Loans Held for Sale

Loans held for sale consisted of the following:



	September 30, 2018		December 31, 2017
	(in millions)
Commercial loans:
Real estate, including construction	$	24	$	115
Global banking	253		533
Total commercial	277		648
Consumer loans:
Residential mortgages	60		6
Other consumer	55		61
Total consumer	115		67
Total loans held for sale	$	392	$	715

Commercial Loans Commercial loans held for sale primarily consists of certain 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 $242 million and $471 million at September 30, 2018 and December 31, 2017, respectively. See Note 10, "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 $35 million and $62 million at September 30, 2018 and December 31, 2017, respectively. During the three and nine months ended September 30, 2018, we reversed $2 million and $5 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 as a result of an increase in fair value due to improved pricing compared with reversing $4 million and $5 million during the three and nine months ended September 30, 2017, respectively.

Consumer Loans Prior to 2018 applications, we sold agency-eligible residential mortgage loan originations on a servicing released basis directly to PHH Mortgage Corporation ("PHH Mortgage"). Beginning with 2018 applications, PHH Mortgage is no longer obligated to purchase these loans from us directly upon origination and instead we currently intend to market these loans for sale to other third parties on a servicing retained basis. Gains and losses from the sale of these residential mortgage loans are reflected as a component of residential mortgage banking expense in the accompanying consolidated statement of income.

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

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. As discussed above, prior to 2018 applications, PHH Mortgage was obligated to purchase agency-eligible loans from us directly upon origination and, as such, we retained none of the risk of market changes in mortgage rates for these loans purchased by PHH Mortgage. Beginning with 2018 applications, we now market these loans for sale to other third parties. As a result, in 2018, we have reinstated an economic hedging program to offset changes in the fair value of these mortgage loans held for sale, from the time of commitment to sale, attributable to changes in market interest rates, partially mitigating the interest rate risk for these mortgage loans. Revenue associated with this economic hedging program, which is included in residential mortgage banking expense in the consolidated statement of income, was less than $1 million during both the three and nine months ended September 30, 2018.

Valuation Allowances Excluding the commercial loans designated under the 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 $4 million and $5 million at September 30, 2018 and December 31, 2017, respectively. The valuation allowance on commercial loans held for sale was $4 million and $10 million at September 30, 2018 and December 31, 2017, respectively.