Moody's downgrades US$1.5B in Washington Mutual residential mortgage-backed securities; collateral backing transactions consists primarily of negative-amortization loans

Cindy Allen

NEW YORK , February 21, 2011 (press release) – Moody's Investors Service has downgraded the ratings of 11 tranches, and confirmed ratings of five tranches from WaMu Mortgage Pass-Through Certificates, WMALT Series 2007-OA3 Trust.

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 rating these securities was "Option ARM RMBS Loss Projection Update: April 2010" rating methodology published in April 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

In addition, the previous rating action on Class FX from WALT Series 2007-OA3 assumed that the tranche was a combination of Interest Only component and Principal Only component. Class FX is in fact an Interest Only tranche, which is linked to Group 4 and Group 5 certificates. The updated rating action corrects this oversight.

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 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, WMALT Series 2007-OA3 Trust

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

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

Cl. 3A, Downgraded to Ca (sf); previously on Jan 27, 2010 Caa2 (sf) Placed Under Review for Possible Downgrade

Cl. 4A-1, Downgraded to Caa3 (sf); previously on Jan 27, 2010 Caa1 (sf) Placed Under Review for Possible Downgrade

Cl. 4A-2, Downgraded to Caa3 (sf); previously on Jan 27, 2010 Caa1 (sf) Placed Under Review for Possible Downgrade

Cl. 4A-B, Downgraded to C (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Cl. 5A, Downgraded to Caa3 (sf); previously on Jan 27, 2010 Caa1 (sf) Placed Under Review for Possible Downgrade

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

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

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

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

Cl. CX-1, Confirmed at Ca (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Cl. CX-2-PPP, Confirmed at Ca (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Cl. EX-PPP, Confirmed at Ca (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Cl. FX, Confirmed at Ca (sf); previously on Jan 27, 2010 Ca (sf) Placed Under Review for Possible Downgrade

Cl. 5X-PPP, Confirmed at Ca (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://v3.moodys.com/viewresearchdoc.aspx?docid=PBS_SF235952

For more information please see www.moodys.com.

REGULATORY DISCLOSURES

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.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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.

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