Stop Trading!: The Key to Citigroup-Senate Loan Deal

Citigroup is set to endorse a new Senate bill, CNBC’s Matt Nesto reported Thursday, that would allow bankruptcy judges to alter mortgages in an effort to prevent foreclosures. Cramer said the move, as long as mortgage principals were reduced, could spark “a major turn in housing.”

Diana Olick, during Thursday's Stop Trading!, reported the bill’s three conditions:

1. The law applies only to loans that are issued up until the day this bill is passed. All loans, and not just subprime, are eligible.
2. Borrowers have to show they made a “good faith” attempt to work with the lender before considering this bankruptcy provision. Bankruptcy cannot be the first option, and borrowers have to prove it wasn’t.
3. Bankruptcy judges can strip away a lender’s credit or rights if they violated the Truth in Lending Act or other state and federal laws.

There had been pushback against such a law, largely from hedge funds that hold collateralized debt obligations backed by mortgages, Cramer said. Any restructuring via this law could lessen the value of those CDOs, so the hedge funds’ feelings are understandable. However, the law would be a big help to the banks who wrote these mortgages.

Cramer’s key concern was whether or not bankruptcy judges would have the power to reduce a loan’s principal. Interest-rate reductions are well and good, he said, but reducing the principal matters most.

“Without principal adjustment,” Cramer said, “it’s just all floss.”

The bill does allow judges to reduce the principal, CNBC's Erin Burnett reported.

Cramer mentioned that it was interesting Citigroup was at the center of Senate negotiations when there are other banks, namely Wells Fargo, with much more mortgage exposure.

Watch the video for Cramer’s take on President-Elect Obama’s green energy strategies. Cramer makes the call on Trinity, Quanta Services, Owens Corning and more.

Jim's charitable trust owns Quanta Services and Wells Fargo.

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