Loans Held for Sale

Loans held for sale consisted of the following:



	June 30, 2017		December 31, 2016
	(in millions)
Commercial loans:
Real estate, including construction	$	—	$	17
Global banking	620		827
Total commercial	620		844
Consumer loans:
Residential mortgages	78		890
Home equity mortgages	—		4
Other consumer	67		71
Total consumer	145		965
Total loans held for sale	$	765	$	1,809

Commercial Loans Commercial loans held for sale primarily consists of certain global banking loans that we have elected to designate under the fair value option which include 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 as well as loans that we purchase from the secondary market and hold as hedges against our exposure to certain total return swaps. The fair value of these loans totaled $389 million and $725 million at June 30, 2017 and December 31, 2016, respectively. See Note 9, "Fair Value Option," for additional information.

Commercial loans held for sale also includes certain loans that we no longer intend to hold for investment and transferred to held for sale which totaled $231 million and $102 million at June 30, 2017 and December 31, 2016, respectively. During the three and six months ended June 30, 2017, we reversed $2 million and $1 million, respectively, of the lower of amortized cost or fair value adjustment previously recorded on commercial loans held for sale as a component of other income (loss) in the consolidated statement of income (loss) as a result of an increase in fair value due to improved pricing compared with recording $4 million and $30 million of lower of amortized cost or fair value adjustments associated with the write-down of commercial loans held for sale during the three and six months ended June 30, 2016, respectively.

Consumer Loans As previously disclosed, during the first quarter of 2016, we determined we no longer have the intent to hold for investment certain residential mortgage loans which had been 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. As a result of this decision, during 2016, we transferred residential mortgage loans to held for sale with a total unpaid principal balance of approximately $568 million 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 $473 million, including related escrow advances. 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 reduction in the estimated pricing on specific pools of loans.

In March 2017, we completed the sale of these residential mortgage loans which had an unpaid principal balance of $364 million (aggregate carrying value of $276 million) at the time of sale to a third party and recognized a loss on sale of approximately $2 million, largely reflecting transaction costs. During the three months ended March 31, 2017, we reversed $5 million of the lower of amortized cost or fair value adjustment previously recorded on these loans as a component of other income (loss) in the consolidated statement of income (loss) as a result of an increase in fair value due to improved pricing.

In addition to the residential mortgage loans discussed above, during the third quarter of 2016, we determined we no longer have the intent to hold for investment a portfolio of residential mortgage loans that we previously purchased from HSBC Finance Corporation ("HSBC Finance"), along with any home equity mortgage balances associated with these loans. As a result of this decision, during the third quarter of 2016, we transferred residential mortgage and home equity mortgage loans to held for sale with a total unpaid principal balance of approximately $648 million 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, as applicable, was approximately $628 million, including accrued interest.

During the three and six months ended June 30, 2017, we sold portions of this portfolio of residential mortgage loans with an unpaid principal balance of $24 million (aggregate carrying value of $22 million) and $495 million (aggregate carrying value of $467 million), respectively, at the time of sale to third parties and recognized gains on sale of approximately $1 million and $44 million, respectively, including transaction costs. At June 30, 2017, the carrying amount of the remaining loans in this held for sale portfolio totaled $71 million. During the three and six months ended June 30, 2017, we reversed $3 million and $2 million of the lower of amortized cost or fair value adjustment previously recorded on this portfolio of loans as a component of other income (loss) in the consolidated statement of income (loss) as a result of an increase in fair value due to improved pricing. As we plan to sell the remaining loans to third party investors, fair value represents the price we believe a third party investor would pay to acquire the loans.

We also continue to 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 (expense) in the accompanying consolidated statement of income (loss). Residential mortgage loans held for sale also includes subprime residential mortgage loans with a fair value of $2 million and $3 million at June 30, 2017 and December 31, 2016, respectively, which were previously acquired from unaffiliated third parties and from 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 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 through other revenues. The valuation allowance on consumer loans held for sale was $7 million and $57 million at June 30, 2017 and December 31, 2016, respectively. The valuation allowance on commercial loans held for sale was $56 million and $55 million at June 30, 2017 and December 31, 2016, respectively.