The domino effect of JPMorgan (JPM) $2 billion hit on a trade took its toll on the Washington Mutual legacy, dollar-denominated covered bond program.
Fitch Ratings downgraded outstanding mortgage covered bonds from AA to AA- on Monday.
The bonds also were placed on ratings watch negative, Fitch said. The covered bonds are secured by a pool of payment-option and hybrid adjustable-rate first-lien mortgage loans secured on U.S. residential properties totaling approximately $7.9 billion. As covered bonds, JPMorgan is on the hook to pay investor losses.
The downgrade comes on the heels of Fitch downgrading the issuer default rating of the program's sponsor, JP Morgan Chase Bank, which just saw its own IDR rating moved from AA-/F1+ to A+/F1. The downgrade came after JPMorgan CEO Jamie Dimon publicly confronted a controversial trade that led to $2 billion in losses.
Fitch says while JPMorgan's issuer default rating downgrade does not change the underlying rationale for rating the covered bonds, the default probability had to be adjusted to equalize the covered bonds rating with JPMorgan's long-term, issuer default rating.
The portfolio of loans has a current loan-to-value ratio average of 63.8% and a FICO score of approximately 737, Fitch said.