Citi Throws Weight Behind Cram-Downs

In a move that clearly caught much of the financial and mortgage markets by surprise late Thursday, Citigroup, Inc. (C) agreed with key legislators on a plan that would allow bankruptcy judges to modify the terms of mortgages during debt restructuring. The move is a surprising break from the financial industry’s long-standing and strong stance against allowing so-called mortgage debt cram-downs. As HousingWire reported on Jan. 5, the stimulus plan set to be proposed by President-elect Barack Obama will include the long-contested cram-down proposal; Obama has made the proposal central to his platform’s mortgage assistance plan, a source on Capitol Hill told HW in December. Key Senate Democrats have long advocated allowing judges to modify principal amounts of mortgages on primary residences in Chapter 13 bankruptcy cases filed by debtors; currently, such modifications are precluded by law. In contrast, Republicans and most industry groups have strongly opposed so-called ‘debt cram-down’ proposals for mortgages, saying that allowing cram-downs would add to the costs of a mortgage for most consumers, and swell the ranks of borrowers filing for bankruptcy protection. Sen. Richard Durbin (D-IL) in November re-introduced legislation to reform bankruptcy law in order to allow for cram-downs, called the Helping Families Save Their Homes in Bankruptcy Act. Citi’s agreement to support the proposal likely signals that the proposal will face lesser headwinds in being passed by legislators, and it certainly curried favor for the financial giant — which has taken dollars from the government — in the eyes of Congressional leaders. “Citigroup’s decision to support this proposal brings us one step closer to helping millions of homeowners save their homes and putting our flagging economy back on track,” Durbin said at a Thursday press conference. “The support of one of the county’s biggest lenders will hopefully spur other lenders to act. I applaud Citigroup for supporting what is in the interests of their customers as well as their own best interests as a financial institution, and I hope others will quickly follow in their footsteps. We can’t end the economic crisis until we address its root cause: the massive housing crisis facing our nation.” Chuck Schumer (D-NY) was approached by Citigroup in December to signal its openness to endorsing the legislation, his office said in a press statement. Schumer, an original co-sponsor of the Durbin bill, indicated that he had heard from other major financial institutions interested in discussing how they might lend their support to the legislation. “Citigroup’s support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly,” Schumer said. “Other banks are already lining up to find out how they can jump on the bandwagon.” That’s not to say the opposition has broken. The Mortgage Bankers Association signaled that they still intend to oppose the legislation. “We remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market,” both John Courson, president and CEO, and David Kittle, chairman at the MBA, said in a statement. “We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed.” Courson and Kittle said the program should only apply to subprime mortgages, be temporary, and needs to “protect FHA and VA guarantee programs.” The MBA has suggested in previous Congressional testimony that wide-scale cramdowns could add as much as 2 full points to mortgage rates. Breaking with the pack It’s certainly interesting timing for Citi to break with the pack; the bank has received $52 billion in bailout funding from the government, more than its peers. It’s also got a loss-sharing agreement in place covering $306 billion of its loans and securties, as the Wall Street Journal noted in a story Friday morning. In other words, to the extent that any cram-down push leads to higher loan losses, Citi may actually be somewhat sheltered from those losses — meaning taxpayers could end up picking up the tab. The Journal suggested that other banks are likely to line up behind Citi to support the bill, but will look to obtain similar loss-sharing arrangement in exchange for their support. A lobbyist on Capitol Hill, however, said that the banks likely face a “fat chance” of getting such concessions from lawmakers, were they to push for it. “With Citi’s support, it doesn’t matter what the MBA says on this issue as much,” said the lobbyist. “A break in the ranks of financiers puts Congress in a power play.” All of which underscores just how good it may have been to be first in the government handout line through this mess; critics have long suggested that the government relief efforts to the financial sector have singled out clear winners and losers. The cram-down agreement reached yesterday may be the first of a growing set of evidence to support that argument. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.