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LENDING ACTIVITIES
 12 Months Ended
Dec. 31, 2017
LENDING ACTIVITIES  
LENDING ACTIVITIES

7. Lending Activities

Mortgage and other loans receivable include commercial mortgages, residential mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, residential mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less allowance for credit losses and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.

Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to earnings using the interest method. Premiums and discounts on purchased residential mortgages are also amortized to income as an adjustment to earnings using the interest method.

Life insurance policy loans are carried at unpaid principal balances. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy.

The following table presents the composition of Mortgage and other loans receivable, net:

December 31,December 31,
(in millions)20172016
Commercial mortgages*$28,596$25,042
Residential mortgages5,3983,828
Life insurance policy loans2,2952,367
Commercial loans, other loans and notes receivable1,0562,300
Total mortgage and other loans receivable37,34533,537
Allowance for credit losses(322)(297)
Mortgage and other loans receivable, net$37,023$33,240

* Commercial mortgages primarily represent loans for offices, apartments and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 23 percent and 12 percent, respectively, at December 31, 2017, and 24 percent and 12 percent, respectively, at December 31, 2016).

Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due. Nonperforming mortgages were not significant for all periods presented.

Credit Quality of Commercial Mortgages

The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:

Debt Service Coverage Ratios(a)
(in millions)>1.20X1.00X - 1.20X<1.00XTotal
December 31, 2017
Loan-to-Value Ratios(b)
Less than 65%$18,000$1,525$351$19,876
65% to 75%6,0381931846,415
76% to 80%56940-609
Greater than 80%1,416206741,696
Total commercial mortgages$26,023$1,964$609$28,596
December 31, 2016
Loan-to-Value Ratios(b)
Less than 65%$13,998$1,694$232$15,924
65% to 75%5,946575626,583
76% to 80%1,246174471,467
Greater than 80%4713922051,068
Total commercial mortgages$21,661$2,835$546$25,042

(a) The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 2.1X and 1.9X at December 31, 2017 and 2016, respectively.

(b) The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 57 percent and 58 percent at December 31, 2017, and 2016, respectively.

The following table presents the credit quality performance indicators for commercial mortgages:

NumberPercent
December 31, 2017ofClassof
(dollars in millions)LoansApartmentsOfficesRetailIndustrialHotelOthersTotal(c)Total $
Credit Quality Performance
Indicator:
In good standing778$8,163$8,585$5,338$2,023$2,373$1,960$28,44299%
Restructured(a)5-11523-16-1541
90 days or less delinquent---------
>90 days delinquent or in
process of foreclosure---------
Total(b)783$8,163$8,700$5,361$2,023$2,389$1,960$28,596100%
Allowance for credit losses:
Specific-31-1-5-%
General729437615182421
Total allowance for credit losses$72$97$38$6$16$18$2471%
December 31, 2016
(dollars in millions)
Credit Quality Performance
Indicator:
In good standing784$6,005$7,830$5,179$1,898$2,373$1,589$24,87499%
Restructured(a)4-13418-16-1681
90 days or less delinquent---------
>90 days delinquent or in
process of foreclosure---------
Total(b)788$6,005$7,964$5,197$1,898$2,389$1,589$25,042100%
Allowance for credit losses:
Specific$-$3$1$6$1$-$11-%
General357241713151831
Total allowance for credit losses$35$75$42$13$14$15$1941%

(a) Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see below.

(b) Does not reflect allowance for credit losses.

(c) Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.

Methodology Used to Estimate the Allowance for Credit Losses

Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is typically determined using the present value of cash flows or the loan’s observable market price. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on statistical models primarily driven by past due status, debt service coverage, loan-to-value ratio, property type and location, loan term, profile of the borrower and of the major property tenants, and loan seasoning. When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance.

Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired loans is generally recorded as a reduction of the current carrying amount of the loan. Accrual of interest income is generally resumed when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and the ongoing required contractual payments have been made for an appropriate period.

A significant majority of commercial mortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.

The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:

201720162015
Years Ended December 31,CommercialOtherCommercialOtherCommercialOther
(in millions)MortgagesLoansTotalMortgagesLoansTotalMortgagesLoansTotal
Allowance, beginning of year$194$103$297$171$137$308$159$112$271
Loans charged off(22)(3)(25)(13)(2)(15)(23)(6)(29)
Recoveries of loans previously
charged off-1111-11415
Net charge-offs(22)(2)(24)(2)(2)(4)(19)(5)(24)
Provision for loan losses75(26)4925(32)(7)312758
Other-------33
Allowance, end of year$ 247 *$75$322$ 194 *$103$297$ 171 *$137$308

* Of the total allowance at the end of the year, $5 million, $11 million and $24 million relates to individually assessed credit losses on $82 million, $280 million and $507 million of commercial mortgages as of December 31, 2017, 2016 and 2015, respectively.

Troubled Debt Restructurings

We modify loans to optimize their returns and improve their collectability, among other things. When we undertake such a modification with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower’s current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower’s forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower’s inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal or interest forgiveness, payment deferrals and easing of loan covenants.

During the 12 month period ended December 31, 2017, loans with a carrying value of $237 million were modified in troubled debt restructurings. Loans that had been modified in troubled debt restructurings during the 12 month period ended December 31, 2016 have been fully paid off.