By Karey Wutkowski and Dan Wilchins
WASHINGTON/NEW YORK (Reuters) - A top bank industry group said on Friday that it opposes an agreement between Citigroup Inc and Democratic senators that would rewrite U.S. bankruptcy law to help troubled mortgage borrowers avoid foreclosure, saying it could make home loans more expensive.
Other industry players questioned the motivations behind Citigroup's about-face on the topic of so-called cram-downs, speculating that the financial giant has been forced to further the U.S. government's agenda.
"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."
A Citigroup spokesman was not immediately available for comment.
Citigroup said on Thursday that it would support a plan put forth by Democratic Senators Charles Schumer and Richard Durbin, among others, that is aimed at preventing foreclosures.
Citigroup had previously opposed changing the law to let bankruptcy court judges, in some circumstances, cut mortgage debts to help bankrupt homeowners.
The government has injected $45 billion of capital into Citigroup since October, making the nation's third-largest bank a top recipient of federal bailout funds.
The American Bankers Association said in a statement on Friday that it did not participate in Citigroup's agreement with lawmakers and has consistently opposed giving bankruptcy judges broad authority to unilaterally modify mortgage terms.
"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, Virginia. "If Wells Fargo or Bank of America got on board, it would be a much more powerful endorsement."
INDUSTRY OPPOSITION
The ABA said the so-called 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, have also 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.
(Reporting by Karey Wutkowski in Washington and Dan Wilchins in New York, editing by Dave Zimmerman and Matthew Lewis)
