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Fitch downgrades Wells Fargo trustee RMBS

Fitch downgraded 146 Wells Fargo Trustee U.S. residential mortgage-backed securities. The rating agency also placed 16 classes on Rating Watch Negative, in addition to those placed on rating watch July 12.

The RMBS were rated "Dsf" to reflect Wells Fargo Bank NA's decision to retain $79 million in trust account funds so as to cover future legal costs. The securities have incurred principal writedowns; they were in 17 Fitch-rated transactions that were called on their June 25 remittance date.

The 16 additional classes are in transactions still outstanding and not directly affected by Wells Fargo's withholding of interest payments. Fitch, however, has deemed them at "increased risk for shortfalls," should the bank repeat the action.

Wells Fargo is reserving against expenses related to lawsuits beginning 2014, filed by institutional investors claiming it had failed as trustee when it did not protect them from defective mortgages.

Fitch noted that the "pre-emptive" decision to withhold payments has been challenged with litigation and that the amount retained reflects the expectation of $3,000 in legal costs for each loan originally in the trust, plus $130,000 per transaction.

The rating agency said it is also reviewing the possibility of similar payment disruptions at other trustee banks.