Fitch Downgrades WaMu Covered Bonds Program to 'AA'

[Editor's note: The following public statement was released by Fitch Ratings.]
NEW YORK & LONDON — Fitch Ratings has downgraded WM Covered Bond Program's (WMCBP) series 1, 2 and 3 to 'AA' from 'AAA' and removed them from Rating Watch Negative.
As of the end of July 2008, aggregate outstanding covered bonds were equivalent to approximately US$7.8 billion and are ultimately secured over a portfolio of U.S. residential mortgage loans of US$11.7 billion held by Washington Mutual Bank ('WMB'; rated 'BBB/F2' by Fitch), resulting in a current overcollateralization (OC) of 50.6%.
The drivers behind today's rating action are the current rating of WMB and the risk posed to the continuity of payments on the covered bonds in the event of a default by WMB. In Fitch's analysis this combination limits the rating to 'AA'. Furthermore the new rating is supported by the committed OC between the cover pool and the covered bonds.
Recently, the Federal Deposit Insurance Corporation (FDIC) issued a policy statement outlining criteria for U.S. covered bonds. The criteria were designed to ensure that the highest quality mortgage loans would be used in new covered bond transactions. Covered bonds meeting the criteria would benefit from a reduced automatic stay period of 10 days in the event an issuer was to become insolvent. Because WMB's mortgage loans do not meet the new criteria, a 90 day stay period is required in the event WMB becomes insolvent which could delay access to the pledged collateral if a sale were required to repay the covered bonds before the end of their maturity extension period.
Approximately 79.9% of the cover pool consists of hybrid adjustable-rate mortgages (ARMs), with the remainder option ARM loans. The portfolio has a weighted average (WA) original loan to value ratio of 63.5%, a WA FICO score of 750, an average 37-month seasoning and a weighted average remaining maturity of 27.2 years. The pool is highly concentrated in California (48.9%), with the top five states, accounting for 68.6% of the portfolio. In its analysis Fitch considered the effect of a stressed value of the cover pool using recent market conditions. This value along with the minimum OC of 22.7% provided through the new asset percentage of 81.5%, is sufficient to fully repay the covered bonds in an 'AA' scenario.
WMB has agreed that they will maintain the asset percentage at a maximum of 81.5% of covered bonds compared to the cover pool. In addition, Fitch took into account the strength of the asset segregation through the pledge in favor of the indenture trustee; the robustness of WMB's IT systems for the management of the cover pool; and the absence of dedicated covered bonds' regulations in the U.S. Fitch will continue to monitor WMB's IDR and the mortgage cover pool, which is dynamic and may change over time.

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