Realty Check

Why Citigroup "Backs" Home Loan Bankruptcy Plan

Homes and dice
Gordon Banks

A while back I debated the pros and cons of a proposal to allow bankruptcy judges to modify troubled loans.

The President-elect included it as one of the four tenets of his housing plan during the campaign, so one can only surmise that it’s still high on his list.

On the first day of the new Congress, Sen. Dick Durbin (D-IL) introduced legislation, the Helping Families Save Their Homes in Bankruptcy Act. Remember, this was stripped out of housing legislation over the summer because there was so much banking industry opposition, and Bush hated it. Now it appears the momentum behind it is strong.

Citigroup just agreed to back the bill after long negotiation with its home state Sen. Charles Schumer. The word is that while the bankers oppose it, they know they can’t stop it, so they’re trying to limit the damage by limiting its scope; Citigroup is agreeing to the bill under the following conditions: 1) it applies to loans issued up until the day that the bill is passed, 2) borrowers have to show first that they made a good faith effort to approach their lender and get a workout, so bankruptcy was not their first option, and 3) bankruptcy judges can strip away lenders' creditor rights if they violated the Truth in Lending Act.

One other interesting connection: In January of last year, the Congressional Budget Office put out a report entitled “Options for Responding to Short-Term Economic Weakness” in January of last year.

In it, as I quote in my previous blog, the author supports the bankruptcy judge proposal, only qualifying that support to say that it would have the danger of clogging the court system. The author of the report was then CBO Director Peter Orszag. If that name sounds familiar, it's because he’s Obama’s new budget director.

Questions?  Comments?