Moody’s Investors Service has downgraded $1.7 billion in Washington Mutual-issued securities backed by first-lien, Alt-A credit, payment-option adjustable-rate mortgages with negative amortization.

The rating agency cited a rapidly deteriorating performance of the loans in the pool in conjunction with continuing economic distress. The downgrades move the securities further into the low end of the speculative grade rating range.

In addition to the downgrades of 22 tranches, Moody’s said it was able to confirm ratings on five tranches from four RMBS transactions of this type.

The move comes a few days after Wells Fargo agreed to modify more than $2 billion in pay option ARMs that it bought from two lenders that also had originated the product, which was widely originated during the 2005-2007 origination years but performed notoriously badly in the ensuing downturn and became widely criticized.

JPMorgan Chase now owns WaMu.

Pay option ARMs allow borrowers to pick different types of payments. The neg am option allows them to grow rather than reduce their principal over time as in a typical loan. Alt-A credit borrowers typically had atypical sources of income such as self-employment and these loans also have performed relatively poorly in the downturn’s wake. Few if any of these types of loans are currently originated.

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