WASHINGTON (AP) — Democratic lawmakers have reached a deal with Citigroup Inc. on a plan to let bankruptcy judges alter home loans in an effort to prevent foreclosures and urged other lenders to follow suit.
The lawmakers aim to attach the plan to President-elect Barack Obama's economic stimulus legislation, and said Thursday the change in bankruptcy law could ease the foreclosure crisis that has dragged the economy into the worst recession in decades.
The compromise between Citigroup and Sens. Richard Durbin of Illinois, Charles Schumer and Christopher Dodd of Connecticut, would be limited to loans made before the bill is signed. Obama has said he backs the concept.
Schumer said he received calls Thursday from several banks — which he did not name — indicating their potential interest in supporting the idea.
"This is a breakthrough day," the senior senator from New York said in a news conference on Capitol Hill. "We've been stymied because the banking industry opposed this simple provision, which is key to getting a floor to the housing market."
In a letter to lawmakers, New York-based Citigroup's chief executive, Vikram Pandit, said the change to bankruptcy law "will serve as an additional tool to the extensive home-retention programs already in place to help at-risk borrowers."
The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis. Consumer advocates and Democrats say it would prod the lending industry to be more aggressive about modifying loans because of the looming threat of having a bankruptcy judge involved.
But the lending industry has battled fiercely against the idea, arguing it would force lenders to hike mortgage rates because they would have to charge more for loans that could be altered later by a judge.
"This would hurt the housing market at the exact time we're trying to stimulate it," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, which represents large banks and insurance companies.
To qualify, borrowers would need to demonstrate that they have asked their lender for a loan modification before filing for bankruptcy.
Currently, a 1993 Supreme Court decision bars judges from altering first mortgages on primary homes, though such changes are allowed on loans for vacation homes, motorcycles, boats and other kinds of property.
Consumer advocates say that is unfair, while mortgage lenders contend it benefits the vast majority of borrowers who don't fall into bankruptcy because it keeps mortgage credit for primary residences cheap.
Other attempts by the government to deal with the surge in foreclosures over the past two years haven't made much of a dent in the problem.
A federal program, dubbed Hope for Homeowners, was intended to let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed-rate loans with lower rates. But the early results have been disappointing, with fewer than 400 applications since the program's launch on Oct. 1.
In an interview earlier this week, a lobbyist for the mortgage industry vowed to keep the bankruptcy judge plan out of the economic recovery bill.
"We think that's an unwise move that could delay the stimulus package," said Francis Creighton, the Mortgage Bankers Association's chief lobbyist.
In a speech Thursday at George Mason University outside Washington, Obama asked Congress to work with him "day and night, on weekends if necessary" to pass an economic revival plan within the next few weeks so that it can be ready for his signature shortly after he takes office on Jan. 20
Obama promised to rewrite financial regulations and pledged to launch "a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes."
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