Loans Held for Sale

Loans held for sale consisted of the following:



At December 31,	2017		2016
	(in millions)
Commercial loans:
Real estate, including construction	$	115	$	17
Global banking	533		827
Total commercial	648		844
Consumer loans:
Residential mortgages	6		890
Home equity mortgages	—		4
Other consumer	61		71
Total consumer	67		965
Total loans held for sale	$	715	$	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 $471 million and $725 million at December 31, 2017 and 2016, respectively. See Note 15, "Fair Value Option," for additional information.

We also originate loans in commercial real estate with the intention of selling them to third parties which totaled $115 million and $17 million at December 31, 2017 and 2016, respectively. 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 $62 million and $102 million at December 31, 2017 and 2016, respectively. During 2017, we reversed $5 million 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 $35 million and $16 million of lower of amortized cost or fair value adjustments associated with the write-down of commercial loans held for sale during 2016 and 2015, respectively.

In 2016, we sold a portfolio of commercial real estate loans to a third party which totaled $1,161 million and recognized a loss on sale of approximately $3 million, including transaction costs. Upon completion of the sale, certain loans which had a carrying value of $612 million were transferred back to held for investment as we now intend to hold these loans for the foreseeable future.

Consumer Loans During 2017, we completed the sale of the portfolio of residential mortgage loans that we previously purchased from HSBC Finance and transferred to held for sale during 2016 to third parties. These residential mortgage loans had an unpaid principal balance of $581 million (aggregate carrying value of $536 million) at the time of sale and we recognized a gain on sale of approximately $50 million, including transaction costs. During 2017, we reversed $1 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.

During 2016, we transferred these residential mortgage loans and associated home equity mortgage loans, with a total unpaid principal balance of approximately $648 million at the time of transfer, to held for sale. 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 2016, we recorded an initial lower of cost or fair value adjustment of $11 million associated with the newly transferred loans, all of which was attributed to credit factors and recorded as a component of the provision for credit losses in the consolidated statement of income (loss). During 2016, we also recorded $4 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 addition to the residential mortgage loans discussed above, in March 2017 we completed the sale of certain residential mortgage loans which previously 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 and were transferred to held for sale during 2016 to a third party. These residential mortgage loans had an unpaid principal balance of $364 million (aggregate carrying value of $276 million) at the time of sale and we recognized a loss on sale of approximately $2 million, largely reflecting transaction costs. During the first quarter of 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.

During 2016, we transferred these residential mortgage loans, with a total unpaid principal balance of approximately $568 million at the time of transfer, to held for sale. 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 2016, we recorded an initial lower of amortized cost or fair value adjustment of $45 million associated with the 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 2016, we also recorded $8 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 subsequent to the initial transfer.

During 2017, we also continued to sell agency eligible residential mortgage loan originations on a servicing released basis directly to PHH Mortgage ("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). Beginning with January 2018 applications, PHH Mortgage is no longer obligated to purchase these loans from us directly upon origination and instead we now market these loans for sale to other third parties. Residential mortgage loans held for sale also includes subprime residential mortgage loans with a fair value of $2 million and $3 million at December 31, 2017 and 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 was 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 retained none of the risk of market changes in mortgage rates for these loans purchased by PHH Mortgage. As discussed above, beginning with January 2018 applications, we now market these loans for sale to other third parties. As a result, beginning in the first quarter of 2018, we have reinstated an economic hedging program to offset changes in the fair value of these mortgage loans held for sale attributable to changes in market interest rates, partially mitigating the interest rate risk for these mortgage loans held for sale.

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 $5 million and $57 million at December 31, 2017 and 2016, respectively. The valuation allowance on commercial loans held for sale was $10 million and $55 million at December 31, 2017 and 2016, respectively.