Weighted Average Remaining Term (WART) Definition

What Is the Weighted Common Remaining Time period (WART)?

Weighted Common Remaining Time period (WART) is a metric that captures the typical time to maturity of a portfolio of asset-backed securities (ABS). Also called the weighted common maturity, WART is commonly utilized in relation to mortgage-backed securities (MBS).

How the WART Works

The WART of a portfolio is a useful metric as a result of it helps traders perceive whether or not the time to maturity of the property throughout the portfolio is comparatively quick or lengthy. As an example, a MBS whose underlying mortgages are all very close to to the top of their phrases would have a low general WART, whereas one with mortgages which have solely not too long ago been initiated would have a better WART. Relying on their threat tolerances and sources of funding, some traders could choose being uncovered to investments with a specific time to maturity.

To calculate the WART of a portfolio, the investor first provides collectively the excellent stability of the underlying property and calculates the scale of every asset in relation to that complete. Then, the investor would weigh the remaining time to maturity of every asset through the use of every asset’s relative measurement. As a closing step, they might then add up the weighted occasions to maturity of every asset to reach at a WART for the whole portfolio.

WART is usually used within the disclosure supplies related to MBS, similar to these provided by Freddie Mac. On this context, WART serves to not evaluate two securities however to display the consequences of exterior forces similar to prepayment on the WART of the safety.  An investor contemplating a Freddie Mac safety would think about these WART calculations when evaluating it to another funding or when searching for to assemble a portfolio containing completely different WARTs.

Actual World Instance of a WART

As an instance, think about a MBS consisting of 4 mortgage loans, through which mortgage 1 has $150,000 of remaining principal due in 5 years, mortgage 2 has $200,000 due in 7 years, mortgage 3 has $50,000 due in 10 years, and mortgage 4 has $100,000 due in 20 years. The entire remaining worth of the loans is due to this fact $500,000. 

To calculate the WART, our subsequent step could be to calculate every mortgage’s share of the whole remaining worth. By dividing every mortgage’s remaining principal by the $500,000 complete, we’d discover that mortgage 1 represents 30% of the whole, mortgage 2 represents 40%, mortgage 3 represents 10%, and mortgage 4 represents 20%.

We are able to then calculate the weighted remaining time period of every mortgage by multiplying its time to maturity by its share of the $500,000 complete. In doing so, we discover the next weighted remaining phrases:

• Mortgage 1: 5 years x 30%  = 1.5 weighted years
• Mortgage 2: 7 years x 40%  = 2.8 weighted years
• Mortgage 3: 10 years x 10% = 1 weighted years
• Mortgage 4: 20 years x 20% = 4 weighted years

Our closing step is to easily add these weighted years collectively, to reach at a WART for the whole portfolio. On this case, our WART is: 1.5 + 2.8 + 1 + 4 = 9.3 years.