Whole Loan Trading

Whole loan trading is the market where mortgage loans are bought and sold between lenders and investors.

What happens when a loan can’t be sold through a traditional agency channel?

In Episode 9 of The AiCR Exchange, Joe Furlong sits down with Nick Dorn, who leads MIAC’s whole loan trading desk. Nick walks through how the non-agency loan market actually works, what drives pricing on scratch and dent and non-QM product, and how MIAC manages the sale and diligence process from first conversation to close.

What is whole loan trading?

Whole loan trading is the buying and selling of mortgage loans outside of agency channels. MIAC’s whole loan trading desk handles any trade that is not an agency trade. That includes seasoned performing loans held by banks and credit unions, jumbo mortgages, non-QM loans, scratch and dent loans, non-performing loans, early buyouts from Ginnie Mae servicers, and unsecured debt including personal loans and auto loans. Residential mortgage loans make up the majority of volume, but the desk has traded commercial loans, bridge loans, and fix-and-flip product as well.

What is a scratch and dent loan?

A scratch and dent loan is a mortgage that cannot be delivered to an agency due to a defect. Most mortgage bankers originate loans intending to sell them to Fannie Mae, Freddie Mac, or Ginnie Mae. When a defect surfaces and the agency kicks the loan back, the lender needs to move it because they originated it to sell, not to hold. Common defects include underwriting errors, documentation problems, disclosure timing issues, and early payment defaults where the borrower missed a payment within the first few months after origination. Investors buy these loans because, depending on the defect, they can represent solid value at the right price.

What do scratch and dent loans sell for?

Pricing on scratch and dent loans depends heavily on the nature of the defect. A high LTV loan that lost its mortgage insurance will sell at a discount regardless of other characteristics. A loan with a minor underwriting issue, where the AUS findings show refer instead of accept but the borrower has made six to twelve payments at a market rate coupon, may sell at or just below par. Getting into the mid to high nineties is considered strong execution for a scratch and dent pool. Premiums are possible but not typical. The goal for most sellers is to recover as much as possible and move the loan off the warehouse line.

What is a non-QM loan and why is investor demand strong?

Non-QM, or non-qualified mortgage, refers to loans that use alternative income documentation rather than the full documentation underwriting required for agency loans. Common non-QM products include bank statement loans that use deposit history to determine cash flow, P&L loans where a CPA-prepared profit and loss statement is used to qualify the borrower, and DSCR loans for investment properties where debt service coverage is calculated from actual or market rent rather than personal income. Non-QM loans typically require higher down payments than agency loans and are not as liquid since they cannot be sold directly to Fannie Mae or Freddie Mac. Investor appetite for non-QM remains strong. When MIAC puts out non-QM pools, they see a lot of bidders and competitive pricing. Nick attributes this to growing borrower demand for alternative qualification products and a persistent investor interest in yield.

How does MIAC manage a whole loan sale from start to finish?

MIAC operates as a broker on whole loan trades, meaning it does not take a principal position in the loans. The process starts with a conversation about what the seller is trying to accomplish. From there the seller provides a data tape, which MIAC analyzes to identify missing information investors will need to bid, flag any data errors, and review sample loan files to confirm documentation is in order. MIAC helps set pricing expectations and reviews the portfolio for assets that should be carved out.

Once the data is clean, MIAC prepares an offering memorandum summarizing the assets and sale terms, then runs an auction process to get best execution. After bids come in, MIAC provides the seller with a bid reconciliation showing all counterparty offers and any deal-specific stipulations. When a buyer is selected, MIAC quarterbacks the diligence process: keeping both parties on timeline, managing document delivery, coordinating third-party reviews, and helping resolve any issues that surface rather than letting them become stalemates. A typical sale takes roughly 45 days from initial conversation to close.

What market conditions are affecting whole loan trading right now?

Rate volatility has been a factor in recent months. The 10-year Treasury moved up roughly 60 basis points over a short period before beginning to retrace. Higher rates restrict new origination supply by reducing the pool of buyers who can afford a mortgage, which makes the market more competitive for the product that does exist. Investors are still motivated to buy and have been pricing aggressively on what comes to market.

Non-performing loan volume has picked up modestly, with more non-performing product coming through the desk in recent months than in the prior couple of years. Pricing on non-performing loans from the investor side has been strong. FHA delinquencies in particular have been rising as borrowers who purchased with high-rate loans face debt service pressure. Nick’s outlook for the rest of the year is continued steady flow of non-QM and non-performing product, with more and more competitive interest from investors in both.

Frequently Asked Questions About Whole Loan Trading

What is the difference between agency and non-agency loan sales?

Agency loan sales involve selling loans to Fannie Mae, Freddie Mac, or Ginnie Mae through standardized processes with defined underwriting criteria. Non-agency loan sales involve selling to private investors who set their own criteria and pricing. Non-agency trades are handled by MIAC’s whole loan trading desk and include scratch and dent, non-QM, non-performing, and seasoned performing loans that do not fit or have been rejected from an agency channel.

What is an early buyout in mortgage lending?

An early buyout, or EBO, is a Ginnie Mae non-performing loan that a servicer purchases back from the agency. Once a borrower goes delinquent on a Ginnie Mae loan, the servicer is required to advance payments to the investor. Servicers may buy the loan back from the pool to resolve the delinquency outside of the agency framework. EBOs are part of the non-performing loan market and are traded through MIAC’s whole loan desk.

How does a whole loan sale auction work?

MIAC runs a competitive auction process for loan sales. After preparing the data tape and offering memorandum, MIAC distributes the offering to qualified investors and collects bids. MIAC provides the seller with a bid reconciliation that shows all offers and counterparty-specific terms. The seller selects a buyer, and MIAC manages the diligence and closing process through to settlement.

What is MIAC’s whole loan trading desk?

MIAC’s whole loan trading desk handles non-agency loan transactions including scratch and dent, non-QM, non-performing, seasoned performing, and other debt products. The desk operates as a broker, working with both buyers and sellers on a transparent basis without taking a principal position in any transaction. Nick Dorn leads the desk and can be reached through MIAC’s website at miacanalytics.com or on LinkedIn.