A top bank industry group Friday said it opposes an agreement between Citigroup Inc. and Democratic senators that would rewrite bankruptcy law to help troubled mortgage borrowers avoid foreclosure.
The American Bankers Association said the proposal to give bankruptcy judges broad authority to modify mortgage terms could make home loans more expensive.
Other industry players questioned the motivations behind Citigroup’s about-face on the co-called mortgage "cram-downs," speculating that the financial giant has been forced to make concessions because it has accepted some $45 billion in federal bailout funds.
“The big change between now and a couple of months ago is that the government is backing Citigroup’s balance sheet,” said Gary Townsend, a veteran analyst who now runs hedge fund Hill-Townsend Capital. “The government has a lot of leverage that wasn’t there before.”
Citigroup declined to comment.
Citigroup said Thursday that it would support a plan put forth by Democratic Sens. Charles Schumer and Richard Durbin, among others, that is aimed at preventing foreclosures.
Citigroup had previously opposed changing the law to let bankruptcy judges, in some circumstances, cut mortgage debts to help bankrupt homeowners.
Citigroup, the nation’s third-largest bank, is one of the biggest recipients of federal bailout funds under a deal in which the government has agreed to absorb many of the losses on the bank's $306 billion portfolio of troubled assets.
The ABA said it did not participate in Citigroup’s agreement.
“ABA is opposed to the agreement because it will leave in place overly broad mortgage cram-down authority and other provisions that will harm thousands of banks across the country that have made, and continue to make, good loans,” said Floyd Stoner, ABA’s executive director for public policy.
As part of a government rescue package in November, Citigroup was forced to adopt a systematic loan modification program for distressed mortgages.
“The comments I’ve heard from bankers is that Citigroup is seen as suspect, because they’ve received so much money from the government,” said Bert Ely, a longtime banking industry consultant in Alexandria, Va. “If Wells Fargo or Bank of America got on board, it would be a much more powerful endorsement.”
In 2008, there were an estimated 1 million personal bankruptcy filings. Of those, about 580,000 had mortgage debt, said Stu Feldstein, president of consumer finance research firm SMR Research Corp.
There are about 50 million residential mortgages outstanding in the U.S., totaling more than $10 trillion of debt.
This legislation is most likely to affect mortgages that are packaged into bonds, which make up about half of outstanding home loans, according to industry sources. Mortgages that are held on bank balance sheets are more likely to be renegotiated prior to bankruptcy, they said.
The draft legislation, which has yet to be debated this year, would only apply to existing mortgages, and borrowers would be required to contact their lender before filing for bankruptcy.
The ABA said the cram-down proposal would “bring additional risk and uncertainty to an already volatile mortgage market and would make home loans more expensive and less available for consumers.”
Other industry groups, such as the Financial Services Roundtable, also have opposed the proposal, while a coalition of five consumer groups embraced the bill, calling it “urgently needed legislation.”
A government law retroactively changing lending terms could certainly make lenders less willing to extend credit in the future, Ely said.
“In many ways it’s an anti-homeownership provision,” Ely said. While reducing homeownership levels makes sense, this law may not be the best way to do it, he added.
Some lawmakers agree. Last year, Durbin failed to win Senate passage of a similar measure. Opponents, including Republicans, some Democrats and banking and housing industry lobbyists, said the proposal would raise costs for future homeowners.
Democratic senators said on Thursday they hope to attach the bill to a broad economic stimulus package that is expected to move its way through Congress in the coming weeks.