8. Loans Held for Sale

Loans held for sale consisted of the following:


	September 30, 2012		December 31, 2011
	(in millions)
Commercial loans	$	443	$	965

Consumer loans:
Residential mortgages		548		2,058
Credit card receivables		-		416
Other consumer		65		231

Total consumer		613		2,705

Total loans held for sale	$	1,056	$	3,670

Included in loans held for sale at December 31, 2011 was $2.5 billion of loans being sold as part of our agreement to sell certain branches to First Niagara, including $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card receivables and $161 million of other consumer loans. Prior to sale, credit card, private label credit card and closed-end loans included in the sale to Capital One were 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 September 30, 2012 and December 31, 2011. The fair value of commercial loans held for sale under this program was $424 million and $377 million at September 30, 2012 and December 31, 2011, respectively. We have elected to designate all of the leveraged acquisition finance syndicated loans classified as held for sale at fair value under the fair value option. See Note 12, “Fair Value Option,” for additional information.

Commercial loans held for sale also includes commercial real estate loans of $19 million and $55 million at September 30, 2012 and December 31, 2011, respectively, which are originated with the intent to sell to government sponsored enterprises.

In addition to the residential mortgage loans sold to First Niagara discussed above, residential mortgage loans held for sale include subprime residential mortgage loans with a fair value of $94 million and $181 million at September 30, 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 lien 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 $64 million and $179 million in the nine months ended September 30, 2012 and 2011, respectively.

Other consumer loans held also includes student loans, which we no longer originate, of $65 million and $70 million at September 30, 2012 and December 31, 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 $169 million and $251 million at September 30, 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 in the consolidated statement of income (loss), were losses of $4 million during the three months ended September 30, 2012 and no gains or losses during the nine months ended September 30, 2012, compared to gains of $3 million and losses of $8 million during the three and nine months ended September 30, 2011, respectively.