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Rating Action:

Moody's takes action on $1.4 billion Option ARM RMBS issued by Washington Mutual.

15 Dec 2010

New York, December 15, 2010 -- Moody's Investors Service has downgraded the ratings of 26 tranches from 3 RMBS transactions, backed by option arm loans, issued by Washington Mutual.

RATINGS RATIONALE

The collateral backing these transactions consists primarily of first-lien, adjustable-rate, negative amortization, Alt-A residential mortgage loans. The actions are a result of the rapidly deteriorating performance of option arm pools in conjunction with macroeconomic conditions that remain under duress. The actions reflect Moody's updated loss expectations on option arm pools issued from 2005 to 2007.

The principal methodology used in these ratings was "Option ARM RMBS Loss Projection Update: April 2010" published in April 2010.

To assess the rating implications of the updated loss levels on option arm RMBS, each individual pool was run through a variety of scenarios in the Structured Finance Workstation® (SFW), the cash flow model developed by Moody's Wall Street Analytics. This individual pool level analysis incorporates performance variances across the different pools and the structural features of the transaction including priorities of payment distribution among the different tranches, average life of the tranches, current balances of the tranches and future cash flows under expected and stressed scenarios. The scenarios include ninety-six different combinations comprising of six loss levels, four loss timing curves and four prepayment curves. The volatility in losses experienced by a tranche due to small increments in losses on the underlying mortgage pool is taken into consideration when assigning ratings.

In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck

The above mentioned approach "Alt-A RMBS Loss Projection Update: February 2010" is adjusted slightly when estimating losses on pools left with a small number of loans. To project losses on pools with fewer than 100 loans, Moody's first estimates a "baseline" average rate of new delinquencies for the pool that is dependent on the vintage of loan origination (10%, 19% and 21% for the 2005, 2006 and 2007 vintage respectively). This baseline rate is higher than the average rate of new delinquencies for the vintage to account for the volatile nature of small pools. Even if a few loans in a small pool become delinquent, there could be a large increase in the overall pool delinquency level due to the concentration risk. Once the baseline rate is set, further adjustments are made based on 1) the number of loans remaining in the pool and 2) the level of current delinquencies in the pool. The fewer the number of loans remaining in the pool, the higher the volatility and hence the stress applied. Once the loan count in a pool falls below 75, the rate of delinquency is increased by 1% for every loan less than 75. For example, for a pool with 74 loans from the 2005 vintage, the adjusted rate of new delinquency would be 10.10%. If current delinquency levels in a small pool is low, future delinquencies are expected to reflect this trend. To account for that, the rate calculated above is multiplied by a factor ranging from 0.2 to 2.0 for current delinquencies ranging from less than 2.5% to greater than 50% respectively. Delinquencies for subsequent years and ultimate expected losses are projected using the approach described in the methodology publication.

The primary source of assumption uncertainty is the current macroeconomic environment, in which unemployment remains at high levels, and weakness persists in the housing market. Moody's notes an increasing potential for a double-dip recession, which could cause a further 20% decline in home prices (versus its baseline assumption of roughly 5% further decline). Overall, Moody's assumes a further 5% decline in home prices with stabilization in early 2011, accompanied by continued stress in national employment levels through that timeframe.

Moody's Investors Service received and took into account one or more third party due diligence reports on the underlying assets or financial instruments in this transaction and the due diligence reports had a neutral impact on the rating.

Complete rating actions are as follows:

Issuer: WaMu Mortgage Pass-Through Certificates, Series 2005-AR1

Cl. A-1A, Downgraded to B1 (sf); previously on Jan 27, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Cl. A-1B, Downgraded to Ca (sf); previously on Jan 27, 2010 A1 (sf) Placed Under Review for Possible Downgrade

Cl. A-2A1, Downgraded to Caa2 (sf); previously on Jan 27, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Cl. A-2A3, Downgraded to Caa2 (sf); previously on Jan 27, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Cl. A-2B, Downgraded to C (sf); previously on Jan 27, 2010 A1 (sf) Placed Under Review for Possible Downgrade

Cl. A-3, Downgraded to Caa3 (sf); previously on Jan 27, 2010 A1 (sf) Placed Under Review for Possible Downgrade

Cl. X, Downgraded to C (sf); previously on Jan 27, 2010 A1 (sf) Placed Under Review for Possible Downgrade

Cl. B-1, Downgraded to C (sf); previously on Jan 27, 2010 Ba1 (sf) Placed Under Review for Possible Downgrade

Cl. B-2, Downgraded to C (sf); previously on Jan 27, 2010 B3 (sf) Placed Under Review for Possible Downgrade

Cl. B-3, Downgraded to C (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Issuer: WaMu Mortgage Pass-Through Certificates, Series 2006-AR4

Cl. 1A-1A, Downgraded to B1 (sf); previously on Jan 27, 2010 Aa1 (sf) Placed Under Review for Possible Downgrade

Cl. 1A-1B, Downgraded to Ca (sf); previously on Jan 27, 2010 Baa1 (sf) Placed Under Review for Possible Downgrade

Cl. 1A-C2, Downgraded to Baa1 (sf); previously on Jan 27, 2010 A3 (sf) Placed Under Review for Possible Downgrade

Cl. 1A-C3, Downgraded to C (sf); previously on Jan 27, 2010 B1 (sf) Placed Under Review for Possible Downgrade

Cl. 1X-1A, Downgraded to C (sf); previously on Jan 27, 2010 B1 (sf) Placed Under Review for Possible Downgrade

Cl. 1X-1B, Downgraded to C (sf); previously on Jan 27, 2010 B1 (sf) Placed Under Review for Possible Downgrade

Cl. 2A-1A, Downgraded to Caa3 (sf); previously on Jan 27, 2010 Baa2 (sf) Placed Under Review for Possible Downgrade

Cl. 2X, Downgraded to C (sf); previously on Jan 27, 2010 B1 (sf) Placed Under Review for Possible Downgrade

Cl. B-1, Downgraded to C (sf); previously on Jan 27, 2010 Caa2 (sf) Placed Under Review for Possible Downgrade

Issuer: WaMu Mortgage Pass-Through Certificates, Series 2006-AR5

Cl. A-1A, Downgraded to Caa2 (sf); previously on Jan 27, 2010 Ba2 (sf) Placed Under Review for Possible Downgrade

Cl. A-1A2A, Downgraded to Caa1 (sf); previously on Jan 27, 2010 Ba1 (sf) Placed Under Review for Possible Downgrade

Cl. A-1A2B, Downgraded to Ca (sf); previously on Jan 27, 2010 Ba2 (sf) Placed Under Review for Possible Downgrade

Cl. A-1B2, Downgraded to C (sf); previously on Jan 27, 2010 Caa1 (sf) Placed Under Review for Possible Downgrade

Cl. A-1B3, Downgraded to C (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Cl. X, Downgraded to C (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

A list of these actions including CUSIP identifiers may be found at:

Excel: http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBS_SF228951

A list of updated estimated pool losses, sensitivity analysis, and tranche recovery details is being posted on an ongoing basis for the duration of this review period and may be found at:

Excel: http://v3.moodys.com/viewresearchdoc.aspx?docid=PBS_SF225686

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Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Jipil Ha
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Amita Shrivastava
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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SUBSCRIBERS: 212-553-1653

Moody's takes action on $1.4 billion Option ARM RMBS issued by Washington Mutual.
No Related Data.
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