|Senate Democrats have found an ally in Citigroup Inc. for their proposed legislation to allow bankruptcy judges to modify mortgages. Citi's endorsement follows an endorsement by U.S. homebuilders -- though it is in opposition to the position taken by the country's mortgage bankers.
Citi has agreed to support the cramdown legislation, according to an announcement from U.S. Rep. John Conyers (D-Mich.) and U.S. Senators Dick Durbin (D-Ill.), Chris Dodd (D-Conn.) and Chuck Schumer (D-N.Y.) The legislators said Citi's support of the bill increases the chance it will be included in the economic recovery package currently being drafted by Congress.
In the press release, Dodd -- who is Chairman of the Senate Banking Committee -- vowed to support the bill's inclusion in the recovery package.
The bill, originally introduced by Conyers in 2007, was reintroduced on Tuesday. Changes to the original legislation include only allowing existing mortgages, making borrowers prove that they attempted to contact their servicers before filing bankruptcy, and limiting the invalidation of claims only to major violations of the Truth in Lending Act.
"I have been working on this matter ever since the mortgage crisis began in 2007 and am pleased that we have been able to reach agreement today," Conyers stated.
The announcement indicated that more than 8 million borrowers are currently at risk of foreclosure.
The move by Citi is a departure from the position usually taken by mortgage bankers.
"We were surprised by the suddenness of the announcement," the Mortgage Bankers Association said in its own statement. "We remain opposed to bankruptcy cramdown legislation because of the destabilizing effect it will have on an already turbulent mortgage market."
In October 2007, MBA Chairman David G. Kittle testified before the House Judiciary Committee's Subcommittee on Commercial and Administrative Law that cramdowns could increase mortgage rates by as much as 2 percent.
The trade group went on to say in today's statement that Citi's agreement does nothing to protect FHA and VA guarantee programs. MBA also wants the bill to have a sunset date, be run through the normal legislative process and be applicable only to subprime loans.
As it sought a massive government financing package, Citi originally approached Schumer last month about endorsing the legislation. Other financial institutions already have quietly offered their support to Schumer for the legislation, the statement said.
"The support of one of the county's biggest lenders will hopefully spur other lenders to act," Durbin said in the statement.
In addition, the National Association of Home builders has reportedly thrown its support behind bankruptcy cramdowns.
"We now have a real chance to pass this legislation quickly," Schumer added.
Lenders Testify Against Cramdowns
Mortgage bankers reiterated their opposition to cramdowns in testimony before Congress. They warned that allowing bankruptcy judges to modify mortgages could lead to tighter standards, higher interest rates and lower loan-to-values -- even on government programs.