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 are comprised of the following:



	June 30, 2016		December 31, 2015
	(in millions)
Real estate secured receivables held for sale:
First lien	$	3,696	$	8,110
Second lien	100		155
Total real estate secured receivables held for sale	$	3,796	$	8,265

We have been engaged in an on-going evaluation of our balance sheet taking into consideration our liquidity, capital and funding requirements as well as capital requirements of HSBC. During 2013, we established an on-going receivable sales program under which we intend to sell first lien real estate secured receivables held for investment meeting pre-determined criteria when they are 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 second quarter of 2015, we expanded our receivable sales program to also include substantially all of our first lien real estate secured receivables held for investment which have been either re-aged, modified or became subject to a bankruptcy filing since 2007, along with any second lien balances associated with these receivables. Under our expanded receivable sales program, we intend to sell substantially all real estate secured receivables when any of the above criteria are met.

During the three and six months ended June 30, 2016, we transferred real estate secured receivables to held for sale with a total unpaid principal balance (excluding accrued interest) of approximately $76 million and $358 million, respectively, at the time of transfer. The carrying value of these receivables prior to transfer after considering the fair value of the property less cost to sell, as applicable, was approximately $75 million and $342 million, respectively, including accrued interest. 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. During the three and six months ended June 30, 2016, we recorded an initial lower of amortized cost or fair value adjustment on receivables transferred to held for sale totaling $8 million and $25 million, respectively. Of this amount, $6 million and $19 million, respectively, was attributed to credit factors and recorded as a component of the provision for credit losses in the consolidated statement of income (loss) and $2 million and $6 million, respectively, was attributable to non-credit factors and recorded as a component of other revenues in the consolidated statement of income (loss).

During the three and six months ended June 30, 2016, we recorded $62 million and $130 million, respectively, of additional lower of amortized cost or fair value adjustment on receivables held for sale as a component of total other revenues in the consolidated statement of income (loss) related to changes in fair value as a result of establishing separate pools for receivables being marketed. Removing these receivables from their risk-based grouping impacts the valuation of the receivables remaining in the risked-based pools.

During the three and six months ended June 30, 2015, we transferred real estate secured receivables to held for sale with an unpaid principal balance (excluding accrued interest) of approximately $11,000 million and $11,431 million, respectively, at the time of transfer. The carrying value of these receivables prior to transfer after considering the fair value of the property less cost to sell was approximately $11,504 million and $11,815 million, respectively, including accrued interest. During the three and six months ended June 30, 2015, we recorded an initial lower of amortized cost or fair value adjustment of $220 million associated with the newly transferred loans all of which was attributed to credit factors and recorded as a component of the provision for credit losses in the consolidated statement of income (loss).

During the three and six months ended June 30, 2015, we recorded an additional lower of amortized cost or fair value of $53 million and $53 million, respectively, related to changes in fair value as a result of a change in the estimated pricing on specific pools of receivables.

We continue to make progress in our strategy to accelerate the run-off and sale of our real estate secured receivable portfolio. During the three and six months ended June 30, 2016, we completed sales of pools of real estate secured receivables with an unpaid principal balance of $4,722 million (aggregate carrying value of $4,219 million) at the time of sale to third-party investors. Aggregate cash consideration received totaled $4,667 million and we recorded a gain on sale of $423 million, including transaction costs, during the second quarter of 2016.

In July 2016, we completed the sale of a pool of real estate secured receivables with an unpaid principal balance of $930 million (aggregate carrying value of $707 million) at the time of sale to a third-party investor. Aggregate cash consideration received totaled $716 million. We currently expect that during the third quarter of 2016 we will record a loss of approximately $5 million, which includes transaction costs.

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 receivable 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 non-credit fair value adjustment on receivables held for sale may be reversed in earnings over time.

