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Troubled Homeowners May Get Mortgage Relief After All

Democratic efforts to rewrite bankruptcy laws so that judges can help troubled borrowers avoid foreclosure gained a surprising new ally after Citigroup, the nation’s third-largest bank and one of the largest issuers of home mortgages, agreed to drop its opposition.

Citigroup had been part of a broad coalition of financial institutions that fiercely opposes giving bankruptcy courts the power to adjust the terms of a mortgage after a homeowner falls behind on payments. Giving judges this new authority would boost the leverage of some 8 million borrowers, about 16 percent of all homeowners, hoping to renegotiate home mortgages now that they have fallen behind, according to Sen. Dick Durbin, D-Ill., sponsor of the legislation.

The about-face comes after the federal government pumped some $45 billion of taxpayer money into the financial giant since last fall to prevent it from failing amid the collapse of the mortgage market and home prices. “This legislation would represent an important step forward,” Citigroup CEO Vikram Pandit said in a letter to the Senate, 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 has broken the dam,” Sen. Chuck Schumer, D-N.Y., told reporters at a Capitol Hill press conference. “We are getting calls from many, many banks and banking associations saying they want to help.”

Advocates say forcing banks to accept new payment schedules could accelerate broader efforts to renegotiate millions of mortgages on which borrowers owe more than the house is worth. This deadlock between banks and borrowers has kept the housing market from properly resetting prices as financial institutions try to rejuvenate their troubled balance sheets.

“If you’re looking at a way to get to the bottom of the economic problems in our country, this is the cause of our economic problems,” said Christopher J. Dodd, D-Conn., chairman of the Senate Banking Committee. “It is the housing foreclosure problem. We’ve got to address that.”

In order to gain Citigroup’s support, Democrats agreed to three compromises on a bill they were unable to bring to a floor vote in 2008: Only existing mortgages would be eligible for modification; homeowners would be required to certify that they attempted to contact their lender before filing for bankruptcy; and major violations of the Truth in Lending Act could invalidate the claims of creditors in bankruptcy court.

Although a major fissure has now developed, opposition to the bankruptcy measure has not entirely melted away. The American Bankers Association said in a statement that it “has consistently opposed proposals that would give bankruptcy judges broad authority to unilaterally modify the terms of mortgages. 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.”

Democrats hope to have the mortgage modification rules included in the economic stimulus package that President-elect Barack Obama is asking Congress to adopt as its first major legislative business.

Michael Zielenziger writes on business and the economy.


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