Receivables Held for Sale

As discussed in prior filings, we established a receivable sales program in 2013 and 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 transferred all remaining real estate secured receivables classified as held for investment to held for sale. As a result, at March 31, 2017 and December 31, 2016, our entire receivable portfolio is classified as held for sale. Receivables held for sale, which are carried at the lower of amortized cost or fair value, are comprised of the following:



	March 31, 2017		December 31, 2016
	(in millions)
Real estate secured receivables held for sale:
First lien	$	1,860	$	4,699
Second lien	51		975
Total real estate secured receivables held for sale⁽¹⁾⁽²⁾	$	1,911	$	5,674

⁽¹⁾

At March 31, 2017 and December 31, 2016, receivables held for sale includes $716 million and $750 million, respectively, 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 10, "Variable Interest Entities," for further discussion of our collateralized funding transactions.


⁽²⁾	At March 31, 2017 and December 31, 2016, contractually delinquent real estate secured receivables held for sale includes $203 million and $235 million, respectively, that are in the process of foreclosure.

During the three months ended March 31, 2017, we reversed $108 million of the lower of amortized cost or fair value adjustment recorded in prior periods related to changes in fair value which was reflected as a component of total other revenues in the consolidated statement of income (loss). This reversal of the lower of amortized cost or fair value adjustment recorded in prior periods reflects fair value changes resulting from a shift in mix in the pools of receivables held for sale due to identifying specific pools to be marketed during the first quarter of 2017 as well as improvements in the fair value of these receivables during the first quarter of 2017. We determine the fair value of receivables held for sale based on pools of receivables which are aggregated based on either similar risk characteristics or receivable pools being marketed.

During the three months ended March 31, 2016, we recorded an additional lower of amortized cost or fair value of $68 million 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. The following table summarizes receivables sold to third party investors during the three months ended March 31, 2017. There were no receivable sales during the three months ended March 31, 2016.



Three Months Ended March 31,	2017
	(in millions)
Unpaid principal balance at the time of sale	$	4,363

Aggregate cash consideration received	$	4,307
Aggregate carrying value at the time of sale	3,665
Transaction costs	25
Gain on sale of real estate secured receivables	$	617

The following table summarizes the activity in receivables held for sale during the three months ended March 31, 2017 and 2016:



Three Months Ended March 31,	2017			2016
	(in millions)
Real estate secured receivables held for sale at beginning of period	$	5,674		$	8,265
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	—			230
Real estate secured receivable sales	(3,665		)	—
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale subsequent to initial transfer to held for sale	113			(51		)
Carrying value of real estate secured receivables held for sale transferred to real estate owned ("REO")	(11		)	(14		)
Carrying value of real estate secured receivables held for sale settled through short sale	(8		)	(8		)
Change in real estate secured receivable balance, including collections	(192		)	(237		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	1,911		$	8,185


⁽¹⁾	During the three months ended March 31, 2016, the initial lower of amortized cost or fair value adjustment recorded on receivables transferred into held for sale totaled $17 million.


⁽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.

During the three months ended March 31, 2016, we transferred real estate secured receivables to held for sale with an unpaid principal balance (excluding accrued interest) of approximately $282 million 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 $267 million including accrued interest. Credit loss reserves associated with these receivables totaled $20 million at the time of transfer to held for sale. During the three months ended March 31, 2016, we recorded an initial lower of amortized cost or fair value adjustment of $17 million. Of this amount, $13 million was attributed to credit factors and recorded as a component of the provision for credit losses in the consolidated statement of income (loss) and $4 million was attributable to non-credit factors and recorded as a component of other revenues in the consolidated statement of income (loss).

The following table provides a rollforward of our valuation allowance for the three months ended March 31, 2017 and 2016. See Note 11, "Fair Value Measurements," for a discussion of the factors impacting the fair value of these receivables.



Three Months Ended March 31,	2017			2016
	(in millions)
Balance at beginning of period	$	174		$	13
Initial valuation allowance for real estate secured receivables transferred to held for sale during the period	—			4
Increase (decrease) in valuation allowance resulting from changes in fair value	(108		)	68
Change in valuation allowance for collections, charged-off, transferred to REO or short sale	(5		)	1
Balance at end of period	$	61		$	86

The following table summarizes the components of the lower of amortized cost or fair value adjustment during the three months ended March 31, 2017 and 2016:



	Lower of Amortized Cost or Fair Value Adjustments Associated With
(Income)/Expense	Fair Value			Settlement⁽¹⁾			Total
	(in millions)
Three Months Ended March 31, 2017:
Lower of amortized cost or fair value adjustment recorded through other revenues⁽²⁾	$	(108	)	$	(5	)	$	(113	)
Total lower of amortized cost or fair value adjustment	$	(108	)	$	(5	)	$	(113	)
Three Months Ended March 31, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽³⁾	$	13		$	—		$	13
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽⁴⁾	4			—			4
Subsequent to initial transfer to held for sale	68			(17		)	51
Lower of amortized cost or fair value adjustment recorded through other revenues	72			(17		)	55
Total lower of amortized cost or fair value adjustment	$	85		$	(17	)	$	68


⁽¹⁾	Reflects receivable settlements due to either receivable payoffs (including short sales) or transfers of receivables to REO and reflects either a reversal of the non-credit fair value adjustment previously recorded on these receivables or an additional lower of amortized cost or fair value adjustment required at the time of settlement.


⁽²⁾	As all of our receivables are classified as held for sale at March 31, 2017 and December 31, 2016, for the three months ended March 31, 2017 and for all future periods, any lower of amortized cost or fair value adjustments will relate to either changes in fair value subsequent to classification as held for sale or settlements of receivables as discussed above.


⁽³⁾	Represents the portion of the initial lower of amortized cost or fair value adjustment attributable to credit factors which are recorded as provision for credit losses in the consolidated statement of income (loss).


⁽⁴⁾	Represents the portion of the initial lower of amortized cost or fair value adjustment attributable to non-credit factors which are 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.