Fitch Upgrades WaMu Covered Bond Program to 'AA+'

In wake of WaMu’s acquisition by JPMorgan, improved 'Discontinuity Factor' is a key

Press Release

12/18/2008

[Editor’s note: The following public statement was issued by Fitch Ratings.]

NEW YORK & LONDON — Fitch Ratings has upgraded the outstanding series of covered bonds issued by WM Covered Bond Program's (WMCBP) to 'AA+' from 'AA-' and removed them from Rating Watch Positive.

The rating action is taken as a result of a completed review of documents relating to the transfer of the program from Washington Mutual Bank (WMB) to JPMorgan Chase Bank, National Association (JPM) whose Long-term Issuer Default Rating (IDR) is 'AA-' by Fitch, a revision of WMCBP's Discontinuity Factor (D-Factor) to 100% from 24.6%, and the contractual minimum overcollateralization (OC) of 49.3% between the cover pool and the covered bonds.

JPM assumed most of WMB's assets and select other liabilities, which include WMB's obligation under its mortgage bonds. These mortgage bonds are owned by WMCBP and are securing WMCBP's covered bonds.

D-Factors assigned by Fitch measure the likelihood of an interruption of payments under the covered bonds when an issuer defaults. They range between 100% for an automatic interruption to 0% for an absolute continuity. In its review of WMCBP's D-Factor, Fitch considered the worst case of a default by JPM occurring just before a covered bonds principal payment was due. The 100% D-Factor is driven by the automatic stay period after default being longer than the maturity extension available on the bonds.

WMCBP's covered bonds were issued as soft-bullet bonds with a 60-day extension period for series 1 and 2 and a 120-day extension period for series 3. The extension period is designed to provide the mortgage bond indenture trustee with sufficient time to enforce its security over the cover pool and liquidate the portfolio. Due to the non-compliance with the Final Covered Bond Policy Statement issued by the Federal Deposit Insurance Corporation's (FDIC) on July 15, 2008, the mortgage loans in WMCBP would be subject to a 90-day automatic stay period in the event of default by JPM. For series 1 and 2 a 90-day automatic stay period exceeds their maximum 60-day extension period. This prevents the bond's timely redemption from the proceeds of the cover pool liquidation. Series 3 would be equally affected through a cross-default clause.

Prior to JPM's acquisition of WMB's obligation under its mortgage bonds, this risk to the continuity of payments on the covered bonds was addressed by WMB through a separate protection agreement. The agreement would have required WMB to post the principal balance of the series 1 and 2 covered bonds in a special deposit account 60 days prior to their maturity if WMB had been downgraded below 'AA-'. Subsequent to WMB's transfer of WMCBP to JPM, the protection agreement was not renewed.

As a consequence, Fitch deems the mortgage covered bonds have the same probability of default as JPM. According to the Fitch covered bonds rating approach, the covered bonds may reach a two-notch uplift above JPM's Long-term IDR of 'AA-' if the recoveries from the cover pool, stressed at a 'AA+' level, enable a full repayment of the covered bonds.

In its analysis Fitch considered the stressed value of the cover pool using recent market conditions. This value along with the minimum OC of 27.5%, provided through the new asset percentage of 78.5%, is sufficient to fully repay the covered bonds in an 'AA+' scenario. JPM has agreed that they will maintain the asset percentage at a maximum of 78.5% 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 JPM's IT systems for the management of the cover pool; and the absence of dedicated covered bonds' regulations in the U.S.

Contact: Huxley Somerville +1-212-908-0381, Alla Sirotic +1-212-908-0732, New York or Arjen Wink +44 (0)20 7682 7378, London.

Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Tyrene Frederick-Mack, New York, Tel: +1 212-908-0540, Email: tyrene.frederick-mack@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.