Taking a big step toward becoming more bank-like, the largest U.S. savings and loan is about to issue a whopping $6.7 billion of mortgage-backed securities.

Washington Mutual Inc. of Seattle is using the deal, which was priced Monday, to shed mortgage loans it acquired in a series of thrift acquisitions in California, and to diversify its holdings.

"We don't want all of our loans in one basket. This sale will help us fulfill our strategy of balancing our residential holdings with commercial and consumer loans," said Libby Hutchinson, a spokeswoman.

The bonds are backed by adjustable-rate mortgages tied to the 11th Federal Home Loan Bank District cost of funds index. Wamu acquired the loans when it bought California thrift companies including American Savings Bank in December 1996, Great Western Financial Corp. in July 1997, and Home Savings of America in October 1998.

Wamu wants to switch to a Treasury-based index and use the sale proceeds for a move into commercial and consumer lending.

Thanks to the series of huge acquisitions, Wamu holds just under 50% of the loans in the 11th District index. The district includes California, Nevada, and Arizona; the index reflects average borrowing costs for thrifts there.

Wamu dislikes the index because the 11th District Home Loan Bank takes up to four months to process the averages. Adjustables geared to Treasury rates track borrowing costs more closely.

Company officials say the securitization is also the first step towards a five-year goal of reducing reliance on residential loans.

Wamu wants to focus more on financing of apartment houses, small businesses, and car, recreational vehicle, and home equity loans.

About 81% of Wamu's portfolio is in residential mortgages. The company hopes to reduce this figure to 60% to 65%.

The loans Wamu is securitizing are jumbo loans - too large to be guaranteed by Fannie Mae or Freddie Mac.

The huge size of the issue has raised eyebrows among analysts. What's more, ARMs are typically harder to securitize than fixed-rate loans.

Ms. Hutchinson downplayed the size issue. Wamu's assets topped $186.5 billion at yearend, so it takes a big step to have significant impact, she said.

She emphasized that Wamu will continue to sell fixed-rate loans.

According to the prospectus, $5 billion of the bonds will be sold to investors, while Wamu will keep nearly $1.6 billion in-house.

The public bonds include a $4.8 billion triple-A tranche at 29 basis points over the London interbank offered rate; a $100 million double-A tranche at 40 basis points over Libor; an A-rated tranche at 80 over Libor; and a $34 million triple-B tranche at 175 over Libor.

More than 99% of Wamu's slice will be a triple-A tranche; the rest will be a first-loss piece worth $20 million. The deal is being underwritten by Lehman Brothers.

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