old received new Broker Price Opinion (BPO) value. Out
of 219 BPOs ordered, 36 BPOs produced negative variances above -10%.
We have reviewed all such variances in detail (available BPO reports and
Wells Fargo Bank's detailed notes and summaries) and concluded that in
most instances some BPOs produced negative variances because such BPOs
relied on different/unsuitable/conflicting comparable and/or such BPOs
excluded key property features from its analysis. In some instances,
a field review actually supported the original appraisal despite the variance
in the BPO results. In this transaction, the valuation cascade
waterfall is very strong compared to many prime originators, which
includes original appraisals on all mortgage loans, 100%
CDAs, field-reviews to test negative CDA variances above
a certain threshold and finally BPOs on all seasoned mortgage loans (more
than 12 months old). As a result, we did not make an additional
adjustments in our model analysis associated with some of the observed
negative BPO variances because we consider the accuracy of the data provided,
scope and depth of the property valuation procedures, quality control
and overall valuation results to be strong.
Finally, the majority of the data integrity errors in the initial
population of the pool were due to observed differences in cash reserves
(32 mortgage loans), CLTV (9 mortgage loans), DTI (36 mortgage
loans), original appraised value (23 mortgage loans), and
self-employment flag (11 mortgage loans). We did not make
any adjustments to our credit enhancement for data integrity since data
discrepancies were addressed appropriately.
Representation & Warranties
We assessed the R&W framework for this transaction as adequate.
We analyzed the strength of the R&W provider, the R&Ws themselves
and the enforcement mechanisms. The R&W provider is highly
rated, the breach reviewer is independent and the breach review
process is thorough, transparent and objective. As a result,
we did not make any additional adjustment to our base case and Aaa loss
expectations for R&Ws.
Wells Fargo Bank, as the originator, makes the loan-level
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 mortgage 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 transactions, this 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 mortgage loans include COVID-19 forbearance mortgage 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.
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 1.60%
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 1.60%
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
1.60% and subordinate floor of 1.60% 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.
Because it includes non-QM loans, the transaction is subject
to the Dodd-Frank Act's risk retention rules. In this transaction,
the sponsor or one or more majority owned affiliates of the sponsor will
retain a 5% vertical residual interest in all the offered certificates.
The sponsor or one or more majority owned affiliates of the sponsor will
also be the holder of the residual certificate.
In WFMBS 2020-RR1, 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
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
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/viewresearchdoc.aspx?docid=PBS_1246519.
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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653