Receivables Held for Sale

Real Estate Secured Receivables Real estate secured receivables held for sale which are carried at the lower of amortized cost or fair value totaled $1,097 million and $860 million at March 31, 2015 and December 31, 2014, respectively.

As discussed in prior filings, during the second quarter of 2013, we adopted a formal program to initiate sale activities for first lien real estate secured receivables in our held for investment portfolio when a receivable meets pre-determined criteria and is written down to the lower of amortized cost or fair value of the collateral less cost to sell in accordance with our existing charge-off policies (generally 180 days past due). During the three months ended March 31, 2015 and 2014, we transferred real estate secured receivables to held for sale with an unpaid principal balance of approximately $431 million and $439 million, respectively, at the time of transfer. The net realizable value (carrying value) of these receivables prior to transfer after considering the fair value of the property less cost to sell was approximately $311 million and $342 million for the three months ended March 31, 2015 and 2014, respectively. As we plan to sell these receivables to third party investors, fair value represents the price we believe a third party investor would pay to acquire the receivable portfolios. A third party investor would incorporate a number of assumptions in predicting future cash flows, such as differences in overall cost of capital assumptions, which may result in a lower estimate of fair value for the cash flows associated with the receivables. For the three months ended March 31, 2015, no initial lower of amortized cost or fair value adjustment was required for these receivables transferred to held for sale as the fair value of the receivables at the time of transfer exceeded the carrying value after consideration of credit loss reserves associated with these receivables. During the three months ended March 31, 2014 we recorded as a component of total other revenues in the consolidated statement of income, a lower of amortized cost or fair value adjustment of $60 million associated with the newly transferred loans, all of which was attributable to non-credit related factors as these receivables were already carried at the lower of amortized cost or fair value of the collateral less cost to sell.

Historically, receivables held for sale have been sold to investors or, if the foreclosure process is completed prior to sale, the underlying properties acquired in satisfaction of the receivables have been classified as real estate owned ("REO") and sold. As we continue to work with borrowers, we have also historically agreed to short sales whereby the property is sold by the borrower at a price which has been pre-negotiated with us and the borrower is released from further obligation. Accordingly, based on the projected timing of loan sales and the expected flow of foreclosure volume into REO or settled through a short sale, a portion of the real estate secured receivables classified as held for sale will ultimately become REO or settled through a short sale. As a result, a portion of the fair value adjustment on receivables held for sale may be reversed in earnings over time. This estimate of fair value is highly dependent upon the timing and size of future receivable sales as well as the volume and timelines associated with foreclosure activity. The following table summarizes the activity of real estate secured receivables either transferred to REO or the underlying collateral sold in a short sale during the three months ended March 31, 2015 and 2014.



Three Months Ended March 31,	2015		2014
	(in millions)
Carrying value of real estate secured receivables:
Transferred to REO after obtaining title to the underlying collateral	$	24	$	70
Underlying collateral sold in a short sale	11		11
Impact to lower of amortized cost or fair value adjustment previously recorded resulting from the transfer to REO or short sales:
Transferred to REO after obtaining title to the underlying collateral	—		4
Underlying collateral sold in a short sale	1		1

Receivable Held for Sale Activity During the Period The following table summarizes the activity in receivables held for sale during the three months ended March 31, 2015 and 2014:



	Receivables Held for Sale
	(in millions)
Three Months Ended March 31, 2015:
Real estate secured receivables held for sale at beginning of period	$	860
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	(17		)
Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO	(35		)
Change in real estate secured receivable balance, including collections	(7		)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽²⁾	296
Real estate secured receivables held for sale at end of period⁽³⁾	$	1,097
Three Months Ended March 31, 2014:
Real estate secured receivables held for sale at beginning of period	$	2,047
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	171
Carrying value of real estate secured receivables held for sale settled through short sale or transfer to REO	(81		)
Change in real estate secured receivable balance, including collections	29
Transfer of real estate secured receivables into held for investment at the lower of amortized cost or fair value⁽¹⁾	(8		)
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽²⁾	262
Real estate secured receivables held for sale at end of period⁽³⁾	$	2,420


⁽¹⁾	During the three months ended March 31, 2014, we identified a small number of receivables held for sale which did not meet our criteria to be classified as held for sale. As a result we transferred these receivables to held for investment at the lower of amortized cost or fair value.

⁽²⁾

For the three months ended March 31, 2015, no initial lower of amortized cost or fair value adjustment was required for the receivables transferred to held for sale as the fair value of these receivables at the time of transfer exceeded the carrying value after consideration of credit loss reserves associated with these receivables. The initial lower of amortized cost or fair value adjustment on receivables transferred into held for sale during the three months ended March 31, 2014, totaled $60 million.

⁽³⁾

The following table provides a rollforward of our valuation allowance for the three months ended March 31, 2015 and 2014. At March 31, 2015, the valuation allowance is zero as the fair value of the pool of receivables held for sale at March 31, 2015 exceeds the carrying value as these receivables are carried at the lower of amortized cost or fair value. See Note 13, "Fair Value Measurements," for a discussion of the factors impacting the fair value of these receivables.



Three Months Ended March 31,	2015			2014
	(in millions)
Balance at beginning of period	$	—		$	329
Initial valuation allowance for real estate secured receivables transferred to held for sale during the period	—			60
Increase in (release of) valuation allowance resulting from changes in fair value	17			(171		)
Valuation allowance on real estate secured receivables transferred to held for investment	—			(4		)
Change in valuation allowance for collections, charged-off, transferred to REO or short sale	(17		)	(49		)
Balance at end of period	$	—		$	165

The following table summarizes the components of the lower of amortized cost or fair value adjustment recorded in other revenues during the three months ended March 31, 2015 and 2014:



	Lower of Amortized Cost or Fair Value Adjustments Associated With
	Fair Value			REO		Short Sales		Total
	(in millions)
(Income)/Expense:
Three Months Ended March 31, 2015:
Initial lower of amortized cost or fair value adjustment	$	—		$	—	$	—	$	—
Subsequent to initial transfer to held for sale	16			—		1		17
Lower of amortized cost or fair value adjustment recorded through other revenues⁽¹⁾	$	16		$	—	$	1	$	17

Three Months Ended March 31, 2014:
Initial lower of amortized cost or fair value adjustment	$	60		$	—	$	—	$	60
Subsequent to initial transfer to held for sale	(176		)	4		1		(171		)
Lower of amortized cost or fair value adjustment recorded through other revenues⁽¹⁾	$	(116	)	$	4	$	1	$	(111	)


⁽¹⁾	During three months ended March 31, 2015 and 2014, no lower of amortized cost or fair value adjustment was recorded as a provision for credit losses.

During the three months ended March 31, 2015, we recorded $16 million of additional lower of amortized cost or fair value adjustment on receivables held for sale as a result of a change in the estimated pricing on a specific pool of loans currently being marketed.

During the three months ended March 31, 2014, we reversed $176 million of the lower of amortized cost or fair value adjustment previously recorded primarily due to an increase in the relative fair value of the real estate secured receivables held for sale as conditions in the housing industry showed improvement during the first quarter of 2014 due to modest improvements in property values as well as lower required market yields and increased investor demand for these types of receivables.

See Note 13, "Fair Value Measurements," for information concerning the fair value of receivables held for sale.