Global banking giant Citigroup will back a proposal in Congress for a change in the bankruptcy law, a move which will help in providing relief to battered mortgage borrowers, says a media report.
"Giant lender Citigroup announced Thursday it would support an effort in Congress to rewrite bankruptcy laws to give struggling homeowners the ability to rewrite the terms of their mortgages to avoid foreclosure," The Washington Post said in a report.
Another media report stated that the controversial change, known as cramdown, would let courts wipe out some mortgage debts.
However, opponents to the proposed reform believe giving bankruptcy judges the power to erase mortgage debt would increase costs for future homeowners.
The Washington Post quoted Illinois Democrat Sen Richard J Durbin as saying, "We think what will happen is that other financial institutions will now follow suit. We think this can be enacted and be part of the stimulus package."
The report said that the Mortgage Bankers Association was evaluating Citigroup's announcement, but added its opposition to the cramdown legislation had not softened.
According to the daily, Sen Charles E Schumer, New York Democrat, said his office had been in contact with other major mortgage lenders about the compromise foreclosure provision Citigroup is backing.
As the Bush administration moving to spend the $700-billion bailout fund, it is estimated that more than eight million US homeowners are at risk of foreclosure, which refers to the legal proceedings initiated by a creditor to repossess the collateral for loan that is in default.
As per the bankruptcy laws, most forms of personal debt, including vacation homes and other property, can be restructured by a bankruptcy court judge. However, a mortgage on a primary residence cannot, the report added.
The two senators said they were able to win Citigroup's endorsement by softening some of the provisions in the previous bankruptcy overhaul Bill.
According to compromise, only existing mortgages would be covered by the new foreclosure rules, which would not apply to future home loans made by the banks.
Further, homeowners would also be required to show that they had tried to contact their lender about reworking their loan before filing for bankruptcy, the report noted.
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