What is Weighted Average Loan Age ?

976 reads · Last updated: December 5, 2024

The weighted average loan age (WALA) measures the average age of the loans in a pool of mortgage-backed securities (MBS). The weights are based on the dollar amount of each loan at each maturity in proportion to the aggregate total of the pool and can be weighted on the remaining principal balance dollar figure or the nominal value of the loan.

Definition

Weighted Average Loan Age (WALA) is a metric used to measure the average age of loans in a mortgage-backed securities pool, weighted by the proportion of each loan's dollar amount to the total amount of the pool. In simple terms, WALA reflects the average duration of loans in a pool, with weights determined by each loan's relative value in the pool.

Origin

The concept of Weighted Average Loan Age originated in the mortgage securitization market to help investors assess the risk and expected returns of a loan pool. As the mortgage-backed securities (MBS) market developed, WALA became an important tool for analyzing the characteristics of loan pools.

Categories and Features

WALA is primarily used in the mortgage-backed securities (MBS) market to help investors understand the average duration of a loan pool. Its features include: 1. Reflecting the overall age structure of the loan pool; 2. Helping assess the prepayment risk of the loan pool; 3. Providing historical performance information of the loan pool. WALA is mainly applied when investors need to evaluate the risk and return of a loan pool.

Case Studies

Case 1: Suppose a mortgage-backed securities pool contains three loans with amounts of $1 million, $2 million, and $3 million, and loan ages of 2 years, 3 years, and 5 years, respectively. The WALA calculation is: (1M*2 + 2M*3 + 3M*5) / (1M+2M+3M) = 4 years. Case 2: An investor analyzing a set of mortgage-backed securities finds that its WALA is relatively short, indicating that most loans in the pool are newly issued, potentially facing higher prepayment risk.

Common Issues

Common issues include: 1. Can WALA accurately predict the future performance of a loan pool? The answer is that WALA provides historical data and cannot directly predict future performance. 2. What is the relationship between WALA and the risk of a loan pool? WALA can help assess the prepayment risk of a loan pool but should not be used as the sole indicator for risk assessment.

Suggested for You

Interest Rate Future

An interest rate future is a futures contract with an underlying instrument that pays interest. The contract is an agreement between the buyer and seller for the future delivery of any interest-bearing asset.The interest rate futures contract allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.

Historic Pricing

Historic pricing is a unit pricing method used to calculate the value of an asset using the last valuation point calculated. Historic pricing is used when the value of an asset does not update in real time.

Rational Behavior

Rational behavior refers to a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual. The assumption of rational behavior implies that people would rather take actions that benefit them versus actions that are neutral or harm them. Most classical economic theories are based on the assumption that all individuals taking part in an activity are behaving rationally.

Discrete Distribution

A Discrete Distribution, also known as a Discrete Probability Distribution, refers to a probability distribution in statistics and probability theory where the random variable can take on a finite or countably infinite number of specific values. Common examples of discrete distributions include the binomial distribution, Poisson distribution, and geometric distribution. In a discrete distribution, each possible value has an associated probability, and the sum of these probabilities is equal to 1. Discrete distributions are widely used in finance, insurance, engineering, and other fields to describe and analyze the probabilities of discrete events. For instance, the number of times a stock price changes, the number of insurance claims, and similar discrete occurrences can be modeled and analyzed using discrete distributions.

White Elephant

A white elephant is something whose cost of upkeep is not in line with its usefulness or value. From an investmentperspective, the term refers to an asset, property, or business that is so expensive to operate and maintain that it is extremely difficult to actually make a profit from it.White elephants also tend to be illiquid assets, meaning they cannot be easily or quickly exchanged or sold for cash without the seller experiencing a significant loss.

Lehman Formula

The Lehman formula is a compensation formula developed by Lehman Brothers to determine the commission on investment banking or other business brokering services. Lehman Brothers developed the Lehman Formula, also known as the Lehman Scale Formula, in the 1960s while raising capital for corporate clients.