Weighted Average Loan Age (WALA)
What Is Weighted Average Loan Age (WALA)?
The weighted average loan age (WALA) measures the average age of the loans in a pool of mortgage-backed securities (MBS). The loads depend on the dollar amount of each loan at every maturity with respect to the aggregate total of the pool and can be weighted on the leftover principal balance dollar figure or the nominal value of the loan.
How Weighted Average Loan Age Works
Weighted average loan age is utilized by investors of mortgage-backed securities to estimate what amount of time it will require for a pool of mortgage-backed securities to be repaid. The measure differs after some time due to the way that a few mortgages get compensated off quicker than others.
Basically, a mortgage-backed security transforms the bank into an intermediary between the homebuyer and the investment industry. A bank can grant mortgages to its customers and afterward sell them at a discount for inclusion in a MBS. The bank records the sale as a plus on its balance sheet and loses nothing if the homebuyer defaults at some point.
The investor who purchases a mortgage-backed security is basically lending money to home purchasers. A MBS can be bought and sold through a broker. The base investment fluctuates between issuers.
WALA is shown up at by duplicating the initial nominal value of every individual mortgage in the MBS pool by the number of months since the mortgage loan was originated. WALA and different measures of MBS maturity are utilized to estimate both profit potential and prepayment risk. Prepayment risk is the risk implied with the premature return of principal on a [fixed-income security](/fixed-incomesecurity, for example, when a mortgage is renegotiated or a house is sold and the mortgage paid off. At the point when principal is returned early, future interest payments won't be paid on that part of the principal, meaning investors in associated fixed-income securities won't receive interest paid on the principal.
Weighted Average Loan Age versus Weighted Average Maturity
Weighted average maturity (WAM) and WALA are both used to estimate the probability of an investment in a mortgage-backed security being profitable. Notwithstanding, WAM will in general be an all the more broadly involved measure for the maturity of pools of mortgage-backed securities. It measures the average time it takes for securities in a debt portfolio to mature, weighted in relation to the dollar amount invested in the portfolio. Portfolios with higher weighted average maturities are more sensitive to interest rate changes.
WALA is really calculated as the inverse of WAM: WAM registers the percentage value of each mortgage or debt instrument in the portfolio. The number of months or years until the bond's maturity is duplicated by every percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.
Features
- Weighted average loan age (WALA) is a measure of the maturity of the mortgages in a mortgage-backed security (MBS).
- WALA is dollar-weighted in view of mortgage size and time left until it matures (ordinarily in months).
- WALA is registered as the mathematical inverse of weighted average maturity (WAM), a more normal assessment of MBS profitability.
