What it means
Most people picture a loan as a contract between one borrower and one lender. When the lender sells that contract in full to someone else, the buyer has bought a whole loan.
This differs from a loan participation, where several lenders share one loan, and from securitisation, where many loans are bundled and sold as bonds. Whole loans are traded in a market between banks, funds and other institutions.
Sellers use it to free up capital, reduce exposure to a region or sector, or clean up their balance sheet. Buyers like it because they can inspect each loan, choose which ones to take and negotiate directly with the seller.
The price is usually quoted as a percentage of the loan's unpaid principal balance. A price of 100 means par, or full face value, while a price of 98.5 means the buyer pays 98.5 cents for each dollar of principal.
Price depends on the interest rate on the loan, the credit quality of the borrower, the value of any collateral and how long the loan is expected to last. Buyers carry out due diligence on each loan, meaning they review the loan file, the borrower's payment history and the security.
They also decide who will service the loan, which means collecting the payments and dealing with the borrower. The servicing rights may be sold with the loan or kept by the seller.
A buyer who holds whole loans carries the full credit and interest rate risk, so they need good systems for monitoring performance. Compared with holding a bond, there is usually less liquidity, because each loan must be sold individually.
Careful pricing is therefore important, as is a clear picture of the legal rights that pass to the buyer. Documentation passes with the loan.
The buyer receives the original note, the security documents and a record of the payment history, and a legal opinion may confirm that ownership has transferred properly. Gaps in this paperwork can delay or even undo a sale, so organised files are part of the loan's value.
In practice
Real-world examples.
Example
A regional bank sells $10,000,000 of residential mortgages to an investment fund. The bank receives cash it can lend again, and the fund takes over the right to the loan payments.
Example
A specialist lender sells a single $2,500,000 commercial property loan to an insurer. The insurer reviews the property valuation and tenant leases before agreeing to a price. It also asks the seller to confirm that no payments are overdue.
Example
An investor buys a portfolio of non-performing whole loans at a steep discount. It plans to work with borrowers to restructure the debts or take control of the collateral and recover cash. Because the price is steeply discounted, even a partial recovery can produce a good return.
Formula
Calculation
Purchase price = unpaid principal balance x (price quote / 100)
Suppose a bank sells a pool of whole mortgage loans with an unpaid principal balance of $10,000,000 at a price of 98.5. The buyer pays 10,000,000 x 0.985 = $9,850,000. The discount is 10,000,000 - 9,850,000 = $150,000, which compensates the buyer for risk and gives a yield above the stated interest rate on the loans.Case study
Seen in the real world.
Greystone Savings is an illustrative, fictional bank that held $50,000,000 of whole loans on commercial properties in one city. The risk committee worried about the concentration and asked the treasurer to sell part of the portfolio.
The treasurer sold $20,000,000 of loans to an insurance company at a price of 99.0, receiving 20,000,000 x 0.99 = $19,800,000. The bank gave up $200,000 of price in return for lower concentration and fresh lending capacity.
It used the cash to make new loans in different regions and sectors. The illustrative lesson is that selling whole loans can be an active tool for managing risk, but the price paid in discount should be weighed against the benefit. Greystone also kept the servicing on the loans it sold, which preserved its relationship with the borrowers and earned a small fee.
Watch out
Common mistakes.
- Confusing a whole loan with a loan participation, when a participation is a share in a loan and the original lender still holds the contract.
- Assuming a sale price near par means the loan is risk free, when the quote may reflect a high interest rate that compensates for risk.
- Skipping due diligence on individual loans, which exposes the buyer to missing documents and hidden problems.
Questions
People also ask.
Is a whole loan the same as a securitised loan?
No, a whole loan is held as a complete asset, while securitisation pools loans and sells bonds backed by them.
Who services a whole loan after it is sold?
It depends on the agreement, and the servicing may stay with the seller or move to the buyer or a specialist company.
Why do banks sell whole loans?
To free up capital, manage risk concentration, meet regulatory requirements or realise a profit.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related