Bank industry slams lawmaker-Citi mortgage deal

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."

Citigroup declined to 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. Under that bailout, Citigroup absorbs the first $29 billion of losses on a $306 billion portfolio of troubled assets, and the government takes 90 percent of losses after that.

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.