Want the latest evidence of just how fast and loose the RMBS game was played during the recent run-up in housing and mortgage securities? Look no further than an obscure downgrade to the master servicing arm at failed thrift Washington Mutual. Fitch Ratings said Tuesday that it had cut its U.S. residential mortgage master servicer rating on Washington Mutual Mortgage Securities Corp. to RMS2 from RMS2+, a move reflecting one of the more quiet challenges thus far inherent in the handoff of operations to JP Morgan Chase & Co. (JPM). Chase took over most of WaMu’s assets on Sept. 25, after the Office of Thrift Supervision closed the master servicing outfit’s parent, Washington Mutual Bank. Fitch’s analysis of master servicing at WaMu is telling, and offers what amounts to a scathing take on the state of the operation. For one thing, WaMu Mortgage Securities Corp. — WMMSC for short — is moving its operations from Florence, SC to Vernon Hills, IL as part of its integration with Chase. The move is causing a bloodletting among key staff, with Fitch expressing a concern over “a reduction in staff experience and company tenure levels due to very few employees transferring.” But a further review of Fitch’s take on the state of WMMSC suggests why so few employees are making the move: numerous remittance and reporting discrepancies resulted in RMBS restatements, Fitch said, and WMMSC appears to have been beyond lax in its oversight of the primary servicers it was charged with managing, as well. “Although WMMSC performs monthly servicer monitoring to determine if on-site reviews are necessary, it has not performed any on-site reviews of the primary servicers it oversees in more than three years,” Fitch analysts noted. Why? Well, that one’s easy: because 95 percent of the master servicing portfolio was with — you guessed it — Washington Mutual Bank. (That portfolio is now serviced by JPMorgan.) In plain English, it means that WaMu was acting as both check and balance in the servicing ecosystem. How could this be allowed to happen? While the rating agency would not come out and say it directly, the language used by Fitch in discussing the downgrade clearly suggests the master servicing operation utterly failed to perform any of the oversight functions usually associated with a master servicer. “WMMSC performed only limited oversight of Washington Mutual Bank’s primary servicing operations, excluding it from desk reviews and monitoring for on-site reviews that a master servicer typically performs,” analysts at the rating agency said. That lack of oversight could be one of the smaller reasons that WaMu fell into regulators’ hands, but is really more of a footnote; far more important is what it suggests about the culture and attitude around servicing deals the company issued into the secondary market. Fitch — again, playing coy in its statement — said the extremely hands-off approach taken by WMMSC clearly didn’t help, but stopped from going any further. “Fitch believes that a strong master servicer oversight program is even more critical based on the current market conditions, where servicers are experiencing financial and liquidity pressures, high delinquencies, additional reporting and advancing requirements, and increased modification, foreclosures, and real estate owned properties,” the analysts said. For anyone well-versed in reading between the lines here, or anyone with experience in servicing management, Fitch’s take on the state of affairs at WaMu Mortgage Securities Corp. should be jaw-dropping. And it begs the question of how far the wormhole really does go when it comes to how secondary market participants structured their deals. Despite the problems at the master servicing operation, Fitch separately on Tuesday affirmed the primary servicing rating for Washington Mutual Bank, at RPS2+. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.