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Analyzing Risks and Disruption

FitchRatings announced on Wednesday that it has placed 299 U.S. residential mortgage-backed securities classes totaling $2.2 billion on Rating Watch Negative in response to withheld trust funds by Wells Fargo.

Of the 299 portions, 244 came from 81 transactions, while 55 classes came from 17 transactions. The latter amounts to $79 million, and has been withheld for future estimated expenses of an estimated $3,000 per loan originally in the trust, with an additional $130,000 per transaction, according to Fitch. The money has been set aside to ensure that Wells Fargo has enough money to cover future expenses that might be incurred due to lawsuits that began in 2014.

The suit claims that investors were damaged by Wells Fargo when it did not fulfill its obligation to protect against faulty or defective mortgages. U.S. Bank, HSBC, Deutsche Bank, Bank of New York Mellon, and Citibank were also named in similar lawsuits.

According to the release, “Fitch assumes Wells Fargo will continue to pre-emptively redirect trust funds to reserve against future expenses in scenarios where they may not be able to reimburse themselves from the trust in the future, such as when a transaction is called or when the remaining pool balance is relatively small.”

Fitch expects to complete its analysis of the classes under review and resolve the Rating Watch status within 30 days, and identifies three key risks to disruption of payment. The first, are callable bonds less than estimated withholding amounts, the second is classes with credit enhancement greater than potential future withholdings, and the final is classes with credit enhancement that will decline over time.

The five trustees named in other, similar lawsuits have been contacted by Fitch, but it is unclear if they will be engaging in a similar practice as Wells Fargo. Fitch reports it will continue to try to contact the other trustees.

About Author: Joey Pizzolato

Joey Pizzolato is the Online Editor of DS News and MReport. He is a graduate of Spalding University, where he holds a holds an MFA in Writing as well as DePaul University, where he received a B.A. in English. His fiction and nonfiction have been published in a variety of print and online journals and magazines. To contact Pizzolato, email joseph.pizzolato@thefivestar.com.

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