Citigroup Reaches Deal With Lawmakers on Home Loans

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By Renae Merle and Lori Montgomery

Citigroup, one of the nation's largest lenders, yesterday agreed to abandon its long-standing opposition to a plan to let bankruptcy judges modify the terms of mortgages, a move that could help millions of distressed borrowers stay in their homes, Senate Democratic leaders said yesterday.

The startling turnaround reflects the changed political and economic realities of the nation's deepening recession. Citigroup's approval puts pressure on other lenders, potentially opening a new and more aggressive chapter in the government's foreclosure-prevention effort by giving some of the most troubled borrowers leverage to force lenders to forgive debt.

Democratic lawmakers praised the agreement as a breakthrough and pledged to add the measure to the economic stimulus package moving through Congress.

Although the support of the banking industry would not guarantee passage, they said, it would go a long way toward breaking down opposition among Republicans and moderate Democrats who torpedoed the idea in the Senate last year. And lawmakers have yet to win the support of the Mortgage Bankers Association, a large lobbying group that has previously helped defeat the change.

"I want to commend Citigroup," said Sen. Richard J. Durbin (D-Ill.), the No. 2 Senate Democrat. "They showed real leadership on this, the first major financial institution to step forward and say, 'We understand this is a crisis in America.' The current efforts, as good as they may be, have not resulted in a dramatic change or reduction in the number of foreclosures."

Since 2007, Durbin has pressed legislation that would allow a bankruptcy judge to change the terms of a loan by reducing its interest rate, extending its length, or lowering the principal or loan balance, known as cramdown provisions. Currently, judges are allowed to modify the terms of a mortgage for a second or vacation home but not a primary residence.

Industry officials fought off the legislation, but the political calculations have changed. President-elect Barack Obama has said he supports the change, Democrats have a larger majority in Congress, and banks that have accepted federal aid are facing pressure to do more to help homeowners. Citigroup, for example, received about $45 billion in government assistance last year.

Also, the foreclosure crisis has worsened in the past year, and industry and government efforts to keep people in their homes have had little impact. If the legislation passes, it could secure the kind of concessions the government has not been able to get from the industry through various voluntary foreclosure-prevention efforts.

"This legislation would represent an important step forward," Vikram S. Pandit, Citigroup's chief executive, said yesterday in a letter to lawmakers. "Given today's exceptional economic environment, we support its swift passage."

Citigroup's involvement in negotiations was reported earlier this week by the Wall Street Journal.

Sen. Charles E. Schumer (D-N.Y.) said the breakthrough came last week, when Lewis B. Kaden, a Citigroup vice chairman, called him.

Citigroup's primary request, lawmakers said, was that only existing mortgage-holders would have access to the bankruptcy courts, not those who take out loans in the future. The bank also asked for provisions that would require homeowners to contact their lender at least 10 days before filing for bankruptcy and that would not permit a judge to void the mortgage debt for minor violations of the Truth in Lending Act, a consumer-protection law.

Durbin called those requests "eminently reasonable." He said House leaders have also endorsed the changes, though some have done so with reluctance.

"I think it should apply to all mortgages for all time," said Rep. Brad Miller (D-N.C.), who joined the senators at the news conference. But in the face of the mounting foreclosure crisis, Miller said, "we have to do what's possible."

The Mortgage Bankers Association said in a statement that it remains opposed. "We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed," the statement said.

The legislation should be limited to subprime loans, the group said, and expire after a predetermined period. "This legislation would have a significant effect on the mortgage markets, and we believe it ought to be subject to the normal legislative process, including hearings."

Troubled homeowners not in bankruptcy could benefit more than those in the process, supporters of the measure said. Lenders are more likely to attempt aggressive modifications when they can still control the terms, rather than allow a judge to set the limits. "Right now, the biggest impediment to meaningful foreclosure prevention is the lack of willingness of investors to make significant modifications," said John Taylor, president of the National Community Reinvestment Coalition, a consumer advocacy group. Changing the way bankruptcy judges handle primary residences "would force people to the table to hopefully come up with meaningful modifications."

The lending industry has argued that allowing bankruptcy judges to change the terms of these mortgages would raise costs for all home buyers. But Schumer said yesterday that by limiting the agreement to current mortgages, it would not affect future interest rates. And the financial and housing industries began to acquiesce in recent weeks, starting with the National Association of Home Builders. Its president, Jerry Howard, said last week that the economic crisis is so severe that "every possible solution must be on the table."

The group is open to cramdowns but is still reviewing the details of the agreement negotiated by Citigroup, an NAHB spokesman said.

Schumer said Citigroup's support for the measure has since spurred "most of the major banks" to call his office, "wanting to hop on board."