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Rating Action:

Moody's assigns provisional ratings to Prime RMBS issued by Provident Funding Mortgage Trust 2019-1

25 Nov 2019

NOTE: On December 9, 2019, the press release was corrected as follows: At the end of the press release, the second contact was changed to Sonny Weng, Vice President - Senior Analyst. Revised release follows.

New York, November 25, 2019 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to 18 classes of residential mortgage-backed securities (RMBS) issued by Provident Funding Mortgage Trust 2019-1 (Provident 2019-1). The ratings range from (P)Aaa (sf) to (P)Ba3 (sf).

Provident 2019-1 is the first transaction entirely backed by loans originated by the sponsor, Provident Funding Associates, L.P. (Provident Funding). Provident 2019-1, a common law trust formed under the laws of the State of New York, is a securitization of agency-eligible mortgage loans originated and serviced by Provident Funding, a California limited partnership (corporate family rating B1; senior unsecured B2) and will be the first transaction for which Provident Funding is the sole originator and servicer.

As of the cut-off date of November 1, 2019, the pool contains of 947 mortgage loans with an aggregate principal balance of $337,597,325 secured by first liens on one- to four-family residential properties, condominiums or planned unit developments, originated from August 2019 through October 2019, and are fully amortizing, fixed-rate Safe Harbor QM (QM) loans, each with an original term to maturity of 30 years. The mortgage loans have principal balances which meet the requirements for purchase by Fannie Mae or Freddie Mac, and were underwritten pursuant to the guidelines of Fannie Mae or Freddie Mac, as applicable, using their automated underwriting systems (collectively, agency-eligible loans). Overall, the credit quality of the mortgage loans backing this transaction is similar to that of transactions issued by other prime issuers.

Provident Funding will act as the initial servicer of the mortgage loans (in such capacity, the Servicer). The Servicer will service the mortgage loans pursuant to the pooling and servicing agreement. 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.

The complete rating actions are as follows:

Issuer: Provident Funding Mortgage Trust 2019-1

Cl. A-1, Assigned (P)Aaa (sf)

Cl. A-1A, Assigned (P)Aaa (sf)

Cl. A-2, Assigned (P)Aaa (sf)

Cl. A-2A, Assigned (P)Aaa (sf)

Cl. A-3, Assigned (P)Aaa (sf)

Cl. A-3A, Assigned (P)Aaa (sf)

Cl. A-4, Assigned (P)Aaa (sf)

Cl. A-4A, Assigned (P)Aaa (sf)

Cl. A-5, Assigned (P)Aa1 (sf)

Cl. A-5A, Assigned (P)Aa1 (sf)

Cl. A-6, Assigned (P)Aaa (sf)

Cl. A-6A, Assigned (P)Aaa (sf)

Cl. A-7, Assigned (P)Aaa (sf)

Cl. B-1, Assigned (P)Aa3 (sf)

Cl. B-2, Assigned (P)A2 (sf)

Cl. B-3, Assigned (P)Baa1 (sf)

Cl. B-4, Assigned (P)Baa3 (sf)

Cl. B-5, Assigned (P)Ba3 (sf)

RATINGS RATIONALE

Summary Credit Analysis and Rating Rationale

Moody's expected loss for this pool in a baseline scenario is 0.31% and reaches 3.46% at a stress level consistent with our Aaa ratings.

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. Loan-level adjustments to the model results included, but were not limited to, adjustments for origination quality, third-party review (TPR) scope and results, and the financial strength of the representation & warranty (R&W) provider.

Collateral Description

As of the cut-off date of November 1, 2019, the pool contains of 947 mortgage loans with an aggregate principal balance of $337,597,325 secured by first liens on one- to four-family residential properties, condominiums or planned unit developments, originated from August 2019 through October 2019, and are fully amortizing, fixed-rate Safe Harbor "qualified mortgages" (QM) loans, each with an original term to maturity of 30 years. The mortgage loans have principal balances which meet the requirements for purchase by Fannie Mae or Freddie Mac, and were underwritten pursuant to the guidelines of Fannie Mae or Freddie Mac, as applicable, using their automated underwriting systems.

