UPDATE 1-S&P cuts WaMu debt as mortgage losses escalate

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NEW YORK, Jan 18 (Reuters) - Standard & Poor's on Friday cut its ratings on Washington Mutual Inc (WM.N), citing weak earnings over an extended time period as losses from residential home loans escalate.

WaMu, the largest U.S. savings and loan, posted a larger-than-expected $1.87 billion fourth-quarter loss on Thursday, battered by mortgage defaults and write-downs. For details, see [ID:nN17626771]

"The weak earnings for 2007 and the prospects for similar performance in 2008 are beyond the tolerance for the 'A' rating on the bank," S&P said in a statement.

S&P cut WaMu one notch to "BBB-plus," the third-lowest investment grade, from "A-minus." The outlook is negative, indicating an additional rating cut may be likely over the next two years.

"If economic and home price trends deteriorate beyond the current market consensus and add further credit losses and stress to WaMu's consolidated banking results and capital, then ratings could be lowered one notch," S&P said.

The cost to insure WaMu's debt with credit default swaps was little changed on Friday at 424 basis points, or $424,000 per year for five years to insure $10 million in debt, according to Markit Intraday. (Reporting by Karen Brettell; Editing by Tom Hals)