What is a Whole Loan?

The term whole loan is used in the secondary mortgage market to discuss a loan which is sold in entirety rather than being pooled with other mortgages. When a buyer purchases a whole loan the buyer takes on the full obligation associated with the loan, rather than sharing the risks with other investors. Of course, the buyer also obtains all of the potential profits associated with the loan, including late fees, interest payments, and so forth.

Banks buy and sell loans all the time in a variety of ways. Products are packaged for the secondary mortgage market with different types of investment styles in mind so that the bank will be likely to find interested investors who will be prepared to make purchases. Banks in turn use the money they raise by selling loans to increase their capital, which can be used to make more loans and to engage in other financial activities. The debtor who owes money on the loan usually finds out about the sale after the fact.

In the case of a whole loan a seller usually buys a group of loans packaged together, rather than just one. In some cases, buyers will contract with the seller to have the seller handle administration of the loan. The buyer pays a fee for this service and does not have to worry about collecting loan payments and handling other administrative tasks related to the whole loans it holds. Sellers in turn get the money from the sale and can enjoy a steady profit on the loan as long as it is in service.

The risk of an investment in a whole loan varies depending on the credit rating associated with the loan, the economic climate, and other factors. Investors who buy whole loans usually try to distribute their risk so that the failure of some investments will not be catastrophic for the investor's entire portfolio.

By contrast, pass through securities and other types of secondary mortgage market products involve groups or pools of loans which people can buy into. Investors do not assume individual loans in the group in the same way that they do with a whole loan and their risk is instead spread out. Lenders trying to sell loans with a mix of credit ratings may use such products to create packages of mixed quality. Investors would not buy loans with poor ratings independently, but they might be willing to take on the risk if the pool also included loans with high credit ratings.