Fitch Assigns Washington Mutual Program's US Covered Bonds Expected 'AAA' Rating.

LONDON & NEW YORK -- Fitch Ratings has assigned WM Covered Bond Program's (WMCBP) series 3 covered bonds an expected rating of 'AAA'. These securities represent the third series of covered bonds under WMCBP's EUR20 billion covered bonds program. The covered bonds will have an expected size of up to EUR2 billion, with an expected maturity between seven and 15 years. The final rating is contingent on the receipt of final documents conforming to information already received.

In the absence of a dedicated covered bonds regime, the program rests on an asset segregation mechanism, which is customary under the U.S. legislation. The issuer is a Delaware statutory trust purposely established while the sponsor of the program is Washington Mutual Bank (WMB; rated 'A/F1'), one of the largest U.S. mortgage lenders.

Under this program, WMB will issue floating-rate, U.S. dollar-denominated U.S. mortgage bonds secured on a portfolio of residential mortgage loans originated or acquired by its branch network. The mortgage bonds will be direct and unconditional obligations of WMB, ranking pari passu and without priority among themselves. Each series of mortgage bonds will be purchased by WMCBP, which will finance this acquisition through the issuance of contractual covered bonds. U.S. dollar-denominated proceeds from the mortgage bonds will be swapped in exchange to interests and principal due under the covered bonds in the relevant currency. The program is designed to protect covered bondholders against the risk that, in an insolvency of WMB, the Federal Deposit Insurance Corporation (FDIC) elects to accelerate the bank's obligations. As a result of this two-tier structure, end-investors have no direct exposure to any regulated financial institution.

The expected rating is based on the program's satisfactory legal structure, the credit quality of the cover pool and the liquidity of the US mortgage loans market. The rating considers the availability of sufficient over collateralization to absorb potential credit losses and the hedging mechanisms in place to offset market risks. In addition, WMB's servicing and originating procedures have been taken into account.

As at May 2007, the projected cover pool, which will be segregated in favor of the mortgage bondholder, consisted of 23,768 performing loans secured on residential properties with a total outstanding balance of approximately USD9.37bn. The portfolio has a weighted average (WA) original loan to value ratio (LTV) of 64.35%, a WA FICO score of 754 and an average 35-month seasoning. The pool is highly concentrated in California (48.0%), with the top five states accounting for 68.6% of the portfolio. The cover pool is dynamic and can change over time.

The main risk for end-investors lies in the market value of the pledged mortgage loans. In the event of an acceleration of the mortgage bonds, the trustee will have to liquidate the entire pool within a tight timeframe. USD proceeds from the pool disposal will be invested in specified instruments in favor of covered bondholders. Covered bonds do not accelerate as a result of a default on the mortgage bonds, rather they will keep being paid out of the cashflows generated by the specified instruments. A series of swaps will be hedging against interest rate and currency risk as well as the potential negative carry associated with holding funds in the specified instruments.

Fitch assessed, in its cashflow analysis, the stressed price at which the pool could be sold or securitized by the trustee in a particularly severe economic environment. The agency has taken into account numerous assumptions in respect of, among others, the cost of funding for a potential buyer under an 'AAA' stress scenario.

A dynamic asset coverage test (ACT) is calculated to ensure that sufficient overcollateralization is available to provide full repayment of the mortgage bonds in a 'AAA' stress scenario. The ACT requires that the asset percentage cannot exceed 93%, providing a minimum 7% credit enhancement at any time. The ACT only gives credit to the portion of the underlying mortgages up to 75% LTV.

The full credit analysis of the program is available at www.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.