The formulas
- Base allowance = pool amortized cost x annual loss rate x weighted-average remaining life
- Allowance = base allowance x (1 + qualitative adjustment)
How it works
The weighted-average remaining maturity (WARM) method turns an annual historical loss rate into a lifetime rate by multiplying by how long the pool has left to run. It needs few inputs, so it suits pools where detailed loan-level data is thin.
The annual rate should come from history on a comparable pool, and the remaining life should reflect expected prepayments as well as scheduled paydown. Adjust for current conditions and forecasts. The tool applies the arithmetic. The judgment is in the inputs.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
How is remaining life found?
Weight each scheduled principal payment by the time until it is due, then adjust for expected prepayments. Support it from the loan system.
Is the rate net of recoveries?
Use a consistent definition. Net charge-offs are common.
When is WARM weak?
For pools with a loss pattern that is not steady across the life, such as loans that default early.
Formulas on this page are the standard definitions.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.