Citigroup, Inc. and Top Democrats Reach Mortgage Deal
January 12, 2009
Eliot Bastian
On January, 8, 2009, The Wall Street Journal1 and Bloomberg News reported that Citigroup, Inc. signed on to a deal with top Democrats in the United States Senate to move forward with a measure that would allow judges to set new repayment terms for millions of mortgage holders who wind up in bankruptcy court. The accord on the Senate version of a bill allowing “cramdowns,” when bankruptcy judges force lenders to modify mortgages, was negotiated by Sen. Dick Durbin (D. Ill.), the Senate’s second-ranking Democrat and the author of the Senate bill. Legislation allowing mortgage cramdowns would be part of an upcoming stimulus package and would be limited to existing mortgages. Sen. Durbin, who has backed pro-consumer bankruptcy initiatives for years, has worked for over a year on the cramdown bill.
The legislation would apply to homeowners who have filed for chapter 13 bankruptcy protection. It is the first of several pieces of legislation Democrats intend to push this year to give homeowners more leverage in bargaining with banks and mortgage-servicing companies.
“This legislation would represent an important step forward,” Citigroup Chief Executive Officer Vikram Pandit said in a letter to the Senate released by Sen. Durbin and reported by Bloomberg. “It will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers.” Nearly 10 million homeowners are having trouble making their mortgage payments, according to Moody’s Economy.com. The proposed changes in bankruptcy rules could help as many as 800,000 troubled borrowers keep their homes estimates Mark Zandi, Moddy’s chief economist at Moody.
But the Financial Services Roundtable, which represents 100 banking, insurance and investment companies, as well as the Mortgage Bankers Association, issued statements in opposition to the cramdown legislation. Other industry players speculated that the motivation behind Citigroup’s position is due to the federal bailout funds that is booked on its balance sheet.
In a follow-up article dated January 12, 2008, the WSJ2 reports that “Federal bankruptcy judges say they are eager to have the power to restructure mortgages for struggling debtors because it could save hundreds of thousands of homeowners from foreclosure.” Judges overseeing bankruptcy cases already can approve modifications for credit-card debt and most other kinds of loans, including second-home mortgages. But they have not been able to modify primary-home mortgages since 1979, when the U.S. Bankruptcy Code went into effect, said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. Before then, many states allowed judges to do some form of modifications. A. Jay Cristol, a federal bankruptcy judge in Miami, said that changing the bankruptcy law would be beneficial because “after foreclosure, families get broken up and lenders hold on to non-performing assets that they sell at a loss.”
1 Reported by WSJ’s Elizabeth Williamson and Ruth Simon.
2 Reported by Amir Efrati and Jennifer S. Forsyth.