Receivable Held for Sale Activity During the Period The following table summarizes the activity in receivables held for sale during the three and six months ended June 30, 2016 and 2015:



	Receivables Held for Sale
	(in millions)
Three Months Ended June 30, 2016:
Real estate secured receivables held for sale at beginning of period	$	8,185
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	63
Real estate secured receivable sales	(4,219		)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	(54		)
Carrying value of real estate secured receivables held for sale transferred to REO	(20		)
Carrying value of real estate secured receivables held for sale settled through short sale	(10		)
Change in real estate secured receivable balance, including collections	(149		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	3,796

Six Months Ended June 30, 2016:
Real estate secured receivables held for sale at beginning of period	$	8,265
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	293
Real estate secured receivable sales	(4,219		)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	(105		)
Carrying value of real estate secured receivables held for sale transferred to REO	(34		)
Carrying value of real estate secured receivables held for sale settled through short sale	(18		)
Change in real estate secured receivable balance, including collections	(386		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	3,796

Three Months Ended June 30, 2015:
Real estate secured receivables held for sale at beginning of period	$	1,097
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	9,706
Real estate secured receivable sales	(301		)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	(54		)
Carrying value of real estate secured receivables held for sale transferred to REO	(22		)
Carrying value of real estate secured receivables held for sale settled through short sale	(15		)
Change in real estate secured receivable balance, including collections	(101		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	10,310

Six Months Ended June 30, 2015:
Real estate secured receivables held for sale at beginning of period	$	860
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	10,002
Real estate secured receivable sales	(301		)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	(71		)
Carrying value of real estate secured receivables held for sale transferred to REO	(46		)
Carrying value of real estate secured receivables held for sale settled through short sale	(26		)
Change in real estate secured receivable balance, including collections	(108		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	10,310


⁽¹⁾	The initial lower of amortized cost or fair value adjustment on receivables transferred into held for sale during the three and six months ended June 30, 2016 totaled $8 million and $25 million, respectively. During the three and six months ended June 30, 2015, there was $220 million initial lower of amortized cost or fair value adjustment on receivables transferred to held for sale.


⁽²⁾	Amount includes any accrued interest associated with the receivable.


⁽³⁾	Real estate secured receivables held for sale in the table above are presented net of the valuation allowance.

The following table provides a rollforward of our valuation allowance for the three and six months ended June 30, 2016 and 2015. See Note 12, "Fair Value Measurements," for a discussion of the factors impacting the fair value of these receivables.



	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
	(in millions)
Balance at beginning of period	$	86	$	—		$	13	$	—
Initial valuation allowance for real estate secured receivables transferred to held for sale during the period	2		—			6		—
Increase in valuation allowance resulting from changes in fair value	62		53			130		53
Change in valuation allowance for receivables sold	—		(21		)	—		(21		)
Change in valuation allowance for collections, charged-off, transferred to REO or short sale	—		1			1		1
Balance at end of period	$	150	$	33		$	150	$	33

The following table summarizes the components of the lower of amortized cost or fair value adjustment during the three and six months ended June 30, 2016 and 2015:



	Lower of Amortized Cost or Fair Value Adjustments Associated With
(Income)/Expense	Fair Value		Settlement (Including Short Sales)			Total
	(in millions)
Three Months Ended June 30, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	6	$	—		$	6
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	2		—			2
Subsequent to initial transfer to held for sale	62		(8		)	54
Lower of amortized cost or fair value adjustment recorded through other revenues	64		(8		)	56
Lower of amortized cost or fair value adjustment	$	70	$	(8	)	$	62
Three Months Ended June 30, 2015:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	220	$	—		$	220
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	—		—			—
Subsequent to initial transfer to held for sale	53		1			54
Lower of amortized cost or fair value adjustment recorded through other revenues	53		1			54
Lower of amortized cost or fair value adjustment	$	273	$	1		$	274
Six Months Ended June 30, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	19	$	—		$	19
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	6		—			6
Subsequent to initial transfer to held for sale	130		(25		)	105
Lower of amortized cost or fair value adjustment recorded through other revenues	136		(25		)	111
Lower of amortized cost or fair value adjustment	$	155	$	(25	)	$	130
Six Months Ended June 30, 2015:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	220	$	—		$	220
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	—		—			—
Subsequent to initial transfer to held for sale	53		18			71
Lower of amortized cost or fair value adjustment recorded through other revenues	53		18			71
Lower of amortized cost or fair value adjustment	$	273	$	18		$	291


⁽¹⁾	Represents the portion of the initial lower of amortized cost or fair value adjustment attributable to credit factors which was recorded as provision for credit losses in the consolidated statement of income (loss) as there was no objective, verifiable evidence to indicate non-credit factors were associated with the decline in fair value.


⁽²⁾	Represents the portion of the initial lower of amortized cost or fair value adjustment attributable to non-credit factors which was recorded as a component of total other revenues in the consolidated statement income (loss) as it reflects the impact on value caused by current marketplace conditions including changes in interest rates.