Citigroup to back rewriting mortgages

Giant lender Citigroup announced Thursday it would support an effort in Congress to rewrite bankruptcy laws to give struggling homeowners the ability to rewrite the terms of their mortgages to avoid foreclosure — the first major crack in the banking industry’s opposition to the idea.

Democratic lawmakers and consumer lobbies hailed the New York-based lender’s switch, saying it gave the drive to overhaul bankruptcy laws new political momentum and that the change might even be included in the massive economic stimulus package being sought by President-elect Barack Obama.

“We think what will happen is that other financial institutions will now follow suit,” said Sen. Richard J. Durbin, Illinois Democrat. “We think this can be enacted and be part of the stimulus package.”

“This breaks the dam,” added Sen. Charles E. Schumer, New York Democrat, who said his office had been in contact with other major mortgage lenders about the compromise foreclosure provision Citigroup is backing.

Banks and mortgage lenders have fiercely opposed the process, known as a “cramdown” in the industry’s inelegant jargon. The practice allows the homeowner and bankruptcy court judges to impose easier rate terms before foreclosure. The industry has said the change would result in higher interest rates and closing costs as banks try to make up the losses.

The Mortgage Bankers Association said Thursday it was evaluating the Citigroup announcement, but added its opposition to the cramdown legislation had not softened.

“We remain opposed to bankruptcy cramdown legislation because of the destabilizing effect it will have on an already turbulent mortgage market,” MBA President John A. Courson and Chairman David G. Kittle said in a joint statement. They said any deal should be limited to the riskiest “subprime mortgages” and that there should be a time limit on how long bankruptcy courts could have the power to modify them.

“This legislation would have a significant effect on the mortgage markets and we believe it ought to be subject to the normal legislative process, including hearings and markup,” they said.

Efforts to pass the bankruptcy overhaul have stalled in the Senate, with an effort in the previous Congress failing to garner 40 votes.

But Democratic lawmakers — and a number of top economic advisers to Mr. Obama — have expressed frustration that the government’s efforts to date to shore up Wall Street and the nation’s biggest banks have yet to make a major dent in the nation’s housing crisis.

The Congressional Budget Office in its forecast for fiscal 2009 projected Wednesday that foreclosure rates “are likely to remain high while house prices continue to fall and the economy remains in recession” in the coming year.

Even with the Bush administration moving to spend the $700 billion Wall Street bailout fund, it is estimated that more than 8 million U.S. homeowners — more than one in six — are at risk of foreclosure.

Under a quirk in bankruptcy laws, most forms of personal debt, including vacation homes and other property, can be restructured by a bankruptcy court judge. But a mortgage on a primary residence cannot.

With popular anger against banks rising, it was widely expected that the cramdown legislation will be a priority of the new Congress, where Democrats will enjoy expanded majorities in both chambers.

Mr. Durbin and Mr. Schumer said they were able to win Citigroup’s endorsement by softening some of the provisions in the previous bankruptcy overhaul bill.

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