SEATTLE – Standard & Poor’s Ratings Services cut Washington Mutual Inc.’s credit rating Thursday, saying the mortgage crisis was worse than it predicted at the start of the year.

Wall Street balked at the news, sending WaMu’s shares down $1.04, or 8.1 percent, to $11.76 Thursday.

“We now believe that the severity of losses on all residential mortgages will be higher than we had thought and that the weak housing market will now be a longer cycle,” S&P analyst Victoria Wagner said in a news release. “This adds to the time frame to resolve foreclosed properties and the cost to carry these non-performing assets.”

Mortgage credit has deteriorated in the past year as home owners have been hurt by weakening property values and rising unemployment.

The ratings service said home prices in key WaMu mortgage markets, such as California and Florida, were falling faster than anticipated. S&P also darkened its view of the health of the overall economy, which it expects will push more people to default on loans and slice into WaMu’s earnings.

S&P said WaMu made “significant strides” in shoring up its finances in the past year. But the agency also said the thrift’s profitable banking, commercial and credit-card operations don’t contribute enough to earnings to offset the troubled home loans business.

The ratings agency cut its long-term credit rating on Washington Mutual Inc. to “BBB” from “BBB+” and its long-term credit rating on banking subsidiary Washington Mutual Bank to “BBB+” from “A-“. The lower ratings are still considered investment grade.

WaMu spokeswoman Libby Hutchinson declined to comment on the changes.

Washington Mutual’s stock has plunged more than 60 percent since last October, when declining home prices made its first real dent in the company’s performance, slashing third-quarter earnings by 72 percent. Since then, WaMu has stopped making loans to subprime borrowers with poor credit, laid off more than 3,000 workers, and shifted more energy to its 2,250 retail bank branches and Web site.

Bad loans helped drag WaMu to a $1.87 billion loss in the fourth quarter of 2007, and executives have said fallout from the mortgage crisis will continue to weigh on the thrift’s finances through 2008. The company has estimated it will have to put aside up to $8 billion this year to cover mortgages its borrowers can no longer afford to pay.