- Note this is a complex area and the application of the UCC (Uniform Commercial Code) to these transactions and the pledging of the Notes as a Cover Pool while they still remain on the balance sheet of the bank is a matter for expert legal analysis. To learn more about Covered Bonds go to the following websites:
The mortgage bonds are senior obligations of Washington Mutual Bank (WMB), which will service the interest and repay principal on the mortgage bonds. If WMB is unable to do so or the asset coverage test is breached, then WM Covered Bond Program will enforce against the assets and use the proceeds to redeem the outstanding bonds.
WMB will pay all principal and interest on the mortgage bonds before an event of default.
Each mortgage loan must meet eligible criteria at the time it is added to the cover pool.
"On September 27, 2006, the Issuer issued approximately $5.1 billion of Mortgage Bonds to WM Covered Bond Program, a Delaware statutory trust not affiliated with the Issuer, which in turn issued €4 billion of Covered Bonds secured by the Mortgage Bonds and by other collateral in an offering outside of the United States. The Mortgage Bonds were purchased by WM Covered Bond Program from the Issuer with the net proceeds of the Covered Bonds, after conversion into U.S. dollars and payment of related expenses. The Mortgage Bonds are senior obligations of the Issuer secured by a pool of residential mortgage loans owned by the Issuer and by certain of the Issuer's other assets (collectively, the 'Cover Pool') and would effectively rank senior to the Notes with respect to the Cover Pool collateral securing the Mortgage Bonds. The Issuer is currently authorized to issue from time to time additional series of Mortgage Bonds in an aggregate principal amount (together with the principal amount of Mortgage Bonds issued on September 27, 2006) of up to €20 billion under the existing Covered Bond Program and to pledge additional Cover Pool collateral to secure such issuances, all of which Mortgage Bonds would effectively rank senior to the Notes with respect to the Cover Pool collateral securing such Mortgage Bonds. Such authorization is subject to being increased in the future. Under the terms of the Mortgage Bonds issued by the Issuer on September 27, 2006, and any additional series of Mortgage Bonds that the Issuer may issue in the future, the Issuer will be required to pledge additional Cover Pool collateral if needed to ensure that the amount of collateral in the Cover Pool remains at or above the level required by the indenture relating to the Mortgage Bonds."
Effective October 2, 2006, The Bank of New York Trust Company, N.A. succeeded J.P. Morgan Chase Bank, National Association under the Global Bank Note Program in its capacities as Domestic Paying Agent, Registrar, Calculation Agent and Exchange Rate Agent.
WM Covered Bond Program Investor Reports can be found through J. P. Morgan's corporate website for their Investment Bank the following can be found:
The WM Covered Bond Program Investor Report effective 31 July 2007 (the first report available at J. P. Morgan) states:
Issuer WM Covered Bond Program
Covered Bond Indenture Trustee The Bank of New York
Mortgage Bond Issuer Washington Mutual Bank
Mortgage Bond Indenture Trustee Deutsche Bank Trust Company Americas
Loans in the pool: 23,730 loans with balance of $9,001,626,789 from >$100,000 - >$3,000,000
79.25% were primary residences; 6.43% were second homes; 14.32% were non-owner occupied.
27.49% were purchase money; 5.54% were permanent construction; 1.01% were property improvement refinance; 39.56% were cash out refinance; 27.40% were non-cash out refinance. 90.13% were single family residential; 9.37% condominiums; 0.50% townhouses. FICO scores ranged from 580-599 to 820 or higher with the majority over a 720 FICO score. Cover pool documentation had 40.03% full documentation; 54.31% low documentation; and 5.66% streamline/unknown/none documentation.
THE WM Covered Bond Program Investor Report effective 31 May 2011 states:
WMCBP Series 1 had an Initial Principal Amount of €2,000,000,000 with a maturity date of 9/27/2011 at a rate of 3.875% Fixed; Swap providers are Barclays Bank PLC & RBS, Ptc.
WMCBP Series 2 had the same Initial Principal Amount of €2,000,000,000; Maturity Date of 9/27/2016; Rate 4.00% Fixed; Swap providers are Barclays Bank PLC & RBS, Ptc.
WMCBP Series 3 had the same Initial Principal Amount of €2,000,000,000; Maturity Date of 5/10/2014; Rate 4.375% Fixed; Swap provider is Barclays Bank PLC.
Parties as of 5/31/2011
Issuer -- WM Covered Bond Program
Covered Bond Indenture Trustee -- The Bank of New York
Mortgage Bond Issuer -- JPMorgan Chase Bank, National Association
Mortgage Bond Indenture Trustee -- Deutsche Bank Trust Company Americas5/31/2011 COVER POOL SUMMARY
Product Loans Amount %
Payment Option ARMs 7,966 $2,975,828,640 25.43% of pool
3/1 Hybrid ARMs 904 $309,248,266 2.64% of pool
5/1/ Hybrid ARMs 1,703 $544,423,887 4.65% of pool
5/1 Interest Only Hybrid ARMs 12,615 $5,833,301,477 49.86% of pool7/1 Hybrid ARMs 89 $54,824,137 0.47% of pool
7/1 Interest Only Hybrid ARMs 1,503 $1,126,419,780 9.65% of pool
10/1 Hybrid ARMs 120 $52,955,660 9.45% of pool
10/1 Interest Only Hybrid ARMs 1,203 $802,788,796 6.6% of pool
Total 26,103 $11,699,790,648 100% of pool
Cover Pool State Distribution
California 11,778 loans $6,290,876,991 balance 53.77%
New York 1,616 loans $860,671,707 balance 7.36%
Florida 1,951 loans $676,398,296 balance 5.79%
Washington 1,176 loans $463,261,434 balance 3.96%
Others (<3%) 9,582 loans $3,408,582,218 balance 29.13%
Cover Pool Delinquency Distribution
Current or less than 30 days 25,471 loans $11,390,913,683 97.36%
30 to 59 Days past due 632 loans $380,876,964 2.64%
60 Days or More 0 loans 0 0
Loan Origination Year
<= 2004 12,206 loans 36.52%
2005 3,479 loans 12.43%
2006 2,553 loans 10.03%
2007 6,536 loans 34.51%
2008 1,329 loans 6.51%
As of the end of July 2008, WMB's aggregate outstanding covered bonds were equivalent to approximately US $7.8 billion and were ultimately secured over a portfolio of U.S. residential mortgage loans of US $11.7 billion held by Washington Mutual Bank ('WMB'; rated 'BBB/F2' by Fitch), resulting in a current over-collateralization (OC) of 50.6%.
