Subprime defauls and losses drive down the market

Stocks tumbled Tuesday as an overly pessimistic market exaggerated everything from the implications of an unwinding in the yen carry trade to potential defaults by subprime lenders spilling over into an economy that again showed signs of slowing.

NEW YORK, Feb 28 (Reuters) - Rising delinquencies may cause losses within some subprime mortgage bonds rated as high as the "A" rated classes, despite conventional wisdom that only the lowest-rated mortgage securities would be hit, according to UBS Securities data.

Among the 20 subprime asset-backed securities in a benchmark index, the ABX 06-2 index, run by Markit Group Ltd., six will likely sustain losses to "BBB-" classes based on UBS calculations, analysts led by Laurie Goodman said in a research note released on Tuesday.

Projected losses are so deep on two issues that they may exceed levels of protection included with the higher-rated classes, they said.
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The losses come as delinquencies continue to soar more than expected on most issuers' 2006 loans as a result of loosened underwriting practices and the abrupt end to the U.S. housing boom last year.

"People think the higher rated stuff will be protected because it's well subordinated" with lower-rated pieces, said Kevin Jackson, a mortgage strategist at RBC Capital Markets in New York. "That's the assumption people are making, but I agree there could be some problems higher up, at the margin."

UBS projected losses of 14.81 percent and 11.53 percent, respectively, on Morgan Stanley's (MS.N: Quote, Profile , Research) MSAC 2006-WMC2 and Lehman Brothers Holding Co.'s (LEH.N: Quote, Profile , Research) SAIL 2006-4. Morgan Stanley's issue is backed by loans of General Electric Co.'s (GE.N: Quote, Profile , Research) WMC Mortgage Corp.