THE INFLUENCE GAME: Banks shift bankruptcy tactics

Posted: Updated:

WASHINGTON — Big banks, scrambling to prevent the government from forcing them to rewrite mortgages for struggling homeowners, are using their lobbying clout to press the Obama administration and Congress to scale back a key measure to rescue borrowers from foreclosures.

The legislation, expected to pass the House on Thursday, would let bankruptcy judges reduce the principal and interest rate on a home loan. That essentially would require mortgage companies to let debt-strapped homeowners reduce their monthly payments rather than lose their main residences.

Obama called for it last week as part of his housing rescue plan. Democrats and consumer advocates regard it as crucial to slowing the rapid rate of foreclosures.

But the mortgage industry contends the measure will impose steep and unpredictable costs on its companies, which will be forced to pass them along to borrowers in the form of higher fees and interest rates. The industry spent millions last year on a successful lobbying effort to kill the bill, which almost all Republicans oppose. Opponents call it the "cram-down."

This year, with Obama in the White House and Democrats enjoying a broader majority, a rift has emerged in the industry. One major player, Citigroup Inc., has bowed to the new political reality and moved to grab a seat at the negotiating table.

It cut a deal last month with Democrats to back the plan, as long as it applied only to existing loans made before enactment and was limited to homeowners who try working with their lender to adjust their loans before seeking relief in bankruptcy.

Other banks have changed their strategy, but not their position. They are continuing efforts to squash the legislation, but also have stepped up their bid to gut key provisions. Among their goals: restrict the measure to certain kinds or sizes of home loans, certain borrowers, or situations where the mortgage holder _ known as the loan servicer _ agrees to the changes.

"I don't see a scenario where we can ever support this, but we're trying to make it the least-worst way to do the wrong thing," said Scott Talbott, a lobbyist for the Financial Services Roundtable, a trade group representing large banks. The group spent $7.8 million last year lobbying on this and other issues. "There are efforts being made to change the bill right now," Talbott said Wednesday, as Democratic leaders were putting the last touches on the measure to be voted on Thursday.

That legislation, sponsored by Rep. John Conyers, D-Mich., the Judiciary Committee chairman, is part of a broader housing plan. It includes a boost in the Federal Deposit Insurance Corporation's borrowing authority and other steps to prevent foreclosures. In the Senate, Sen. Dick Durbin of Illinois, the No. 2 Democrat, has teamed with the Banking Committee chairman, Chris Dodd, D-Conn., and Sen. Charles E. Schumer, D-N.Y., on the bankruptcy measure. A vote could come in a few weeks.

The change in tactics has paid off for the banks, now actively bargaining with top Democrats on the details of the legislation.

"We continue to be opposed to the bill and that hasn't changed, but we do live in the real world, and we do understand that this is very likely to happen, and we owe it to our members to recognize that reality and to limit the damage as much as possible," said Francis Creighton, a lobbyist for the Mortgage Bankers Association, which spent $4.2 million on lobbying last year. "We're encouraged by the fact that the bill is moving to limit the damage of cram-down rather than make it worse."

Aside from Citigroup, two other large banks, JPMorgan Chase & Co. and Bank of America Corp., have been in discussions with top Democrats. Neither has signed onto the bill, however.

Industry players have pushed to limit the measure to home loans originated in the last several years. House Democrats agreed late Wednesday to strengthen the requirement that borrowers prove they tried other ways of modifying their mortgages before resorting to bankruptcy. They also restricted the measure to people who could not otherwise afford to make their home loan payments.

"The bank opposition has had a profound impact on the bill as it stands today. They're very powerful special interests. They're a force in Washington," said Michael Calhoun of the Center for Responsible Lending, a consumer group. "Look at the concessions they extracted from the bill and are still extracting."

Lobbyists and congressional aides close to the negotiations say the banking industry has recognized that some sort of action on the bankruptcy measure is virtually certain, and is actively seeking a deal on the issue that will limit its cost.

In an internal research report last month, Credit Suisse said it expected the legislation to be enacted and projected it could lead to a 20 percent reduction in foreclosures.

Citigroup had an interest in showing a willingness to cooperate with the new administration in getting the foreclosure crisis under control. It has taken $45 billion from the government's financial bailout program already and is in discussions about getting even more federal assistance. The government is guaranteeing billions in risky Citigroup assets, meaning taxpayers are essentially on the hook for losses it could incur through the bankruptcy change.