DBRS Morningstar Finalizes Provisional Ratings on Wells Fargo Mortgage Backed Securities 2021-2 Trust

DBRS, Inc. (DBRS Morningstar) finalizes its provisional ratings on the Mortgage Pass-Through Certificates, Series 2021-2 (the Certificates) issued by Wells Fargo Mortgage Backed Securities 2021-2 Trust:

-- $547.8 million Class A-1 at AAA (sf)
-- $547.8 million Class A-2 at AAA (sf)
-- $410.8 million Class A-3 at AAA (sf)
-- $410.8 million Class A-4 at AAA (sf)
-- $136.9 million Class A-5 at AAA (sf)
-- $136.9 million Class A-6 at AAA (sf)
-- $328.7 million Class A-7 at AAA (sf)
-- $328.7 million Class A-8 at AAA (sf)
-- $219.1 million Class A-9 at AAA (sf)
-- $219.1 million Class A-10 at AAA (sf)
-- $82.2 million Class A-11 at AAA (sf)
-- $82.2 million Class A-12 at AAA (sf)
-- $89.0 million Class A-13 at AAA (sf)
-- $89.0 million Class A-14 at AAA (sf)
-- $47.9 million Class A-15 at AAA (sf)
-- $47.9 million Class A-16 at AAA (sf)
-- $64.5 million Class A-17 at AAA (sf)
-- $64.5 million Class A-18 at AAA (sf)
-- $612.3 million Class A-19 at AAA (sf)
-- $612.3 million Class A-20 at AAA (sf)
-- $612.3 million Class A-IO1 at AAA (sf)
-- $547.8 million Class A-IO2 at AAA (sf)
-- $410.8 million Class A-IO3 at AAA (sf)
-- $136.9 million Class A-IO4 at AAA (sf)
-- $328.7 million Class A-IO5 at AAA (sf)
-- $219.1 million Class A-IO6 at AAA (sf)
-- $82.2 million Class A-IO7 at AAA (sf)
-- $89.0 million Class A-IO8 at AAA (sf)
-- $47.9 million Class A-IO9 at AAA (sf)
-- $64.5 million Class A-IO10 at AAA (sf)
-- $612.3 million Class A-IO11 at AAA (sf)
-- $13.9 million Class B-1 at AA (sf)
-- $7.7 million Class B-2 at A (sf)
-- $4.2 million Class B-3 at BBB (sf)
-- $2.6 million Class B-4 at BB (low) (sf)
-- $967.0 thousand Class B-5 at B (sf)

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

Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-9, Class A-10, Class A-11, Class A-13, Class A-15, Class A-17, Class A-19, Class A-20, Class AIO2, Class A-IO3, Class A-IO4, Class A-IO6,
and Class A-IO11 Certificates are exchangeable certificates. These classes can be exchanged for combinations of exchange certificates as specified in the offering documents.

Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-11, Class A-12, Class A-13, Class A-14, Class A-15, and Class A-16 Certificates are super-senior certificates. These classes benefit from additional protection from the 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 (sf), BBB (sf), BB (low) (sf), and B (sf) ratings reflect 2.85%, 1.65%, 1.00%, 0.60%, and 0.45% of credit enhancement, respectively.

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

This securitization is a portfolio of first-lien, fixed-rate prime residential mortgages funded by the issuance of the Mortgage Pass-Through Certificates, Series 2021-2 (the Certificates). The Certificates are backed by 955 loans with a total principal balance of $644,485,820 as of the Cut-Off Date (September 1, 2021).

The pool consists of fully amortizing fixed-rate mortgages (FRMs) with original terms to maturity of 30 years and a weighted-average (WA) loan age of five months. In contrast to prior DBRS Morningstar-rated WFMBS prime transactions, WFMBS 2021-2 is mostly composed of conforming mortgages (99.2% of the pool), which were underwritten using an automated underwriting system (AUS) designated by Fannie Mae or Freddie Mac and were eligible for purchase by such agencies. Details on the underwriting of conforming loans can be found in the Key Probability of Default Drivers section.

Another difference from prior DBRS Morningstar-rated WFMBS prime transactions is the incorporation of a lower than 100% sample size for third-party due diligence reviews. Details on the scope of third-party due diligence reviews can be found in the Third-Party Due Diligence section.

In addition, the pool contains a moderate concentration of loans that were granted appraisal waivers by the agencies (6.5%) or used desktop appraisals (17.2%). In its analysis, DBRS Morningstar applied property value haircuts to such loans, which increased the expected losses on the collateral.

All of the mortgage loans were either (1) originated by Wells Fargo Bank, N.A. (Wells Fargo) or (2) acquired by Wells Fargo from a qualified correspondent. Wells Fargo is also the Servicer, Mortgage Loan Seller, and Sponsor of the transaction. In addition, Wells Fargo will act as the Master Servicer, Securities Administrator, and Custodian. DBRS Morningstar rates Wells Fargo’s Long-Term Issuer and Long-Term Senior Debt rating at AA with Negative trends and its Short-Term Instruments at R-1 (high) with a Negative trend.

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

For this transaction, unlike the prior DBRS Morningstar-rated WFMBS prime securitization, the servicing fee payable to the Servicer comprises three separate components: the base servicing fee, the delinquent servicing fee, and the additional servicing fee. These fees vary based on the delinquency status of the related loan and will be paid from interest collections before distribution to the securities. The base servicing fee will reduce the Net weighted-average coupon (WAC) payable to certificateholders as part of the aggregate expense calculation. However, except for the Class B-6 Net WAC, the delinquent and additional servicing fees will not be included in the reduction of Net WAC and will thus reduce available funds entitled to the certificateholders. To capture the impact of such potential fees, DBRS Morningstar ran additional cash flow stresses based on its 60+-day delinquency and default curves, as detailed in the Cash Flow Analysis section of this report.

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

For this transaction, 44 loans (4.3% of the pool by balance) are in counties designated by the Federal Emergency Management Agency (FEMA) as having been affected by a natural disaster, not related to the Coronavirus Disease (COVID-19), as of September 6, 2021. The Sponsor has elected to obtain third-party property disaster inspection (PDI) reports for such FEMA zone loans, and for any FEMA zone loan where the PDI indicates material damage, the Mortgage Loan Seller will declare a discretionary breach of the damage R&W and will repurchase the affected loan at the applicable Repurchase Price.

Coronavirus Pandemic Impact
The coronavirus pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar saw increases in delinquencies for many residential mortgage-backed securities (RMBS) asset classes, shortly after the onset of coronavirus.

Such mortgage delinquencies were mostly in the form of forbearance, which are generally short-term payment reliefs that may perform very differently from traditional delinquencies. At the onset of coronavirus, because the option to forebear mortgage payments was so widely available, it drove forbearance to a very high level. When the dust settled, coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low LTV, and good underwriting in the mortgage market in general. Across nearly all RMBS asset classes, delinquencies have been gradually trending down in recent months as forbearance periods come to an end for many borrowers.

As of the Cut-Off Date, there are no loans that are subject to an active coronavirus-related forbearance plan with the Servicer. Any loan that enters into a coronavirus-related forbearance plan after the Cut-Off Date and prior to or on the Closing Date will be repurchased within 30 days of the Closing Date. Loans that enter into a coronavirus-related forbearance plan after the Closing Date will remain in the pool.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns,” dated September 8, 2021.

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.

The ratings reflect transactional challenges that include loans with desktop appraisals or government-sponsored entity (GSE) appraisal waivers and the R&W framework.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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