CITI Drops Opposition to Cramdown

Citigroup and key Senate members reached an agreement on Thursday that will bring the Helping Families Save Their Homes in Bankruptcy Act one step closer to passage.

The proposed law, introduced by Senator Durbin (D-IL) in the Senate and Rep. John Conyers (D-CA) in the House, would allow bankruptcy judges to alter or cramdown the terms of mortgages covering the homes of individuals in Chapter 13 bankruptcy. The court would be able to lower principal to reflect the actual current market value of the home, lower the interest rate, or extend the term of the loan.

Under current legislation, virtually every type of personal debt can be reduced by the court including credit card debt and, ironically, mortgage debt on vacation homes, but not the mortgage on a debtor's primary residence.  According to a press release from the office of Senator Charles Schumer (D-NY) who has been working with Durbin on the legislation, this exception dates back to the 1970's when most mortgages were fixed-rate, long-term arrangements between local bankers and neighborhood customers, a situation which is rare today.

The Durbin-Conyers bill was reintroduced this week.  Durbin had originally filed it 14 months ago when an estimated 2 million homeowners were at risk of foreclosure.   That number has now quadrupled. 

Citigroup has agreed to support the legislation with three modifications:  only existing mortgages would be eligible; homeowners would be required to certify that they attempted to contact their lender regarding loan modifications before filing for bankruptcy; and only major violations of the Truth in Lending (TILA) would invalidate creditor claims in bankruptcy rather than TILA violations of any size.

Citigroup has been a strong opponent of the legislation which Durbin hopes will become part of the $800 trillion economic stimulus act.  The company's change of heart may be a result of the billions in bailout funds it has received in the last few months.  Other major banks such as J.P. Morgan and Wells Fargo as well as the Mortgage Bankers Association are still opposed to the bill.

Senator Durbin said of the agreement with Citi, "The support of one of the county's biggest lenders will hopefully spur other lenders to act. I applaud Citigroup for supporting what is in the interests of their customers as well as their own best interests as a financial institution, and I hope others will quickly follow in their footsteps. We can't end the economic crisis until we address its root cause: the massive housing crisis facing our nation."

The Republican leadership has not yet weighed in on the Citigroup agreement.