Citigroup agrees to home loan revisions

The lawmakers aim to attach the plan to President-elect Barack Obama's economic stimulus legislation, and said yesterday that the change in bankruptcy law could ease the foreclosure crisis, which has dragged the economy into the worst recession in decades.

The compromise, between Citigroup and senators Richard Durbin of Illinois and Charles Schumer and Christopher Dodd of Connecticut, would be limited to loans made before the bill is signed. Obama has said he backs the concept.

Schumer said he received calls yesterday from several banks - which he did not name - indicating their potential interest in supporting the idea.

"This is a breakthrough day," the senior senator from New York said. "We've been stymied because the banking industry opposed this simple provision, which is key to getting a floor to the housing market."

In a letter to lawmakers, Citigroup's chief executive, Vikram Pandit, said the change to bankruptcy law "will serve as an additional tool to the extensive home-retention programs already in place to help at-risk borrowers."

The so-called cramdown proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis. Consumer advocates and Democrats say it would prod the lending industry to be more aggressive about modifying loans because of the looming threat of having a judge involved.

But the lending industry has battled fiercely against the idea, arguing it would force lenders to increase mortgage rates, because they would have to charge more for loans that could be altered later by a judge.

"This would hurt the housing market at the exact time we're trying to stimulate it," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, which represents large banks and insurance companies.

To qualify, borrowers would need to demonstrate they have asked their lender for a loan modification before filing for bankruptcy protection.

Currently, a 1993 Supreme Court decision bars judges from altering first mortgages on primary homes, though such changes are allowed on loans for vacation homes, motorcycles, boats, and other kinds of property. Consumer advocates say that is unfair, while mortgage lenders contend it benefits the vast majority of borrowers who don't fall into bankruptcy because it keeps mortgage credit for primary residences cheap.

Other attempts by the government to deal with the surge in foreclosures over the past two years haven't made much of a dent in the problem.

In an interview this week, a lobbyist for the mortgage industry vowed to keep the bankruptcy judge plan out of the economic recovery bill. "We think that's an unwise move that could delay the stimulus package," said Francis Creighton, the Mortgage Bankers Association's chief lobbyist.