Citigroup Backs Measure To Help Avoid Foreclosures

Citigroup has reached a deal with top Democrats in the Senate on legislation to prevent home foreclosures. The lawmakers want to empower bankruptcy judges to force lenders to lower homeowners' payments.

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ARI SHAPIRO, host:

This is Morning Edition from NPR News. I'm Ari Shapiro.

RENEE MONTAGNE, host:

Steve Inskeep is spending the day at member station KJZZ in Phoenix. I'm Renee Montagne. Lawmakers in Congress want to give bankruptcy judges the power to make lenders reduce payments for struggling homeowners. And news from Citigroup, it's reached a deal with top Democrats on legislation to prevent home foreclosures. NPR's Chris Arnold reports.

CHRIS ARNOLD: The deal is a surprising about-face for Citigroup, and such industry support increases the chances that the legislation will get passed. Advocates say the proposal could keep more than a million American homeowners in their houses and out of foreclosure.

Senator DICK DURBIN (Democrat, Illinois): We've had a breakthrough today.

ARNOLD: Senator Dick Durbin gathered with other top Democrats in Washington to announce the deal.

Sen. DURBIN: I want to commend Citigroup. They showed real leadership on this; first major financial institution to step forward and to say, we understand this is a crisis in America. The current efforts, as good as they may be, have not resulted in a dramatic change or reduction in the number of mortgage foreclosures.

ARNOLD: Durbin and other Democrats have been pushing to let bankruptcy judges help fix the foreclosure mess. These judges intervene all the time for other kinds of loans: car loans, second houses, boats. If you get into financial trouble and can't pay and declare bankruptcy, a judge can restructure your debt, lower your payments, so the amount that you owe to what you can realistically pay. That's called a cramdown, but the law does not allow judges to do that for your primary residence. Dick Durbin.

Sen. DURBIN: So, as a consequence going into this mortgage-foreclosure crisis, many people with their homes at stake, facing foreclosure, headed into bankruptcy, had no way to have the mortgage rewritten in the bankruptcy court, even if they still had an income and the change in interest rate or principle was all they need to stay in the home. So, I've been trying for almost two years now to change this.

ARNOLD: But the industry fought the proposal. It argued that this would violate contract law, increase lenders' risks and therefore drive up interest rates for all borrowers. And the measure hasn't had the votes to pass. But now, with Democrats more firmly in control of Washington, the pendulum is swinging towards greater regulation and more help for homeowners. Citigroup declined an interview, but in a letter to lawmakers, said it would now support the legislation if several changes were made. For example, Citi only wants judges to be able to cramdown existing loans, not new loans going forward. Lawmakers agreed to the changes, and many foreclosure-prevention advocates think all this is a very big deal.

Mr. MIKE CALHOUN (President and Chief Operating Officer, Center for Responsible Lending): The Citi announcement is a real milestone in starting to take effective action to correct the housing crisis.

ARNOLD: That's Mike Calhoun with the Center for Responsible Lending, one of the groups that's been working to pass a bankruptcy-reform bill. These groups stress that bankruptcy judges are not going to help people who don't deserve it; say, people who didn't have a job and lied on their loan application to buy a house that they totally couldn't afford. Ira Rheingold heads up the National Association of Consumer Advocates.

Mr. IRA RHEINGOLD (Executive Director, National Association of Consumer Advocates): You're turning yourself over to the hands of a court who will look at it and say, OK, based on your income, and based on the real value of your property, can you afford this home? Based on the parameters that'll get set out with this legislation.

ARNOLD: Rheingold says a lot of people facing foreclosure have decent jobs; they just stretched too far to buy a house at the market's peak. Some are stuck in high-interest loans, and with prices falling, they can't refinance. He says it's in the best interests of the lenders to be flexible with those people, so you don't have all these foreclosures glutting the housing market and fouling up the whole economy. But Mike Calhoun says the industry has been paralyzed.

Mr. CALHOUN: The real problem we have here is that the loans that are facing foreclosures were tangled up in these complicated securities that Wall Street created.

ARNOLD: Calhoun thinks that even if most of the problem loans never end up in bankruptcy court, just the threat of a cramdown from a bankruptcy judge could break the logjam and prevent a lot of foreclosures. Chris Arnold, NPR News.

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Citigroup Anti-Foreclosure Plan Would Alter Loans

Three Senate Democrats said Thursday they have reached an agreement with Citigroup to allow bankruptcy judges to alter home loans in an effort to prevent foreclosures. Other lenders are expected to follow.

Sen. Charles Schumer of New York said several banks have already expressed support for the plan, which would be limited to loans made before the bill is signed. President-elect Barack Obama has also said he backs the concept.

Only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment. Homeowners would have to certify that they tried to contact their lender before filing for bankruptcy, lawmakers said.

Illinois Sen. Dick Durbin and Connecticut Sen. Christopher Dodd also helped forge the agreement, which had been opposed by the lending industry in the past.

Lawmakers said they would attach the plan to Obama's stimulus package. In a speech at George Mason University Thursday morning, Obama promised to rewrite financial regulations in an effort to address the foreclosure crisis and keep "responsible" families in their homes.

Schumer said he received calls Thursday from several banks — which he did not name — indicating their interest in supporting the idea.

"Citigroup's action has broken the dam," Schumer said in a news conference on Capitol Hill.

The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis. 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," Scott Talbott, chief lobbyist at the Financial Services Roundtable, said Thursday.

From NPR staff and wire reports

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