Whole Loan — Definition and Overview
A whole loan is a single loan made by one lender to one borrower. Common examples include mortgage, personal, and commercial loans. While a lender may hold a whole loan on its balance sheet and service it, many lenders sell whole loans to institutional buyers to free up capital and reduce risk.
How Whole Loans Work
- Underwriting: The lender evaluates the borrower and sets loan terms through the underwriting process.
- Servicing: The lender or a servicer collects payments, applies interest, and manages escrow and defaults while the loan is held.
- Sale: Lenders can sell whole loans individually or in pools to institutional buyers (for example, Fannie Mae or Freddie Mac) or to portfolio managers in the secondary market.
- Accounting: When a loan is sold, it is removed from the original lender’s balance sheet and the buyer assumes ownership (and usually the servicing, unless servicing is retained).
Why Lenders Sell Whole Loans
- Liquidity: Selling loans converts long-term receivables into immediate cash that can be used to originate new loans.
- Risk Management: Transfers credit and interest-rate risk to the buyer, reducing the seller’s exposure to defaults and long-term market shifts.
- Business Focus: Some lenders prefer to originate loans and earn fees rather than hold and service loans over many years.
The Secondary Market and Securitization
- Whole loans can be traded individually through institutional loan trading groups or aggregated into securitizations.
- Securitization: Loans with similar characteristics are pooled and divided into tranches with different risk/return profiles. Investment banks often structure and market these securities to investors.
- Market participants: Institutional portfolio managers, dealers, and agency buyers (e.g., Fannie Mae, Freddie Mac) are active in the whole loan market.
- Effect on underwriting: Agency purchase criteria influence lenders’ underwriting standards because only certain loan types qualify for purchase or securitization.
Example
If lender XYZ sells a mortgage to an agency buyer:
- XYZ receives cash immediately and removes the loan from its books.
- XYZ no longer earns interest from that mortgage but can use the proceeds to originate new loans and earn origination fees.
- The buyer assumes ownership and risk; servicing may be handled by the buyer or a designated servicer.
What Changes for Borrowers?
- Ownership and servicing may change, but the contractual terms of the loan (rate, balance, repayment schedule) do not change when the loan is sold.
- Borrowers will be notified of any change in loan ownership and may need to set up payments with a new servicer.
Bottom Line
A whole loan is simply a single loan between lender and borrower. For lenders, selling whole loans is a key tool for managing liquidity and risk and for supporting continued lending activity. For borrowers, a sale typically has no effect on loan terms, only on who owns or services the loan.