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PNC » Topics » Commercial Mortgage Loans Held For Sale

These excerpts taken from the PNC 10-Q filed May 11, 2009.

Commercial Mortgage Loans Held for Sale

We account for certain commercial mortgage loans held for sale at fair value under SFAS 159. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. It also eliminates the requirements of hedge accounting under SFAS 133. At origination, these loans were intended for securitization. As such, a synthetic securitization methodology was used historically to value the loans and the related unfunded commitments on an aggregate basis based upon current commercial mortgage-backed securities (CMBS) market structures and conditions. Due to inactivity in the CMBS securitization market in 2008 and 2009, we now determine the fair value of commercial mortgage loans held for sale under SFAS 159 by using a whole loan methodology. Fair value is determined using assumptions that management believes a market participant would use in pricing the loans. When available, valuation assumptions included observable inputs based on whole loan sales in the quarter. Adjustments are made to these assumptions to account when uncertainties exist, including market conditions, and liquidity. Based on the significance of unobservable inputs, we classified this portfolio as Level 3.

Commercial Mortgage Loans Held for Sale

We account for certain commercial mortgage loans held for sale at fair value under SFAS 159. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. It also eliminates the requirements of hedge accounting under SFAS 133. At origination, these loans were intended for securitization. As such, a synthetic securitization methodology was used historically to value the loans and the related unfunded commitments on an aggregate basis based upon current commercial mortgage-backed securities (CMBS) market structures and conditions. Due to inactivity in the CMBS securitization market in 2008 and 2009, we now determine the fair value of commercial mortgage loans held for sale under SFAS 159 by using a whole loan methodology. Fair value is determined using assumptions that management believes a market participant would use in pricing the loans. When available, valuation assumptions included observable inputs based on whole loan sales in the quarter. Adjustments are made to these assumptions to account when uncertainties exist, including market conditions, and liquidity. Based on the significance of unobservable inputs, we classified this portfolio as Level 3.   Credit risk was included as part of our valuation process for these loans by considering expected rates of return for market participants for similar loans in the marketplace.

At March 31, 2009, commercial mortgage loans held for sale for which the fair value option had been elected had an aggregate fair value of $1.2 billion and an aggregate outstanding principal balance of $1.5 billion. The comparable amounts at December 31, 2008 were $1.4 billion and $1.6 billion, respectively.

Interest income on these loans is recorded as earned and reported in the Consolidated Income Statement in the caption Interest Income—Other. Net losses resulting from changes in

fair value of these loans of $58 million in the first quarter of 2009 and $130 million for the first quarter of 2008 were recorded in other noninterest income. The impact on earnings of offsetting economic hedges is not reflected in these amounts. Changes in fair value due to instrument-specific credit risk for both the first quarter of 2009 and the first quarter of 2008 were not material. The changes in fair value of these loans were partially offset by changes in the fair value of the related financial derivatives that economically hedged these loans.

This excerpt taken from the PNC 10-K filed Mar 2, 2009.

Commercial Mortgage Loans Held For Sale

Effective January 1, 2008, we elected to account for commercial mortgage loans classified as held for sale and intended for securitization at fair value under the provisions of SFAS 159. Based on the significance of unobservable inputs, we classify this portfolio as Level 3. As such, a synthetic securitization methodology was used historically to value the loans and the related unfunded commitments on an aggregate basis based upon current commercial mortgage-backed securities (CMBS) market structures and conditions. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. It also eliminates the requirements of hedge accounting under SFAS 133. Due to the inactivity in the CMBS securitization market in 2008, we determined the fair value of commercial mortgage loans held for sale by using a whole loan valuation methodology. Based on the significance of unobservable inputs, we classified this portfolio as Level 3. Valuation assumptions included observable inputs based on whole loan sales, both observed in the market and actual sales from our portfolio and new loan origination spreads during the quarter. Adjustments were made to the assumptions to account for uncertainties, including market conditions, and liquidity. Credit risk was included as part of our valuation process for these loans by considering expected rates of return for market participants for similar loans in the marketplace.

PNC has not elected the fair value option for the remainder of our loans held for sale portfolio as the amounts are not significant and hedge accounting is not used for these loans.

At December 31, 2008, commercial mortgage loans held for sale for which the fair value option had been elected had an aggregate fair value of $1.4 billion and an aggregate outstanding principal balance of $1.6 billion.

Interest income on these loans is recorded as earned and reported in the Consolidated Income Statement in the caption Interest Income – Other. Net losses resulting from changes in fair value of these loans of $251 million for 2008 were recorded in other noninterest income. The impact on earnings of offsetting hedges is not reflected in these amounts. Changes in fair value due to instrument-specific credit risk for 2008 were not material. The changes in fair value of these loans were partially offset by changes in the fair value of the related financial derivatives that economically hedged these loans.

This excerpt taken from the PNC 10-Q filed Nov 6, 2008.

Commercial Mortgage Loans Held For Sale

Effective January 1, 2008, we elected to account for commercial mortgage loans classified as held for sale and intended for securitization at fair value under the provisions of SFAS 159. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. It also eliminates the requirements of hedge accounting under SFAS 133.

