Weighted Average Loan Age (WALA)
Candlefocus EditorTo calculate WALA, each loan's size and maturity period must first be determined. The loan size is determined by the amount of money borrowed, while the maturity is the length of time until the loan payment is due in full. Once those figures have been determined, they can then be multiplied against the percentage of the loan pool that they represent. For example, if a loan pool was composed of 15 loans of various sizes and lengths, each loan size and maturity value would be multiplied against the percentage of the loan pool that it represented.
Once the loans have been weighted, the total weight of the loan pool is calculated by taking the sum of the products of each loan size and maturity. This is followed by a multiplication of the total weight by the number of months until the maturity of each loan. The result is the WALA for the loan pool.
WALA is a useful tool for investors to use when considering investment opportunities in the mortgage-backed securities market. WALA provides investors with a better understanding of the risk associated with each security as well as how the pool of loans allocated in the MBS is expected to perform over time. Additionally, WALA can help investors understand when the loan in the MBS will reach maturity and allow them to better plan their investment portfolio accordingly.
In conclusion, Weighted Average Loan Age (WALA) is an important metric in analyzing mortgage-backed securities that gives investors an understanding of the risk associated with their investment as well as the maturity profile of the underlying loans. Knowing how the loans in a MBS are expected to perform over time helps investors make more informed and profitable decisions.