NYT: Citi Reaches Deal with Lawmakers on Home Loans

By CARL HULSE
Published: January 8, 2009

WASHINGTON — In a move that would help troubled homeowners, Citigroup agreed to support legislation that would let bankruptcy judges adjust mortgages for at-risk borrowers, leading Congressional Democrats said on Thursday.

Financial industry lobbyists, however, said the plan was flawed and vowed to fight legislation aimed at easing up on homeowners facing foreclosure.

Members of the House and Senate said Citigroup had agreed to drop its opposition, providing no future mortgages are covered by the law.

Citigroup, which is receiving more than $300 billion in bailout assistance, says that it is open to measures that would help homeowners.

“Citi shares this legislation’s goal to help distressed borrowers stay in their homes, and believes it will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers,” Vikram S. Pandit, the chief executive of Citigroup, wrote in a letter released Thursday night.

The revised bill that Citigroup endorsed would allow bankruptcy judges to adjust the principal payments or interest rates on existing loans.

Judges could also extend the terms on mortgage loans, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings.

Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, said he and fellow backers of the plan see it as a way to create more voluntary negotiations between struggling homeowners and financial institutions. So far, voluntary programs have proved ineffective, Democrats said.

Citigroup had been part of the Bankruptcy Coalition of the Financial Services Roundtable, an industry group, since it aggressively lobbied for changes to the bankruptcy code in 2005.

The coalition — a group of major trade associations and lenders like Bank of America, JPMorgan Chase and Wells Fargo — also fought to block the so-called cramdown legislation last year.

No other bank has broken ranks with the industry on the proposed bill. Mr. Durbin said he hoped the move by Citigroup, should other banks and financial trade associations take the same stance, would lead to backing by enough Democrats and moderate Republicans to push the bill through.

Senator Charles E. Schumer, Democrat of New York, said he had been contacting officials of top financial institutions for months, trying to persuade them that it would be to their advantage to back the plan since it could help stabilize a housing market that has severely hurt the economy.

Three changes were made to the legislation sponsored by Mr. Durbin and Representative John Conyers Jr., Democrat of Michigan and chairman of the House Judiciary Committee: only existing mortgages will be eligible; homeowners will have to certify they tried to contact their mortgage holder lenders regarding loan modifications before filing for bankruptcy; and only major violations of the Truth in Lending Act will cause lenders to forfeit their claims in a bankruptcy.

Backed by bankers and other financial groups, many Congressional Republicans and some Democrats have balked at the plan to let bankruptcy judges alter mortgage terms on primary residences, saying that would drive up mortgage costs.

But officials said financial institutions were coming to the conclusion that it might be better to get a reduced loan payment through a bankruptcy or voluntary negotiations than to get no money at all.

Aides to Senator Richard C. Shelby of Alabama, the senior Republican on the Senate banking committee, said he would have no immediate response to the plan.

Scott E. Talbott, senior vice president for government affairs at the Financial Services Roundtable, said the group opposed cramdown legislation because it “creates huge risks” for the mortgage market.

He suggested the bill would force banks to further restrict lending and absorb huge losses as the economy worsens. He also suggested the bill would create perverse incentives that might encourage more homeowners to seek bankruptcy protection.

Citigroup recently began negotiating with lawmakers, in a move that some observers suggest reflects its desire to win favor on Capitol Hill after receiving billions in funds from the bailout program.

The government has invested $45 billion in Citigroup and agreed to guarantee about $269 billion in highly illiquid mortgage investments.

“If you’re looking at a way to get to the bottom of the economic problems in our country, this is the cause of our economic problems,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee. “It is the housing foreclosure problem. We’ve got to address that.”

The plan has been backed by members of Congress who see it as a way to help distressed homeowners and balance federal relief efforts that have been aimed at Wall Street and the automobile industry.

Mr. Schumer said he had been in contact with other large banks and he expected they would soon announce their support or at least drop their opposition to the plan.

“Citigroup’s action has broken the dam,” he said.

Eric Dash in New York contributed reporting.

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