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Citigroup Accord on Bankruptcy Bill: Let Judges Cut Mortgage Rates
Bloomberg
By Margaret Chadbourn
January 9, 2009

Jan. 9 (Bloomberg) -- Citigroup Inc.'s agreement to back legislation that lets bankruptcy judges cut mortgage rates for at-risk borrowers drew criticism from bank industry lobbyists who said the compromise with Senate Democrats was flawed.

Citigroup endorsed the bill after Senate Banking Committee Chairman Christopher Dodd, and Senators Charles Schumer of New York and Richard Durbin of Illinois, said they will limit the legislation to existing mortgages, rather than future loans. Durbin, the Senate's second-ranking Democrat, brokered the deal with Citigroup and sought similar agreements with other lenders.

"We can create a force that brings a bipartisan vote to the Senate floor," Durbin said in a Washington news conference yesterday. "I think we can enact this and I hope we can make it part of the economic recovery and reinvestment act."

The Citigroup deal with the Democrats failed to win support from the banking industry, which joined Republicans last year to help kill the legislation as the Senate sought to slow a record pace of foreclosures. Durbin yesterday said 8.1 million, or 16 percent, of homeowners may face foreclosure.

The Financial Services Roundtable, representing 100 banking, insurance and investment companies, said the compromise was a "first step" to improve a measure the group said remained "far too broad." The Mortgage Bankers Association objected to the Citigroup agreement and said modifications are needed before the measure helps stem housing declines.

‘Consistently Opposed'

The American Bankers Association "has consistently opposed proposals that would give bankruptcy judges broad authority to unilaterally modify the terms of mortgages," said Floyd E. Stoner, the group's executive director for congressional relations, in an e-mail statement today. "Such proposals would bring additional risk and uncertainty to an already volatile mortgage market and would make home loans more expensive and less available for consumers."

The revised bill Citigroup endorsed would give judges the ability to adjust principle payments or interest rates on existing loans, and could extend the term on the loan, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings.

"This legislation would represent an important step forward," Citigroup Chief Executive Officer Vikram Pandit said in a letter to the three senators released by Durbin. "It will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers."

Citigroup in November got $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the bank. The deal, brokered by the Federal Reserve, Treasury Department and Federal Deposit Insurance Corp., required the bank to modify terms for guaranteed troubled loans based on a model created by the FDIC.

Congress Actions

Congress has passed several measures in the past year to stem home foreclosures, including a $300 billion bill passed in July aimed at helping 400,000 borrowers keep their homes. Senate Democrats were unable in April to adopt the bankruptcy proposal. Republicans, and the banking industry, said the plan would raise costs because lenders would try to recoup losses in court with higher rates on other loans.

Durbin, set back by the defeat of the legislation in April, reintroduced his legislation Jan. 6, the same day House Judiciary Committee Chairman John Conyers introduced a similar bill. The Senate and House bills may be included in the economic stimulus proposals this year, said Max Gleischman, a Durbin spokesman.

Lawmakers modified the bill to require that borrowers show they had contacted their lender 10 days prior to filing with a bankruptcy judge to determine if an agreement can be reached, Durbin said. Schumer said limiting the provision to current mortgages helped ease Citigroup's opposition.

'Poker Game'

"This is something that Citi is championing but it's not clear that anyone is with them," said Bert Ely, chief executive officer of Ely & Co. Inc., a financial institutions and monetary policy consultant in Alexandria, Virginia, in a phone interview. "It's an interesting political problem. There may be a poker game going on."

Consumer groups said the Citigroup agreement is a step that may help stem the record pace of foreclosures.

"We have long endorsed this and feel it is an important part of the puzzle that has hurt consumers and communities," said Barry Zigas, director of housing and credit policy, Consumer Federation of America, in a telephone interview.

Citigroup accounted for 7 percent of the U.S. market for servicing home loans as of Sept. 30, according to the Inside Mortgage Finance newsletter in October.

Citigroup rose 1 cent to $7.16 in New York Stock Exchange trading yesterday, and the shares have tumbled 74 percent in the past 12 months.

To contact the reporter on this story: Margaret Chadbourn in Washington at Mchadbourn@bloomberg.net
Last Updated: January 9, 2009 12:07 EST

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