New York, October 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 2020-5
Trust ("WFMBS 2020-5"). The ratings range from Aaa (sf)
to Ba2 (sf).
WFMBS 2020-5 is the sixth prime issuance by Wells Fargo Bank,
N.A. (Wells Fargo Bank, the sponsor and mortgage loan
seller) in 2020, consisting of 435 primarily 30-year,
fixed rate, prime residential mortgage loans with an unpaid principal
balance of $390,538,860. 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
2.96 months. The mortgage loans for this transaction are
originated by Wells Fargo Bank, through its retail channel,
in accordance with its underwriting guidelines. In this transaction,
all 435 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.
In response to the COVID-19 national emergency, Wells Fargo
has temporarily transitioned to allowing exterior-only appraisals,
instead of a full interior and exterior inspection of the subject property,
on many mortgage transactions. Majority of the loan pool,
approximately 73.92% by unpaid principal balance,
does not have a full appraisal that includes an exterior and an interior
inspection of the property. Instead, these loans have an
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 2020-5 Trust
Cl. A-1, Assigned Aaa (sf)
Cl. A-2, Assigned Aaa (sf)
Cl. A-3, Assigned Aaa (sf)
Cl. A-4, Assigned Aaa (sf)
Cl. A-5, Assigned Aaa (sf)
Cl. A-6, Assigned Aaa (sf)
Cl. A-7, Assigned Aaa (sf)
Cl. A-8, Assigned Aaa (sf)
Cl. A-9, Assigned Aaa (sf)
Cl. A-10, Assigned Aaa (sf)
Cl. A-11, Assigned Aaa (sf)
Cl. A-12, Assigned Aaa (sf)
Cl. A-13, Assigned Aaa (sf)
Cl. A-14, Assigned Aaa (sf)
Cl. A-15, Assigned Aaa (sf)
Cl. A-16, Assigned Aaa (sf)
Cl. A-17, Assigned Aaa (sf)
Cl. A-18, Assigned Aaa (sf)
Cl. A-19, Assigned Aaa (sf)
Cl. A-20, Assigned Aaa (sf)
Cl. B-1, Assigned Aa3 (sf)
Cl. B-2, Assigned A2 (sf)
Cl. B-3, Assigned Baa2 (sf)
Cl. B-4, Assigned Baa3 (sf)
Cl. B-5, Assigned Ba2 (sf)
Summary Credit Analysis and Rating Rationale
In response to COVID-19, Wells Fargo Home Lending (WFHL)
has temporarily been allowing exterior-only appraisals.
The majority of the mortgage loans (73.92% by unpaid principal
balance) have been evaluated using this alternative exterior-only
appraisal method. Since the exterior-only appraisal only
covers the outside of the property there is a risk that the property condition
cannot be verified to the same extent had the appraiser been provided
access to the interior of the home. We did not make any adjustments
to our losses for such loans primarily because (i) substantial percentage
of the exterior only appraisal loans are Wells Fargo rate/term refinance
transactions where (a) majority of the original appraisals were performed
within the past 48 months, (b) the differences in value between
the original and current appraisals were reasonable and (c) the loans
had substantial amount of reserves of $416,194 on an average,
and (ii) for purchase only loans Wells Fargo's review process includes
looking at photographs and other information available on publicly available
databases. This is further mitigated because (iii) all of the mortgage
loans are owner occupied with strong credit characteristics, such
as high FICOs, low LTVs and DTI ratios, and significant liquid
cash reserves, and it is unlikely that homeowners with equity in
their homes and resources would not properly maintain their properties,
(iv) all of the mortgage loans have a history of at least two monthly
payments, indicating that the borrowers have not found any major
issues with the interiors of the property that would prevent them from
paying the mortgage as required, (v) the reliability of Wells Fargo's
property valuation policies and procedures, experienced valuation
team, robust appraisal oversight, along with a well-defined
scope of work for exterior-only appraisals helps to remove uncertainty
risks associated with lack of the full-appraisals for such mortgage
loans, and (vi) such mortgage loans were not adversely selected
for inclusion in this transaction but representative of Wells Fargo's
portfolio of loans originated during the same period.
Moody's expected loss for this pool in a baseline scenario-mean
is 0.21% and reaches 3.03% 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% (8.14% 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 2020-5 transaction is a securitization of 435 first lien
residential mortgage loans with an unpaid principal balance of $390,538,860
as of the cut-off date . The loans in this transaction have
strong borrower characteristics with a weighted average original FICO
score of 782 and a weighted-average original loan-to-value
ratio (LTV) of 72.2%. In addition, 4.43%
of the borrowers are self-employed; rate-and-term
refinance and cash-out loans comprise approximately 36.06%
of the aggregate pool (inclusive of construction to permanent loans).
5.76% (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 51.32% of the aggregate pool located
in California and 14.36% located in the New York-Newark-Jersey
Exterior-Only Appraisals: Our assessment of an originator's
property valuation capabilities focuses primarily on the types of valuation
techniques lenders use and which products are subsequently utilized to
validate the soundness of the primary source of valuation in originations.
Starting on March 26, 2020, Wells Fargo Bank suspended the
use of interior appraisals and introduced the use of exterior-only
appraisals for specific non-conforming transactions due to the
health and safety concerns associated with COVID-19.
Wells Fargo Bank implemented certain changes to underwriting guidelines
such as the requirement of potential borrowers to (i) exit any forbearance
plan on any prior mortgage loan prior to applying for a new loan from
Wells Fargo Bank and (ii) provide documentary evidence of on-time
payment of mortgage, rent and/or HELOC, as applicable,
for the past three consecutive months. This requirement was put
in place because of inconsistencies around credit reporting for customers
Other changes to underwriting guidelines, include (i) a verbal verification
of employment for all salaried and self-employed borrowers within
10 business days of the note date, (ii) exclusion of rental income
to satisfy income requirement to qualify for a mortgage loan, (iii)
reduction in maximum permitted DTI, (iv) reduction in maximum LTV/CLTV
for second home purchase and rate/term refinance loans, and (v)
increase in post-close liquidity requirement. Some of the
credit policy changes include suspension of non-conforming loan
origination via correspondent channel and addition of restrictions for
non-conforming loan originations via retail channel.
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 $1.97 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
Wells Fargo Bank has sponsored or has been engaged in the securitization
of residential mortgage loans since 1988. Wells Fargo Home Lending
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 channel, 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
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 of the 497 loans in the initial population of this transaction.
For an initial population of 497 loans, Clayton Services LLC identified
479 loans with level A and 18 loans with level B credit component grades.
Most of the level B loans were underwritten using underwriter discretion.
Areas of discretion included documents not supporting minor guideline
requirements, insufficient cash reserves, length of mortgage/rental
history, 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.
Clayton Services LLC identified 13 loans with level B compliance issues
and the remaining 484 loans received level A grade. The identified
compliance issues were primarily related to Right of Rescission and TRID
exceptions and are not considered material.
Clayton Services LLC identified 496 loans with level A 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 were cited as compensating
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
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 1.20%
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 1.20%
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
1.20% and subordinate floor of 1.20% 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 2020-5, 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/researchdocumentcontentpage.aspx?docid=PBS_1251250
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.
Jay H. Thacker
Asst Vice President - Analyst
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