Loans Held for Sale

Loans held for sale consisted of the following:



	March 31, 2013		December 31, 2012
	(in millions)
Commercial loans	$	58	$	481
Consumer loans:
Residential mortgages	277		472
Other consumer	64		65
Total consumer	341		537
Total loans held for sale	$	399	$	1,018

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at March 31, 2013 and December 31, 2012. The fair value of commercial loans held for sale under this program was $3 million and $465 million at March 31, 2013 and December 31, 2012, respectively. We have elected to designate all of the leveraged acquisition finance syndicated loans classified as held for sale at fair value under fair value option. See Note 12, “Fair Value Option,” for additional information.

Commercial loans held for sale also includes commercial real estate loans of $55 million and $16 million at March 31, 2013 and December 31, 2012, respectively, which were originated with the intent to sell to government sponsored enterprises.

Residential mortgage loans held for sale include first mortgage loans originated and held for sale primarily to various government sponsored enterprises. Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income. We retained the servicing rights in relation to the mortgages upon sale. Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $51 million and $52 million at March 31, 2013 and December 31, 2012, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. While the initial carrying amount of loans held for sale continued to exceed fair value at March 31, 2013, we experienced a decrease in the valuation allowance for consumer loans held for sale during 2013 due primarily to loan sales. The valuation allowance on consumer loans held for sale was $106 million and $114 million at March 31, 2013 and December 31, 2012, respectively.

Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the interest rate and credit environment. Interest rate risk for residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of the mortgage loans held for sale attributable to changes in market interest rates. Trading related revenue associated with this economic hedging program, which is included in net interest income and residential mortgage banking revenue in the consolidated statement of income, was a loss of less than $1 million during the three months ended March 31, 2013 compared to a gain of $7 million during the three months ended March 31, 2012.