Citi Supports Plan to Adjust Mortgages in Bankruptcy

Citigroup became the first major bank to support a controversial plan to let bankruptcy judges alter mortgages in a effort to prevent more housing foreclosures.

AP

Until now, banks have been ardently opposed to the proposal, which key Democratic lawmakers hope to attach to President-elect Obama's economic stimulus legislation.

The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis.

Under the change, bankruptcy courts could alter the terms of mortgages, subject to certain conditions:

1) Only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment. 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.

The agreement with Citigroup to support the legislation was announced in Washington by Senators Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut.

Video: Citigroup accord is announced in Washington

The said the legal reform would help "millions of families save their homes."

Durbin, the Senate's second-ranking Democrat, has solicited the support of other large lenders and is urging them to endorse a plan that would let bankruptcy judges erase a share of mortgage debt.

Durbin tried last year to win passage of his proposal, but it failed in the face of opposition from lending and housing groups that warned giving bankruptcy judges power to erase mortgage debt would increase costs for future homeowners.

But as the housing crisis has worsened and the pace of foreclosures has quickened, opponents of the plan have been looking to cut a deal with Democrats, who control Congress and want more aggressive policies to help homeowners.

The National Association of Home Builders has dropped its opposition to the plan and the National Association of Realtors is debating whether to end its opposition.

Still, housing and lending industry leaders hope that they can soften the terms of "mortgage cram-down'' to limit its impact.

In an interview earlier this week, a top lobbyist for the mortgage industry vowed to keep such a plan out of the economic recovery bill.

"We think that's an unwise move that could delay the stimulus package," said Francis Creighton, the Mortgage Bankers Association's chief lobbyist.

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