What Is a Whole Loan?
A whole loan is a single loan that a lender has issued to a borrower. Whole loan lenders commonly sell their whole loans in the secondary market to buyers such as institutional portfolio managers and agencies such as Freddie Mac and Fannie Mae. One reason lenders sell whole loans is to reduce their risk. Instead of holding a loan for 15 or 30 years and hoping that the borrower will repay the money, the lender can get the principal back almost immediately by selling it to an institutional buyer.
How a Whole Loan Works
Whole loans are issued by lenders to borrowers for multiple purposes. A lender may issue a personal loan or a mortgage loan to a borrower with specified terms determined by the credit issuer following the underwriting process. Generally, whole loans are held on a lender’s balance sheet, and the lender is responsible for servicing the loan.
[Important: Selling whole loans in the secondary market allows a lender to generate cash that it can use to make more whole loans, which generate more cash from closing costs paid by borrowers.]
How Do Lenders Use a Whole Loan?
Many lenders choose to package and sell their whole loans in the secondary market, which allows for active trading and market liquidity. Various buyers are available for different types of loans in the secondary market. The mortgage market has one of the most well-established whole loan secondary markets, with agencies Freddie Mac and Fannie Mae serving as whole loan buyers. Whole loans are often packaged and sold in the secondary market through a process called securitization. They may also be individually traded through institutional loan trading groups.
The whole loan secondary market is a type of fourth market that is utilized by institutional portfolio managers and facilitated by institutional dealers. Lenders work with institutional dealers to list their loans on the secondary market. Lenders can sell all types of loans, including personal loans, corporate loans and mortgage loans. Loan portfolio managers are typically the most active buyers within the whole loan secondary market.
Lenders also have the option to package and sell loans in a securitization deal. This type of deal is supported by an investment bank that manages the packaging, structuring and sales process of a securitization portfolio. Lenders will typically package loans with similar characteristics in a securitization portfolio with various tranches that are rated for investors.
Residential and commercial mortgage loans have a well-established secondary market through agency buyers Freddie Mac and Fannie Mae, which typically buy securitized loan portfolios from mortgage lenders. Freddie Mac and Fannie Mae have specific requirements for the types of loans they buy in the secondary market, which influences the underwriting of mortgage loans for lenders.
Example of Selling a Whole Loan
Suppose lender XYZ sells a whole loan to Freddie Mac. XYZ no longer earns interest on said loan, but it gains cash from Freddie Mac to make additional loans. When XYZ closes on those additional loans, it earns money from origination fees, points and other closing costs paid by borrowers. XYZ also reduces its default risk when selling the whole loan to Freddie Mac. It has essentially sold the loan to a new borrower who services the loan, and said loan is removed from XYZ’s balance sheet.