The 3 Most Important Questions that Guide Whole Loan Trades

By June 19, 2019Loan Trading
I think we can all agree that whole loan trading has MANY aspects to consider.
And you may be wondering:

“Where do I even start?”

Deciding to begin whole loan trading in the secondary market is a huge leap for any institution. Not only is whole loan trading tedious and cumbersome — it is also extremely complex and requires a lot of forethought.
Even with 15 years of experience in the banking industry and after strategically advising hundreds of financial institutions on balance sheet management, I’ve found that educating financial institutions on how and when to execute a whole loan trade still requires a lot of time and consideration.
Well, it turns out, there are three important questions to ask yourself when trying to figure out what the best option is for your institution. With these tips, you can be a part of the $2.5 billion worth of listings on the loan trading platform, Stackfolio.
To guide my thinking, particularly for whole loan purchases, I always look to answer 3 main questions:
  1. What do I need to earn from this trade for it to make financial sense for my institution?
  2. What type of diversification do I need to achieve in my portfolio from this trade?
  3. How much risk am I looking to absorb?
Why these three?
Each question gives me insight into not only the type of loans and transactions I should be looking at, but also the type of trading partner I’m looking to engage with and the level of complexity I can expect from this transaction. Here’s how I try to answer each question:
1

What do I need to earn from this trade for it to make financial sense for my institution?

More so than just looking at the expected yield from a trade, this question asks you to dig into the full monetary benefits a loan trade can bring. With so many institutions searching for loan growth in their communities, organic loan growth has become harder and more expensive to compete for. So, I would look to answer how much money will my bank or credit union save in origination costs from a whole loan trade. Will these loans bring me a larger opportunity to cross-sell new borrowers from new markets? Also, is there an opportunity to save in fees by trading online instead of using legacy brokers?


yield diagram Yield analysis tool for listings on the Stackfolio Marketplace
2

What type of diversification do I need to achieve in my portfolio from this trade?

While this is often a regulatory concern and question, determining the type of loans that I want to acquire is often a larger strategic initiative. For example, do I need to do a loan trade to achieve our residential loan growth targets for the quarter? Will I be able meet my CRA loan target needs without a whole loan trade? Or do I need to buy a niche loan pool to reduce concentration in core parts of my loan portfolio? Being able to answer these questions and knowing how to execute them efficiently is critical in engaging in a whole loan trade.


loan asset mix
Asset mix available for any Bank or Credit Union via their Stackfolio Scorecard
3

How much risk am I looking to absorb?

Like the answers around diversification, determining how much risk your institution is prepared to absorb is key when preparing to enter a whole loan trade. One key insight to get here is not just around what level of risk in the loan asset type, but the credit characteristics within those asset types as well. So are you only looking to acquire prime borrowers in unsecured consumer loans? Does a barbell distribution of risk work if it brings you the loan assets you need?


Distribution 
PlotDistribution plotting available on all listings on the Stackfolio Marketplace

While there will be more questions asked during a whole loan trade and many more answers needed to complete one, answering the big three questions above will ensure your institution can begin its journey of trading in the secondary market with confidence.

Omar Esposito serves as the Chief Revenue Officer of Stackfolio. His experience stems from over 15 years of whole loan trading, banking, and balance sheet management experience. At Stackfolio, Omar focuses on executing the company’s go-to-market strategy, scaling and aligning all revenue-generating aspects of the business, and building long-lasting client relationships with financial institutions across the country.
Stackfolio is the online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.
Omar Esposito

Author Omar Esposito

More posts by Omar Esposito

Leave a Reply