DBRS Morningstar Finalizes Provisional Ratings on Wells Fargo Mortgage Backed Securities 2020-2 Trust

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Mortgage Pass-Through Certificates, Series 2020-2 (the Certificates) issued by Wells Fargo Mortgage Backed Securities 2020-2 Trust (WFMBS 2020-2):

-- $406.4 million Class A-1 at AAA (sf)
-- $406.4 million Class A-2 at AAA (sf)
-- $304.8 million Class A-3 at AAA (sf)
-- $304.8 million Class A-4 at AAA (sf)
-- $101.6 million Class A-5 at AAA (sf)
-- $101.6 million Class A-6 at AAA (sf)
-- $243.8 million Class A-7 at AAA (sf)
-- $243.8 million Class A-8 at AAA (sf)
-- $162.6 million Class A-9 at AAA (sf)
-- $162.6 million Class A-10 at AAA (sf)
-- $61.0 million Class A-11 at AAA (sf)
-- $61.0 million Class A-12 at AAA (sf)
-- $66.0 million Class A-13 at AAA (sf)
-- $66.0 million Class A-14 at AAA (sf)
-- $35.6 million Class A-15 at AAA (sf)
-- $35.6 million Class A-16 at AAA (sf)
-- $47.8 million Class A-17 at AAA (sf)
-- $47.8 million Class A-18 at AAA (sf)
-- $454.2 million Class A-19 at AAA (sf)
-- $454.2 million Class A-20 at AAA (sf)
-- $454.2 million Class A-IO1 at AAA (sf)
-- $406.4 million Class A-IO2 at AAA (sf)
-- $304.8 million Class A-IO3 at AAA (sf)
-- $101.6 million Class A-IO4 at AAA (sf)
-- $243.8 million Class A-IO5 at AAA (sf)
-- $162.6 million Class A-IO6 at AAA (sf)
-- $61.0 million Class A-IO7 at AAA (sf)
-- $66.0 million Class A-IO8 at AAA (sf)
-- $35.6 million Class A-IO9 at AAA (sf)
-- $47.8 million Class A-IO10 at AAA (sf)
-- $454.2 million Class A-IO11 at AAA (sf)
-- $7.9 million Class B-1 at AA (sf)
-- $9.1 million Class B-2 at A (low) (sf)
-- $2.9 million Class B-3 at BBB (sf)
-- $1.4 million Class B-4 at BB (sf)
-- $717.0 thousand Class B-5 at B (low) (sf)

Classes A-IO1, A-IO2, A-IO3, A-IO4, A-IO5, A-IO6, A-IO7, A-IO8, A-IO9, A-IO10, and A-IO11 are interest-only certificates. The class balances represent notional amounts.

Classes A-1, A-2, A-3, A-4, A-5, A-6, A-7, A-9, A-10, A-11, A-13, A-15, A-17, A-19, A-20, A-IO2, A-IO3, A-IO4, A-IO6, and A-IO11 are exchangeable certificates. These classes can be exchanged for combinations of initial exchangeable certificates as specified in the offering documents.

Classes A-1, A-2, A-3, A-4, A-5, A-6, A-7, A-8, A-9, A-10, A-11, A-12, A-13, A-14, A-15, and A-16 are super-senior certificates. These classes benefit from additional protection from senior support certificates (Classes A-17 and A-18) with respect to loss allocation.

The AAA (sf) ratings on the Certificates reflect 5.00% of credit enhancement provided by subordinated certificates. The AA (sf), A (low) (sf), BBB (sf), BB (sf), and B (low) (sf) ratings reflect 3.35%, 1.45%, 0.85%, 0.55%, and 0.40% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

WFMBS 2020-2 is a securitization of a portfolio of first-lien fixed-rate prime residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 556 loans with a total principal balance of $478,122,716 as of the Cut-Off Date (June 1, 2020).

The pool consists of fully amortizing fixed-rate mortgages with original terms to maturity of primarily 30 years and a weighted-average (WA) loan age of six months. All of the mortgage loans were originated by Wells Fargo Bank, N.A. (Wells Fargo; rated AA/R-1 (high) with a Negative trend by DBRS Morningstar) or were acquired by Wells Fargo from its qualified correspondents. In addition, Wells Fargo is the Servicer of the mortgage loans, as well as the Mortgage Loan Seller and Sponsor of the transaction. Wells Fargo will also act as the Master Servicer, Securities Administrator, and Custodian.

Wilmington Savings Fund Society, FSB will serve as Trustee. Opus Capital Markets Consultants, LLC will act as the Representation and Warranty (R&W) Reviewer.

The transaction employs a senior-subordinate, shifting-interest cash flow structure that is enhanced from a pre-crisis structure.

As of the Cut-Off Date, there are no loans that have entered a Coronavirus Disease (COVID-19)-related forbearance plan with the Servicer. Any loans that enter into a coronavirus-related forbearance plan after the Cut-Off Date and prior to or on the Closing Date will be repurchased within 45 days of the Closing Date. Loans that enter a coronavirus-related forbearance plan after the Closing Date will remain in the pool.

CORONAVIRUS PANDEMIC IMPACT
The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many residential mortgage-backed security (RMBS) asset classes, some meaningfully.

The prime mortgage sector is a traditional RMBS asset class that consists of securitizations backed by pools of residential home loans originated to borrowers with prime credit. Generally, these borrowers have decent FICO scores, reasonable equity, and robust income and liquid reserves.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies, loans on forbearance plans, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020), for the prime asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than what it previously used. Such MVD assumptions are derived through a fundamental home price approach based on the forecasted unemployment rates and GDP growth outlined in the aforementioned moderate scenario. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the prime asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that this sector should have low intrinsic credit risk. Within the prime asset class, loans originated to (1) self-employed borrowers or (2) higher loan-to-value ratio (LTV) borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Self-employed borrowers are potentially exposed to more volatile income sources, which could lead to reduced cash flows generated from their businesses. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and therefore slower prepayments. In addition, certain pools with elevated geographic concentrations in densely populated urban metropolitan statistical areas may experience additional stress from extended lockdown periods and the slowdown of the economy.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: June Update,” dated June 1, 2020.

The ratings reflect transactional strengths that include high-quality credit attributes, well-qualified borrowers, financial strength of the counterparties, satisfactory third-party due-diligence review, structural enhancements, and 100% current loans.

This transaction employs an R&W framework that contains certain weaknesses, such as materiality factors, knowledge qualifiers, and sunset provisions that allow for certain R&Ws to expire within three to five years after the Closing Date. To capture the perceived weaknesses in the R&W framework, DBRS Morningstar reduced the originator scores in this pool. A lower originator score results in increased default and loss assumptions and provides additional cushions for the rated securities.

The full description of the strengths, challenges, and mitigating factors is detailed in the related report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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