PNC has not elected the fair value option for the remainder of our loans held for sale portfolio as the amounts are not significant and hedge accounting is not used for these loans.

We determine the fair value of commercial mortgage loans held for sale by using a synthetic securitization methodology. Based on the significance of unobservable inputs, we classify this portfolio as Level 3. In light of the lack of securitization transactions in the market during the third quarter of 2008, valuations considered observable inputs based on whole loan sales, both observed in the market and actual sales from our portfolio during the quarter. Adjustments are made to the valuations to account for securitization uncertainties, including the composition of the portfolio, market conditions, and liquidity. Credit risk was included as part of our valuation process for these loans by considering expected rates of return for market participants for similar loans in the marketplace.

 

At September 30, 2008, commercial mortgage loans held for sale for which the fair value option had been elected had an aggregate fair value of $1.5 billion and an aggregate outstanding principal balance of $1.7 billion.

Interest income on these loans is recorded as earned and reported in the Consolidated Income Statement in the caption Interest Income – Other. Net losses resulting from changes in fair value of these loans of $243 million were recorded in other noninterest income for the first nine months of 2008, including $63 million during the third quarter of 2008. The impact on earnings of offsetting hedges is not reflected in these amounts. Changes in fair value due to instrument-specific credit risk for the first nine months and third quarter of 2008 were not material. The changes in fair value of these loans were partially offset by changes in the fair value of the related financial derivatives that economically hedged these loans.

This excerpt taken from the PNC 10-Q filed Aug 8, 2008.

Commercial Mortgage Loans Held For Sale

Effective January 1, 2008, we elected to account for certain commercial mortgage loans classified as held for sale and intended for securitization at fair value under the provisions of SFAS 159. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. It also eliminates the requirements of hedge accounting under SFAS 133.

PNC has not elected the fair value option for the remainder of our loans held for sale portfolio as the amounts are not significant and hedge accounting is not used for these loans.

We determine the fair value of commercial mortgage loans held for sale by using a synthetic securitization methodology. Observable inputs include the pricing of CMBS with similar collateral and using tranche interest rates from end of period yield curves. Management assumptions include subordination levels, CMBS bond spreads, and the value of the mortgage servicing rights. Adjustments are made to the valuations to account for securitization uncertainties, including the composition of the portfolio, market conditions, and liquidity.

At June 30, 2008, commercial mortgage loans held for sale for which the fair value option had been elected had an aggregate fair value of $1.6 billion and an aggregate outstanding principal balance of $1.7 billion.

 

Interest income on these loans is recorded as earned and reported in the Consolidated Income Statement in the caption Interest Income – Other. Net losses resulting from changes in fair value of these loans of $180 million were recorded in other noninterest income for the first six months of 2008, including $50 million during the second quarter of 2008. Changes in fair value due to instrument-specific credit risk for the first six months and second quarter of 2008 were not material. The changes in fair value of these loans were partially offset by changes in the fair value of the related financial derivatives that economically hedged these loans.

This excerpt taken from the PNC 10-Q filed May 12, 2008.

Commercial Mortgage Loans Held For Sale

Effective January 1, 2008, we elected to account for certain commercial mortgage loans classified as held for sale at fair value under the provisions of SFAS 159. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. It also eliminates the requirements of hedge accounting under SFAS 133.

PNC has not elected the fair value option for the remainder of our loans held for sale portfolio as the amounts are not significant and hedge accounting is not used for these loans.

We determine the fair value of commercial mortgage loans held for sale by using a synthetic securitization methodology. Observable inputs include the pricing of commercial mortgage-backed securities (“CMBS”) with similar collateral and using tranche interest rates from end of period yield curves. Management assumptions include subordination levels, CMBS bond spreads, and the value of the mortgage servicing rights. Adjustments are made to the valuations to account for securitization uncertainties, including the composition of the portfolio, market conditions, and liquidity.

At March 31, 2008, commercial mortgage loans held for sale for which the fair value option had been elected had an aggregate fair value of $2.1 billion and an aggregate outstanding principal balance of $2.2 billion. These amounts are included in loans held for sale on our Consolidated Balance Sheet.

Interest income on these loans is recorded as earned and reported in the Consolidated Income Statement in the caption

Interest Income – Loans. Net losses resulting from changes in fair value of these loans of $130 million were recorded in other noninterest income for the first three months of 2008. The change in fair value due to instrument-specific credit risk for the first three months of 2008 was not material. The changes in fair value of these loans were partially offset by changes in the fair value of the related financial derivatives that economically hedged these loans.

Upon our adoption of SFAS 159, origination fees/costs were recognized immediately within the appropriate line item in the Consolidated Income Statement and were not material. Previously, the net fees/costs were deferred as part of the carrying amount of the loans and recognized when the loans were sold.

EXCERPTS ON THIS PAGE:

10-Q (2 sections)
May 11, 2009
10-K
Mar 2, 2009
10-Q
Nov 6, 2008
10-Q
Aug 8, 2008
10-Q
May 12, 2008

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