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Rating Action:

Moody's assigns provisional ratings to Prime RMBS issued by Wells Fargo Mortgage Backed Securities 2019-1 Trust

10 Jan 2019

NOTE: On January 11, 2019, the press release was corrected as follows: In the second sentence of the second paragraph, the originator was changed to Wells Fargo Bank, N.A. Revised release follows.

New York, January 10, 2019 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to 24 classes of residential mortgage-backed securities (RMBS) issued by Wells Fargo Mortgage Backed Securities 2019-1 Trust ("WFMBS 2019-1"). The ratings range from (P)Aaa (sf) to (P)Ba1 (sf).

WFMBS 2019-1 is the first prime issuance by Wells Fargo Bank, N.A. (the sponsor) in 2019. The mortgage loans for this transaction are originated by Wells Fargo Bank, N.A. generally in accordance with the non-conforming underwriting guidelines. All of the loans are designated as qualified mortgages (QM) under the QM safe harbor rules.

Wells Fargo Bank, N.A. will service all the loans and will also be the master servicer for this transaction. 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. In the event a servicer event of default has occurred and the Trustee terminates the servicer as a result thereof, 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 and commences servicing the mortgage loans). 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.

The WFMBS 2019-1 transaction is a securitization of 1,017 30-year, fixed rate, prime residential mortgage loans with an unpaid principal balance of $711,662,431. 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 is seasoned for almost 6 months.

The securitization has a shifting interest structure with a five-year lockout period that benefits from a senior subordination floor and a subordinate floor.

The complete rating actions are as follows:

Issuer: Wells Fargo Mortgage Backed Securities 2019-1 Trust

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

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

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

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

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

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

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

Cl. A-8, Assigned (P)Aaa (sf)

Cl. A-9, Assigned (P)Aaa (sf)

Cl. A-10, Assigned (P)Aaa (sf)

Cl. A-11, Assigned (P)Aaa (sf)

Cl. A-12, Assigned (P)Aaa (sf)

Cl. A-13, Assigned (P)Aaa (sf)

Cl. A-14, Assigned (P)Aaa (sf)

Cl. A-15, Assigned (P)Aaa (sf)

Cl. A-16, Assigned (P)Aaa (sf)

Cl. A-17, Assigned (P)Aa1 (sf)

Cl. A-18, Assigned (P)Aa1 (sf)

Cl. A-19, Assigned (P)Aaa (sf)

Cl. A-20, Assigned (P)Aaa (sf)

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

Cl. B-2, Assigned (P)A1 (sf)

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

Cl. B-4, Assigned (P)Ba1 (sf)

RATINGS RATIONALE

Summary Credit Analysis and Rating Rationale

Moody's expected cumulative net loss on the aggregate pool is 0.25% in a base scenario and reaches 3.50% at a stress level consistent with the Aaa (sf) ratings.

Our loss estimates are based on a loan-by-loan assessment of the securitized collateral pool as of the cut-off date using Moody's Individual Loan Level Analysis (MILAN) model. Loan-level adjustments to the model included adjustments to borrower probability of default for higher and lower borrower debt-to-income ratios (DTIs), for borrowers with multiple mortgaged properties, self-employed borrowers, origination channels and for the default risk of Homeownership association (HOA) properties in super lien states. The model combines loan-level characteristics with economic drivers to determine the probability of default for each loan, and hence for the portfolio as a whole. Severity is also calculated on a loan-level basis. The pool loss level is then adjusted for borrower, zip code, and MSA level concentrations.

We base our provisional ratings on the certificates on the credit quality of the mortgage loans, the structural features of the transaction, our assessments of the origination quality and servicing arrangement, the strength of the third party due diligence and the R&W framework of the transaction.

Collateral Description

The WFMBS 2019-1 transaction is a securitization of 1,017 first lien residential mortgage loans with an unpaid principal balance of $711,662,431. The loans in this transaction have strong borrower characteristics with a weighted average original FICO score of 780 and a weighted-average original loan-to-value ratio (LTV) of 73.2%. In addition, 11.2% of the borrowers are self-employed and refinance loans comprise 13.0% of the aggregate pool. 7.8% (by loan balance) of the pool comprised of 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 all the 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 39.6% of the aggregate pool located in California and 16.2% located in the New York-Newark-Jersey City MSA. The characteristics of the loans underlying the pool are generally comparable to other recent prime RMBS transactions backed by 30-year mortgage loans that we have rated.

Origination Quality

The mortgage loans for this transaction are originated by Wells Fargo Bank generally in accordance with the non-conforming underwriting guidelines. After considering the non-conforming underwriting guidelines from Wells Fargo Bank, we made no adjustments to our base case and Aaa loss expectations. Majority of the loans are originated through retail channel i.e. 80.9% of the pool and the remaining pool i.e. 19.1% is originated through correspondent channel.

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

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 1,030 loans in the initial population of this transaction (100% of the mortgage pool).

