Loans Held for Sale

Loans held for sale consisted of the following:



	June 30, 2016		December 31, 2015
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	1,895
Global banking	901		200
Total commercial	901		2,095
Consumer loans:
Residential mortgages	391		11
Other consumer	77		79
Total consumer	468		90
Total loans held for sale	$	1,369	$	2,185

Construction and Other Real Estate During the second quarter of 2016, we sold $1,161 million of certain commercial real estate loans to a third party and recognized a loss on sale of approximately $3 million, including transaction costs. Upon completion of the sale, the remaining loans that were not sold, which had a carrying value of $612 million at June 30, 2016, were transferred back to held for investment as we now intend to hold these loans for the foreseeable future.

Global Banking During the first quarter of 2016, we transferred certain global banking loans with a carrying value of $1,088 million to held for sale, including a portion of our interest in a large secured bridge loan facility as well as certain other loans which were transferred as part of an effort to optimize returns on risk weighted assets. There was no lower of amortized cost or fair value adjustment recorded associated with these transfers as the transferred loans are performing. During the second quarter of 2016, the large secured bridge loan facility was repaid and replaced with a new term loan facility which had a carrying value of $763 million at June 30, 2016 that we intend to sell through loan participations and have elected to designate under the fair value option.

Global banking commercial loans held for sale includes certain loans which we have elected to designate under the fair value option, which includes commercial loans that we originate in connection with our participation in a number of syndicated credit facilities with the intent of selling them to unaffiliated third parties (including the $763 million new term loan facility discussed above) and commercial loans that we purchase from the secondary market and hold as hedges against our exposure to certain total return swaps. The fair value of loans held for sale under these programs totaled $867 million and $151 million at June 30, 2016 and December 31, 2015, respectively. See Note 11, "Fair Value Option," for additional information.

During the three and six months ended June 30, 2016, we recorded lower of amortized cost or fair value adjustments of $4 million and $30 million, respectively, associated with the write-down of global banking loans which were transferred to held for sale prior to 2016 as a component of other income (loss) in the consolidated statement of income (loss).

Residential Mortgages As previously disclosed, we continue to evaluate our overall operations as we seek to optimize our risk profile and cost efficiencies, as well as our liquidity, capital and funding requirements. As part of this on-going evaluation, as well as continued market demand for non-performing residential mortgage loans, during the first quarter of 2016 we decided we no longer have the intent to hold for investment certain residential mortgage loans and adopted a formal program to initiate sale activities for these residential mortgage loans when a loan meeting pre-determined criteria is written down to the lower of amortized cost or fair value of the collateral less cost to sell (generally 180 days past due) in accordance with our existing charge-off policies. These loans were largely originated by us prior to the implementation of our Premier strategy.

Under this program, during the three and six months ended June 30, 2016, we transferred residential mortgage loans to held for sale with a total unpaid principal balance of approximately $27 million and $524 million, respectively, at the time of transfer. The carrying value of these loans prior to transfer after considering the fair value of the property less costs to sell was approximately $25 million and $433 million, respectively, including related escrow advances. As we plan to sell these loans to third party investors, fair value represents the price we believe a third party investor would pay to acquire the loan portfolios. During the three and six months ended June 30, 2016, we recorded an initial lower of amortized cost or fair value adjustment of $5 million and $38 million, respectively, associated with newly transferred loans, all of which was attributed to non-credit factors and recorded as a component of other income (loss) in the consolidated statement of income (loss). During both the three and six months ended June 30, 2016, we recorded $6 million of additional lower of amortized cost or fair value adjustment on these loans held for sale as a component of other income (loss) in the consolidated statement of income (loss) as a result of a change in the estimated pricing on specific pools of loans.

In addition to the residential mortgage sales program discussed above, we sell all our agency eligible residential mortgage loan originations servicing released directly to PHH Mortgage Corporation ("PHH Mortgage"). Gains and losses from the sale of these residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income (loss). Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $3 million at both June 30, 2016 and December 31, 2015 which were previously acquired from unaffiliated third parties and from HSBC Finance Corporation ("HSBC Finance") with the intent of securitizing or selling the loans to third parties.

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 credit environment. PHH Mortgage is obligated to purchase agency eligible loans from us as of the earlier of when the customer locks the mortgage loan pricing or when the mortgage loan application is approved. As such, we retain none of the risk of market changes in mortgage rates for these loans purchased by PHH Mortgage.

Other Consumer Loans Other consumer loans held for sale reflects student loans which we no longer originate.

Valuation Allowances 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, with adjustments to fair value being recorded as a valuation allowance. The valuation allowance on consumer loans held for sale was $55 million and $13 million at June 30, 2016 and December 31, 2015, respectively. The valuation allowance on commercial loans held for sale was $50 million and $21 million at June 30, 2016 and December 31, 2015, respectively.