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:



	September 30, 2016		December 31, 2015
	(in millions)
Real estate secured receivables held for sale:
First lien	$	9,079	$	8,110
Second lien	1,069		155
Total real estate secured receivables held for sale⁽¹⁾	$	10,148	$	8,265

⁽¹⁾

At September 30, 2016, receivables held for sale includes $790 million of closed-end real estate secured receivables which are part of a collateralized funding transaction. These receivables will be sold when they are contractually released as collateral under the public trust and become available for sale. See Note 11, “Variable Interest Entities,” for further discussion of our collateralized funding transactions.

As discussed in prior filings, since 2007 we have been engaged in an on-going evaluation of our operations as we seek to optimize our risk profile and cost structure as well as our liquidity, capital and funding requirements. As part of this on-going evaluation, in September 2016, we further expanded our receivable sales program to include all remaining real estate secured receivables classified as held for investment as we no longer have the intent to hold these receivables. As a result of this decision, we transferred receivables to held for sale with a carrying value of $7,814 million, including accrued interest, at the time of transfer and recorded an initial lower of amortized cost or fair value adjustment of approximately $541 million. All of the lower of amortized cost or fair value adjustment was attributed to credit factors and recorded as a component of the provision for credit losses. This decision further accelerates our run-off strategy and, as a result, during the third quarter of 2016, we recorded pre-tax expense of $31 million for severance and loan review costs. We will continue to incur loan review costs in future periods as we prepare these receivables for sale.

During the three and nine months ended September 30, 2016, we transferred real estate secured receivables to held for sale (including the expansion of the receivable sales program in September 2016) with a total unpaid principal balance (excluding accrued interest) of approximately $8,219 million and $8,577 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 $8,087 million and $8,429 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 nine months ended September 30, 2016, we recorded an initial lower of amortized cost or fair value adjustment on all receivables transferred to held for sale totaling $562 million and $587 million, respectively. Of this amount, $557 million and $576 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 $5 million and $11 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 nine months ended September 30, 2016, we recorded $15 million and $145 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 nine months ended September 30, 2015, we transferred real estate secured receivables to held for sale with an unpaid principal balance (excluding accrued interest) of approximately $280 million and $11,711 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 $284 million and $12,099 million, respectively, including accrued interest. During the three and nine months ended September 30, 2015, we recorded an initial lower of amortized cost or fair value adjustment of $12 million and $232 million, respectively, 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 nine months ended September 30, 2015, we recorded an additional lower of amortized cost or fair value of $84 million and $137 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 run-off and sell our real estate secured receivable portfolio. During the three and nine months ended September 30, 2016, we completed sales of receivables with an unpaid principal balance of $930 million (aggregate carrying value of $714 million) and $5,652 million (aggregate carrying value of $4,933 million), respectively, at the time of sale to third-party investors. Aggregate cash consideration received totaled $715 million and $5,382 million during the three and nine months ended September 30, 2016, respectively. As a result, we recorded a loss on sale of $5 million, including transactions costs, during the three months ended September 30, 2016 and a gain on sale of $418 million, including transaction costs, during the year-to-date period.

In October 2016, we completed the sale of a pool of real estate secured receivables with an unpaid principal balance of $892 million (aggregate carrying value of $757 million) at the time of sale to a third-party investor. Aggregate cash consideration received totaled $761 million. We currently expect that during the fourth quarter of 2016 we will record a loss on this transaction 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 the property is subsequently 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 recorded on these receivables may be reversed in earnings when they become REO or settle through a short sale.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in millions)
Real estate secured receivables held for sale at beginning of period	$	3,796		$	10,310		$	8,265		$	860
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	7,281			248			7,574			10,250
Real estate secured receivable sales	(714		)	(107		)	(4,933		)	(408		)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale	(3		)	(83		)	(108		)	(154		)
Carrying value of real estate secured receivables held for sale transferred to REO	(11		)	(25		)	(45		)	(71		)
Carrying value of real estate secured receivables held for sale settled through short sale	(8		)	(15		)	(26		)	(41		)
Change in real estate secured receivable balance, including collections	(193		)	(287		)	(579		)	(395		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	10,148		$	10,041		$	10,148		$	10,041

⁽¹⁾

The initial lower of amortized cost or fair value adjustment on receivables transferred into held for sale during the three and nine months ended September 30, 2016 totaled $562 million and $587 million, respectively. During the three and nine months ended September 30, 2015, the initial lower of amortized cost or fair value adjustment on receivables transferred to held for sale was $12 million and $232 million, respectively.


⁽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 nine months ended September 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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in millions)
Balance at beginning of period	$	150		$	33		$	13		$	—
Initial valuation allowance for real estate secured receivables transferred to held for sale during the period	5			—			11			—
Increase in valuation allowance resulting from changes in fair value	15			84			145			137
Change in valuation allowance for receivables sold	(81		)	(33		)	(81		)	(54		)
Change in valuation allowance for collections, charged-off, transferred to REO or short sale	(1		)	—			—			1
Balance at end of period	$	88		$	84		$	88		$	84

The following table summarizes the components of the lower of amortized cost or fair value adjustment during the three and nine months ended September 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 September 30, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	557	$	—		$	557
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	5		—			5
Subsequent to initial transfer to held for sale	15		(12		)	3
Lower of amortized cost or fair value adjustment recorded through other revenues	20		(12		)	8
Total lower of amortized cost or fair value adjustment	$	577	$	(12	)	$	565
Three Months Ended September 30, 2015:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	12	$	—		$	12
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	—		—			—
Subsequent to initial transfer to held for sale	84		(1		)	83
Lower of amortized cost or fair value adjustment recorded through other revenues	84		(1		)	83
Total lower of amortized cost or fair value adjustment	$	96	$	(1	)	$	95
Nine Months Ended September 30, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	576	$	—		$	576
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	11		—			11
Subsequent to initial transfer to held for sale	145		(37		)	108
Lower of amortized cost or fair value adjustment recorded through other revenues	156		(37		)	119
Total lower of amortized cost or fair value adjustment	$	732	$	(37	)	$	695
Nine Months Ended September 30, 2015:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽¹⁾	$	232	$	—		$	232
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽²⁾	—		—			—
Subsequent to initial transfer to held for sale	137		17			154
Lower of amortized cost or fair value adjustment recorded through other revenues	137		17			154
Total lower of amortized cost or fair value adjustment	$	369	$	17		$	386


⁽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).


⁽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.