In an attempt to help millions of homeowners mired in foreclosure and to stabilize a slumping real estate market, Citigroup is negotiating the details of a mortgage modification agreement with federal lawmakers, The Wall Street Journal reports (“Citigroup, Senators in Talks to Let Judges Modify Mortgages,” Jan. 8. 2009).

The bill would give bankruptcy judges the authority to adjust mortgage principal payments or interest rates for homeowners who end up in bankruptcy court as long as their mortgages existed at the time the law went into effect, reports The New York Times (“Citi Reaches Deal With Lawmakers on Home Loans,” Jan. 9, 2009).

“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,” wrote Citigroup CEO Vikram Pandit in a letter released Jan. 8.

Historically, banks have opposed this “cramdown” legislation, which allows judges to extend the terms on mortgage loans during bankruptcy proceedings, since it forces lenders to take losses and prohibits them from having a say in the loan modification process.

Citigroup Backing May Help Push Bill Through

Observers say that Citigroup’s support of the cramdown legislation may be the bank’s attempt to appease Congress and curry favor on Capitol Hill after the bank received more than $300 billion in bailout assistance from the federal government, but Sen. Charles Schumer, D-N.Y., thinks that with Citigroup backing the legislation, other large banks may also soon favor the bill.

Schumer says he expects many banks to announce their support of the bill soon or at least drop their opposition to it.

Under the newly proposed bill, lenders will have a say in bankruptcy proceedings unless a lender has committed a major violation of the Truth in Lending Act, which would force the lender to relinquish its bankruptcy claim. Banks would limit their losses with this new provision in place.

Passage Could Bring an End to the Foreclosure Crisis

Support for the new mortgage modification legislation may also be growing outside the banking industry; leading homebuilders are beginning to realize that the new bill may help clear the glut of foreclosures in the real estate market.

Jerry Howard, president of the National Association of Home Builders, said that his organization has reversed its opposition to cramdowns as foreclosures continue to swamp the housing market. “Until you stop the trickle of inventory onto the market through foreclosure, supply will increase more than it should,” Howard said. “This is an about-face for our organization.”

When commenting on the legislation, Sen. Dick Durbin, D-Ill., said “The question that faces us now is this: After committing over one trillion dollars in taxpayer money to address the financial crisis, why don’t we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?”

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