Loans Held for Sale

Loans held for sale consisted of the following:



At December 31,	2018		2017
	(in millions)
Commercial loans:
Real estate, including construction	$	27	$	115
Global banking	367		533
Total commercial	394		648
Consumer loans:
Residential mortgages	65		6
Other consumer	53		61
Total consumer	118		67
Total loans held for sale	$	512	$	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 $109 million and $471 million at December 31, 2018 and 2017, respectively. See Note 15, "Fair Value Option," for additional information. In addition, at December 31, 2017, commercial loans held for sale included $115 million of syndicated real estate loans that were sold during 2018.

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 $285 million and $62 million at December 31, 2018 and 2017, respectively. During 2018 and 2017, we reversed $5 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 (loss) as a result of an increase in fair value due to improved pricing compared with recording $35 million of lower of amortized cost or fair value adjustments associated with the write-down of commercial loans held for sale during 2016.

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 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 other income (loss) in the accompanying consolidated statement of income (loss).

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 reflected as a component of other income (loss) in the consolidated statement of income (loss), was a loss of $1 million during 2018.

During 2017, we completed the sale to third parties of the portfolio of residential mortgage loans that we previously purchased from HSBC Finance Corporation ("HSBC Finance") and transferred to held for sale during 2016. 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, during 2017 we completed the sale to a third party 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. 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 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.

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 December 31, 2018 and 2017, respectively. The valuation allowance on commercial loans held for sale was $3 million and $10 million at December 31, 2018 and 2017, respectively.