Overview of Moody’s Revised Modeling Parameters for Rating Structured Finance and Commercial Real Estate CDOs

Abstract

This article briefly summarizes the changes made byMoody’s in its parameter values for rating structured finance CDOs and commercial real estate CDOs, two structured credit products that have experienced tremendous ratings pressure during the current credit crisis. It explains that whileMoody’s broad framework for rating SF and CRE CDOs continues to be based on a Gaussian copula model, several parametric changes have been implemented in the model as a result of more recent data from the crisis. It argues that certain risks that were previously deemed less correlated have proved to be otherwise in the current environment and that the correlation in SF CDOs and CRE CDOs is generally much higher today than several years ago. The article also discusses parameter updates aimed at increasing default probabilities and lowering recovery expectations for CDOs’ structured finance and commercial real estate-related collateral.