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IRA Downgrades Washington Mutual Over Concerns About Negative Amortization Loans

Institutional Risk Analytics, a designer of customized financial analysis
and valuation tools for risk managers, credit officers, auditors, corporate
lenders, regulators and other financial decision makers, has downgraded
Washington Mutual (NYSE:WM) because of concerns about the effect of negative
amortization loans on this leading US mortgage lender and the $360 billion
asset bank's low levels of tangible equity.

"While default rates at US banks are starting to climb, the growing use of
derivative loan structures such as negative amortization loans is clearly
masking the true economic rate of defaults," notes Christopher Whalen, who
head's IRA's research efforts. "WM is one of the leading mortgage lenders
in the US and also one of the most aggressive in terms of derivative loans
such as negative amortization products."

In a report published this week, IRA notes that among the larger US banking
institutions, WM has the lowest levels of tangible tier one equity (< 3.0%)
and one of the highest proportions of negative amortization loans in its
portfolio. IRA also notes that besides being the nation's third largest
mortgage lender, WM is also a leader in the use of option ARMS and other
exotic loan structures, derivative loan products which have enabled more and
more home buyers to shoehorn their way into mortgages that they could have
never obtained even 12 months before.

"Over the past several months, WM has begun to tighten loan standards for
option ARMS, but in our view, the damage is already done," Whalen writes.
"The use of derivative loan structures not only hold considerable financial
risks for mortgage lenders such as WM, but also threatens them with
considerable regulatory and reputational risk because these products are
increasingly seen as predatory. Families using interest only and negative
amortization products to purchase homes, often with very high loan to value
ratios, run a terrible risk of losing their homes in an economic downturn."

"Banks that engage in consumer lending need to have tangible capital levels
that are measured in double digits," notes Whalen, who warns that if
predictions of higher mortgage default rates in the US are shown to be
correct, banks like WM could have a very difficult time in 2006.