Banks May Reluctantly Back Bankruptcy Bill

The banking industry is skeptical of lawmakers' efforts to allow bankruptcy courts to modify terms of residential mortgages, but some companies may join Citigroup (C Quote) in supporting a bill in an effort to help shape it.

Late Thursday, Senate Democrats announced a deal with Citigroup to support a bill that could alleviate housing foreclosures for consumers facing bankruptcy. Roughly 8.1 million homeowners, about 16% of all homeowners, are at risk of foreclosure, Sen. Richard Durbin (D., Ill.), Sen. Christopher Dodd (D., Conn.) and Sen. Charles Schumer (D., N.Y.), said in announcing Citi's support for the bill on Thursday.

Sen. Durbin had re-introduced the bill to the Senate on Tuesday. House Democrats also introduced a similar bill.

The senators hope Citi's support for the legislation, which mortgage lenders fiercely opposed last year leading up to the passage of the $700 billion financial bailout package Congress passed in October, will become a part of the economic recovery package being drafted on Capitol Hill. They also expect to win the support of other financial institutions on the issue, the senators said.

But some say that in light of the tumultuous housing environment banks have already been working to help borrowers through loan modifications. They say that more legislation is unnecessary.

"My personal view is we don't [need the legislation] because I think that it's in the lenders best interest -- and most of them are doing it -- to negotiate with borrowers," says Jean Everett, a partner at Hiscock & Barclay's financial institutions and lending practice.