About 40% of CDO collateral is residential MBS. Almost three quarters of that is in subprime and home-equity loans, with the rest in higher-quality, prime home loans, the study estimated.
CDOs have become an important part of the mortgage market because they buy the riskier parts of MBS that others don't want. The higher-rated portions, or tranches, of MBS are sold to pension funds and insurers. But if the riskier tranches aren't sold too, the whole deal is off, Mason explained.
http://www.marketwatch.com/story/in-subprime-mortgage-shakeout-cdos-may-be-most-at-risk