WASHINGTON (Reuters) - Financial giant Citigroup Inc has agreed to support a rewrite of bankruptcy law being proposed in the U.S. Congress to help troubled mortgage borrowers avoid foreclosure, lawmakers said on Thursday.
Known as “cramdown,” the change in the law would let bankruptcy court judges cut mortgage debts to help bankrupt homeowners, subject to strict conditions.
The legal reform would help “millions of families save their homes,” said Democratic senators Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut.
Michigan Democratic Rep. John Conyers has introduced the measure in the House of Representatives.
“We welcome the support of Citigroup, one of the nation’s largest mortgage lenders, for responsible and urgently needed legislation,” said a coalition of five consumer groups, including the Center for Responsible Lending, in a statement.
Last year, Durbin failed to win Senate passage of a similar measure against stiff opposition from Republicans, some Democrats and banking and housing industry lobbyists who said that giving bankruptcy judges the power to erase mortgage debt would increase costs for future homeowners.
This time around — with a deepening recession and the housing market in crisis — Citigroup backs the reform, under certain conditions, said the senators. They hope to attach their bill to an economic stimulus package taking shape in Washington.
Republicans were wary of staking out a position yet on the measure. “It’s far too early to make that kind of decision,” Utah Republican Sen. Robert Bennett told Reuters on Thursday.
A spokesman for Citigroup, one of the nation’s largest mortgage lenders, declined to comment.
Today, most forms of personal debt such as vacation homes and family farms can be restructured in bankruptcy. But a mortgage on a primary residence cannot.
Under the terms of the reform as agreed, only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment, the senators said.
Homeowners would have to certify that they have tried to contact their lender before filing for bankruptcy, they said.
Only major violations of the “Truth in Lending Act” would invalidate creditor claims on bankruptcy, they said.
Schumer said his office has contacted top bankers nationwide and some said they would be supportive.
Officials at other banks — including Wells Fargo, Bank of America, SunTrust and JPMorgan Chase & Co — were contacted by Reuters but had no comment.
“Citigroup’s support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly,” Schumer said.
The National Association of Home Builders has dropped its opposition to the reform and the National Association of Realtors, which has largely stood aside in the debate, is mulling whether to support reform.
The government has injected billions of dollars in taxpayer funds into Citigroup since October, making the nation’s third-largest bank a top recipient of federal bailout money.
Additional reporting by Diane Bartz, John Poirier and Jeremy Pelofsky; with Dan Wilchins in New York; editing by Carol Bishopric