Citi backs foreclosure prevention plan

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NEW YORK (CNNMoney.com) -- Citigroup reached an agreement with Democratic lawmakers Thursday on legislation that would allow judges to reduce mortgage debt for individuals who have filed for bankruptcy.

Sen. Dick Durbin of Illinois, the bill's architect, said he hoped the participation of Citigroup would entice other mortgage lenders to sign onto the program.

"I hope other institutions will follow suit," he said. Durbin appeared at a press conference along with fellow sponsors of the bill, Sen. Christopher Dodd of Connecticut and Sen. Charles Schumer of New York.

Until recently, members of the banking industry, including Citigroup (C, Fortune 500), as well as other housing-related groups like the National Association of Realtors, have criticized the notion of allowing the courts to have a say over their mortgage portfolios.

The Mortgage Bankers Association is extremely resistant to this idea. The trade group insists that so-called "mortgage cram downs," which allow bankruptcy courts to "cram down" or reduce the size of a home loan, will add considerably to borrowing costs for borrowers in the future.

"We remain opposed to bankruptcy cram-down legislation because of the destabilizing affect it will have on an already turbulent mortgage market," said John Courson, president and CEO of the Mortgage Bankers Association.

The National Association of Home Builders has also historically opposed such a measure. But the group recently announced an about-face, saying it will now support the idea of bankruptcy judges altering the terms of a borrower's mortgage.

A call to the National Association of Realtors requesting comment was not immediately returned.

Under the proposed plan, only homeowners with existing mortgages would be eligible to have their loans reduced. Additionally, homeowners would have to certify that they attempted to contact their lender about modifying their loan before filing for bankruptcy.

An earlier version of the bill proposed in 2008 only made this option available to borrowers who lived in their homes and held either a subprime or non-traditional mortgage, such as an adjustable rate loan.

The Center for Responsible Lending backs the bill, and expects that it could help more than 600,000 households across the country avoid foreclosure.

Current estimates puts the number of homeowners at risk of foreclosure around 8 million.

"We don't think this will remedy the whole [housing] situation, but we think this is an essential and necessary tool," said Kathleen Day, a spokeswoman for the non-profit group.

While Citigroup's approval of this bill may appear puzzling, participation in the program could go a long way to helping the ailing institution, which has been one of the hardest-hit banks during the housing crisis. It is expected to report a fourth-quarter loss later this month, due in part to its exposure to the U.S. housing market.

A spokesperson for Citigroup was not able to immediately comment on Thursday's announcement.

It remains to be seen whether other lenders will back the cram-down measure, but the legislation might serve to strong-arm banks into being more flexible with their loan modification programs. Faced with the threat of having judges step in and alter the terms of their loans, banks may be more willing to make the adjustments themselves.

"There is clearly a need to try something new," said Durbin.