Loans Held for Sale

3 Months Ended

Mar. 31, 2012

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

Loans Held for sale

8.    Loans Held for Sale

Loans held for sale consisted of the following:

	March 31, 2012		December 31, 2011
	(in millions)
Commercial loans	$	960	$	965
Consumer loans:
Residential mortgages		1,833		2,058
Credit card receivables		388		416
Other consumer		212		231
Total consumer		2,433		2,705
Total loans held for sale	$	3,393	$	3,670

Included in loans held for sale at March 31, 2012 and December 31, 2011 are $2.4 billion and $2.5 billion, respectively, of loans that are being sold as part of our agreement to sell certain branches to First Niagara. Included in this amount at March 31, 2012 are $497 million of commercial loans, $1.3 billion of residential mortgages, $388 million of credit card receivables and $144 million of other consumer loans. Included in this amount at December 31, 2011 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 included in the sale to Capital One are reflected 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 March 31, 2012 and December 31, 2011. The fair value of commercial loans held for sale under this program was $410 million and $377 million at March 31, 2012 and December 31, 2011, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. See Note 12, “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 $170 million and $181 million at March 31, 2012 and December 31, 2011, 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. 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.

In addition to routine sales to government sponsored enterprises upon origination, we sold subprime residential mortgage loans with a carrying amount of $4 million and $71 million in the three months ended March 31, 2012 and 2011, respectively.

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. The cumulative fair value adjustment on loans held for sale was $235 million and $251 million at March 31, 2012 and December 31, 2011, 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 $7 million and losses of $12 million during the three months ended March 31, 2012 and 2011, respectively.