Moody's Investors Service has enhanced its analysis of highly concentrated structured finance CDOs - largely as a result of the ever-increasing exposure to RMBS in recent deals. As the largest sector of the ABS market, it's not uncommon to see RMBS concentrations to top 50%, of a CDO's collateral, but concentrations have trended upward to 75% and even 85%, according to Moody's.
The so-called Correlated Binomial Methodology builds upon its previous methodology for assessing correlation risk, the Binomial Expansion Technique. Correlated Binomial Methodology models asset correlations explicitly in order to find increasing concentrations of real estate securities, according to Moody's. The methodology uses the rating agency's recently revised asset correlation assumptions for structured finance securities.