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 $356,491 and the weighted average (WA) current mortgage rate is 3.6%. The mortgage pool has a WA original term of 30 years. The mortgage pool has a WA seasoning of 1.1 months. The borrowers have a WA credit score of 776, WA combined loan-to-value ratio (CLTV) of 66.6% and WA debt-to-income ratio (DTI) of 33.3%. Most of the properties are located in California (25.4% by balance). The credit quality of the transaction is in line with recent prime jumbo transactions that we have rated.

Approximately 61.1% of the loans (by loan balance) were originated through the broker channel. Approximately 29.1% and 9.8% were originated through retail and correspondent channels, respectively. This pool has a lower proportion of purchase loans (28% by loan balance) compared to recent JPMMT transactions which typically contained about 50% to 70% of such loans. Refinance loans, including debt consolidation, constitute 72% of the pool, with about 34% of the pool as cash-out refinance loans. Furthermore, approximately 62.3% (by loan balance) of the properties backing the mortgage loans are located in five states: California, Utah, Texas, Colorado and Oregon, with 25.4% (by loan balance) of the properties located in California. Properties located in the states of Washington, North Carolina, Pennsylvania, Arizona, and Georgia round out the top ten states by loan balance. Approximately 81.4% (by loan balance) of the properties backing the mortgage loans included in Provident 2019-1 are located in these ten states. Overall, the credit quality of the transaction is in line with recent prime jumbo transactions that we have rated.

Third Party Review and Reps & Warranties (R&W)

Two third-party due diligence (TPR) firms verified the accuracy of the loan level information. The TPR firms conducted detailed credit, property valuation, data accuracy and compliance reviews on 100% of the mortgage loans in the collateral pool. From the initial pool of reviewed mortgage loans by the TPR firms, 59 mortgage loans were removed from the final mortgage pool for the following reasons: (i) 16 due to an inaccurate designation of a small borrower paid fee in the TRID disclosures that were remitted by law to a state governmental reinsurance fund, (ii) five due to issues related to a CDA where a field review could not be obtained in time for the transaction, (iii) four for points and fees in excess of the maximum permitted for "qualified mortgages", and (iv) 34 for miscellaneous individual minor compliance and documentation issues unrelated to the credit of the borrower. The TPR results indicate that the majority of reviewed loans were in compliance with originator's underwriting guidelines, that there were no material compliance or data issues, and that there were no material appraisal defects. We did not make any adjustments to our base case and Aaa stress loss assumptions based on the TPR results.

Overall, we consider the strength of the R&W framework in Provident 2019-1 to be adequate. Our analysis of the R&W framework considers the R&Ws, enforcement mechanisms and creditworthiness of the R&W provider. The sponsor has provided unambiguous R&Ws with no material knowledge qualifiers and not subject to a sunset. There is a provision for binding arbitration in the event of a dispute between investors and the R&W provider concerning R&W breaches. However, 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 Provident 2019-1 differs from some of the other prime jumbo transactions because breach review is not automatic since an independent reviewer is not named at closing and there is a possibility that an independent reviewer will not be appointed altogether. As a result, there is a risk that some loans with R&W defects may not be reviewed. In general, reviews are performed at the option and expense of the controlling holder (which is the holder of majority of the most subordinate certificates), or if there is no controlling holder (which is the case at closing, because an affiliate of the sponsor will hold the subordinate classes and thus there will be no controlling holder initially), a senior holder group. Specifically, once a review trigger has been met (i.e. 120-day delinquency), it is the responsibility of the controlling holder, or the senior holder group, to engage an independent reviewer and to bear the costs of the review, even if a breach is discovered (unless the R&W is an "intrinsic representation", then the sponsor will bear the cost of review). If the controlling holder and the senior holder group elect not to engage an independent reviewer to conduct a breach review, the loan may not be reviewed, which may result in systemic defects remaining undetected. In our analysis, we considered the incentives of the controlling holder (the holder of the most subordinate certificateholder, has the most at stake in a default) and the senior holder group, that a third-party due diligence firm has performed a 100% review of the mortgage loans as well as the early payment default protection in this transaction.

