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Loans Held for Sale
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Jun. 30, 2011
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| Loans Held for Sale |
7. Loans
Held for Sale
Loans held for sale consisted of the following:
We originate and syndicate commercial loans in connection with
our participation in a number of leveraged acquisition finance
transactions. A substantial majority of these loans are
originated with the intent of selling them to unaffiliated third
parties and are classified as commercial loans held for sale at
June 30, 2011 and December 31, 2010. The fair value of
commercial loans held for sale under this program was
$456 million and $1.0 billion at June 30, 2011
and December 31, 2010, respectively, all of which are
recorded at fair value as we have elected to designate these
loans under fair value option. We also have provided foreign
currency denominated loans to third parties which are classified
as commercial loans held for sale and for which we also elected
to apply fair value option. The fair value of these commercial
loans under this program was $273 million at both
June 30, 2011 and December 31, 2010. See Note 11,
“Fair Value Option,” for additional information.
Residential mortgage loans held for sale include
sub-prime
residential mortgage loans with a fair value of
$229 million and $391 million at June 30, 2011
and December 31, 2010, respectively, which were acquired
from unaffiliated third parties and from HSBC Finance with the
intent of securitizing or selling the loans to third parties.
Also included in residential mortgage loans held for sale are
first mortgage loans originated and held for sale primarily to
various government sponsored enterprises.
Other consumer loans held for sale consist of student loans.
Excluding the commercial loans designated under fair value
option discussed above, loans held for sale are recorded at the
lower of cost or fair value. While the initial book value of
loans held for sale continued to exceed fair value at
June 30, 2011, we experienced a decrease in the valuation
allowance during 2011 due primarily to loan sales. The valuation
allowance on loans held for sale was $302 million and
$435 million at June 30, 2011 and December 31,
2010, respectively.
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 interest
rate and credit environment. Interest rate risk for residential
mortgage loans held for sale is partially mitigated through an
economic hedging program to offset changes in the fair value of
the mortgage loans held for sale. Trading related revenue
associated with this economic hedging program, which is included
in net interest income and residential mortgage banking revenue
(loss) in the consolidated statement of income, were gains of
$1 million and losses of $11 million during the three
and six months ended June 30, 2011, respectively
compared to losses of $10 million and $16 million
during the three and six months ended June 30, 2010,
respectively.
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