Citigroup supports measure giving courts big say on mortgage reductions

Citigroup has finally given in and backed a proposal aimed at letting bankruptcy court judges modify existing home mortgages:

For the first time since the housing crisis began, a major mortgage lender agreed Thursday that courts should be allowed to order reductions in the principal of “underwater” loans for some troubled borrowers, cracking what had been fierce and unified industry opposition.

The agreement struck between congressional Democrats and Citigroup Inc. would permit bankruptcy judges to change the terms of mortgages as part of court-ordered debt restructuring. Democrats hope to include the provision in the upcoming economic rescue legislation under negotiation between Congress and the incoming Obama administration.

It still remains to be seen whether measures like these have any real effect on preventing foreclosures, as many troubled borrowers simply go into default again on modified loans a few months later. Proposals such as this also run the real risk of causing lenders to raise their rates on other loans (or cut back on lending), when faced with the prospect of absorbing losses on loans it made in the past.