Citi reaches deal with lawmakers on home loans
Friday, January 9, 2009
Citigroup, one of the nation's largest lenders, yesterday agreed to abandon its long-standing opposition to a plan to let bankruptcy judges modify the terms of mortgages, a move that could help millions of distressed borrowers stay in their homes, Senate Democratic leaders said yesterday.
The startling turnaround reflects the changed political and economic realities of the nation's deepening recession. Citigroup's approval puts pressure on other lenders, potentially opening a new and more aggressive chapter in the government's foreclosure-prevention effort by giving some of the most troubled borrowers leverage to force lenders to forgive debt.
Democratic lawmakers praised the agreement as a breakthrough and pledged to add the measure to the economic stimulus package moving through Congress.
Although the support of the banking industry would not guarantee passage, they said, it would go a long way toward breaking down opposition among Republicans and moderate Democrats who torpedoed the idea in the Senate last year. And lawmakers have yet to win the support of the Mortgage Bankers Association, a large lobbying group that has previously helped defeat the change.
"I want to commend Citigroup," said Sen. Richard J. Durbin (D-Ill.), the No. 2 Senate Democrat. "They showed real leadership on this, the first major financial institution to step forward and say, 'We understand this is a crisis in America.' The current efforts, as good as they may be, have not resulted in a dramatic change or reduction in the number of foreclosures."
Since 2007, Durbin has pressed legislation that would allow a bankruptcy judge to change the terms of a loan by reducing its interest rate, extending its length, or lowering the principal or loan balance, known as cramdown provisions. Currently, judges are allowed to modify the terms of a mortgage for a second or vacation home but not a primary residence.
Industry officials fought off the legislation, but the political calculations have changed. President-elect Barack Obama has said he supports the change, Democrats have a larger majority in Congress, and banks that have accepted federal aid are facing pressure to do more to help homeowners. Citigroup, for example, received about $45 billion in government assistance last year.
Also, the foreclosure crisis has worsened in the past year, and industry and government efforts to keep people in their homes have had little impact. If the legislation passes, it could secure the kind of concessions the government has not been able to get from the industry through various voluntary foreclosure-prevention efforts.
"This legislation would represent an important step forward," Vikram S. Pandit, Citigroup's chief executive, said yesterday in a letter to lawmakers. "Given today's exceptional economic environment, we support its swift passage."
Citigroup's involvement in negotiations was reported earlier this week by the Wall Street Journal.
Sen. Charles E. Schumer (D-N.Y.) said the breakthrough came last week, when Lewis B. Kaden, a Citigroup vice chairman, called him.
Citigroup's primary request, lawmakers said, was that only existing mortgage-holders would have access to the bankruptcy courts, not those who take out loans in the future. The bank also asked for provisions that would require homeowners to contact their lender at least 10 days before filing for bankruptcy and that would not permit a judge to void the mortgage debt for minor violations of the Truth in Lending Act, a consumer-protection law.