What Is Weighted Average Loan Age (WALA)?
Let me explain what Weighted Average Loan Age, or WALA, really is. It's a metric that calculates the average age of the loans within a pool of mortgage-backed securities, or MBS. I weight this average based on the dollar amount of each loan relative to the total pool, and it can use either the remaining principal balance or the nominal value of the loan.
Key Takeaways
- Weighted average loan age (WALA) is a measure of the maturity of the mortgages in a mortgage-backed security (MBS).
- WALA is dollar-weighted based on mortgage size and time left until it matures (usually in months).
- WALA is computed as the mathematical inverse of weighted average maturity (WAM), a more common estimation of MBS profitability.
How Weighted Average Loan Age Works
You use Weighted Average Loan Age to estimate how long it will take for a pool of mortgage-backed securities to get repaid, and this measure changes over time because some mortgages pay off faster than others. Think of a mortgage-backed security as something that positions the bank as an intermediary between homebuyers and investors. The bank issues mortgages to customers, then sells them at a discount to bundle into an MBS. When they do this, the bank books the sale as a gain on its balance sheet and doesn't lose out if the buyer defaults later.
As an investor buying an MBS, you're basically lending money to those homebuyers. You can trade MBS through a broker, and the minimum investment depends on the issuer. To calculate WALA, I multiply the initial nominal value of each mortgage in the pool by the months since origination. You use WALA and similar maturity measures to assess profit potential and prepayment risk. Prepayment risk comes from principal returning early, like when someone refinances or sells their house and pays off the mortgage. That means future interest on that principal won't get paid, so investors miss out on those payments.
Weighted Average Loan Age vs. Weighted Average Maturity
Both Weighted Average Maturity (WAM) and WALA help you estimate if an MBS investment will be profitable, but WAM is the more widely used metric for maturity in MBS pools. WAM calculates the average time until securities in a debt portfolio mature, weighted by the dollar amount invested. Portfolios with higher WAM are more sensitive to interest rate shifts.
WALA is essentially the inverse of WAM. For WAM, you take the percentage value of each mortgage or debt instrument, multiply by the months or years to maturity, and sum them up to get the weighted average maturity of the portfolio.
