Loans Held for Sale

12 Months Ended

Dec. 31, 2011

Loans, Allowance for Credit Losses and Loans Held for Sale [Abstract]

Loans Held for sale

10.    Loans Held for Sale

Loans held for sale consisted of the following:

At December 31,	2011		2010
	(in millions)
Commercial loans	$	965	$	1,356
Consumer loans:
Residential mortgages		2,058		954
Credit cards receivables		416		-
Other consumer		231		80
Total consumer		2,705		1,034
Total loans held for sale	$	3,670	$	2,390

Included in loans held for sale at December 31, 2011 are $2.5 billion of loans that are being sold as part of our agreement to sell certain branches to First Niagara. Included in this amount are $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card receivables and $161 million of other consumer loans. Credit card, private label credit card and closed-end loans being sold to Capital One are included in Assets of discontinued operations on our balance sheet.

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at December 31, 2011 and 2010. The fair value of commercial loans held for sale under this program was $377 million and $1.0 billion at December 31, 2011 and 2010, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. We provided 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 December 31, 2010. As of December 31, 2011, there were none of these loans outstanding. See Note 18, “Fair Value Option,” for additional information.

In addition to the residential mortgage loans being sold to First Niagara discussed above, residential mortgage loans held for sale include subprime residential mortgage loans with a fair value of $181 million and $391 million at December 31, 2011 and 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.

In addition to routine sales to government sponsored enterprises upon origination, we sold subprime residential mortgage loans with a carrying amount of $229 million and $276 million in 2011 and 2010, respectively. We sold approximately $4.5 billion of prime adjustable and fixed rate residential mortgage loans in 2009 and recorded gain of $70 million. No such sales occurred in 2010. Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income (loss). We retained the servicing rights in relation to the mortgages upon sale.

During the first quarter of 2010, auto finance loans held for sale with a carrying value of $353 million were sold to HSBC Finance to facilitate completion of a loan sale to a third party. Also as discussed above, during the third quarter of 2010 auto finance loans with a carrying value of $1.2 billion were transferred to loans held for sale and subsequently sold to SC USA.

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. While the initial carrying amount of loans held for sale continued to exceed fair value at December 31, 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 $251 million and $435 million at December 31, 2011 and 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, was a loss of $11 million during 2011 and gains of $3 million and $15 million during 2010 and 2009, respectively.