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Whole Loan: What It Is, How It Works, Example

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Updated November 07, 2023

What Is a Whole Loan?

A whole loan is a single loan issued to a borrower. Lenders of whole loans often sell them in the secondary market to institutional portfolio managers and agencies, such as Freddie Mac and Fannie Mae. Lenders sell their whole loans to reduce their risk. Rather than keeping a loan on their books for 15 or 30 years, by selling the whole loan to an institutional buyer, the lender can almost immediately recoup the principal.

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 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.

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 like 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 used 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 personal, corporate, and mortgage loans. Loan portfolio managers are 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 the 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 lender who services the loan, and the loan is removed from XYZ’s balance sheet.

What Are Examples of Whole Loans?

Whole loans are any loan made from one lender to one borrower. One of the most recognizable examples is a mortgage loan.

Does Anything Change for Me if My Loan Is Sold?

Mortgages are often bought and sold. In the event that your loan is sold, you'll receive notification that your loan is owned by a new company and may have to set up a new payment portal. The terms of your loan will not change.

Why Do Lenders Sell Whole Loans?

While closing whole loans generates fast cash, sometimes a lender would rather originate loans as opposed to servicing them. By selling them to another company, the original lender secures funds it can use to originate more loans.

The Bottom Line

Most loans are considered whole loans, but they may quickly be sold to larger companies and bundled into securities. For borrowers, the terms are the same. For lenders, whole loans represent a longer period of work for their profit.

Article Sources

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Fannie Mae. "Basics of Fannie Mae's Whole Loan Conduit," Page 3 of PDF.

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