The credit review consisted of a review of the documentation in each loan file relating to the creditworthiness of the borrowers, and an assessment of whether the characteristics of the mortgage loans and the borrowers reasonably conformed to Wells Fargo's underwriting guidelines. Where there were exceptions to guidelines, the TPR firm noted compensating factors. Additionally, the TPR firm evaluated evidence of the borrower's willingness and ability to repay the obligation and examined Data Verify/Fraudgaurd/Interthinx or similar risk evaluation reports ordered by Wells Fargo or Clayton.

Clayton Services LLC 's regulatory compliance review consisted of a review of compliance with the Truth in Lending Act and the Real Estate Settlement Procedures Act among other federal, state and local regulations. Additionally, the TPR firm applied SFIG's enhanced RMBS 3.0 TRID Compliance Review Scope.

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. 10% negative variances were reported and in some cases additional appraisals were performed.

The overall TPR results were in line with our expectations considering the clear underwriting guidelines and overall processes and procedures that Wells Fargo has in place. Many of the grade B loans were underwritten using underwriter discretion where the compensating factors were not clearly documented in the loan file. Areas of discretion included missing verbal verification of employment, verification of closing funds and assets and explanation for multiple credit exceptions. The due diligence firm noted that these exceptions are minor and/or provided an explanation of compensating factors. Several of the compensating factors listed were sufficient to explain the underwriting exception. We also inquired to Wells Fargo for some of these loans and analyzed the responses provided by them. The responses provided by Wells and the compensating factors were adequate in our view. As a result, we did not make any adjustment to our losses for this.

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. Similar to JPMMT transactions, the transaction contains a "prescriptive" R&W framework. The originator makes comprehensive loan-level R&Ws and an independent reviewer will perform detailed reviews 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 30 to 119 days delinquent and is modified by the servicer. These reviews are prescriptive in that the transaction documents set forth detailed tests for each R&W that the independent reviewer will perform. We believe that Wells Fargo'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 has anti-fraud software tools that are integrated with the loan origination system (LOS) and utilized pre-closing for each loan. In addition, Wells Fargo has dedicated credit risk, compliance and legal teams oversee fraud risk in addition to compliance and operational risks. We did not make any adjustment to our base case and Aaa loss expectations for R&Ws.

Tail Risk and Subordination Floor

The transaction cash flows follow a shifting interest structure that allows subordinated bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool shrinks, senior bonds are exposed to increased performance volatility, known as tail risk. The transaction provides for a senior subordination floor of 1.20% of the closing pool balance, which mitigates tail risk by protecting the senior bonds from eroding credit enhancement over time. Based on our tail risk analysis, the level of senior subordination floor in WFMBS 2019-1 provides adequate protection against potential tail risk. In addition, if the subordinate percentage drops below 5.75% of current pool balance, the senior distribution amount will include all principal collections and the subordinate principal. Additionally there is a subordination lock-out amount which is 1.20% of the closing pool balance.

Transaction structure

The securitization has a shifting interest structure that benefits from a senior subordination 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.

Exposure to Extraordinary expenses

Extraordinary Trust Expenses that will reduce amounts available to make distributions on the Certificates and will be applied to reduce the Net WAC Rate. However, certain extraordinary trust expenses (such as servicing transfer costs) in the WFMBS 2019-1 transaction are deducted directly from the available distribution amount. The remaining trust expenses (which have an annual cap of $350,000 per year for i) Wells Fargo CTS Annual Expense Cap, ii) Trustee Annual Expense Cap and iii) Independent Reviewer Expense Cap) are deducted from the Net WAC Rate. We believe there is a very low likelihood that the rated certificates in WFMBS 2019-1 will incur any losses from extraordinary expenses or indemnification payments from potential future lawsuits against key deal parties. First, the loans are prime quality, 100 percent qualified mortgages and were originated under a regulatory environment that requires tighter controls for originations than pre-crisis, which reduces the likelihood that the loans have defects that could form the basis of a lawsuit. Second, the transaction has reasonably well defined processes in place to identify loans with defects on an ongoing basis. In this transaction, an independent breach reviewer (Opus Capital Markets Consultants, LLC), named at closing must review loans for breaches of representations and warranties when certain clear defined triggers have been breached, which reduces the likelihood that parties will be sued for inaction. Furthermore, the issuer has disclosed the results of a compliance, credit, valuation and data integrity review covering a sample of the mortgage loans by an independent third party (Clayton Services LLC). We did not make an adjustment for extraordinary expenses because most of the trust expenses will reduce the net WAC as opposed to the available funds.

Other Considerations

In WFMBS 2019-1, unlike other prime jumbo transactions, Wells Fargo Bank is both the servicer and master servicer for the deal. However, 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.

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 Prime RMBS," published on November 2018. 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_1152172.

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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Khakan Haider
Associate Lead 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

Sang Shin
VP-Sr Credit Officer/Manager
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.
© 2019 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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