secondarymortgage.comWAC: Weighted Average Coupon
The weighted average interest rate of all loans in an MBS pool, calculated by balancing each loan’s rate against its outstanding principal balance.
WAC serves as the reference yield for an MBS before accounting for prepayments or credit losses—making it a baseline for comparing securities across issuers or vintages. It does not reflect actual investor returns, which are reduced by servicing fees, guarantee fees, and the impact of faster-than-expected principal repayments. Investors use WAC to gauge relative income potential, especially when reviewing newer versus seasoned pools.
A pool’s WAC influences its price sensitivity: higher WAC securities tend to trade at premiums in rising rate environments because their cash flows are more valuable relative to newer, higher-yielding debt. Conversely, when rates fall, high-WAC loans are more likely to be refinanced, increasing prepayment risk and compressing effective yield. The gap between WAC and current market yields signals expected premium or discount pricing.
Servicers disclose WAC in monthly reports and offering memoranda, allowing investors to validate pool composition against stated terms. A sudden drop in WAC post-issuance may indicate selective repayments (e.g., low-coupon loans refinancing first), signaling underwriting heterogeneity or changing borrower behavior. Tracking WAC trends helps differentiate structural performance from broader market shifts.