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 San Bruno, California. The company originates, sells and services residential mortgage loans throughout the US. The company is ranked as the 34th largest originator for the first six months of 2019 with approximately $5.8 billion in loan origination volume, having fallen from the 16th largest in 2013. The company has originated $330+B loans since 1998 (with over 10B YTD 2019). The company sources loans through a nationwide network of independent brokers, correspondent lenders and in-house retail channel. All the mortgage loans in this transaction were originated either through Fannie Mae's Desktop Underwriter "DU" program or Freddie Mac's Loan Product Advisor "LP" program in accordance with the underwriting criteria applicable to such programs, as modified or supplemented by an additional overlay of the company.

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.

Servicer: Provident Funding was formed in 1992, as a privately held mortgage banking company headquartered in San Bruno, California, and has been servicing residential mortgage loans since 2009. Provident Funding is rated B1 by Moody's (similar to other non-bank entities). The company originates, sells and services residential mortgage loans throughout the US. The company is a limited partnership that is closely held by senior management, including CEO Craig Pica. The COO and chief technology officer also are members of the Pica family. The company is an approved seller/servicer in good standing with the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Federal Housing Administration , the United States Department of Agriculture and the United States Department of Veterans Affairs.

Before distributions are made on the certificates, the servicer will be paid an aggregate monthly fee equal to 0.25% per annum of the stated principal balance of each mortgage loan as of the first day of the related due period. The servicer will also be entitled to receive, to the extent provided in the pooling and servicing agreement, additional compensation in the form of prepayment interest excess in excess of prepayment interest shortfalls, late charges and certain other ancillary fees paid by borrowers, REO management fees (in certain cases) and interest or other income earned on funds the Servicer has deposited in the collection account pending remittance to the distribution account.

Master Servicer: Wells Fargo will be the master servicer. We consider the presence of a strong master servicer to be a mitigant for any servicing disruptions. We consider Wells Fargo as a strong master servicer of prime residential mortgage loans. Wells Fargo maintains a significant market presence in third-party master servicing space. Based on portfolio size, Wells Fargo is the largest RMBS master servicer. The master servicing operations, based in Columbia, Maryland, are part of the corporate trust services division of the bank, which operates under the wholesale banking division of Wells Fargo Bank, N.A. Our evaluation of Wells Fargo as a master servicer takes into account the bank's strong reporting and remittance procedures, servicer compliance and monitoring capabilities and servicing stability.

Before distributions are made on the certificates, the master servicer will be paid prior to deposit into the distribution account, a monthly fee equal to the greater of (i) 0.021% per annum multiplied by the stated principal balance of each mortgage loan as of the first day of the related due period and (ii) $3,500. The fees of the securities administrator will be paid by the master servicer from the Master Servicing Fee.

Securities Administrator/Custodian/Trustee

Securities administrator, paying agent and certificate registrar: Wells Fargo. As securities administrator, Wells Fargo will perform certain securities administration duties with respect to the certificates, including acting as authentication agent, calculation agent, paying agent, certificate registrar, and the party responsible for preparing distribution statements and preparing tax filings for the issuing entity.

Custodian: Deutsche Bank National Trust Company (rated A2), a national banking association, will act as custodian of the mortgage files pursuant to a custodial agreement. The custodian will maintain custody of the mortgage loan documents relating to the mortgage loans on behalf of the trustee for the benefit of the certificateholders.

Trustee: Wilmington Savings Fund Society, FSB will act as the trustee for this transaction.

Other Considerations

Servicer optional purchase of delinquent loans: 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 that a third-party due diligence firm has performed a 100% review 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 0.60% 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 October 2019. 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.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1204599 .

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.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Philip Rukosuev
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

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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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 JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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