Wells Fargo plays it safe with 1st post-crisis RMBS

Register now

Wells Fargo’s first private-label mortgage securitization since the financial crisis doesn’t break any new ground — and that’s probably the point.

The $441.25 million transaction, which was launched Wednesday, is backed by very high-quality collateral, likely a mix of conforming loans from high-cost markets and jumbo loans, according to rating agency presale reports. The borrowers have strong credit profiles, low leverage and large liquid reserves. All of the loans pay fixed rates of interest, most have terms of 30 years, and all were originated in-house. They are seasoned an average of 17 months.

It comes two months after the bank reached a $2.09 billion settlement with the Justice Department stemming from mortgage bonds sold to investors before the financial crisis using faulty information about borrowers’ incomes.

Unlike the loans that were the subject of the settlement, the credit quality of the collateral for Wells Fargo’s new deal is not in doubt; due diligence has been performed on all 660 loans and found no evidence of material defects, according to Fitch Ratings.

Indeed, the new transaction is as much of a landmark for the mortgage market as it is for Wells Fargo, which is one of the largest underwriters of home loans in the U.S. but has sat on the sidelines over the past couple of years while JPMorgan Chase and other rivals revved up issuance.

“More large banks will need to view nonagency RMBS as a viable financing option in order for the private-label market to play a more meaningful role in the U.S. mortgage sector,” Grant Bailey, head of U.S. RMBS at Fitch Ratings, said in an email. “Wells Fargo’s return is a notable step in that direction.”

So far this year, some $75 billion of private-label mortgage bonds have been issued. The total includes not just prime jumbo mortgage bonds, but also bonds backed by new loans to borrowers with weaker credit profiles as well as precrisis loans to borrowers who were once delinquent but are now making timely payments.

Wells Fargo declined to comment on the new offering; in an email a spokesman noted that the bank has previously disclosed plans to re-enter the private market “to continue to best serve our mortgage customers as the market evolves and to expand our funding sources.”

The loans being securitized are “consistent with those we have been putting on our balance sheet for the past several years,” the email states.

Fitch describes the collateral as “among the strongest of post-crisis RMBS” it has rated. The pool has a weighted average updated FICO score of 779, which is higher than any transaction rated by Fitch post-crisis and is indicative of very high-credit-quality borrowers. Approximately 52% have original FICO scores at or above 780. In addition, the original WA CLTV ratio of 73% represents substantial borrower equity in the property.

All of the loans were originated through Wells Fargo Bank’s retail channel, which Fitch views as a key strength. “Loans originated directly by the lending institution traditionally have performed better than correspondent and broker loans due to lower risk of misrepresentation and fraud,” the presale report states.

Both Fitch and Moody's Investors Service expect to assign triple-A ratings to the super senior tranches, which benefit from 15% credit enhancement as well as to a senior support tranches, which have 5% credit enhancement.

Moody's expects losses over the life of the deal to be 0.25%, in its base-case scenario.

For reprint and licensing requests for this article, click here.