Covered bonds appeared on balance sheets as "securitizations." In other words a "security" is created for the purpose of raising liquidity. These securities may be issued over a period of time. Payments of principal and interest are made to the "investor" from general cash flows of the "issuer." Prepayment of loans does not affect the investors. A single class of bonds is issued. In theory the securities are those of the issuer and are usually "AAA" rated.
The Covered Bond Program provided the bank with capital relief. They were treated as on-balance sheet retail portfolio and call for regulatory capital.
US Treasury Best Practices of July 2008 required issuance by a Special Purpose Vehicle (SPV) and direct issuance by the originator. SPV issuance requires the mortgage bond originator to take the loan from the SPV and issue a mortgage bond in lieu. The SPB issues the securities backed by the mortgage bond. The originators maintains the mortgage. This provides structural enhancements at the SPV level such as facility of liquidity and independent trustees. Investors have no recourse against the "originator." Investors do not face prepayment risk.
Critical issues include underwriting standards and selection criteria of new loans in the pool.
The "covered pool" is comprised of mostly dynamic assets. The borrower is allowed to manage the pool as long are the required "covers" are ensure. There may be multiple issuances from a common pool of assets
A covered bond is a case of collateralized borrowing by the issuer. The covered bond is backed by assets known as "cover assets" (mortgages) of a particular value. The pool is subject to identification.
On August 8, 2008 Fitch Ratings issued the following press release and public statement downgrading Washington Mutual Covered Bond Program's (WMCBP) Series 1, 2, and 3 from "AAA" to "AA." http://www.coveredbondinvestor.com/news/fitch-downgrades-wamu-cover...
"NEW YORK & LONDON — Fitch Ratings has downgraded WM Covered Bond Program's (WMCBP) series 1, 2 and 3 to 'AA' from 'AAA' and removed them from Rating Watch Negative.
"As of the end of July 2008, aggregate outstanding covered bonds were equivalent to approximately US $7.8 billion and are ultimately secured over a portfolio of U.S. residential mortgage loans of US $11.7 billion held by Washington Mutual Bank ('WMB'; rated 'BBB/F2' by Fitch), resulting in a current over-collateralization (OC) of 50.6%.
The drivers behind today's rating action are the current rating of WMB and the risk posed to the continuity of payments on the covered bonds in the event of a default by WMB. In Fitch's analysis this combination limits the rating to 'AA'. Furthermore the new rating is supported by the committed OC between the cover pool and the covered bonds.BOTTOM LINE:
Recently, the Federal Deposit Insurance Corporation (FDIC) issued a policy statement outlining criteria for U.S. covered bonds. The criteria were designed to ensure that the highest quality mortgage loans would be used in new covered bond transactions. Covered bonds meeting the criteria would benefit from a reduced automatic stay period of 10 days in the event an issuer was to become insolvent.
Because WMB's mortgage loans do not meet the new criteria, a 90 day stay period is required in the event WMB becomes insolvent which could delay access to the pledged collateral if a sale were required to repay the covered bonds before the end of their maturity extension period.
Approximately 79.9% of the cover pool consists of hybrid adjustable-rate mortgages (ARMs), with the remainder option ARM loans. The portfolio has a weighted average (WA) original loan to value ratio of 63.5%, a WA FICO score of 750, an average 37-month seasoning and a weighted average remaining maturity of 27.2 years. The pool is highly concentrated in California (48.9%), with the top five states, accounting for 68.6% of the portfolio. In its analysis Fitch considered the effect of a stressed value of the cover pool using recent market conditions. This value along with the minimum OC of 22.7% provided through the new asset percentage of 81.5%, is sufficient to fully repay the covered bonds in an 'AA' scenario.
WMB has agreed that they will maintain the asset percentage at a maximum of 81.5% of covered bonds compared to the cover pool. In addition, Fitch took into account the strength of the asset segregation through the pledge in favor of the indenture trustee; the robustness of WMB's IT systems for the management of the cover pool; and the absence of dedicated covered bonds' regulations in the U.S. Fitch will continue to monitor WMB's IDR and the mortgage cover pool, which is dynamic and may change over time.
JPMorgan & Company controls the WM Covered Bond Program.
For questions about WM Covered Bond Program, Series 1, 2 & 3, Chase gives the following email address email@example.com
Does anyone believe that Mr. Specketer will tell us if our loans are in the mortgage cover pool?