As part of bailout, Citi must lower loan rates

WASHINGTON - The government's multibillion-dollar bailout of Citigroup Inc. requires the giant financial services company to lower loan rates for struggling homeowners who are behind on their mortgage payments.

Borrowers whose loans are in a $306 billion pool of Citigroup assets that have new government backing may qualify for a reduction on their payment to 38 percent of their monthly income.

As of yesterday, neither the government nor Citibank could provide an estimate on how many borrowers may qualify for assistance. If the bulk of those assets are mortgages or securities based on them, potentially hundreds of thousands of borrowers could be helped.

The requirement was part of a complex deal worked out between federal regulators and Citigroup over the weekend. It is based on a model created by the Federal Deposit Insurance Corp. and already applied to IndyMac Bank, a failed thrift.

The government has not released a breakdown of assets in the Citigroup pool. Regulators have described it as "loans and securities backed by residential and commercial real estate and other such assets."

Under the agreement, the Treasury Department will make a direct investment in the bank, plus guarantee against the "possibility of unusually large losses" in the $306 billion pool. Citigroup will assume the first $29 billion in losses. Beyond that, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent.

The Citigroup arrangement will not include any federal loan guarantees, said FDIC spokesman Andrew Gray. The IndyMac plan doesn't have those government guarantees either.

Under the IndyMac plan, mortgage payments are lowered to 38 percent or less of a homeowner's monthly income for qualified applicants. To reach the target payment, the lending rate may drop to as low as 3 percent and stay there for five years. After five years, interest rates rise year by year to the national market survey rate, where it is capped.

The plan has gotten plenty of attention in Washington as lawmakers and President-elect Barack Obama have called for a more systematic approach to stem the tide of foreclosures.

In addition to Citigroup, Fannie Mae, Freddie Mac, and two other failed thrifts taken over by the government last week are adopting the FDIC-IndyMac approach for easing homeowners' monthly mortgage payments.

FDIC chairwoman Sheila Bair is also pushing a more ambitious, nationwide plan for foreclosure relief. That plan includes $24 billion in government loan guarantees to insure lenders against borrowers who still default on the renegotiated mortgages despite the lower payments.