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 1in the weighted average calculation the principal balance of each mortgage is used as its weighting factor 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 2the weighted average coupon wac is calculated by taking the gross of the interest 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 each 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 added 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 3for 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 consists 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 millionwac 300 000 250 000 76 000 11 millionwac 626 000 11 million 5 69 alternatively the wac an be computed by evaluating the weight of each of the mortgage 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 calculated 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 rates and on different timetables no mention of mortgage backed securities is complete without a reference to the 2007 2008 financial crisis 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 bubble 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 subprime loans 4