What Is the Weighted Average Coupon (WAC)?

The weighted average coupon (WAC) is a measurement of the rate of return on a pool of mortgages that is sold to investors as a mortgage-backed security (MBS). 🔯The underlying mortgages are repaid at different lengths of time, so the WAC represents its return at the time it was issued and may differ from its WAC later.

Understanding a Weighted Average Coupon (WAC)

Banks routinely sell the mortgages they issue on a secondary mortgage market. The buyers are institutional investors such as hedge funds, and investment banks. These buyers package the mortgages into marketable securities that can be traded to investors on the open market as mortgage-backed securities (MBS).

MBS holders receive interest or coupon payments which are calculated as the weighted average of the underlying coupon of the mortgage loans backing the MBS.

Calculating the WAC

The weighted average coupon (WAC) is calculated by taking the gross of the i🦄nterest rates owed on the underlying mortgages of the MBS and weighting them according 🐼to the percentage of the security that each mortgage represents.

The WAC represents the average interest rate of different pools of mortgages with varying interest rates. In the weighted average calculation, the principal balance of eacꦯh underlying mortgage is used as the weighting factor.

To calculate the WAC, the coupon rate of each mortgage or MBS is multiplied by its remaining principal balance. The results are adde♎d together, and the sum total is divided by the remaining balance.

Another way to calculate the weighted average coupon is by taking the weights of each mortgage pool, multiplying by their respective coupon rates, and adding the result to get the WAC.

For example, suppose a MBS is composed of three different pools of mortgages with a principal balance of $11 million. The first mortgage bundle, or tranche, cons🍬ists of $4 million worth of mortgages that yield 7.5%. The second pool has a $5 million mortgage balance at a 5% rate. The third pool has $2 million worth of mortgages with a rate of 3.8%.

Using the first method outlined above:

WAC = [($4 million x 0.075) + ($5 million x 0.05) + ($2 million x 0.038)] / $11 million

WAC = ($300,000 + $250,000 + $76,000) / $11 million

WAC = $626,000/$11 million = 5.69%

Alternatively, the WAC an be computed by evaluating the weight of each of the mort🌊gage tranches first:

Pool 1 weight: $4 million / $11 million = 36.36%

Pool 2 weight: $5 million / $11 million = 45.45%

Pool 3 weight: $2 million / $11 million = 18.18%

Sum of the weights is 100%. The WAC is, therefore෴, calcul༺ated as:

WAC = (36.36 x 0.075) + (45.45 x 0.05) + (18.18 x 0.038)

WAC = 2.727 + 2.2725 + 0.6908 = 5.69%

The weighted average coupon rate may change over the life of the MBS, as various mortgage holders pay down their mortgages at different interest rat🌼es and on different timetables.

When an MSB Gets Risky

No mention of mortgage-backed securities is complete without a reference to the 2007-2008 financial cr�ꦑ�isis, which was blamed on them in large part.

Many of the MBS investments of that period were backed by mortgages issued during the nationwide housing bubble and, in many cases, issued to borrowers who could not afford to repay them. When the bubbl♓e burst, many of these borrowers were forced 🥃into default and the value of the securitization of these assets melted away.

They were, in fact, collateralized with 澳洲幸运5开奖号码历史查询:subprime loans.