Industry Recoils at Citi's Mortgage Deal
Saturday, January 10, 2009
Citigroup's support for a plan to let bankruptcy judges modify the terms of troubled mortgages and help borrowers avoid foreclosure left its banking industry counterparts on the defensive yesterday, insisting that the plan would do more harm than good.
After years of failed attempts, congressional supporters of the proposed law are cautiously optimistic about its prospects. And privately, banking executives acknowledge that some type of legislation is likely to pass, but they said they want to limit the loans eligible to be modified.
The major banking trade groups held a conference call with members after the Citigroup announcement Thursday, and all of the banks affirmed their opposition to the deal, according to a person on the call. Industry groups including the Financial Services Roundtable, the American Bankers Association, the Mortgage Bankers Association and the American Securitization Forum have all issued statements opposing the deal.
But, according to a congressional aide, two other large banks are actively negotiating with Sen. Richard J. Durbin (D-Ill.) to be included in the agreement.
This comes as more borrowers are being swept into a deepening foreclosure crisis despite government and industry efforts to help. Under the legislation being considered, a bankruptcy judge could 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. The law would apply only to existing loans and not to loans made after the law passed. Currently, judges are allowed to modify the terms of a mortgage for a second or vacation home but not a primary residence.
In its agreement with Senate leaders, including Durbin and Sen. Charles E. Schumer (D-N.Y.), Citigroup won some concessions. The agreement added a requirement that homeowners contact their lender at least 10 days before filing for bankruptcy.
The industry wants to limit the cramdowns to subprime borrowers or to homeowners driven into bankruptcy by an unaffordable mortgage.
"The fix doesn't go far enough to address all of the problems. It's a good first step, but there is a lot more to be done to make the bill targeted," said Scott E. Talbott, senior vice president for government affairs at the Financial Services Roundtable. "We are continuing to work to limit the negative effects, to make it the least worst way to do the wrong thing."
While the agreement limits the impact of the provision to existing mortgages, many investors assume Congress will extend it, amplifying the potential losses to lenders, they said. If the borrower sells the home after the modification and reaps a profit, lenders should be able to secure a share, they maintain.
"Anything that is so broad, even if limited in time, is a grave concern," said Floyd Stoner, executive director of the American Bankers Association. "We always believe this economy will recover. As it does, real banks are the engine of the recovery. We need to make sure that we don't do things that make it more difficult for them to participate in that recovery."
Such a change could also cause problems with loans insured by the Federal Housing Administration, an FHA official told a congressional panel yesterday. The government does not have legal authority to reimburse lenders for any losses caused by a cramdown, creating a disincentive for lenders to do business with the agency, said Phillip Murray, who handles all single-family business for the FHA.
Durbin thinks the current version of the agreement is fair, but he is open to further discussions, said Max Gleischman, his spokesman.