What it means
When loans are bundled into a security, investors want to know whether the pool is brand new or well established. WALA answers that by measuring the average age of the loans, usually in months.
Weighting by balance means older, larger loans count for more than small recent ones. A single new $5,000,000 loan can pull the figure down noticeably in a pool of otherwise old and small loans.
Age matters because loan behaviour changes over time. Defaults tend to be low in the first months, climb as borrowers face real pressure, and then flatten, while prepayment speeds also change as pools season.
Analysts often read WALA alongside weighted average maturity, which measures the time remaining. Together the two figures show how far through its life the pool is.
A pool with a WALA of 27 months and a weighted average maturity of 33 months, for example, has a total expected life of about 60 months, which means it is a little under half way through. WALA changes as time passes, rising by roughly one month each month if no loans are added or removed.
Some pools also reset the figure through refinancing, so reports should be read with the pool's history in mind. Investors also compare WALA across different pools in the same market.
A pool of recent loans may offer higher yields because it has not yet shown how it behaves, while a seasoned pool offers more evidence at a lower return.
In practice
Real-world examples.
Example
An investor in mortgage-backed securities compares two pools. One has a WALA of 8 months and the other 48 months, so she expects the younger pool to behave less predictably and demands a higher yield for it. She also reviews whether the originator's lending standards changed during that short period.
Example
A credit analyst at a rating agency reviews a pool of student loans. A WALA of 36 months suggests that most of the early default risk has already played out, which supports the rating. The analyst still checks the loans that are less than one year old, because they have had little time to show any weakness.
Example
A finance team at an equipment lessor sells a pool of lease receivables to investors. It markets the pool using a WALA of 22 months and shows that arrears have been stable through that period. Buyers accept a lower yield than they would on a younger pool.
Formula
Calculation
WALA = sum of (loan balance x loan age in months) / sum of loan balances
Suppose a pool has three loans. Loan A is $500,000 and 12 months old, Loan B is $300,000 and 30 months old and Loan C is $200,000 and 60 months old, so total balances are $1,000,000. The weighted ages are 500,000 x 12 = 6,000,000, plus 300,000 x 30 = 9,000,000, plus 200,000 x 60 = 12,000,000, which gives 27,000,000. WALA = 27,000,000 / 1,000,000 = 27 months, compared with a simple average age of (12 + 30 + 60) / 3 = 34 months. A year later, with no loans added or removed, each loan is 12 months older, so WALA = 27 + 12 = 39 months.Case study
Seen in the real world.
Harbour Point Capital is an illustrative, fictional asset manager considering two pools of small business loans. Pool One had a WALA of 6 months and Pool Two had a WALA of 30 months, although both offered a similar coupon.
The analyst noted that Pool One had no track record through a full year of repayments, whereas Pool Two had already shown how its borrowers behaved. She recommended a smaller allocation to Pool One and required a higher yield to compensate for the unknown.
The illustrative lesson is that age is information, and two pools with the same headline interest rate can carry very different risks. Harbour Point now records the WALA of every pool in its investment committee papers, next to the coupon and the rating.
Watch out
Common mistakes.
- Using a simple average of loan ages instead of weighting by balance, which makes small old loans look more important than they are.
- Assuming an older pool is always safer, when the oldest loans may simply have survived because the weaker borrowers have already left.
- Confusing WALA with WAM, when one measures time elapsed and the other measures time remaining.
Questions
People also ask.
Is a higher WALA better?
Usually a higher WALA means more seasoning and more predictable behaviour, but it also means less remaining income, so the answer depends on the investor's goals. A long-term investor might prefer a younger pool with more income still to come.
How is WALA different from WAM?
WALA is the average age of the loans so far, while WAM is the average time left until they are repaid.
How often is WALA reported?
It is normally updated in the monthly reports that servicers and trustees provide to investors. Offering documents show the figure at the start of the deal, so changes can be tracked.
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