Weighted Average Maturity (WAM) is a critical metric for investors to consider when assessing the risk of a Mortgage-Backed Securities (MBS) portfolio. WAM measures the weighted average maturity of mortgages within the portfolio, meaning it takes into account the timeframe over which those mortgages are expected to be repaid.

Generally speaking, a longer weighted average maturity (WAM) indicates a higher interest rate and credit risk than MBSs with shorter WAMs. This is because the longer the maturity, the more exposure the MBS has to the potential for interest rate volatility and other risks associated with mortgages of longer maturities.

WAM is the inverse of another popular MBS duration metric, which is the Weighted Average Loan Age (WALA). The WALA is also a measure of average mortgage maturity, but it takes into account the number of months since the loan origination date in addition to the remaining years until maturity.

When evaluating MBSs, investors must consider both the WAM and WALA measures to ensure they have an accurate grasp of the exposure they are taking on with the portfolio. They should recognize that higher WAMS can signal the presence of other risks, such as risk of default, that may not be easily identifiable in other metrics and should carefully review the entire MBS portfolio to assess these risks.

Evaluating the WAM and WALA measures of an MBS portfolio is an essential aspect of any sound investment decision. While the WAM generally indicates the risk of interest rate and credit volatility associated with the MBS, the WALA provides insight into the amount of time left on the mortgages within the portfolio, which can be used to make sure the mortgage loan terms are in line with the investor’s expectations. Ultimately, both measures should be measured carefully before investing in any MBS portfolio.