Whole Loan

Definition

A whole loan is an individual mortgage sold in its entirety, as opposed to being a part of a pooling process where multiple mortgage loans are gathered and sold as mortgage-backed securities. This term is pertinent within the secondary mortgage market, which relates to the trade of previously issued financial instruments.

Examples

Direct Purchase: An investment firm buys a whole loan directly from a lender. The firm now holds the entire mortgage and will receive all payments made by the borrower.
Loan Sale: A bank sells an individual residential mortgage it originated to another financial institution, such as a credit union or a specialty mortgage investor.
Retention: A mortgage lender originator retains the whole loan on its balance sheet rather than selling it into the secondary market.

Frequently Asked Questions

What is the difference between a whole loan and a mortgage-backed security?

A whole loan is an individual, original mortgage, while a mortgage-backed security (MBS) is an asset-backed security that is secured by a collection, or pool, of mortgages. Investors in MBS receive pass-through payments from all mortgage payments made by homeowners within the pool.

Why would an investor choose to invest in whole loans instead of mortgage-backed securities?

Investing in whole loans allows for direct ownership and complete control over the individual mortgage loan, including flexibility in management and potential modifications. It also may offer a more significant return for bearing higher credit risk specific to the individual borrower.

What is the secondary mortgage market, and how does it relate to whole loans?

The secondary mortgage market is where lenders sell mortgages to investors, enhancing liquidity and freeing up capital to originate more loans. Whole loans are a type of asset sold in this market, maintaining their original form without being pooled with other mortgages.

Are whole loans riskier than pooled loans like mortgage-backed securities?

Whole loans can be riskier as they do not benefit from risk diversification across multiple loans. The investor is exposed to the credit risk of a single borrower rather than a pool of borrowers.

How are whole loans priced in the market?

Whole loans are priced based on various factors, including the interest rate, the borrower’s creditworthiness, loan-to-value ratio, and prevailing market conditions.

Mortgage-Backed Security (MBS): An asset-backed security secured by a collection of mortgages that entitles the investor to receive a share of the cash flows generated by the homes’ mortgages.
Secondary Mortgage Market: The market where existing mortgage loans and securities are sold to investors.
Pass-Through Security: A type of MBS in which the collected funds are passed through from borrowers to investors directly.
Loan Participation: A loan where multiple lenders share in the funding, reducing the risk for any single lender.

Online References

Suggested Books

Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques by Frank J. Fabozzi
The Handbook of Mortgage-Backed Securities by Frank J. Fabozzi
Mortgage Markets Worldwide by Danny Busch and Guido Ferrarini

Fundamentals of Whole Loan: Finance Basics Quiz

### What is a whole loan? - [x] An individual mortgage sold in its entirety. - [ ] A pooled set of mortgages. - [ ] An investment-backed security. - [ ] A corporate debt instrument. > **Explanation:** A whole loan is an individual mortgage loan sold entirely, differing from a pooled set of mortgages or investment-backed security. ### What kind of security is a whole loan classified under? - [x] Individual direct mortgage investment. - [ ] Pass-through security. - [ ] Derivative security. - [ ] Collective investment scheme. > **Explanation:** A whole loan is classified as an individual direct mortgage investment, not a pass-through or derivative security. ### Where is a whole loan typically sold? - [ ] Primary mortgage market. - [ ] Stock market. - [x] Secondary mortgage market. - [ ] Bond market. > **Explanation:** Whole loans are usually sold in the secondary mortgage market, where existing securities and mortgages are traded. ### Why might an investor prefer whole loans to mortgage-backed securities? - [x] For greater control and potential higher returns. - [ ] For immediate liquidity. - [ ] For minimal credit risk exposure. - [ ] For tax benefits. > **Explanation:** Investors might prefer whole loans due to the greater control they offer and the potential for higher returns by managing individual borrower risk. ### Which aspect predominantly affects a whole loan's pricing? - [ ] Market capitalization. - [ ] Daily trading volume. - [x] Borrower's creditworthiness and loan-to-value ratio. - [ ] Government regulations. > **Explanation:** A whole loan’s price is mainly influenced by the borrower's creditworthiness and loan-to-value ratio. ### What is the risk profile of whole loans compared to MBS? - [x] Higher due to focus on individual borrower’s credit risk. - [ ] Lower due to diversification. - [ ] Equivalent as both are backed by mortgages. - [ ] Negligible once sold in secondary markets. > **Explanation:** Whole loans have a higher risk profile due to exposure to the credit risk of an individual borrower without the benefit of diversification found in MBS. ### What is another term frequently associated with a pooled set of mortgages? - [x] Mortgage-Backed Security. - [ ] Whole Loan. - [ ] Equity Loan. - [ ] Direct Investment. > **Explanation:** Mortgage-Backed Security is associated with pooled sets of mortgages, not whole loans. ### Which is NOT a characteristic of a whole loan? - [ ] Original mortgage loan. - [ ] Sold in secondary markets. - [ ] Pass-through payment structure. - [x] Pool of multiple loans. > **Explanation:** Whole loans are original mortgage loans, sold in secondary markets but do not involve a pass-through payment structure or pooling of loans. ### Who typically sells whole loans? - [ ] Borrower. - [ ] Investors. - [x] Original lenders or mortgage issuers. - [ ] Government agencies. > **Explanation:** Original lenders or mortgage issuers typically sell whole loans to investors in the secondary mortgage market. ### What market condition might inflate the price of whole loans? - [x] High demand for residential mortgages. - [ ] Increasing default rates. - [ ] Rising interest rates on federal loans. - [ ] Greater availability of subprime mortgages. > **Explanation:** High demand for residential mortgages can drive up the price of whole loans due to competition among investors.

Thank you for exploring the comprehensive aspects of whole loans within the secondary mortgage market and participating in our detailed quiz! Continue to expand your understanding of financial instruments for informed investment decisions.