Citigroup Inc.

The following table provides information about certain mortgage loans HFS carried at fair value at December 31, 2010 and, 2009:In millions of dollars December 31, 2010 December 31, 2009Carrying amount reported on the Consolidated Balance Sheet $7,230 $3,338Aggregate fair value in excess of unpaid principal balance 81 55Balance of non-accrual loans or loans more than 90 days past due 1 4Aggregate unpaid principal balance in excess of fair value for non-accrual loans or loans more than 90 days past due 1 3The changes in fair values of these mortgage loans are reported in Otherrevenue in the Company’s Consolidated Statement of Income. The changesin fair value during the years ended December 31, 2010 and 2009 due toinstrument-specific credit risk resulted in a loss of $1 million and $4 million,respectively. Related interest income continues to be measured based on thecontractual interest rates and reported as such in the Consolidated Statementof Income.Certain consolidated VIEsThe Company has elected the fair value option for all qualified assetsand liabilities of certain VIEs that were consolidated upon the adoptionof SFAS 167 on January 1, 2010, including certain private label mortgagesecuritizations, mutual fund deferred sales commissions and collateralizedloan obligation VIEs. The Company elected the fair value option for theseVIEs as the Company believes this method better reflects the economic risks,since substantially all of the Company’s retained interests in these entities arecarried at fair value.With respect to the consolidated mortgage VIEs, the Company determinedthe fair value for the mortgage loans and long-term debt utilizing internalvaluation techniques. The fair value of the long-term debt measured usinginternal valuation techniques is verified, where possible, to prices obtainedfrom independent vendors. Vendors compile prices from various sources andmay apply matrix pricing for similar securities when no price is observable.Security pricing associated with long-term debt that is verified is classifiedas Level 2 and non-verified debt is classified as Level 3. The fair value ofmortgage loans of each VIE is derived from the security pricing. Whensubstantially all of the long-term debt of a VIE is valued using Level 2 inputs,the corresponding mortgage loans are classified as Level 2. Otherwise, themortgage loans of a VIE are classified as Level 3.With respect to the consolidated mortgage VIEs for which the fairvalue option was elected, the mortgage loans are classified as Loans onCitigroup’s Consolidated Balance Sheet. The changes in fair value ofthe loans are reported as Other revenue in the Company’s ConsolidatedStatement of Income. Related interest revenue is measured based on thecontractual interest rates and reported as Interest revenue in the Company’sConsolidated Statement of Income. Information about these mortgage loansis included in the table below. The change in fair value of these loans due toinstrument-specific credit risk was a gain of $190 million for the year endedDecember 31, 2010.The debt issued by these consolidated VIEs is classified as long-termdebt on Citigroup’s Consolidated Balance Sheet. The changes in fair valuefor the majority of these liabilities are reported in Other revenue in theCompany’s Consolidated Statement of Income. Related interest expense ismeasured based on the contractual interest rates and reported as such in theConsolidated Statement of Income. The aggregate unpaid principal balanceof long-term debt of these consolidated VIEs exceeded the aggregate fairvalue by $857 million as of December 31, 2010.The following table provides information about Corporate and Consumerloans of consolidated VIEs carried at fair value:December 31, 2010In millions of dollarsCorporateloansConsumerloansCarrying amount reported on theConsolidated Balance Sheet $425 $1,718Aggregate unpaid principal balance inexcess of fair value 357 527Balance of non-accrual loans or loans morethan 90 days past due 45 133Aggregate unpaid principal balance in excessof fair value for non-accrual loans or loansmore than 90 days past due 43 139Mortgage servicing rightsThe Company accounts for mortgage servicing rights (MSRs) at fair value.Fair value for MSRs is determined using an option-adjusted spread valuationapproach. This approach consists of projecting servicing cash flows undermultiple interest-rate scenarios and discounting these cash flows usingrisk-adjusted rates. The model assumptions used in the valuation of MSRsinclude mortgage prepayment speeds and discount rates. The fair value ofMSRs is primarily affected by changes in prepayments that result from shiftsin mortgage interest rates. In managing this risk, the Company hedges asignificant portion of the values of its MSRs through the use of interest-ratederivative contracts, forward-purchase commitments of mortgage-backedsecurities, and purchased securities classified as trading. See Note 22 to theConsolidated Financial Statements for further discussions regarding theaccounting and reporting of MSRs.These MSRs, which totaled $4.554 billion and $6.530 billion as ofDecember 31, 2010 and 2009, respectively, are classified as Mortgageservicing rights on Citigroup’s Consolidated Balance Sheet. Changes in fairvalue of MSRs are recorded in Other revenue in the Company’s ConsolidatedStatement of Income.274