Loans Held for Sale

9 Months Ended

Sep. 30, 2021

Loans held for sale consisted of the following:


	September 30, 2021		December 31, 2020
	(in millions)
Commercial loans:
Real estate, including construction	$	1,123	$	10
Business and corporate banking	105		—
Global banking	63		119
Total commercial	1,291		129
Consumer loans:
Residential mortgages	2,449		208
Home equity mortgages	257		—
Credit cards	785		—
Other consumer	145		—
Total consumer	3,636		208
Total loans held for sale	$	4,927	$	337

Commercial Loans During the third quarter of 2021, we transferred $1,123 million of certain commercial real estate loans to held for sale as part of an effort to reduce exposure to this sector and improve returns on risk-weighted assets. There was no lower of amortized cost or fair value adjustment recorded upon transferring these loans to held for sale.

During the second quarter of 2021, as part of our Restructuring Plan we made the decision to exit our mass market retail banking business. See Note 3, "Branch Assets and Liabilities Held for Sale," in the accompanying consolidated financial statements for additional information. As a result, during the second quarter of 2021, we transferred our retail business banking loan portfolio to held for sale with a carrying value of $149 million. The lower of amortized cost or fair value adjustment upon transferring these loans to held for sale was not material. At September 30, 2021, the carrying value of these loans was $105 million.

Also included in commercial loans held for sale are certain loans that we have elected to designate under the fair value option which consists of 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 $63 million and $36 million at September 30, 2021 and December 31, 2020, respectively. See Note 11, "Fair Value Option," for additional information.

In addition, at December 31, 2020, commercial loans held for sale included certain other loans that we no longer intended to hold for investment and transferred to held for sale which totaled $93 million. There were none of these loans remaining at September 30, 2021. During the three and nine months ended September 30, 2021, we reversed $1 million and recorded $4 million, respectively, of lower of amortized cost or fair value adjustments associated with the write-down of these commercial loans held for sale as a component of other income (loss) in the consolidated statement of income (loss) compared with recording $16 million and $25 million of lower of amortized cost or fair value adjustments during the three and nine months ended September 30, 2020, respectively.

Consumer Loans As discussed above, during the second quarter of 2021, as part of our Restructuring Plan we made the decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio. As a result, during the second quarter of 2021, we transferred certain consumer loans to held for sale, including loans related to the branch disposal group, with a carrying value which collectively totaled $3,616 million, including $2,364 million of residential mortgages, $265 million of home equity mortgages, $829 million of credit cards and $158 million of other consumer loans. There was no lower of amortized cost or fair value adjustment recorded upon transferring these loans to held for sale. At September 30, 2021, the carrying value of these loans collectively totaled $3,584 million, including $2,397 million of residential mortgages (reflecting additional residential mortgage originations to mass market retail banking customers), $257 million of home equity mortgages, $785 million of credit cards and $145 million of other consumer loans.

Also included in residential mortgage loans held for sale are agency-eligible conforming residential mortgage loans which are originated and held for sale to third parties, currently 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 consolidated statement of income (loss).

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. Interest rate risk for residential mortgage loans which are originated and held for sale is partially mitigated through 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. 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 losses of $1 million and $2 million during the three and nine months ended September 30, 2021, respectively, compared with nil and a loss of $1 million during the three and nine months ended September 30, 2020, respectively.

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 $1 million and nil at September 30, 2021 and December 31, 2020, respectively. The valuation allowance on commercial loans held for sale was nil and $1 million at September 30, 2021 and December 31, 2020, respectively.