What Is a Whole Loan?
Let me explain what a whole loan is—it's a banker's term for a single mortgage or other loan that's often bundled with similar loans and sold in the secondary debt market.
You should know that a whole loan is simply a single loan given to a borrower. As a lender, I might issue these and then sell them to institutional portfolio managers or agencies like Freddie Mac and Fannie Mae. This way, I reduce my risk. Instead of keeping the loan on my books for 15 or 30 years, selling it lets me get the principal back almost right away.
Key Takeaways
- A whole loan is a single loan issued to a borrower.
- Whole loan lenders may sell their whole loans on the secondary market to reduce their risk.
- Instead of holding a loan for 15 or 30 years, the lender can recoup the principal almost immediately by selling it to an institutional buyer, such as Freddie Mac or Fannie Mae.
Understanding Whole Loans
Whole loans get issued by lenders to borrowers for various reasons. I could issue a personal loan or a mortgage with terms set after underwriting. Typically, these loans stay on the lender's balance sheet, and the lender handles servicing.
Here's something important: Selling whole loans in the secondary market lets a lender generate cash to create more whole loans, which in turn brings in more cash from borrowers' closing costs.
How Do Lenders Use a Whole Loan?
Many lenders, including myself, choose to package and sell whole loans in the secondary market to promote trading and liquidity. Different buyers exist for various loan types in this market. The mortgage sector has a strong secondary market, with agencies like Fannie Mae buying whole loans.
Whole loans often go through securitization for packaging and sale. They can also trade individually via institutional groups. This secondary market is a fourth market used by institutional managers and dealers. As a lender, I work with these dealers to list loans for sale—personal, corporate, or mortgage ones. Loan portfolio managers buy actively here.
Lenders can also package loans into securitization deals, managed by investment banks that handle structuring and sales. I would group similar loans into portfolios with rated tranches for investors.
For residential and commercial mortgages, there's a solid secondary market via Freddie Mac and Fannie Mae, who buy securitized portfolios. These agencies set requirements that affect how lenders underwrite mortgages.
Example of Selling a Whole Loan
Suppose lender XYZ sells a whole loan to Freddie Mac. XYZ stops earning interest but gets cash from Freddie Mac to issue more loans. When closing those new loans, XYZ collects origination fees, points, and closing costs from borrowers. Plus, XYZ cuts its default risk by selling—the loan moves to Freddie Mac's servicing, off XYZ's balance sheet.
What Are Examples of Whole Loans?
Whole loans include any loan from one lender to one borrower. A common example is a mortgage loan.
Does Anything Change for Me if My Loan Is Sold?
Mortgages get bought and sold frequently. If your loan sells, you'll get notified of the new owner and might need a new payment setup. But your loan terms stay the same.
Why Do Lenders Sell Whole Loans?
Originating loans brings quick cash, but sometimes lenders prefer originating over servicing. By selling to another company, the original lender gets funds to originate more.
The Bottom Line
Most loans qualify as whole loans, but they can soon be sold to bigger firms and bundled into securities. For you as a borrower, terms don't change. For lenders, whole loans mean longer work for profits unless sold.
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